innfood-corresp1262009.htm
FEDER,
KASZOVITZ, ISAACSON, WEBER, SKALA, BASS & RHINE, LLP
750
Lexington Avenue
New
York, New York 10022
212-888-8200
February
4, 2009
VIA
EDGAR
Securities
and Exchange Commission
William
Thompson, CPA
Division
of Corporate finance
100 F
Street, N.E.
Washington,
D.C. 20549-5546
RE: Innovative
Food Holdings, Inc. (the “Company”)
Gentlemen:
By letter
dated November 7, 2008, (the “Letter”), the staff (the
“Staff”) of the Securities and Exchange Commission (the “Commission”)
transmitted to the Company comments on the Company’s Form 10-KSB for the Fiscal
Year Ended December 31, 2007 and Form 10-Q for the Fiscal Quarter Ended June 30,
2008. On behalf of the Company we are responding to the Staff’s
comments contained in the Letter. The numbered paragraphs below
correspond to the numbered comments in the Letter.
1.) The
agreement was extended and we disclosed that fact in a Form 8-K filed on
November 6, 2008. Please note that a copy of the extension was not
filed as the Company no longer considers this to be a material agreement
inasmuch as we now believe, based upon our years of experience in this industry,
that regardless of the existence of a contract we will either retain our
customers or not based upon our prices and quality of our service. In
other words, it is the Company's belief that US Foodservice's sales force will
use our services with or without a contract provided we continue to satisfy
their customers with respect to pricing and service.
2.) We
will revise the disclosure in Item 3. Legal Proceedings to reflect
the outstanding principal balance of the promissory notes to $360,000, as
follows:
In
September 2006 we commenced an action in New York Supreme Court, Nassau County,
against Pasta Italiana, Inc., Robert Yandolino and Lloyd Braider to collect on
outstanding promissory notes totaling $360,000 (plus interest and collection
expenses) of which $65,000 were personally guaranteed by the two individual
defendants. The defendants have counterclaimed for an unspecified
amount of damages due to our alleged breach of an agreement to purchase the
corporate defendant. As of December 31, 2007 the action had barely
commenced and its outcome at that time was too speculative to
predict. In September 2008, the parties entered into an
agreement settling the action. Under the settlement, Pasta became
obligated to, inter alia, deliver to the Company 10% of Pasta's fully diluted
common stock and $165,000, paid over the course of 37 months, plus 8%
interest payable in Pasta common stock. We agreed to issue 1.5 million of
our shares to Yandolino and Braider, to vest 500,000 per year as long as Pasta
did not default on the Settlement Agreement. We also agreed to issue to
Yandolino and Braider 500,000 warrants, each carrying with it the right, for
five years, to purchase a share of our common stock for $.0012.
Such warrants vest after 3 years, or when Pasta has fully complied
with its obligations under the Settlement Agreement, whichever comes
sooner.
3.) The
amount of aggregate principal of the convertible notes in Item 5, Derivative
Securities Currently Outstanding will be revised as follows to
reflect the correct amount of the aggregate principal of convertible notes of
$1,126,000:
As of
December 31, 2008 and 2007, the Company has issued convertible notes
payable in the aggregate principal amount of $_________ and $1,126,000,
respectively, with accrued interest of $________ and $378,465,
respectively, which, if converted to common stock, will result in our issuance
of approximately _____________ and 254,222,520 shares
(post-reverse split), respectively, of common stock at conversion
rates ranging from $0.005 to $0.010 per share (post-reverse
split).
4.) Your
comments with respect to the MD&A section have been reviewed and will be
incorporated into the disclosure made in the 10-K for the period ended December
31, 2008.
5.)
Your comments with respect to the Liquidity section have been reviewed and will
be incorporated into the disclosure made in the 10-K for the period ended
December 31, 2008.
6.) We
will revise in the 10-K for the period ended December 31, 2008 our Critical
Accounting Estimates section on page 12 as follows:
Critical
Accounting Policy and Accounting Estimate Discussion
Use
of Estimates in the Preparation of Financial Statements
The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities. These estimates include certain assumptions related to
doubtful accounts receivable, stock-based services, valuation of financial
instruments, and income taxes. On an on-going basis, we evaluate
these estimates, including those related to revenue recognition and
concentration of credit risk. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. We believe our estimates have not been
materially inaccurate in past years, and our assumptions are not likely to
change in the foreseeable future.
Doubtful Accounts
Receivable
The
Company maintained an allowance in the amount of $10,000 for doubtful accounts
receivable at December 31, 2008, 2007 and 2006. Actual losses on accounts
receivable were $______ for 2008, and $0 for 2007 and 2006. The Company has an
operational relationship of several years with our major customers, and we
believe this experience provides us with a solid foundation from which to
estimate our expected losses on accounts receivable. Should our sales mix change
or if we develop new lines of business or new customers, these estimates and our
estimation process will change accordingly. These estimates have been accurate
in the past.
Fair Value of Financial
Instruments
The
Company measures its financial assets and liabilities in accordance with
accounting principles generally accepted in the United States of America. The
estimated fair values approximate their carrying value because of the short-term
maturity of these instruments or the stated interest rates are indicative of
market interest rates. These fair values also vary due to the market
price of the Company’s stock at the date of valuation. Generally,
these liabilities will increase as the price of the Company’s stock increases
(with resultant gain), and decrease as the Company’s stock decreases (yielding a
loss). These fluctuations are likely to continue as long as the
Company has large financial instrument liabilities on its balance
sheet. Should the Company succeed in removing these liabilities from
its balance sheet, either by satisfying them or by reclassifying them as equity,
the amount of gains and losses recognized will be reduced.
Income
Taxes
The
Company has a history of losses, and as such has recorded no liability for
income taxes. Until such time as the Company begins to generate a
profit and provides evidence that a continued profit is a reasonable
expectation, management will not determine that there is a basis for accruing an
income tax liability. These estimates have been accurate in the
past as the Company has not yet generated a
profit.
We will
also similarly
revise
our disclosure in the second paragraph of our discussion of stock-based
compensation on page 13 to reflect the adoption of SFAS 123(R), as
follows:
Stock-based
Compensation
Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised), "Share-Based
Payment" (SFAS 123(R)) utilizing the modified prospective approach. Prior to the
adoption of SFAS 123(R) we accounted for stock option grant in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees" (the intrinsic
value method), and accordingly, recognized compensation expense for stock option
grants.
