innnovfood-10q63009.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
 

 
FORM 10-Q
 

 
 
x  Quarterly report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934.

For the quarterly period ended June 30, 2009

r  Transition report pursuant to Section 13 or 15(d) of the Exchange
Act for the transition period from _________ to _________.

Commission File Number: 0-9376

INNOVATIVE FOOD HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)

Florida
(State of or Other Jurisdiction of Incorporation or Organization)
20-1167761
(IRS Employer I.D. No.)

3845 Beck Blvd., Suite 805
Naples, Florida 34114
(Address of Principal Executive Offices)

(239) 596-0204
(Registrant's Telephone Number, Including Area Code)

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 þ  NO r

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES r  NO r
 
Indicate by check mark whether the registrant is a shell company (as defined in Regulation 12b-2 of the Exchange Act):
 
YES r  NO þ

Indicate by 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 r
Accelerated filer                   r
Non-accelerated filer    r
(Do not check if a smaller reporting company)
Smaller reporting company þ
 
State the number of shares outstanding of each of the issuer's classes of Common equity, as of the latest practicable date:  194,638,638 Common Shares outstanding at August 3, 2009.
 

 
 


 
INNOVATIVE FOOD HOLDINGS, INC.
INDEX TO FORM 10-Q

   
Page
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
3
 
3
 
4
 
5
 
6
Item 2.
28
Item 4T.
34
     
PART II.
OTHER INFORMATION
 
     
Item 1.
35
Item 2.
35
Item 3.
35
Item 4.
35
Item 5.
35
Item 6.
35
 
36
 

 
 

 
 
 
 
   
   
June 30,
   
December 31,
 
   
2009
   
2008
 
ASSETS
 
(UNAUDITED)
   
(AUDITED)
 
             
Current assets
           
             
     Cash and cash equivalents
 
$
93,410
   
$
160,545
 
     Accounts receivable, net
   
203,168
     
239,566
 
     Loan receivable, current portion net
   
87,000
     
60,000
 
     Inventory
   
28,754
     
-
 
     Other current assets
   
7,625
     
9,000
 
                 
          Total current assets
   
419,957
     
469,111
 
                 
Loan receivable, net
   
66,000
     
93,000
 
Property and equipment, net
   
42,833
     
52,620
 
                 
   
$
528,790
   
$
614,731
 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
               
                 
Current liabilities
               
                 
     Accounts payable and accrued liabilities
 
$
674,511
   
$
832,613
 
     Accrued liabilities- related parties
   
134,085
     
126,671
 
     Accrued interest, net of discount
   
527,097
     
437,269
 
     Accrued interest - related parties
   
156,208
     
173,471
 
     Notes payable, current portion, net of discount
   
918,629
     
938,364
 
     Notes payable - related parties, current portion, net of discount
   
288,721
     
261,002
 
     Warrant liability
   
1,642,570
     
1,388,287
 
     Option liability
   
209,738
     
174,692
 
     Conversion option liability
   
1,990,944
     
1,150,000
 
     Penalty for late registration of shares
   
-
     
551,400
 
          Total current liabilities
   
6,542,503
     
6,033,769
 
                 
Note payable
   
14,899
     
10,723
 
     
6,557,402
     
6,044,492
 
Stockholders' deficiency
               
   Common stock, $0.0001 par value; 500,000,000 shares authorized;
               
       194,638,638 and 183,577,038  shares issued,  184,638,638  and
               
       173,577,038 shares outstanding at June 30, 2009 and December 31,
       2008, respectively
   
19,464 
     
18,358 
 
   Additional paid-in capital
   
2,116,597
     
1,985,335
 
   Accumulated deficit
   
(8,164,673
)
   
(7,433,454
)
      Total stockholders' deficiency
   
(6,028,612
)
   
(5,429,761
)
                 
   
$
528,790
   
$
  614,731
 
 
See notes to consolidated financial statements.

 
3

 
Innovative Food Holdings, Inc. and Subsidiaries
 
 
(UNAUDITED)
 

   
For the Three
   
For the Three
   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
   
Months Ended
   
Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
         
(Restated)
         
(Restated)
 
                         
Revenue
  $ 1,767,923     $ 1,681,854     $ 3,368,598     $ 3,285,232  
                                 
Cost of goods sold
    1,384,666       1,292,741       2,572,360       2,579,634  
      383,257       389,113       796,238       705,598  
                                 
Selling, General and administrative expenses
    372,558       541,092       759,119       877,562  
      Total operating expenses
    372,558       541,092       759,119       877,562  
                                 
Operating profit (loss)
    10,699       (151,979 )     37,119       (171,964 )
                                 
Other (income) expense:
                               
   Interest expense
    78,596       81,220       189,765       166,591  
   (Gain) loss on extinguishment of debt
    -       -       (222,656 )     168,620  
  Loss from revaluation of penalty shares
    -       220,560       -       551,400  
    Loss from change in fair value of warrant liability
    964,694       363,690       254,283       964,402  
  Fair value of options issued
    -       39,196       -       78,540  
   Loss from change in fair value of option liability
    122,471       37,725       35,046       72,751  
  Fair value of conversion option issued
    -       14,945             14,945  
   Loss from change in fair value of conversion option liability
    857,500       388,171       511,900       1,057,912  
      Total other expense
    2,023,261       1,145,507       768,338       3,075,161  
                                 
 Loss before income taxes
    ( 2,012,562 )     (1,297,486 )     ( 731,219 )     (3,247,125 )
                                 
  Income tax expense
    -       -       -       -  
                                 
Net loss
  $ (2,012,562 )   $ (1,297,486 )   $ (731,219 )   $ (3,247,125 )
                                 
Net loss per share - basic
  $ (0.011 )   $ (0.007 )   $ (0.004 )   $ (0.018 )
                                 
Weighted average shares outstanding - basic
    191,114,467       181,787,638       187,366,574       181,787,638  
 
See notes to consolidated financial statements.

 
4

 
Innovative Food Holdings, Inc. and Subsidiaries
(UNAUDITED)
 
   
Six Months Ended June 30,
 
   
2009
   
2008
 
Cash flows from operating activities:
       
(Restated)
 
             
   Net loss
 
$
(731,219
 
$
(3,247,125
  Adjustments to reconcile net loss to  net
               
  cash used in operating activities:
               
    Depreciation and amortization
   
17,327
     
20,397
 
     Non-cash compensation
   
11,200
     
-
 
    (Gain) loss on extinguishment of debt
   
(222,656
   
168,620
 
    Fair value of options issued
   
-
     
78,540
 
     Fair value of conversion options issued in excess of discount
   
-
     
14,945
 
    Amortization of discount on notes payable
   
29,380
     
34,564
 
    Amortization of discount on accrued interest
   
70,136
     
53,417
 
    Change in fair value of warrant liability
   
254,283
     
964,406
 
    Change in fair value of option liability
   
35,046
     
72,751
 
    Change in fair value of conversion option liability
   
511,900
     
1,057,912
 
    Revaluation of penalty for late registration of shares
   
-
     
551,396
 
  Changes in operating assets and liabilities:
               
        Accounts receivable
   
36,398
     
101,325
 
        Prepaid expenses and other current assets
   
(21,129
   
-
 
        Accounts payable and accrued expenses- related party
   
(9,849
   
41,641
 
        Accounts payable and accrued expenses
   
(37,793
   
47,813
 
   Net cash used in operating activities
   
(56,976
   
(39,398
                 
Cash flows from investing activities:
               
   Acquisition of property and equipment
   
(7,540
)
   
(4,379
   Net cash used in investing activities
   
(7,540
   
(4,379
                 
Cash flows from financing activities:
               
    Principal payments on debt
   
(2,619
)
   
(2,372
)
   Net cash used in  financing activities
   
(2,619
   
(2,372
                 
Decrease in cash and cash equivalents
   
(67,135
   
(46,149
                 
Cash and cash equivalents at beginning of  period
   
160,545
     
74,610
 
                 
Cash and cash equivalents at end of  period
 
$
93,410
   
$
28,461
 
                 
Supplemental disclosure of cash flow information:
               
                 
Cash paid during the period for:
               
Interest
 
$
-
   
$
-
 
                 
 Income Taxes
 
$
-
   
$
-
 
Items not affecting cash
               
Revaluation of conversion option liability
 
$
511,900
   
$
1,057,912
 
                 
Revaluation of warrant liability
 
$
254,283
   
$
964,406
 
                 
Revaluation of warrant liability
 
$
35,046
   
$
71,751
 
                 
Revaluation of penalty for late registration of shares
 
$
-
   
$
551,396
 
                 
Common stock issued for consulting contract
 
$
16,250
   
$
-
 
                 
Common stock issued to employees
 
$
1,200
   
$
-
 
                 
Common stock issued for conversion of notes payable and accrued interest
 
$
21,058
   
$
-
 
 
See notes to consolidated financial statements.

