UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D. C. 20549
FORM
10-QSB
x Quarterly
report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of
1934.
For the quarterly period
ended September
30, 2007
o Transition
report pursuant to Section 13 or 15(d) of the Exchange
Act for
the transition period from _________ to _________.
Commission File Number:
0-9376
INNOVATIVE
FOOD HOLDINGS, INC.
(Exact
Name of Small Business Issuer as Specified in its Charter)
|
Florida
(State
of or Other Jurisdiction of Incorporation or Organization)
|
20-1167761
(IRS
Employer I.D. No.)
|
1923
Trade Center Way
Naples,
Florida 34109
(Address
of Principal Executive Offices)
(239)
596-0204
(Issuer's
Telephone Number, Including Area Code)
Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Issuer Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES x NO
o
Indicate
by check mark whether the issuer is a shell company (as defined in Regulation
12b-2 of the Exchange Act:
YES o NO
x
State the
number of shares outstanding of each of the issuer's classes of Common equity,
as of the latest practicable date:
171,787,638
Common Shares (post-reverse split) as of April 14, 2008
Transitional
Small Business Disclosure Format:
YES o NO
x
INDEX
TO FORM 10-QSB
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Page
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PART
I.
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FINANCIAL
INFORMATION
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Item
1.
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3
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3
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4
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5
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6
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Item
2.
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20
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Item
3.
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24
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PART
II.
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OTHER
INFORMATION
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Item
1.
|
25
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Item
2.
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25
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Item
3.
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25
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Item
4.
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25
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Item
5.
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25
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Item
6.
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25
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26
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Condensed
Consolidated Balance Sheet
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||||
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(unaudited)
|
||||
|
September
30,
|
||||
|
2007
|
||||
|
ASSETS
|
||||
|
Current
assets
|
||||
|
Cash
|
$ | 38,722 | ||
|
Accounts
receivable, net
|
216,068 | |||
|
Interest
receivable
|
7,147 | |||
|
Loan
receivable, net
|
285,000 | |||
|
Other
current assets
|
12,807 | |||
|
Total
current assets
|
559,744 | |||
|
Property
and equipment, net
|
93,840 | |||
| $ | 653,584 | |||
|
LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
|
||||
|
Current
liabilities
|
||||
|
Accounts
payable and accrued liabilities
|
$ | 701,840 | ||
|
Accrued
interest, net
|
284,371 | |||
|
Accrued
interest - related parties, net
|
134,263 | |||
|
Notes
payable, current portion
|
927,753 | |||
|
Notes
payable - related parties, current portion
|
424,500 | |||
|
Warrant
liability
|
759,191 | |||
|
Conversion
option liability
|
814,776 | |||
|
Penalty
for late registration of shares
|
441,120 | |||
|
Total
current liabilities
|
4,487,814 | |||
|
Convertible
notes payable
|
17,346 | |||
|
Stockholders’
deficiency
|
||||
|
Common stock, $0.0001 par value; 500,000,000 shares
authorized
|
||||
|
149,787,638 shares
issued and 139,787,638 shares outstanding
|
||||
|
(post
reverse-splits)
|
14,979 | |||
|
Additional paid-in capital
|
550,959 | |||
|
Accumulated deficit
|
(4,417,514 | ) | ||
|
Total
stockholders’ deficiency
|
(3,851,576 | ) | ||
| $ | 653,584 | |||
See notes
to the Condensed Consolidated Financial Statements
|
Condensed
Consolidated Statements of Operations
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Sales
|
$ | 1,556,006 | $ | 1,564,653 | $ | 4,860,414 | $ | 5,044,098 | ||||||||
|
Cost
of goods sold
|
1,198,981 | 1,167,832 | 3,605,093 | 3,838,060 | ||||||||||||
|
Gross
Margin
|
357,025 | 396,821 | 1,255,321 | 1,206,038 | ||||||||||||
|
Selling,
General and administrative expenses
|
449,442 | 484,171 | 1,277,206 | 1,520,810 | ||||||||||||
|
Total
operating expenses
|
449,442 | 484,171 | 1,277,206 | 1,520,810 | ||||||||||||
|
Operating
loss
|
(92,417 | ) | (87,350 | ) | (21,885 | ) | (314,772 | ) | ||||||||
|
Other
(income) expense:
|
||||||||||||||||
|
Interest
(income) expense, net
|
80,535 | 107,360 | 238,668 | 266,007 | ||||||||||||
|
Penalty
for late registration of shares
|
13,272 | 362,960 | 64,984 | 1,584,912 | ||||||||||||
|
Change
in fair value of warrant liability
|
265,338 | (5,203,035 | ) | 237,585 | (4,670,200 | ) | ||||||||||
|
Change
in fair value of conversion option liability
|
284,825 | (6,009,676 | ) | 377,569 | (5,642,095 | ) | ||||||||||
|
(Gain)
loss from marking to market
|
152,040 | (1,934,800 | ) | 113,576 | (1,928,592 | ) | ||||||||||
| 796,010 | (12,677,191 | ) | 1,032,382 | (10,389,968 | ) | |||||||||||
|
(Loss)
income before income tax expense
|
(888,427 | ) | 12,589,841 | (1,054,267 | ) | 10,075,196 | ||||||||||
|
Income
tax expense
|
- | - | - | - | ||||||||||||
|
Net
(loss) income
|
$ | (888,427 | ) | $ | 12,589,841 | $ | (1,054,267 | ) | $ | 10,075,196 | ||||||
|
Net
(loss) earnings per share - basic (post reverse-splits)
|
$ | (0.01 | ) | $ | 0.09 | $ | (0.01 | ) | $ | 0.08 | ||||||
|
Net
(loss) earnings per share – diluted (post reverse-splits)
|
$ | (0.01 | ) | $ | 0.03 | $ | (0.01 | ) | $ | 0.02 | ||||||
|
Weighted
average shares outstanding - basic (post reverse-splits)
|
149,787,638 | 136,912,804 | 148,997,316 | 120,338,009 | ||||||||||||
|
Weighted
average shares outstanding –diluted (post reverse-split)
|
149,787,638 | 495,501,354 | 148,997,316 | 478,926,559 | ||||||||||||
See Notes
to the Condensed Consolidated Financial Statements
|
Condensed
Consolidated Statements of Cash Flows
|
|||
|
(unaudited)
|
|||
|
For
the Nine Months Ended September 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
(loss) income
|
$ | (1,054,267 | ) | $ | 10,075,196 | |||
|
Adjustments
to reconcile net (loss) income to net
|
||||||||
|
cash
(used in) provided by operating activities:
|
||||||||
|
Depreciation
and amortization
|
39,399 | 39,835 | ||||||
|
Value
of warrants issued
|
- | 10,750 | ||||||
|
Amortization
of discount on note payable issued to officer for salary
|
40,500 | - | ||||||
|
Stock
issued as bonuses to employees and board members
|
8,125 | 49,901 | ||||||
|
Penalty
due to late registration of shares
|
64,984 | 1,584,912 | ||||||
|
Change
in fair value of warrant liability
|
377,569 | (4,652,805 | ) | |||||
|
Change
in fair value of conversion option liability
|
237,585 | (5,642,095 | ) | |||||
|
(Gain)
loss from marking to market-penalty
|
113,576 | (1,928,592 | ) | |||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable, net
|
99,631 | 190,095 | ||||||
|
Prepaid
and other current assets
|
2,699 | (29,844 | ) | |||||
|
Accounts
payable and accrued expenses
|
36,031 | 371,584 | ||||||
|
Net
cash (used in) provided by operating activities
|
(34,168 | ) | 68,937 | |||||
|
Cash
flows from investing activities:
|
||||||||
|
Loan
receivable
|
- | (190,000 | ) | |||||
|
Acquisition
of property and equipment
|
(40,611 | ) | (26,445 | ) | ||||
|
Net
cash used in investing activities
|
(40,611 | ) | (216,445 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Principal
payments on notes payable
|
(5,017 | ) | (10,000 | ) | ||||
|
Proceeds
from issuance of debt
|
- | 160,000 | ||||||
|
Net
cash (used in) provided by financing activities
|
(5,017 | ) | 150,000 | |||||
|
(Decrease)
Increase in cash and cash equivalents
|
(79,796 | ) | 2,492 | |||||
|
Cash
and cash equivalents at beginning of period
|
118,518 | 10,203 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 38,722 | $ | 12,695 | ||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid during the period for:
|
||||||||
|
Interest
|
$ | - | $ | - | ||||
|
Taxes
|
$ | - | $ | - | ||||
|
Common
stock to be issued for services performed
|
$ | - | $ | 85,901 | ||||
|
Note
payable issued for acquisition of computer equipment
|
$ | - | $ | 25,787 | ||||
|
Value
of warrants and options issued as compensation
|
$ | - | $ | 10,750 | ||||
|
Value
of shares issued as penalty for late registration
|
$ | 64,984 | $ | 1,584,912 | ||||
|
Revaluation
of conversion option liability
|
$ | 237,585 | $ | 5,642,095 | ) | |||
|
Revaluation
of liability for warrants
|
$ | 377,569 | $ | (4,652,805 | ) | |||
|
Revaluation
of penalty for late registration of shares
|
$ | 113,576 | $ | (1,928,592 | ) | |||
|
Stock
issued for bonuses to employees
|
$ | 8,125 | $ | 49,901 | ||||
|
Common
stock issued for conversion of notes payable and accrued
interest
|
$ | 4,000 | $ | - | ||||
|
Cancellation
of shares of common stock
|
$ | 557 | $ | - |
See Notes
to the Condensed Consolidated Financial Statements
Notes
to the Condensed Consolidated Financial Statement
(unaudited)
1. BASIS
OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
Basis
of Presentation
The
accompanying unaudited consolidated financial statements of Innovative Food
Holdings, Inc., and Food Innovations, Inc. ("FII"), its wholly
owned subsidiary (collectively, the "Company" or "IVFH") have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
They do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for a complete
financial statement presentation. U.S. accounting principles also contemplate
continuation of the Company as a going concern.