Under the
modified prospective approach, SFAS 123(R) applies to new awards and to awards
that were outstanding on January 1, 2006 that are subsequently modified,
repurchased or cancelled. Under the modified prospective approach, compensation
cost recognized in the nine months of fiscal 2006 includes compensation cost for
all share-based payments granted prior to, but not yet vested as of January 1,
2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS 123, and compensation cost for all share-based
payments granted subsequent to January 1, 2006 based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(R). Prior periods
were not restated to reflect the impact of adopting the new
standard.
A summary
of option activity under the Plan as of December 31, 2007, and changes during
the period ended December 31, 2008 are presented below:
|
|
Options
|
|
|
Weighted
Average Exercise Price
|
|
Outstanding
as December 31, 2005
|
|
|
500,000 |
|
|
$ |
0.500 |
|
Issued
|
|
|
15,000,000 |
|
|
|
0.005 |
|
Exercised
|
|
|
- |
|
|
|
- |
|
Forfeited
or expired
|
|
|
- |
|
|
|
- |
|
Outstanding
at December 31, 2006
|
|
|
15,500,000 |
|
|
$ |
0.021 |
|
Issued
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
Forfeited
or expired
|
|
|
- |
|
|
|
- |
|
Outstanding
as December 31,2007
|
|
|
15,500,000 |
|
|
$ |
0.021 |
|
|
|
|
|
|
|
|
|
|
Non-vested
at December 31, 2007
|
|
|
200,000 |
|
|
$ |
0.500 |
|
Exercisable
at December 31, 2007
|
|
|
15,300,000 |
|
|
$ |
0.010 |
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested
at December 31, 2008
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2008
|
|
|
|
|
|
|
|
|
Aggregate
intrinsic value of options outstanding and exercisable at December 31,
2006, 2007 and 2008 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 $0.003 as of December 31, 2006 and 2007 and
$0.005 at December 31, 2008, and the exercise price multiplied by the number of
options outstanding. As of December 31, 2007 and 2008, total unrecognized
stock-based compensation expense related to stock options was $0 and $_____,
respectively. During the years ended December 31, 2006, 2007 and
2008, the Company charged $0, $67,500 and $_____, respectively, to
operations related to recognized stock-based compensation expense for employee
stock options.
7.) We
will remove, in the 10-K for the period ended December 31, 2008, the
terminology “Condensed” from our consolidated balance sheets, statements of
operations, statements of cash flows, and statement of stockholders’
equity.
8.) In
May 2006, the Company issued 10,000,000 shares of common stock in anticipation
of completing the acquisition of an outside entity. At the time the
accounting for the year ended December 31, 2006 was being performed, this
transaction had not occurred and the negotiations had ceased, but the shares had
not been transferred to the Company’s transfer agent for
cancellation. Because these shares were issued but were not traded or
tradable, they were shown as issued, but not outstanding. These
shares were being held by the Company’s Chief Executive Officer. At
December 31, 2007 and 2008, these shares were still being held by the Company’s
CEO. These shares are currently in the process of being
cancelled
Since a
transaction was not performed utilizing these shares, there was no value
assigned to them other than their par value of $0.0001 per
share. The entry to record these shares was a debit to
additional paid-in capital and a credit to common stock in the amount of
$1,000.
In
September 2006, the Company converted three notes payable and accrued interest
in the aggregate amount of $44,666 into a total of 8,933,200 shares of common
stock. The entry to issue these shares was:
Notes
payable
|
|
|
8,000 |
|
Accrued
interest
|
|
|
36,666 |
|
Common
Stock
|
|
|
(893 |
) |
APIC
|
|
|
(43,773 |
) |
Also in
September 2006, the Company mistakenly issued 5,573,158 shares of common stock
for the conversion of accrued interest. These shares were actually included in
the 8,933,358 shares previously issued. When the accounting for these
shares was underway, the Company had realized this error. The
entry to issue these shares was:
Common
Stock
|
|
|
557 |
|
APIC
|
|
|
(557 |
) |
In
February 2007, the Company returned these 5,573,158 shares of common stock to
the transfer agent for cancellation. The entry made when the shares
were cancelled was:
APIC
|
|
|
557 |
|
Common
Stock
|
|
|
(557 |
) |
Our revised disclosure
on the face of the balance sheet will reflect these changes as
follows:
Common
stock, $0.0001 par value; 500,000,000 shares authorized; _________________ and
181,787,638 shares issued and _______________ and 171,787,638 outstanding at
December 31, 2008 and 2007, respectively
We
will expand in the 10-K for the period ended December 31, 2008 our
disclosures in Note 12 to describe these transactions as
follows:
The
Company had a 1-for-200 reverse split of its common stock effective March 8,
2004. There were a total of 30,011,706 shares issued and outstanding
immediately before the reverse split, and 157,037 shares issued and outstanding
immediately after the reverse split.
During
the year ended December 31, 2006, the Company had issued 10,000,000 shares of
common stock in anticipation of an acquisition which was never
consummated. At December 31, 2006, 2007 and 2008, these
shares were being held by the Company’s chief executive officer, and are
recorded as issued but not outstanding on the Company’s balance
sheet.
During
the twelve months ended December 31, 2007 and 2008, the Company also had the
following transactions:
During
the twelve months ended December 31, 2007, the Company cancelled 5,573,158
shares (post reverse-split) of common stock which were issued but not
outstanding. These shares were issued in 2006 pursuant to the
conversion of notes and accrued interest into shares of common stock, and were
mistakenly issued twice in 2006. The entry for the second issuance in
2006 was a charge to additional paid-in capital for the par value of these
shares, or $557. The entry made for the cancellation of these shares in 2007 was
a credit to additional paid-in capital in the amount of
$557.
9.) We
believe our basic earnings per share complies with the guidance of SFAS 128: it
is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during the
period. Shares issued during the period are weighted for the portion
of the period that they were outstanding.