 
5


INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
(Unaudited)

1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements of Innovative Food Holdings, Inc., and its wholly owned subsidiaries, Food Innovations, Inc. (“FII”), Food New Media Group, Inc. (“FNM”)  and 4 The Gourmet, Inc (“Gourmet”) (collectively, the “Company, or “IVFH”),  have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  FNM is currently inactive. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete financial statement presentation. U.S. accounting principles also contemplate continuation of the Company as a going concern.

Acquisition and Corporate Restructure

We were initially formed in September 1979 as Alpha Solarco Inc., a Colorado corporation. From September 1979 through February 2004, we were either inactive or involved in discontinued business ventures. In February 2003 we changed our name to Fiber Application Systems Technology, Ltd.

On January 26, 2004, through a share exchange, the shareholders of Food Innovations, Inc. (‘FII”) converted 10,000 shares (post-reverse split) of FII common stock outstanding into 25,000,000 shares  of IVFH. On January 29, 2004, in a transaction known as a reverse acquisition, the shareholders of Innovative Food Holdings, Inc. (“IVFH”) exchanged 25,000,000 shares  of IVFH for 25,000,000 shares  of Fiber Application Systems (formerly known as Alpha Solarco) (“Fiber”), a publicly-traded company.   The shareholders of IVFH thus assumed control of Fiber, and Fiber changed its name to IVFH.  The 25,000,000 shares  of IVFH are shown on the Company’s balance sheet at December 31, 2003 as shares outstanding.  These shares are shown at their  par value of $2,500 as a decrease of additional paid-in capital at the acquisition date of January 29, 2004.  There were 157,037 shares  outstanding in Fiber at the time of the reverse acquisition; the par value of these shares, or $16, was transferred from additional paid-in capital at the time of the reverse acquisition.
 
2. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
 
Business Activity
 
Food Innovations, Inc. (“FII”) is in the business of providing premium white tablecloth restaurants with the freshest origin-specific perishables and specialty food 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 90% of our products through a distributor relationship with Next Day Gourmet, L.P., a subsidiary of US Foodservice, Inc. (“USF”), a $20 Billion broadline distributor.
 
Interim Financial Information

The accompanying unaudited interim consolidated financial statements have been prepared by the Company, in accordance with generally accepted accounting principles pursuant to Regulation S-X of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in audited consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, these interim financial statements should be read in conjunction with the Company’s financial statements and related notes as contained in Form 10-K for the year ended December 31, 2008. In the opinion of management, the interim consolidated financial statements reflect all adjustments, including normal recurring adjustments, necessary for fair presentation of the interim periods presented. The results of the operations for the three and six months ended June 30, 2009 are not necessarily indicative of the results of operations to be expected for the full year.

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.

 
6

 
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 charges 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.

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 $607 and $15,877 at June 30, 2009 and December 31, 2008, 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
 
Inventory is stated at the lower of cost or market determined by the first-in, first-out method. Inventories consist primarily of specialty foods held for resale. 

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.
 
 
7

 
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 June 30, 2009, 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.
 
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 Income (Loss) Per Share

In accordance with SFAS No. 128, "Earnings Per Share," the basic loss per common share is computed by dividing net income 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, and the numerator is changed to reflect any changes  to net loss that would have occurred had the dilutive shares been issued.
 
Diluted loss per share was not calculated for the three or six months ended June 30, 2009 and 2008 as the effect would have been anti-dilutive.
 
Anti-dilutive shares at June 30, 2009:
 
The following securities were outstanding at June 30, 2009:
 
Warrants:  179,700,000 shares at an exercise price of $0.005 per share; 18,500,000 shares at an exercise price of $0.011 per share; 174,000,000 shares at an exercise price of $0.0115 per share; and 1,000,000 shares at an exercise price of $0.012 per share.

 
8

 
Options:  35,000,000 shares at $0.005 per share.

Convertible notes and interest:  477,500,000 shares at $0.005; 5,512,000 shares at $0.01; and 1,354,240 shares at $0.025.

 Anti-dilutive shares at June 30, 2008:

The following securities were outstanding at June 30, 2009:

Warrants:  179,700,000 shares at an exercise price of $0.005 per share; 18,500,000 shares at an exercise price of $0.011 per share; and 74,000,000 shares at an exercise price of $0.0115 per share.
 
Options:   15,000,000 shares at $0.005 per share; 20,000,000 shares at $0.007 per share; and 500,000 shares at $0.50 per share.
 
Convertible notes and interest:  393,316,800 shares at $0.005; 5,353,200 shares at $0.01 per share; and 1,314,600 shares at 0.025 per share.

Liquidity
 
As reflected in the accompanying consolidated financial statements, the Company had a  loss of $2,012,562 and $1,297,486  for the three months ended June 30, 2009 and 2008, respectively.  The Company had a loss of $731,219  and $3,247,125 for the six months ended June 30, 2009 and 2008, 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  $8,164,673  at  June 30, 2009.  In addition, the Company’s current liabilities exceeded its current assets by   $6,122,546  as of June 30, 2009.  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 generate positive cash flow from operations or secure additional funds it will not be able to continue as a going concern.

By adjusting its operations 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 it finds acceptable, 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  in investments with credit quality institutions. At times, such investments may be in excess of applicable government mandated insurance limit. At June 30, 2009 and 2008, trade receivables from the Company’s largest customer amounted to 92.7 % and 91.1%  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.
 
9

 
Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of SFAS 123R, Share-Based Payment (“SFAS 123R”). This statement requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period in which the employee is required to provide service in exchange for the award, which is usually the vesting period.

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 three months ended June 30, 2009 and 2008 are summarized in the table below:
 
   
Three Months ended June 30,
 
   
2009
   
2008
 
Option expense
 
$
-
   
$
39,196
 
                 
Loss on revaluation of options
 
$
122,471
   
$
37,725
 
 
Options expense and gain or loss on revaluation during the six months ended June 30, 2009 and 2008 are summarized in the table below:

   
Six Months ended June 30,
 
   
2009
   
2008
 
Option expense
 
$
-
   
$
78,540
 
                 
Loss on revaluation of options
 
$
35,046
   
$
72,751
 
 
A summary of option activity as of December 31, 2008, and changes during the period ended June 30, 2009 are presented below:

         
Weighted
 
         
Average
 
   
Number of
   
Exercise
 
   
Shares
   
Price
 
Options outstanding at December 31, 2008
   
35,500,000
   
$
0.013
 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Cancelled/Expired
   
(500,000
   
(0.500)
 
                 
Options outstanding at June 30, 2009
   
35,000,000
   
$
0.006
 
 
Aggregate intrinsic value of options outstanding and options exercisable at June 30, 2009, 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 $0.006  at June 30, 2009, and the exercise  price  multiplied by the number  of  options  outstanding.  As  of  June 30, 2009  total  unrecognized stock-based compensation expense related to non-vested stock options was $0. The total fair value of options vested was $0 for the three and six month periods ended June 30, 2009 and 2008.

 
10

 
Significant Recent Accounting Pronouncements
 
On April 9, 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This staff position amends FASB Statement (“SFAS”) No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. This FSP became effective for interim reporting periods ending after June 15, 2009. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. As this FSP provides for additional disclosure requirements only, the Company does not expect the adoption of this FSP to have an impact on the Company’s results of operations, financial position or cash flows.
 
On April 9, 2009, the FASB issued FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”), which amends SFAS No. 157, “Fair Value Measurements” , to provide additional guidance on fair value measurements in inactive markets when the volume and level of activity for the asset and liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 became effective for interim reporting periods ending after June 15, 2009. The Company does not expect the adoption of this FSP to have an impact on the Company’s results of operations, financial position or cash flows.
 
On April 9, 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” which amends impairment guidance for certain debt securities and will require an entity to assess whether it (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, the entity must recognize an other-than-temporary impairment. If an entity is able to meet the criteria to assert that it will not have to sell the security before recovery, impairment charges related to credit losses would be recognized in earnings, while impairment charges related to non-credit losses (for example, liquidity risk) would be reflected in other comprehensive income. This FSP became effective for interim reporting periods ending after June 15, 2009. The Company does not expect the adoption of this FSP to have an impact on the Company’s results of operations, financial position or cash flows.
 