Acquisition
and Corporate Restructure
We were
initially formed in September 1979 as Alpha Solarco Inc., a Colorado
corporation. From September 1979 through February 2004, we were either inactive
or involved in discontinued business ventures. In February 2003 we changed our
name to Fiber Application Systems Technology, Ltd.
On
January 26, 2004, through a share exchange, the shareholders of FII converted
10,000 shares (post-reverse split) of FII common stock outstanding into
25,000,000 shares (post-reverse split) of IVFH. On January 29, 2004, in a
transaction known as a reverse acquisition, the shareholders of IVFH exchanged
25,000,000 shares (post-reverse split) of IVFH for 25,000,000 shares
(post-reverse split) of Fiber Application Systems (formerly known as Alpha
Solarco) (“Fiber”), a publicly-traded company. The shareholders
of IVFH thus assumed control of Fiber, and Fiber changed its name to Innovative
Food Holdings, Inc. The 25,000,000 shares (post-reverse split) of
Innovative Food Holdings are shown on the Company’s balance sheet at December
31, 2003 as shares outstanding. These shares are shown at their par
value of $2,500 as a decrease of additional paid-in capital at the acquisition
date of January 29, 2004. There were 157,037 shares
(post-reverse split) outstanding in Fiber at the time of the reverse
acquisition; the par value of these shares, or $16, was transferred from
additional paid-in capital at the time of the reverse
acquisition.
2. NATURE
OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
Business
Activity
FII is in
the business of providing premium white tablecloth restaurants with the freshest
origin-specific perishables and specialty products direct from its network of
vendors to the end users (restaurants, hotels, country clubs, national chain
accounts, casinos, and catering houses) within 24-72 hours, except as stated
hereafter, eliminating all wholesalers and distributors. We currently sell the
majority of our products through a distributor relationship with Next Day
Gourmet, L.P., a subsidiary of US Foodservice, Inc. (“USF”), a $20 Billion
broadline distributor.
Interim
Financial Information
The
accompanying unaudited interim financial statements have been prepared by the
Company, in accordance with generally accepted accounting principles pursuant to
Regulation S-B of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in audited financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Accordingly, these interim financial statements
should be read in conjunction with the Company’s financial statements and
related notes as contained in form 10-KSB for the year ended December 31, 2006.
In the opinion of management, the interim financial statements reflect all
adjustments, including normal recurring adjustments, necessary for fair
presentation of the interim periods presented. The results of the operations for
the three and nine months ended September 30, 2007 are not necessarily
indicative of the results of operations to be expected for the full
year.
Reclassification
Certain
reclassifications have been made to conform prior periods' data to the current
presentation. These reclassifications had no effect on reported
income.
Going
Concern
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. However, the
Company has reported a net loss of $888,427, and net income of $12,589,841 for
the three months ended September 30, 2007, and 2006,
respectively. The Company reported a net loss of $1,054,267 and net
income of $10,075,196 for the nine months ended September 30, 2007 and 2006,
respectively. The Company also had an accumulated deficit of
$4,417,514 and a working capital deficiency of $3,928,070 as of September 30,
2007.
The
Company cannot be certain that anticipated revenues from operations will be
sufficient to satisfy its ongoing capital requirements. Management's belief is
based on the Company's operating plan, which in turn is based on assumptions
that may prove to be incorrect. If the Company's financial resources are
insufficient the Company may require additional financing in order to execute
its operating plan and continue as a going concern. The Company cannot predict
whether this additional financing will be in the form of equity or debt, or be
in another form. The Company may not be able to obtain the necessary additional
capital on a timely basis, on acceptable terms, or at all. In any of these
events, the Company may be unable to implement its current plans for growth,
repay its debt obligations as they become due or respond to competitive
pressures, any of which circumstances would have a material adverse effect on
its business, prospects, financial condition and results of
operations.
Management
plans to take the following steps that it believes will be sufficient to provide
the Company with the ability to continue as a going concern. Management intends
to raise financing through the sale of its stock or debt instruments in private
placements to individual investors. Management may raise funds in the public
markets, though there currently are no plans to do so. Management believes that
with this financing, the Company will be able to generate additional revenues
that will allow the Company to continue as a going concern. This will be
accomplished by hiring additional personnel and focusing sales and marketing
efforts on the distribution of product through key marketing channels currently
being developed by the Company. The Company also intends to pursue the
acquisition of certain strategic industry partners where
appropriate.
Revenue
Recognition
The
Company recognizes revenue upon shipment of the product from the
vendor. Shipping and handling costs incurred by the Company are
included in cost of goods sold.
For revenue from product
sales, the Company recognizes revenue in accordance with Staff
Accounting Bulletin ("SAB") No.
104, "Revenue Recognition," which superseded
SAB No. 101, "Revenue Recognition in
Financial Statements." SAB No. 104 requires that four basic criteria
must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has
ocurred; (3) the selling price is fixed and determinable; and (4)
collectibility is reasonably assured. Determination
of criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers,
estimated returns and allowances, and other adjustments are provided for in the
same period the related sales are recorded. The Company defers any
revenue for which the product has not been delivered or is subject to refund
until such time that the Company and the customer jointly determine that the
product has been delivered or no refund will be required. SAB No. 104
incorporates Emerging Issues Task Force ("EITF") No.
00-21, "Multiple-Deliverable Revenue Arrangements." EITF
No. 00-21 addresses accounting for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use
assets. The effect of implementing EITF No. 00-21 on the Company's
consolidated financial position and results of operations was not significant.
This issue addresses determination of whether an arrangement involving more than
one deliverable contains more than one unit of accounting and how the
arrangement consideration should be measured and allocated to the separate units
of accounting. EITF No. 00-21 became effective for revenue
arrangements entered into in periods beginning after September 15,
2003. For revenue arrangements occurring on or after August 1, 2003,
the Company revised its revenue recognition.
Income
Taxes
The
Company accounts for income taxes using the liability method. Under
the liability method, deferred income taxes are determined based on differences
between the financial reporting and tax bases of assets and
liabilities. They are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to
reverse. The Company is required to adjust its deferred tax
liabilities in the period when tax rates or the provisions of the income tax
laws change. Valuation allowances are established to reduce deferred
tax assets to the amounts expected to be realized.
Disclosures
about Fair Value of Financial Instruments
The
carrying amounts of
the Company's financial instruments, which
include accounts receivable
and accounts payable, approximate fair value at
September 30, 2007.
Inventories
The
Company does not currently maintain any material amount of
inventory.
Stock-Based
Compensation
On
January 1, 2006 the company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004) "Share-Based Payment" ("SFAS 123 (R), which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to employees and directors including employee stock options and
employee stock purchases related to a Employee Stock Purchase Plan based on the
estimated fair values. SFAS 123 (R) supersedes the company's previous accounting
under Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to
Employees" for the periods beginning fiscal 2006.
The company adopted SFAS
123(R) using
the modified prospective transition
method, which required the application of the accounting standard as
of January 1, 2006. The
company's Consolidated Financial Statements as of and
for twelve months Ended September 30, 2006 reflect the impact of SFAS 123(R). In
accordance with the modified prospective transition method, the company's
Consolidated Financial Statements for the prior periods have not been
restated to reflect, and do not include the impact of SFAS 123 (R).
Stock based compensation expense recognized under SFAS 123(R) for the
three and nine months ended September 30, 2007
was $0. Pro forma stock based compensation was $0 for the three and nine months
ended September 30, 2007.
Stock-based compensation expense recognized
during the period is based on the value of the portion of
share-based payment awards that is ultimately expected to
vest during the period.
A summary
of option activity as of September 30, 2007, and changes
during the periods then ended are presented below:
|
Weighted
|
||||
|
Average
|
||||
|
Number
of
|
Exercise
|
|||
|
Shares
|
Price
|
|||
|
Options
outstanding at December 31, 2006
|
15,500,000
|
$
|
0.021
|
|
|
Exercisable
|
15,200,000
|
0.012
|
||
|
Not
exercisable
|
300,000
|
0.50
|
||
|
Granted
|
-
|
-
|
||
|
Exercised
|
-
|
-
|
||
|
Cancelled
/ Expired
|
-
|
-
|
||
|
Options
outstanding at March 31, 2007
|
15,500,000
|
$
|
0.021
|
|||||
|
Exercisable
|
15,300,000
|
$
|
0.010
|
|||||
|
Not
exercisable
|
200,000
|
$
|
0.50
|
|||||
|
Granted
|
-
|
-
|
||||||
|
Exercised
|
-
|
-
|
||||||
|
Cancelled/Expired
|
-
|
-
|
||||||
|
Options
outstanding at September 30, 2007
|
15,500,000
|
$
|
0.021
|
|||||
|
Exercisable
|
15,300,000
|
$
|
0.010
|
|||||
|
Not
exercisable
|
200,000
|
$
|
0.500
|
|||||
|
Granted
|
-
|
-
|
||||||
|
Exercised
|
-
|
-
|
||||||
|
Cancelled/Expired
|
-
|
-
|
||||||
|
Options
outstanding at September 30, 2007
|
15,500,000
|
$
|
0.021
|
|||||
|
Exercisable
|
15,300,000
|
$
|
0.010
|
|||||
|
Not
exercisable
|
200,000
|
$
|
0.500
|
Aggregate
intrinsic value of options outstanding and options exercisable at September 30,
2007, was $0. Aggregate intrinsic value represents the difference between the
company's closing stock price on the
last trading day of the fiscal period, which
was $0.004 (post-reverse split)as of September 30, 2007, and the
exercise price multiplied by the
number of options outstanding. As of
September 30, 2007 total unrecognized stock-based
compensation expense related to non-vested stock options was $0. The total fair
value of options vested was $0 for the three and nine month periods ended
September 30, 2007, and 2006.
