The consolidated financial statements and related notes are included as part of
this Annual Report.
Notes to Consolidated Financial Statements
July 31, 2012 and 2011
1. NATURE OF OPERATIONS AND BASIS FOR PRESENTATION
Vital Products, Inc. (the "Company") was incorporated in the State of Delaware
on May 27, 2005. On July 5, 2005, the Company purchased the Childcare Division
of Metro One Development, Inc., (formerly On The Go Healthcare, Inc.) which
manufactured and distributed infant care products.
In August 2008, we changed our business plan and began the process of
developing a new line of business as a distributor of industrial packaging
products. On September 17, 2008, we entered into a Letter of Intent to
purchase Montreal-based Den Packaging Corporation. The transaction proposed in
the Letter of Intent did not close. On February 27, 2010, we entered into a
License Agreement with Den Packaging Corporation as noted below.
On October 7, 2008, we entered into a consulting agreement with DLW Partners
of Toronto, an industrial packaging consulting firm specializing in market
analysis, market and product strategies and the development of product line
extensions. We believed that DLW would work closely with us to develop new
products for existing markets and establish product line extensions to further
our market share. Most importantly DLW has experience in the development of
environmentally friendly products and we expected that DLW would further our
initiative to develop environmentally acceptable products. As we have not had
a product commercialized by DLW we let the agreement expire on
July 31, 2011.
On October 21, 2008, we entered into a sales and marketing agreement with Eco
Tech Development LLC of Nevada, a product research and development company
specializing in eco-friendly industrial packaging applications, whereby we
would market certain proprietary and patent-pending technologies that have
recently been developed by Eco Tech, beginning with the marketing of a new
bio-based foam packaging product. As we have not had a product commercialized
we let the agreement expire on July 31, 2011.
On January 13, 2009, we announced that we had commenced production of
Biofill(TM), our bio-based foam in place packaging product, and on
January 26, 2009, we received our first purchase order.
On February 19, 2009, we entered into an agreement to market a new paper
packaging system. While we believe paper packaging has been a staple in the
industrial packaging market for many years, our new system produces a craft
paper product that simulates a moldable nest. We believe this product is
priced competitively with other paper products and gives us the advantage of
performance and range of use. Although our new line of business continues
to develop, we believe that these purchase orders validate our product and
reflect the industrial packaging industry's trend towards environmentally
friendly product lines. As of July 31, 2011, we have limited production of
the new paper packaging product.
F6
On February 27, 2010, we entered into a License Agreement with Den Packaging
Corporation, in which our Chief Executive Officer has a majority ownership
interest. Under the terms of the Agreement, we have the right to market the
products of Den Packaging as well as the right of use of the facilities of
Den Packaging including but not limited to the sales and distribution
facilities. We purchased all of the inventory on hand as of March 1, 2010 and
agreed to pay a fee of 5% of all sales generated plus a management fee of
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 March 1, 2010 and thereafter on a
month-by-month basis unless sooner terminated by Den Packaging as provided
for in the agreement. Den Packaging 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 determined that Den Packaging was a Variable Interest Entity
and that Vital Products, Inc. is the primary beneficiary. As such, Den
Packaging Corporation was consolidated into the Company's financial
statements.
Den Packaging delivered a termination notice to the Company to cancel the
License Agreement effective May 1, 2011. The Company determined that it lost
control of Den Packaging on May 1, 2011 and ceased to include the balance
sheet, results of operations and cash flows of Den Packaging in the
consolidated financial statements of the Company after April 30, 2011.
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.
F7
2. SIGNIFICANT ACCOUNTING POLICIES
Liquidity and Going Concern
During the years ended July 31, 2012 and 2011, the Company incurred
losses of $268,495 and $376,169, respectively and cash used in operations was
$103,387 and $95,395, respectively. The Company financed its operations
through loans payable and vendors' credit.
Management believes that the current cash balances at July 31, 2012 and net
future cash proceeds from operations will not be sufficient to meet the
Company's cash requirements for the next twelve months.
These consolidated 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. These
consolidated financial statements do not contain any adjustments for this
contingency.
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.
F8
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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.
F9
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
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 July 31, 2012 and
2011, 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 July 31, 2012 and 2011, the
allowance for doubtful accounts amounted to $0.
Fair Value of Financial Instruments
The Company's financial instruments comprise cash, accounts receivable -
related party, accounts payable and accrued liabilities, notes payable to
The Cellular Connection Ltd. and L. Burke, advances, and advances from
related party. 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.
F10
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventory
Inventory comprises finished goods held for sale and is stated at the 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. On this
basis management recorded a reserve of $0 at July 31, 2012
(July 31, 2011 - $11,518).