We have
analyzed our calculation of fully-diluted earnings per share with regard to the
guidance in SFAS 128, paragraph 49 of EITH 00-19, and EITF
D-72. Specifically:
Convertible
securities
FYE
12.31.07: The shares issuable for the conversion of convertible debt
securities and convertible interest would be anti-dilutive, and pursuant to
paragraph 13 of SFAS 128 we did not include these items in the calculation of
fully-diluted EPS.
FYE
12.31.06: We applied the guidance of paragraph 26 of SFAS 128
regarding the calculation of fully-diluted EPS with regard to convertible
securities, and calculated the effect via the if-converted
method. Accordingly, we added back to the numerator of the EPS
calculation the interest charges associated with the convertible debt, as well
as the amortization of the beneficial conversion feature associated with the
convertible interest on this debt. We also added back the
amount of the change in value of the conversion option liability for the
period. We added to the denominator of the EPS calculation the number
of shares that would have been issued had these securities been converted to
common stock.
This
complies with the guidance of paragraph 49 of EITF 00-19 for contracts in which
the counterparty controls the method of settlement: we used the more dilutive of
the two options (settlement in cash or in stock). This also complies
with the guidance in Topic D-72.
Purchase warrants and stock
options
FYE
12.31.07: The shares issuable for the exercise of purchase warrants
and stock options would be anti-dilutive, and pursuant to paragraph 13 of SFAS
128 we did not include these items in the calculation of fully-diluted
EPS.
FYE
12.31.06: We applied the guidance of paragraph 17 of SFAS 128
regarding the calculation of fully-diluted EPS with regard to the dilutive
effect of call options and warrants, and calculated the effect via the treasury
stock method. We calculated the number of shares issuable based
upon the in-the-money warrants and options, based upon the average value of the
company’s stock price during the period. We also calculated a
weighted-average number of shares outstanding for those warrants which were
issued during the year. This is in compliance with paragraph 46 of
SFAS 128.
Penalty
shares
FYE
12.31.07: The shares issuable for the issuance of penalty shares
would be anti-dilutive, and pursuant to paragraph 13 of SFAS 128 we did not
include these items in the calculation of fully-diluted EPS.
FYE
12.31.06: We applied the guidance of paragraph 29 of SFAS 128
regarding the calculation of fully-diluted EPS with regard to the dilutive
effect of penalty shares. As the Company has the option to satisfy
the accrued penalty in the form of shares or cash, the fully diluted EPS was
calculated assuming the issuance of shares, as this would be more
dilutive. Paragraph 49 of EITF 00-19 states that “… for those
contracts that provide the company with a choice of settlement methods, the
company should assume that the contract will be settled in shares.” We believe
we have complied with this guidance.
Our
revised calculation of EPS is summarize below:
Diluted
EPS Computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
|
|
|
$ |
12,137,413 |
|
Plus:
Income impact of assumed conversions:
|
|
|
|
|
|
|
|
Interest,
amortization of BCF on convertible NP
|
|
|
305,179 |
|
|
|
|
|
Revaluation
of conversion option liability
|
|
|
|
|
|
|
|
|
on
convertible notes payable
|
|
|
(6,666,068 |
) |
|
|
|
|
Revaluation
of options and warrants
|
|
|
(5,579,541 |
) |
|
|
|
|
Revaluation
of penalty shares
|
|
|
(2,332,952 |
) |
|
|
|
|
Effect
of assumed conversions
|
|
|
|
|
|
|
(14,273,382 |
) |
Loss
available to common stockholders
|
|
|
|
|
|
|
|
|
+
assumed conversions
|
|
|
|
|
|
$ |
(2,135,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares
|
|
|
|
|
|
|
128,144,848 |
|
Plus:
Incremental shares from assumed conversions:
|
|
|
|
|
|
|
|
|
Convertible
notes payable and convertible interest
|
|
|
227,393,060 |
|
|
|
|
|
Options
and warrants
|
|
|
98,452,381 |
|
|
|
|
|
Penalty
shares
|
|
|
58,240,000 |
|
|
|
|
|
Dilutive
potential common shares
|
|
|
|
|
|
|
384,085,441 |
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted-average shares
|
|
|
|
|
|
|
512,230,289 |
|
|
|
|
|
|
|
|
|
|
Diluted
EPS:
|
|
|
|
|
|
$ |
(0.004 |
) |
Our
as-filed weighted-average shares outstanding on
December 31, 2007 was 506,197,505,
which is a difference of 6,032,784 or 1.2% from the revised number,
above. We intend to make adjustments to future
filings.
10.) We
will add in the 10-K for the period ended December 31,
2008
the
following disclosure to our Summary of Significant Accounting Policies
section:
Cost of goods
sold
We have
included in cost of good sold all costs which are directly related to the
generation of revenue. These costs include primarily the cost of the
product plus the shipping costs.
Selling, general, and
administrative expenses
We have
included in selling, general, and administrative expenses all other costs which
support the Company’s operations but which are not includable as a cost of
sales. These include primarily payroll, facility costs such as rent
and utilities, selling expenses, and other administrative
costs.
11.) The
Company has determined that revenue should be recognized on a
gross rather than a net basis. This decision was based
upon the guidance provided in EITF 99-19, paragraphs 7 to 14, which provides
eight indicators to use in making this determination. An analysis of the
application of these indicators to the Company’s sales process
follows: NOTE: Please confirm that it is IVFH and not FII that is the
proper entity listed in each of these responses.
A.)
Indicator: The company is the primary obligor in the arrangement.
Analysis:
Innovative Food Holdings is the primary obligor, as the Company has the
responsibility for the fulfillment of orders, including the acceptability of the
product by the customer and the assurance of customer
satisfaction. This indicates the use of the gross basis of
recognizing revenue.
B.)
Indicator: The company has general inventory risk.
Analysis:
Innovative Food Holdings has general inventory risk as we would bear
the cost of any damage or loss to inventory from the time it is shipped to the
time it is accepted by our customers. Our clients also have the
right to return products to us. This indicates the use of the gross
basis of recognizing revenue.
C.)
Indicator: The company has the ability to determine the price at which it sells
the product.
Analysis: Innovative
Food Holdings establishes the price at which it sells its
products to its customers. This indicates the use of the gross
basis of recognizing revenue.
D.)
Indicator: The company changes the product or performs part of the
service.
