NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
FII is in the business of providing premium foodservice establishments, including white tablecloth restaurants with the freshest origin-specific perishables and specialty food products direct from its warehouses and from a network of vendors, to the end users (restaurants, hotels, country clubs, national chain accounts, casinos, and catering houses) across the United States within 24 - 72 hours. For The Gourmet Inc., through its website
www.forthegourmet.com
, and through additional sales channels, provides the highest quality gourmet food products to the direct to consumer market. Gourmet Food Service Group, Inc. is focused on expanding the Company’s program offerings to additional customers.
We currently sell the majority of our products through a distributor relationship between FII and Next Day Gourmet, L.P., a subsidiary of U.S. Foods (“USF”), a $20 Billion broad line distributor. On May 18, 2012, the Company executed a Stock Purchase Agreement to acquire all of the issued and outstanding shares of Artisan Specialty Foods, Inc., an Illinois corporation (“Artisan”). Artisan was previously a supplier to the Company. Artisan is a supplier of over 1,500 niche gourmet products to over 500 customers in the Greater Chicago area.
Use of Estimates
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, we 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 FASB ASC 815-40-05, from August 25, 2005 through December 27, 2012, we accounted 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 were valued at issuance utilizing the Black-Scholes valuation method, and were re-valued at each period ending date, also using the Black-Scholes valuation method. Any gain or loss from revaluation was charged to operations during the period. On December 27, 2012, we entered into agreements (the “2012 Notes Payable Extension Agreement”) with certain holders of our convertible notes which, among other things, created a minimum conversion price for the principal amount of the notes of $0.05. Under accounting guidance provided by FASB ASC 815-40-05, this resulted in a change in accounting method for our derivative financial instruments to the equity method of accounting.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Innovative Food Holdings, Inc., and its wholly owned operating subsidiaries, Artisan Specialty Foods, Inc. (“Artisan”), Food Innovations, Inc. (“FII”), Food New Media Group, Inc. (“FNM”), Gourmet Foodservice Group, Inc. (“GFG”), Gourmet Foodservice Warehouse, Inc. (“GFGW”), The Haley Group, Inc., (“Haley”) , and 4 The Gourmet, Inc. (d/b/a For The Gourmet, Inc.) (“Gourmet” and collectively, the “Company, or “IVFH”). All material intercompany transactions have been eliminated upon consolidation of these entities.
Revenue Recognition
The Company recognizes revenue upon product delivery. All of our products are shipped either overnight or through longer shipping terms to the customer and the customer takes title to product and assumes risk and ownership of the product when it is delivered. 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 Financial Accounting Standards Board “FASB” Accounting Standards Codification “ASC” 605-15-05. ASC 605-15-05 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.
Cost of goods sold
We have included in cost of goods 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 and costs associated with non-cash stock compensation. 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 $56,740 and $5,547 at December 31, 2013, and 2012, 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
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3 years
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Warehouse Equipment
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5 years
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Office Furniture and Fixtures
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5 years
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Vehicles
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5 years
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Inventories
Inventory is valued at the lower of cost or market and is determined by the first-in, first-out method.
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.
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.
The Company adopted ASC 820-10, “Fair Value Measurements” (SFAS 157), which provides a framework for measuring fair value under GAAP. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
Long-Lived Assets
The Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
As of December 31, 2013, 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
ASC 220-10-15 “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, ASC 220-10-15 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company does not have any items of comprehensive income in any of the periods presented.
Basic and Diluted Loss Per Share
Basic net earnings per share is based on the weighted average number of shares outstanding during the period, while fully-diluted net earnings per share is based on the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the period using the treasury stock method. Potentially dilutive securities consist of options and warrants to purchase common stock, and convertible debt. Basic and diluted net loss per share is computed based on the weighted average number of shares of common stock outstanding during the period.
The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from the calculation.
Anti-dilutive shares at December 31, 2013:
A net loss causes all outstanding stock options and warrants to be antidilutive. As a result, the basic and
dilutive
losses per common share are the same for
the year ended December 31, 2013, The Company excluded the following dilutive securities form the calculation of dilutive earnings per share because the effect would be anti-dilutive: options to purchase 1,920,000 and warrants to purchase 5,819,130, shares of common stock.
Anti-dilutive shares at December 31, 2012:
For the year ended December 31, 2012, the Company excluded certain dilutive securities form the calculation of dilutive earnings per share because the effect would be anti-dilutive, including warrants to purchase 1,870,000 shares at exercise prices of $0.55 to $0.60 per share; 2,070,000 shares issuable upon the exercise of options at $0.35 to $0.40, and 1,531,256 shares issuable upon the conversion of notes and accrued interest at $1.00 per share.
Diluted earnings per share was computed as follows for the year ended December 31, 2012:
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Income (Numerator)
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Shares (Denominator)
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Per-Share Amount
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Effect of Dilutive Securities
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Conversion of notes and interest into common stock:
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Decrease in interest expense due to conversion
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Remove loss on revaluation of conversion option liability
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Exercise of in-the-money warrants:
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Remove loss on revaluation of warrant liability
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Shares accrued, not yet issued
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Diluted earnings per share
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Concentrations of Credit Risk
Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash in investments with credit quality institutions. At times, such investments may be in excess of applicable government mandated insurance limit. At December 31, 2013 and 2012, trade receivables from the Company’s largest customer
amount to 53
%
and
60%, 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.
Stock-based Compensation
The Company measures 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 ASC 718-40 the cost of these options were valued via the Black-Scholes valuation method when issued, and re-valued at each reporting period. The gain or loss from this revaluation was charged to compensation expense during the period. On December 27, 2012, the Company entered into the 2012 Notes Payable Extension Agreement with certain holders of its convertible notes which, among other things, created a minimum conversion price for the principal amount of the notes. Under accounting guidance provided by FASB ASC 815-40-05, this resulted in a change in accounting method for our derivative financial instruments to the equity method of accounting. We revalued our derivative liabilities at December 27, 2012, and charged the gain or loss from this revaluation to compensation expense during the period.