Equipment
Equipment is recorded at cost less accumulated depreciation. Depreciation of
equipment is provided annually as indicated below over the estimated useful
life of the asset, except for current year additions on which one-half of the
rates are applicable:
Manufacturing equipment 5 years straight line
Molds 3 years straight line
The cost of repairs and maintenance is charged to expense as incurred.
Expenditures for property betterments and renewals are capitalized. Upon sale
or other disposition of a depreciable asset, cost and accumulated depreciation
are removed from the accounts and any gain or loss is reflected in other
revenues (expenses). The Company periodically evaluates whether events and
circumstances have occurred that may warrant revision of the estimated useful
life of equipment or whether the remaining balance of equipment should
be evaluated for possible impairment. The Company uses an estimate of the
related undiscounted cash flows over the remaining life of the equipment
in measuring their recoverability.
Income Taxes
The Company follows FASB ASC Subtopic 740, Income Taxes, for recording the
provision for income taxes. Deferred tax assets and liabilities are computed
based upon the difference between the financial statement and income tax basis
of assets and liabilities using the enacted marginal tax rate applicable when
the related asset or liability is expected to be realized or settled.
Deferred income tax expenses or benefits are based on the changes in the asset
or liability each period. If available evidence suggests that it is more
likely than not that some portion or all of the deferred tax assets will not
be realized, a valuation allowance is required to reduce the deferred tax
assets to the amount that is more likely than not to be realized. Future
changes in such valuation allowance are included in the provision for deferred
income taxes in the period of change.
F11
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Basic 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 stockholders' deficit and in the balance sheet as a component
of stockholders' deficit.
F12
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
New Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting
pronouncements that impacted the fourth quarter of fiscal 2012, or which are
expected to impact future periods, that were not already adopted and disclosed
in prior periods.
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.
Den Packaging Corporation - On February 27, 2010, we entered into a License
Agreement with Den Packaging Corporation, in which our Chief Executive Officer
has a majority ownership interest. Under the terms of the Agreement, we have
the right to market the products of Den Packaging as well as the right of use
of the facilities of Den Packaging including but not limited to the sales and
distribution facilities. We purchased all of the inventory on hand as of
March 1, 2010 and agreed to pay a fee of 5% of all sales generated plus a
management fee of 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 March 1, 2010 and
thereafter on a month-by-month basis unless sooner terminated by Den Packaging
as provided for in the agreement. Den Packaging 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 Den Packaging
Corporation as our interest in the entity is subject to variability based on
results from operations and changes in the fair value. For the period ended
April 30, 2010, the License Agreement was determined not to be a VIE because
certain operations of Den Packaging Corporation were not included in the
Agreement and as such did not meet the definition of a legal entity. After
April 30, 2010, all operations of Den Packaging are included in the License
Agreement.
The results of operations for Den Packaging Corporation have been included in
the consolidated 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:
F13
April 30, 2010
--------------
Current assets $ 424,773
Equipment 22,850
Bank indebtedness (60,541)
Accounts payable and accrued liabilities (161,070)
Non-controlling interest (226,012)
---------
$ -
=========
|
The License Agreement was terminated by Den Packaging and the Company
determined that it lost control of Den Packaging effective May 1, 2011.
As such, the Company derecognized the following assets and liabilities of
Den Packaging from its consolidated financial statements at their carrying
values as of May 1, 2011.
May 1, 2011
-----------
Current assets $ 365,765
Equipment 24,248
Bank indebtedness (29,854)
Accounts payable and accrued liabilities (147,596)
Accumulated other comprehensive loss (19,358)
Non-controlling interest (193,205)
---------
$ -
=========
|
Upon derecognition of the assets and liabilities of Den Packaging, the
Company recognized a liability of $103,384 for management fees earned during
the License Agreement which are due to Den Packaging.
For the year ended July 31, 2011, our statement of operations recognizes
sales of $1,099,066, cost of sales of $784,576 and selling, general and
administrative expenses of $316,548 related to our interest in Den Packaging
Corporation for the period from August 1, 2010 to April 30, 2011.
Vital Products Supplies, Inc. - 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.
F14
The results of operations for Vital Supplies have been included in the
consolidated 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)
---------
$ -
=========
|
At July 31, 2012 our consolidated balance sheet recognizes current assets of
$244,583, and accounts payable and accrued liabilities of $266,632 related
to our interests in Vital Supplies. Our statement of operations recognizes
sales of $569,063 cost of sales of $541,052 and selling, general and
administrative expenses of $50,259 related to our interest in Vital Supplies
for the period from April 26, 2012 to July 31, 2012.
4. INVENTORY
As of July 31, 2012 and 2011, inventory is comprised of finished goods and no
provision for inventory obsolescence has been recorded.