Analysis: Innovative
Food Holdings provides several key, fundamental services to its customers as
components of the overall sales, delivery, and customer satisfaction
process. These include but are not limited to (i) our food experts
discussing specific needs with customers; (ii) our staff locating the specific
items required by customers; and (iii) arranging for on-time delivery of these
items. As much of our inventory consists of timely delivery of specialty fresh
food items, our customers depend upon us for these services and they
are key components of the overall sales process. This indicates the
use of the gross basis of recognizing revenue.
E.) Indicator: The
company has discretion in supplier selection.
Analysis: Innovative
Food Holdings utilizes multiple suppliers of its products, and has
significant discretion in determining which supplier to utilize in filling
a particular order. This indicates the use of the
gross basis of recognizing revenue.
F.) Indicator: The
company is involved in the determination of product or service
specifications.
Analysis: An
integral part of the Company’s operation is assisting our customers in
determining which product best suits their needs. We maintain a staff
of trained chefs with expert knowledge of food and food products for this
specific purpose. Our staff is in frequent contact with our clients
to ensure that we are providing them with the proper product for their specific
needs. This indicates the use of the gross basis of recognizing
revenue.
G.) The
company has physical loss inventory risk
Analysis: Innovative
Food Holdings takes title for the products at the shipping
point and assumes the loss should the product be damaged or lost during
shipment. This is an indicator that the company should record
revenues on a gross basis.
H.) The
Company has credit risk
Analysis: Innovative
Food Holdings must pay its suppliers in full regardless of whether or
not we are ultimately paid for the shipment by our customers. This is an
indicator that the company should record revenues on a gross
basis
Conclusion: All
8 of the indicators suggested in paragraphs 7 to 14 of EITF
99-19 above lead us to conclude that the gross method of revenue
recognition is the appropriate manner in which to record our revenue. This
information will be added to the disclosures made in the 10-K for the period
ended December 31, 2008.
12.) We
ship all our products either overnight shipping terms or three day shipping
terms to the customer. The customer takes title to product and assumes risk and
ownership of the product when it is received by the customer. This
information will be added to the disclosures made in the 10-K for the period
ended December 31, 2008
13.) A
reconciliation of the numerators and denominators of basic and diluted EPS,
pursuant to the guidance in paragraph 40 of SFAS 128 follows:
|
|
For
the Year Ended December 31, 2006
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per-Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Basic
EPS
|
|
$ |
12,137,413 |
|
|
|
128,144,848 |
|
|
$ |
0.095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on convertible debt
|
|
|
305,179 |
|
|
|
|
|
|
|
|
|
Conversion
option liability
|
|
|
(6,666,068 |
) |
|
|
227,393,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and warrants
|
|
|
(5,579,541 |
) |
|
|
98,452,381 |
|
|
|
|
|
Penalty
shares
|
|
|
(2,332,952 |
) |
|
|
58,240,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
$ |
(2,135,969 |
) |
|
|
512,230,289 |
|
|
$ |
(0.004 |
) |
Anti-dilutive shares
at December 31, 2006:
Warrants to purchase 10,500,000 shares
at $0.11 per share and 42,000,000 shares at $0.115 per share were not included
in the computation of diluted EPS because the warrants' exercise prices
were greater than the average market price of the
common shares. The warrants, which expire in August 2010,
were still outstanding at December 31,
2006.
Anti-dilutive shares
at December 31, 2007:
Diluted EPS was not disclosed for the
twelve months ended December 31, 2007 because the effect would have been anti-dilutive. The
following shares were not included in diluted EPS, but were outstanding at December 31,
2007:
Warrants to purchase 10,500,000 shares
at $0.11 per share, 42,000,000 shares at $0.115 per share, and 136,500,000 shares at $0.005 per
share were not included in the computation of diluted EPS because the warrants' exercise prices
were greater than the average market price of the common shares. 255,684,260 shares
issuable upon the conversion of debt and convertible interest;
15,500,000 shares
issuable upon the conversion of options, and 98,900,000 penalty
shares issuable.
We have
also included a disclosure of securities that could potentially dilute basic
earnings per share in the future that were not included in the computation of
diluted earnings per share because to do so would have been
anti-dilutive.
14) In the
10-K for 2008 we will
revise the section currently
appearing on page
21 regarding credit risk as follows:
Concentrations
of Credit Risk
Financial
instruments and related items, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash, cash equivalents and
trade receivables. The Company places its cash and temporary cash in
investments with credit quality institutions. At times, such
investments may be in excess of applicable government mandated insurance limit.
At December 31, 2007 and 2006, trade receivables from the Company’s largest
customer amount to 86% and 81%, respectively, of total trade
receivables.
15.) The
Company has only one loan receivable, and this loan has characteristics that are
unique to this particular borrower. Accordingly, Pursuant to the
guidance in paragraph 12 of SFAS 114, management used its best estimate of the
amount likely to be recoverable from this loan. This loan is very
short term in nature, and an extensive net present value
cash flow analysis was not considered relevant or material.
16.) Pursuant
to the guidance in EITF 00-27 Issue 6, we have amortized the beneficial
conversion feature associated with the accrued interest on the convertible notes
over the life of each
note. We
continued to amortize the discount on convertible accrued interest over the
original term of the note when a note is in
default. Accelerating the amortization of these discounts on
notes that have entered default status would result in the following
changes:
|
|
Interest
Expense
|
|
Year
ended December 31,
|
|
Original
|
|
|
Change
|
|
|
Adjusted
|
|
2005
|
|
$ |
751,783 |
|
|
$ |
38,211 |
|
|
$ |
789,994 |
|
2006
|
|
|
385,505 |
|
|
|
(16,824 |
) |
|
|
368,681 |
|
2007
|
|
|
308,923 |
|
|
|
(21,387 |
) |
|
|
287,536 |
|
It is the
Company’s position that, the defaults have never resulted in an
acceleration of payments (and the Company did not have funds to pay in any
case), so the accelerated due date is not actually a true due date.
17.) The
table of accrued interest at December 31, 2007 does not reflect a discount
because the discounts on accrued interest are all fully amortized at December
31, 2007. The discount disclosed in the table of accrued interest at
December 31, 2006 differs from the amount disclosed on the face of the
consolidated balance sheet due to a typographical error on the face of the
balance sheet: the amount “421,387” should be “$21,387”, which is the
amount in the table. This change will be made in the 10-K for the
period ended December 31, 2008.