Options expense and gain or loss on revaluation during the twelve months ended December 31, 2013 and 2012 are summarized in the table below:
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December 31,
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2013
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2012
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(Gain) loss on revaluation of options
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Significant Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.
2. ACQUISITIONS
Artisan Specialty Foods, Inc.
On May 18, 2012, the Company executed a Stock Purchase Agreement to acquire all of the issued and outstanding shares of Artisan Specialty Foods, Inc., an Illinois corporation (“Artisan”), from its owner, Mr. David Vohaska. The purchase price was $1.2 million, with up to another $300,000 (with a fair value of $131,000) payable in the event certain financial milestones are met by April 30, 2014. During the years ended December 31, 2013 and 2012, the Company made payments in the aggregate amount of $160,933 and $82,930, respectively, to Mr. Vohaska for the attainment of certain of these financial milestones.
The total purchase price was allocated to Artisan’s net tangible assets, with the residual allocated to intangible assets:
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Contingent purchase price
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* excluding the Line of Credit paid off with closing cash payment
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Pro forma results
The following tables set forth the unaudited pro forma results of the Company as if the acquisition of Artisan had taken place on the first day of the periods presented. These combined results are not necessarily indicative of the results that may have been achieved had the companies always been combined.
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December 31, 2012
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$
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20,284,899
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2,219,314
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Basic net income (loss) per common share
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$
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0.389
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Diluted net income (loss) per common share
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$
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0.208
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Weighted average shares – basic
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5,698,434
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Weighted average shares – diluted
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10,650,222
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The Haley Group
The Haley Group is a food manufacture representative that manages food manufacturing foodservice relationships at a food distributor’s corporate level. The Haley Group also provides their suppliers with guidance and assistance as needed at the distributor’s regional and divisional level. The Haley Group provides these services in exchange for a combination of monthly retainers and percentages of future sales of client products. On November 2, 2012, the Company, through its wholly-owned subsidiary The Haley Group, Inc., entered into an asset purchase agreement (the “Haley Acquisition Agreement”) with The Haley Group, LLC whereby the Company acquired all existing contracts between The Haley Group, LLC and its customers for the following consideration: 300,000 shares of the Company’s common stock; 150,000 shares of which vest immediately and 150,000 shares of which vest in one year under certain conditions; options to purchase 100,000 shares of the Company’s common stock at a price of $0.44 per share; and $20,000 cash contingent upon the attainment of future revenue milestones. During the year ended December 31, 2013, pursuant to certain terms of the Haley Acquisition Agreement, Mr. Haley would have been subject to a reduction in salary. The Company agreed not to reduce Mr. Haley’s salary; in return, Mr. Haley forfeited the options to purchase 100,000 shares of the Company’s common stock.
The Haley Group acquisition was valued at a total cost of $119,645. This intangible fair value of the purchase amount was allocated to Haley Group’s customer relationships and capitalized accordingly on the Company’s balance sheet at December 31, 2013 and is being amortized over 3 years. During the year ended December 31, 2013 and 2012, the Company charged to operations the amount of $39,882 and $3,323, respectively, related to the amortization of these intangible assets.
3. ACCOUNTS RECEIVABLE
At December 31, 2013 and 2012, accounts receivable consists of:
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2013
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2012
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Accounts receivable from customers
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Allowance for doubtful accounts
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4. INVENTORY
Inventory consists primarily of specialty products which are warehoused in Bonita Springs, Florida and Lyons, Illinois. At December 31, 2013 and 2012, finished goods inventory is as follows:
5. PROPERTY AND EQUIPMENT
Acquisition of Building
During the year ended December 31, 2013, the Company purchased a building and property located at 28411 Race Track Road, Bonita Springs, Florida 34135 and with respect thereto entered into each of a Loan Agreement, Mortgage, Security Agreement and Note with Fifth Third Bank, each with an effective date of February 26, 2013. The property consists of approximately 1.1 acres of land and close to 10,000 square feet of combined office and warehouse space and was purchased as part of a bank short sale. The Company moved its operations to these premises on July 15, 2013. The purchase price of the property was $792,758 and was financed in part by a five year mortgage in the amount of $546,000 carrying an annual interest rate of 3% above LIBOR Rate, as such term is defined in the Note.
A summary of property and equipment at December 31, 2013 and 2012 is as follows:
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December 31,
2013
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December 31,
2012
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Computer and Office Equipment
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Total before accumulated depreciation
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Less: accumulated depreciation
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Depreciation and amortization expense for property and equipment amounted to $79,002 and $51,532 for the year ended December 31, 2013 and 2012, respectively.
6. INTANGIBLE ASSETS
The Company acquired certain intangible assets pursuant to the acquisition of Artisan Specialty Foods and the acquisition of certain assets of The Haley Group (see note 2). The following is the net book value of these assets:
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December 31, 2013
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Accumulated
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Gross
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Amortization
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Net
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December 31, 2012
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Accumulated
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Gross
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Amortization
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Net
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Total amortization expense charged to operations for the year ended December 31, 2013 and 2012 was $183,880 and $73,323, respectively.
Amortization of finite life intangible assets as of December 31, 2013 is as follows:
The trade name is not considered a finite-lived asset, and is not being amortized. The non-compete agreement is being amortized over a period of 48 months. The customer relationships acquired in the Artisan and Haley transactions are being amortized over a period of 60 and 36 months, respectively.
