Exhibit 99.1
Financial Statements
Table of Contents
Page | ||
Auditor’s Report | 2 | |
Financial Statements | ||
Audited Financial Statements | ||
Balance Sheets as of December 31, 2005 and 2006. | 3 | |
Statements of Operations for the years ending December 31, 2005 and 2006. | 4 | |
Statements of Changes in Shareholders’ Equity for the years ending December 31, 2005 and 2006. | 5 | |
Statement of Cash Flows for the years ending December 31, 2005 and 2006. | 6 | |
Notes to Financial Statements for the years ending December 31, 2005 and 2006. | 7 - 16 | |
Unaudited Financial Statements | ||
Balance Sheet as of March 31, 2007 | 1 | |
Statement of Operations for the three months ended March 31, 2007. | 2 | |
Statement of Cash Flows for the three months ended March 31, 2007. | 3 | |
Notes to unaudited Financial Statements for the three months ended March 31, 2007. | 4 | |
Pro Forma financial Information | ||
Unaudited Pro Forma Consolidated Statement of Operations for the year ending December 31, 2006. | 1 | |
Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 2007. | 2 | |
Unaudited Pro Forma Consolidated Statement of Operations for the three months ended March 31, 2007. | 3 | |
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Auditors' Report
To the Shareholder of
Interactive Nutrition International Inc.
We have audited the balance sheets of Interactive Nutrition International Inc. as of December 31, 2006 and 2005 and the statements of operations, shareholder's equity and cash flows for the years then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at December 31, 2006 and 2005 and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
![sig](https://capedge.com/proxy/8-KA/0001144204-07-042294/sig.jpg)
Chartered Accountants, Licensed Public Accountants
April 2, 2007
This office is independently owned
And operated by Collins Barrow Ottawa LLP.
The Collins Barrow trademarks are
used under license.
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Interactive Nutrition International Inc.
Balance Sheets
(in U.S. dollars)
December 31 | 2006 | 2005 | |||||
Assets | |||||||
Current | |||||||
Cash | $ | 350,823 | $ | 937,569 | |||
Accounts receivable (Note 1) | 1,828,712 | 1,479,485 | |||||
Inventories (Note 2) | 2,202,666 | 2,356,550 | |||||
Prepaid expenses | 36,038 | 132,294 | |||||
4,418,239 | 4,905,898 | ||||||
Property and equipment (Note 3) | 881,174 | 953,689 | |||||
Intangible assets | 12,871,501 | 12,897,001 | |||||
$ | 18,170,914 | $ | 18,756,588 | ||||
Liabilities and Shareholder's Equity | |||||||
Current | |||||||
Accounts payable and accrued liabilities | $ | 536,229 | $ | 552,466 | |||
Income taxes payable | 358,783 | 87,284 | |||||
Current portion of long-term debt and capital leases (Note 6) | 44,079 | 21,913 | |||||
Promissory note in default (Note 4) | 9,542,586 | 11,442,046 | |||||
10,481,677 | 12,103,709 | ||||||
Liabilities subject to compromise (Note 5) | 2,386,116 | 2,256,708 | |||||
Deferred income taxes (Note 9) | 751,702 | 534,957 | |||||
Long-term debt and capital leases (Note 6) | 125,821 | 72,151 | |||||
13,745,316 | 14,967,525 | ||||||
Shareholder's equity | |||||||
Share capital (Note 7) | 87 | 87 | |||||
Retained earnings | 3,823,674 | 3,160,607 | |||||
Other comprehensive income | 601,837 | 628,369 | |||||
4,425,598 | 3,789,063 | ||||||
$ | 18,170,914 | $ | 18,756,588 |
On behalf of the Board:
________________________________ Director
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements.
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Interactive Nutrition International Inc.
Statements of Operations
(in U.S. dollars)
For the year ended December 31 | 2006 | 2005 | |||||
Sales | $ | 13,576,635 | $ | 13,126,320 | |||
Cost of sales | 9,904,147 | 9,701,968 | |||||
3,672,488 | 3,424,352 | ||||||
Operating expenses | |||||||
Selling, general and administrative | 1,549,058 | 1,436,497 | |||||
Interest expense | 864,633 | 857,093 | |||||
2,413,691 | 2,293,590 | ||||||
Income from operations | 1,258,797 | 1,130,762 | |||||
Receivership items (Note 8) | 124,363 | 101,790 | |||||
Income for the year before income taxes | 1,134,434 | 1,028,972 | |||||
Income taxes (Note 9) | |||||||
Current | 247,607 | 24,788 | |||||
Deferred | 223,760 | 391,943 | |||||
471,367 | 416,731 | ||||||
Net income for the year | 663,067 | 612,241 | |||||
Other comprehensive income (loss) | |||||||
Foreign exchange translation | (26,532 | ) | 131,106 | ||||
Comprehensive income | $ | 636,535 | $ | 743,347 |
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements.
