innovfood10k123108.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM 10-K 
 

 
x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2008
 
OR
 
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
COMMISSION FILE NUMBER: 0-9376
 
INNOVATIVE FOOD HOLDINGS, INC.
(Name of Registrant as Specified in its Charter)
 
FLORIDA
 
20-116776
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
3845 Beck Blvd., Suite 805 Naples, Florida
 
34114
(Address of Principal Executive Offices)
 
(Zip Code)
 
(239) 596-0204
(Registrant's Telephone Number, Including Area Code)
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
NONE
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
  COMMON STOCK, $0.0001 PAR VALUE PER SHARE
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  o   No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o   

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,”  “accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
 
Large accelerated filer  o
 
Accelerated filer o
Non-accelerated filer    o  (Do not check if a smaller reporting company)
 
Smaller reporting company x
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o   No  x
 
The aggregate market value of the voting and non-voting stock held by non-affiliates was approximately $330,718 as of  April 10, 2009, based upon a closing price of $0.0025  for the issuer's common stock on such date.

On April 10, 2009, 178,577,038 shares of our common stock were outstanding.

 


 
INNOVATIVE FOOD HOLDINGS, INC.
 
INDEX TO ANNUAL REPORT ON FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
 
ITEMS IN FORM 10-K
 
 
PART I
PAGE
     
Item 1.
2
Item 2.
7
Item 3.
7
Item 4.
7
     
 
PART II
 
     
Item 5.
8
Item 6.
9
Item 7.
9
Item 8.
17
Item 9.
46
Item 9A.
46
Item 9B.
46
     
 
PART III
 
     
Item 10.
47
Item 11.
49
Item 12.
51
Item 13.
52
Item 14.
52
Item 15.
53
     
 
54
 
 

 
 
FORWARD LOOKING INFORMATION
MAY PROVE INACCURATE
 
 
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO US THAT ARE BASED ON THE BELIEFS OF MANAGEMENT, AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO US. WHEN USED IN THIS DOCUMENT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," “SHOULD,” AND "EXPECT" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO US, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT OUR CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING THOSE DESCRIBED IN THIS ANNUAL REPORT ON FORM 10-K. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED OR EXPECTED. WE DO NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
 

 PART I

ITEM 1.  Business
 
Our History
 
We were initially formed in June 1979 as Alpha Solarco Inc., a Colorado corporation. From June 1979 through February 2003, we were either inactive or involved in discontinued business ventures. We changed our name to Fiber Application Systems Technology, Ltd in February 2003. In January 2004, we changed our state of incorporation by merging into Innovative Food Holdings, Inc. (IVFH), a Florida corporation formed for that purpose. As a result of the merger we changed our name to that of Innovative Food Holdings, Inc. In January 2004 we also acquired Food Innovations, Inc., a Delaware corporation, for 25,000,000 shares  of our common stock.
 
Our Operations
 
Our business is currently conducted by our subsidiary, Food Innovations, Inc. (“FII”), which was incorporated in the state of Delaware on January 9, 2002. Since its incorporation our subsidiary has been in the business of providing premium restaurants with the freshest origin-specific perishables and specialty products shipped directly from our network of vendors within 24 – 72 hours. Our customers include restaurants, hotels, country clubs, national chain accounts, casinos, and catering houses.  In our business model, we take orders from our customers and then forward the orders to our various suppliers for fulfillment.  In order to preserve freshness, we do not warehouse or store our products, thereby significantly reducing our overhead.  Rather, we carefully select our suppliers based upon, among other factors, their reliability and access to overnight courier services.
  
Our Products
 
We distribute over 3,000 perishable and specialty food products, including origin-specific seafood, domestic and imported meats, exotic game and poultry, artisanal cheeses, caviar, wild and cultivated mushrooms, micro-greens, heirloom and baby produce, organic farmed and manufactured food products, estate-bottled olive oils and aged vinegars. We are constantly adding other products that food distributors cannot effectively warehouse, including organic products and specialty grocery items. We offer our customers access to the best food products available nationwide, quickly and cost-effectively. Some of our best-selling items include:
 
 
● 
 Seafood - Alaskan wild king salmon, Hawaiian sashimi-grade ahi tuna, Gulf of Mexico day-boat snapper, Chesapeake Bay soft shell crabs, New England live lobsters, Japanese hamachi
 
 
● 
 Meat & Game - Prime rib of American kurobuta pork, dry-aged buffalo tenderloin, domestic lamb, Cervena venison, elk tenderloin
 
 
● 
 Produce - White asparagus, baby carrot tri-color mix, Oregon wild ramps, heirloom tomatoes
 
 
● 
 Poultry - Grade A foie gras, Hudson Valley quail, free range and organic chicken, airline breast of pheasant
 
 
● 
 Specialty - Truffle oils, fennel pollen, prosciutto di Parma, wild boar sausage
 
 
● 
 Mushrooms - Fresh morels, Trumpet Royale, porcini powder, wild golden chanterelles
 
 
● 
 Cheese - Maytag blue, buffalo mozzarella, Spanish manchego, Italian gorgonzola dolce
 
In 2008 seafood accounted for 14% of sales, meat and game accounted for 21%   of sales, specialty items accounted for 43%  of sales, produce accounted for 5%  of sales, cheese accounted for 13% of sales, and poultry accounted for 4%  of sales.
 
2

 
Customer Service and Logistics
 
Our “live” chef-driven customer service department is available by telephone every weekday, from 7 a.m. to 7 p.m., Florida time. The team is made up of four chefs who are full-time employees of the Company, and who are experienced in all aspects of perishable and specialty products. By employing chefs to handle customer service, we are able to provide our customers with extensive information about our products, including:
 
 Flavor profile and eating qualities
 
 Recipe and usage ideas
 
 Origin, seasonality, and availability
 
 Cross utilization ideas and complementary uses of products
 
Our logistics team tracks every package to ensure timely delivery of products to our customers. The logistics manager receives tracking information on all products ordered, and packages are monitored from origin to delivery. In the event that delivery service is interrupted, our logistics department begins the process of expediting the package to its destination. The customer is then contacted before the expected delivery commitment time allowing the customer ample time to make arrangements for product replacement or menu changes. Our logistics manager works directly with our vendors to ensure our strict packaging requirements are in place at all times.
 
Relationship with U.S. Foodservice
 
In 2003, Next Day Gourmet, L.P., a subsidiary of USF, a $20 Billion broadline distributor then owned by Dutch grocer Royal Ahold, contracted FII to handle the distribution of over 3,000 perishable and specialty products. Under the current terms of the contract FII is the exclusive supplier of overnight delivered, perishable sea foods, fresh produce, and other exotic fresh foods. Such products are difficult for broadline food distributors to manage profitably and keep in warehouse stock due to their perishable nature and high-end limited customer base. Through USF’s sales associates, FII’s products are available to USF accounts nationwide, ensuring superior freshness and extended shelf life to their customers. The current contract with USF expires on September 11, 2009, During the years ended December 31, 2008, and 2007, sales through USF’s sales associates  accounted for 97% and 95% of total sales respectively.    We believe that although a significant portion of our sales occur through the USF sales force, the success of the program is less contingent on a contract then on the actual performance and quality of our products. Other than our business arrangements with USF, we are not affiliated with either USF or Next Day Gourmet, L.P.  
 
Growth Strategy
 
Restaurant food sales continue to grow, both in total dollars spent (from $295 billion in 1995 to over $565 billion projected for 2009) and projected to equal 4% of the U.S. gross domestic product. On a typical day in America in 2009, more than 130 million individuals will be projected to be foodservice patrons , according to the National Restaurant Association website (www.restaurant.org).
 
For our continued growth within the foodservice industry we rely heavily on the availability to our customers of our chefs' culinary skills,  a high level of personal customer service, premium quality products, and sales available through our relationship with USF.

We anticipate attempting to grow our current business both through increased sales of products to our existing foodservice customers, increasing our foodservice customer base, and through the entry into additional markets such as the direct to consumer market through a variety of potential sales channels, and sales partnerships.

In addition to attempting to grow our current business, we believe that there are lateral opportunities  in the food industry generally and such we may look into  the possibility of acquiring a gourmet food manufacturer or gourmet distributor at some future point in time. We have no specific plans at this point, nor do we know how we would finance any such acquisition. We anticipate that, given our current cash flow situation, any acquisition would involve the issuance of additional shares of our common stock. No acquisition will be consummated without thorough due diligence. No assurance can be given that we will be able to identify and successfully conclude negotiations with any potential target.
 
General economic conditions and consumer confidence can affect the frequency of purchases and amounts spent by consumers for food-prepared-away-from-home and, in turn, can impact our customers and our sales. We believe the current general economic conditions, including pressure on consumer disposable income, may contribute   to a decline in the foodservice market. We intend to continue our efforts to expand our market share and grow earnings by focusing on sales growth, margin management, productivity gains and supply chain management And product and service differentiation.
 