As detailed in ASC 350, the Company tests for goodwill impairment in the fourth quarter of each year and whenever events or changes in circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. As detailed in ASC 350-20-35-3A, in performing its testing for goodwill impairment, management has completed a qualitative analysis to determine whether it was more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. To complete this review, management followed the steps in ASC 350-20-35-3C to evaluate the fair value of goodwill and considered all known events and circumstances that might trigger an impairment of goodwill. The analysis completed in 2013 and 2012, determined that there was no impairment to goodwill assets.
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 2013 and 2012 are as follows:
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2013
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2012
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Accrued payroll and commissions
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At December 31, 2013 and 2012, accrued liabilities to related parties 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 a price of $0.25 share. There is a beneficial conversion feature embedded in the convertible accrued interest, which can be exercised at any time by the note holders. Through December 27, 2012, the Company had immediately charged the value of this beneficial conversion feature of convertible accrued interest to operations. At December 27, 2012, the Company entered into the 2012 Note Extension Agreements, the terms of which brought about a change in the Company’s accounting for its convertible equity instruments from the liability method to the equity method.
During the twelve months ended December 31, 2013 and 2012, the amounts of $0 and $87,736, respectively, were credited to additional paid-in capital as a discount on convertible interest. The aggregate amount of discounts on convertible interest charged to operations during the twelve months ended December 31, 2013 and 2012 was $0 and $87,520, respectively.
At December 31, 2013, convertible accrued interest was $720,189 (including $48,708 to a related party), which is convertible into 2,880,756 shares of common stock. During the twelve months ended December 31, 2013, the Company paid cash for interest in the aggregate amount of $48,278 and $35,327, and converted an additional $118,594 of accrued interest into an aggregate of 332,282 shares of common stock.
At December 31, 2012, convertible accrued interest was $759,053 (including $39,866 to a related party) which was convertible into 2,916,614 shares of common stock. During the twelve months ended December 31, 2012, the Company did not pay cash or convert any shares of common stock in settlement of accrued interest charges.
9. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
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December 31,
2013
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December 31,
2012
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Secured Convertible note payable to Alpha Capital Anstalt (f/k/a/ Alpha Capital Aktiengesselschaft) (“Alpha Capital”), originally dated February 25, 2005 and due May 15, 2014. The note contains a cross default provision, and is secured by a majority of the Company’s assets. This note bears interest at the rate of 5% per annum. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement (as defined below). During the twelve months ended December 31, 2013, principal and accrued interest in the amounts of $124,000 and $89,641, respectively, were converted into 496,000 and 358,565 shares of common stock, respectively.
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Convertible note payable to Alpha Capital due May 15, 2014. This note bears interest at the rate of 5% per annum. This note is unsecured. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
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Convertible note payable to Osher Capital Partners LLC due May 15, 2014. This note bears interest at the rate of 5% per annum. This note is unsecured. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
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Convertible note payable to Assameka Capital Inc. due May 15, 2014. This note bears interest at the rate of 5% per annum. This note is unsecured. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
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Convertible note payable to Alpha Capital due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
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December 31,
2013
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December 31,
2012
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Convertible note payable to Osher Capital Partners LLC due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Convertible note payable to Assameka Capital Inc. due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement .
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Convertible note payable to Huo Hua due May 15, 2014. This note bears interest at the rate of 5% per annum. This note is unsecured. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share and the 2013 Notes Payable Extension Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
Convertible secured note payable to Alpha Capital due May 15, 2014. This note bears interest at the rate of 5% per annum, This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible secured note payable to Alpha Capital due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible secured note payable to Osher Capital Partners LLC due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible secured note payable to Assameka Capital, Inc. due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible secured note payable to Asher Brand due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement. During the twelve months ended December 31, 2013, principal and accrued interest in the amounts of $5,000 and $7,471, respectively, were converted into 20,000 and 29,884 shares of common stock, respectively.
|
|
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|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Convertible secured note payable to Lane Ventures due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
During the twelve months ended December 31, 2013, principal and accrued interest in the amounts of $6,000 and $4,383, respectively, were converted into 24,000 and 17,533 shares of common stock, respectively.
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Convertible secured note payable Alpha Capital due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible secured note payable Alpha Capital due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible secured note payable to Osher Capital Partners LLC due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible secured note payable to Assameka Capital, Inc. due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
|
|
|
|
|
|
|
|
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|
|
|
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|
|
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, issued pursuant to the Company’s then employment agreement with Mr. Klepfish, which provided that the amount of $4,500 in salary is accrued each month to a note payable. These notes are unsecured. 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 conversion price of $0.25 per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible secured note payable to Alpha Capital due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible secured note payable to Alpha Capital due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Convertible secured note payable to Alpha Capital, due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Convertible secured note payable to Osher Capital Partners LLC due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible secured note payable to Assameka Capital, Inc. due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement. During the twelve months ended December 31, 2013, principal and interest in the amounts of $4,400 and $3,600, respectively, were converted into 17,600 and 14,400 shares of common stock, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible secured note payable to Momona Capital due May 15, 2014. This note contains a cross default provision. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. This note bears interest at the rate of 5% per annum. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement. During the twelve months ended December 31, 2013, principal and accrued interest in the amounts of $25,310 and $9,652, respectively, were converted into 101,240 and 38,608 shares of common stock, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible secured note payable to Lane Ventures due May 15, 2014. This note bears interest at the rate of 5% per annum. This note contains a cross-default provision, and is secured by a majority of the Company’s assets. The note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. This note was included in the 2012 Notes Payable Extension Agreement and the 2013 Notes Payable Extension Agreement. During the twelve months ended December 31, 2013, principal and accrued interest in the amounts of $10,124 and $3,847, respectively, were converted into 40,496 and 15,388 shares of common stock, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured convertible promissory note payable for the acquisition of Artisan Specialty Foods, Inc. to Alpha Capital, dated May 11, 2012 in the face amount of $1,200,000 at a purchase price of $1,080,000. The note carries simple interest at an annual rate of 4.5% and is due in full by April 2015. The note is convertible into the registrant's common stock at a fixed conversion price of $1.00 per share. Principal and interest in the aggregate amount of $39,163 are payable on a monthly basis beginning in September 2012. The note allows for prepayments at any time. The note also includes cross-default provisions; is secured by all of the registrant's and its subsidiaries' assets; and is guaranteed by each of the Company’s subsidiaries. Interest expense in the amount of $31,472 and $30,921 and was accrued on this note during the years ended December 31, 2013 and 2012, respectively. During the twelve months ended December 31, 2013, the Company paid this note in full and also paid interest in the amount of $31,472.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured vehicle lease payable at an effective interest rate of 9.96% for purchase of truck, payable in monthly installments (including principal and interest) of $614 through January 2015. During the twelve months ended December 31, 2013, the Company made payments in the aggregate amount of $7,368 on this note, consisting of $6,274 of principal and $1,094 of interest.
