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                                UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549

                                  FORM 10-K

                                  (Mark One)

  [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934
                 For the fiscal year ended July 31, 2012.

  [ ] TRANSITION REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
                For the transition period from ________ to ________

                        Commission file number 333-127915

                               VITAL PRODUCTS, INC.
             (Name of small business issuer in its charter)

            DELAWARE                                  98-0464272
      ----------------------                         --------------
   (State or other jurisdiction of                 (I.R.S. Employer
     incorporation or organization)               Identification No.)


   2404 Via Mariposa West, 1-A, Laguna Woods, California                 92637
    (Address of principal executive offices)                     (Zip Code)

      Issuer's telephone number: (949) 306-3110

      Securities registered under Section 12(b) of the Exchange Act:

                                       NONE.

      Securities registered under Section 12(g) of the Exchange Act:

                                       NONE.


Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ]; No [X]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ]; No [X]

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 Website, if any, every Interactive Data file
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(section 229.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post
such files). Yes [ ]; No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]


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 definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ]; No [X] State the aggregate market value of the voting and non-voting common equity, consisting solely of common stock, held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter: $119,391 (based on a total of 298,478 shares of the registrant's common stock held by non-affiliates on January 31, 2012, at the closing price of $0.40 per share) The number of shares of outstanding common stock of the registrant as of October 29, 2012 was 579,298,478. Documents incorporated by reference: None. ---------------------------------------
VITAL PRODUCTS, INC. FORM 10-K TABLE OF CONTENTS PAGE NO. PART I ITEM 1. Business...............................................4 ITEM 1A. Risk Factors...........................................7 ITEM 2. Properties............................................10 ITEM 3. Legal Proceedings.....................................10 ITEM 4. Mine Safety Disclosures...............................10 PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities............................................11 ITEM 6. Selected Financial Data...............................12 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................12 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk...........................................17 ITEM 8. Financial Statements and Supplementary Data.....F1 - F21 ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...................18 ITEM 9A(T) Controls and Procedures...............................18 ITEM 9B. Other Information.....................................19 PART III ITEM 10. Directors, Executive Officers and Corporate Governance............................................20 ITEM 11. Executive Compensation................................22 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters............24 ITEM 13. Certain Relationships and Related Transactions, and Director Independence.................................25 ITEM 14. Principal Accounting Fees and Services................26 ITEM 15. Exhibits, Financial Statement Schedules...............27
PART I ITEM 1. BUSINESS HISTORICAL DEVELOPMENT We incorporated in the State of Delaware on May 27, 2005. We commenced business under the Vital Products name in June 2005, having purchased assets from Metro One Development, Inc. (formerly On The Go Healthcare, Inc.). In August 2008, we changed our business strategy and we intend to develop a business as a developer, marketer and distributor of eco-friendly industrial packaging products. OUR BUSINESS As of July 31, 2008, our sole business was to manufacture two products marketed to infants and toddlers under the "On The Go" name. As of July 31, 2008, these two products failed to produce enough revenue for us to cover our expenses. After evaluating the market for baby care products, we determined that the industry does not offer enough opportunity for a small company to create affordable products that can be introduced into distribution channels without significant expense. As a result, we decided not to invest further funds developing our baby products line. 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 reach as a developer of industrial packaging products. 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, 2010. 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 agreed to 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. 4
On January 13, 2009, we formally announced that we had commenced production of Biofill (TM), our bio-based foam packaging product, and on January 26, 2009, we received our first purchase order. On January 30, 2009, we received a second purchase order for our Biofill product from a major North American manufacturer. 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 this new paper packaging system. 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 has determined that Den Packaging is a Variable Interest Entity and that Vital Products, Inc. is the primary beneficiary. As such, Den Packaging Corporation has been 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 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. 5