Earnings
(Loss) per Common Share
The
Company computes earnings per share under SFAS 128. Net loss per
common share is computed by dividing net loss by the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding during
the year. Dilutive common stock equivalents consist of shares
issuable upon conversion of convertible notes and the exercise of the Company’s
stock options and warrants (calculated using the treasury stock
method).
Management
Estimates
The
presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Comprehensive
Income
The
Company has no items of other comprehensive income (loss) for the
three and nine months ended September 30, 2007.
3. PER
SHARE INFORMATION
The
Company computes earnings per share under Financial Accounting Standard
No.128, "Earnings Per Share" (SFAS 128). Net loss per
common share is computed by dividing net loss by the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding during
the year. Dilutive common stock equivalents consist
of shares issuable upon conversion of convertible notes and the exercise of the
Company’s stock options and warrants (calculated using the treasury stock
method).
4.
ACCOUNTS RECEIVABLE
At
September 30, 2007, accounts receivable consists of:
|
Accounts
receivable from customers
|
$
|
226,068
|
||
|
Allowance
for doubtful accounts
|
(10,000
|
)
|
||
|
Accounts
receivable, net
|
$
|
216,068
|
5. LOAN
RECEIVABLE
The
balance of loan receivable consisted of a loan to Pasta Italiana, Inc. in the
amount of $360,000 as of September 30, 2007. These notes bear
interest in the amount of 8% per annum. These notes matured on August
24, 2006. At September 30, 2007, the Company has set up an allowance
of $75,000 of the loan receivable. The Company stopped accruing
interest income on this note at December 31, 2005. At September 30, 2007,
interest receivable was $7,147.
6.
PROPERTY AND EQUIPMENT, NET
A summary
of property and equipment at September 30, 2007, is as follows:
|
Computer
equipment
|
$
|
288,229
|
||
|
Furniture
and fixtures
|
63,565
|
|||
|
351,794
|
||||
|
Less
accumulated depreciation and amortization
|
(257,954)
|
|||
|
Total
|
$
|
93,840
|
||
Depreciation
and amortization expense amounted to $39,399, and $39,835 respectively, for the
nine months ended September 30, 2007 and 2006, respectively.
7.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts
payable and accrued liabilities at September 30, 207:
|
Accounts
payable and accrued expenses
|
$ | 701,840 | |||
8.
ACCRUED INTEREST
At
September 30, 2007 the Company has the following accrued interest on its balance
sheet:
|
Non-related
parties
|
$
|
284,371
|
||
|
Related
parties
|
134,263
|
|||
|
Total
|
$
|
418,634
|
||
Accrued
interest on some of the Company’s notes payable is convertible into common stock
of the Company at a price of $0.005 per share (post-reverse split) (note 9).
There is a beneficial conversion feature embedded in this convertible accrued
interest. The Company is amortizing this beneficial conversion
feature over the life of the related party notes payable. During the
nine months ended September 30, 2007, and 2006 the amounts of $98,376
and $116,641 were credited to additional paid-in capital as a
discount on accrued interest. The Company amortized to interest
expense a total of $38,505, and $65,398 of these discounts during the
nine months ended September 30, 2007, and 2006, respectively.
9. NOTES
PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
The
Company has a line of credit with Wachovia Bank in the amount of
$25,000. There was no outstanding balance as of September 30,
2007. The Company has a loan payable outstanding for the purchase of
a server, at September 30, 2007 the outstanding balance was
$22,099.
At
September 30, 2007, the Company has outstanding notes payable in the aggregate
amount of $1,369,599. Notes payable and notes payable to
related parties at September 30, 2007, consist of the
following:
|
September
30, 2007
|
|||
|
Convertible
note payable in the original amount of $350,000 to Alpha Capital
Aktiengesselschaft (“Alpha Capital”), dated February 25, 2005. This note
consists of $100,000 outstanding under a previous note payable which was
cancelled on February 25, 2005, and $250,000 of new borrowings. We did not
meet certain of our obligations under the loan documents relating to this
issuance. These lapses include not reserving the requisite
number of treasury shares, selling subsequent securities without offering
a right of first refusal, not complying with reporting obligations, not
having our common shares quoted on the OTC:BB and not timely registering
certain securities. This note is entered technical default
status on May 16, 2005. The note originally
carried interest at the rate of 8% per annum, and is due in
full on February 24, 2007. Upon default, the note’s interest
rate increased to 15% per annum, and the note became immediately due. The
note is convertible into common stock of the Company at a conversion price
of $0.005 per share (post-reverse split). A beneficial conversion feature
in the amount of $250,000 was recorded as a discount to the note, and was
amortized to interest expense during the twelve months ended December 31,
2005. Accrued interest is convertible into common stock of the
Company at a conversion price of $0.005 per share (post-reverse
split). During the twelve months ended December 31, 2006 the note holder
converted $5,000 into shares of common stock. During the twelve months
ended December 31, 2006 the holder of the note converted $27,865 of
accrued interest into common stock. This note is in
default at September 30, 2007. Interest in the amount of $13,043 was
accrued on this note during the three months ended September 30, 2007, and
2006.
|
$ |
345,000
|
|
|
Convertible
note payable in the amount of $160,000 to Michael Ferrone, a board member
and related party, dated March 11, 2004. The note bears interest at the
rate of 8% per annum, and was originally due in full on March 11, 2006. On
February 25, 2005, an amendment to the convertible notes was signed which
extended the term, which resulted in a new maturity date of October 12,
2006. The note is convertible by the holder into common stock of the
Company at a conversion of $0.005 per share (post-reverse split). A
beneficial conversion feature in the amount of $160,000 was recorded as a
discount to the note, and was amortized to interest expense
during the twelve months ended December 31, 2004. Accrued interest is
convertible by the holder into common stock of the Company at maturity of
the note at a price of $0.005 per share (post-reverse
split) Interest in the amount of $3,226 was accrued on this
note during the each of the three months ended
September 30, 2007, and 2006. This note is in default at
September 30, 2007.
|
160,000
|
||
|
Convertible
note payable in the original amount of $100,000 to Joel Gold, a board
member and related party, dated October 12, 2004. The note bears interest
at the rate of 8% per annum, and was due in full on October 12, 2006. The
note is convertible by the holder into common stock of the Company at a
conversion price of $0.005 per share (post-reverse split). A
beneficial conversion feature in the amount of $100,000 was recorded as a
discount to the note, and was amortized to interest expense during the
twelve months ended December 31, 2004. Accrued interest is convertible by
the holder into common stock of the Company at maturity of the note at a
price of $0.005 per share (post-reverse split) . During
the twelve months ended December 31, 2006, $75,000 of the principal amount
was converted into common stock. Interest in the amount of $504 was
accrued on this note during the three months ended September 30, 2007, and
2006. This note is in default at September 30, 2007.
|
25,000
|
||
|
Convertible
note payable in the amount of $85,000 to Briolette Investments, Ltd, dated
March 11, 2004. The note bears interest at the rate of 8% per annum, and
is due in Full on March 11, 2006. The note is convertible into common
stock of the Company at a conversion of $0.005 per share (post-reverse
split). A beneficial conversion feature in the amount of
$85,000 was recorded as a discount to the note, and was amortized to
interest expense during the twelve months ended December 31, 2004 Accrued
interest is convertible by the holder into common stock of the Company at
a price of $0.005 per share (post-reverse split). During the twelve months
ended December 31, 2005, the note holder converted $44,000 of the note
payable into common stock. During the twelve months ended December 31,
2006, the Company made a $3,000 cash payment on the principal amount of
the note. Interest in the amount of $766, and $828 was accrued on this
note during the three months ended September 30, 2007, and 2006,
respectively. This note is in default at September 30,
2007.
|
38,000
|
||
|
Convertible
note payable in the amount of $80,000 to Brown Door, Inc., dated March 11,
2004. The note bears interest at the rate of 8% per annum, and was due in
full on March 11, 2006. The note is convertible into common stock of the
Company at a conversion of $0.005 per share (post-reverse
split). A beneficial conversion feature in the amount of $80,000 was
recorded as a discount to the note, and was amortized to interest expense
during the twelve months ended December 31, 2004. Accrued interest is
convertible by the holder into common stock of the Company at maturity of
the note at a price of $0.005 per share (post-reverse
split) Interest in the amount of $1,614 was accrued on
this note during each of the three months ended September 30,
2007, and 2006. This note is in default at September 30,
2007.
|
80,000
|
||
|
Convertible
note payable in the amount of $50,000 to Whalehaven Capital Fund, Ltd.
(“Whalehaven Capital”) dated February 25, 2005. We did not meet certain of
our obligations under the loan documents relating to this
issuance. These lapses include not reserving the requisites
numbers of treasury shares, selling subsequent securities without offering
a right of first refusal, not complying with reporting obligations, not
having our common shares quoted on the OTC:BB and not timely registering
certain securities. This note is in technical default as of May
16, 2005. The note originally carried interest at
the rate of 8% per annum, and was due in Full on February 24, 2007. Upon
default, the note’s interest rate increased to 15% per annum, and the note
became due immediately. The note is convertible into common stock of the
Company at a conversion of $0.005 per share (post-reverse
split). A beneficial conversion feature in the amount of
$50,000 was recorded as a discount to the note, and was amortized to
interest expense during the three months ended March 31, 2005. Accrued
interest is convertible into common stock of the Company at a price of
$0.005 per share (post-reverse split). During the twelve months ended
December 31, 2006, $5,000 of principal was converted into common
stock. During the twelve months ended December 31, 2006 the
holder of the note converted $5,000 of principal and $589 of accrued
interest into shares of common stock. Interest in the amount of
$1,513, and $1,596 was accrued on this note during the three months ended
September 30, 2007 and 2006, respectively. This note is in
default at September 30, 2007.
|
40,000
|
||
|
Convertible
note payable in the amount of $50,000 to Oppenheimer & Co., /
Custodian for Joel Gold IRA, a related party, dated March 14, 2004. The
note bears interest at the rate of 8% per annum, and was due in full on
October 12, 2006. The note is convertible into common stock of the
Company at a conversion of $0.005 per share (post-reverse
split). A beneficial conversion feature in the amount of $50,000 was
recorded as a discount to the note, and was amortized to interest expense
during the twelve months ended December 31, 2005. Accrued
interest is convertible into common stock of the Company at a price of
$0.005 per share (post-reverse split). Interest in the amount of $1,009
was accrued on this note during each of the three months ended
September 30, 2007, and 2006. This note is in default at September 30,
2007.
|
50,000
|
||
|
Convertible
note payable in the original amount of $30,000 to Huo Hua dated May 9,
2005. The note bears interest at the rate of 8% per annum, and was due in
full on October 12, 2006. The note is convertible into common
stock of the Company at a conversion of $0.005 per share
(post-reverse split). A beneficial conversion feature in the amount of
$30,000 was recorded as a discount to the note, and was amortized to
interest expense during the twelve months ended December 31, 2005. Accrued
interest is convertible into common stock of the Company at a price of
$0.005 per share(post-reverse split) During the twelve months
ended December 31, 2006, the note holder converted $10,000 of principal
into common stock. Interest in the amount of $404 was accrued
on this note during the three months ended September 30, 2007, and 2006.