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Secured vehicle lease payable at an effective interest rate of 8.26% for purchase of truck, payable in monthly installments (including principal and interest) of $519 through June 2015. During the twelve months ended December 31, 2013, the Company made payments in the aggregate amount of $6,232 on this note, consisting of $5,269 of principal and $962 of interest.
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan from Fifth Third Bank in the original amount of $1,000,000; $660,439 of this amount was used to pay a note payable; $339,561 was used for working capital. This loan is secured by first priority perfected security interest in all personal property of the Company. bears interest at the rate of Libor plus 4.75%, with monthly payments in the amount of $55,556, with a maturity date of May 26, 2015. During the year ended December 31, 2013, the Company made payments of principal and interest in the amounts of $55,556 and $2,639, respectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured mortgage note payable from Fifth Third Bank for the acquisition of land and building in Bonita Springs, Florida in the amount of $546,000. Principal payments of $4,550 and interest at the rate of Libor plus 3% are due monthly. The balance of the principal amount will be due March 2018. During the twelve months ended December 31, 2013, the Company made payments in the aggregate amount of $59,667 on this note, consisting of $45,500 of principal and $14,167 of interest.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December
31,
|
|
|
|
2013
|
|
|
2012
|
|
Discount on Notes Payable amortized to interest expense:
|
|
$
|
2,322,909
|
|
|
$
|
838,339
|
|
At December 31, 2013 and 2012, the Company had unamortized discounts to notes payable in the aggregate amount of $371,812 and $1,868,482, respectively.
Aggregate maturities of long-term notes payable as of December 31, 2013 are as follows:
For the twelve months ended December 31,
Beneficial Conversion Features
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 were considered discounts to the notes, to the extent the aggregate value of the warrants and conversion features did not exceed the face value of the notes. These discounts were amortized to interest expense via the effective interest method over the term of the notes. The fair value of these instruments was charged to interest expense to the extent that the value of these instruments exceeds the face value of the notes.
From September 2005 through December 26, 2012, the Company accounted for conversion options embedded in convertible notes in accordance with FASB ASC 815-10-05. ASC 815-10-05 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 ASC 815-40-05.
Effective December 27, 2012, the Company entered into the 2012 Notes Payable Extension Agreement with certain convertible note holders regarding twenty-five convertible notes in the aggregate amount of $2,037,249 in principal and $719,187 in accrued interest. Pursuant to the 2012 Notes Payable Extension Agreement, the maturity date of each note and accrued interest was extended to February 1, 2014 (unless the original maturity date was beyond the extended date, in which case the original maturity date will not change); the expiration date of each warrant associated with each of the notes was extended to August 1, 2015 (unless the original expiration date of each warrant was beyond August 1, 2015, in which case the original expiration date will not change); the minimum conversion price of the note and accrued interest, in the case of any adjustment to such price, was set to be $0.05 per share. The Company also agreed that for as long as the convertible notes are held by the existing note holders, it will not issue any common stock or other securities convertible into or exercisable for shares of common stock at a price of less than $0.05 per share. Accordingly, the conversion option and warrants were reclassified from liability to equity since the conversion and exercise prices were fixed and all other conditions were met to classify the conversion feature and warrants as equity.
The Company revalued its derivative equity instruments at December 27, 2012 using the Black-Scholes valuation method, and recorded losses on revaluation in the amount of $478,822 for the conversion options, $566,063 for the warrants, and $103,248 for stock options. This resulted in liabilities in the amount of $2,088,475 for the value of the warrants, $1,708,528 for the value of the conversion options, and $411,792 for the stock options. The value of the warrants and conversion options (a total of $3,797,001) was eliminated, and recorded as a gain on extinguishment of debt. The value of the stock options of $411,792 was eliminated, and recorded as a charge to additional paid-in capital.
Pursuant to debt extinguishment accounting, the Company charged to interest expense the unamortized amount of the discount on the related convertible notes at December 27, 2012 in the amount of $824,286. Prior to December 27, 2012, the Company had amortized $13,899 of the discount. At December 27, 2012, the Company recorded a new discount on the convertible notes in the aggregate amount of $1,918,993, which was charged to additional paid-in capital.
The Company revalued the conversion options at each reporting period, and charged any change in value to operations. During the twelve months ended December 31, 2013 and 2012, the Company recorded an aggregate loss of $0 and $281,024, respectively, due to the change in value of the conversion option liability.
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 twelve months ended December 31, 2013 and 2012, conversion option liabilities in the amounts of $0 and $81,921, respectively, were transferred from liability to equity due to the conversion or payment of the related convertible notes payable.