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. EMPLOYEES As of July 31, 2012 we have no employees. CUSTOMERS The company currently has two customers. One customer represents 99% of the total outstanding accounts receivable and two customers represent 100% of total sales. 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. We are looking to expand our customer base in the United States. In general, the dealers and consumers of our products also sell and use other similar products, some of which compete with our products. COMPETITION We compete with other manufacturers and distributors who offer one or more products that compete with the products we sell. However, we believe that no single competitor serving our markets offers as competitive a price as we do. Our principal means of competition are our quality, reliability, and value-added services, including delivery and service alternatives. Our industry is highly competitive, characterized by the frequent introduction of new products and includes numerous domestic and foreign competitors, some of which are substantially larger and have greater financial and other resources than we do. DISTRIBUTION We provide same-day and next-day services to all of our customers. Our products are delivered via couriers such as FedEx, UPS and Purolator and our delivery truck to meet our delivery commitments. We believe that our ability to continue to grow our revenue base depends in part upon our ability to provide our customers with efficient and reliable service. We distribute our products through one primary point of distribution located in Laguna Woods, California. We plan to distribute our products from other distribution facilities if and when required. However, we have not committed our resources at this time for any additional distribution facilities. 6
PRODUCT DEVELOPMENT New toner and ink jet cartridge designs are constantly coming to market, which Vital Supplies plans to include in their products available for sale. MANUFACTURING AND PRODUCT SOURCING Vital Products Supplies is in the business of selling compatible ribbons, as well as remanufactured and compatible laser and inkjet cartridges. GOVERNMENTAL REGULATION There are no government regulations for our current product line. ITEM 1A. RISK FACTORS. RISKS RELATED TO OUR BUSINESS WE ARE NOT CURRENTLY PROFITABLE AND WE MAY NEVER BECOME PROFITABLE. Our future operations may not be profitable if we are unable to develop our business. Our ability to generate revenues and profits, if any, will depend upon various factors, including whether we will be able to raise funding to develop and market new products or find additional businesses to operate and/or acquire. We may not achieve our business objectives and the failure to achieve these goals would have an adverse impact on our business. WE HAVE A LIMITED OPERATING HISTORY AND YOU MAY LOSE YOUR INVESTMENT IF WE ARE UNABLE TO DEVELOP AND DISTRIBUTE OUR INDUSTRIAL PACKAGING PRODUCTS OR SUCCESSFULLY CHANGE OUR BUSINESS MODEL. We commenced operations in June 2005 and initially engaged in limited business activities manufacturing and marketing childcare products. In August 2008, we changed our business plan to focus on the development and distribution of eco-friendly industrial packaging products. We anticipated that we anticipate facing challenges typically faced by start-up companies. We may experience problems, delays, expenses and other difficulties, which are typically encountered by companies in an early stage of development, many of which may be beyond our control. Therefore, we could go out of business and you may lose your investment. WE NEED EXTERNAL FUNDING TO SUSTAIN AND GROW OUR BUSINESS AND IF WE CANNOT FIND THIS FUNDING ON ACCEPTABLE TERMS, WE MAY HAVE TO CURTAIL OUR OPERATIONS AND WE MAY NOT BE ABLE TO IMPLEMENT OUR BUSINESS PLAN WHICH WOULD REDUCE OUR REVENUES. We may not be able to generate sufficient revenues from our existing operations to fund our capital requirements. 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. 7
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. JAMES MCKINNEY, OUR PRESIDENT, CHIEF FINANCIAL OFFICER AND SOLE DIRECTOR HAS SIGNFICANT INFLUENCE OVER OUR POLICIES AND AFFAIRS AND HE MAY MAKE CORPORATE DECISIONS THAT COULD NEGATIVELY IMPACT OUR BUSINESS AND STOCK PRICE. James McKinney, our current President and Chief Financial Officer, owns approximately 18.3% of our voting securities. Mr. McKinney also has significant influence over our policies and affairs and all corporate actions requiring shareholder approval including the election of directors. This may delay, deter or prevent transactions, such as mergers or tender offers, that could otherwise benefit investors. WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR PLANNED GROWTH, WHICH WOULD ADVERSELY AFFECT OUR BUSINESS AND COULD RESULT IN INCREASING COSTS AS WELL AS A DECREASE IN OUR STOCK PRICE. As of July 31, 2012 we have no employees and we do not intend to continue to develop new products. To manage our anticipated growth, we must continue to improve our operational and financial systems and expand, train, retain and manage our employee base. Because of the registration of our securities, we are subject to reporting and disclosure obligations, and we anticipate that we will hire additional finance and administrative personnel to address these obligations. In addition, the anticipated growth of our business will place a significant strain on our existing managerial and financial resources. If we cannot effectively manage our growth, our business may be harmed. OUR INDEPENDENT AUDITORS HAVE EXPRESSED DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE FINANCING. In their report dated October 29, 2012, our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern in our consolidated financial statements for the fiscal year ended July 31, 2012. The auditors raised concerns about our ability to continue as a going concern as a result of losses during the year and working capital deficit. The auditors also raised concerns about our need to obtain additional financing to continue our operations. We may not be able to obtain sufficient additional funds in the future. The auditors also state that these conditions cause substantial doubt about our 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. 8
