The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
Notes to Consolidated Financial Statements
April 30, 2013 and 2012
(Unaudited)
NOTE 1 - NATURE OF OPERATIONS AND BASIS FOR PRESENTATION
The accompanying unaudited interim consolidated
financial statements of Vital Products, Inc. have been prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission requirements for interim financial statements. Therefore, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United States for complete financial statements. The interim
consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year
ended July 31, 2012 of Vital Products, Inc.
The interim consolidated financial statements
present the balance sheets, statements of operations and comprehensive loss and cash flows of Vital Products, Inc. The financial
statements have been prepared in accordance with accounting principles generally accepted in the United States.
The interim financial information is unaudited.
In the opinion of management, all adjustments necessary to present fairly the financial position as of April 30, 2013 and the results
of operations and cash flows presented herein have been included in the interim consolidated financial statements. All such adjustments
are of a normal and recurring nature. Interim results are not necessarily indicative of results of operations for the full year.
On April 26, 2012, we entered into a License
Agreement with Vital Products Supplies, Inc. (“Vital Supplies”). Under the terms of the Agreement, we have the right
to market the products of Vital Supplies as well as the right of use of the facilities of Vital Supplies including but not limited
to the sales and distribution facilities. We agreed to pay a fee of 1.5% of all sales generated plus a management fee of 1.5% based
on the total monies paid for employee salaries, benefits and commissions. The Company is responsible for all expenses that relate
to sales generated under the License Agreement. The duration of the agreement is for a period of twelve months commencing on April
26, 2012 and thereafter on a month-by-month basis unless sooner terminated by Vital Supplies as provided for in the agreement.
Vital Supplies may at any time in its sole discretion, with sixty days prior notice, terminate the agreement and revoke the license
granted for any reason whatsoever and upon such termination we will immediately stop the use of the facilities as described.
The Company has determined that Vital Supplies
is a Variable Interest Entity and that Vital Products, Inc. is the primary beneficiary. As such, Vital Supplies has been consolidated
into the Company’s financial statements.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Liquidity and Going Concern
During the nine months ended April 30, 2013
and 2012, the Company incurred losses of $79,635 and $216,922, respectively, and cash used in operations was $2,549 and $32,565,
respectively. The Company financed its operations through convertible notes payable, advances from related parties and vendors'
credit.
Management believes that the current cash balance
at April 30, 2013 and net cash proceeds from operations will not be sufficient to meet the Company's cash requirements for the
next twelve months.
Accordingly, these financial statements
have been prepared on a going concern basis and do not include any adjustments to the measurement and classification of the
recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as
a going concern. The Company has experienced losses in the period and has negative working capital. The Company's ability to
realize its assets and discharge its liabilities in the normal course of business is dependent upon continued support. The
Company is currently attempting to obtain additional financing from its existing shareholders and other strategic investors
to continue its operations. However, the Company may not obtain sufficient additional funds from these sources.
These conditions cause substantial doubt about
the Company's ability to continue as a going concern. A failure to continue as a going concern would require that stated amounts
of assets and liabilities be reflected on a liquidation basis that could differ from the going concern basis. The consolidated
financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the
amounts of and classification of liabilities that might be necessary in the event the company cannot continue in existence.
ACCOUNTING PRINCIPLES
The Company's accounting and reporting policies
conform to generally accepted accounting principles in the United States. The consolidated financial statements are reported in
United States dollars.
CONSOLIDATION
The consolidated financial statements include
the accounts of the Company and its variable interest entity ("VIE") in which the Company is the primary beneficiary.
Effective August 1, 2009, the Company adopted the accounting standards for non-controlling interests and reclassified the equity
attributable to its non-controlling interests as a component of equity in the accompanying consolidated balance sheets. All significant
intercompany balances and transactions have been eliminated in consolidation. See Note 3.
Management's determination of the appropriate
accounting method with respect to the Company's variable interests is based on accounting standards for VIEs issued by the Financial
Accounting Standards Board ("FASB"). The Company consolidates any VIEs in which it is the primary beneficiary and discloses
significant variable interests in VIEs of which it is not the primary beneficiary, if any.
USE OF ESTIMATES
The preparation of consolidated financial statements
in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ
from those estimates. Significant estimates include amounts for impairment of equipment, share based compensation, inventory obsolescence
and allowance for doubtful accounts.
FOREIGN CURRENCY TRANSLATION
After operations of the Company moved from
Ontario, Canada to California, the Company reviewed its functional currency and determined that it was appropriate to change the
functional currency to the U.S. dollar from the Canadian dollar May 1, 2012.
Prior to May 1, 2012, our financial information
was translated into U.S. dollars using exchange rates in effect at period-end. The income statement is translated at the average
year-to-date exchange rate. Adjustments resulting from translation of foreign exchange are included as a component of other comprehensive
income within stockholders' deficit.
VALUATION OF LONG-LIVED ASSETS
We assess the recoverability of long-lived
assets whenever events or changes in business circumstances indicate that the carrying value may not be recoverable. An impairment
loss is recognized when the sum of the expected undiscounted net cash flows over the remaining useful life is less than the carrying
amount of the assets.
REVENUE RECOGNITION
The Company recognizes revenue in accordance
with FASB ASC Subtopic 605, Revenue Recognition. Under FASB ASC Subtopic 605, revenue is recognized at the point of passage to
the customer of title and risk of loss, there is persuasive evidence of an arrangement, the sales price is determinable, and collection
of the resulting receivable is reasonably assured. The Company generally recognizes revenue at the time of delivery of goods. Sales
are reflected net of sales taxes, discounts and returns.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments
with maturities of three months or less when purchased. Cash and cash equivalents are on deposit with financial institutions without
any restrictions. At April 30, 2013 and July 31, 2012, cash equivalents amounted to $0.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company records an allowance for doubtful
accounts as a best estimate of the amount of probable credit losses in its accounts receivable. Each month, the Company reviews
this allowance and considers factors such as customer credit, past transaction history with the customer and changes in customer
payment terms when determining whether the collection of a receivable is reasonably assured. Past due balances over 90 days and
over a specified amount are reviewed individually for collectability. Receivables are charged off against the allowance for doubtful
accounts when it becomes probable that a receivable will not be recovered. At April 30, 2013 and July 31, 2012, the allowance for
doubtful accounts amounted to $0.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments comprise
cash, accounts receivable, accounts payable and accrued liabilities, notes payable to The Cellular Connection Ltd. and Larry Burke,
and advances from related parties. The carrying value of Company's short-term instruments approximates fair value, unless otherwise
noted, due to the short-term maturity of these instruments. In management's opinion, the fair value of notes payable is approximate
to carrying value as the interest rates and other features of these instruments approximate those obtainable for similar instruments
in the current market. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest,
currency or credit risks in respect of these financial instruments.
INVENTORY
Inventory comprises finished goods held for
sale and is stated at lower of cost or market value. Cost is determined by the average cost method. The Company estimates the realizable
value of inventory based on assumptions about forecasted demand, market conditions and obsolescence. If the estimated realizable
value is less than cost, the inventory value is reduced to its estimated realizable value. If estimates regarding demand and market
conditions are inaccurate or unexpected changes in technology affect demand, the Company could be exposed to losses in excess of
amounts recorded.
STOCK-BASED COMPENSATION
The Company follows FASB ASC Subtopic 718,
Stock Compensation, for accounting for stock-based compensation. The guidance requires that new, modified and unvested share-based
payment transactions with employees, such as grants of stock options and restricted stock, be recognized in the consolidated financial
statements based on their fair value at the grant date and recognized as compensation expense over their vesting periods. The Company
also follows the guidance for equity instruments issued to consultants.
LOSS PER SHARE
FASB ASC Subtopic 260, Earnings Per Share,
provides for the calculation of "Basic" and "Diluted" earnings per share. Basic earnings per share is computed
by dividing net loss available to common shareholders by the weighted average number of common shares outstanding for the period.
All potentially dilutive securities have been excluded from the computations since they would be antidilutive. However, these dilutive
securities could potentially dilute earnings per share in the future.
COMPREHENSIVE INCOME
The Company has adopted FASB ASC Subtopic 220,
Comprehensive Income, which establishes standards for reporting and display 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 or
distributions to owners. Among other disclosures, FASB ASC Subtopic 220 requires that all items that are required to be recognized
under the current accounting standards as a component of comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comprehensive income is displayed in the statement of operations and comprehensive
loss and in the balance sheet as a component of stockholders' deficit.
RECENT ACCOUNTING PRONOUNCEMENTS
There have been no recent accounting pronouncements
or changes in accounting pronouncements that impacted the third quarter of fiscal 2013, or which are expected to impact future
periods that were not already adopted and disclosed in prior periods.
NOTE 3 - VARIABLE INTEREST ENTITY
Following is a description of our financial
interests in a variable interest entity that we consider significant, those for which we have determined that we are the primary
beneficiary of the entity and, therefore, have consolidated the entity into our financial statements.
On April 26, 2012, we entered into a License
Agreement with Vital Products Supplies, Inc. (“Vital Supplies”). Under the terms of the Agreement, we have the right
to market the products of Vital Supplies as well as the right of use of the facilities of Vital Supplies including but not limited
to the sales and distribution facilities. We agreed to pay a fee of 1.5% of all sales generated plus a management fee of 1.5% based
on the total monies paid for employee salaries, benefits and commissions. The Company is responsible for all expenses that relate
to sales generated under the License Agreement. The duration of the agreement is for a period of twelve months commencing on April
26, 2012 and thereafter on a month-by-month basis unless sooner terminated by Vital Supplies as provided for in the agreement.
Vital Supplies may at any time in its sole discretion, with sixty days prior notice, terminate the agreement and revoke the license
granted for any reason whatsoever and upon such termination we will immediately stop the use of the facilities as described.
We have determined that we are the primary
beneficiary of Vital Supplies as our interest in the entity is subject to variability based on results from operations and changes
in the fair value.
The results of operations for Vital Supplies
have been included in the financial statements of the Company. The Company did not pay consideration to enter into the License
Agreement. The acquisition has been accounted for using the purchase method as follows:
Cash
|
$
|
200
|
Non-controlling interest
|
|
(200)
|
|
$
|
-
|
Vital Products Supplies, Inc. – At April
30, 2013 our consolidated balance sheet recognizes current assets of $381,733 and accounts payable and accrued liabilities of $397,647
related to our interests in Vital Supplies. Our statement of operations recognizes sales of $1,718,258, cost of sales of $1,508,957
and selling, general and administrative expenses of $233,821 related to our interest in Vital Supplies for the period from August
1, 2012 to April 30, 2013.
NOTE 4 - NOTES PAYABLE TO THE CELLULAR CONNECTION LTD. AND LARRY
BURKE
|
Original Date of Issuance
|
Maturity
Date
|
|
April 30, 2013
|
|
July 31, 2012
|
Promissory Note 7
|
May 27, 2010
|
May 26, 2013
|
$
|
53,280
|
$
|
53,280
|
Promissory Note 9
|
November 29, 2010
|
November 28, 2013
|
|
70,560
|
|
58,800
|
Promissory Note 12
|
April 7, 2011
|
April 6, 2013
|
|
46,080
|
|
38,400
|
Promissory Note 13
|
February 24, 2012
|
February 23, 2013
|
|
81,723
|
|
27,241
|
Interest
|
|
|
|
24,612
|
|
23,773
|
Accretion
|
|
|
|
27,360
|
|
42,909
|
|
|
|
$
|
303,615
|
$
|
244,403
|
As of April 30, 2013 and July 31, 2012 notes
payable are recorded net of unamortized debt discount of $66,324 and $78,088, respectively.