18.) The
aggregate amount of discounts on convertible interest charged to operations
during the twelve months ended December 31, 2007 and 2006 was $123,670 and
$159,140, respectively.
19.) We
did amortize the discounts on convertible notes immediately, and not over the
two year life of the notes. We relied upon EITF D-60, which
reads in part, as
follows:
Since the
discounts were charged to operations immediately, there was no amortization to
accelerate upon default. Since these discounts are all fully amortized at
12.31.07 and would be fully amortized under either amortization period
(immediately or over the term of the note) we will adjust the financial
statements to reflect the above in future filings.
20.) The
aggregate amounts of discounts on convertible debt charged to operations are
scheduled below:
|
|
|
12.31.04 |
|
|
|
12.31.05 |
|
|
|
12.31.06 |
|
|
|
12.31.07 |
|
|
Total
|
|
Discount
charge to operations:
|
|
$ |
628,000 |
|
|
$ |
705,000 |
|
|
$ |
9,000 |
|
|
$ |
- |
|
|
$ |
1,342,000 |
|
21.) Pursuant
to the guidance in EITF 96-19 and 06-6, because the modification of the terms of
the new notes payable included the addition of conversion features, the Company
accounted for these modifications as extinguishment of debt. Because
the discounted cash flows of the new instruments were the same as the fair value
of the extinguished instruments, there were no gains or losses on these
extinguishments.
The
conversion prices of the modified notes to Alpha Capital (dated February 7, 2006
and May 19, 2006) and Whalehaven Capital (dated February 7, 2006) are $0.005 per
share. The closing price of the Company’s common stock on
the
modification date of July 31, 2007 was $.0031. As this conversion option was not
in the money, no beneficial conversion features were
calculated.
22.) The
fair value of the beneficial conversion features of the notes to Mr. Klepfish
and Alpha Capital are as follows:
Year
ended December 31, 2007:
Alpha
Capital – There was no beneficial conversion feature recognized as a discount to
the notes payable to Alpha Capital because the conversion price of the notes was
greater than the market price of the stock on the date of issuance of the
notes.
Mr.
Klepfish – There was no beneficial conversion feature recognized as a discount
to the notes payable to Mr. Klepfish because the conversion price of the
notes was greater than the market price of the stock on the date of
issuance of the notes.
Year
ended December 31, 2006:
Alpha
Capital – There was no convertible debt issued to Alpha Capital during the 12
months ended December 31, 2006.
Mr.
Klepfish – Beneficial conversion features in the aggregate amount of
$9,000 were recognized as a discount to two notes in the aggregate amount of
$9,000. $9,000 of these discounts were amortized to interest
expense.
23.) In
future filings the Company will add disclosure as
follows:
At
December 31, 2007, and 2006, the Company had a total of 39 and 28 notes payable
outstanding,
respectively, in
the aggregate amount of $1,221,953, and $1,332,377. This includes an
aggregate of fourteen and two notes at
December 31, 2007 and 2006, respectively, payable
to Sam Klepfish, the Company’s Chief Executive Officer, to whom the Company
signs a separate note payable each month representing wages payable to Mr.
Klepfish. None of the notes to Mr. Klepfish are in default at
December 31, 2007 or 2006. Of the remaining 25 and 26 notes
outstanding at December 31, 2007 and 2006, a total of 24 and 25,
respectively, are in
default.
The
company will also clarify, in the discussion of each of the notes payable in the
body of footnote 8, which of the notes are in default.
24.) The
following disclosure will be added to the disclosure in future
filings:
There are
issuable a total of 298,168,520 and 252,386,120 shares of common stock at
December 31, 2007 and 2006, respectively, upon the conversion of convertible
notes payable and accrued interest.
25.) It
appears that there is an error in our response to Comment 57 of the SEC letter
dated January 19, 2006. In our response, we stated that we valued the beneficial
conversion features of the convertible notes issued during the year ended
December 31, 2004 in the aggregate amount of $628,000 by using the
Black-Scholes valuation model. This is not correct; as we stated in
the last full paragraph of page 30 of our Form 10-KSB for the year ended
December 31, 2007, “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.”
There
were a number of transactions that occurred effective August 25, 2005; it is not
possible to determine which of these specific transactions triggered the number
of common shares issuable to exceed authorized shares. These
transactions are listed below:
Convertible
Notes Payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
Holder
|
|
Note
Amounts
|
|
|
#
conversion shares
|
|
Alpha
Capital
|
|
$ |
120,000 |
|
|
|
24,000,000 |
|
Whalehaven
Capital
|
|
|
30,000 |
|
|
|
6,000,000 |
|
Asher
Brand
|
|
|
25,000 |
|
|
|
5,000,000 |
|
Momona
Capital
|
|
|
25,000 |
|
|
|
5,000,000 |
|
Lane
Ventures
|
|
|
10,000 |
|
|
|
2,000,000 |
|
Total
conversion shares
|
|
$ |
210,000 |
|
|
|
42,000,000 |
|
|
|
|
|
|
|
|
|
|
Warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Holder
|
|
|
|
|
|
#
of warrant
shares
|
|
Alpha
Capital
|
|
|
|
|
|
|
24,000,000 |
|
Alpha
Capital
|
|
|
|
|
|
|
6,000,000 |
|
Alpha
Capital
|
|
|
|
|
|
|
2,400,000 |
|
Whalehaven
Capital
|
|
|
|
|
|
|
6,000,000 |
|
Whalehaven
Capital
|
|
|
|
|
|
|
1,500,000 |
|
Whalehaven
Capital
|
|
|
|
|
|
|
600,000 |
|
Asher
Brand
|
|
|
|
|
|
|
5,000,000 |
|
Asher
Brand
|
|
|
|
|
|
|
1,250,000 |
|
Asher
Brand
|
|
|
|
|
|
|
500,000 |
|
Momona
Capital
|
|
|
|
|
|
|
5,000,000 |
|
Momona
Capital
|
|
|
|
|
|
|
1,250,000 |
|
Momona
Capital
|
|
|
|
|
|
|
500,000 |
|
Lane
Ventures
|
|
|
|
|
|
|
2,000,000 |
|
Lane
Ventures
|
|
|
|
|
|
|
500,000 |
|
Lane
Ventures
|
|
|
|
|
|
|
200,000 |
|
|
|
|
|
|
|
|
56,700,000 |
|
|
|
|
|
|
|
|
|
|
Total
conversion
shares
and warrant shares:
|
|
|
|
|
|
|
98,700,000 |
|
Accounting
for beneficial conversion features before the triggering event:
If a note
payable had a conversion feature that was in-the-money at the date of issuance
of the note, we calculated a value for this beneficial conversion feature via
the intrinsic value method. If there were warrants issued with the note, we
valued the warrants via the Black-Scholes valuation model, and apportioned the
relative values of the warrants and the beneficial conversion feature via the
relative fair value method. We limited the total amount of the
discount to the face value of each note, and did not record any excess value
over the principal amount of the debt. We accounted for the value of
the beneficial conversion feature via the equity method, and debited “discount
on notes payable” and credited “additional paid-in capital”.