THE CURRENT AND FUTURE CHALLENGING GLOBAL ECONOMY MAY ADVERSELY AFFECT OUR BUSINESS The current economic slowdown and any further economic decline in future reporting periods could negatively affect our business and results of operations. The volatility of the current economic climate makes it difficult for us to predict the complete impact of this slowdown on our business and results of operations. Due to these current economic conditions, our customers and potential customers may face financial difficulties, the unavailability of or reduction in commercial credit, or both, that may result in decreased sales and revenues of our Company. Certain of our customers may cease operations or seek bankruptcy protection, which would reduce our cash flows and adversely impact our results of operations. Our customers that are financially viable and not experiencing economic distress may elect to reduce the volume of orders for our products in an effort to remain financially stable or as a result of the unavailability of commercial credit which would negatively affect our results of operations. Further, we may experience challenges in forecasting revenues and operating results due to these global economic conditions. The difficulty in forecasting revenues and operating results may result in volatility in the market price of our common stock. OUR BUSINESS IS SENSITIVE TO CHANGES IN INDUSTRY DEMANDS. Vital is no longer active in industrial packaging products in the United States or Canadian markets. Effective May 1, 2012 ceased industrial packaging operations in Ontario Canada and moved to California. Vital Products is a business to business supplier of printer ribbons, toner cartridges and ink jet cartridges. RISKS RELATED TO OUR STOCK A TRADING MARKET MAY NOT DEVELOP FOR OUR COMMON STOCK AND YOU MAY FIND IT DIFFICULT OR IMPOSSIBLE TO SELL YOUR SHARES FOR THE FORESEEABLE FUTURE. Our common stock currently trades on the Over-the-Counter Bulletin Board. If a trading market does not develop for our common stock, you may find it difficult or impossible to sell your shares. "PENNY STOCK" RULES MAY MAKE BUYING OR SELLING OUR SECURITIES DIFFICULT WHICH MAY MAKE OUR STOCK LESS LIQUID AND MAKE IT HARDER FOR INVESTORS TO BUY AND SELL OUR SHARES. Trading in our securities is subject to the SEC's "penny stock" rules and it is anticipated that trading in our securities will continue to be subject to the penny stock rules for the foreseeable future. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer who recommends our securities to persons other than prior customers and accredited investors must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser's written agreement to execute the transaction. Unless an exception is available, the regulations require the 9
delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by these requirements may discourage broker-dealers from recommending transactions in our securities, which could severely limit the liquidity of our securities and consequently adversely affect the market price for our securities. WE ARE EXPOSED TO FOREIGN CURRENCY RISKS. Our operations are previously located in Canada and most of our transactions were in the local currency. As a result, we have significant debts due in Canadian dollars recorded on our balance sheet. We do not trade in hedging instruments and a significant change in the foreign exchange rate between the Canadian Dollar and U.S. Dollar could have a material adverse effect on our business, financial condition and results of operations. ITEM 2. PROPERTIES. We are headquartered in Laguna Woods, California where we have a 120 square foot for the office at no charge. Vital Products, Inc. uses the warehousing and shipping facilities of Vital Product Services, Inc. in accordance with our our license agreement. We have a month to month lease for these facilities and pay monthly rent of $4,050. ITEM 3. 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 4. MINE SAFETY DISCLOSURE Not applicable 10
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Market Information Our common stock has traded over the counter and has been quoted on the Over-The-Counter Bulletin Board since June 16, 2008. The stock currently trades under the symbol "VTPI. " The following table sets forth the high and low bid prices for our common stock for each quarter during the last two fiscal years, so far as information is reported, as quoted on the Over-the-Counter Bulletin Board. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. All prices have been adjusted to reflect a 1 for 1000 reverse stock split, effective March 2, 2012. High Low For the Fiscal Year Ended July 31, 2012 $ 1.80 $ 0.015 First Quarter ended October 31, 2010 $ 0.70 $ 0.20 Second Quarter ended January 31, 2011 $ 0.50 $ 0.20 Third Quarter ended April 30, 2011 $ 1.20 $ 0.05 Fourth Quarter ended July 31, 2012 $ 0.29 $ 0.02 For the Fiscal Year Ended July 31, 2011 Fourth Quarter ended July 31, 2011 $ 3.80 $ 0.50 Holders The number of record holders of our common stock as of July 31, 2012 was approximately 80, not including nominees of beneficial owners. Dividends Since our inception, we have not paid dividends on our common stock. We do not expect to pay dividends on our common stock in the foreseeable future; rather we intend to retain any earnings for use in our business activities. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS As of July 31, 2012, we do not have any securities authorized for issuance under equity compensation plans. 11
SECURITIES ISSUED UNDER STOCK OPTION PLANS During the fiscal year ended July 31, 2012, we did not issue securities under any Stock Option Plans. RECENT SALES OF UNREGISTERED SECURITIES All amounts have been adjusted to reflect a 1 to 1000 stock reverse split on March 5, 2012. 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). Between March 20, 2012 and April 26, 2012, an existing investor converted $95,800 principal and interest amount in loans into an aggregate of 479,000,000 shares of our common stock, at a conversion rate of $0.0002 per share. With respect to the sales of our securities described above, we relied on the Section 4(2) exemption from securities registration under the federal securities laws for transactions not involving any public offering. No advertising or general solicitation was employed in offering the securities. The securities were sold to accredited investors. The securities were offered for investment purposes only and not for the purpose of resale or distribution, and the transfer thereof was appropriately restricted by us. ITEM 6. SELECTED FINANCIAL DATA. 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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Important Factors Regarding Forward Looking Statements This annual report on Form 10-K 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 this report and other reports we file 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 annual report to conform these statements to actual results or to changes in our expectations, except as required by law. 12