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Interactive Nutrition International Inc.
Statements of Shareholder's Equity
(in U.S. dollars)
For the year ended December 31, 2006 | |||||||||||||
Other | Total | ||||||||||||
Common | Retained | Comprehensive | Shareholder's | ||||||||||
Stock | Earnings | Income (Loss) | Equity | ||||||||||
Balances, December 31, 2004 | $ | 84 | $ | 2,548,366 | $ | 497,263 | $ | 3,045,713 | |||||
Net income | - | 612,241 | - | 612,241 | |||||||||
Foreign currency translation | 3 | - | 131,106 | 131,109 | |||||||||
Balances, December 31, 2005 | 87 | 3,160,607 | 628,369 | 3,789,063 | |||||||||
Net income for the year | - | 663,067 | - | 663,067 | |||||||||
Foreign currency translation | - | - | (26,532 | ) | (26,532 | ) | |||||||
Balances, December 31, 2006 | $ | 87 | $ | 3,823,674 | $ | 601,837 | $ | 4,425,598 |
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements.
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Interactive Nutrition International Inc.
Statements of Cash Flows
(in U.S. dollars)
For the year ended December 31 | 2006 | 2005 | |||||
Cash flows from operating activities | |||||||
Net income for the year | $ | 663,067 | $ | 612,241 | |||
Adjustments for | |||||||
Depreciation of property and equipment | 223,170 | 221,077 | |||||
Deferred income taxes | 223,760 | 391,943 | |||||
1,109,997 | 1,225,261 | ||||||
Changes in non-cash working capital items | |||||||
Accounts receivable | (349,227 | ) | (332,327 | ) | |||
Income taxes payable | 271,499 | 61,216 | |||||
Inventories | 153,884 | 231,538 | |||||
Prepaid expenses | 96,256 | (76,821 | ) | ||||
Accounts payable and accrued liabilities | (16,237 | ) | 279,891 | ||||
1,266,172 | 1,388,758 | ||||||
Cash flows from investing activities | |||||||
Additions to property and equipment | (30,620 | ) | (191,375 | ) | |||
Cash flows from financing activities | |||||||
Decrease of promissory note in default | (1,899,460 | ) | (1,370,895 | ) | |||
Increase in liabilities subject to compromise | 129,408 | 143,782 | |||||
Proceeds from long-term debt obligations | - | 44,449 | |||||
Payments on long-term debt and capital lease obligations | (41,836 | ) | (10,623 | ) | |||
(1,822,298 | ) | (1,474,851 | ) | ||||
Effect of exchange rate changes on cash | (10,410 | ) | (281,564 | ) | |||
Decrease in cash during the year | (586,746 | ) | (277,468 | ) | |||
Cash and equivalents, beginning of year | 937,569 | 1,215,037 | |||||
Cash and equivalents, end of year | $ | 350,823 | $ | 937,569 |
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements.
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Interactive Nutrition International Inc.
Summary of Significant Accounting Policies
(in U.S. dollars)
December 31, 2006
Nature of Business and Receivership Status | The company is incorporated under the laws of Canada and is a manufacturer of quality sport nutrition and health food products. | |
On December 13, 2004, the Company was placed in receivership as a secured creditor exercised its contractual right to appoint a receiver pursuant to a general security agreement dated March 31, 2004. | ||
The properties subject to the general security agreement are: inventory, equipment, motor vehicles, accounts and book debts, contractual rights and insurance claims, and intellectual property (patents, industrial designs and trade marks). | ||
The plan of action of the Receiver during its appointment is to continue the Company's operation and contact parties that may be interested in acquiring the Company's assets, as a going concern. | ||
Financial Statement Presentation and Going Concern Issues | These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), using the same accounting principles as applied by the Company prior to the receivership except as described below under the heading Accounting policies applicable to an entity in receivership. While the Company is in receivership, these financial statements continue to be prepared using the going concern concept, which assumes that the Company will be able to realize its assets and discharge its post-receivership liabilities in the normal course of business for the foreseeable future. | |
The company is profitable and is able to generate sufficient cash flows to make repayments against the promissory note in default and it is the Receiver's intention to operate the business. Management believes that these actions make the going concern basis appropriate. However, it is not possible to predict whether the corporation will be able to continue as a going concern once it emerges from receivership as the unsecured pre-receivership payables will become due. If the going concern basis is not appropriate, adjustments may be necessary to the carrying amounts and/or classification of assets and liabilities, and expenses in these financial statements. | ||
Reporting Currency | Although the company is located in Canada, its parent company is based in the United States and requires the financial statements to be presented in U.S. currency. |
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Interactive Nutrition International Inc.