On April 1, 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arises from Contingencies” (“FSP FAS 141(R)-1”), to amend and clarify the initial recognition and measurement, subsequent measurement and accounting, and related disclosures arising from contingencies in a business combination under SFAS 141(R), “Business Combinations.” Under FSP FAS 141(R)-1, assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value can not be determined, companies should account for the acquired contingencies using existing guidance. FSP FAS 141(R)-1 is effective for the Company for business combinations finalized after January 1, 2009.
                                                                                                                          
3. ACCOUNTS RECEIVABLE

At June 30, 2009 and December 31, 2008, accounts receivable consists of:
 
   
June 30,
2009
   
December 31, 2008
 
Accounts receivable from customers
 
$
203,775
   
$
255,443
 
Allowance for doubtful accounts
   
(607
)
   
(15,877
)
Accounts receivable, net
 
$
203,168
   
$
239,566
 

4.  LOAN RECEIVABLE

The  loan receivable consists  of a loan to Pasta Italiana, Inc. (“Pasta”) in the net carrying amount of $153,000  at June 30, 2009 and December 31, 2008.  This  note bears interest at the rate of  15% per annum, payable in shares of Pasta stock.  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  June 30, 2009, $87,000 of the amount due is classified as a current asset, and $66,000 is classified as a long term asset. At December 31, 2008, $60,000 was classified as a current asset, and $93,000 is classified as a long-term asset.  At June 30, 2009, Pasta is not in compliance with  the terms of the settlement agreement. Management will consider the benefit to the Company of giving formal notice to Pasta with regard to their non-compliance with the payment terms of the Pasta note, which would trigger default status of the note, during the coming six months ending December 31, 2009.
 
 
11

 
5. INVENTORY

Inventory consists of the Company's specialty food which has been purchased from third parties. Components of inventories are as follows:

   
June 30,
   
December 31,
 
   
2009
   
2008
 
Finished goods
 
$
28,754
   
$
-
 
Total
 
$
28,754
   
$
-
 
 
6. PROPERTY AND EQUIPMENT

A summary of property and equipment at June 30, 2009 and December 31, 2008, is as follows:

   
June 30, 2009
   
December 31, 2008
 
Computer equipment
 
$
301,812
   
$
292,608
 
Furniture and fixtures
   
65,650
     
67,298
 
     
367,462
     
359,906
 
Less accumulated depreciation and amortization
   
(324,629
   
(307,286
Total
 
$
42,833
   
$
52,620
 

Depreciation and amortization expense amounted to $ 7,777 and $10,381, respectively, for the three months ended June 30, 2009 and 2008. Depreciation and amortization expense amounted to $17,327 and $20,397, respectively, for the six months ended June 30, 2009 and 2008.
 
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
Accounts payable and accrued liabilities at June 30, 2009 and December 31, 2008 are as follows:

 
June 30,
 
December 31,
 
 
2009
 
2008
 
Trade payables
  $ 663,000     $ 824,172  
Accrued payroll and commissions
    11,511       8,441  
    $ 674,511     $ 832,613  

At June 30, 2009 and December 31, 2008, accrued liabilities to related parties in the amount of $134,085 and $126,671, respectively, consisted of accrued payroll and payroll related benefits.

8. 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 prices ranging from of $0.005 to $0.010 per share.  Beneficial conversion features are  embedded in the convertible accrued interest.  The Company is amortizing these beneficial conversion features over the lives  of the related notes payable.  Certain of these notes payable have exceeded their stated terms, and are still outstanding; in those instances, the Company charges  the value of these beneficial conversion features to operations immediately, at the time the interest is accrued.
 
During the three months ended June 30, 2009 and 2008, the amounts of $39,914, and $30,374, 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 three months ended June 30, 2009 and 2008 was $25,528  and $22,426 , respectively.
 
During the six months ended June 30, 2009 and 2008, the amounts of $86,060, and $60,175, 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 six months ended June 30, 2009 and 2008 was $70,228 and $53,416, respectively.
 
 
12

 
At June 30, 2009 and December 31, 2008, the Company has the following accrued interest on its balance sheet:

June 30, 2009:
 
Gross
   
Discount
   
Net
 
Non-related parties
 
$
546,802
   
(19,705
 
$
527,097
 
Related parties
   
156,208
     
-
     
156,208
 
Total
 
$
703,010
   
$
(19,705
 
$
683,305
 

December 31, 2008:
 
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
 

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 June 30, 2009, convertible accrued interest was $673,531 which was convertible into  131,776,840 shares of common stock; at December 31, 2008, convertible accrued interest was $587,981 which was convertible into 114,043,320 shares of common stock.
                      
9. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
 
 
                 
     
June 30, 2009 
      December 31, 2008  
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. During the three months ended June 30, 2009, the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $6,880 and $12,901 was accrued on this note during the three months ended June 30, 2009 and 2008, respectively. Interest in the amount of $19,640 and $25,803 was accrued on this note during the six months ended June 30, 2009 and 2008, 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 past due at December 31, 2008. The noteholder has agreed to extend the maturity date of this note until January 1, 2010
  $ 345,000     $ 345,000  
                 
Convertible note payable in the original amount of $100,000 to Joel Gold, a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, 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 $498 was accrued on this note during the three months ended June 30, 2009, and 2008. Interest in the amount of $991 and $997 was accrued on this note during the six months ended June 30, 2009, and 2008, respectively. During the twelve months ended December 31, 2006, $75,000 of the principal amount was converted into common stock. This note is past due at June 30, 2009 and December 31, 2008.
    25,000       25,000  
                 
Convertible note payable in the original 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 $758 and $774 was accrued on this note during the three months ended June 30, 2009 and 2008, respectively. Interest in the amount of $1,507 and $1,532 was accrued on this note during the six months ended June 30, 2009 and 2008, 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 past due at June 30, 2009 and December 31, 2008.
    38,000       38,000  
 
 
 
 
                 
Convertible note payable in the amount of $80,000 to Brown Door, Inc., dated March 11, 2004. The note bears interest at the rate of 8% per annum, 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 $1,596 was accrued on this note during the three months ended June 30, 2009, and 2008. Interest in the amount of $3,175 and $3,192 was accrued on this note during the six months ended June 30, 2009, and 2008, respectively. This note is past due at June 30, 2009 and December 31, 2008.
    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. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $798 and $1,496 was accrued on this note during the three months ended June 30, 2009 and 2008, respectively. Interest in the amount of $2,278 and $2,993 was accrued on this note during the six months ended June 30, 2009 and 2008, 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 past due at December 31, 2008. The noteholder has agreed to extend the maturity date of this note until January 1, 2010.
    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 $998 was accrued on this note during the three months ended June 30, 2009, and 2008. Interest in the amount of $1,985 and 1,996 was accrued on this note during the six months ended June 30, 2009, and 2008, respectively. This note is past due at June 30, 2009 and December 31, 2008.
    50,000       50,000  
                 
Convertible note payable in the original amount of $30,000 to Huo Hua dated May 9, 2005. The note bears interest at the rate of 8% per annum, 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 $30,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 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 $400 was accrued on this note during the three months ended June 30, 2009 and 2008. Interest in the amount of $795 and $799 was accrued on this note during the six months ended June 30, 2009 and 2008, respectively. During the twelve months ended December 31, 2006, the note holder converted $10,000 of principal into common stock. This note is past due at June 30, 2009 and December 31, 2008.
    20,000       20,000  
                 
Convertible note payable in the amount of $25,000 to Joel Gold a board member and related party, dated January 25, 2005. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was due in full on January 25, 2007. The note is convertible into common stock of the Company at a conversion of $0.025 per share. A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005, 2006, and 2007. Accrued interest is convertible into common stock of the Company at a price of $0.025 per share. Interest in the amount of $498 was accrued on this note during the three months ended June 30, 2009 and 2008. Interest in the amount of $991 and $997 was accrued on this note during the six months ended June 30, 2009 and 2008, respectively. This note is past due at June 30, 2009 and December 31, 2008.
    25,000       25,000  
                 
Convertible note payable in the amount of $25,000 to The Jay & Kathleen Morren Trust dated January 25, 2005. The note bears interest at the rate of 6% per annum, has no provisions for a default or past due rate and was due in full on January 25, 2007. The note is convertible into common stock of the Company at a conversion of $0.005 per share. A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005, 2006, and 2007. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $373 was accrued on this note during the three months ended June 30, 2009 and 2008. Interest in the amount of $742 and $746 was accrued on this note during the six months ended June 30, 2009 and 2008, respectively. This note is past due at June 30, 2009 and December 31, 2008.
    25,000       25,000  
 
 
                 