3

 
Competition
 
While we face intense competition in the marketing of our products and services, it is our belief that there is no other single company in the United States that offers such a broad range of customer service oriented quality chef driven perishables for delivery in 24 to 72 hours. Our primary competition is from local meat and seafood purveyors that supply a limited local market and have a limited range of products. However, many purveyors are well established, have reputations for success in the development and marketing of these types of products and services and have significantly greater financial, marketing, distribution, personnel and other resources. These financial and other capabilities permit such companies to implement extensive advertising and promotional campaigns, both generally and in response to efforts by additional competitors such as us, to enter into new markets and introduce new products and services.
 
Insurance
 
We maintain a general liability insurance policy with a per occurrence limit of $1,000,000 and aggregate policy covering $2,000,000 of liability. In addition, we have non-owned automobile personal injury coverage with a limit of $1,000,000. Such insurance may not be sufficient to cover all potential claims against us and additional insurance may not be available in the future at reasonable costs.
 
Government Regulation
 
Various federal and state laws currently exist, and more are sure to be adopted, regulating the delivery of fresh food products. However, our business plan does not require us to deliver fresh food products directly, as third-party vendors ship the products directly to our customers. We require all third-party vendors to maintain $2,000,000 liability insurance coverage and compliance with Hazard Analysis and Critical Control Point (HACCP), an FDA- and USDA-mandated food safety program. Any changes in the government regulation of delivering of fresh food products that hinders our current ability and/or cost to deliver fresh products, could adversely impact our net revenues and gross margins and, therefore, our profitability and cash flows could also be adversely affected.

Employees
 
We currently employ 14 full-time employees, including 4 chefs and 2 executive officers. We believe that our relations with our employees are satisfactory. None of our employees are represented by a union.
 
Transactions with Major Customers
 
Transactions with major customers and related economic dependence information is set forth under the heading Transactions with Major Customers in Note 14  to the Consolidated Financial Statements included in the Financial Statements section hereof and is incorporated herein by reference.
 
How to Contact Us
 
Our executive offices are located at  3845 Beck Blvd., Naples, Florida 34109; our Internet address is www.foodinno.com; and our telephone number is (239) 596-0204.
 
Risk Factors
 
We Have a History Of Losses Which May Continue, Requiring Us To Seek Additional Sources of Capital Which May Not Be Available, Requiring Us To Curtail Or Cease Operations.
 
We suffered a net loss of $2,421,122   for the year ended December 31, 2008. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, we will incur losses. We will also incur losses if the fair value of warrants, options, etc changes unfavorably. We will incur operating losses until we are able to establish significant sales. Our possible success is dependent upon the successful development and marketing of our services and products, as to which we can give no assurance. Any future success that we might enjoy will depend upon many factors, including factors out of our control or which cannot be predicted at this time. These factors may include changes in or increased levels of competition, including the entry of additional competitors and increased success by existing competitors, changes in general economic conditions, increases in operating costs, including costs of supplies, personnel, marketing and promotions, reduced margins caused by competitive pressures and other factors. These conditions may have a materially adverse effect upon us or may force us to reduce or curtail operations. In addition, we will require additional funds to sustain and expand our sales and marketing activities, particularly if a well-financed competitor emerges. We can give no assurance that financing will be available in amounts or on terms acceptable to us, if at all. Our inability to obtain sufficient funds from our operations or external sources would require us to curtail or cease operations.
 
4

 
If We Are Unable to Obtain Additional Funding Our Business Operations Will be Harmed and If We Do Obtain Additional Financing Our Then Existing Shareholders May Suffer Substantial Dilution.
 
Additional capital will be required to effectively support our operations and to otherwise implement our overall business strategy. However, we can give no assurance that financing will be available when needed on terms that are acceptable to us. Our inability to obtain additional capital will restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our marketing and development plans and possibly cease our operations. Any additional equity financing (or equity related financing such as convertible debt financing) may involve substantial dilution to our then existing shareholders.
 
Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to Continue As a Going Concern, and We Concur With This Assessment
 
In their report dated April 7, 2009,  our independent auditors stated that our financial statements for the year ended December 31, 2008  were prepared assuming that we would continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of our significant losses from operations since inception and our working capital deficiency. We continue to experience net operating losses. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, increasing sales or obtaining loans and grants from various financial institutions where possible. Our continued net operating losses increase the difficulty in our meeting such goals and we can give no assurance that such methods will prove successful.
 
We Have Historically Derived Substantially All of Our Revenue From One Client and if We Were to Lose Such Client and  Be Unable to Generate New Sales to Offset Such Loss, We May Be Forced to Cease or Curtail Our Operations.
 
In 2003, Next Day Gourmet, L.P. initially contracted with our subsidiary to handle the distribution of over 3,000 perishable and specialty food products to customers of US Food Services, Inc. (“USF”). Our current contract with USF expires in September 2009. Our sales through USF’s sales force generated gross revenues for us of $6,791,767  in the year ended December 31, 2008, and $6,519,721  in the year ended December 31, 2007. Those amounts contributed 97%  and  95%, respectively of our total sales in those periods. Our sales efforts are for the most part dependent upon the efforts of the USF sales force. Although we have generated revenues from additional customers other than USF, if our relationship with USF were to be materially changed and we are unable to generate new sales to  offset such loss, we may be forced to cease or curtail our operations.

We May Be Unable to Manage Our Growth Which Could Result in Our Being Unable to Maintain Our Operations.
 
Our strategy for growth is focused on continued enhancements and expansion to our existing business model, offering a broader range of services and products and affiliating with additional vendors and through possible joint ventures. Pursuing this strategy presents a variety of challenges. We may not experience an increase in our services to our existing customers, and we may not be able to achieve the economies of scale, or provide the business, administrative and financial services, required to sustain profitability from servicing our existing and future customer base. Should we be successful in our expansion efforts, the expansion of our business would place further demands on our management, operational capacity and financial resources. To a significant extent, our future success will be dependent upon our ability to maintain adequate financial controls and reporting systems to manage a larger operation and to obtain additional capital upon favorable terms We can give no assurance that we will be able to successfully implement our planned expansion, finance its growth, or manage the resulting larger operations. In addition, we can give no assurance that our current systems, procedures or controls will be adequate to support any expansion of our operations. Our failure to manage our growth effectively could have a material adverse effect on our business, financial condition and results of operations.
 
The Foodservice Industry is Very Competitive, Which May Result in Decreased Revenue for Us as Well as Increased Expenses Associated With Marketing Our Services and Products.
 
We compete against other providers of quality foods, some of which sell their services globally, and some of these providers have considerably greater resources and abilities than we have. These competitors may have greater marketing and sales capacity, established distribution networks, significant goodwill and global name recognition. Furthermore, it may become necessary for us to reduce our prices in response to competition. This could impact our ability to be profitable.
 
Our Success Depends on Our Acceptance by the Chef Community and if the Chef Community Does Not Accept Our Products Then Our Revenue Will be Severely Limited.
 
The chef community may not embrace our products. Acceptance of our services will depend on several factors, including: cost, product freshness, convenience, timeliness, strategic partnerships and reliability. Any of these factors could have a material adverse effect on our business, results of operations and financial condition. We also cannot be sure that our business model will gain wide acceptance among chefs. If the market fails to continue to develop, or develops more slowly than we expect, our business, results of operations and financial condition will be adversely affected.
 
We Rely Upon Outside Vendors and Shippers for Our Specialty Food Products and Interruption in the Supply of Our Products May Negatively Impact Our Revenues.
 
Shortages in supplies of the food products we sell may impair our ability to provide our services. Our vendors are independent and we cannot guarantee their future ability to source the products that we sell. Many of our products are wild-caught, and we cannot guarantee their availability in the future. Unforeseen strikes and labor disputes as well as adverse weather conditions may result in our inability to deliver our products in a timely manner. Since our customers rely on us to deliver their orders within 24-72 hours, delivery delays could significantly harm our business.
 
5

 
We Are and May Be Subject to Regulatory Compliance and Legal Uncertainties.
 
Changes in government regulation and supervision or proposed Department of Agriculture reforms could impair our sources of revenue and limit our ability to expand our business. In the event any future laws or regulations are enacted which apply to us, we may have to expend funds and/or alter our operations to insure compliance.
 
Health Concerns Could Affect Our Success.
 
We require our vendors to produce current certification that the vendor is H.A.C.C.P. compliant, and a current copy of their certificate of liability insurance. However, unforeseen health issues concerning food may adversely affect our sales and our ability to continue operating our business.
 
The Issuance of Shares Upon Conversion of Convertible Notes and Exercise of Outstanding Warrants May Cause Immediate and Substantial Dilution to Our Existing Stockholders.
 