Accounting
for beneficial conversion features after the triggering event:
If a note
payable had a conversion feature that was in-the-money at the date of issuance
of the note, we calculated a value for this beneficial conversion
feature via the Black-Scholes valuation model. We also used this valuation
method for any warrants that might have been issued with the note. We
limited the total amount of the discount to the face value of each note, and did
not record any excess value over the principal amount of the debt. We
accounted for the value of the beneficial conversion feature via the liability
method, and debited “discount on notes payable” and credited “conversion option
liability” for this amount. At the end of each reporting period, we
re-valued the amount of the conversion option liability via the equity method,
and any change in value was charged to operations for the period. It was via
this entry that the excess of the amount of the fair value of the beneficial
conversion option over the principal amount of the debt obligations were charged
to operations.
As the
net effect to the Company’s financial statements at December 31, 2007 is the
same via the method used compared to charging the excess of the fair value of
the conversion option to operations at the time of issuance, it is our belief
that that these errors are not material to the financial statements
..
(i) We
did not use weighted-average assumptions, but a range of assumptions in valuing
the beneficial conversion options after the triggering event. These assumptions
are as follows:
|
|
Twelve
months ended:
|
|
|
|
|
12.31.07 |
|
|
|
12.31.06 |
|
Term
- years
|
|
|
10 |
|
|
|
10 |
|
Volatility
|
|
|
184%
- 207 |
% |
|
|
151%
- 156 |
% |
Expected
dividends
|
|
|
- |
|
|
|
- |
|
Interest
rate
|
|
|
4.25%
- 4.75 |
% |
|
|
4.75 |
% |
(ii) We
used a ten year note term because the company has historically not paid off the
notes at the end of the nominal term. We considered a ten year term to be a
conservative approach to valuing the conversion options. We
calculated a volatility at each note date. We utilized an
approximation of the risk-free interest rate associated with obligations of the
U.S. Treasury. (iii) We did not record a charge to interest expense
for the amount of the fair value of the debt obligations over the principal
amount of these obligations; instead, the fair value was re-measured at each
period end, and the amount of any increase or decrease was charged to operations
at that time.
26.) The
assumptions to value the embedded conversion options at each reporting date are
the same as our response to comment 25. We used a ten year life to
value the embedded conversion options because the nominal term of the notes was
exceeded, and the notes were still in effect; in management’s judgment, a ten
year term was a reasonable estimate of the expected actual term of the
debt.
27.) In
Note 8 we identified the seven notes that contain registration rights for the
shares underlying the convertibility feature of the notes. Except for
the penalties already described in Note 10 for not registering such underlying
shares, there are no circumstances that would require the Company to transfer
any consideration to the note holders. Please note that the
registration rights expired on August 25, 2007.
28.) We
will revise our disclosure in future filings as follows:
Financial
Accounting Standard No. 109 requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statement or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between
financial statements and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Temporary differences between taxable income reported for financial reporting
purposes and income tax purposes are insignificant.
At
December 31, 2007, the Company has available for income tax reporting purposes a
net operating loss carryforward of approximately $1,520,000, which may be used
to offset future taxable income. These
carryforwards expire in 2028. The deferred tax
asset related to the carryforward is approximately $594,000. The Company has
provided a valuation reserve against the full amount of the net operating loss
benefit because, in the opinion of management based upon the earning history of
the Company, it is more likely than not that the benefits will not be realized.
Due to significant changes in the Company’s ownership, the Company’s future use
of its existing net operating losses may be limited in accordance with Section
382 of the Internal Revenue Code, as
amended.
Components
of deferred tax assets as of December 31, 2007 are as follows:
Non
Current:
|
|
|
|
Net
operating loss carryforward
|
|
$ |
594,000 |
|
Valuation
allowance
|
|
|
(594,000
|
) |
Net
deferred tax asset
|
|
$ |
- |
|
29.) A
summary of the significant terms of the outstanding warrant agreements is
included in the first table currently
appearing on page
32. We will change the disclosure in future filings as
follows:
The
following table summarizes the significant terms of warrants outstanding at
December 31, 2007. These warrants may be settled in cash or via
cashless conversion into shares of the Company’s common stock at the request of
the warrant holder. These warrants were granted as part of a
financing agreement (amounts have been adjusted to reflect the reverse stock
split):
30.) We
will change the disclosure in future filings as follows:
Options
In May
2004, the Company issued options with five year terms to purchase 500,000 shares
(post-reverse split) of common stock to an employee. These options
have no alternative settlement provisions. The options vest 100,000 annually
over the next five years. The Company valued these options via the
intrinsic value method, and charged the fair value of the options of $135,673 to
operations during the twelve months ended December 31, 2004.
In
December 2006, the Company agreed to issue 5,000,000 options with five year
terms to purchase additional shares (post-reverse split) of common stock to each
of the Company’s three directors, pursuant to a board resolution for services
performed in 2006. These options have no alternative settlement
provisions. The options were issued in April
2007. Compensation cost was recognized via the straight-line
attribution method. These options vested upon issuance in 2006, and the fair
value of $67,500 was expensed to operations during the year ended December 31,
2006.