Convertible note payable in the amount of $10,000 to Lauren M. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company at a conversion of $0.01 per share . A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share. Interest in the amount of $200 was accrued on this note during the three months ended June 30, 2009, and 2008. Interest in the amount of $397 and $400 was accrued on this note during the six months ended June 30, 2009, and 2008, respectively. This note is past due at June 30, 2009 and December 31, 2008.
    10,000       10,000  
 
               
Convertible note payable in the amount of $10,000 to Richard D. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company at a conversion of $0.01 per share . A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share. Interest in the amount of $200 was accrued on this note during the three months ended June 30, 2009, and 2008. Interest in the amount of $397 and $400 was accrued on this note during the six months ended June 30, 2009, and 2008, respectively. This note is past due at June 30, 2009 and December 31, 2008.
    10,000       10,000  
                 
Convertible note payable in the amount of $10,000 to Christian D. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company at a conversion of $0.01 per share. A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share. Interest in the amount of $200 was accrued on this note during the three months ended June 30, 2009, and 2008. Interest in the amount of $397 and $400 was accrued on this note during the six months ended June 30, 2009, and 2008, respectively. This note is past due at June 30, 2009 and December 31, 2008.
    10,000       10,000  
                 
Convertible note payable in the amount of $10,000 to Andrew I. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company at a conversion of $0.01 per share . A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share. Interest in the amount of $200 was accrued on this note during the three months ended June 30, 2009, and 2008. Interest in the amount of $397 and $400 was accrued on this note during the six months ended June 30, 2009, and 2008, respectively. This note is past due at June 30, 2009 and December 31, 2008.
 
    10,000       10,000  
                 
Convertible note payable in the amount of $8,000 to Adrian Neilan dated March 11, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and is due in full on October 12, 2006. The note is convertible into common stock of the Company at a conversion of $0.005 per share. A beneficial conversion feature in the amount of $8,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004, 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 $160 was accrued on this note during the three months ended June 30, 2009, and 2008. Interest in the amount of $317 and $319 was accrued on this note during the six months ended June 30, 2009, and 2008, respectively. This note is past due at June 30, 2009 and December 31, 2008.
    8,000       8,000  
                 
Convertible note payable in the amount of $5,000 to Matthias Mueller dated March 11, 2004. The note bears interest at the rate of 8% per annum, 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 $5,000 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 $100 was accrued on this note during the three months ended June 30, 2009, and 2008. Interest in the amount of $199 and $200 was accrued on this note during the six months ended June 30, 2009, and 2008, respectively. This note is past due at June 30, 2009 and December 31, 2008.
    5,000       5,000  
 
 
 
                 
Convertible note payable in the amount of $120,000 to Alpha Capital dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance. These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities. This note is in technical default as of November 13, 2005. The note originally carried interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $120,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in November 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $2,393 and $4,487 was accrued on this note during the three months ended June 30, 2009 and 2008, respectively. Interest in the amount of $6,832 and $8,975 was accrued on this note during the six months ended June 30, 2009 and 2008, respectively. This note is past due at December 31, 2008. The noteholder has agreed to extend the maturity date of this note until January 1, 2010.
    120,000       120,000  
                 
Convertible note payable in the amount of $30,000 to Whalehaven Capital dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance. These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities. This note was in technical default as of November 13, 2005. The note originally carried interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $30,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in November 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $598 and $1,122 was accrued on this note during the three months ended June 30, 2009 and 2008, respectively. Interest in the amount of $1,707 and $2,244 was accrued on this note during the six months ended June 30, 2009 and 2008, respectively. This note is past due at December 31, 2008. The noteholder agreed to extend the maturity date of this note until January 1, 2010.
    30,000       30,000  
 
               
Convertible note payable in the original amount of $25,000 to Asher Brand, dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance. These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities. This note was in technical default as of November 13, 2005. The note originally carried interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $25,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in November, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $394 and $861 was accrued on this note during the three months ended June 30, 2009 and 2008, respectively. Interest in the amount of $1,134 and $1,721 was accrued on this note during the six months ended June 30, 2009 and 2008, respectively. During the twelve months ended December 31, 2006, the holder of the note converted $2,000 of principal and $3,667 of accrued interest into common stock, and during the twelve months ended December 31, 2008, the holder of the note converted an additional $3,000 of principal into common stock. During the three months ended June 30, 2009, the holder converted $2,000 of principal and $1,058 of accrued interest into common stock. This note is past due at December 31, 2008. The noteholder has agreed to extend the maturity date of this note until January 1, 2010.
    18,000       20,000  
                 
Convertible note payable in the original amount of $25,000 to Momona Capital, dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance. These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities. This note was in technical default at November 13, 2005. The note originally carried interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $25,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in November 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $358 and $861 was accrued on this note during the three months ended June 30, 2009 and 2008, respectively. Interest in the amount of $1,023 and $1,721 was accrued on this note during the six months ended June 30, 2009 and 2008, respectively. During the twelve months ended December 31, 2006, the holder of the note converted $2,000 of principal and $3,667 of accrued interest into common stock, and during the twelve months need December 31, 2008, the holder of the note converted an additional $5,000 principal into common stock. This note is past due at December 31, 2008. The noteholder agreed to extend the maturity date of this note until January 1, 2010.
    18,000       18,000  
 
 
 
 
               
Convertible note payable in the amount of $10,000 to Lane Ventures dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance. These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities. This note was in technical default at November 13, 2005. The note originally carried interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $10,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in November, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $119 and $224 was accrued on this note during the three months ended June 30, 2009 and 2008, respectively. Interest in the amount of $340 and $448 was accrued on this note during the six months ended June 30, 2009 and 2008, respectively. During the twelve months ended December 31, 2006, the holder of the note converted $4,000 of principal and $1,467 of accrued interest into common stock. This note is past due at December 31, 2008. The noteholder has agreed to extend the maturity date of this note until January 1, 2010.
    6,000       6,000  
                 
Note payable in the amount of $120,000 to Alpha Capital, dated February 7, 2006. The note originally carried interest at the rate of 15% per annum, and was originally due in full on February 7, 2007. The Company was not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at May 8, 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. During the three months ended September 30, 2007, the Company extended the due date of the notes one year, to October 31, 2007; at the same time, the Company added a convertibility feature, allowing the noteholders to convert the notes and accrued interest into common stock of the Company at a rate of $0.005 per share. This note entered technical default on October 31, 2007. The Company recorded a discount to this note for the fair value of the conversion feature in the amount of $95,588 and amortized this discount to interest expense when the note entered default status in October 2007. In January 2009, the Company extended this note to April 16, 2009. As consideration for the extension of this notes, the Company issued five-year warrants as follows: warrants to purchase 24,000,000 shares of common stock at $0.0115 per share; 6,000,000shares of common stock at $0.011 per share; and 2,400,000 shares of common stock at $0.005 per share. These warrants were valued via the Black-Scholes valuation method at an aggregate amount of $126,465. This transaction was accounted for as an extinguishment of debt, and a loss of $126,465 was charged to operations during the twelve months ended December 31, 2008. Interest in the amount of $4,487 and $5,984 was accrued on this note during the three months ended June 30, 2009 and 2008, respectively. Interest in the amount of $10,674 and $11,967 was accrued on this note during the six months ended June 30, 2009 and 2008, respectively. This note is past due at June 30,2009.
    120,000       120,000  
 
               
Note payable in the amount of $30,000 to Whalehaven Capital dated February 7, 2006. The note originally carried interest at the rate of 15% per annum, and was due in full on February 7, 2007. The Company was not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at May 8, 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable. During the three months ended September 30, 2007, the Company extended the due date of the notes one year, to October 31, 2007; at the same time, the Company added a convertibility feature, allowing the noteholders to convert the notes and accrued interest into common stock of the Company at a rate of $0.005 per share. This note entered technical default on October 31, 2007. The Company recorded a discount to this note for the fair value of the conversion feature in the amount of $23,897 and amortized this discount to interest expense when the note entered default status in October 2007. On January 2009, the Company extended this note to April 16, 2009. As consideration for the extension of this notes, the Company issued five-year warrants as follows: warrants to purchase 6,000,000 shares of common stock at $0.0115 per share; 1,500,000 shares of common stock at $0.011 per share; and 600,000 shares of common stock at $0.005 per share. These warrants were valued via the Black-Scholes valuation method at an aggregate amount of $31,616. This transaction was accounted for as an extinguishment of debt, and a loss of $31,616 was charged to operations during the twelve months ended December 31, 2008. Interest in the amount of $1,496 was accrued on this note during the three months ended June 30, 2009 and 2008. Interest in the amount of $2,602 and $2,244 was accrued on this note during the six months ended June 30, 2009 and 2008, respectively. This note is past due at June 30, 2009.
    30,000       30,000  
                 