The issuance of shares upon conversion of convertible notes and exercise of warrants may result in substantial dilution to the interests of other stockholders since the note/warrant holders may ultimately convert or exercise and sell the full amount of shares issuable on conversion / exercise. Although, for the most part, such note/warrant holders may not convert their convertible notes and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.99% of our outstanding common stock unless waived in writing by the investor with  61 day notice to the Company, this restriction does not prevent them from converting and/or exercising some of their holdings, selling off those shares, and then converting the rest of their holdings. In this way, they could sell more than this limit while never holding more than this limit. We anticipate that eventually, over time, the full amount of the convertible notes will be converted into shares of our common stock, in accordance with the terms of the secured convertible notes.
 
If We Are Required for any Reason to Repay Our Outstanding Convertible Notes We Would Be Required to Deplete Our Working Capital, If Available, or Raise Additional Funds.
 
We are required to repay our convertible notes commencing in June 2009 with respect to the convertible notes issued in connection with the December 2008 Securities Purchase Agreement. If we are required to repay the secured convertible notes, we would be required to use our limited working capital and/or raise additional funds (which may be unavailable) which would have the effect of causing further dilution and lowering shareholder value.
 
We Have a History of Being In Default Under Certain Convertible Notes Which Could Result in Legal Action Against Us, Which Could Require the Sale of Substantial Assets.
 
While we are not currently in default under any of our outstanding notes, we have a history of being in default under certain of our outstanding convertible notes, and possibly will be again in the future, which could require the early repayment of the convertible notes, including a default interest rate of 15% on the outstanding principal balance of the notes if the default is acted upon by the note holders and not cured within the specified grace period. If we were unable to repay the notes when required, the note holders could commence legal action against us and foreclose on all of our assets to recover the amounts due. Any such action would require us to curtail or cease operations.
 
Our Revenues Can be Affected by Price Increases Imposed by our Carriers.

We deliver our products to our customers through third party overnight or express delivery carriers.  If the carriers we use raise their shipping rates or add surcharges such as fuel surcharges and other charges,  we will either have to absorb the increased costs which will put pressure on  our bottom line or pass on the cost to our customers which may result in reduced sales if our customers are unwilling to pay the higher prices.  Either way, such an increase in shipping costs  will likely have a negative impact on our results of operations.

Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the Trading Market in Our Securities is Limited, Which Makes Transactions in Our Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
 
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share (post-reverse split) or with an exercise price of less than $5.00 per share (post-reverse split), subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
 
 
● 
that a broker or dealer approve a person's account for transactions in penny stocks; and
 
 ● 
the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
 
6

 
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
 
 
● 
obtain financial information and investment experience objectives of the person; and
 
 ● 
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
 
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:
 
 
● 
sets forth the basis on which the broker or dealer made the suitability determination; and
 
● 
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
 
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
 
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

ITEM 2. Properties

On October 17, 2008, we entered into a three-year lease with Grand Cypress Communities, Inc. for new premises consisting of 4,000 square feet at 3845 Beck Blvd.,  Naples, Florida.  The commencement date of the lease is January 1, 2009.  The annual rent and fees under the lease is approximately $54,000.  The lease provides for a buyout option at the end of the lease with credit towards the purchase price received for the rental payments made during the term of the lease

ITEM 3. Legal Proceedings
 
In September 2006 we commenced an action in New York Supreme Court, Nassau County, against Pasta Italiana, Inc. Robert Yandolino and Lloyd Braider (collectively “Pasta”)  to collect on outstanding promissory notes totaling    $360,000  (plus interest and collection expenses) of which $65,000 was  personally guaranteed by the two individual defendants.  The defendants  counterclaimed for an unspecified amount of damages due to our alleged breach of an agreement to purchase the corporate defendant. 

On September 5, 2008, we reached a settlement agreement with Pasta.  The settlement   agreement (the “Pasta Settlement Agreement”) calls for  Pasta to pay to the Company $165,000 of the principal amount of the note.  Pasta is to  make 36  monthly payments in the amount of $4,500 beginning in September, 2008  and a final payment of $3,000  The first of these 36 payments was received by the Company during the third quarter of  2008.  Upon execution of the agreement, Pasta was also obligated  to deliver to the Company 10% of its fully diluted common stock.  This stock is valued at $0 in the Company’s financial statements for the period ended September 30, 2008.    The Company was obligated  to deliver to Pasta 1,500,000 shares of its common stock (valued at $9,000 at September 5, 2008) and warrants to purchase an additional 1,000,000 shares of common stock at a price of $0.012 ( valued at $5,977 at September 5, 2008).  The Company recorded an impairment charge in the amount of $142,124  during the three months ended September 30, 2008, representing the difference between the net book value of the Pasta receivable prior to the Pasta Settlement Agreement and the amount of the new note receivable negotiated in the Pasta Settlement Agreement, plus the value of the Company’s common stock and warrants provided to Pasta.

Interest will accrue at a rate of 8% on the unpaid portion of the $165,000.   The accrued interest is to be paid semi-annually in shares of common stock of Pasta (the “Pasta Interest Shares”).    The Pasta Interest Shares are valued at $0 in the financial statements of the Company, and no interest income is recorded by the Company for these shares during  the three months ended September 30, 2008.
 
Pasta made several  payments required by the settlement agreement, totaling $19,000.     Thereafter, Pasta defaulted on the next payment, and failed to cure its default within the required time period after a Notice of Default was sent to it.  We are continuing discussions with Pasta in regards to resuming payments and continue examine all legal remedies available to us to insure compliance with the agreement. We intend to cost affectively pursue the monies owed to us under  the Pasta Settlement Agreement

ITEM 4. Submission of Matters to a Vote of Security Holders
 
None.
 
7


 
 PART II

ITEM 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Prices for our common stock are quoted in the Pink Sheets. Since March 2004, our common stock has traded under the symbol "IVFH". Prior thereto, our common stock traded under the symbol "FBSN". 173,577,038  shares  of common stock were outstanding as of December 31, 2008. The following table sets forth the high and low closing  sales prices of our common stock as reported in the Pink Sheets for each full quarterly period within the two most recent fiscal years.
   
Fiscal Year Ending December 31, 2008
 
HIGH
   
LOW
First Quarter
 
$
0.008
   
$
0.003
Second Quarter
   
0.008
     
0.00304
Third Quarter
   
0.008
     
0.003
Fourth Quarter
   
0.0015
     
0.001
 
Fiscal Year Ending December 31, 2007
         
First Quarter
  $ 0.005     $ 0.002
 Second Quarter
    0.004       0.002
Third Quarter
    0.005       0.002
Fourth Quarter
    0.008       0.002

The quotations listed above reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. On April 10, 2009 the closing price of our common stock as reported by the OTC Bulleting Board was $0.0025.

Security Holders
 
On December 31, 2008, there were approximately 5,200 record holders of our common stock. In addition, we believe there are numerous beneficial owners of our common stock whose shares are held in "street name."
 
Dividends
 
We have not paid dividends during the three most recently completed fiscal years, and have no current plans to pay dividends on our common stock. We currently intend to retain all earnings, if any, for use in our business.
 
Recent Sales and Other Issuances of Our Equity Securities 
 
During the twelve months ended December 31, 2008, the Company  had the following transactions:

The Company issued 1,789,400 shares of common stock for the conversion of notes payable and accrued interest in the amount of $8,947.
 
All of the issuances described above were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 for the following reasons:  (1) none of the issuances involved a public offering or public advertising of the payment of any commissions or fees; (2) the issuances for cash were to “accredited investors”; (3) the issuances upon conversion of notes were for notes held at least 12 months and did not involve the payment of any other considerations; and (4) all issuances to affiliates and to non-affiliates holding the securities for less than  1 year carried restrictive legends.
 
Derivative Securities Currently Outstanding
 
As of December 31, 2008 and 2007, the Company has issued convertible notes payable in the aggregate principal amount of $1,465,000 and $1,126,000 , respectively, with accrued interest of $614,484   and $458,679 , respectively, which, if converted to common stock, will result in our issuance of approximately 395,043,320  and 298,168,520  shares , respectively, of common stock at conversion rates ranging from $0.005 to $0.010 per share.

The Company has warrants to purchase an additional 273,200,000 and 189,000,000  shares  of common stock  at December 31, 2008 and 2007, respectively. The Company also has outstanding  options to purchase an additional 35,500,000 and 15,500,000 shares  of common stock at December 31, 2008 and 2007, respectively.  The Company also has outstanding obligations to issue a total of 110,280,000 additional shares of common stock at December 31, 2008 and 2007 pursuant to the terms of penalty agreements for failure to register shares underlying certain convertible notes payable.  The company does not currently have sufficient shares of common stock authorized to satisfy these additional issuances of shares.
 
8

 
Securities Authorized for Issuance Under Equity Compensation Plans
 
We do not currently have any equity compensation plans.

ITEM 6. Selected Financial Data

Not Applicable.
 
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto, as well as all other related notes, and financial and operational references, appearing elsewhere in this document.
 
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 business plan,
   
 Our ability to implement our business plan,
 
 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 current  or anticipated business,
 
 Changes in the demand for our services,
 
 The degree and nature of our competition,
 
 The lack of diversification of our business plan,
   
 The general volatility of the capital markets and the establishment of a market for our shares, and
   
 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 weather conditions.
 