The
following table summarizes the changes outstanding and the related prices for
the shares of the Company’s common stock issued to employees of the Company
(post-reverse split):
31.) We
will revise the disclosure in future filings as follows:
The
weighted-average grant-date fair value of stock options issued during the twelve
months ended December 31, 2006 was $0.0045. This value was determined
via the Black-Scholes valuation model, using the following
assumptions: Term of 5 years; computed volatility of 151% to 156%;
discount rate of 4.75%; and dividends of $0. The basis for our
assumptions are the historical results of the Company and the risk-free interest
rate in effect at the time the options were granted.
32.) There
are two groups of options: an option to purchase 500,000 shares at $0.50 per
share was issued to an employee on May 17, 2004, and options to purchase
15,000,000 shares at $0.005 per shares were issued to directors on November 20,
2006.
The
option to purchase 500,000 shares issued to the employee vests at the rate of
1/5 per year on the anniversary date of the issuance. The closing
price of the Company’s stock on the issuance date was $0.50, which was equal to
the option price. These options were valued at $135,673 by utilizing the
Black-Scholes valuation model. This amount was expensed at the time of issuance,
or May 17, 2004. The equity method of accounting was used, and the
credit for these options was made to additional paid-in capital.
The
15,000,000 options issued to directors were granted in November
2006. These shares vested immediately upon issuance. The
closing price of the Company’s common stock on the date of issuance was
$0.045. These options were valued via the Black-Scholes valuation
model at an aggregate of $67,500. Because they immediately vested, the fair
value of these options of $67,500 was expensed upon issuance. Because the
company did not have sufficient authorized shares to issue the shares underlying
these options, the liability method of accounting for these options was used and
the credit was made to a liability account.
Paragraph
39 of SFAS 123(R) states that “The compensation cost for an award of share-based
employee compensation classified as equity shall be recognized over the
requisite service period, with a corresponding credit to equity (generally,
paid-in capital). The requisite service period is the period during which an
employee is required to provide service in exchange for an award, which often is
the vesting period. The requisite service period is estimated based on an
analysis of the terms of the share-based payment award.”
33.) We
will change our disclosure in future filings as follows:
In
December 2006, the Company agreed to issue 5,000,000 options to purchase
additional shares (post-reverse split) of common stock to each of the Company’s
three directors, pursuant to a board resolution for services performed in 2006
(an aggregate of options to purchase 15,000,000 shares). The options
were issued in April 2007. The fair value of the options at the time
of the grant was $67,500. Compensation cost related to the
vesting of stock options was $0 and $67,500 during the twelve months ended
December 31, 2006 and 2007, respectively.
34.) We
will add to our disclosure in future filings as follows:
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). At
December 31, 2007 and 2006, the Company has no freestanding derivative financial
instruments that require net cash settlement or give the counterparty a choice
of net cash settlement or settlement in shares.
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. As the Company no longer had
sufficient shares authorized to settle all of our outstanding
contract,
this triggered a change in the manner in which the Company
accounts for these warrants. 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).
35.)
In future
filings we will
add the following to our disclosure that
currently appears on page
33:
|
|
For
the Year
|
|
|
For
the Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December
31
|
|
|
December
31
|
|
|
|
2007
|
|
|
2006
|
|
Compensation
cost related to stock-based awards:
|
|
|
|
|
|
|
Issuance
of awards
|
|
$ |
- |
|
|
$ |
67,500 |
|
Change
in value of awards
|
|
|
3,452 |
|
|
|
(15,433 |
) |
|
|
|
|
|
|
|
|
|
Cost
related to warrants:
|
|
|
|
|
|
|
|
|
Change
in value of warrants
|
|
$ |
55,590 |
|
|
$ |
(5,564,108 |
) |
The cost
related to employee stock-based compensation should be classified as sales,
general and administrative costs, not other expense. We
will make those changes in our future filings.
36.) We
will add to our disclosure in future filings as follows:
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 twelve months ended December 31, 2007 and 2006,
the Company recognized (gain) loss of $59,042 and $(5,579,541),
respectively, for the decrease in the fair value of the warrant
liability and recorded the gains
or losses
in
operations during the twelve months ended December 31, 2007 and
2006.
The fair
value of these stock options was estimated
as of
December
31, 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: 5 years; and volatility: 194.46%. The fair value of these
stock options was estimated
as of
December
31, 2006 using the Black-Scholes option pricing model with the following
assumptions: risk free interest rate: 4.75%; expected dividend yield: 0%;
expected option life: 5 years; and volatility: 152.50%.
The basis
for our assumptions are the historical stock prices of the
Company.
37.) We
will change the first table currently
appearing on page
33 in future filings as follows:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
average
|
|
|
|
|
|
average
|
|
|
|
|
|
|
|
|
|
|
exercise
|
|
|
|
|
|
exercise
|
|
Range
of
|
|
|
Number
of
|
|
|
remaining
|
|
|
price
of
|
|
|
Number
of
|
|
|
price
of
|
|
exercise
|
|
|
shares
|
|
|
contractual
|
|
|
outstanding
|
|
|
shares
|
|
|
exercisable
|
|
prices
|
|
|
outstanding
|
|
|
life
(years)
|
|
|
options
|
|
|
exercisable
|
|
|
options
|
|
$ |
0.500 |
|
|
|
500,000 |
|
|
|
3.89 |
|
|
$ |
0.500 |
|
|
|
300,000 |
|
|
$ |
0.500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.005 |
|
|
|
15,000,000 |
|
|
|
1.38 |
|
|
|
0.005 |
|
|
|
15,000,000 |
|
|
|
0.005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,500,000 |
|
|
|
3.81 |
|
|
|
|
|
|
|
15,300,000 |
|
|
$ |
0.015 |
|
We will
change the second table currently
appearing on page
33 in future filings as follows:
|
|
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
Outstanding
December 31, 2006
|
|
|
15,500,000 |
|
|
$ |
0.021 |
|
Issued
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
Forfeited
or expired
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
15,500,000 |
|
|
$ |
0.021 |
|
Non-vested
at December 31, 2007
|
|
|
200,000 |
|
|
$ |
0.50 |
|
Exercisable
at December 31, 2007
|
|
|
15,300,000 |
|
|
$ |
0.015 |
|
38.) Pursuant
to the guidance in EITF 96-19 and 06-6, because the modification of the terms of
the new notes payable included the addition of conversion features, the Company
accounted for these modifications as extinguishment of debt. Because
the discounted cash flows of the new instruments were the same as the fair value
of the extinguished instruments, there were no gains or losses on these
extinguishments.