Note payable in the amount of $75,000 to Michael Ferrone, dated August 2, 2004. The note bears interest at the rate of 8% per annum, and was due in full on February 2, 2005. On September 30, 2008, this note was extended to December 31, 2009 in exchange for adding a convertibility feature to the note. This feature allows for conversion to common stock at a price of $0.005 per share. The Company valued this beneficial conversion feature at the amount of $89,945 using the Black-Scholes valuation model. $75,000 of this amount was charged to discount on the note; $4,001 of this discount was amortized to interest expense during the year ended December 31, 2008. During the three and six months ended June 30, 2009, $9,477 and $14,220 was amortized to interest expense , respectively. Interest in the amount of $1,496 was accrued on this note during the three months ended June 30, 2009, and 2008. Interest in the amount of $2,976 and $2,993 was accrued on this note during the six months ended June 30, 2009, and 2008, respectively.
    75,000       75,000  
 
 
 
               
Note payable in the amount of $10,000 to Alpha Capital, dated May 19, 2006. The note originally carried interest at the rate of 15% per annum, and was originally due in full on November 19, 2006. The Company is not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at February 20 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. During the three months ended September 30, 2007, the Company extended the due date of the notes one year, to October 31, 2007; at the same time, the Company added a convertibility feature, allowing the noteholders to convert the notes and accrued interest into common stock of the Company at a rate of $0.005 per share. This note entered technical default on October 31, 2007. The Company recorded a discount to this note for the fair value of the conversion feature in the amount of $7,966 and amortized this discount to interest expense when the note entered default status in October 2007. On March 12, 2008, the Company extended this note to March 4, 2009. As consideration for the extension of this notes, the Company issued five-year warrants as follows: warrants to purchase 2,000,000 shares of common stock at $0.0115 per share; 500,000 shares of common stock at $0.011 per share; and 200,000 shares of common stock at $0.005 per share. These warrants were valued via the Black-Scholes valuation method at an aggregate amount of $10,539. This transaction was accounted for as an extinguishment of debt, and a loss of $10,539 was charged to operations during the twelve months ended December 31, 2008. Interest in the amount of $373 and $498 was accrued on this note during the three months ended June 30, 2009 and 2008, respectively. Interest in the amount of $866 and $997 was accrued on this note during the six months ended June 30, 2009 and 2008, respectively. The noteholder agreed to extend the maturity date of this note until January 1, 2010.
    10,000       10,000  
                 
Twenty-nine convertible notes payable in the amount of $4,500 each to Sam Klepfish, the Company’s CEO and a related party, dated the first of the month beginning on November 1, 2006. Pursuant to the Company’s employment agreement with Mr. Klepfish, the amount of $4,500 in salary is accrued each month to a note payable. These notes bear interest at the rate of 8% per annum and have no due date. These notes and accrued interest are convertible into common stock of the Company at a rate of $0.005 per share. Beneficial conversion features in the aggregate amount of $9,000 for the year ended December 31, 2006, $39,190 for the year ended December 31, 2007, $58,464 for the year ended December 31, 2008, and $8,100 for the three months ended March 31, 2009 were calculated using the Black-Scholes valuation model. Since these notes are payable on demand, the value of these discounts were charged immediately to interest expense. Interest in the aggregate amount of $2,603 and $1,652 was accrued on these notes during the three months ended June 30, 2009 and 2008, respectively. Interest in the aggregate amount of $5,006 and $3,044 was accrued on these notes during the six months ended June 30, 2009 and 2008, respectively.
    130,500       117,000  
                 
Twelve one-year notes payable in the amount of $1,500 each for an aggregate amount of $18,000 to Mountain Marketing, for services. A note in the amount of $1,500 is dated as of the last day of each month of the year ended December 31, 2008. These notes are convertible into common stock of the Company at the rate of $0.005 per share. Discounts in the aggregate amount of $15,664 were amortized to interest during the year ended December 31, 2008. These notes do not bear interest. During the three months ended June 30, 2009, the Company issued 3,600,000 shares of common stock for the conversion of these notes payable.
    -       18,000  
 
               
Note payable in the original amount of $25,787 to Microsoft Corporation dated May 3, 2006. The note bears interest at the rate of 9.7% per annum, and is payable in 60 monthly payments of $557 beginning October 1, 2006. Interest in the amount of $348 and $470 was capitalized to this note during the three months ended June 30, 2009 and 2008, respectively. Interest in the amount of $728 and $969 was capitalized to this note during the six months ended June 30, 2009 and 2008, respectively. Principal and interest in the amounts of $1,324 and $1,202 were paid on this note during the three months ended June 30, 2009 and 2008, respectively. Principal and interest in the amounts of $2,617 and $2,376 were paid on this note during the six months ended June 30, 2009 and 2008, respectively.
    13,470       16,087  
                 
Convertible note payable in the amount of $200,000 to Alpha Capital, dated December 31, 2008. This note bears interest at the rate of 8% per annum, and is due in full on December 31, 2009. Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share. Also issued with this note are warrants to purchase 40,000,000 shares of the Company’s common stock at a price of $0.005 per share. The Company calculated a discount to the note in the amount of $200,000, and recorded $1,378 and $$2,316 amortization for this discount during the three and six months ended June 30, 2009, respectively. Interest in the aggregate amount of $3,989 and $0 was accrued on this note during the three months ended June 30, 2009 and 2008, respectively. Interest in the aggregate amount of $7,934 and $0 was accrued on this note during the six months ended June 30, 2009 and 2008, respectively.
    200,000       200,000  
                 
Convertible note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $230,000 to Alpha Capital, dated January 1, 2009. This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011. Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share. The Company calculated a discount to the note in the amount of $230,000, and recorded $2,024 and $3,319 amortization for this discount during the three and six months ended June 30, 2009, respectively. Interest in the aggregate amount of $4,587 was accrued on this note during the three months ended June 30, 2009. Interest in the aggregate amount of $9,074 was accrued on this note during the six months ended June 30, 2009.
    230,000       -  
 
 
                 
Convertible note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $38,000 to Whalehaven Capital, dated January 1, 2009. This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011. Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share. The Company calculated a discount to the note in the amount of $38,000, and recorded $334 and $548 amortization for this discount during the three and six months ended June 30, 2009, respectively. Interest in the aggregate amount of $1,420 was accrued on this note during the three months ended June 30, 2009. Interest in the aggregate amount of $2,809 was accrued on this note during the six months ended June 30, 2009.
    38,000       -  
                 
Convertible note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $25,310 to Asher Brand, dated January 1, 2009. This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011. Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share. The Company calculated a discount to the note in the amount of $25,310, and recorded $223 and $365 amortization for this discount during the three and six months ended June 30, 2009, respectively. Interest in the aggregate amount of $504 was accrued on this note during the three months ended June 30, 2009. Interest in the aggregate amount of $997 was accrued on this note during the six months ended June 30, 2009.
    25,310       -  
 
               
Convertible note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $25,310 to Momona Capital, dated January 1, 2009. This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011. Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share. The Company calculated a discount to the note in the amount of $25,310, and recorded $223 and $365 amortization for this discount during the three and six months ended June 30, 2009, respectively. Interest in the aggregate amount of $504 was accrued on this note during the three months ended June 30, 2009. Interest in the aggregate amount of $997 was accrued on this note during the six months ended June 30, 2009.
    25,310       -  
                 
Convertible note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $10,124 to Lane Ventures, dated January 1, 2009. This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011. Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share. The Company calculated a discount to the note in the amount of $10,124, and recorded $89 and $146 amortization for this discount during the three and six months ended June 30, 2009, respectively. Interest in the aggregate amount of $203 was accrued on this note during the three months ended June 30, 2009. Interest in the aggregate amount of $401 was accrued on this note during the six months ended June 30 2009.
    10,124       -  
    $ 1,800,714     $ 1,481,087  
 
 
   
Note
   
Unamortized
   
Net of
 
June 30, 2009:
 
Amount
   
Discounts
   
Discount
 
Notes payable - current portion
 
$
918,629
   
$
-
   
$
918,629
 
Notes payable - related parties, current portion
   
345,500
     
(56,779
)
   
288,721
 
Notes payable
   
536,585
     
(521,686
)
   
14,899
 
Total
 
$
1,800,714
   
$
(578,465
)
 
$
1,222,249
 
 
   
Note
   
Unamortized
   
Net of
 
December 31, 2008:
 
Amount
   
Discounts
   
Discount
 
Notes payable - current portion
 
$
938,364
   
$
-
   
$
938,364
 
Notes payable - related parties, current portion
   
332,000
     
(70,998
   
261,002
 
Notes payable
   
210,723
     
(200,000
   
10,723
 
Total
 
$
1,481,087
   
$
(270,998
 
$
1,210,089
 
 
 
19

 
   
Three months ended
 
   
June 30,
 
   
2009
   
2008
 
Discount on Notes Payable amortized to interest expense:
 
$
13,748
   
$
19,367
 

   
Six months ended
 
   
June 30,
 
   
2009
   
2008
 
Discount on Notes Payable amortized to interest expense:
 
$
29,380
   
$
34,564
 

Maturities of debt are as follows:
December 31,
     
2009
 
$
674,247
 
2010
   
592,908
 
2011
   
553,560
 
   
$
1,800,715
 
 
Conversion Options Embedded in Convertible Notes

The Company accounts for conversion options embedded in convertible notes in accordance with SFAS No. 133 ‘‘Accounting for Derivative Instruments and Hedging Activities’’ (“SFAS 1333”)  and EITF 00-19 ‘‘Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). SFAS 133 generally requires companies to bifurcate conversion options embedded in convertible notes from their host instruments and to account for them as free standing derivative financial instruments in accordance with EITF 00-19.