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.
 
9

 
Critical Accounting Policy and Estimates
 
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.

On August 25, 2005, the Company entered into contracts which obligated the company under certain circumstances to issue shares of common stock in excess of the number of shares of common stock authorized. Under accounting guidance provided by EITF 00-19, effective August 25, 2005 the Company began to account for all derivative financial instruments, including warrants, conversion features embedded in notes payable, and stock options,  via the liability method of accounting. Accordingly, all these instruments are  valued at issuance utilizing the Black-Scholes valuation method, and are re-valued at each period ending date, also using the Black-Scholes valuation method.  Any gain or loss from revaluation is charged to operations during the period.

(a) Warrants:

The Company values warrants using the Black-Scholes valuation model.  Warrants are valued upon issuance, and re-valued at each financial statement reporting date.  Any change in value is charged to income or expense during the period.  The following table illustrates certain key information regarding our warrants and warrant valuation assumptions at December 31, 2008 and 2007:

   
December 31,
 
   
2008
   
2007
 
             
Number of warrants outstanding
    273,200,000       189,000,000  
Value at December 31
  $ 1,388,287     $ 431,188  
Number of warrants issued during the year
    84,200,000       -  
Value of warrants issued during the year
  $ 374,557     $ -  
Revaluation gain (loss) during the year
  $ (588,519 )   $ (19,116 )
                 
Black-Scholes model variables:
               
Volatility
    203.6% - 332.7 %     178.2% - 194.5 %
Dividends
  $ 0     $ 0  
Risk-free interest rates
    0.27% - 2.41 %     3.49% - 5.06 %
Term (years)
    1.15 - 5.00       2.15 - 4.13  

b.) Embedded conversion features of notes payable:

The Company accounts for conversion options embedded in convertible notes in accordance with SFAS No. 133 ‘‘Accounting for Derivative Instruments and Hedging Activities’’ and EITF 00-19 ‘‘Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.’’ SFAS 133 generally requires companies to bifurcate conversion options embedded in convertible notes and preferred shares from their host instruments and to account for them as free standing derivative financial instruments in accordance with EITF 00-19.
 
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The Company values embedded conversion features utilizing the Black-Scholes valuation model.  Warrants are valued upon issuance, and re-valued at each financial statement reporting date.  Any change in value is charged to income or expense during the period.  The following table illustrates certain key information regarding our warrants and warrant valuation assumptions at December 31, 2008 and 2007:

   
December 31,
 
   
2008
   
2007
 
             
Number of shares potentially issuable for conversion privileges  outstanding
    285,000,000       217,200,000  
Value at December 31
  $ 1,388,287     $ 431,188  
Number of options issued during the year
    69,400,000       42,800,000  
Value of options issued during the year
  $ 364,079     $ 166,640  
Number of options exercised or underlying
               
    notes paid during the year
    1,600,000       32,000,000  
Value of options exercised or underlying
               
    notes paid during the year
  $ 8,800     $ 149,747  
Revaluation gain (loss) during the year
  $ (182,583 )   $ 11,098  
                 
Black-Scholes model variables:
               
Volatility
 
193.7% to 332.7%
   
146.4% to194.5%
 
Dividends
    0       0  
Risk-free interest rates
    0.27% - 2.41 %     3.37% - 5.16 %
Term (years)
    1.00 - 10.00       10.00 – 10.00  

c.)   Stock options

The Company accounts for options in accordance SFAS 123(R) Share Based Payments”.  Options are valued upon issuance, and re-valued at each financial statement reporting date, utilizing the Black-Scholes valuation model.   Option expense is recognized over the requisite service period of the related option award. Any change in value is charged to income or expense during the period.  The following table illustrates certain key information regarding our options and option assumptions at December 31, 2008 and 2007:

   
December 31,
 
   
2008
   
2007
 
             
Number of options outstanding
    35,500,000       15,500,000  
Value at December 31
  $ 174,691     $ 39,344  
Number of options issued during the year
    20,000,000       -  
Value of options issued during the year
  $ 138,262       -  
Number of options recognized during the year
               
  pursuant to SFAS 123(R)
    20,100,000       100,000  
Value of options recognized during the year
               
   pursuant to SFAS 123(R)
  $ 138,313.00     $ 37  
Revaluation gain (loss) during the year
  $ 5,717     $ (1,623 )
                 
Black-Scholes model variables:
               
Volatility
 
203.7% to 332.7%
   
178.3% to 194.5%
 
Dividends
    0       0  
Risk-free interest rates
    0.27% - 2.41 %     3.09% - 5.06 %
Term (years)
    0.37 - 5.00       1.38 - 4.64  
 
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Doubtful Accounts Receivable

The Company maintained an allowance in the amount of $15,877  for doubtful accounts receivable at December 31, 2008,  and $10,000 at December 31, 2007 and 2006. Actual losses on accounts receivable were $0 for 2008, 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

Background
 
We were initially formed in June 1979 as Alpha Solarco Inc., a Colorado corporation. From June 1979 through February 2003, we were either inactive or involved in discontinued business ventures. In February 2003 we changed our name to Fiber Application Systems Technology, Ltd.
 
In January 2004, we changed our state of incorporation by merging into Innovative Food Holdings, Inc. (“IVFH”), a Florida shell corporation. As a result of the merger we changed our name to that of Innovative Food Holdings, Inc. In February 2004 we also acquired Food Innovations, Inc. (“FII”) a Delaware corporation incorporated on January 9, 2002 and through FII we are in the business of national food distribution using third-party shippers.
 
Transactions With a Major Customer
 
Transactions with a major customer and related economic dependence information is set forth (1) following our discussion of Liquidity and Capital Resources, (2) under the heading Transactions with Major Customers in Note 14 to the Consolidated Financial Statements, and (3) as the fourth item under Risk Factors.
 
RESULTS OF OPERATIONS
 
The following is a discussion of our financial condition and results of operations for the years ended December 31, 2008 and 2007, respectively.

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.
 
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
 
Revenue
 
Revenue increased by $236,328  or approximately 3.5%  to $6,969,730  for the year ended December 31, 2008 from $6,733,402  in  the prior year.  The increase was attributable to an increase in sales of specialty items, cheese products, and poultry products, partially offset by decreases in meat and game products, and seafood.  We continue to assess the potential of new revenue sources from the manufacture and sale of proprietary food products and additional sales channel opportunities and will implement that strategy if, based on our analysis, we deem it beneficial to us. 
 
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Any changes in the food distribution operating landscape that materially hinders our current ability and/or cost to deliver our fresh produce to our customers could potentially cause a material impact on our net revenue and gross margin and, therefore, our profitability and cash flows could be adversely affected.
 
Currently, a small portion of our revenues comes from imported products or international sales.   Our current sales from such segments may be hampered and negatively impacted by any economic tariffs that may be imposed in the United States  or in foreign countries.

See "Transactions with Major Customers" and the Securities and Exchange Commission's ("SEC") mandated FR-60 disclosures following the "Liquidity and Capital Resources" section for a further discussion of the significant customer concentrations, loss of significant customer, critical accounting policies and estimates, and other factors that could affect future results.
 
Cost of good sold
 
Our cost of goods sold  for the year ended December 31, 2008 was $5,628,101, an increase of $576,472  or approximately 11.4%  compared to cost of goods sold  of $5,051,629  for the year ended December 31, 2007. Cost of goods sold is primarily made up of the following expenses for the year ended December 31, 2008: shipping expenses in the amount of $1,556,297;  and cost of good of specialty, meat, game, cheese poultry and other sales categories in the amount of $4,012,789
 
In 2008 we made a strategic decision to  aggressively price our products in order to gain market share and increase the number  of our end users.    We were successful in doing so and increased the number of our end users  by approximately 17.7%  to more than 10,238  end users. We currently expect if market conditions remain constant that our cost of goods sold will stabilize and likely improve to historical levels  in the  first half of  2009

Selling, general, and administrative expenses

Selling, general, and administrative expenses increased by  $130,047 or approximately 7.4%, to  $1,879,239  during the year ended December 31, 2008 from $1,749,192  for the year ended December 31, 2007.   The increase was due mainly to increased professional fees relating to fees for the Pasta litigation and legal and accounting fees relating to our SEC filings.  Selling, general and administrative expenses were primarily made up of the following for the year ended December 31, 2008: payroll and related expenses in the amount of $1,012,480, including non-cash costs of $132,596 related to stock options; consulting and professional fees in the amount of $438,754; facilities and related expenses in the amount of $160,853; insurance costs in the amount of $97,059; amortization and depreciation expense in the amount of $39,316; travel and entertainment expenses in the amount of $28,788; dues and subscriptions in the amounts of $20,945; advertising expenses in the amount of $14,023; marketing and public relations expenses in the amount of $13,390; bank and finance charges in the amount of $7,729; and food show expenses in the amount of $5,516. We expect our legal fees to decrease in 2009 due to (i) an expected reduction in costs related to the Pasta litigation (ii) our continued negotiation of flat billing fees rates with several of our professional service providers including for much of our legal fees going forward..  We also expect to incur reduced accounting fees in 2009 as we have primarily addressed the SEC’s comments to our previous filings.  We do however expect to increase our spending on advertising and  marketing  fees in 2009.

Impairment of investment in note receivable

During the twelve months ended December 31, 2008, the Company renegotiated the terms of its loan to Pasta Italiana.  These revised terms resulted in recording an impairment in the amount of $142,124.  There was no such impairment recorded during the twelve months ended December 31, 2007.  (See “Item 3 – Legal Proceedings”.)

Interest (income) expense, net
 
Interest (income) expense, net decreased by $130,444 or approximately 26% to $372,175 during the twelve months ended December 31, 2008, compared to $502,619 during the twelve months ended December 31, 2007.  The primary reason for the decrease was  a decrease  in the amortization of the discount on notes payable   as many of these discounts were fully amortized.

Loss on extinguishment of debt

During the year ended December 31, 2008, the Company extended certain of its notes payable, and as consideration for these extensions the Company provided the lender with warrants  to purchase an aggregate 43,200,000 shares of the Company’s common stock.  This resulted in a loss on extinguishment of debt in the amount of $168,620.  There was no such transaction during the comparable period of the prior year.
 
Penalty for late registration of shares
 
Pursuant to a registration rights agreement, the Company is obligated to register shares of common stock  underlying certain convertible notes payable. The Company failed to  register these shares in timely fashion, and accordingly is subject to a penalty payable in additional shares of common stock (the “Penalty Shares”).   During the During the twelve months ended December 31, 2008, the Company had no accrual for the  issuance of Penalty Shares, as the maximum number of Penalty Shares issuable had been reached during the prior year.   During the twelve months ended December 31, 2007, the Company charged to operations the amount of  $64,984  representing the fair value of the liability for Penalty Shares incurred.  At December 31, 2008 and 2007, there were a total of 110,280,000 Penalty Shares issuable.
 
13

 
Loss from revaluation of penalty shares

During the years ended December 31, 2008 and 2007, the Company revalued the 110,280,000 Penalty Shares using the Black-Scholes valuation model, and at December 31, 2008 and 2007 recorded liabilities in the amount of $551,400 and $330,840, respectively.  These revaluations resulted in recording losses in the amount of $220,564 and $3,296 during the twelve months ended December 31, 2008 and 2007, respectively.

Fair value of warrants issued in excess of discount on notes payable

During the twelve months ended December 31, 2008, the Company issued convertible notes payable along with detachable warrants to purchase shares of common stock.  The fair value of these warrants exceeded the principal amount of the notes payable, and the Company charged this excess in the amount of $99,960 to operations.  There was no such charges during the prior year.

Loss from change in fair value of warrant liability
 
At December 31, 2008, the Company has outstanding warrants to purchase an aggregate 273,200,000  shares of the Company’s common stock.  The Company valued this warrant liability at December 31, 2008 at $1,388,287.    This revaluation resulted in a loss of $582,541  which the Company charged to operations during the year ended December 31, 2008.  This is an increase  $563,425  or approximately 2,947% compared to a loss of $19,116  from the revaluation of the warrant liability which the Company recorded during the twelve months ended December 31, 2007.

Fair value of conversion option liability

During the twelve months ended December 31, 2008, the Company charged to operations the amount of  $114,945 representing the fair value of a conversion option liabilities issued in excess of the amount of the discount on the related convertible notes payable.  There was no such charge during the prior year.

(Gain) loss from Change in Fair Value of Conversion Option Liability
 
At December 31, 2008, the Company had outstanding a liability to issue an aggregate of 285,000,000  shares of the Company’s common stock pursuant to convertible notes payable.  The Company revalued this liability at December 31, 2008 at $1,150,000.  This revaluation resulted in a loss of $182,583  which the Company included in operations for the year ended December 31, 2008.  This is an increase  of $193,681  or approximately 1,745% compared to a gain of $11,098 from the revaluation of the conversion option liability which the Company recorded during the twelve months ended December 31, 2007.
 
Net Loss
 
For the reasons above, the Company had a net loss for the period ended December 31, 2008 of $2,421,122, an increase  of  $1,774,786 or approximately 275% to compared a net loss  of $646,336  during the twelve months ended December 31, 2007. 

Liquidity and Capital Resources at December 31, 2008
 
As of December 31, 2008, the Company had current assets of $469,111, consisting of cash of $160,545, loans receivable of $ 60,000, other current assets of  $9,000, and trade accounts receivable of $239,566.  Also, at December 31, 2008, the Company had current liabilities of  $6,033,769, consisting of accounts payable and accrued liabilities of $959,284 (of which $126,671 is payable to a related party); accrued interest of $437,269; accrued interest – related parties of $173,471; current portion of notes payable, net of discounts of $938,364; current portion of notes payable – related parties, net of discounts of $261,002; warrant liability of $1,388,287; option liability of $174,692; conversion option liability of $1,150,000; and penalty for late registration of shares of $551,400.  This resulted in a working capital deficit of $5,530,658.
 
During the twelve months ended December 31, 2008, the Company had cash used by operating activities of $113,070. The Company charged to operations $39,332 for depreciation and amortization, $168,621 for the loss on extinguishment of debt, $99,960 for the value of new warrants issued, $138,312 for the value of new options issued, $114,945 for the value of new conversion options liability, $78,137 for the amortization of the discount on notes payable, $35,360 for the amortization of the discount on accrued interest, $5,877 for the reverse on bad debt, $582,541 for the revaluation of the warrant liability, $182,586 for the revaluation of the conversion option liability, $220,560 for the revaluation of penalty shares, and recorded a gain of  $5,717 for the revaluation of the option liability,  The Company’s results  also reflect  an increase working capital deficiency of $2,335,172.    
 
The Company had cash provided by investing act ivies of $3,871, which consisted of payments made on a loan receivable of $12,000 and acquisitions of property and equipment of $8,129.

The Company cash provided by financing activities of $195,134, which consisted of proceeds from notes payable of $200,000 and principal payments on debt of $4,866.  

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.
 
14

 
The Company’s cash on hand may be insufficient to fund its planned operating needs.  Management is continuing to pursue new debt and/or equity financing and is continually evaluating the Company’s cash and capital needs.
 
The Company expects 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, or the Company will be able to obtain such funds on favorable terms and conditions.  If  the Company cannot secure additional funds it will not be able to continue as a going concern.
 
By adjusting its operation and development to the level of available resources, management believes it has sufficient capital resources to meet projected cash flow through the next twelve months. The Company also intends to increase market share and cash flow from operations by focusing its sales activities on specific market segments. However, if thereafter, the Company is 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.  Currently, we do not have any material long-term obligations other than those described in Note 8 to the financial statements included in this report, nor have we identified any long-term obligations that we contemplate incurring in the near future. 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.
 
The independent auditors report on our December 31, 2008 financial statements state that our recurring losses raise substantial doubts about our ability as a going concern.

2009 Plans

During 2009, in addition to our efforts to increase sales in our existing foodservice operations we  plan to expand our business by extending our focus from a purely wholesale foodservice business directed towards chefs to commencing retail sales by making sales direct to consumers through a variety of direct to consumer sales channel relationships which are currently being explored. In addition we are currently exploring the introduction of a variety of new product categories, to leverage our existing foodservice customer base.

As discussed above, we also expect to improve our financial position, especially with respect to cash flows, by reducing our expenditures for professional fees to our attorneys and accountants, and by further improving our selling efforts.

No assurances can be given that any of these plans will come to fruition or that if implemented that they will necessarily yield positive results.

Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
Inflation
 
In the opinion of management, inflation has not had a material effect on the Company’s financial condition or results of its operations.
 
Transactions With Major Customers
 
The Company’s largest customer, US Foodservice, Inc. and its affiliates, accounted for approximately and 97%  and  95% of total sales in the years ended December 31, 2008, and 2007, respectively.  A contract with Next Day Gourmet, LP, a subsidiary of U.S. Foodservice, expires September 11, 2009. Negotiations are underway to extend the existing contract or to sign a new contract, and the Company has continued to have US Foodservice, Inc. as a customer. Of our remaining  active customers in the year ended December 31, 2008, no other single customer contributed 1% or more to our net revenue.
 
We continue to conduct business with U.S. Food Services.
 
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.
 
15

 
Doubtful Accounts Receivable

The Company maintained an allowance in the amount of $15,877 and $10,000 for doubtful accounts receivable at December 31, 2008, 2007, respectively.  Actual losses on accounts receivable were $0 for 2008 and 2007.  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.