The
conversion prices of the modified notes to Alpha Capital (dated February 7, 2006
and May 19, 2006) and Whalehaven Capital (dated February 7, 2006) are $0.005 per
share. The closing price of the Company’s common stock the
modification date of July 31, 2007 was $.0031. As this conversion option was not
in the money, no beneficial conversion features were calculated.
39.) In
future filings Item 8A will be revised to replace the current disclosure with
the following:
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and
with the participation of our principal executive officer and principal
financial officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act). Accordingly, we
concluded that our disclosure controls and procedures as defined in Rule
13a-15(e) under the Exchange Act were effective as of December 31, 2008 to
ensure that information required to be disclosed in reports we file or submit
under the Exchange Act is recorded, processed, and summarized and reported
within the time periods specified in SEC rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and communicated to the
issuer’s management, including its principal executive and principal financial
officers, or persons performing similar functions as appropriate to allow timely
decisions regarding required disclosure. Subject to the inherent
limitations described below and the exception disclosed in the next sentence,
our management has concluded
that our internal control over financial reporting was effective as of
December 31, 2007 and 2008
at the
reasonable assurance level. However, the above notwithstanding, our
internal controls and procedures for the year ended December 31, 2007 were
deficient in one respect as our management’s report on internal control on
financial reporting was inadvertently omitted from the filing of the 2007
annual report.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) and 15d-(f) under
the Exchange Act. Our internal control over financial reporting are designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes
in accordance with U.S. generally accepted accounting principles. Our internal
control over financial reporting includes those policies and procedures
that:
(i)
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our
assets;
|
(ii)
|
provide
reasonable assurance that transactions are recorded as necessary to permit
the preparation of our consolidated financial statements in accordance
with U.S. generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of
our management and directors; and
|
(iii)
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the consolidated financial
statements.
|
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008 and
2007. In
making this assessment, management used the criteria set forth in Internal
Control Over Financial Reporting — Guidance for Smaller Public Companies issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
Subject
to the inherent limitations described in the following paragraph, our management
has concluded that our internal control over financial reporting was effective
as December 31, 2008 and 2007
at the
reasonable assurance level.
Inherent
Limitations Over Internal Controls
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations, including
the possibility of human error and circumvention by collusion or overriding of
controls. Accordingly, even an effective internal control system may not prevent
or detect material misstatements on a timely basis. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may
deteriorate. Accordingly, our internal controls and procedures are
designed to provide reasonable assurance of achieving their
objectives.
Changes
in Internal Control over Financial Reporting
We have
made no change in our internal control over financial reporting during the last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Attestation
Report of the Registered Public Accounting Firm
This annual report does
not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our independent registered
public accounting firm pursuant to temporary rules of the SEC that permit us to
provide only management’s report in this annual report on Form
10-K.
40.) As
per the response to Comment 39, the Company will include in its disclosure in
the 10-K for the period ended December 31, 2008 that its controls and procedures
for the period ended December 31, 2007 were deficient.
41.)
The alternative disclosure will be included in the revised Item 8A(T)
included above in response 39.
42.) The
required disclosure will be included in the revised Item 8A(T)
included above in response 39.
43.) The
Executive Compensation section will be revised as per your
comments.
44.) Exhibits
14 and 21 will be included in future filings
45.) Revised
Exhibits 31.1 and 31.2 will be included in future filings
46.)
The applicable changes discussed above will be made to our
next Quarterly Report on Form 10-Q for the quarter ended March 31,
2009.
47.)
The option to purchase 20 million shares of common stock vested on December 31,
2008. The fair value of these shares will be charged to operations at that
time. The 3 million shares of restricted stock issued to Mr.
Wiernasz also vested on December 31, 2008; the fair value of these shares will
be charged to operations at that time.
Our
footnote 11 on page 18 is incorrect, and will be changed in future filings as
follows:
On
January 22, 2008, our Board approved the grant to Mr. Wiernasz of an aggregate
of 3 million restricted shares, which vest on December 31, 2008; our Board also
approved the grant to Mr. Wiernasz of 5 million options exercisable for
five years at an exercise price of $0.007 per share, which also vest on December
31, 2008, provided Mr. Wiernasz is then still an employee.
48.)
During the three months ended March 31, 2008, an adjusting entry was made to
reduce the amount in accounts payable by $61,443, which represented credits that
were due to Innovative Food Holdings from one of our vendors. The entry
was made to reduce selling, general and administrative expenses during the three
months ended March 31, 2008. This credit should have been made to cost of
goods sold expense. This entry was corrected during the three months ended
June 30, 2008.
Subsequent
to filing the Form 10-Q for the period ended June 30, 2008, the Company realized
that this treatment above resulted in an overstatement of cost of goods sold
expense and an understatement of selling, general, and administrative expense
for the three months ended March 31, 2008 in the amount of $61,443; it also
resulted in an understatement of cost of goods sold expense and an overstatement
of selling, general, and administrative expense for the three months ended June
30, 2008 in the same amount. Both cost of goods sold expense and
selling, general, and administrative expense for the six months ended June 30,
2008 are correct as reported. The Company believes that these errors are
not material to the financial statements taken as a whole, and has implement
measures to ensure that this sort of error will not occur in the
future.
49.) The
requested changes will be made in future filings, similar to the revised
disclosure contained above in response to items 3, 6, 8, and 39.
The
Company has authorized us to state on its behalf that it is aware and
acknowledges that:
●
|
The
Company is responsible for the adequacy and accuracy of the disclosure in
the filing;
|
●
|
Staff
comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to the
filing; and
|
●
|
The
Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
|
If the
Staff has any questions or further comments with respect to the Company's
revised filings or the contents of this letter, please call either Howard Rhine
or Irving Rothstein at 212-888-8200, at extension 314 or 321,
respectively.
Very
truly yours,
/s/ FEDER, KASZOVITZ,
ISAACSON, WEBER, SKALA, BASS & RHINE,
LLP
FEDER,
KASZOVITZ, ISAACSON, WEBER, SKALA, BASS & RHINE, LLP