This note is in default at September 30, 2007.
|
20,000
|
||
|
Convertible
note payable in the amount of $25,000 to Joel Gold a board member and
related party, dated January 25, 2005. The note bears interest at the rate
of 8% per annum, and is due in full on January 25, 2007. The
note is convertible into common stock of the Company at a
conversion of $0.025 per share. A beneficial conversion feature in the
amount of $25,000 was recorded as a discount to the note, and was
amortized to interest expense during the twelve months ended December 31,
2005. Accrued interest is convertible into common stock of the Company at
a price of $0.025 per share. Interest in the amount of $504, was accrued
on this note during the three months ended September 30,
2007, and 2006. This note is in default at September 30,
2007.
|
25,000
|
|
Convertible
note payable in the amount of $25,000 to The Jay & Kathleen Morren
Trust dated January 25, 2005. The note bears interest at the
rate of 6% per annum, and is due in full on January 25,
2007. The note is convertible into common stock of the
Company at a conversion of $0.005 per share (post-reverse
split). A beneficial conversion feature in the amount of $25,000 was
recorded as a discount to the note, and was amortized to interest expense
during the twelve months ended December 31, 2005. Accrued interest is
convertible into common stock of the Company at a price of $0.005 per
share (post-reverse split) Interest in the amount of $377 was accrued on
this note during the three months ended September 30, 2007, and 2006. This
note is in default at September 30, 2007.
|
25,000
|
|||
|
Convertible
note payable in the amount of $10,000 to Lauren M. Ferrone, a relative of
a board member and related party, dated October 12, 2004. The note bears
interest at the rate of 8% per annum, and was originally due in full on
October 12, 2005. On February 25, 2005, an amendment to the convertible
notes was signed which extended the term, which resulted in a new maturity
date of October 12, 2006. The note is convertible into common stock of the
Company at a conversion of $0.01 per share (post-reverse
split). A beneficial conversion feature in the amount of $10,000 was
recorded as a discount to the note, and was amortized to interest expense
during the twelve months ended December 31, 2004. Accrued interest is
convertible into common stock of the Company at a price of $0.01 per share
(post-reverse split). Interest in the amount of 202, was accrued on this
note during the three months ended September 30, 2007, and
2006. This note is in default at September 30,
2007.
|
10,000
|
|||
|
Convertible
note payable in the amount of $10,000 to Richard D. Ferrone, a relative of
a board member and related party, dated October 12, 2004. The note bears
interest at the rate of 8% per annum, and was originally due in full on
October 12, 2005. On February 25, 2005, an amendment to the convertible
notes was signed which extended the term, which resulted in a new maturity
date of October 12, 2006. The note is convertible into common stock of the
Company at a conversion of $0.01 per share (post-reverse
split). A beneficial conversion feature in the amount of $10,000 was
recorded as a discount to the note, and was amortized to interest expense
during the twelve months ended December 31, 2004. Accrued interest is
convertible into common stock of the Company at a price of $0.01 per share
(post-reverse split) . Interest in the amount of $202 was accrued on this
note during the three months ended September 30, 2007, and
2006. This note is in default at September 30,
2007.
|
10,000
|
|||
|
Convertible
note payable in the amount of $10,000 to Christian D. Ferrone, a relative
of a board member and related party, dated October 12, 2004. The note
bears interest at the rate of 8% per annum, and was originally
due in full on October 12, 2005. On February 25, 2005, an amendment to the
convertible notes was signed which extended the term, which resulted in a
new maturity date of October 12, 2006. The note is convertible into common
stock of the Company at a conversion of $0.01 per share
(post-reverse split). A beneficial conversion feature in the amount of
$10,000 was recorded as a discount to the note, and was amortized to
interest expense during the twelve months ended December 31, 2004. Accrued
interest is convertible into common stock of the Company at a price of
$0.01 per share (post-reverse split). Interest in the amount of
$202 was accrued on this note during the three months ended September 30,
2007, and 2006. This note is in default at September 30,
2007.
|
10,000
|
|||
|
Convertible
note payable in the amount of $10,000 to Andrew I. Ferrone, a relative of
a board member and related party, dated October 12, 2004. The note bears
interest at the rate of 8% per annum, and was originally due in full on
October 12, 2005. On February 25, 2005, an amendment to the convertible
notes was signed which extended the term, which resulted in a new maturity
date of October 12, 2006. The note is convertible into common stock of the
Company at a conversion of $0.01 per share (post-reverse
split). A beneficial conversion feature in the amount of $10,000 was
recorded as a discount to the note, and was amortized to interest expense
during the twelve months ended December 31, 2004. Accrued interest is
convertible into common stock of the Company at a price of $0.01 per
share (post-reverse split). Interest in the amount of $202 was
accrued on this note during the three months ended September 30, 2007, and
2006. This note is in default at September 30,
2007.
|
10,000
|
|||
|
Convertible
note payable in the amount of $8,000 to Adrian Neilan dated March 11,
2004. The note bears interest at the rate of 8% per annum, and is due in
full on October 12, 2006. The note is convertible into common stock of the
Company at a conversion of $0.005 per share (post-reverse
split). A beneficial conversion feature in the amount of $8,000 was
recorded as a discount to the note, and was amortized to interest expense
during the twelve months ended December 31, 2004.. Accrued interest is
convertible into common stock of the Company at a price of $0.005 per
share (post-reverse split). Interest in the amount of $161 was accrued on
this note during the each of the three months ended September 30, 2007,
and 2006. This note is in default at September 30, 2007.
|
8,000
|
||
|
Convertible
note payable in the amount of $5,000 to Matthias Mueller dated March 11,
2004. The note bears interest at the rate of 8% per annum, and was due in
full on October 12, 2006. The note is convertible into common stock of the
Company at a conversion of $0.005 per share (post-reverse
split). A beneficial conversion feature in the amount of $5,000 was
recorded as a discount to the note, and was amortized to interest expense
during the twelve months ended December 31, 2005. Accrued interest is
convertible into common stock of the Company at a price of $0.005 per
share (post-reverse split). Interest in the amount of $101 was
accrued on this note during the each of the three months ended September
30, 2007, and 2006. This note is in default at September 30,
2007.
|
5,000
|
||
|
Convertible
note payable in the amount of $120,000 to Alpha Capital dated August 25,
2005. We did not meet certain of our obligations under the loan documents
relating to this issuance. These lapses include not reserving
the requisite number of treasury shares, selling subsequent securities
without offering a right of first refusal, not complying with reporting
obligations, not having our common shares quoted on the OTC:BB and not
timely registering certain securities. This note is in
technical default as of November 13, 2005. The note originally
carried interest at the rate of 8% per annum, and was due in
full on August 25, 2007. Upon default, the note’s interest rate increased
to 15% per annum and the note became immediately due. The note is
convertible into common stock of the Company at a conversion of
$0.005 per share (post-reverse split). A beneficial conversion feature in
the amount of $120,000 was recorded as a discount to the note, and was
amortized to interest expense during the twelve months ended December 31,
2005. Accrued interest is convertible into common stock of the Company at
a price of $0.005 per share (post-reverse split). Interest in the amount
of $4,537 was accrued on this note during the three months ended September
30, 2007, and 2006. This note is in default at September
30, 2007.
|
120,000
|
||
|
Convertible
note payable in the amount of $30,000 to Whalehaven Capital dated August
25, 2005. We did not meet certain of our obligations under the
loan documents relating to this issuance. These lapses include
not reserving the requisite number of treasury shares, selling subsequent
securities without offering a right of first refusal, not complying with
reporting obligations, not having our common shares quoted on the OTC:BB
and not timely registering certain securities. This note was in
technical default as of November 13, 2006. The note originally
carried interest at the rate of 8% per annum, and was due in
full on August 25, 2007. Upon default, the note’s interest rate increased
to 15% per annum and the note became immediately due. The note is
convertible into common stock of the Company at a conversion of
$0.005 per share (post-reverse split). A beneficial conversion feature in
the amount of $30,000 was recorded as a discount to the note, and was
amortized to interest expense during the twelve months ended December 31,
2005. Accrued interest is convertible into common stock of the Company at
a price of $0.005 per share (post-reverse split). Interest in the amount
of $1,134 and $1,512 was accrued on this note during the three months
ended September 30, 2007 and 2006, respectively. This note is
in default at September 30, 2007.