At June 30, 2009 and December 31, 2008, the Company had outstanding   $1,787, 244 and $1,465,000 in principal, respectively, of various convertible notes with embedded conversion options accounted for as free standing derivative financial instruments in accordance with SFAS 133 and EITF 00-19.   The fair value of these embedded conversion options was $1,990,944 and $1,150,000 at June 30, 2009 and December 31, 2008, respectively.  The fair value of these embedded conversion options were estimated at June 30, 2009 using the Black-Scholes option pricing model with the following assumptions:  risk free interest rate of 0.35%; expected dividend yield of 0%; expected option life  of 10; and volatility of 390,59%.  The fair value of these embedded conversion options were estimated at June 30, 2009 using the Black-Scholes option pricing model with the following assumptions:  risk free interest rate of 0.35%; expected dividend yield of 0%; expected option life  of 10; and volatility of 390.59%.  The fair value of these embedded conversion options were estimated at December 31, 2008 using the Black-Scholes option pricing model with the following assumptions:  risk free interest rate of 0.27%; expected dividend yield of 0%; expected option life  of 10; and volatility of 332.67%.  The expected term of 10 years was used for all notes in both periods because several of the notes are currently or have been in default, and accordingly the term of the note is deemed not relevant as a variable for the Black-Scholes calculation.  The Company revalues the conversion options at each reporting period, and charges any change in value to operations. During the three months ended June 30, 2009 and 2008, the Company recorded a loss of $857,500 and $388,171, respectively, due to the change in value of the conversion option liability. During the six months ended June 30, 2009 and 2008, the Company recorded a loss of $511,900 and $1,057,912, respectively, due to the change in value of the conversion option liability.

 
20

 
When convertible notes payable are satisfied by payment or by conversion to equity, the Company revalues the related conversion option liability at the time of the payment or conversion.  The conversion option liability is then relieved by this amount, which is charged to additional paid-in capital.  During the three and six months ended June 30, 2009 and 2008, a conversion option in the amount of $7,800 and $0, respectively, was transferred from liability to equity due to the conversion or payment of the related convertible notes payable.

Discounts on notes payable

The Company calculates the fair value of any beneficial conversion features embedded in its convertible notes via the Black-Scholes valuation method. The Company also calculates the fair value of any detachable warrants offered with its convertible notes via the Black-Scholes valuation method.  The instruments are considered discounts to the notes, to the extent the aggregate value of the warrants and conversion features do not exceed the face value of the notes. These discounts are amortized to interest expense via the effective interest method over the term of the notes.  The fair value of these instruments is expensed as original issue discount to the extent that the value of these instruments exceeds the face value of the  notes.
 
Extension of notes payable

The Company accounts for modifications of its notes payable according to the guidance in EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” (“EITF 96-19”) and EITF 06-6, “Debtor’s Accounting for a Modification (or Exchange) of Convertible Debt Instruments” (“EITF 06-6”).  Pursuant to EITF 96-19, changes to an existing note should be accounted for as an extinguishment of the note with resultant gain or loss if the present value of the cash flows from the new note vary by  more than 10% from the present value of the cash flows from the original note.  EITF 06-6 provides an exception to this rule for the addition of conversion options accounted for as a derivative liability.

During the year ended December 31, 2007, the Company negotiated the extension of three of its notes payable in the aggregate amount of $160,000.  As consideration for the extension, the Company agreed to add a convertibility feature to the notes.  Because this note falls under the exception in EITF 06-6 regarding the addition of conversion options accounted for as a derivative liability, the Company accounted for this transaction as a modification of the existing note. The conversion option liability was valued at the amount of $127,450 at the date of the issuance of the extension via the Black-Scholes method. This amount was debited to discount on notes payable, and is being amortized via the effective interest method over the extended term of the related notes.

During the year ended December 31, 2008, the Company negotiated the further extension of these three notes payable in the aggregate amount of $160,000.  As consideration for the extension, the Company provided warrants to purchase an aggregate 43,200,000 shares of common stock.  The Company valued these warrants at the date of issuance via the Black-Scholes valuation method at $168,620.  The value of these warrants are considered a component of the 10% present value calculation under EITF 96-19. The Company accounted for this transaction as an extinguishment of debt, and recorded a loss on extinguishment in the amount of $168,620.  This amount was charged to operations during the year ended December 31, 2008.

During the six  months ended June 30, 2009, the Company negotiated the extension of its notes payable in the aggregate amount of $587,000.  The Company extended the maturity date of these notes until January 1, 2010.  These notes, along with two additional notes payable in the aggregate amount of $150,000, contained certain provisions for a default interest rate.  The Company negotiated an agreement with the noteholders and the noteholders have agreed to the original interest rate of 8% per annum.

Embedded conversion features of notes payable:

The Company accounts for conversion options embedded in convertible notes in accordance with SFAS No. 133 and EITF 00-19. 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.
 
The Company values embedded conversion features utilizing the Black-Scholes valuation model.  Conversion options 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 conversion option  valuation assumptions for the six months ended June 30, 2009 and 2008:

   
June 30,
 
   
2009
   
2008
 
Number of options outstanding
   
349,448,800
     
224,400,000
 
Value at June 30
 
$
1,990,944
   
$
1,794,115
 
Number of options issued during the period
   
-
     
18,600,000
 
Value of options issued during the period
 
$
-
   
$
108,871
 
Number of options exercised or underlying
               
    notes paid during the period
   
4,000,000
     
-
 
Value of options exercised or underlying
               
    notes paid during the period
 
$
7,800
   
$
-
 
Revaluation gain (loss) during the period
 
$
511,900
   
$
1,057,912
 
                 
Black-Scholes model variables:
               
Volatility
 
364.61 - 390.59
 
213.70- 669.34
Dividends
   
-
     
-
 
Risk-free interest rates
   
0.35 – 0.43
%
   
1.51 - 2.17
%
Term (years)
   
10.00
     
10.00
 
 
 
21

 
10. PENALTY FOR LATE REGISTRATION OF SHARES
 
During the twelve months ended December 31, 2008 and 2007, the Company accrued liabilities for the issuance of 0 and 22,760,000, respectively (the “Penalty Shares”), of the Company’s stock pursuant to a penalty calculation with regard to the late registration of shares underlying convertible notes payable.  At December 31, 2008 and 2007, there were a total of 110,280,000 Penalty Shares issuable.  The Company charged to operations $0 and $64,984 during the twelve months ended December 31, 2008 and 2007, respectively, representing the fair values of the Penalty Shares accrued.  During the  twelve  months ended December 31, 2008 and 2007, the Company  revalued  these 110,280,000 Penalty Shares.  This resulted in  losses of $ 220,564 and $3,296, respectively.  The liability carried on the Company’s balance sheets at December 31, 2008 and 2007 representing the value of the Penalty Shares is $551,400 and $330,840, respectively.

On January 1, 2009, the Company reached a settlement agreement (the “Registration Penalty Settlement” ) with the parties to whom the penalty for the late registration is owed.  The agreement was a cancellation of the liability for the registration of shares in exchange for convertible notes in the amount of $328,744.  At January 1, 2009, the Company valued the conversion option liability based upon the closing price of the Company’s common stock. This value was the same as the December 31, 2008 value of $551,400.  During the six months ended June 30, 2009, the Company recognized a gain on settlement of the conversion option liability in the amount of $222,656, representing the difference between the value of the conversion option of $551,400 and the notes payable issued  pursuant to the Registration Penalty Settlement of $328,744.