5. EQUIPMENT
As of July 31, 2012 and 2011, equipment consists of the following:
2012 2011
------------ -----------
Machinery and equipment $ - $ 342,153
Molds - 235,081
Computer hardware and software - -
Leasehold improvements - -
------------ -----------
- 577,234
Less: Accumulated depreciation - (577,234)
------------ -----------
Equipment, net $ - $ -
============ ===========
|
Depreciation expense was $0 and $3,117 for the years ended July 31, 2012
and 2011, respectively.
F15
6. REVOLVING DEMAND CREDIT FACILITY
Den Packaging Corporation, a consolidated variable interest entity, had an
operating line of credit of $225,000 CDN of which $34,037 ($35,000 CDN) was
utilized at July 31, 2010. The line of credit bears interest of prime
plus 1.75% and is secured by accounts receivable, inventory and other assets
of Den Packaging Corporation and a personal guarantee of the President. On
May 1, 2010, the Company ceased recognition of the revolving demand credit
facility upon termination of the License Agreement with Den Packaging.
7. CONVERTIBLE NOTES PAYABLE TO THE CELLULAR CONNECTION LTD. AND L. BURKE
Original
Date of Issuance Maturity Date 2012 2011
---------------- ------------- --------- ---------
Promissory Note 3 June 12, 2009 June 11, 2012 $ 0 $ 31,680
Promissory Note 4 November 18, 2009 November 17, 2012 0 30,000
Promissory Note 5 March 26, 2010 March 25, 2012 0 12,000
Promissory Note 6 June 29, 2010 June 28, 2012 0 12,000
Promissory Note 7 May 27, 2010 May 26, 2013 53,280 44,400
Promissory Note 8 September 28, 2010 September 27, 2012 0 12,000
Promissory Note 9 November 29, 2010 November 28, 2012 58,800 49,000
Promissory Note 10 December 10, 2010 December 9, 2012 0 10,000
Promissory Note 11 February 25, 2011 February 24, 2012 0 5,200
Promissory Note 12 April 7, 2011 April 6, 2013 38,400 32,000
Promissory Note 13 February 24, 2012 February 23, 2013 27,241 0
Interest 23,773 25,844
Accretion 42,909 33,902
--------- --------
$ 244,403 $ 298,026
========= =========
|
As of July 31, 2012 and 2011, notes payable are recorded net of unamortized
debt discount of $78,088 and $87,949, respectively.
On August 31, 2010, the Company agreed to amend the terms of Promissory Note 2
issued to the Cellular Connection Ltd. 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 interest accretion expense of $22,160
as a result of unamortized debt discount on August 30, 2010. Under the terms
of the Side Letter Agreement, the conversion feature of the Note was amended
to a fixed conversion price of $0.10 from $100.00 per share of common stock.
The face value of the Note is $29,546 which aggregates principal and
accumulated interest through August 30, 2010. The amendment of the terms of
Promissory Note 2 resulted in a beneficial conversion feature of $29,546
since the closing price of common stock on August 31, 2010 exceeded the fixed
conversion price. The beneficial conversion feature of $29,546 is included
in additional paid-in capital. Commencing on August 31, 2010 and ending on
April 30, 2011 the holder of the note converted $29,546 of principal plus
accrued interest into 295,457 shares of the Company's common stock.
F16
On November 18, 2010, Promissory Note 4 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 $10,000 gain.
On March 26, 2011, Promissory Note 5 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 $4,000 gain.
On May 27, 2011, Promissory Note 7 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 $14,800 gain.
On June 12, 2011, Promissory Note 3 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 $10,560 gain.
On June 26, 2011, Promissory Note 6 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 $4,000 gain.
On November 29, 2011, 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 $19,600 gain.
On December 10, 2011, Promissory Note 10 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 $4,000 gain.
On April 7, 2012, 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 $12,800 gain.
F17
On February 24, 2012, the Company agreed to amend the terms of Promissory
Notes 3, 4, 5, 6, 8, 10 and 11 issued to the Cellular Connection Ltd. Under
the terms of the Side Letter Agreement, the Promissory Notes were combined
into one new Promissory Note ('Promissory Note 13') with an issue amount of
$147,936 and face amount of $177,523. The conversion feature of the
Promissory Note 13 has a fixed conversion price of $0.0002 per share of
common stock of the Company. The face amount of the new Promissory Note is
payable February 24, 2013. The outstanding face amount of Promissory Note 13
shall increase by another 20% on February 24, 2014 and again on each one year
anniversary of February 24, 2014 until the new Promissory Note has been paid
in full. The amendment of the terms of these notes resulted in a beneficial
conversion feature of $88,762 since the closing price of common stock on
February 24, 2012 exceeded the fixed conversion price. The beneficial
conversion feature of $88,762 is included in additional paid-in capital.