|
30,000
|
|
Convertible
note payable in the original amount of $25,000 to Asher Brand, dated
August 25, 2005. We did not meet certain of our obligations under the loan
documents relating to this issuance. These lapses include not
reserving the requisite number of treasury shares, selling subsequent
securities without offering a right of first refusal, not complying with
reporting obligations, not having our common shares quoted on the OTC:BB
and not timely registering certain securities. This note was in
technical default as of November 13, 2006. The note originally
carried interest at the rate of 8% per annum, and was due in
full on August 25, 2007. Upon default, the note’s interest rate increased
to 15% per annum and the note became immediately due The note is
convertible into common stock of the Company at a conversion of
$0.005 per share (post-reverse split). A beneficial conversion feature in
the amount of $25,000 was recorded as a discount to the note, and was
amortized to interest expense during the twelve months ended December 31,
2005. Accrued interest is convertible into common stock of the Company at
a price of $0.005 per share (post-reverse split) Interest in the amount of
$870 and $938 was accrued on this note during the three months ended
September 30, 2007 and 2006, respectively. During the three months ended
September 30, 2006, the holder of the note converted $2,000 of principal
and $3,667 of accrued interest into common stock. This
note is in default at September 30, 2007.
|
23,000
|
||
|
Convertible
note payable in the original amount of $25,000 to Momona Capital, dated
August 25, 2005. We did not meet certain of our obligations under the loan
documents relating to this issuance. These lapses include not
reserving the requisite number of treasury shares, selling subsequent
securities without offering a right of first refusal, not complying with
reporting obligations, not having our common shares quoted on the OTC:BB
and not timely registering certain securities. This note was in
technical default at November 13, 2005. The note originally
carried interest at the rate of 8% per annum, and was due in
full on August 25, 2007. Upon default, the note’s interest rate increased
to 15% per annum and the note became immediately due The note is
convertible into common stock of the Company at a conversion of
$0.005 per share (post-reverse split). A beneficial conversion feature in
the amount of $25,000 was recorded as a discount to the note, and was
amortized to interest expense during the twelve months ended December 31,
2005. Accrued interest is convertible into common stock of the Company at
a price of $0.005 per share (post-reverse split. Interest in
the amount of $870 and $938 was accrued on this note during the three
months ended September 30, 2007 and 2006. During the twelve months ended
December 31, 2006, the holder of the note converted $2,000 of principal
and $3,667 of accrued interest into common stock. This note is in default
at September 30, 2007.
|
23,000
|
||
|
Convertible
note payable in the amount of $10,000 to Lane Ventures dated August 25,
2005. We did not meet certain of our obligations under the loan documents
relating to this issuance. These lapses include not reserving
the requisite number of treasury shares, selling subsequent securities
without offering a right of first refusal, not complying with reporting
obligations, not having our common shares quoted on the OTC:BB and not
timely registering certain securities. This note was in
technical default at November 13, 2005. The note originally
carried interest at the rate of 8% per annum, and was due in
full on August 25, 2007. Upon default, the note’s interest rate increased
to 15% per annum and the note became immediately due. The note is
convertible into common stock of the Company at a conversion of
$0.005 per share (post-reverse split). A beneficial conversion feature in
the amount of $10,000 was recorded as a discount to the note, and was
amortized to interest expense during the twelve months ended December 31,
2005. Accrued interest is convertible into common stock of the Company at
a price of $0.005 per share (post-reverse split). Interest in the amount
of $226 and $364 was accrued on this note during the three
months ended September 30, 2007 and 2006,
respectively. During the twelve months ended December 31,
2006, the holder of the note converted $4,000 of principal and $1,467 of
accrued interest into common stock. This note is in default at
September 30, 2007.
|
6,000
|
||
|
Note
payable in the amount of $120,000 to Alpha Capital, dated February 7,
2006. The originally carried interest at the rate of 15% per annum, and
was originally due in full on February 7, 2007. During the three months
ended September 30, 2007, the Company extended the due date of the notes
one year, to October 31, 2007; at the same time, the Company added a
convertibility feature, allowing the noteholders to convert the notes and
accrued interest into common stock of the Company at a rate of $0.005 per
share. The Company is not in compliance with various terms of this note,
including making timely payments of interest, and this note was in
technical default at May 8, 2006. At this time, the interest rate
increased to 20% and the note became immediately due and
payable. Interest in the amount of $6,049 was
accrued on this note during the three months ended September 30, 2007 and
2006.
|
120,000
|
|
Note
payable in the amount of $30,000 to Whalehaven Capital dated February 7,
2006. The note originally carried interest at the rate of 15%
per annum, and was due in full on February 7, 2007. During the three
months ended September 30, 2007, the Company extended the due date of the
notes one year, to October 31, 2007; at the same time, the Company added a
convertibility feature, allowing the noteholders to convert the notes and
accrued interest into common stock of the Company at a rate of $0.005 per
share. The Company is not in compliance with various terms of this note,
including making timely payments of interest, and this note was in
technical default at May 8, 2006. At this time, the interest rate
increased to 20% and the note became immediately due and payableInterest
in the amount of $1,122 was accrued on this note during
the three months ended September 30, 2007 and
2006.
|
30,000
|
||
|
Note
payable in the amount of $75,000 to Michael Ferrone, dated August 2, 2004.
The note bears interest at the rate of 8% per annum, and was due in full
on February 2, 2005. Interest in the amount of $1,513, was accrued on this
note during the three months ended September
30, 2007 and 2006, respectively. This note is
in default at September 30, 2007.
|
75,000
|
||
|
Note
payable in the amount of $10,000 to Alpha Capital, dated May 19, 2006. The
note bears interest at the rate of 15% per annum, and was due in full on
November 19, 2006. During the three months ended September 30,
2007, the Company extended the due date of the notes one year, to October
31, 2007, at the same time, the Company added a convertibility feature,
allowing the noteholders to convert the notes and accrued interest into
common stock of the Company at a rate of $0.005 per
share. Interest in the amount of $504 and $461 was accrued on
this note during the three months ended September 30, 2007 and
2006.
|
10,000
|
||
|
Eleven
convertible notes payable in the amount of $4,500 each to Sam Klepfish,
the Company’s Interim President and a related party, dated November 1,
2006, December 1, 2006, January 1, 2007, February 1,
2007, March 1, 2007, April 1, 2007, May 1, 2007, June 1, 2007, July 1,
2007, August 1, 2007 and September 1, 2007. Pursuant to the
Company’s employment agreement with Mr. Klepfish, the amount of $4,500 in
salary is accrued each month to a note payable. These notes
bear interest at a rate of 8% per annum. These notes and
accrued interest are convertible into common stock as a rate of $0.005 per
chare. Interest in the aggregate amount of $880 and $0 was
accrued on these notes during the three months ended September 30, 2007
and 2006.
|
49,500
|
||
|
Note
payable in the original amount of $25,787 to Microsoft Corporation dated
May 3, 2006. The note bears interest at the rate of 9.7% per annum, and is
payable in 60 monthly payments of $557 beginning October 1, 2006. Negative
interest in the amount of $554 was capitalized to this note during the
three months ended September 30, 2007.
|
|
22,099
|
|
|
$
|
1,369,599 | ||
|
Total
Non-related parties
|
$ | 945,099 | |
| Total related parties | 424,500 | ||
| 1,369,599 | |||
|
Less:
Current maturities
|
(1,352,253) | ||
| Long-term portion | $ |
17,346
|
Accounting
for Conversion Options Embedded in Convertible Notes and Convertible
Interest
The
Company has certain convertible notes payable which contain embedded beneficial
conversion features. Through August 2005, the beneficial conversion
features of these convertible notes were accounted for by the equity method,
whereby the intrinsic value of the beneficial conversion features were
considered discounts to the notes. These discounts were immediately amortized to
interest expense. During September 2005, the number of shares of the Company’s
common stock issued and issuable exceeded the number of shares of common stock
the Company had authorized, and this triggered a change in the manner in which
the Company accounts for these beneficial conversion
features. In accordance with Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative Instruments and Hedging
Activities, as amended (“SFAS 133”), the debt features provision contained in
the terms governing the Notes are not clearly and closely related to the
characteristics of the Notes. Accordingly, the features qualified as
embedded derivative instruments at September 30, 2005 and because they do not
qualify for any scope exception within SFAS 133, they were required by SFAS 133
to be accounting for separately from the debt instrument and recorded as
derivative financial instruments. In September 2005, the Company
valued the beneficial conversion features of its notes payable using
the Black-Scholes valuation method, and arrived at an aggregate value
of $12,528,662. Pursuant to Emerging Issues Task Force
Issue 00-19 “Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock” (“EITF
00-19”)
“If a
contract is reclassified from permanent or temporary equity to an
asset or a liability, the change in fair value of the contract during the period
the contract was classified as equity should be accounted for as an adjustment
to stockholders’ equity.” Accordingly, during the year ended December
31, 2005, the Company charged the amount of $12,445,576 to stockholders’
equity. $5,665,290 of this amount was charged to additional paid-in
capital, which brought the balance of additional paid-in capital to $0. The
remainder, or $6,780,286, was charged to accumulated deficit. During
subsequent periods, the conversion option liability will be revalued,
and any change in value charged to operations. At September 30, 2007,
the conversion option liability was valued at $814,776. The
revaluation resulted in a loss during the three and nine months ended
September 30, 2007, of $284,825 and $377,569,
respectively.
The
Company valued these embedded conversion options using the Black-Scholes option
pricing model with the following assumptions:
|
Risk
Free
|
Expected
|
Expected
|
||||||||||||||
|
Interest
|
Dividend
|
Option
|
||||||||||||||
|
Rate
|
Yield
|
Life
|
Volatility
|
|||||||||||||
|
September
30, 2007
|
4.25
|
%
|
-
|
10
|
178.26
|
%
|
||||||||||
10. RELATED
PARTY TRANSACTIONS
The
Company engaged in the following transactions with related parties in the nine
months ended September 30, 2007:
The
Company issued nine convertible notes payable in the amount of $4,500 each for
additional salary due to the Company’s Interim President.
11.
EQUITY
On March
27, 2003 a 1-for-1,000 reverse stock split of the Company’s common stock was
effected. On March 8, 2004, a 1-for 200 reverse stock split of the
Company’s common stock was effected.
Common
Stock
The
Company had the following common stock transactions during the nine months ended
September 30, 2007:
The
Company cancelled 5,573,158 shares (post reverse-split) of common stock for
which were issued but not outstanding.