August 2013 Notes Payable Extension Agreement
Effective August 22, 2013, the Company entered into agreements (the “2013 Notes Payable Extension Agreement”) with certain convertible notes holders regarding twenty-five convertible notes in the aggregate amount of $912,982 in principal and $744,246 in accrued interest. Pursuant to the 2013 Notes Payable Extension Agreement, the maturity date of each note and accrued interest was extended to May 15, 2014; the interest rate was changed to 5%; and the expiration of each warrant associated with each of the notes was extended to February 1, 2016 or February 1, 2017.
Pursuant to debt extinguishment accounting, the Company charged to interest expense the unamortized amount of the discount on the related convertible notes at August 22, 2013 in the amount of $491,606. Prior to August 22, 2013, the Company had amortized $637,663 of the discount. At August 22, 2013, the Company recorded a new discount on the convertible notes which was attributable to the conversion feature and related warrants in the aggregate amount of $826,238, which was charged to additional paid-in capital. The discount will be amortized over the term of the related notes.
During the year ended December 31, 2012, the Company recorded the following discounts on a note payable in the principle amount of $1,200,000 related to the acquisition of Artisan Specialty Foods, Inc.: (a) an original issue discount (“OID”) in the amount of $120,000, and (b) a discount related to an embedded conversion feature of the note and warrants issued with the note in the aggregate amount of $836,441. During the twelve months ended December 31, 2012, the Company amortized to interest expense a total of $13,899 of these discounts. On November 26, 2013, the Company entered into a loan agreement with Fifth Third Bank (the “November 2013 Bank Loans”) whereby Fifth Third Bank provided the Company with two credit facilities: (a)
Revolving Credit and Term Bank Facility
On December 10, 2013, the registrant closed a financing transaction with Fifth Third Bank that provides a $1.0 million revolving credit facility and a $1.0 million term credit facility. Both facilities are secured by the Company’s and its subsidiaries’ tangible and intangible assets pursuant to the terms of a Security Agreement between us, our subsidiaries and Fifth Third Bank dated November 26, 2013.
The revolving credit facility carries an interest rate of 3.25% above LIBOR and matures on November 26, 2015. The term credit facility carries an interest rate of 4.75% above LIBOR and matures on May 26, 2015. Both facilities are subject to certain financial covenants, dated with an effective date of November 26, 2013.
At December 31, 2013, the Company has utilized the net proceeds of the $1,000,000 term loan for the following purposes: $660,439 to pay the balance of a note payable to Alpha Capital representing debt acquired to finance the acquisition of Artisan Specialty Foods, Inc.; and $339,561 for working capital. At the time the Company paid the Alpha Capital note, there were remaining discounts on the note in the aggregate amount of $597,774 which were charged to interest expense during the twelve months ended December 31, 2013. As of December 31, 2013, the term loan balance outstanding was $944,444.
As of December 31, 2013, the Company did not have any borrowings on the revolving credit facility.
The following table illustrates certain key information regarding our conversion option valuation assumptions at December 31, 2013 and 2012:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Number of conversion options outstanding
|
|
|
3,594,592
|
|
|
|
5,368,195
|
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Number of conversion options issued during the period
|
|
|
-
|
|
|
|
1,200,000
|
|
Value of conversion options issued during the period
|
|
$
|
-
|
|
|
$
|
263,664
|
|
Number of conversion options exercised or underlying
notes paid during the period
|
|
|
1,773,603
|
|
|
|
3,419,284
|
|
Value of conversion options exercised or underlying
notes paid during the period
|
|
$
|
N/A
|
|
|
$
|
81,921
|
|
Revaluation loss (gain) during the period
|
|
$
|
N/A
|
|
|
$
|
281,024
|
|
|
|
|
|
|
|
|
|
|
Black-Scholes model variables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
112.4%
|
to
|
214.3
|
%
|
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rates
|
|
|
|
|
-
|
|
|
|
0.11%
|
to
|
1.18
|
%
|
Term (years)
|
|
|
|
|
-
|
|
|
|
1.1
|
to
|
10
|
|
10. RELATED PARTY TRANSACTIONS
For the year ended December 31, 2013:
Pursuant to the terms of an employment agreement, the Company made cash payments to its Chief Executive Officer in the amount of $90,500 for previously-accrued bonuses earned in 2012 . Also pursuant to the terms of his employment agreement, the Company issued options to its Chief Executive Officer as follows: Four year options to purchase 50,000 shares of the Company’s common stock at a price of $0.40 per share which vest on December 31, 2014; four year options to purchase 50,000 shares of the Company’s common stock at a price of $0.40 per share which vest on December 31, 2015; five year options to purchase 100,000 shares of the Company’s common stock at a price of $0.57 per share which vest on December 31, 2014; five year options to purchase 62,500 shares of the Company’s common stock at a price of $1.60 per share which vest on December 31, 2013; and five year options to purchase 62,500 shares of the Company’s common stock at a price of $1.60 per share which vest on December 31, 2014. The Company also accrued the amount of $27,937 for the value of Restricted Stock Units (“RSU’s”) due to its Chief Executive Officer under the terms of his employment agreement.
Pursuant to the terms of an employment agreement, the Company made cash payments to its President in the amount of $90,500 for previously-accrued bonuses earned in 2012. Also pursuant to the terms of his employment agreement, the Company issued options to its President as follows: Four year options to purchase 50,000 shares of the Company’s common stock at a price of $0.40 per share which vest on December 31, 2014; four year options to purchase 50,000 shares of the Company’s common stock at a price of $0.40 per share which vest on December 31, 2015; five year options to purchase 100,000 shares of the Company’s common stock at a price of $0.57 per share which vest on December 31, 2014; five year options to purchase 62,500 shares of the Company’s common stock at a price of $1.60 per share which vest on December 31, 2013; and five year options to purchase 62,500 shares of the Company’s common stock at a price of $1.60 per share which vest on December 31, 2014. The Company also issued to Mr. Wiernasz five year options to purchase 100,000 shares of the Company’s common stock at a price of $0.35 per share which options vested immediately.