The amendment of the terms of the note was accounted for as a debt
extinguishment and the issuance of a new debt instrument. Accordingly,
in connection with extinguishment of the original debt, the Company
recognized a $14,728 gain. Commencing on March 20, 2012 and ending on
April 26, 2012 the holder of the note converted $95,800 of principal and
interest of Promissory Note 13 into 479,000,000 shares of the Company's
common stock.
On May 27, 2012, Promissory Note 7 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 $17,760 gain.
Each of the notes bear 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.
8. RELATED PARTY BALANCES AND TRANSACTIONS
During the year ended July 31, 2012 and 2011, the Company had sales of $569,371
and $0, respectively, and as of July 31, 2012 and 2011 accounts receivable of
$128,320 and $0. respectively, all with Century Computer Products ("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.
For the year ended July 31, 2012 and 2011, the Company had rent
expense totaling $26,884 and $36,257, respectively and as of July 31, 2012
and July 31, 2011 advances of $25,618 and $64,597, respectively, and
outstanding payables totaling $195,001 and $173,224, respectively, all with
Zynpak Packaging Inc. in which the Company's Chief Executive Officer has
a majority ownership interest. The balances are non-interest bearing,
unsecured and have no specified terms of repayment.
F18
For the year ended July 31, 2012 and 2011, the Company had management fee
expense totaling $0 and $103,384, respectively and as of July 31, 2012
and July 31, 2011 advances of $110,312 and $110,312, respectively, with Den
Packaging Corporation in which the Company's Chief Executive Officer has
a majority ownership interest. The balances are non-interest bearing,
unsecured and have no specified terms of repayment. See Note 3 - Variable
Interest Entity.
9. 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.
Commencing on August 31, 2010 and ending on April 30, 2011 the holder of a
convertible note payable converted $29,546 of principal plus accrued interest
into 295,457 shares of the Company's common stock at a fixed conversion price
of $0.10 per share.
On February 10, 2012 the Board of Directors approved the issuance to James
McKinney, the President and Chief Financial Officer of the Company, a signing
bonus comprising 60,000 shares of Series A Convertible Preferred Stock and
100,000,000 shares of common stock valued at $21,200 ($0.002 per share of
common stock). The shares were fully vested when issued, value based on the
closing price on the date they were approved and expensed in the consolidated
statement of operations.
On March 5, 2012 the Company approved and effected a 1-for-1000 reverse stock
split of issued and outstanding common stock. Consequently, all share
information has been revised to reflect the reverse stock split from the
Company's inception.
Commencing on March 20, 2012 and ending on April 26, 2012 the holder of
Promissory Note 13 converted $95,800 of principal and interest into
479,000,000 shares of the Company's common stock at a fixed conversion
price of $0.0002 per share.
F19
10. INCOME TAXES
The following is a reconciliation comparing income taxes calculated at the
statutory rates to the amounts provided in the accompanying consolidated
financial statements as of July 31, 2012 and 2011:
The Company's computation of income tax recovery is as follows:
2012 2011
------------ -----------
Net loss for the period $( 268,495) $( 376,169)
Enacted income tax rate 34.6% 34.6%
------------ -----------
Income tax recovery at enacted rate (92,899) (130,154)
Non-deductible expenses 47,568 46,226
Change in valuation allowance 45,331 83,928
------------ -----------
Income tax expense / recovery $ - $ -
============ ===========
Components of the Company's net
future income tax assets are:
2012 2011
------------ -----------
Non-capital loss carry forward $ 1,133,548 $ 1,088,217
Valuation allowance (1,133,548) (1,088,217)
------------ -----------
Net future income tax assets $ - $ -
============ ===========
|
In assessing the realizability of future tax assets, management considers
whether it is more likely than not that some portion or all of the future
tax assets will not be realized. The ultimate realization of future 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 future tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. Management has
provided for a valuation allowance on all of its losses as there is no
assurance that future tax benefits will be realized. The change in the
valuation allowance during the years ended July 31, 2012 and 2011 was
$45,331 and $83,216, respectively. The change in the valuation allowance
due to a change in tax rates for the years ended July 31 2012 and 2011
was $0 and $0, respectively. The Company recognizes interest and penalties,
if any, related to uncertain tax positions in selling, general and
administrative expenses. No interest and penalties related to uncertain tax
positions were accrued at July 31, 2012 ($0 - July 31, 2011)
The non-capital losses expire in 2015 through 2032.
F20
11. RISK MANAGEMENT
Foreign Exchange Risk
From time to time, the company can be exposed to foreign exchange risk on
purchases of inventory which are made in US 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 year ended July 31, 2012, the company has few customers. One customer
represents 99% of the total outstanding accounts receivable and two customers
represent 98% of total sales. Management consistently monitors its client
credit terms with customers to reduce credit risk exposure.
For the year ended July 31, 2012, the company purchased its inventory
from many vendors.
F21