The registration rights which triggered the accrual of the penalty shares expired on November 27, 2008.  At December 31, 2008, the Company had accrued the maximum number of shares issuable under the registration rights agreement.

Except for the penalties disclosed above for not registering the shares of common stock underlying certain convertible notes, there are no circumstances that would require the Company to transfer any consideration to the note holders.

11. INCOME TAXES

Deferred income taxes result from the temporary differences arising from the use of accelerated depreciation methods for income tax purposes and the straight-line method for financial statement purposes, and an accumulation of Net Operating Loss carryforwards for income tax purposes with a valuation allowance against the carryforwards for book purposes. 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in deferred tax assets are Federal and State net operating loss carryforwards of approximately $2,940,000,  which will expire beginning in 2028.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon our cumulative losses through June 30, 2009, we have provided a valuation allowance reducing the net realizable benefits of these deductible differences to $0 at June 30, 2009.  The amount of the deferred tax asset considered realizable could change in the near term if projected future taxable income is realized.   In the event of  significant changes in the Company's ownership, the Company's future use of its existing net operating losses may be limited.
 
The income tax provision (benefit) for the six months ended June 30, 2009 and  2008 consists of the following:

   
June 30, 2009
   
June 30, 2008
 
Current
           
Federal
 
$
--
   
$
--
 
State
   
--
     
--
 
     
--
     
--
 
                 
Deferred
               
Federal
   
--
     
--
 
State
   
--
     
--
 
     
--
     
--
 
                 
   
$
--
   
$
--
 

A reconciliation between the actual income tax expense and income taxes computed by applying the statutory Federal and state income tax rates to income from continuing operations before income taxes is as follows:

   
Six Months Ended June 30, 2009
   
Six Months Ended June 30, 2008
 
Computed “expected” income tax expense at approximately 34%
 
$
(249,000
 
$
(1,104,000
)
                 
Increase (decrease) in NOL carryforwards
   
249,000
     
1,104,000
 
 
 
22

 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities as of June 30, 2009 and 2008 are as follows:

   
June 30, 2009
   
June 30, 2008
 
Deferred tax assets:
           
Net operating loss
 
$
1,189,000
   
$
2,330,000
 
Allowance and accruals not recognized for    income tax purposes
   
-
     
-
 
Total gross deferred tax assets
   
1,189,000
     
2,330,000
 
Less : Valuation allowance
   
(1,189,000
)
   
(2,330,000
)
Net deferred tax assets
 
$
0
   
$
0
 
                 
Deferred tax liabilities:
               
                 
Total gross deferred tax liabilities:
               
Depreciation and amortization, net
   
(2,000
)
   
(5,000
)
Deferred state tax liability
   
-
     
-
 
Total net deferred tax liabilities
 
$
(2,000
)
 
$
(5,000
)
 
These amounts have been presented in the consolidated balance sheets as follows:

   
June 30, 2009
   
June 30, 2008
 
Current deferred tax asset
 
$
-
   
$
-
 
Non current deferred tax asset
   
-
     
-
 
Non current deferred tax liability
   
-
     
-
 
Total net deferred tax asset
 
$
-
   
$
-
 
 
12. EQUITY

Common Stock

During the three months ended March 31, 2009, the Company issued  5,000,000 shares of common stock to a consultant for services previously provided. The fair value of these shares of $10,000 was charged to operations during the year ended December 31, 2008.

During the three months ended June 30, 2009, the Company issued 600,000 shares of common stock to employees for services previously provided.  The fair value of these shares of $1,200 was charged to operations during the three months ended June 30, 2009.

During the three months ended June 30, 2009, the Company issued 3,600,000 shares of common stock to an investor for the conversion of a note payable in the amount of $18,000.

During the three months ended June 30, 2009, the Company issued 1,250,000 shares of common stock to a consultant for services.  The fair value of these shares in the amount of $6,250 was recorded as a prepaid asset.  As of June 30, 2009, the Company has charged $3,125 to operations.

During the three months ended June 30, 2009, the Company issued 611,600 shares of common stock to an investor for the conversion of $2,000 of principal of a convertible note and $1,058 of accrued interest on the convertible note.

 
23

 
Warrants
 
The following table summarizes the significant terms of warrants outstanding at June 30, 2009. These warrants may be settled in cash or via cashless conversion into shares of the Company’s common stock at the request of the warrant holder. These warrants were granted as part of a financing agreement:

Range of
exercise
prices
   
Number of
warrants outstanding
   
Weighted
average
remaining
contractual
life (years)
   
Weighted
average
exercise
price of
outstanding
warrants
   
Number of
warrants exercisable
   
Weighted
average
exercise
price of
exercisable
warrants
$
0.0050
     
179,700,000
     
1.57
   
$
0.0050
     
179,700,000
   
$
0.0050
                                           
$
0.0110
     
18,500,000
     
2.24
   
$
0.0110
     
18,500,000
   
$
0.0110
                                           
$
0.0120
     
1,000,000
     
4.21
   
$
0.0120
     
-
   
$
-
                                           
$
0.0115
     
74,000,000
     
2.24
   
$
0.0115
     
74,000,000
   
$
0.0115
         
273,200,000
     
1.81
   
$
0.072 
     
272,200,000
   
$
0.071
 
 Transactions involving warrants are summarized as follows:

   
Number of
warrants
   
Weighted
Average
Exercise
Price
 
Warrants exercisable at December 31, 2008
   
273,200,000
   
$
0.008
 
                 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Cancelled / Expired
   
-
     
-
 
                 
Warrants outstanding at June 30, 2009
   
273,200,000
   
$
0.007
 
                 
Exercisable
   
272,200,000
   
$
0.007
 
Not exercisable
   
1,000,000
   
$
0.012
 

Options

In December 2006, the Company agreed to issue 5,000,000 options with five year terms to purchase additional shares of common stock to each of the Company’s three directors, pursuant to a board resolution for services performed in 2006 (a total of 15,000,000 options). These options have no alternative settlement provisions. The options were issued in April 2007. Compensation cost was recognized via the straight-line attribution method.
 
In January 2008, the Company agreed to issue 5,000,000 options with five year terms to purchase additional shares of common stock to each of the Company’s three directors and the Company’s President pursuant to a board resolution for services performed (a total of 20,000,000 options). The options were issued in January 2008.  Compensation cost was recognized via the straight-line attribution method as expensed to operations during the year ended December 31, 2008.
 
 
24

 
The following table summarizes the changes outstanding and the related prices for the options to purchase shares of the Company’s common stock issued by the Company: 
 
                 
Weighted
         
Weighted
 
           
Weighted
   
average
         
average
 
           
average
   
exercise
         
exercise
 
Range of
   
Number of
   
remaining
   
price of
   
Number of
   
price of
 
exercise
   
options
   
contractual
   
outstanding
   
options
   
exercisable
 
prices
   
outstanding
   
life (years)
   
options
   
exercisable
   
options
 
$
0.005
     
15,000,000
     
2.39
   
$
0.005
     
15,000,000
   
$
0.005
 
                                             
$
0.007
     
20,000,000
     
3.75
   
$
0.007
     
20,000,000
   
$
0.007
 
                                             
         
35,000,000
     
3.17
   
$
0.009
     
35,000,000
   
$
0.008
 
 
Transactions involving stock options  are summarized as follows:
 
         
Weighted
Average
 
   
Number of
   
Exercise
 
   
Shares
   
Price
 
Options outstanding  at December 31, 2008
   
35,500,000
   
$
0.013
 
                 
 Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Cancelled / Expired
   
(500,000
   
(0.500)
 
                 
Options outstanding at June 03, 2009
   
35,000,000
   
$
0.006
 

Accounting for warrants and  stock options

The Company accounts for the issuance of common stock purchase warrants, stock options, and other freestanding derivative financial instruments in accordance with the provisions of EITF 00-19. Based on the provisions of EITF 00-19, the Company classifies, as equity, any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contract that (i) require net-cash or (ii) give the counterparty a choice of net-cash settlement in shares (physical or net-share settlement). At June 30, 2009  and 2008, the Company had  no freestanding derivative financial instruments that require net cash settlement or give the counterparty a choice of net cash settlement or settlement in shares.