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  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 31,2007
   
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
   
20,000,000 
   
 $
0.007 
Exercised
   
-- 
     
--
Forfeited or expired
   
-- 
     
--
Outstanding at December 31, 2008
   
35,500,000 
   
 $
0.013 
               
Non-vested at December 31, 2008
   
35,400,000
   
 $
0.012
Exercisable at December 31, 2008
   
100,000
   
 $
0.500
 
Aggregate intrinsic value of options outstanding and exercisable at December 31, 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 and $0.005  as of December 31, 2007 and 2008, respectively, 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. During the years ended December 31, 2007 and 2008, the Company charged $0 and   $67,500, respectively, to operations related to recognized stock-based compensation expense for employee stock options.
 
16


ITEM 8. Financial Statements
 
Report of Independent Registered Public Accounting Firm 
 
To the Board of Directors and Shareholders of
Innovative Food Holdings, Inc.
Naples, Florida
 
We have audited the accompanying consolidated balance sheets of Innovative Food Holdings, Inc and subsidiaries (“the Company”) as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders' deficiency, and cash flows for the years then ended.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have nor were we engaged to perform, an audit of its Internal Control over financial reporting.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 15, the Company has incurred significant losses from operations since its inception and has a working capital deficiency.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 15.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
  
/s/ Bernstein & Pinchuk LLP        
New York, New York
April 7, 2009
 
17


Innovative Food Holdings, Inc. and Subsidiaries
 
Consolidated Balance Sheets
 
   
   
December 31,
 
   
2008
   
2007
 
ASSETS
       
 (Restated)
 
             
Current assets
           
             
     Cash and cash equivalents
 
$
160,545
   
$
74,610
 
     Accounts receivable, net
   
239,566
     
243,148
 
     Interest receivable
   
-
     
7,147
 
     Loan receivable, current portion net
   
60,000
     
285,000
 
     Other current assets
   
9,000
     
7,030
 
                 
          Total current assets
   
469,111
     
616,935
 
                 
Loan receivable, net
   
93,000
     
-
 
Property and equipment, net
   
52,620
     
83,823
 
                 
 
$
614,731
   
$
700,758
 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
               
                 
Current liabilities
               
                 
 Accounts payable and accrued liabilities
 
$
832,613
   
$
692,586
 
     Accrued liabilities- related parties
   
126,671
     
73,027
 
     Accrued interest, net
   
437,269
     
316,058
 
     Accrued interest - related parties, net of discount
   
173,471
     
142,621
 
     Notes payable, current portion, net of discount
   
938,364
     
927,870
 
     Notes payable - related parties, current portion, net of discount
   
261,002
     
278,000
 
     Warrant liability
   
1,388,287
     
431,188
 
     Option liability
   
174,692
     
42,097
 
     Conversion option liability
   
1,150,000
     
612,134
 
     Penalty for late registration of shares
   
551,400
     
330,840
 
          Total current liabilities
   
6,033,769
     
3,846,421
 
                 
Note payable
   
10,723
     
16,083
 
     
6,044,492
     
3,862,504
 
Stockholders' deficiency
               
   Common stock, $0.0001 par value; 500,000,000 shares authorized;
               
       183,577,038 and 181,787,638 shares issued, and  173,577,038 and
               
       171,787,638 shares outstanding at December 31, 2008 and 2007, respectively
   
18,358 
     
18,179 
 
   Additional paid-in capital
   
1,985,335
     
1,832,407
 
   Accumulated deficit
   
(7,433,454
)
   
(5,012,332
)
      Total stockholders' deficiency
   
(5,429,761
)
   
(3,161,746
)
                 
 
$
614,731
   
$
  700,758
 
 
See notes to consolidated financial statements.

18

 
Innovative Food Holdings, Inc. and Subsidiaries
 
Consolidated Statements of Operations
 
         
   
 
   
 
 
   
Year Ended December 31,
 
   
2008
   
2007
 
         
(Restated)
 
             
Revenue
 
$
6,969,730
   
$
6,733,402
 
                 
Cost of goods sold
   
5,628,101
     
5,051,629
 
  Gross margin
   
1,341,629
     
1,681,773
 
                 
Selling, General and administrative expenses
   
1,879,239
     
1,749,192
 
                 
Operating loss
   
(537,610
)
   
(67,419
)
                 
Other (income) expense:
               
   Impairment of notes receivable
   
142,124
     
-
 
   Interest (income) expense, net
   
372,175
     
502,619
 
   Loss on extinguishment of debt
   
168,620
     
-
 
   Cost of penalty for late registration of shares
   
-
     
64,984
 
   Loss on revaluation of penalty shares
   
220,564
     
3,296
 
   Fair value of warrants issued in excess of discount on notes
   
99,960
     
-
 
   Loss from change in fair value of warrant liability
   
582,541
     
19,116
 
   Fair value of conversion options issued
   
114,945
     
-
 
   (Gain) loss from change in fair value of conversion option liability
   
182,583
     
(11,098
)
     
1,883,512
     
578,917
 
                 
  Loss before tax expense
   
(2,421,122
)
   
(646,336
                 
  Income tax expense
   
-
     
-
 
                 
Net loss
 
$
(2,421,122
)
 
$
(646,336
                 
Net loss per share - basic and diluted
 
$
(0.01
)
 
$
(0.00
                 
Weighted average shares outstanding - basic and diluted
   
182,011,728
     
154,106,110
 
 
See notes to consolidated financial statements.
 
19

 
Innovative Food Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
             
   
Year Ended December 31,
 
   
2008
   
2007
 
Cash flows from operating activities:
       
(Restated)
 
             
   Net loss
 
$
(2,421,122
)
 
$
(646,336
  Adjustments to reconcile net loss to  net
               
  cash provided by operating activities:
               
    Depreciation and amortization
   
39,332
     
49,415
 
    Stock issued to employees for services performed
   
-
     
8,125
 
    Loss on extinguishment of debt
   
168,620
     
-
 
    Fair value of warrants issued
   
99,960
     
-
 
    Fair value of stock options issued
   
138,312
     
37
 
    Fair value of conversion options issued
   
114,945
     
-
 
    Amortization of discount on notes payable
   
78,137
     
181,952
 
    Amortization of discount on accrued interest
   
135,360
     
155,249
 
    Impairment of investment in notes receivable
 
142,124
     
-
 
    Allowance for bad debt
   
5,877
     
-
 
    Cost of penalty due to late registration of shares
   
-
     
64,984
 
    Change in fair value of warrant liability
   
582,541
     
19,116
 
    Change in fair value of option liability
   
(5,717
)
   
1,624
 
    Change in fair value of conversion option liability
   
182,583
     
(11,097
)
    Revaluation of penalty for late registration of shares
   
220,564
     
3,296
 
  Changes in assets and liabilities:
               
        Accounts receivable
   
(2,295
   
72,551
 
        Prepaid expenses and other current assets
   
(1,970
   
8,479
 
        Accounts payable and accrued expenses- related party
   
84,495
     
-
 
        Accounts payable and accrued expenses
   
325,184
     
95,997
 
   Net cash  (used in) provided by operating activities
   
(113,070
   
3,392
 
                 
Cash flows from investing activities:
               
   Principal payments received on loan
   
12,000
     
-
 
   Acquisition of property and equipment
   
(8,129
)
   
(40,610
)
   Net cash provided by (used in) investing activities
   
3,871
     
(40,610
)
                 
Cash flows from financing activities:
               
    Proceeds from issuance of debt
   
200,000
     
-
 
    Principal payments on debt
   
(4,866
)
   
(6,690
)
                 
   Net cash provided by (used in)  financing activities
   
195,134
     
(6,690
                 
Increase (decrease) in cash and cash equivalents
   
85,935
     
(43,908
                 
Cash and cash equivalents at beginning of  year
   
74,610
     
118,518
 
                 
Cash and cash equivalents at end of  year
 
$
160,545
   
$
74,610
 
                 
Supplemental disclosure of cash flow information:
               
                 
Cash paid during the period for:
               
Interest
 
$
1,926
   
$
2,268
 
                 
Taxes
 
$
-
   
$
-
 
                 
Other items not affecting cash:
               
Revaluation of conversion option liability
 
$
297,528
   
$
(11,098
                 
Revaluation of warrant liability
 
$
682,501
   
$
19,116
 
                 
Cost of penalty for late registration for shares
 
$
-
   
$
64,984
 
                 
Cancellation of shares of common stock
 
$
-
   
$
557
 
                 
Common stock issued to employees as bonus
 
$
-
   
$
8,125
 
                 
Common stock issued for conversion of notes payable and accrued interest
 
$
-
   
$
164,000
 
 
See notes to consolidated financial statements.