Pursuant to the terms of an employment agreement, the Company made cash payments to Chief Information and Principal Accounting Officer $25,000 for previously-accrued bonuses, Also pursuant to the terms of his employment agreement, the Company issued options to its Chief Information and Principal Accounting Officer as follows: Four year options to purchase 25,000 shares of the Company’s common stock at a price of $0.40 per share which vested on January 1, 2013; four year options to purchase 25,000 shares of the Company’s common stock at a price of $0.40 per share which vest on January 1, 2015; three year options to purchase 25,000 shares of the Company’s common stock at a price of $0.40 per share which vest on January 1, 2016; five year options to purchase 25,000 shares of the Company’s common stock at a price of $0.57 per share which vest on January 1, 2018; five year options to purchase 30,000 shares of the Company’s common stock at a price of $1.60 per share which vest on January 1, 2014; and five year options to purchase 30,000 shares of the Company’s common stock at a price of $1.60 per share which are scheduled to vest on January 1, 2015.
For the year ended December 31, 2012:
Pursuant to the terms of an employment agreement, the Company has accrued a bonus payable to the Company’s Chief Executive Officer in the amount of $90,500. This bonus is recorded on the Company’s balance sheet as a liability to related parties as of December 31, 2012. The Company also made cash payments to the Company’s chief Executive Officer in the amount of $45,250 for previously-accrued bonuses.
Pursuant to the terms of an employment agreement, the Company has accrued a bonus payable to the Company’s President in the amount of $90,500. This bonus is recorded on the Company’s balance sheet as a liability to related parties as of December 31, 2012. The Company also made cash payments to the Company’s chief Executive Officer in the amount of $45,250 for previously-accrued bonuses.
The Company accrued a bonus payable to the Company’s Chief Information and Principal Accounting Officer in the amount of $25,000. This bonus is recorded on the Company’s balance sheet as a liability to related parties as of December 31, 2012.
The Company made a cash payment of $20,000 to its Chief Executive Officer on the principal amount of convertible note. The Company also accrued interest in the amount of $10,356 on this note. This accrued interest is convertible at a rate of $0.25 per share (post reverse-split) into a total of 41,424 shares (post reverse-split) of the Company’s stock.
In May 2012, the Company issued options to purchase 100,000 shares (post reverse-split) of common stock to each of its five directors (options to purchase an aggregate of 500,000 shares, post reverse-split) and additional options to purchase 100,000 shares of common stock to its President. The aggregate fair value of these options in the amount of $186,299 was charged to operations during the period. On December 31, 2012, the Company issued options to purchase an additional 100,000 shares (post reverse-split) of its common stock to each of its five directors for services rendered during the twelve months ended December 31, 2012 (options to purchase an aggregate of 500,000 shares, post reverse-split). The fair value of these options in the amount of $161,821 was charged to operations during the period.
On May 7, 2012, we entered into a three-year lease with David and Sherri Vohaska for approximately 18,700 feet of office and warehouse space located at 8121 Ogden Avenue, Lyons, Illinois. The annual rent under the lease is approximately $8,333 per month for the first year, $8,417 per month for the second year, and $8,500 for the third year. David Vohaska is currently an employee of the Company, and prior to the Artisan acquisition was the owner of Artisan.
11. CONTINGENT LIABILITY
Pursuant to the Artisan acquisition, the Company may be obligated to pay up to another $300,000 in the event certain financial milestones are met by April 30, 2014 (see note 3). This obligation had a fair value of $131,000 at the time of the Artisan acquisition. During the twelve months ended December 31, 2013 and 2012, the Company made payments in the amount of
$160,933
and $82,930, respectively, and accrued an additional $182,811. At December 31, 2013, the amount of $80,881 is reflected on the Company’s balance sheet as a contingent liability.
12. 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 $1.4 million, which will expire through 2031. 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. Due to significant changes in the Company's ownership, the Company's future use of its existing net operating losses may be limited.
The provision (benefit) for income taxes for the years ended December 31, 2013 and 2012 consist of the following:
The provision (benefit) for income taxes differs from the amount of income tax determined by applying the applicable statutory income tax rate of 39.6% for the December 31, 2013 and 2012 to the loss before taxes as a result of the following differences:
|
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2013
|
|
|
2012
|
|
Income (loss) before income taxes
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%
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%
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Total tax at statutory rate
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Permanent difference – meals and entertainment
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Permanent differences- non cash compensation, derivatives and discount amortization
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Changes in valuation allowance
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Deferred income taxes reflect the tax impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations.
Deferred income taxes include the net tax effects of net operating loss (NOL) carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, 2013 and 2012 significant components of the Company's deferred tax assets are as follows:
|
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2013
|
|
|
2012
|
|
Deferred Tax Assets (Liabilities):
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|
|
Net operating loss carryforwards
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Allowance for doubtful accounts
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The Company’s tax returns for the previous three years remain open for audit by the respective tax jurisdictions.
13. EQUITY
Reverse Stock Split
On June 13, 2012, the Company implemented a reverse split of its common stock (the “Reverse Split”) in the ratio of 1-for-50. The number of shares issued and outstanding immediately before the Reverse Split was 293,692,189 and 282,956,546, respectively; the number of shares issued and outstanding immediately after the Reverse Split was 5,873,801 and 5,659,130, respectively. All share and per share data have been retroactively restated to reflect the reverse split.