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto, and other financial information included elsewhere in this annual report on Form 10-K. Overview We incorporated in the State of Delaware on May 27, 2005 and commenced business under the Vital Products name in July 2005. Our fiscal year end is July 31. On April 26, 2012, we entered into a Licensing Agreement with Vital Product Supplies, Inc. ("Vital Supplies") that allows us 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 As a result of this agreement, Vital Supplies has been consolidated as a variable interest entity. Management's Strategic Vision Our overall business strategy primarily rests on our ability to secure additional capital through financing activities. In August 2008, we changed our business plan to pursue a new line of business as a developer and distributor of material, handling and industrial packaging products. We are not able to predict when we will move forward with our business plan until we can raise additional capital. The License Agreement with Den Packaging Corporation allowed us access to a broader range of products to sell and an existing customer base. 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 assets and liabilities of Den Packaging from its consolidated financial statements at their carrying values. On April 26, 2012, we entered into a License Agreement with 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. 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. Challenges and Uncertainties We may not be able to arrange any additional 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 incurring debt, we may not be able to sustain or grow our business which may cause our revenues and stock price to decline. 13
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: 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 on May 1, 2012 Prior to May 1, 2012, 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. 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 fixed or 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. 14
Comprehensive Income The Company has adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which was primarily codified in Topic 220, Comprehensive Income in the Accounts Standards Codification, 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, SFAS No. 130 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. 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. Results of Operations for the Fiscal Year Ended July 31, 2012 Compared to the Fiscal Year Ended July 31, 2011 Revenues: Our revenues decreased by 54% or $615,325 during the year, from $1,149,624 in fiscal 2011 to $534,299 in fiscal 2012. The decrease in revenues was primarily the result of the termination of the License Agreement with Den Packaging Corporation on May 1, 2012. As a result, revenues from operations for Den Packaging after April 30, 2011 are not included in the consolidated financial statements of the Company. On April 26, 2012, we entered into a License Agreement with 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. 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. Cost of Sales: Our cost of sales decreased by $340,794 or 40% during the year, from $846,635 in fiscal 2011 to $505,841 in fiscal 2012. The decrease in cost of sales was directly related to the termination of the License Agreement with Den Packaging Corporation. On May 1, 2011 the License Agreement was terminated and cost of sales for Den Packaging after April 30, 2011 are not included in the consolidated financial statements of the Company. 15
Selling, General, Administrative and Consulting Expenses: Our selling, general, administrative and consulting expenses for the year ended July 31, 2012 decreased by $403,348 or 72% to $159,473, as compared to $562,821 for the year ended July 31, 2011. The decrease in selling, general, administrative and consulting expenses was primarily due to the termination of the License Agreement with Den Packaging. On May 1, 2011 the License Agreement was terminated and expenses for Den Packaging after April 30, 2011 are not included in the consolidated financial statements of the Company. Net loss: Our net loss attributable to Vital Products for the year ended July 31, 2012 was $244,246, as compared to a net loss of $374,111 for the year ended July 31, 2011. The $129,865 decrease in net loss compared to the prior year was primarily attributable to a reduction in selling, general and administrative expenses. The loss attributed to Vital Products was $24,249 for the period from April 26, 2012 to July 31,2012. Our total assets for the year ended July 31, 2012 were $244,583, an increase of 1071%, or $223,700, as compared to $20,833 for the fiscal year ended July 31, 2010. The increase in total assets compared to the prior year was primarily the result of an increase in inventory and accounts receivable as a result of the License Agreement with Vital Supplies. Our total liabilities for the year ended July 31, 2012 were $987,968 an increase of $271,905 or 38%, as compared to $716,063 for the year ended July 31, 2011. The increase in our total liabilities compared to the prior year was primarily the result of increased accounts payable related to financing accounts receivable and inventory for Vital Supplies and Advances to pay for administrative costs of the Company. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off balance sheet arrangements to report for the fiscal year ended July 31, 2012. Liquidity and Capital Resources As of July 31, 2012, we had total current assets of $244,583 and total current liabilities of $987,968, resulting in a working capital deficit of $743,385. As of July 31, 2012, we had cash of $1,050. Our cash used in operating activities for the year ended July 31, 2012 was $103,387. Our current cash balance and cash flow from operating activities will not be sufficient to fund our operations. Our cash inflow from financing activities for the year ended July 31, 2012 was $86,240 which was primarily the result of cash advances received by the Company. 16