Each of the notes bears interest at 20% per
annum and allow for the lender to secure a portion of the Company assets up to 200% of the face value of the note and mature one
year from the day of their respective issuance. Unless otherwise indicated, the holder has the right to convert the Notes plus
accrued interest into shares of the Company's common stock at any time prior to the maturity date. The number of common stock to
be issued will be determined using a conversion price based on 75% of the average of the lowest closing bid price during the fifteen
trading days immediately prior to conversion.
On November 29, 2012, Promissory Note 9 renewed
for an additional year under the terms outlined in the original Note. The modification of the Note upon renewal has been accounted
for as debt extinguishment and the issuance of a new debt instrument. Accordingly, in connection with extinguishment of the original
debt, the Company recognized a $23,520 gain.
On April 7, 2013, Promissory Note 12 renewed
for an additional year under the terms outlined in the original Note. The modification of the Note upon renewal has been accounted
for as debt extinguishment and the issuance of a new debt instrument. Accordingly, in connection with extinguishment of the original
debt, the Company recognized a $15,360 gain.
NOTE 5 - ADVANCES
Advances from a non-related party for business expenses are non-interest
bearing, unsecured and have no-specific terms of repayment.
NOTE 6 - RELATED PARTY BALANCES AND TRANSACTIONS
During the nine months ended April 30,
2013 and 2012, the Company had sales of $1,718,258 and $53,537, respectively, and as of April 30, 2013 and July 31, 2012
accounts receivable of $187,374 and $128,320, respectively, all with Century Computer Products, Inc. ("Century")
and Reliable Printing Solutions, Inc. ("Reliable"). Aaron Shrira, the sole shareholder of Vital Supplies, is a 50%
shareholder of both Century and Reliable. Vital Supplies is a consolidated subsidiary of Vital Products. We have determined
that we are the primary beneficiary of Vital Supplies as our interest in the entity is subject to variability based on
results from operations and changes in the fair value.
At April 30, 2013 and July 31, 2012, the Company
has advances of $9,000 and $0, respectively, due to Century. The advances are non-interest bearing, unsecured and have no specific
terms of repayment.
For the nine months ended April 30, 2013 and
2012, the Company had rent expense totaling $0 and $26,884, respectively and as of April 30, 2013 and July 31, 2012 advances due
of $30,822 and $31,891, respectively, and outstanding payables totaling $188,466 and $195,001, respectively, all with Zynpak Packaging
Inc. in which the Company's former Chief Executive Officer has a majority ownership interest. The balances are non-interest bearing,
unsecured and have no specified terms of repayment.
As of April 30, 2013 and July 31, 2012, the
Company has advances of $100,553 and $104,039, respectively, due to Den Packaging Corporation in which the Company's former Chief
Executive Officer has a majority ownership interest. The balances are non-interest bearing, unsecured and have no specified terms
of repayment.
NOTE 7 – CONVERTIBLE PREFERRED AND CAPITAL STOCK
Each Series A Preferred Stock is convertible
at any time, at the option of the holder, into 100 shares of common stock. Series A Preferred Stocks carry voting rights equal
to the number of common shares into which the preferred stock can be converted, multiplied by 30. Upon any liquidation, dissolution
or winding-up of the Company, the Holders shall be entitled to receive out of the assets of the Company, whether such assets are
capital or surplus, for each share of Preferred Stock an amount equal to the holder's pro rata share of the assets and funds of
the Company.
NOTE 8 - RISK MANAGEMEN
T
Foreign Exchange Risk
At April 30, 2013 and July 31, 2012, the Company
had trade payables and advances of $364,997 and $364,997, respectively, due in Canadian dollars. The Company does not use derivative
instruments to hedge its foreign exchange risk.
Concentration Risk
The Company is subject to risk of non-payment
on its trade accounts receivable. For the nine months ended April 30, 2013, the company has few customers. Two related party customers,
Reliable Printing and Century Computer, represent 100% of the total outstanding accounts receivable and those same two related
party customers represent 100% of total sales. Management consistently monitors its client credit terms with customers to reduce
credit risk exposure.
For the nine months ended April 30, 2013, the company purchased
its inventory from many vendors.