Common Stock
Twelve months ended December 31, 2013:
The Company issued 279,310 shares of common stock for settlement of a note. This issuance of shares was accrued in a prior period, and was carried as common stock subscribed in the Company’s balance sheet at December 31, 2012.
The Company issued 1,173,712 shares of common stock for the conversion of the principal of convertible notes in the aggregate amount or $174,833 and accrued interest in the amount of $118,593, for a total conversion value of $293,426.
The Company issued 255,633 shares of common stock for the cashless exercise of warrants.
Twelve months ended December 31, 2012:
The Company issued 150,000 shares of common stock with a value of $37,500 pursuant to the Haley Acquisition Agreement.
The Company committed to issue 26,078 shares of common stock for settlement of a note. The fair value of $7,302 is included in Common Stock Subscribed on the Company’s balance sheet at December 31, 2012.
Treasury Stock
During the twelve months ended December 31, 2013, the Company purchased 400,000 shares of the Company’s outstanding common stock. The purchase price was $100,000 and the Company recorded the transaction at cost to Treasury Stock.
During the twelve months ended December 31, 2012, the Company did not purchase any outstanding shares of the Company’s common stock.
The Company has an additional 304 shares of common stock which are held in treasury stock at a cost of $99.
Warrants
The Company extended the term of warrants to purchase a total of 3,080,000 shares of common stock at a price of $0.575 per share and a total of 1,570,000 shares of common stock at a price of $0.55 per share to February 1, 2017; and warrants to purchase a total of 794,000 shares of common stock at a price of $0.25 per share to February 1, 2016. At August 22, 2013, the Company recorded a new discount on the convertible notes which was attributable to the conversion feature and related warrants in the aggregate amount of $826,238, which was charged to additional paid-in capital. The discount will be amortized over the term of the related notes. Also during the twelve months ended December 31, 2013, warrants to purchase a total of 396,871 shares were exercised via cashless conversion. In addition, warrants to purchase 820,000 shares of common stock were cancelled as a result of the early payment of a note.
During the twelve months ended December 31, 2012, the Company issued warrants to purchase 1,500,000 shares of common stock; the fair value of these warrants was $572,777. The Company also extended the term of warrants to purchase 5,440,000 shares of common stock from April 3, 2012 to April 3, 2015. The fair value of this extension of $842,100 was charged to operations during the twelve months ended December 31, 2012.
The following table summarizes the significant terms of warrants outstanding at December 31, 2013. 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:
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Weighted
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|
Weighted
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Weighted
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|
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average
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average
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|
average
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|
Range of
|
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|
Number of
|
|
|
remaining
|
|
|
exercise
|
|
|
|
|
|
exercise
|
|
exercise
|
|
|
warrants
|
|
|
contractual
|
|
|
price of
|
|
|
Number of
|
|
|
price of
|
|
Prices
|
|
|
Outstanding
|
|
|
life (years)
|
|
|
outstanding Warrants
|
|
|
warrants Exercisable
|
|
|
exercisable Warrants
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Transactions involving warrants are summarized as follows:
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Weighted
Average
|
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|
|
Number of
Shares
|
|
|
Exercise
Price
|
|
Warrants outstanding at December 31, 2011
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Warrants outstanding at December 31, 2012
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Warrants outstanding at December 31, 2013
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|
Options
During the twelve months ended December 31, 2013, the Company issued the following options to its Chief Executive Officer: options to purchase 100,000 shares of common stock at a price of $0.40 per share; options to purchase 100,000 shares of common stock at a price of $0.57 per share; and options to purchase 125,000 shares of common stock at a price of $1.60 per share. The Company also issued the following options to its President: options to purchase 100,000 shares of common stock at a price of $0.35 per share; options to purchase 100,000 shares of common stock at a price of $0.40 per share; options to purchase 100,000 shares of common stock at a price of $0.57 per share; and options to purchase 125,000 shares of common stock at a price of $1.60 per share. The Company also issued the following options to its Chief Accounting and Information Officer: options to purchase 120,000 shares of common stock at $0.40 per share; options to purchase 25,000 shares of common stock at $0.57 per share; and options to purchase 60,000 shares of common stock at $1.60 per share.
During the twelve months ended December 31, 2012, the Company issued options to purchase 100,000 shares of common stock at a price of $0.35 per share to each of its five directors (options to purchase an aggregate of 500,000 shares, post reverse-split) and additional options to purchase 100,000 shares of common stock at a price of $0.35 to its President. On December 31, 2012, the Company issued options to purchase an additional 100,000 shares of common stock at a price of $0.35 per share to each of its five directors (options to purchase an aggregate of 500,000 shares).
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:
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|
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Weighted
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|
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|
Weighted
|
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Weighted
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average
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|
average
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|
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|
average
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|
exercise
|
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|
|
exercise
|
|
Range of
|
|
|
Number of
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|
Remaining
|
|
|
price of
|
|
|
Number of
|
|
|
price of
|
|
exercise
|
|
|
options
|
|
|
contractual
|
|
|
outstanding
|
|
|
options
|
|
|
exercisable
|
|
Prices
|
|
|
Outstanding
|
|
|
life (years)
|
|
|
Options
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|
Exercisable
|
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|
Options
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|
Transactions involving stock options issued to employees are summarized as follows:
|
|
Options
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at December 31, 2011
|
|
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|
Outstanding as December 31, 2012
|
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|
|
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|
|
Outstanding at December 31, 2013
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of options outstanding and exercisable at December 31, 2013 and 2012 was $1,563,370 and $0, respectively. Aggregate intrinsic value represents the difference between the Company's closing stock price on the last trading day of the fiscal period, which was $1.25 and $0.33 as of December 31, 2013 and 2012, respectively, and the exercise price multiplied by the number of options outstanding.