20

 
Innovative Food Holdings, Inc. and Subsidiaries
 
Consolidated Statements of Changes in Stockholders' Deficiency
 
For the two years ended December 31, 2008
 
 
 
 
   
Common Stock
                   
   
Amount
   
Par Value
   
Additional Paid-In
Capital
   
Accumulated
Deficit
   
Total
 
Balance at December 31, 2006
   
151,310,796
   
$
15,131
   
$
1,358,334
   
$
(4,365,996
)
 
$
(2,992,531
)
                                         
Common shares cancelled
   
(5,573,158
)
   
(557
)
   
557
     
-
     
-
 
                                         
Common shares issued for employee bonuses
   
3,250,000
     
325
     
7,800
     
-
     
8,125
 
                                         
Common stock issued for conversion of note payable and accrued interest
   
32,800,000
     
3,280
     
160,720
     
-
     
164,000
 
                                         
Reclassification of conversion option liability
   
-
     
-
     
149,747
     
-
     
149,747
 
                                         
Discount due to Beneficial conversion feature on interest accrued on convertible notes payable
   
-
     
-
     
155,249
     
-
     
155,249
 
                                         
Loss for the year ended December 31, 2007
   
-
     
-
     
-
     
(646,336
)
   
(646,336
)
                                         
Balance at December 31, 2007 (Restated)
   
181,787,638
   
$
18,179
   
$
1,832,407
   
$
(5,012,332
)
 
$
(3,161,746
)
                                         
Common stock issued for the conversion of  notes payable and accrued interest
   
1,789,400
     
179
     
8,768
     
-
     
8,947
 
                                         
Reclassification of conversion option liability
   
-
     
-
     
8,800
     
-
     
8,800
 
                                         
Discount due to Beneficial conversion feature on interest accrued on convertible notes payable
   
-
     
-
     
135,360
     
-
     
135,360
 
                                         
Loss for the year ended December 31, 2008
   
-
     
-
     
-
     
(2,421,122
)
   
(2,421,122
)
                                         
Balance as of December 31, 2008
   
183,577,038
   
$
18,358
   
$
1,985,335
   
$
(7,433,454
)
 
$
(5,429,761
)
 
.
 
 
See notes to consolidated financial statements.

21

 
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Business Activity
 
Food Innovations, Inc. (“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.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 reported periods. Actual results could materially differ from those estimates.
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned operating subsidiary,  Food Innovations, Inc.  and its other wholly-owned subsidiaries Food New Media Group, Inc.  and 4 The Gourmet, Inc.  All material intercompany transactions have been eliminated upon consolidation of these entities.
 
Revenue Recognition
 
The Company recognizes revenue upon product shipment.   We ship all our products either overnight shipping terms or three day shipping terms to the customer and the customer takes title to product and assumes risk and ownership of the product when it is shipped.  Shipping changes to customers and sales taxes collectible from customers, if any, are included in revenues.
 
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 occurred;   (3)  the  selling   price  is  fixed  and   determinable;   and  (4) collectability 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 collectability 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 June 15, 2003.  For revenue arrangements occurring on or after August 1, 2003, the Company revised its revenue recognition policy to comply with the provisions of EITF No. 00-21 and EITF 99-19.
 
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 such as commissions and advertising,, and other administrative costs including professional fees.  Advertising costs are expensed as incurred.
 
22

 
Cash and Cash Equivalents
 
Cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.
 
Accounts Receivable
 
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts.  The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable.  It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change.  Accounts receivable are presented net of an allowance for doubtful accounts of $15,877 and  $10,000 at December 31, 2008 and 2007, respectively.
 
Property and Equipment
 
Property and equipment are valued at cost.  Depreciation is provided over the estimated useful lives up to five years using the straight-line method.  Leasehold improvements are depreciated on a straight-line basis over the term of the lease.
 
The estimated service lives of property and equipment are as follows:
 
Computer Equipment                  3 years
Office Furniture and Fixtures     5 years
 
Inventories
 
The Company does not currently maintain any material amount of inventory.
 
Income Taxes
 
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are   individually   classified as current and non-current based on their characteristics.  Realization of the deferred tax asset is dependent on generating sufficient taxable income in future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management,  it is more likely than not that some portion or all of the deferred tax assets will not be realized.
 
Fair Value of Financial Instruments
 
The carrying amount of the Company’s cash and cash equivalents, accounts receivable, notes payable, line of credit, accounts payable and accrued expenses, none of which is held for trading, approximates their estimated fair values due to the short-term maturities of those financial instruments.
 
Long-Lived Assets
 
The Company reviews its property and equipment and any  identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
 
As of December 31, 2008, the Company’s management believes there is no impairment of its long-lived assets.  There can be no assurance, however, that market conditions will not change which could result in impairment of long-lived assets in the future.
 
23

 
Comprehensive Income
 
Statement of Financial Accounting Standards No. 130 (“SFAS 130”), “Reporting Comprehensive Income,” establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances.  Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.  Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.  The Company does not have any items of comprehensive income in any of the periods presented.
 
Basic and Diluted Loss Per Share
 
In accordance with SFAS No. 128, "Earnings Per Share," the basic loss per common share is computed by dividing net loss available to common stockholders less preferred dividends by the weighted average number of common shares outstanding. Diluted loss per common share is computed similarly to basic loss per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were not anti-dilutive.  

The Company has excluded the following securities from the calculation of diluted net loss per share because these securities are anti-dilutive:

Anti-dilutive shares at December 31, 2008:
                                                                                                                                
Warrants to purchase 179,700,000 shares at $0.005 per share, 18,500,000 shares at $0.011 per share, and 74,000,000  shares at $0.0115 per share were not included in the computation of loss per share  because the warrant exercise prices were  greater than the average market price of the common shares.  Also not included in the calculation of loss per share were 399,984,600 shares issuable upon the conversion of debt and convertible interest; 35,500,000 shares issuable upon the conversion of options, 110,280,000 penalty shares issuable because the effect would have been anti-dilutive; 5,000,000 shares of common stock the Company has committed to issue to a service provider; and 3,000,000 shares of common stock the Company has committed to issue to its President.
                                                                                                                                
Anti-dilutive shares at December 31, 2007:
                                                                                                                                
Warrants to purchase 136,500,000 shares at $0.005 per share, 10,500,000 shares at $0.011 per share, and 136,500,000 shares at $0.005 per share were not included in the computation of earnings per share because the warrant exercise prices were greater than the average market price of the common shares.  Also not included in the calculation of earnings per share were 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 because the effect would have been antidilutive.
 
Liquidity
 
As reflected in the accompanying consolidated financial statements, the Company had net losses of $2,421,122  and $646,336 for the years ended December 31, 2008 and 2007, respectively.  This  variance was principally due to changes in fair values of warrant, conversion option and registration penalty liabilities rather to differences in actual operating results.  The Company  has an accumulated deficit of  $7,433,454  at  December 31, 2008.  In addition, the Company’s current liabilities exceeded its current assets by   $5,564,658  as of December 31, 2008.  Consequently, its operations are subject to all risks inherent in the establishment of a new business enterprise.

Historically, we have funded our operations from cash generated by operations and from the issuance of both debt and equity securities.  The Company’s cash on hand may be insufficient to fund its planned operating needs.  Management is continuing to pursue new debt and/or equity financing and is continually evaluating the Company’s cash and capital needs.

The Company expects 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, or the Company will be able to obtain such funds on favorable terms and conditions.  It the Company cannot secure additional funds it will not be able to continue as a going concern.

By adjusting its operation and development to the level of available resources, management believes it has sufficient capital resources to meet projected cash flow through the next twelve months. The Company also intends to increase market share and cash flow from operations by focusing its sales activities on specific market segments. However, if thereafter, the Company is 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.  Currently, we do not have any material long-term obligations other than those described in Note 7 to the financial statements included in this report, nor have we identified any long-term obligations that we contemplate incurring in the near future. 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.
 
The independent auditors report on our December 31, 2008 financial statements state that our recurring losses raise substantial doubts about our ability as a going concern.
 
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, 2008 and 2007, trade receivables from the Company’s largest customer amount to 86% and 81%, respectively, of total trade receivables.
 
Reclassification
 
Certain reclassifications have been made in prior year’s financial statements to conform to classifications used in the current year.
 
24

 
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.

In August 2005, the Company’s commitments to issue shares of common stock first exceeded its common stock authorized. At this time, the Company began to value its stock options via the liability method of accounting. Pursuant to guidance in SFAS 123(R), the cost of these options are valued via the Black-Scholes valuation method when issued, and re-valued at each reporting period.  The gain or loss from this revaluation is charged to compensation expense during the period.  Options expense and gain or loss on revaluation during the twelve months ended December 31, 2007 and 2008 are summarized in the table below:

   
December 31,
   
2008
   
2007
           
Option expense
  $ 50     $ 37
               
(Gain) loss on revaluation of options
   
(5,717
)     1,623
 
A summary of option activity 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 31,2007
   
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
   
20,000,000 
   
 $
0.007 
Exercised
   
-- 
     
--
Forfeited or expired
   
-- 
     
--
Outstanding at December 31, 2008
   
35,500,000 
   
 $
0.013 
               
Non-vested at December 31, 2008
   
100,000
   
 $
0.500
Exercisable at December 31, 2008
   
35,400,000
   
 $
0.012
 
Aggregate intrinsic value of options outstanding and exercisable at December 31, 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 and $0.005  as of December 31, 2007 and 2008, respectively, 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. During the years ended December 31, 2007 and 2008, the Company charged $37 and   $138,313, respectively, to operations related to recognized stock-based compensation expense for employee stock options.
 