We will need to raise capital of approximately $300,000 to $350,000, through either debt or equity instruments to fund our operations. We may not be successful in raising the necessary capital to fund our operations. In addition to amounts needed to fund our operations, we may need to generate an additional $985,968 to cover our current liabilities. The Company did not receive cash from the issuance of convertible notes payable during the year ended July 31, 2012. The notes currently outstanding bear interest at 20% per annum, allow for the lender to secure a portion of the Company assets up to 200% of their respective face values of the loan and mature one year from the day of their respective issuance. As at July 31, 2012, the unamortized discount on the promissory notes payable amounts to $78,088. The notes held by L. Burke have right to convert the Note 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 based on 75% of the average of the lowest closing bid price during the fifteen trading days immediately prior to conversion. The note held by The Cellular Connection Ltd. has a fixed conversion price of $0.0002 per share of common stock of the Company. None of the convertible secured promissory notes are in default. Until such a time when 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, we will remain reliant on borrowing funds or selling equity to cover our expenses. We intend to raise funds through the issuance of debt or equity. Raising funds in this manner typically requires significant time and effort to find accredited investors, and the terms of such an investment must be negotiated for each investment made. 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. ITEM 7A. 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. 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements and related notes are included as part of this Annual Report. VITAL PRODUCTS, INC. INDEX July 31, 2012 and 2011 Page REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.............. F1 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets.......................................... F2 Consolidated Statements of Operations and Comprehensive Loss......... F3 Consolidated Statements of Stockholders' Deficit .................... F4 Consolidated Statements of Cash Flows................................ F5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................... F6 - F17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Board of Directors and Stockholders Vital Products, Inc. We have audited the accompanying consolidated balance sheets of Vital Products, Inc. as of July 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income, stockholders' deficit, and cash flows for each of the years in the two-year period ended July 31, 2012. Vital Products, Inc.'s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vital Products, Inc. as of July 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the two-year period ended July 31, 2012, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred recurring losses from operations, which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ De Joya Griffith, LLC De Joya Griffith, LLC Henderson, NV October 29, 2012 F1
Vital Products, Inc. CONSOLIDATED BALANCE SHEETS (Audited) July 31, 2012 July 31, 2011 ASSETS Current assets Cash $ 1,050 $ 3,869 Accounts receivable - 9,989 Accounts receivable - related party 128,320 - Inventory 115,213 4,572 Due from related party -- 2,453 Total current assets 244,583 20,883 --------- ---------- Total assets $ 244,583 $ 20,883 ========= ========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Accounts payable and accrued liabilities $ 324,594 $ 69,904 Accounts payable and accrued liabilities - related party 195,001 173,224 Provision for sales returns 2,000 - Advances 86,040 - Convertible notes payable, net 244,403 298,026 Advances from related parties 135,930 174,909 --------- ---------- Total current liabilities 987,968 716,063 --------- ---------- Total liabilities 987,968 716,063 --------- ---------- 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, 100,000 and 40,000 issued and outstanding, respectively 1,000 400 Common stock; $0.0001 par value; 1,000,000,000 shares authorized and 579,298,478 and 298,478 issued and outstanding, respectively 57,930 30 Additional paid-in capital 3,803,744 3,656,482 Accumulated other comprehensive income 47,181 32,853 Accumulated deficit (4,629,191) (4,384,945) --------- ---------- Total Vital Products, Inc. stockholders' deficit (719,336) (695,180) Noncontrolling interest (24,049) - --------- ---------- Total deficit (743,385) (695,180) --------- ---------- Total liabilities and deficit $ 244,583 $ 20,883 ========= ========== See Accompanying Notes to Consolidated Financial Statements. F2
Vital Products, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Audited) For the For the year ended year ended July 31, 2012 July 31, 2011 ------------- ------------- Sales $ 534,299 $ 1,149,624 Cost of sales 505,841 846,635 ------------- ------------- Gross profit 28,458 302,989 ------------- ------------- Operating expenses Selling, general and administrative 159,473 562,821 Consulting -- 14,926 Depreciation -- 3,117 ------------- ------------- Total operating expenses 159,473 580,864 ------------- ------------- Net operating loss (131,015) (277,875) Other income (loss) Financing costs (214,889) (157,749) Gain on settlement of debt 85,688 16,095 Gain (loss) on currency exchange rate (8,279) 43,360 ------------- ------------- Net loss (268,495) (376,169) Net (income) loss attributed to noncontrolling interest (24,249) (2,058) ------------- ------------- Net loss attributable to Vital Products, Inc. (244,246) (374,111) Other comprehensive income (loss) Foreign currency translation adjustment 14,328 (37,745) ------------- ------------- Comprehensive loss $ (229,918) $ (411,856) ============= ============= Net loss attributable to Vital Products Inc. per common share, basic $ (0.00) $ (2.17) ============= ============= Weighted average number of common shares outstanding, basic 182,416,675 172,624 ============= ============= See Accompanying Notes to Consolidated Financial Statements. F3
Vital Products, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED JULY 31, 2012 AND 2011 (Audited) Accumulated Additional Other Total Preferred Stock Common Stock Paid-in Comprehensive Accumulated Noncontrolling Shareholders' Shares Amount Shares Amount Capital Income Deficit interest (Deficit) Balance July 31, 2010 40,000 $ 400 3,021 $ -- $3,597,420 $ 70,598 $(4,010,834) $ 195,263 $ (147,153) Beneficial conversion feature on convertible promissory notes -- -- -- -- 29,546 -- -- -- 29,546 Issuance of common stock for conversion of promissory notes -- -- 295,457 30 29,516 -- -- -- 29,546 Loss of control of Den Packaging Inc. -- -- -- -- -- -- -- (193,205) (193,205) Net loss attributable to non-controlling interest -- -- -- -- -- -- -- (2,058) (2,058) Foreign currency translation -- -- -- -- -- (37,745) -- -- (37,745) Net loss attributed to Vital Products, Inc. -- -- -- -- -- -- (374,111) -- (374,111) ----------------------------------------------------------------------------------------------------------------------------------- Balance July 31, 2011 40,000 400 298,478 30 3,656,482 32,853 (4,384,945) -- (695,180) ----------------------------------------------------------------------------------------------------------------------------------- Issuance of stock to CFO for signing bonus 60,000 600 100,000,000 10,000 10,600 -- -- -- 21,200 Beneficial conversion feature on convertible promissory note -- -- -- -- 88,763 -- -- -- 88,763 Issuance of stock for conversion of promissory note -- -- 479,000,000 47,900 47,900 -- -- -- 95,800 Acquisition of Vital Products Supplies, Inc. -- -- -- -- -- -- -- 200 200 Net loss attributable to non-controlling interest -- -- -- -- -- -- -- (24,249) (24,249) Foreign currency translation -- -- -- -- -- 14,328 -- -- 14,328 Net loss -- -- -- -- -- -- (244,246) -- (244,246) ----------------------------------------------------------------------------------------------------------------------------------- Balance July 31, 2012 100,000 $ 1,000 579,298,478 $57,930 $3,803,744 $ 47,181 ($4,629,191) ($24,049) ($743,385) =================================================================================================================================== See Accompanying Notes to Consolidated Financial Statements. F4
Vital Products, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Audited) For the For the year ended year ended July 31, 2012 July 31, 2011 ------------- ------------- Cash flows from operating activities Net loss $ (268,495) $ (376,169) Adjustments to reconcile net loss to cash used in operating activities Share-based compensation 21,200 - Depreciation -- 3,117 Accretion of debt discount and interest expense 216,627 157,749 Bad debt expense -- 7,193 Loss on currency exchange -- (16,095) Gain on settlement of debt (85,688) (43,360) Changes in operating assets and liabilities Accounts receivable (118,331) 35,429 Inventory (110,641) 10,722 Due from related party 2,453 3,563 Accounts payable and accrued liabilities 276,467 36,641 Provision for sales returns 2,000 - Advances (repayment)from related parties (38,979) 85,815 ------------- ------------- Net cash used in operating activities (103,387) (95,395) ------------- ------------- Cash flow from financing activities Payment on bank overdraft - (9,467) Advances 86,040 - Proceeds from convertible notes payable - 108,200 Non-controlling interest 200 - ------------- ------------- Net cash provided by financing activities 86,240 98,733 ------------- ------------- Effect of exchange rate on cash 14,328 136 ------------- ------------- Net change in cash (2,819) 3,474 Cash, beginning of the period 3,869 395 ------------- ------------- Cash, end of the period $ 1,050 $ 3,869 ============= ============= Supplemental disclosure of non-cash investing and financing activities Issuance of common stock for conversion of promissory note $ 95,800 $ 29,546 ============= ============= Beneficial conversion feature $ 88,762 $ 29,546 ============= ============= See Accompanying Notes to Consolidated financial statements. F5
VITAL PRODUCTS, INC. 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, 2012 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
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None ITEM 9A(T). CONTROLS AND PROCEDURES. EVALUATION OF 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 of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective to ensure that information we are 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. MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: 1. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; 2. provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures of our Company are being made only in accordance with authorizations of our management and our directors; and 18
3. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of July 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this evaluation, our management concluded that our internal control over financial reporting were not effective as of July 31, 2012. This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to the temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report. Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting, which are included within disclosure controls and procedures, that occurred during our fiscal quarter ended July 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION. None. 19
PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The following table sets forth the name, age, positions and offices that each director and officer has held for the past five years as of July 31, 2012. Members of the Board are elected and serve for one year terms or until their successors are elected and qualify. Our executive officers are elected by and serve at the pleasure of our Board of Directors. There are no family relationships among our directors and executive officers. 19
Name Age Position ----------------------------------------------------------------------------- Michael Levine (1) 51 Former Chairman, Chief Executive Officer, and Director Bram Lecker B.A. L.L.B 53 Former Director James McKinney 67 President, Chief Financial Officer and Director ----------------------------------------------------------------------------- BIOGRAPHIES OF EXECUTIVE OFFICERS AND DIRECTORS Mr. Michael Levine has served as our Chief Executive Officer and Chairman of the Board since June 2005. Mr. Levine devotes a minimum of 25% of his working time to the affairs of our Company. Prior to joining us, Mr. Levine founded and was the President of Zynpak Packaged Products, Inc. for the past 21 years. Mr. Levine attended McGill University. Mr. Levine resigned as an officer and director of the Company on July 30, 2012. Mr. Bram Lecker has served as a Director since June 2005. Mr. Lecker has been in private practice since 1984 specializing in employment and commercial law. Mr. Lecker is also the co-founder of Yog'n'berries, a frozen yogurt and related products wholesale and retail business and is involved in the introduction of the "Mackenzie Method" spinal therapy pain relief and rehabilitation protocols to Ontario, Canada therapy centers. Mr. Lecker graduated from both York University in Toronto, Canada and University of Ottawa Law School. Mr. Lecker resigned as a director of the Company on July 30, 2012. 20