Summary of Significant Accounting Policies
(in U.S. dollars)
December 31, 2006
Accounting Policies Applicable to an Entity in Receivership | As a result of the receivership as described above, the Company has followed accounting policies, including disclosure items, applicable to entities that are under creditor protection. The Company is applying the guidance in the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" (SOP 90-7). While SOP 90-7 refers specifically to companies under Chapter 11, its guidance, in management's view, is also applicable to this entity in receivership as it is profitable, expected to be sold as a going concern and provides the most appropriate information to the users of the financial statements. | |
SOP 90-7 requires that the financial statements for periods subsequent to the receivership distinguish transactions and events that are directly associated with the receivership from the ongoing operations of the business. Revenues, expenses, gains and losses, and provision for losses that can be directly associated with the receivership are reported separately as Receivership items (see Note 8). Receivership items are expensed as incurred. Cash flows related to Receivership items have been disclosed separately in Note 8. | ||
While payments may not be made on liabilities subject to compromise, interest on debt obligations will continue to be recognized. Interest is not a Receivership item. The balance sheet distinguishes pre-receivership liabilities subject to compromise from both other pre-receivership liabilities that are not subject to compromise and from post-receivership liabilities (see Note 5). Liabilities are recorded at the amount allowed, even if they may be settled for lesser amounts. | ||
SOP 90-7 has been applied effective December 13, 2004, and for subsequent reporting periods while the Company continues to operate in receivership. | ||
Use of Estimates | The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. | |
Financial Instruments | The Company's financial instruments, when valued using market interest rates, would not be materially different from the amounts presented in the financial statements. |
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Interactive Nutrition International Inc.
Summary of Significant Accounting Policies
(in U.S. dollars)
December 31, 2006
Inventories | Labels, packaging and raw materials are stated at the lower of cost or market. Cost is determined using the moving average cost method. | |
Finished goods are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. | ||
Advertising Costs | Advertising costs, including cooperative advertising payments to retailers, are charged to expense in the period that the advertising first takes place. | |
Shipping Costs | Shipping costs associated with the distribution of finished product to our customers are recorded as selling, general and administrative expense and are recognized when the related finished product is shipped to the customer. | |
Research and Development | All expenditures for research and development are charged against earnings in the year incurred. | |
Intangible Assets | Intangible assets primarily consist of patents, trademarks and trade secrets. All intangible assets have an indefinite life and are carried at cost. The impairment evaluation of the carrying amount of intangible assets with indefinite lives is conducted annually, or more frequently if events or changes in circumstances indicate that an asset might be impaired. An impairment loss would be recognized when fair value is less than the carrying amount of the intangible, measured as the excess of the carrying amount of the intangible over its fair value. | |
Income Taxes | Deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. | |
Property and Equipment | Property and equipment are recorded at cost. Depreciation is based on the estimated useful life of the asset and is provided as follows: |
Manufacturing equipment | 20% | diminishing balance basis | |
Furniture and office equipment | 20% | diminishing balance basis | |
Computer equipment | 45% | diminishing balance basis | |
Computer software | 100% | diminishing balance basis | |
Leasehold improvements | 5 year straight-line basis |
One-half of the above rates is used in the year of acquisition. |
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Interactive Nutrition International Inc.
Summary of Significant Accounting Policies
(in U.S. dollars)
December 31, 2006
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows from the operation and disposition of the assets are less than the carrying amount of the assets. Measurement of an impairment loss would be based on the excess of the carrying amount of the assets over their fair value. Fair value is measured using discounted cash flows or independent appraisals as appropriate. | ||
Revenue recognition | Revenue is recognized upon acceptance of the shipment by the customer. Sales are reported net of customer rebates and estimated returns. | |
Foreign Exchange | The Company considers the local currency as its functional currency. The results of operations are translated in U.S. dollars using average exchange rates each month. Assets and liabilities are translated at the rate of exchange in effect at the balance sheet date, and differences from historical exchange rates are reflected within accumulated other comprehensive income in shareholders' equity as cumulative translation adjustments. |
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Interactive Nutrition International Inc.
Notes to Financial Statements
(in U.S. dollars)December 31, 2006
1. Accounts Receivable
2006 | 2005 | ||||||
Trade accounts | $ | 1,981,856 | $ | 1,608,648 | |||
Other | 4,315 | 29,199 | |||||
Less: Allowance for doubtful accounts | (144,587 | ) | (158,362 | ) | |||
Less: Allowance for sales returns | (12,872 | ) | - | ||||
$ | 1,828,712 | $ | 1,479,485 |
2. Inventories
2006 | 2005 | ||||||
Labels and packaging | $ | 593,217 | $ | 545,175 | |||
Raw materials | 1,418,815 | 1,698,106 | |||||
Finished goods | 190,634 | 113,269 | |||||
$ | 2,202,666 | $ | 2,356,550 |
3. Property and Equipment
2006 | 2005 | ||||||||||||||||||
Cost | Accumulated Depreciation | Net Book Value | Cost | Accumulated Depreciation | Net Book Value | ||||||||||||||
Manufacturing equipment | $ | 1,126,561 | $ | 421,127 | $ | 705,434 | $ | 990,640 | $ | 261,824 | $ | 728,816 | |||||||
Furniture and office equipment | 97,532 | 38,418 | 59,114 | 93,533 | 24,211 | 69,322 | |||||||||||||
Computer equipment | 61,581 | 42,837 | 18,744 | 58,603 | 28,823 | 29,780 | |||||||||||||
Computer software | 16,887 | 15,926 | 961 | 15,476 | 15,476 | - | |||||||||||||
Leasehold improvements | 139,469 | �� | 42,548 | 96,921 | 139,745 | 13,974 | 125,771 | ||||||||||||
$ | 1,442,030 | $ | 560,856 | $ | 881,174 | $ | 1,297,997 | $ | 344,308 | $ | 953,689 |
During the year, manufacturing equipment at an aggregate cost of $116,745 were acquired by means of capital leases.
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Interactive Nutrition International Inc.
Notes to Financial Statements
(in U.S. dollars)December 31, 2006
3. Property and Equipment (continued)
Manufacturing equipment held under capital leases of $162,933 (2005 - $46,280) and related accumulated depreciation of $24,608 (2005 - $4,628) are included in the cost and accumulated depreciation of manufacturing equipment respectively. Depreciation expense for the year includes $20,535 (2005 - $4,444) of depreciation for manufacturing equipment under capital leases.
Furniture and office equipment held under capital leases of $10,971 (2005 - $10,993) and related accumulated depreciation of $3,072 (2005 - $1,099) are included in the cost and accumulated depreciation of furniture and office equipment respectively. Depreciation expense for the year includes $2,029 (2005 - $1,056) of depreciation for furniture and fixtures under capital leases.
4. Promissory Note in Default
The promissory note in default ("debt") represents the amount owing to the secured creditor who appointed the Receiver. The debt was not included in the liabilities subject to compromise as the value of the security (the Company) is greater than the amount owed. The Company defaulted on the debt as of July 22, 2004. As a result, the unpaid principal balance together with interest became due on that date. The debt accrues interest at a rate of the Commercial Royal Bank of Canada prime plus 2% since the date of default.
During the year, repayments to the secured creditor were $2,644,699 (2005 - $2,476,463) and interest accrued on the outstanding balance was $716,540 (2005 - $747,712).
5. Liabilities Subject to Compromise
Liabilities subject to compromise refers to unsecured liabilities incurred prior to the receivership date as included in the list of unsecured creditors as of December 12, 2004. The Company continues to accrue for interest on income taxes payable that is subject to compromise but no interest has been paid subsequent to the date of filing.
2006 | 2005 | ||||||
Accounts payable and accrued liabilities | $ | 686,122 | $ | 686,775 | |||
Income taxes payable | 1,699,994 | 1,569,933 | |||||
$ | 2,386,116 | $ | 2,256,708 |
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Interactive Nutrition International Inc.
Notes to Financial Statements
(in U.S. dollars)December 31, 2006
6. Long-Term Debt and Capital Leases
The long-term debt and capital leases came into effect after the receivership date and are as follow:
Long-Term Debt | |||||||
2006 | 2005 | ||||||
Due to Connelly Properties, non-interest bearing, repayable in monthly instalments of $1,013, unsecured, due April 2009 | $ | 28,364 | $ | 40,601 | |||
Less: Current portion | 12,156 | 12,180 | |||||
$ | 16,208 | $ | 28,421 |
Principal repayments required over the next three years to retire the debt are as follows:
2007 | $ | 12,156 | ||
2008 | 12,156 | |||
2009 | 4,051 | |||
$ | 28,363 |
Capital Leases
The following table summarizes, as of December 31, 2005, the minimum rental commitments under capital leases with initial terms in excess of one year. The leases have a remaining term of 5 years.