The
Company recorded a discount to the convertible notes payable for the accrued
interest in the amount of $98,376 during the nine months ended September 30,
2007.
Warrants
The
following table summarizes the warrants outstanding at September 30, 2007 (post
reverse-split):
|
Weighted
|
|||||||||||
|
Weighted
|
average
|
||||||||||
|
average
|
exercise
|
||||||||||
|
Range
of
|
Number
of
|
remaining
|
price of
|
Number
of
|
|||||||
|
exercise
|
shares
|
contractual
|
outstanding
|
shares
|
|||||||
|
prices
|
outstanding
|
life
(years)
|
warrants
|
exercisable
|
|||||||
|
$
|
0.005
|
136,500,000
|
2.42
|
$0.005
|
136,500,000
|
||||||
|
$
|
0.110
|
10,500,000
|
2.89
|
$0.110
|
10,500,000
|
||||||
|
$
|
0.115
|
42,000,000
|
2.89
|
$0.115
|
42,000,000
|
||||||
|
189,000,000
|
2.55
|
189,000,000
|
|||||||||
There
were no transactions involving warrants during this period.
Options
The
following table summarizes the options outstanding at March 31,
2007:
|
Weighted
|
Weighted
|
|||||||||||||||||||||
|
Weighted
|
average
|
average
|
||||||||||||||||||||
|
Average
|
exercise
|
exercise
|
||||||||||||||||||||
|
Range
of
|
Number
of
|
remaining
|
price
of
|
Number
of
|
price
of
|
|||||||||||||||||
|
exercise
|
Options
|
contractual
|
Outstanding
|
Options
|
exercisable
|
|||||||||||||||||
|
prices
|
outstanding
|
life
(years)
|
Options
|
exercisable
|
options
|
|||||||||||||||||
|
$
|
0.005
|
15,000,000
|
4.14
|
$
|
0.005
|
15,000,000
|
$
|
0.005
|
||||||||||||||
|
0.500
|
500,000
|
1.63
|
0.500
|
300,000
|
0.500
|
|||||||||||||||||
|
15,500,000
|
4.06
|
15,300,000
|
$
|
0.015
|
||||||||||||||||||
|
Weighted
|
||||||||
|
Average
|
||||||||
|
Number
of
|
Exercise
|
|||||||
|
Shares
|
Price
|
|||||||
|
Options
outstanding at December 31, 2006
|
15,500,000
|
$
|
0.0.21
|
|||||
|
Granted
|
-
|
-
|
||||||
|
Exercised
|
-
|
-
|
||||||
|
Cancelled
/ Expired
|
-
|
-
|
||||||
|
Options
outstanding at September 30, 2007
|
15,500,000
|
$
|
0.021
|
|||||
|
Exercisable
|
15,300,000
|
$ |
0.010
|
|||||
|
Not
exercisable
|
200,000
|
$ |
0.500
|
|||||
Accounting
for Warrants and Freestanding Derivative Financial
Instruments
The
Company accounts for the issuance of common stock purchase warrants and other
freestanding derivative financial instruments in accordance with the provisions
of EITF 00-19. Based on the provisions of EITF 00-19, the Company
classifies, as equity, any contracts that (i) require physical settlement or
net-share settlement or (ii) gives the Company a choice of net-cash settlement
or settlement in its own shares (physical settlement or net-share
settlement). The Company classifies as assets or liabilities any
contract that (i) require net-cash or (ii) give the counterparty a choice of
net-cash settlement in shares (physical or net-share settlement).
The fair
value of these warrants is determined utilizing the Black-Scholes valuation
model. Through August 2005, these warrants were accounted for by the
equity method, whereby the fair value of the warrants was charged to additional
paid-in capital. During September, 2005, the number of shares of the Company’s
common stock issued and issuable exceeded the number of shares of common stock
the Company had authorized, and this triggered a change in the manner in which
the Company accounts for these warrants and the Company began to
account for these warrants utilizing the liability
method. Pursuant to EITF 00-19 , “If a
contract is reclassified from permanent or temporary equity to an
asset or a liability, the change in fair value of the contract during the period
the contract was classified as equity should be accounted for as an adjustment
to stockholders’ equity.” Accordingly, during the year ended December
31, 2005, the Company charged the amount of $10,374,536 to
stockholders’ equity. At the same time, the Company
changed the way in which it accounts for the beneficial conversion feature of
convertible notes payable (see note 8).
The
accounting guidance shows that the warrants and options which are a derivative
liability should be revalued each reporting period. The recorded
value of such warrants can fluctuate significantly based on fluctuations in the
market value of the underlying securities of the issuer of the warrants and
options, as well as in the volatility of the stock price during the term used
for observation and the term remaining for warrants and
options. During the nine months ended September 30, 2007, the Company
recognized a gain of $237,585 for the increase in the fair
value of the warrant liability and recorded this gain in operations during the
nine months ended September 30, 2007. The fair value of these
instruments was estimated at September 30, 2007, using the Black-Scholes option
pricing model with the following assumptions: risk free interest rate: 4.25%;
expected dividend yield: 0%; expected option life: 10 years; and volatility:
178.26%.
Insufficient
Authorized but Unissued Shares of Common Stock
The
Company has a potential obligation to issue 627,167,680 shares (post-reverse
split) of common stock upon the conversion of convertible notes and accrued
interest, warrants and penalty shares issuable at September 30,
2007. The Company had 145,737,638
shares
(post-reverse split) of common stock outstanding at September 30, 2007
and 500,000,000 shares (post-reverse split) of common stock
authorized at September 30, 2007. The Company has exceeded its shares
authorized by 276,955,318 (post-reverse split) at September 30,
2007.
12.
PENALTY FOR LATE REGISTRATION OF SHARES
At
September 30, 2007, the Company had a liability in the amount of $441,120 for
the issuance of 110,280,000 shares (post-reverse split) of the
Company’s common stock pursuant to a penalty calculation with regard to the late
registration of shares underlying convertible notes
payable. The Company charged to operations the amount of $13,272 and
$64,984 during the three and nine months ended September 30, 2007,
respectively, representing the fair value of these
shares. During the three and nine months ended September 30, 2007,
the Company also marked to market the value of these shares. This
resulted in a loss $152,040 and $113,576, respectively
13.
SUBSEQUENT EVENTS
On March
12, 2008, we executed amendments to restructure an aggregate of $150,000 of
senior secured notes which were due February 7, 2007. The amendments extended
the due date of the notes to March 4, 2009 and were in consideration of our
issuance of an aggregate of: 30 million Class A warrants exercisable at $0.0115
per share, 7.5 million Class B warrants exercisable at $0.011 per share, and 3
million Class C warrants exercisable at $0.005 per share. All of
these warrants have essentially similar terms to the warrants we issued to such
investors on February 24, 2005, except that the underlying common stock does not
have registration rights. .
On March
12, 2008, we also extended, to March 4, 2009, the due date of an additional
$10,000 note that was due November 19, 2006 in consideration of adding a
convertibility feature, at a conversion price of $0.005 per share, to the note
and the issuance of 2 million Class A warrants exercisable at $0.0115 per share,
500,000 Class B warrants exercisable at $0.011 per share, and 200,000 Class C
warrants exercisable at $0.005 per share. All of these warrants have
essentially similar terms to the warrants we issued to such investors on
February 24, 2005, except that the underlying common stock does not have
registration rights. .
On
January 22, 2008, we extended, to December 31, 2009, the due date of a $75,000
note previously extended to March 31, 2008 in consideration of adding a
convertibility feature, at a conversion price of $0.005 per share, to the
note.
Effective
July 31, 2008, Mr. Ziakas resigned his position as our Chief Operating Officer
and assumed the non-executive officer position of Vice President of
Procurement. Mr. Ziakas’ existing employment agreement has been
terminated and he will continue working for us as an employee-at–will with an
annual salary of $105,000.
Effective
on July 31, 2008, Mr. Justin Wiernasz, age 42, was promoted to the position of
President of Innovative Food Holdings, Inc. Mr. Wiernasz was the
Executive Vice President of Marketing and Sales and Chief Marketing Officer of
our operating subsidiary, Food Innovations, Inc. since May 2007 and the
President of Food Innovations and our Chief Marketing Officer since December
2007. Prior thereto, he was at U.S. Foodservice, our largest customer
for 13 years. From 2005 to 2007 he was the Vice President of Sales &
Marketing, U.S. Foodservice, Boston, and prior thereto, from 2003 to 2005 he was
a National Sales Trainer at U.S. Foodservice, Charleston SC, from 1996 to 2003
he was the District Sales Manager at U.S. Foodservice, Western Massachusetts and
from 1993 to 1996 he was Territory Manager, U.S. Foodservice, Northampton,
Easthampton & Amherst, MA. Prior to that from 1989 to 1993 he was the owner
and operator J.J.’s food and spirit, a 110 seat restaurant. Mr. Wiernasz signed an
employment agreement dated May 18, 2007 that expires on September 13, 2008
pursuant to which he is currently compensated at an annual rate of $120,000. The
agreement also provides for the earning of a bonus of 10% of his salary, up to
50%, for each $100,000 of incremental profits we make over the previous year. On
January 22, 2008, our Board approved the grant of an aggregate of 3 restricted
million shares and 5 million in options exercisable for five years at an
exercise price of $0.007 per share to Mr. Wiernasz, upon his appointment as
President of Innovative Food Holdings, all of which vest on December 31, 2008,
provided Mr. Wiernasz is then still an employee.
FORWARD
LOOKING STATEMENTS
Certain
information contained in this discussion and elsewhere in this report may
include “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, and is subject to the safe harbor
created by that act. The safe harbor created by the Securities Litigation Reform
Act will not apply to certain “forward looking statements” because we issued
"penny stock" (as defined in Section 3(a)(51) of the Securities Exchange Act of
1934 and Rule 3a51-1 under the Exchange Act) during the three year period
preceding the date(s) on which those forward looking statements were first made,
except to the extent otherwise specifically provided by rule, regulation or
order of the Securities and Exchange Commission. We caution readers that certain
important factors may affect our actual results and could cause such results to
differ materially from any forward-looking statements which may be deemed to
have been made in this Report or which are otherwise made by or on behalf of us.
For this purpose, any statements contained in this report that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, words such as "may", "will",
"expect", "believe", "explore", "consider", "anticipate", "intend", "could",
"estimate", "plan", "propose" or "continue" or the negative variations of those
words or comparable terminology are intended to identify forward-looking
statements. Factors that may affect our results include, but are not limited to,
the risks and uncertainties associated with:
|
●
|
Our
ability to raise capital necessary to sustain our anticipated operations
and implement our proposed business
plan,
|
|
●
|
Our
ability to implement our proposed business
plan,
|
|
●
|
The
ability to successfully integrate the operations of businesses we have
acquired, or may acquire in the future, into our
operations,
|
|
●
|
Our
ability to generate sufficient cash to pay our lenders and other
creditors,
|
|
●
|
Our
ability to employ and retain qualified management and
employees,
|
|
●
|
Our
dependence on the efforts and abilities of our current employees and
executive officers,
|
|
●
|
Changes
in government regulations that are applicable to our
client or anticipated business,
|
|
●
|
Changes
in the demand for our services,
|
|
●
|
The
degree and nature of our
competition,
|
|
●
|
Our
lack of diversification of our business
plan,
|
|
●
|
The
general volatility of the capital markets and the establishment of a
market for our shares,
|
|
●
|
Our
ability to generate sufficient cash to pay our creditors,
an1d
|
|
●
|
Disruption
in the economic and financial conditions primarily from the impact of past
terrorist attacks in the United States, threats of future attacks, police
and military activities overseas and other disruptive worldwide political
and economic events and natural
disasters.
|
We are
also subject to other risks detailed from time to time in our other Securities
and Exchange Commission filings and elsewhere in this report. Any one or more of
these uncertainties, risks and other influences could materially affect our
results of operations and whether forward-looking statements made by us
ultimately prove to be accurate. Our actual results, performance and
achievements could differ materially from those expressed or implied in these
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether from new information, future
events or otherwise.
Critical
Accounting Policy and Estimates
Our
Management’s Discussion and Analysis section discusses our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, management evaluates
its estimates and judgments, including those related to
revenue recognition, accrued expenses,
financing operations, and contingencies and litigation. Management
bases its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these Estimates under different assumptions or conditions. There
are no significant accounting estimates inherent in the preparation of our
financial statements.
Background
The
following discussion should be read in conjunction with the financial statements
of the company and related notes included elsewhere in this Report and in the
Company’s Annual Report on Form 10-KSB for the year ended December 31,
2006.
RESULTS
OF OPERATIONS
The
following is a discussion of our financial condition and results of operations
for the three and nine months ended September 30, 2007 and 2006. This discussion
may contain forward looking-statements that involve risks and uncertainties. Our
actual results could differ materially from the forward looking-statements
discussed in this report. This discussion should be read in conjunction with our
consolidated financial statements, the notes thereto and other financial
information included elsewhere in the report and our other public
filings.
Three
Months Ended September 30, 2007 Compared to Three Months Ended September 30,
2006
Sales
Sales
decreased by $8,647, or approximately 1%, to $1,556,006 for the three months
ended September 30, 2007 from $1,564,653 from the
prior year.
The substantial portion of the decrease was attributable to changing the
shipping on a significant number of products from overnight to 3 day
shipping. This lowered our costs and our product prices was lowered
in turn.
Cost of
goods sold was $1,198,981 for the three months ended September 30, 2007, an
increase of $31,149 or approximately 3% compared to cost of revenue of
$1,167,832 for the three months ended September 30, 2006. The
increase in the cost of revenue was due to changing the shipping on a
significant number of products from overnight to 3 day shipping. We
shipped more product this quarter at a lower markup.
Gross profit margin for the three months ended September 30, 2007 was
approximately 23%, compared to gross profit margin of approximately 25% for the
three months ended September 30, 2006. The
increased gross margins for the current quarter was due primarily to changing
the shipping on a significant number of products from overnight to 3 day
shipping. This lowered our markup on shipping for the
quarter.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses decreased by $34,729, or approximately 7%,
to $449,442 during the three months ended September 30, 2007 compared to
$484,171 for the three months ended September 30, 2006. The
decrease was attributable to lower travel costs $17,921 and lower legal and
professional fees $16,495. The primary components of selling,
general, and administrative expenses for the three months ended September 30,
2007 were payroll and related costs of $195,087; consulting fees of $41,803;
legal and accounting fees of $46,100; office supplies and expense of $23,515;
insurance costs of $21,583; facilities cost of $19,457; commissions of $19,013;
travel and entertainment of $12,933; amortization and depreciation of $9,432;
and technical support of $6,193.
Penalty
for Late Registration of Shares
During
the three months ended September 30, 2007, the Company accrued the issuance of
4,200,000 shares (post-reverse split) of common stock pursuant to a penalty
calculation with regard to the late registration of shares underlying
convertible notes payable. The Company charged to operations $13,272, during the
three months ended September 30, 2007, representing the fair value of these
shares. At September 30, 2007, there were a total of 110,280,000 shares
(post-reverse split) issuable pursuant to this penalty. During the three months
ended June 30, 2007, the Company also marked to market the value of these
110,280,000 shares (post-reverse split). This resulted in a net loss of
$152,040.
Change
in Fair value of Warrant Liability
At
September 30, 2007, the Company had an accrued a liability of $759,191
representing the value of the warrants issued with the convertible
notes. The Company charged to operations the amount of $265,338
during the three months ended September 30, 2007, representing the change in the
fair value of these warrants.
Change
in Fair value of the Conversion Option Liability
At
September 30, 2007, the Company had an accrued a liability of $814,776,
representing the fair value of the beneficial conversion feature of convertible
notes payable. The Company charged operations $284,825 during the
three months ended September 30, 2007, representing the change in the
fair value of these options
Interest
(Income) expense, net
Interest
expense, net of interest income, decreased by $26,825, or approximately 25%,
from $107,360 during the three months ended September 30, 2006 to $80,535 for
the three months ended September 30, 2007. This decrease was attributable
primarily to the conversion of a convertible note payable into shares of common
stock.
Net
Income (Loss)
For the
reasons stated above, net loss for the three months ended September 30, 2007 was
$888,427, a decrease of $13,478,268 or approximately 107% compared to net income
of $12,589,841, during the three months ended September 30, 2006. We note that
these “profits” are the result of the application of various accounting rules as
they apply to the Company and that these “Profits” have no impact on out cash
flows.
Nine
Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
2006
Sales
Sales decreased by
$183,684, or approximately 4%, to $4,860,414 for the nine months ended September
30, 2007 from $5,044,098 from the
prior year.
The substantial portion of the decrease was attributable to changing the
shipping on a significant number of products from overnight to 3 day
shipping. This lowered our costs and our product prices was lowered
in turn.
Cost of goods sold was
$3,605,093 for the nine months ended September 30, 2007, a decrease of $232,967
or approximately 6% compared to cost of revenue of $3,838,060 for the nine
months ended September 30, 2006. The
decrease in the cost of revenue was due to decrease in sales and lower
transportation costs. Gross profit margin for the nine months
ended September 30, 2007 was approximately 26%, compared to gross profit margin
of approximately 24% for the nine months ended September 30, 2006. The
increased gross margins for the current quarter was due primarily to an increase
in prices over the cost of goods.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses decreased by $243,604, or approximately 16%,
to $1,277,206 during the nine months ended September 30, 2007 compared to
$1,520,810 for the nine months ended September 30, 2006. The
majority of the decrease was attributable to a decrease in
professional and legal fees of $105,898, a decrease in travel of $61,245 and a
decrease in supplies of $16,323. The primary components of selling, general, and
administrative expenses for the nine months ended
September 30, 2007 were payroll and related costs of $568,614; consulting and
professional fees of $206,169; legal and accounting fees of $127,357; office
supplies and expense of $67,967; commissions of $66,019; facilities cost of
$60,604; insurance costs of $58,597; amortization and depreciation of $39,399;
technical support of $22,823; and travel and entertainment of
$27,015.
Penalty
for Late Registration of Shares
During
the nine months ended September 30, 2007, the Company accrued the issuance of
22,760,000 shares (post-reverse split) of common stock pursuant to a penalty
calculation with regard to the late registration of shares underlying
convertible notes payable. The Company charged to operations $64,984, during the
nine months ended September 30, 2007, representing the fair value of these
shares. At September 30, 2007, there were a total of 110,280,000 shares
(post-reverse split) issuable pursuant to this penalty. During the nine months
ended September 30, 2007, the Company also marked to market the value of these
110,280,000 shares (post-reverse split). This resulted in a net loss
of $113,576.
Change
in Fair value of Warrant Liability
At
September 30, 2007, the Company had an accrued a liability of $759,191
representing the value of the warrants issued with the convertible
notes. The Company credited to operations the amount of $237,585
during the nine months ended September 30, 2007, representing the change in the
fair value of these warrants.
Change
in Fair value of the Conversion Option Liability
At
September 30, 2007, the Company had an accrued a liability of $814,776,
representing the fair value of the beneficial conversion feature of convertible
notes payable. The Company charged operations $377,569 during the
nine months ended September 30, 2007, representing the change in the
fair value of these options.
Interest
(Income) expense, net
Interest
expense, net of interest income, decreased by $27,339, or approximately 10%,
from $266,007 during the nine months ended September 30, 2006 to $238,668 for
the nine months ended September 30, 2007. This decrease was attributable
primarily to the conversion of a convertible note payable into shares of common
stock.
Net
Income (Loss)
For the
reasons stated above, net loss for the nine months ended September 30, 2007 was
$1,054,267, an decrease of $11,129,463 or approximately 111% compared to net
income of $10,075,196 during the nine months ended September 30,
2006. We note that these “profits” are the result of the application of various
accounting rules as they apply to the Company and that these “Profits” have no
impact on out cash flows.