Mr. James McKinney has served as President and CFO since April 30, 2012 and was appointed the sole director of the Company on July 30, 2012. Mr. McKinney graduated from the University of Southern California with a Bachelor of Science in Accountancy in 1967. From 1967 to 1971 Mr. McKinney was employed by PriceWaterhouse Coopers with temporary leave for military service during this period. Over Mr. McKinney's career, he has been employed as an accountant and controller for several companies and was the proprietor of an income tax preparation business for 25 years. In addition, her has been a member of the Exchange Club (South Orange County) for three year and is currently serving as its Vice-President. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS We are not aware of any material legal proceedings that have occurred within the past five years concerning any director, director nominee, or control person which involved a criminal conviction, a pending criminal proceeding, a pending or concluded administrative or civil proceeding limiting one's participation in the securities or banking industries, or a finding of securities or commodities law violations. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE We do not have any securities registered under Section 12 of the Exchange Act, as amended. Accordingly, our directors, executive officers, and stockholders beneficially owning more than 10% of our common stock are not required to comply with the reporting requirements of Section 16(a) of the Exchange Act. CODE OF ETHICS We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We will provide a copy of our Code of Ethics to any person, free of charge, upon written request to Vital Products, Inc., 2404 Via Mariposa West, 1-A, Laguna Woods, California 92637. PROCEDURE FOR NOMINATING DIRECTORS There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors. The Board of Directors will consider candidates for director positions that are recommended by any of our stockholders. The recommended candidate should be submitted to us in writing addressed to 2404 Via Mariposa West, 1-A, Laguna Woods, California 92637. The recommendation shall include the following information: name of candidate; address, phone, and fax number of candidate; a statement signed by the candidate certifying that the candidate wishes to be considered for nomination to our Board of Directors and stating why the candidate believes that he or she meets the director qualification criteria and would otherwise be a valuable addition to our Board of Directors; a summary of the candidate's work experience for the prior five years and the number of shares of our stock beneficially owned by the candidate. 21
The Board will evaluate the recommended candidate and will determine whether or not to proceed with the candidate in accordance with our procedures. We reserve the right to change our procedures at any time to comply with the requirements of applicable laws. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has the responsibility for establishing broad corporate policies and reviewing our overall performance rather than day-to-day operations. The Board's primary responsibility is to oversee management of our company and, in so doing, serve the best interests of our company and our stockholders. Our full Board of Directors performs all of the functions normally designated to an Audit Committee, Compensation Committee and Nominating Committee. Although our Board does not have a separately-designated standing Audit Committee, our full Board of Directors performs the functions usually designated to an Audit Committee. As of July 30, 2012, Mr. McKinney has been designated as the Board's "audit committee financial expert" as defined in Item 407(d)(5)(ii) of Regulation S-K. We have determined that Mr. McKinney is "independent" as independence for audit committee members is defined in Rule 5605 of the Nasdaq Marketplace Rules and Rule 10A-3 of the Securities Exchange Act of 1934. Mr. McKinney's experience and background has provided him with an understanding of accounting principles generally accepted in the United States of America and financial statements prepared thereon. Mr. McKinney has experience preparing, auditing, analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues comparable to the issues that can reasonably be expected to be raised by our financial statements. Mr. McKinney has an understanding of audit committee functions. ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION The following table shows the compensation paid or accrued during the fiscal years ended July 31, 2012 and 2011 to Michael Levine, our former principal executive officer, also referred to as our "named executive officer" and James McKinney, our President, CFO and sole director. No other executive officer or employee earned over $100,000 in the last completed fiscal year. 22
Summary Compensation Table for the Fiscal Years Ended July 31, 2012 and 2011 ------------------------------------------------------------------------------- Name and Year Base Bonus Stock Option Non- All Dollar Value Principal Ended Salary Awards Awards qualified Other of Total Position July Deferred Compensa- Compensation 31, compensa- tion for the tion Covered Earnings Fiscal Year $ $ $ $ $ $ $ (a) (b) (c) (d) (e) (f) (h) (i) (j) ------------------------------------------------------------------------------- Michael Levine, Chief Executive Officer 2012 $ 0 $ 0 2011 $ 0 $ 0 James McKinney, President and Chief Financial Officer 2012 $ 0 $21,200 $ 21,200 ------------------------------------------------------------------------------- NARRATIVE TO SUMMARY COMPENSATION TABLE EMPLOYMENT AGREEMENTS We do not currently have any employment agreements with our executive officers, including our named executive officer. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END As of July 31, 2012, our named executive officer did not have any equity awards outstanding. Potential Payments Upon Termination or Change of Control We do not have any potential payments upon termination or change of control. 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information concerning the beneficial ownership of our outstanding common stock as of October 19, 2011, by each person known by us to be (i) the beneficial owner of more than 5% of our outstanding shares of common stock, (ii) each current director and nominee, (iii) our named executive officer named in the Summary Compensation Table who was serving as an executive officer at the end of the July 31, 2012 fiscal year and (iv) all of our directors and current executive officers as a group. Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock except to the extent that authority is shared by spouses under applicable law. The calculation of percentage ownership for each listed beneficial owner is based upon the number of shares of common stock issued and outstanding on October 29, 2012, plus shares of common stock subject to options, warrants and conversion rights held by such person on October 29, 2012, and exercisable or convertible within 60 days thereafter. Title of class Name and address of Amount and Percent of beneficial owner (1) nature of class (2) beneficial owner Common Stock DC Design Inc. 52,500,000 9.1% Richard B Dorfman 46,000,000 7.8% Al Kau 50,000,000 8.6% Ray Kau 49,000,000 8.5% Dan Masters 49,000,000 8.5% Brian Saylin 52,000,000 9.0% Beneficial owners of more than 5% as a group 298,500,000 51.5% (6 persons) Michael Levine (3) 4,001,550 0.7% Bram Lecker B.A. L.L.B 0 0 James McKinney 106,000,000 18.3% Directors and executive officers as a group (3 persons) 110,001,550 19.0% 24