The fair value of these warrants and stock options is determined utilizing the Black-Scholes valuation model. Through August 2005, these warrants were accounted for by the equity method, whereby the fair value of the warrants was charged to additional paid-in capital. During September, 2005, the number of shares of the Company's common stock issued and issuable exceeded the number of shares of common stock the Company had authorized. As the Company no longer had sufficient shares authorized to settle all of our outstanding contracts, this triggered a change in the manner in which the Company accounts for the warrants and stock options. The Company began to account for these warrants  and stock options utilizing the liability method. Pursuant to EITF 00-19,"If a contract is reclassified from permanent or temporary equity to an asset or a liability, the change in fair value of the contract during the period the contract was classified as equity should be accounted for as an adjustment to stockholders' equity." Accordingly, during the year ended December 31, 2005, the Company charged the amount of $10,374,536 to stockholders' equity. At the same time, the Company changed the way in which it accounts for the beneficial conversion feature of convertible notes payable (see note 8).
 
The accounting guidance states  that the warrants and stock options which are a derivative liability should be revalued each reporting period. The recorded value of such warrants and stock options can fluctuate significantly based on fluctuations in the market value of the underlying securities of the issuer of the warrants and stock options, as well as in the volatility of the stock price during the term used for observation and the term remaining for warrants. During the three months ended June 30, 2009 and 2008, the Company recognized a loss of $964,694 and of $363,690, respectively, for the change in the fair value of the warrant liability and recorded the gains and losses in operations during the three months ended June 30, 2009  and 2008. During the six months ended June 30, 2009 and 2008, the Company recognized a loss of $254,283 and $964,402, respectively, for the change in the fair value of the warrant liability and recorded the gains and losses in operations during the six months ended June 30, 2009  and 2008. During the three months ended June 30, 2009  and 2008, the Company recognized a loss of $122,471 and $37,725, respectively, for the change in the fair value of the stock option liability and recorded these amounts in operations during the three months ended June 30, 2009  and 2008. During the six months ended June 30, 2009  and 2008, the Company recognized a loss of $35,046 and $72,751, respectively, for the change in the fair value of the stock option liability and recorded these amounts in operations during the six months ended June 30, 2009  and 2008.
 
 
25

 
The Company valued warrants using the Black-Scholes valuation model utilizing the following variables:
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
Volatility
   
356.55-386.12
%
   
203.6% - 332.7
%
Dividends
 
$
-
   
$
-
 
Risk-free interest rates
   
0.35-0.43
%
   
0.27% - 2.41
%
Term (years)
   
0.90-4.46
     
1.15 - 5.00
 

The Company valued stock options using the Black-Scholes valuation model utilizing the following variables:

   
June 30,
December 31,
 
   
2009
   
2008
 
Black-Scholes model variables:
           
Volatility
 
356.55-386.12
 
203.6% to 332.7
 %
Dividends
 
$
-
   
$
-
 
Risk-free interest rates
   
0.35 -0.43
%
   
0.27% - 2.41
%
Term (years)
   
0.13-3.81
     
0.37 - 5.00
 
 
Insufficient Authorized but Unissued Shares of Common Stock
 
The Company has a potential obligation to issue   791,425,640 and  704,865,040 shares  of common stock upon the conversion of convertible notes and accrued interest, warrants and penalty shares issuable at June 30, 2009, and 2008, respectively.  The Company  had 194,638,638 and 181,787,638   shares  of common stock outstanding at June 30, 2009,  and December 31, 2008, respectively, and  500,000,000 shares  of common stock authorized at June 30, 2009 and 2008.   The Company has exceeded its shares authorized by  486,064,278  and  386,652,678 shares  at June 30, 2009 and 2008, respectively.
 
13.  GOING CONCERN
 
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern.  The  Company has reported a loss of   $2,012,562 and $731,219  for the three and six  months ended June 30, 2009, and  had an accumulated deficit of  $8,164,673 as of June 30, 2009.  The Company’s net loss for the six months ended June 30, 2009 of  $731,219  was generated primarily by non-cash transactions, including non-cash losses of $254,283 on the revaluation of the warrant liability, $35,046 on the revaluation of the option liability, $511,900 for the revaluation of the conversion option liability, and ($222,656) on the extinguishment of debt. The Company cannot be certain that anticipated revenues from operations will be sufficient to satisfy its ongoing capital requirements.  Management believes the Company will generate sufficient capital from operations and from debt and equity financing in order to satisfy current liabilities in the succeeding twelve months.  Management’s belief is based on the Company’s operating plane, which in turn is based on assumptions that may prove to be incorrect.  If the Company’s financial resources are insufficient the Company may require additional financing in order to execute its operating plan and continue as a going concern.  The Company cannot predict whether this additional financing will be in the form of equity or debt, or be in another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all.  In any of these events, the Company may be unable to implement its current plans for expansion, repay its debt obligations as they become due or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations. The Company has not made any adjustments to the financial statements which would be necessary should the Company not be able to continue as a going concern.

14.  AMENDMENTS TO FINANCIAL STATEMENTS

By letters dated November 7,  2008 and March 6, 2009,  the Company received comments from the SEC to its Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007.  As such, the Company has amended its financial statements for the three  and six months ended  June 30, 2008.
 
In the table below, in tabular format,  are the areas of major changes for the three months ended June 30, 2008:
 
   
Previously Reported
   
Adjustment
   
Restated Amount
 
Current liabilities
 
$
6,601,995
   
$
267,601
   
$
6,869,596
 
                         
Total liabilities
 
6,615,465
   
$
267,601
   
6,883,066
 
                         
Additional paid-in capital
 
$
841,890
   
1,054,158
   
$
1,896,048
 
                         
Accumulated deficit
 
(6,943,698
)
 
$
(1,315,759
 
(8,259,457
)
                         
Total  stockholders’ deficiency
 
$
(6,083,629
)
 
(261,601
 
$
(6,345,230
)
                         
Total liabilities and (deficiency in) stockholders' equity
 
531,536
   
-
   
531,836
 
                         
Selling, general and administrative expenses
 
$
534,271
   
6,821
   
541,092
 
                         
Total operating expenses
 
(145,158
)
 
(6,821
)
 
(151,979
)
                         
Total other expense
 
$
1,235,773
   
(90,266
 
1,145,507
 
                         
Net loss
 
(1,380,931
)
 
83,445
   
(1,297,486
)
 
 
26

 
In the table below, in tabular format,  are the areas of major changes for the six months ended June 30, 2008:
 
   
Previously Reported
   
Adjustment
   
Restated Amount
 
Current liabilities
 
$
6,601,995
   
$
261,601
   
$
6,863,596
 
                         
Total liabilities
 
6,615,465
   
$
261,601
   
6,877,066
 
                         
Additional paid-in capital
 
$
841,890
   
1,054,158
   
$
1,896,048
 
                         
Accumulated deficit
 
(6,943,698
)
 
$
(1,315,759
 
(8,256,457
)
                         
Total  stockholders’ deficiency
 
$
(6,083,629
)
 
(261,601
 
$
(6,345,230
)
                         
Total liabilities and (deficiency in) stockholders' equity
 
531,836
   
-
   
531,836
 
                         
Selling, general and administrative expenses
 
$
865,348
   
12,214
   
877,562
 
                         
Total operating expenses
 
(159,750
)
 
(12,214
)
 
(171,964
)
                         
Total other expense
 
$
2,758,902
   
316,259
   
3,075,161
 
                         
Net loss
 
(2,918,652
)
 
(328,473
 
(3,247,125
)

The following changes were made to the footnote disclosure of our financial statements:

Beneficial conversion features of notes payable were added:

We have added to the disclosures regarding the settlement agreement on our note receivable from Pasta Italiana, and recalculated the impairment recorded on the note;

We have recalculated the beneficial conversion features of notes payable, and amortized the discount on notes payable via the effective interest method over the term of the related notes;

We have revised our accounting for stock options issued, and included the revaluation of the fair value of stock options as compensation expense;

We have revised our accounting for the extension of one of our notes payable to reflect an extinguishment loss;

We have revised our notes payable footnotes to reflect changes to discounts, amortization of discounts, and losses on the renegotiation of notes;

We have revised our accounting and related disclosure regarding the liability for the conversion feature of notes payable for notes that are paid or converted, so that these liabilities are revalued at the time of conversion, and credited to additional paid-in capital.
 

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

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,
 
● 
The fact that over 90% of our revenues come from one customer,
   
● 
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.
 
 
28

 
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 for the six months ended June 30, 2009 and 2008:

   
June 30,
 
   
2009
   
2008
 
Number of warrants outstanding
   
273,200,000
     
232,200,000
 
Value at June 30
 
$
1,642,570
   
$
385,868
 
Number of warrants issued during the period
   
-
     
-
 
Value of warrants issued during the period
 
$
-
   
$
-
 
Revaluation (gain) loss during the period
 
$
254,283
   
$
964,402
 
                 
Black-Scholes model variables: