UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 2012
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to __________
Commission file number: 333-127915
VITAL PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 98-0464272
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
245 DRUMLIN CIRCLE, CONCORD ONTARIO, CANADA L4K 3E4
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(Address of principal executive offices)
(905) 482-0200
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(Section 232.405 of this chapter) during the preceding 12 months (or such
shorter period that the registrant was required to submit and post such
files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"small reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated filer [ ] Accelerated filer [ ]
Non-Accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of March 16, 2012, the Issuer had 296,457 shares of common stock
issued and outstanding, par value $0.0001 per share.
2
VITAL PRODUCTS, INC
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 2012
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements..................................F1
Consolidated Balance Sheets as of January 31, 2012 (unaudited) and
July 31, 2011 (audited)..................................................F1
Consolidated Statements of Operations and Comprehensive Loss for
the three and six months ended January 31, 2012 and 2011 (unaudited)......F2
Consolidated Statements of Cash Flows for the six months ended
January 31, 2012 and 2011 (unaudited)....................................F3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................F4 - F9
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................4
Item 3 - Quantitative and Qualitative Disclosures About Market Risk..........8
Item 4T - Controls and Procedures............................................9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings...................................................9
Item 1A - Risk Factors.......................................................9
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds........10
Item 3 - Defaults Upon Senior Securities....................................10
Item 4 - Submission of Matters to a Vote of Security Holders................10
Item 5 - Other Information..................................................10
Item 6 - Exhibits...........................................................10
3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Vital Products Inc.
CONSOLIDATED BALANCE SHEETS
January 31, 2012 July 31, 2011
(Unaudited) (Audited)
_______________ ____________
ASSETS
Current assets
Cash $ 44 $ 3,869
Accounts receivable 9,118 9,989
Inventory 3,315 4,572
Due from related party 2,337 2,453
_______________ ____________
Total current assets 14,814 20,833
_______________ ____________
Total assets $ 14,814 $ 20,833
=============== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued
liabilities $ 64,409 $ 69,904
Accounts payable and accrued
liabilities ' related party 181,691 173,224
Advances 48,511 -
Convertible notes payable, net of
unamortized debt discount of $82,098
and $68,394 at January 31, 2012 and
July 31, 2011,respectively 331,470 298,026
Advances from related parties 147,413 174,909
_______________ ____________
Total current liabilities 773,494 716,063
_______________ ____________
Total liabilities 773,494 716,063
_______________ ____________
Stockholders' deficit
Preferred Stock; $0.01 par value;
authorized undesignated 900,000
shares, no shares issued and
outstanding
Series A Convertible Preferred Stock;
$0.01 par value;100,000 shares
authorized, 40,000 and 40,000 issued
and outstanding, respectively 400 400
Common stock; $0.0001 par value;
1,000,000,000 shares authorized and
296,457 and 296,457 issued and
outstanding, respectively 30 30
Additional paid-in-capital 3,656,482 3,656,482
Accumulated other comprehensive income 64,541 32,853
Accumulated deficit (4,480,133) (4,384,945)
_______________ ____________
Total stockholders' deficit (758,680) (695,180)
_______________ ____________
Total liabilities and stockholders' deficit $ 14,814 $ 20,883
=============== ============
See Accompanying Notes to Consolidated Financial Statements.
F1
Vital Products Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
For the For the For the For the
three months three months nine months nine months
ended September 30, ended September 30 ended September 30, ended September 30
2012 2011 2012 2011
=============== ============== ============== ==============
Sales $ 5,791 $ 365,668 $ 10,425 $ 766,862
Cost of sales 4,677 254,669 7,431 583,502
--------------- -------------- -------------- ---------------
Gross profit 1,114 110,999 2,994 183,360
--------------- -------------- -------------- ---------------
Operating expenses
Selling, general and
administrative 28,429 101,822 50,559 227,873
Consulting - (41) - 14,486
Depreciation - 1,361 - 2,718
--------------- -------------- -------------- ---------------
Total expenses 28,429 103,142 50,559 245,077
--------------- -------------- -------------- ---------------
Net operating loss (27,315) 7,857 (47,516) (61,717)
Other income (loss)
Financing costs (37,592) (41,760) (73,048) (91,665)
Gain on settlement of
debt 35,600 10,000 40,400 10,000
Gain (loss) on currency
exchange rate (2,795) 3,018 (14,975) 5,369
--------------- -------------- -------------- ---------------
Net loss for the period (32,102) (20,885) (95,188) (138,013)
Net loss attributed to
non-controlling interest - (37,757) - (20,621)
--------------- -------------- -------------- ---------------
Net loss attributable to
Vital Products Inc. (32,102) (58,642) (95,188) (158,634)
Other comprehensive income
(loss)
Foreign currency
translation adjustment 3,730 (2,737) 31,688 (6,229)
--------------- -------------- -------------- ---------------
Comprehensive loss $ (28,372) $ (61,379) (63,500) (164,863)
=============== ============== ============== ===============
Net loss attributable to
Vital Products Inc. per
common share, basic $ (0.11) $ (0.55) $ (0.32) $ (2.75)
=============== ============== ============== ===============
Weighted average number
of common shares
outstanding ' basic 296,457 107,409 296,457 57,735
=============== ============== ============== ===============
See Accompanying Notes to Consolidated Financial Statements.
F2
Vital Products Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six For the six
months ended months ended
January 31, January 31
2012 2011
------------- ------------
Cash flows from operating activities
Net loss attributable to Vital Products Inc. $ (95,188) $ (158,634)
Adjustments to reconcile net loss
to cash used in operating activities
Non-controlling interest - 20,621
Depreciation - 2,718
Accretion of debt discount
and interest expense 73,048 91,665
Loss on currency exchange 14,975 (5,369)
Gain on settlement of debt (40,400) (10,000)
Change in operating assets and liabilities
Accounts receivable 398 34,231
Inventory 1,032 (12,666)
Prepaid expenses - 3,458
Accounts payable and
accrued liabilities 7,301 (39,714)
Accounts payable to a related party (21,781) -
Advances from related parties - 8,015
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Net cash used in operating activities (31,809) (65,675)
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Cash flow from financing activities
Advance on bank overdraft - (2,951)
Advances from related parties 48,511 -
Payments on related party advances (19,300) -
Proceeds from convertible notes payable - 59,000
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Net cash provided by financing activities 29,211 56,049
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Foreign currency translation effect (1,227) 11,232
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Net change in cash (3,825) 1,607
Cash, beginning of the period 3,869 395
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Cash, end of the period $ 44 $ 2,002
============= ============
Supplemental disclosure of non-cash
investing and financing activities
Issuance of common stock for
conversion of promissory note $ - $ 26,121
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Beneficial conversion feature $ - $ 29,546
============= ============
See Accompanying Notes to Consolidated Financial Statements.
F3
VITAL PRODUCTS, INC.
Notes to Consolidated Financial Statements
January 31, 2012 and 2011
(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, 2011 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
January 31, 2012 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.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Liquidity and Going Concern
During the six months ended January 31, 2012 and 2011, the Company incurred
losses of $95,188 and $138,013, respectively, and cash used in operations
was $31,809 and $65,675, respectively. The Company financed its operations
through loans payable, advances from related parties and vendors' credit.
Management believes that the current cash balances at January 31, 2012 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.
F4
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
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
The Company determined the functional currency to be the Canadian dollar
and, accordingly, our financial information is 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.
F5
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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.
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 L. Burke, 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.
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.
NOTE 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.
F6
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
RECENT ACCOUNTING PRONOUNCEMENTS
There have been no recent accounting pronouncements or changes in accounting
pronouncements that impacted the second 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 ' For the six months period ended January 31, 2011
our consolidated statement of operations and comprehensive loss recognizes
sales of $766,862, cost of sales of $583,502 and selling, general and
administrative expenses of $227,873 related to our interest in Den Packaging
Corporation for the period from August 1, 2010 to January 31, 2011.
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 all of the assets and liabilities of
Den Packaging from its consolidated financial statements at their carrying
values.
NOTE 4 - NOTES PAYABLE TO THE CELLULAR CONNECTION LTD. AND LARRY BURKE
Original January 31, July 31
Date of Issuance Maturity Date 2012 2011
---------------- ------------- -------- ---------
Promissory Note 3 June 12, 2009 June 11, 2012 $ 31,680 $ 31,680
Promissory Note 4 November 18, 2009 November 17, 2012 36,000 30,000
Promissory Note 5 March 26, 2010 March 25, 2012 12,000 12,000
Promissory Note 6 June 29, 2010 June 28, 2012 12,000 12,000
Promissory Note 7 May 27, 2010 May 26, 2012 44,400 44,400
Promissory Note 8 September 28, 2010 September 27, 2012 14,400 12,000
Promissory Note 9 November 29, 2010 November 28, 2012 58,800 49,000
Promissory Note 10 December 10, 2010 December 9, 2012 12,000 10,000
Promissory Note 11 February 25, 2011 February 24, 2012 5,200 5,200
Promissory Note 12 April 7, 2011 April 6, 2012 32,000 32,000
Interest 32,440 25,844
Accretion 40,550 33,902
--------- --------
$ 331,470 $ 298,026
========= =========
F7
As of January 31, 2012 and July 31, 2010 notes payable are recorded net of
unamortized debt discount of $82,098 and $68,394, respectively.
On September 28, 2011, Promissory Note 8 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 $4,800 gain.
On November 18,2011, 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 $12,000 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.
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.
NOTE 5 ' ADVANCES
Advances are non-interest bearing, unsecured and have no-specific terms of
repayment.
NOTE 6 - RELATED PARTY BALANCES AND TRANSACTIONS
For the six months ended January 31, 2012 and 2011, the Company had rent
expenses totaling $17,950 and $17,973, respectively and as of January 31, 2012
and July 31, 2011 advances of $42,305 and $64,597, respectively, and
outstanding payables totaling $181,691 and $173,224, respectively, with a
vendor to 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.
As of January 31, 2012 and July 31, 2011 the Company had advances of $105,108
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.
F8
NOTE 7 ' SUBSEQUENT EVENTS
On February 24, 2012, the Company agreed to amend the terms of Promissory
Notes 3, 4, 5, 6, 8, 10 and 11 (See Note 4 - Notes Payable to Cellular
Connection, Ltd. and L. Burke) issued to the Cellular Connection Ltd. Under
the terms of the Side Letter Agreement, the Promissory Notes were combined into
one new Promissory Note with an issue amount of $147,936 and face amount of
$177,523. The conversion feature of the new Promissory Note was amended to 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 the new Promissory Note 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.
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.
F9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains "forward-looking statements" that involve
risks and uncertainties. You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in the forward-looking statements for many reasons, including
the risks described in our Form 10-K filed November 14, 2011, for the year
ended July 31, 2011, and other filings we make with the Securities and Exchange
Commission. Although we believe the expectations reflected in the
forward-looking statements are reasonable, they relate only to events as of
the date on which the statements are made. We do not intend to update any of
the forward-looking statements after the date of this report to conform these
statements to actual results or to changes in our expectations, except as
required by law.
The following discussion and analysis of financial condition and results of
operations is based upon, and should be read in conjunction with our audited
financial statements and related notes thereto included elsewhere in this
report, and in our Form 10-K filed November 14, 2011, for the year ended
July 31, 2011.
OVERVIEW
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.
There were no material assets or revenues that relate to the discontinued
Childcare Division.
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 expect that DLW will 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, 2010.
4
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, 2010.
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, 2010, we have limited production of
the new paper packaging product.
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 had 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. Total fees earned by Den Packaging Corporation as a result of
the License Agreement for the three months ended January 31, 2012 and 2011 is
$0 and $25,461, respectively. The Company is responsible for all expenses that
relate to sales generated under the License Agreement. The duration of the
agreement was 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
would immediately stop the use of the facilities as described.
The Company had determined that Den Packaging is a Variable Interest Entity
and that Vital Products, Inc. was the primary beneficiary. As such, Den
Packaging Corporation was consolidated into the Company's financial
statements.
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 all of the assets and liabilities of
Den Packaging from its consolidated financial statements at their carrying
values.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements and related disclosures
in conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Estimates are used for, but not limited to, the accounting for the
allowance for doubtful accounts, inventories, impairment of long-term
assets, income taxes and loss contingencies. Management bases its estimates
on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances. Actual results could differ from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies, among others, may be
impacted significantly by judgment, assumptions and estimates used in the
preparation of the consolidated financial statements.
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FOREIGN CURRENCY TRANSLATION
We consider the functional currency to be the local currency being Canadian
dollars and, accordingly, our financial information is translated into U.S.
dollars using exchange rates in effect at year-end for assets and liabilities
and average exchange rates during each reporting period for the results of
operations. Adjustments resulting from translation of foreign exchange are
included as a component of other comprehensive income (loss) within
stockholders' deficit. Significantly all of our operations are located in
Canada. Operational foreign exchange gains or losses from transacting in
foreign currencies are recognized through the statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") as modified by Securities and Exchange Commission Staff
Accounting Bulletin No. 104. Under SAB 101,which was primarily codified into
Topic 605 Revenue Recognition SEC Staff Accounting Bulletin Topic 13 in the
Accounting Standards Codification, 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
discounts and returns.
COMPREHENSIVE INCOME
The Company has adopted Topic 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, ASC 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
consolidated financial statements. Comprehensive income is displayed in the
statement of stockholders' deficit and in the balance sheet as a component of
stockholders' deficit.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
There have been no recent accounting pronouncements or changes in accounting
pronouncements that impacted the second quarter of fiscal 2012, or which are
expected to impact future periods, that were not already adopted and disclosed
in prior periods.
RESULTS OF OPERATIONS
COMPARISON OF RESULTS FOR THREE AND SIX MONTHS ENDED JANUARY 31, 2012 AND 2011
REVENUES:
We had revenues of $5,791 and $10,425 for the three and six months ended
January 31, 2012, as compared to revenues of $365,668 and $766,862 for the
three and six months ended January 31, 2011. The decrease in revenues was
primarily the result of termination of the License Agreement with Den Packaging
Corporation on May 1, 2011. The Company determined that it lost control of Den
Packaging effective May 1, 2011. As such, the Company derecognized the assets
and liabilities of Den Packaging from its consolidated financial statements at
their carrying values.
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COST OF SALES:
Our cost of sales for the three and six months ended January 31, 2012 was
$4,677 and $7,431, compared to $254,669 and $583,502 for the three and six
months ended January 31, 2011. The decrease in cost of sales was directly
related to decrease in sales associated with the termination of the License
Agreement with Den Packaging Corporation on May 1, 2011.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Our selling, general and administrative and consulting costs were $28,429 and
$50,559 for the three and six months ended January 31, 2012, compared to
$101,822 and $227,873 for the three and six months ended January 31, 2011.
The decrease in selling, general and administrative expenses was primarily
the result of the termination of the License Agreement with Den Packaging
Corporation.
NET LOSS:
Our net loss attributed to vital Products Inc. for the three and six months
ended January 31, 2012 was $32,102 and $95,188, compared to the net loss
attributed to Vital Products Inc. of $20,885 and $138,013 for the three and
six months ended January 31, 2011. The decrease of the net loss compared to
the prior period was primarily attributable to the termination of the License
Agreement with Den Packaging Corporation.
TOTAL ASSETS:
Our total assets as of January 31, 2012 were $14,814 a decrease of $6,019,
as compared to the fiscal year ended July 31, 2011 which was $20,833. Our total
liabilities as of January 31, 2012 were $773,494, an increase of $57,431, as
compared to $716,063 as of July 31, 2011. The increase in our total liabilities
compared to July 31, 2011 was primarily the result of the increased advances
from loans, related parties and vendors.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2012, we had total current assets of $14,814 and total
current liabilities of $773,494, resulting in a working capital deficit of
$758,680. At the end of the quarterly period ending January 31, 2012, we had
cash of $44. Our cash flow used in operating activities for the six months
ended January 31, 2012 is $31,809. Our current cash balance and cash flow
from operating activities will not be sufficient to fund our operations. Our
cash flow from financing activities for the six months ended January 31, 2012
was $29,211. We believe we will need to raise capital of approximately
$300,000 to $350,000 through either debt or equity instruments to fund our
operations for the next 12 months. However, we may not be successful in
raising the necessary capital to fund our operations. In addition to the
amounts needed to fund our operations, we will need to generate an additional
$500,000 to cover our current liabilities for the next 12 months.
As of January 31, 2012, we have $331,470 of convertible notes payable due to
The Cellular Connection Ltd. and Larry Burke. The initial
$258,480 advanced from The Cellular Connection, Ltd. and Larry Burke is the
aggregate amount due under ten convertible secured promissory notes with an
aggregate face amount of $310,176. Convertible notes payable are recorded on
our balance sheet net of debt discount of $82,098. We issued these notes to
The Cellular Connection Ltd. and Larry Burke during 2011, 2010 and 2009. The
carrying value of convertible notes payable of $331,470 includes accreted
interest totaling $72,990 and actual loan amount totaling $258,480.
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The convertible secured promissory notes accrue interest at a rate of
20% per year and have maturity dates as disclosed in Note 4 of the
consolidated financial statements for the period ended January 31, 2012.
The outstanding face amount of the convertible secured promissory notes
increase by 20% in 2011, by an additional 20% in 2012 and again on each
one year anniversary after 2012 until the notes have been paid in full.
The notes entitle the holder to convert the note, plus accrued interest,
any time prior to the maturity date, at 75% of the average of the lowest
closing bid price during the fifteen trading days immediately preceding
the conversion date.
Pursuant to the terms of the convertible secured promissory notes, The Cellular
Connection Ltd. may elect to secure a portion of our assets not to exceed 200%
of the face amount of the notes, including, but not limited to, accounts
receivable, cash, marketable securities, equipment, or inventory.
Until we are able to generate positive cash flows from operations in an amount
sufficient to cover our current liabilities and debt obligations as they become
due, if ever, we will remain reliant on borrowing funds or selling equity. We
intend to raise funds through the issuance of debt or equity. Raising funds in
this manner typically requires much time and effort to find accredited
investors, and the terms of such an investment must be negotiated for each
investment made. There is a risk that such additional financing may not be
available, or may not be available on acceptable terms, and the inability to
obtain additional financing or generate sufficient cash from operations could
require us to reduce or eliminate expenditures for capital equipment,
production, design or marketing of our products, or otherwise curtail or
discontinue our operations, which could have a material adverse effect on our
business, financial condition and results of operations. We may not be able
to raise sufficient funds to meet our obligations. If we do not raise
sufficient funds, our operations will be curtailed or will cease entirely and
you may lose all of your investment.
Further, to the extent that we raise capital through the sale of equity or
convertible debt securities, the issuance of such securities may result in
dilution to our existing stockholders. If we raise additional funds through
issuance of debt securities, these securities may have rights, preferences
and privileges senior to holders of our common stock and the terms of such
debt could impose restrictions on our operations. Regardless of whether our
cash assets prove to be adequate to meet our operational needs, we may seek
to compensate our service providers with stock in lieu of cash, which may also
result in dilution to existing stockholders.
OFF-BALANCE SHEET ARRANGEMENTS
As of January 31, 2012, we have no off-balance sheet arrangements that have or
are reasonably likely to have a current or future material effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a Smaller Reporting Company, as defined by Rule 12b-2 of the Exchange Act
and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure
reporting obligations and therefore are not required to provide the
information requested by this Item.
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ITEM 4T. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Our management evaluated, with the participation of our Chief Executive Officer
and our Chief Financial Officer, the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, as of the end of the period
covered by this quarterly report on Form 10-Q. Based on this evaluation, our
Chief Executive Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures are not effective to ensure that information
required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 (i) is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and (ii) is accumulated and communicated to our management, including
our Chief Executive Officer and our Chief Financial Officer, as appropriate
to allow timely decisions regarding required disclosure. Our disclosure
controls and procedures are designed to provide reasonable assurance that
such information is accumulated and communicated to our management. Our
disclosure controls and procedures include components of our internal control
over financial reporting. Management's assessment of the effectiveness of our
internal control over financial reporting is expressed at the level of
reasonable assurance that the control system, no matter how well designed
and operated, can provide only reasonable, but not absolute, assurance that
the control system's objectives will be met.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting that
occurred during the quarter ended January 31, 2012 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We may be involved from time to time in ordinary litigation, negotiation and
settlement matters that will not have a material effect on our operations or
finances. We are not aware of any pending or threatened litigation against
our Company or our officers and directors in their capacity as such that could
have a material impact on our operations or finances.
ITEM 1A. RISK FACTORS
WE NEED EXTERNAL FUNDING TO SUSTAIN AND GROW OUR BUSINESS AND IF WE CANNOT
FIND THIS FUNDING ON ACCEPTABLE TERMS, WE MAY NOT BE ABLE TO IMPLEMENT OUR
BUSINESS PLANS AND THEREFORE MAY HAVE TO CEASE OUR OPERATIONS
We may not be able to generate sufficient revenues from our existing
operations to fund our capital requirements. At the end of the quarterly
period ending January 31, 2012, we had a cash balance of $44. We will
require additional funds to enable us to operate profitably and grow our
business. We believe we will need $300,000 to $350,000 to run our business
for the next twelve months. In addition to the amounts needed to fund our
operations, we will need to generate an additional $500,000 to cover our
current liabilities for the next 12 months.
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The financing we need may not be available on terms acceptable to us or
at all. We currently have no bank borrowings and we may not be able to
arrange any debt financing. Additionally, we may not be able to successfully
consummate offerings of stock or other securities in order to meet our
future capital requirements. If we cannot raise additional capital through
issuing stock or creating debt, we may not be able to sustain or grow our
business which may cause our revenues and stock price to decline.
WE HAVE ISSUED CONVERTIBLE SECURED PROMISSORY NOTES THAT ARE FULLY SECURED BY
OUR ASSETS AND IF WE ARE UNABLE TO PAY THE NOTES ON THE MATURITY DATES WE MAY
HAVE TO CEASE OPERATIONS
We have outstanding ten convertible secured promissory notes to The Cellular
Connection Ltd. and Larry Burke that bear interest at 20% per annum and have
maturity dates beginning on January 31, 2012. As of January 31, 2012 we had
$331,470 due under the note issuances to The Cellular Connection and Larry
Burke and we may not be able to make payments under the notes when due. The
holders of the notes also have the right to convert the notes plus accrued
interest into shares of our common stock at any time prior to the maturity
dates. If the holders elect to convert the notes this will further dilute
the equity interests of existing shareholders.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended January 31, 2012, we did not sell any unregistered
securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the quarter ended January 31, 2012, we did not have any defaults upon
senior securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended January 31, 2012, we did not submit any matters to a
vote of security holders.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
Exhibit Number Description of Exhibit
3.1 Certificate of Incorporation (included as exhibit 3.1 to the Form SB-2
filed August 29, 2005 and incorporated herein by reference).
3.2 By-laws (included as exhibit 3.2 to the Form SB-2 filed August 29, 2005
and incorporated herein by reference).
4.1 Form of Stock Certificate (included as exhibit 4.1 to the Form SB-2
filed October 26, 2006 and incorporated herein by reference).
4.2 Certificate of Designation of Preferences, Rights and Limitations of
Series A Convertible Preferred Stock, dated April 20, 2009 (included as
exhibit 4.1 to the Form 8-K filed April 24, 2009 and incorporated herein
by reference).
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10.1 Asset Sale Agreement between the Company and On The Go Healthcare, Inc.
dated July 5, 2005 (included as exhibit 10.3 to the Form SB-2 filed
August 29, 2005 and incorporated herein by reference).
10.2 Secured Promissory Note between the Company and On The Go Healthcare,
Inc. dated February 23, 2006 (included as exhibit 10.2 to the Form SB-2
filed February 24, 2006 and incorporated herein by reference).
10.3 Secured Promissory Note between the Company and On The Go Healthcare,
Inc. dated February 23, 2006 (included as exhibit 10.3 to the Form SB-2
filed February 24, 2006 and incorporated herein by reference).
10.4 Secured Promissory Note between the Company and The Cellular Connection
Ltd. dated January 20, 2009 (included as exhibit 10.5 to the Form
10-Q filed March 20, 2009 and incorporated herein by reference).
10.5 Convertible Promissory Note between the Company and Metro One
Development, Inc. dated June 18, 2009 (included as exhibit 10.5 to the
Form 10-Q filed June 19, 2009 and incorporated herein by reference).
10.6 Secured Promissory Note between the Company and The Cellular Connection
Ltd. dated April 30, 2009 (included as exhibit 10.6 to the Form 10-Q
filed June 19, 2009 and incorporated herein by reference).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
31.1 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: March 16, 2012 Vital Products, Inc.
By:/s/ Michael Levine
--------------------------
Michael Levine
Principal Executive Officer
and Principal Accounting Officer
and Director
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