(1) The address of all individual directors and executive officers is c/o Vital Products, Inc., 2404 Via Mariposa West, 1-A, Laguna Woods, California 92637. (2) The number of shares of common stock issued and outstanding on October 29, 2012 was 579,298,478 shares. (3) Michael Levine's beneficial ownership is comprised of 1,550 shares of common stock and 40,000 shares of Series A Convertible Preferred Stock which are convertible into an aggregate of 4,000,000 shares of common stock. (4) James McKinney beneficial ownership is comprised of 100,000,000 shares of common stock and 60,000 shares of Series A Convertible Preferred Stock which are convertible into an aggregate of 6,000,000 shares of common stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As of July 31, 2012, we have accrued a total of $195,001 in rent due to Zynpak, a company Controlled by Michael Levine, our former Chief Executive Officer and former Chairman of the Board for use of a 4,000 square foot facility within a building it owns in Concord, Ontario, Canada. The lease is on a month-to-month basis and we pay $3,000 CDN per month. Our rent expense for the fiscal years ended July 31, 2012 and 2011 was $26,884 and $36,257, respectively. The lease was terminated on April 30, 2012. As of and for the fiscal years ended July 31, 2012 and 2011, we had outstanding advances of $58,977 and $78,669, respectively and payables totaling $158,150 and $121,667 with a vendor to which Michael Levine, our former Chief Executive Officer, President and Chairman of the Board, has a majority ownership interest As of July 31, 2012, we have accrued a total of $103,384 in management fees due to Den Packaging a company Controlled by Michael Levine, our Chief Executive Officer, President and Chairman of the Board for a License Agreement for the period from March 1, 2010 to April 30, 2011. Our management fee expense for the fiscal years ended July 31, 2012 and 2011 was $0 and $101,921, respectively. The above related party transactions are not necessarily indicative of the amounts that would have been incurred had a comparable transaction been entered into with an independent party. The terms of these transactions were more favorable than would have been attained if the transactions were negotiated at arm's length. 25
DIRECTOR INDEPENDENCE As of July 30, 2012, Michael Levine and Bram Lecker resigned as directors of the Company and Jim McKinney was appointed the sole director of the Company. We are currently traded on the Over-the-Counter Bulletin Board or OTCBB, which does not require that a majority of the board be independent. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. Fees related to services performed by DeJoya Griffith in the years ended July 31, 2012 and 2011 were as follows: 2012 2011 Audit Fees $ 26,500 $ 24,000 Audit-Related Fees 0 0 Tax Fees 0 0 All Other Fees 0 0 Total $ 26,500 $ 24,000 Pre-Approval Policies The Board's policy is to pre-approve all audit services and all non-audit services before they commence, including the fees and terms thereof, to be provided by our independent auditor. All of the services provided during the fiscal year ended July 31, 2012 were pre-approved. No audit, review or attest services were approved in accordance with Section 2-01(c)(7)(i)(C) of Regulation S-X during the fiscal year ended July 31, 2012. During the approval process, the Board considered the impact of the types of services and the related fees on the independence of the independent registered public accounting firm. The services and fees were deemed compatible with the maintenance of that firm's independence, including compliance with rules and regulations of the SEC. Throughout the year, the Board will review any revisions to the estimates of audit fees initially estimated for the engagement. 26
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. a. The following documents are filed as part of this annual report on Form 10-K: 1. FINANCIAL STATEMENTS The following documents are filed in Part II, Item 8 of this annual report on Form 10-K: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets at July 31, 2012 and 2011 Consolidated Statements of Operations and Comprehensive Income for the years ended July 31, 2012 and 2011 Consolidated Statements of Stockholders' Deficit for the years ended July 31, 2012 and 2011 Consolidated Statements of Cash Flows for the years ended July 31, 2012 and 2011 Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES All financial statement schedules have been omitted as they are not required, not applicable, or the required information is otherwise included. 3. EXHIBITS The exhibits listed below are filed with or incorporated by reference in this annual report on Form 10-K. EXHIBIT NO. IDENTIFICATION 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). 3.3 Certificate of Amendment to the Certificate of Incorporation, dated June 22, 2009 (included as exhibit 3.1 to the Form 8-K filed June 26, 2009 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). 27
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). 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). 14.1 Code of Ethics (included as exhibit 14.1 to the Form 10-KSB filed November 13, 2008 and incorporated herein by reference). 23.1 Consent of Independent Auditors, MSCM LLP (filed herewith). 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 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. 28
SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Vital Products, Inc. By:/s/ James McKinney -------------------------- James McKinney Principal Executive Officer, Principal Financial Officer and Director Date: November 2, 2012 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. SIGNATURE TITLE DATE By: /s/ James McKinney November 2, 2012 ------------------------- Principal Executive Officer, ----------------- Principal Financial Officer and Director 2