During the year ended December 31, 2013 and 2012, the Company charged $32,364 and $348,120, respectively, to operations related to recognized stock-based compensation expense for employee stock options.
The exercise price grant dates in relation to the market price during 2013 and 2012 are as follows:
|
|
2013
|
|
|
2012
|
|
Exercise price lower than market price
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercise price equal to market price
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercise price exceeded market price
|
|
|
$0.40
|
to
|
$1.60
|
|
|
|
$0.33
|
to
|
$0.43
|
|
As of December 31, 2013 and 2012, there were 660,000 and 0, respectively, non-vested options issued to employees and directors.
Restricted Stock Units
Pursuant to the terms of an employment agreement with the Chief Executive Officer, the Company is obligated to issue $27,937 in restricted stock units (“RSU”) or stock for 2013, $24,875 RSU for 2014 and $13,688
RSU for 2015. The
RSU or stock for 2013 shall be issued on January 1, 2013 and be priced at the lower of the closing price of the Corporation’s common stock on the date the Board of Directors approves this Agreement or on January 3, 2013, provided that in no event shall the price be less than $0.25 per share. For 2014 and 2015 the
RSU or stock shall be issued on January 1 of each such year based upon the average closing trading price of the Corporation’s common stock over the 30 trading days prior to the date of grant. As permitted by law, Executive may receive any portion of the cash Base Salary in the form of stock or
RSU by delivering notice to the Corporation, from to time, at a valuation based upon the average closing price of the Corporation’s common stock over the 30 trading days ended on a trading date that is five trading days prior to Executive’s notice.
The Company valued stock options and warrants using the Black-Scholes valuation model utilizing the following variables:
|
|
December 31,
|
|
|
December 31,
|
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|
|
2013
|
|
|
2012
|
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to
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to
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to
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to
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to
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to
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to
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to
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|
|
14. COMMITMENTS AND CONTINGENCIES
On October 17, 2008, we entered into a three-year lease with Grand Cypress Communities, Inc. for new premises consisting of 4,000 square feet at 3845 Beck Blvd., Naples, Florida. The commencement date of the lease is January 1, 2009. On November 11, 2011, the Company extended the lease with Grand Cypress Communities, Inc. for 3 years, commencing on January 1, 2012. The annual rent and fees under the lease is approximately $54,000. The lease provides for a buyout option at the end of the lease with credit towards the purchase price received for the rental payments made during the term of the lease. In February 2013, the Company entered into a modification of the lease agreement whereby the lease term was reduced from 3 years to 2 years. The lease was mutually terminated effective August 31, 2013.
On May 7, 2012, we entered into a three-year lease with David and Sherri Vohaska for approximately 18,700 feet of office and warehouse space located at 8121 Ogden Avenue, Lyons, Illinois. The annual rent under the lease is approximately $8,333 per month for the first year, $8,417 per month for the second year, and $8,500 for the third year. David Vohaska is currently an employee of the Company and prior to the acquisition of Artisan Specialty Foods, Inc. was the owner of Artisan.
At December 31, 2013, commitments for minimum rental payments were as follows:
For the twelve months ended:
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15. MAJOR CUSTOMER
The Company’s largest customer, US Foods, Inc. and its affiliates, accounted for approximately 72
% and 76% of total sales in the years ended December 31, 2013 and 2012, respectively. A contract between our subsidiary, Food Innovations, and USF entered an optional renewal period in December 2012 but was automatically extended for an additional 12 months in each of January 1, 2013 and 2014. We believe that although a significant portion of our sales occur through USF and its affiliates, the success of the program is less contingent on a contract than on our actual performance and the quality of our products.
16. FAIR VALUE MEASUREMENTS
Our short-term financial instruments, including cash, accounts payable and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate their book value. The fair value of the Company’s stock option, convertible debt features and warrant instruments is determined using option pricing models.
As a result of the adoption of ASC 815-40, the Company is required to disclose the fair value measurements required by ASC 820, “Fair Value Measurements and Disclosures.” The other liabilities recorded at fair value in the balance sheet as of December 31, 2009 are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 are directly related to the amount of subjectivity associated with the inputs to fair valuations of these liabilities are as follows:
Level 1 -
|
Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
|
|
|
Level 2 -
|
Inputs other than Level 1 inputs that are either directly or indirectly observable; and
|
|
|
Level 3-
|
Unobservable inputs, for which little or no market data exist, therefore requiring an entity to develop its own assumptions.
|
As December 31, 2013 and 2012, the Company did not have
financial assets or liabilities that are required to be accounted for at fair value on a recurring basis.
The following is a reconciliation of the derivative liability for which Level 3 inputs were used in determining the approximate fair value:
Beginning balance as of January 1, 2012
|
|
$
|
1,908,470
|
|
Reclassification to equity
|
|
|
(493,713
|
)
|
Fair value of common stock equivalents issued
|
|
|
1,022,726
|
|
Fair value of extension of warrant term
|
|
|
842,100
|
|
Gain on restructure of notes payable
|
|
|
(3,797,001
|
)
|
Change in fair value
|
|
|
517,418
|
|
Ending balance as of December 31, 2012
|
|
$
|
-
|
|
Beginning balance as of January 1, 2013
|
|
$
|
-
|
|
Additions during the year
|
|
|
-
|
|
Ending balance as of December 31, 2013
|
|
$
|
-
|
|
17. SUBSEQUENT EVENTS
Subsequent to December 31, 2013, the Company issued 16,202 shares of common stock due to the cashless exercise of warrants at a price of $0.25 per share, and an additional 360,354 shares of common stock due to the conversion of notes payable and accrued interest at a price of $0.25 per share. The Company also repurchased 85,950 shares of common stock for the amount of $60,000 to be held as treasury shares.