2007 | $ | 42,007 | ||
2008 | 42,007 | |||
2009 | 42,007 | |||
2010 | 36,515 | |||
2011 | 2,325 | |||
Total minimum lease payments | 164,861 | |||
Less: Imputed interest ranging from 7.48% to 9.75% | 23,325 | |||
Present value of minimum capital lease payments | 141,536 | |||
Less: Current portion | 31,923 | |||
$ | 109,613 |
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Interactive Nutrition International Inc.
Notes to Financial Statements
(in U.S. dollars)December 31, 2006
7. Share Capital
Authorized | ||
Unlimited | Number of Class A common shares, voting | |
Unlimited | Number of Class B common shares, non-voting | |
Unlimited | Number of Class C non-cumulative, variable, non-voting, redeemable and retractable preference shares at the price equal to the amount paid per share plus any declared and unpaid dividends | |
Unlimited | Number of Class D cumulative, variable, non-voting, retractable preference shares at the price equal to the amount paid per share plus any declared and unpaid dividends |
2006 | 2005 | ||||||
Issued | |||||||
101 Class A common shares | $ | 87 | $ | 87 |
8. Receivership Items
Receivership items relating to continuing operations represent post-receivership revenues, expenses, gains and losses, and provision for losses that can be directly associated with the receivership of the Company. The following represent the receivership items included in the Statement of Operations:
2006 | 2005 | ||||||
Professional fees | $ | 124,363 | $ | 101,790 |
The cash flow associated with receivership items are the following: |
Professional fees | $ | 124,363 | $ | 101,790 |
9. Income Taxes
The current income tax expense differs from the amount calculated using statutory provincial and federal rates applied to the accounting net income due to the cumulative eligible capital deduction for taxes (2005 - the cumulative eligible capital deduction for taxes and the use of operating loss carryforwards during the year).
The significant temporary differences that give rise to deferred tax liabilities are property and equipment and intangible assets.
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Interactive Nutrition International Inc.
Notes to Financial Statements
(in U.S. dollars)December 31, 2006
10. Related Party Transactions
The Company and the secured creditor are considered related parties as they are under common control due to the receivership.
During the year, the Company paid $2,644,699,300 (2005 - $2,476,463) to the secured creditor as payments against the promissory note in default (see Note 4).
During the year, the Company paid $331,981 (2005 - $289,894) to the secured creditor for leasing the building and warehouse.
The transactions are conducted on the same terms and at similar prices as transactions with unrelated parties.
11. Market Risks
As part of the ongoing business operations, the Company is exposed to market risks such as foreign currency exchange rates, commodity prices and concentration risks.
Foreign Exchange Transaction Risk
The Company is exposed to fluctuations in foreign currency cash flows related primarily to third-party purchases and sales. The primary Canadian dollar exchange rate exposure is with the U.S. dollar.
Commodity Price Risk
The Company is exposed to price fluctuations primarily as a result of anticipated purchases of ingredients. The principal raw material that is used in the manufacturing of products is whey protein.
Credit Risk
At December 31, 2006, one customer account made up 55% (2005 - 58%) of the total trade accounts balance.
Concentration Risk
Sales to the largest customer for the fiscal period accounted for approximately 56% (2005 - 64%) of total sales.
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Interactive Nutrition International Inc.
Notes to Financial Statements
(in U.S. dollars)December 31, 2006
12. Commitments
The Company leases its building and warehouse at a current minimum annual cost of $272,784. The Company is also responsible for its share of property tax, maintenance and utility costs on the warehouse lease. The leases expire on April 30, 2009.
Future minimum payments under the building and warehouse leases described above, on a fiscal year basis are as follows:
2007 | $ | 280,527 | ||
2008 | 285,194 | |||
2009 | 95,065 | |||
$ | 660,786 |
13. Supplemental Information
2006 | 2005 | ||||||
Shipping costs | $ | 138,033 | $ | 178,776 | |||
Advertising | $ | 139,796 | $ | 155,556 | |||
Depreciation | $ | 223,170 | $ | 221,077 |
14. United States and Canadian Accounting Policy Differences
There are no material differences between the financial statements prepared in accordance with accounting principles generally accepted in the United States of America and the financial statements, if they had been prepared in accordance with Canadian generally accepted accounting principles using early adoption of Section 1530 - Comprehensive income. As a result, a reconciliation to Canadian generally accepted accounting principles is not prepared.
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