25

 
Significant Recent Accounting Pronouncements

In June 2008, the FASB issued EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-5”). EITF 07-5 supersedes EITF Issue No. 01-6, The Meaning of ‘Indexed to a Company’s Own Stock’, and provides guidance in evaluating whether certain financial instruments or embedded features can be excluded from the scope of SFAS No. 133, Accounting for Derivatives and Hedging Activities (“SFAS 133”). EITF 07-5 sets forth a two-step approach that evaluates an instrument’s contingent exercise and settlement provisions for the purpose of determining whether such instruments are indexed to an issuer’s own stock (a requirement necessary to comply with the scope exception under SFAS 133). EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We are currently assessing the impact related to the adoption of EITF 07-5 on our financial instruments.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”), which replaces SFAS No. 141, Business Combinations, and requires an acquirer to recognize the assets acquired, the liabilities assumed and any non-controlling interest in the acquired company at the acquisition date, measured at their fair values as of that date, with limited exceptions. SFAS 141(R) also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquired company, at the full amounts of their fair values. SFAS 141(R) makes various other amendments to authoritative literature intended to provide additional guidance or conform the guidance in that literature to that provided in SFAS 141(R). SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The potential impact of adopting SFAS 141(R) will depend on the magnitude and frequency of our future acquisitions.
 
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”), which amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries not held by the parent to be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. SFAS 160 also requires the amount of consolidated net income attributable to the parent and to the non-controlling interest to be clearly identified and presented on the face of the consolidated statement of operations. Changes in a parent’s ownership interest while the parent retains its controlling financial interest must be accounted for consistently, and when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary must be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any non-controlling equity investment. SFAS 160 also requires entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 applies prospectively to all entities that prepare consolidated financial statements and applies prospectively for all fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We do not believe that its adoption will have a significant impact on our consolidated financial statements.
 
In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We do not believe that its adoption will have a significant impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure many financial instruments, and certain other items, at fair value. SFAS 159 applies to reporting periods beginning after November 15, 2007. The adoption of SFAS 159 is not expected to have a material impact on the Company’s financial condition or results of operations.
 
 2. ACCOUNTS RECEIVABLE
 
At December 31, 2008 and 2007, accounts receivable consists of:
 
   
December 31, 2008
   
December 31, 2007
 
Accounts receivable from customers
 
$
255,443
   
$
253,148
 
Allowance for doubtful accounts
   
(15,877
)
   
(10,000
)
Accounts receivable, net
 
$
239,566
   
$
243,148
 
 
3. LOAN RECEIVABLE AND INTEREST RECEIVABLE
 
The balance of loan receivable consisted of a loan to Pasta Italiana, Inc. in the net carrying amount of $153,000 at December 31, 2008 and $285,000 at December 31, 2007, respectively.  This  note bears interest at the rate of  15% per annum.  The loan was renegotiated during the twelve months ended December 31, 2008, and resulted in the Company recognizing an impairment to the loan in the amount of $142,124, which was charged to operations during the year ended December 31, 2008.  This impairment was based upon the renegotiated principal and interest amount due the Company.  At December 31, 2008, $60,000 of the amount due is classified as a current asset, and $93,000 is classified as a long term asset. At December 31, 2007, $285,000 was classified as a current asset, and none is classified as a long-term asset.  (See note 17).
 
26

 
4. PROPERTY AND EQUIPMENT
 
A summary of property and equipment at December 31, 2008 and 2007, is as follows:
 
   
December 31,
 2008
   
December 31, 2007
 
Computer hardware and software
 
$
292,608
   
$
288,228
 
Furniture and fixtures
   
67,298
     
63,565
 
     
359,906
     
351,793
 
Less accumulated depreciation and amortization
   
(307,286
)
   
(267,970
)
Total
 
$
52,620
   
$
83,823
 
 
Depreciation and amortization expense for property and equipment amounted to $39,332  and $49,415 for the year ended December 31, 2008 and 2007, respectively.
 
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
Accounts payable and accrued liabilities at December 31, 2008 and 2007 are as follows:

   
December 31,
   
December 31,
   
2008
   
2008
           
Trade payables
  $ 824,172     $ 678,455
Accrued payroll and commissions
    8,441       14,131
               
    $ 832,613     $ 692,586

At December 31, 2008 and 2007, accrued liabilities to related parties consisted of accrued payroll and payroll related benefits.

6.  ACCRUED INTEREST
 
Accrued interest on the Company’s convertible notes payable is convertible at the option of the note holders into the Company’s common stock at price ranging from of $0.005 to $0.010 per share .  There is a beneficial conversion feature embedded in the convertible accrued interest.  The Company is amortizing this beneficial conversion feature over the life of the related  notes payable.  Certain of the notes payable have exceeded their stated  terms, and are still outstanding; in those instances, the Company expenses the value of the beneficial conversion feature on the accrued interest immediately.

During the twelve months ended December 31, 2008 and 2007, the amounts of $135,360, and $155,249, respectively, were credited to additional paid-in capital as a discount on convertible interest.  The aggregate amount of discounts on convertible interest charged to operations during the twelve months ended December 31, 2008 and 2007 was $135,360 and $155,249, respectively.
 
At December 31, 2008, the Company has the following accrued interest on its balance sheet:
 
   
Gross
   
Discount
   
Net
Non-related parties
 
$
441,013
   
$
3,744
   
$
437,269
Related parties
   
173,471
     
-
     
173,471
Total
 
$
614,484
   
$
3,744
   
$
610,740
 
At December 31, 2007, the Company has the following accrued interest on its balance sheet:
 
   
Gross
   
Discount
   
Net
Non-related parties
 
$
316,058
   
$
-
   
$
316,058
Related parties
   
142,621
     
-
     
142,621
Total
 
$
458,679
   
$
-
   
$
458,679
 
Certain of the accrued interest is convertible in to shares of the Company’s common stock at prices ranging from $0.005 to $0.010 per share. At December 31, 2008, convertible accrued interest was $587,981 which was convertible into 114,043,320 shares of common stock; at December 31, 2007, convertible accrued interest was $438,195 which  was convertible into 84,968,520 shares of common stock.
 
27


 
7. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES 
 
   
December 31, 2008
 
December 31, 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  entered technical default status on 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 immediately due. The note is convertible into common stock of the Company at a conversion price of $0.005 per share. 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 . Interest in the amount of $51,889 and $51,747  was accrued on this note during the twelve months ended December 31, 2008   and 2007, respectively. 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 December 31, 2008 and 2007.
 
$
345,000
  $
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, has no provisions for a default or past due rate and was originally due in full on March 11, 2006. On February 25, 2005, an amendment to the convertible note 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. 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 and 2005.  Interest in the amount of $0 and $10,835  was accrued on this note during  the twelve months ended December 31, 2008, and 2007, respectively. During the twelve  months ended December 31, 2007, the note holder converted a total of $160,000 of principal into 32,000,000 shares of common stock.
 
   
-
-
 
 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, has no provisions for a default or past due rate 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 .  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 and 2005. 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.  Interest in the amount of $2,005  and $1,999 was accrued on this note during the twelve months ended December 31, 2008, and 2007, respectively.  During the twelve months ended December 31, 2006, $75,000 of the principal amount was converted into common stock. This note was in default at December 31, 2008 and  2007.
 
   
                                            25,000
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, has no provisions for a default or past due rate 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. 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, 2005, and 2006. Accrued interest is convertible by the holder into common stock of the Company at a price of $0.005 per share. Interest in the amount of $3,064  and $3,039  was accrued on this note during the twelve months ended December 31, 2008 and 2007, respectively. 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.  This note is in default at December 31, 2008 and 2007.
   
                                              38,000
38,000
 
 
28

 
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, has no provisions for a default or past due rate 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. 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, 2005, and 2006. 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.  Interest in the amount of $6,420 and $6,403 was accrued on this note during the twelve months ended December 31, 2008,  and 2007, respectively. This note is in default at December 31, 2008 and 2007.
 
   
80,000
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.  A beneficial conversion feature in the amount of $50,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in May, 2005.  Accrued interest is convertible into common stock of the Company at a price of $0.005 per share.  Interest in the amount of $6,019  and $6,002 was accrued on this note during the twelve months ended December 31, 2008 and 2007, respectively.  During the twelve months ended December 31, 2006, $10,000 of principal and $589 of accrued interest was converted into common stock.   This note is in default at December 31, 2008 and 2007.
 
   
                 40,000
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, has no provisions for a default or past due rate 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. 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, 2004, 2005, and 2006.  Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $4,014 and $4,003 was  accrued on this note during the twelve months ended December 31, 2008, and 2007, respectively. This note is in default at December 31, 2008 and 2007.