Liquidity
and Capital Resources
As of
September 30, 2007, the Company had a cash on hand of $38,722, a
decrease of $79,796 from December 31, 2006. During the nine months ended
September 30, 2007, cash used by operating activities was $34,168, consisting
primarily of the net loss of $1,054,267 offset by depreciation and amortization
of $39,399; convertible note payable issued for salary of $40,500; value of
stock issued to board members as a bonus of $8,125; cost of penalty due to late
registration of shares of $64,984; change in fair value of warrant liability of
$377,569, change in fair value of conversion option liability of $237,585;
loss from marking to market shares issuable due to penalty on
late registration of shares of $113,576; and changes in the components of
working capital in the net amount of $138,361. Cash used in investing activities
was $40,611 consisting of the purchase of property and equipment of
$40,611. Cash used by financing activities was $5,017, consisting
of $5,017 in principal payments on notes payable.
Historically,
our primary cash requirements have been used to fund the cost of operations,
with additional funds having been used in promotion and advertising and in
connection with the exploration of new business lines.
Under
current operating plans and assumptions, management believes that projected cash
flows from operations and available cash resources may be insufficient to
satisfy our anticipated cash requirements for at least the next twelve months.
As we seek to increase our sales of perishables, as well as identify new and
other consumer oriented products and services, we may use existing cash
reserves, long-term financing, or other means to finance such
diversification.
Critical
Accounting Policy and Accounting Estimate Discussion
In
accordance with the Securities and Exchange Commission's (the "Commission")
Release Nos. 33-8040; 34-45149; and FR-60 issued in December 2001, referencing
the Commission's statement "regarding the selection and disclosure by public
companies of critical accounting policies and practices", we have set forth in
Note 2 of the Notes to Consolidated Financial Statements what we believe to be
the most pervasive accounting policies and estimates that could have a material
effect on our results of operations and cash flows if general business
conditions or individual customer financial circumstances change in an adverse
way relative to the policies and estimates used in the attached financial
statements or in any "forward looking" statements contained herein.
The
Company’s cash on hand may be insufficient to fund its planned operating needs.
We continue to seek funding for working capital requirements, necessary
equipment purchases, marketing costs, and other operations for the next year and
foreseeable future by raising capital through the sale of equity and/or debt
securities, issuing common stock in lieu of cash for services and by advances
from shareholders.
We expect
that any sale of additional equity securities or convertible debt will result in
additional dilution to our stockholders. The Company can give no assurance that
it will be able to generate adequate funds from operations, that funds will be
available to us from debt or equity financing, or that if available, the company
will be able to obtain such funds on favorable terms and conditions. If the
company cannot secure additional funds it may have to reduce its operations be
able to continue as a going concern. The Company currently has no
definitive arrangements with respect to additional financing.
While we
have raised capital to meet our working capital and financing needs in the past,
additional financing may be required in order to meet our current and projected
cash flow deficits from operations and development. We are seeking financing in
the form of equity or debt in order to provide the necessary working capital. We
currently have no commitments for financing. There is no guarantee that we will
be successful in raising the funds required.
By
adjusting our operations and development to the level of capitalization,
management believes we have sufficient capital resources to meet projected cash
flow deficits through the next twelve months. However, if thereafter, we are not
successful in generating sufficient liquidity from operations or in raising
sufficient capital resources, on terms acceptable to us, this could have a
material adverse effect on our business, results of operations, liquidity and
financial condition.
The
independent auditors report on our December 31, 2006 financial statements states
that our recurring losses raise substantial doubts about our ability to continue
as a going concern.
INFLATION
The
impact of inflation on the costs of the Company, and the ability to pass on cost
increases to its customers over time is dependent upon market conditions. The
Company is not aware of any inflationary pressures that have had any significant
impact on the Company’s operations over the past quarter, and the Company does
not anticipate that inflationary factors will have a significant impact on
future operations.
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company does not maintain off-balance sheet arrangements nor does it participate
in non-exchange traded contracts requiring fair value accounting
treatment.
RISK
FACTORS
The
Company’s business and success is subject to numerous risk factors as detailed
in its Annual Report on Form 10-KSB for the year ended December 31,
2006.
Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit pursuant to the requirements of the Securities Exchange Act of
1934 is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, among other things, controls and
procedures designed to ensure that information required to be disclosed by us in
the reports that we file under the Exchange Act is accumulated and communicated
to our management, including our principal executive and financial officers, as
appropriate to allow timely decisions regarding required
disclosure.
(a)
Evaluation of disclosure controls and procedures
Our
Principal Executive Officer and Principal Financial Officer, after evaluating
the effectiveness of our disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered
by this Quarterly Report, have concluded that as of that date, our disclosure
controls and procedures were adequate and effective to ensure that information
required to be disclosed by us in the reports we file or submit with the
Securities and Exchange Commission is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. The conclusions notwithstanding, you are advised
that no system if foolproof.
(b)
Changes in internal control over financial reporting
There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by Exchange Act Rules 13a-15(d) and
15d-15 that occurred during the period covered by this Quarterly Report that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
NONE
NONE
We are in
default of $1,298,000 of our outstanding notes payable. We did not meet certain
of our obligations under the loan documents relating to this issuance. These
lapses include not reserving the requisite number of treasury shares, selling
subsequent securities without offering a right of first refusal, not complying
with reporting obligations, not having our common shares quoted on the OTC:BB
and not timely registering certain securities.
NONE
NONE
25
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
SIGNATURE
|
TITLE
|
DATE
|
||
|
/s/ Sam
Klepfish
Sam
Klepfish
|
Chief Executive
Officer
|
July
31, 2008
|
||
|
/s/ John
McDonald
John
McDonald
|
Principal Financial
Officer
|
July
31, 2008
|
26
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350
AS
ADOPTED PURSUANT TO
SECTION
302 OF THE SARBANES OXLEY ACT OF 2002
CERTIFICATION
I, Sam
Klepfish, certify that:
1. I have reviewed this
quarterly
report on Form 10-QSB of Innovative
Food Holdings, Inc.;
2. Based
on my knowledge, this report does not contain any
untrue statement of a material fact or omit
to state
a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
report;
3. Based
on
my knowledge, the financial statements, and
other financial information included in this report, fairly present
in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. I am responsible for
establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the
registrant and have:
|
a.
|
designed such disclosure controls
and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to
ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in
which this report is being prepared;
|
|
|
b.
|
designed such internal control
over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
|
|
|
c.
|
evaluated
the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this
report based on such evaluation; and
|
|
|
d.
|
disclosed in
this report any change in the registrant's internal
control over financial reporting that occurred during
the registrant's most
recent fiscal quarter (the small business
issuer's fourth
quarter in the case of an
annual report) that has materially
affected,
or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
|
5. I
have disclosed, based on my most recent evaluation of internal
control over financial reporting, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
|
a.
|
all
significant deficiencies and material weaknesses in the design or
operation of
internal control over financial reporting which
are reasonably likely to adversely affect
the registrant's ability to record, process,
summarize and report financial information; and
|
|
|
b.
|
any
fraud, whether or not material, that involves management or other
employees who have a significant role in
the registrant's internal control over financial
reporting.
|
|
Date: July
31, 2008
|
/s/ Sam
Klepfish
|
|
Sam
Klepfish, Chief Executive Officer and
Director
|
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350
AS
ADOPTED PURSUANT TO
SECTION
302 OF THE SARBANES OXLEY ACT OF 2002
CERTIFICATION
I, John
McDonald, certify that:
1. I have reviewed this quarterly
report on Form 10-QSB of Innovative
Food Holdings, Inc.;
2. Based
on my knowledge, this report does not contain any
untrue statement of a material fact or omit
to state
a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
report;
3. Based
on
my knowledge, the financial statements, and
other financial information included in this report, fairly present
in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. I am responsible for
establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the
registrant and have:
|
a.
|
designed such disclosure controls
and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which
this report is being prepared;
|
|
|
b.
|
designed such internal control
over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
|
|
|
c.
|
evaluated
the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this
report based on such evaluation;
and
|
|
|
d.
|
disclosed in
this report any change in the registrant's internal
control over financial reporting that occurred
during the registrant's most
recent fiscal quarter (the small business
issuer's fourth
quarter in the case of
an annual report)
that has materially
affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting;
and
|
5. I
have disclosed, based on my most recent evaluation of internal
control over financial reporting, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
|
a.
|
all
significant deficiencies and material weaknesses in the design or
operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process,
summarize and report financial information; and
|
|
|
b.
|
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's
internal control over financial
reporting.
|
|
Date:
July 31, 2008
|
/s/ John McDonald
|
|
John
McDonald
Principal
Financial
Officer
|
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES OXLEY ACT OF 2002
CERTIFICATION
In
connection with the Quarterly Report of Innovative Food Holdings, Inc. (the
"Company") on Form 10-QSB for the quarter ended September 30, 2007 as filed with
the Securities and Exchange Commission on the date hereof (the
"Report"), I, Sam Klepfish, Chief Executive Officer and Director of
the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that to the best of my
knowledge:
(1) The
Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2)
The information contained in the
Report fairly presents, in all
material respects, the financial condition and
result of operations of the Company.
/s/ Sam
Klepfish
Sam
Klepfish
Chief
Executive Officer and Director
July 31,
2008
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES OXLEY ACT OF 2002
CERTIFICATION
In
connection with the Quarterly Report of Innovative Food Holdings, Inc. (the
"Company") on Form 10-QSB for the quarter ended September 30, 2007 as filed with
the Securities and Exchange Commission on the date hereof (the
"Report"), I, John McDonald, Principal Financial Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
(1) The
Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2)
The information contained in the
Report fairly presents, in all
material respects, the financial condition and
result of operations of the Company.
/s/
John
McDonald
John
McDonald
Principal
Financial Officer
July 31,
2008