10-Q 1 vital_10qoctober312009.txt VITAL 10Q OCTOBER 31 2009 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 2009 or [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission file number: 333-127915 VITAL PRODUCTS, INC. --------------------- (Exact name of registrant as specified in its charter) Delaware 98-0464272 ---------------------- -------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 245 DRUMLIN CIRCLE, CONCORD ONTARIO, CANADA L4K 3E4 --------------------------------------------------------- (Address of principal executive offices) (905) 482-0200 --------------------- (Registrant's telephone number, including area code) Not Applicable -------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ] Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filed, a non-accelerated filed, or a small reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "small reporting company" in Rule 12b-2 of the Exchange Act. Large Accelerated filer [ ] Accelerated filer [ ] Non-Accelerated filer [ ] Smaller reporting company [X] (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of December 3, 2009, the Issuer had 30,455,187 shares of common stock issued and outstanding, par value $0.0001 per share. 2 VITAL PRODUCTS, INC QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED OCTOBER 31, 2009 TABLE OF CONTENTS Page PART I - FINANCIAL INFORMATION Item 1 - Financial Statements...............................................F1 Balance Sheets as of October 31, 2009 and July 31, 2009 (unaudited)................................................F1 Statements of Operations for the three months ended October 31, 2009 and 2008 (unaudited)....................................F2 Statement of Shareholders' Deficit for the three months ended October 31, 2009 (unaudited).......................................F3 Statements of Cash Flows for the three months ended October 31, 2009 and 2008 (unaudited)....................................F4 NOTES TO FINANCIAL STATEMENTS..........................................F5 - F8 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................4 Item 3 - Quantitative and Qualitative Disclosures About Market Risk..........8 Item 4T - Controls and Procedures............................................8 PART II - OTHER INFORMATION Item 1 - Legal Proceedings...................................................9 Item 1A - Risk Factors.......................................................9 Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds........10 Item 3 - Defaults Upon Senior Securities....................................10 Item 4 - Submission of Matters to a Vote of Security Holders................10 Item 5 - Other Information..................................................10 Item 6 - Exhibits...........................................................10 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VITAL PRODUCTS, INC. Balance Sheets October 31, 2009 and July 31, 2009 (Unaudited) October 31, July 31, 2009 2009 ---------- ---------- ASSETS Current assets Cash $ 321 $ 8,046 Accounts receivable 7,213 25,134 Inventory 21,531 41,795 ---------- ---------- Total current assets 29,065 74,975 ---------- ---------- Other Equipment, net of accumulated depreciation 22,877 25,058 ---------- ---------- 22,877 25,058 ---------- ---------- Total assets $ 51,942 $ 100,033 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities $ 152,695 $ 190,932 Note payable to Cellular Connection Ltd. 239,900 199 457 Advances from related parties 41,748 7,579 ---------- ---------- Total current liabilities 434,343 397,968 ---------- ---------- SHAREHOLDERS' DEFICIT Convertible Preferred Stock; $0.01 par value; 1,000,000 shares authorized, 40,000 and 40,000 issued and outstanding respectively 400 400 Capital stock; $0.0001 par value; 100,000,000 shares authorized, 30,455,187 and 30,455,187 issued and outstanding respectively 3,045 3,045 Additional paid-in capital 2,846,421 2,846,421 Accumulated other comprehensive income 93,050 92,263 Accumulated deficit (3,325,317) (3,240,064) ---------- ---------- Total stockholders' deficit (382,401) (297,935) ---------- ---------- Total liabilities and stockholders' deficit $ 51,942 $ 100,033 ========== ========== See Accompanying Notes to Financial Statements F1 VITAL PRODUCTS, INC. Statements of Operations For the three months ended October 31, 2009 and 2008 (Unaudited) For The For The Three Three Months Months Ended Ended October October 31, 2009 31, 2008 ----------- ---------- Sales $ 2,670 $ - Cost of sales 21,616 - ----------- ---------- Gross profit (18,946) - ----------- ---------- Operating expenses Depreciation 2,078 2,041 Selling, general and administrative expenses 23,014 111,767 ----------- ---------- Total operating expenses 25,092 113,808 ----------- ---------- Net operating loss (44,038) (113,808) Other expenses Financing costs (40,439) (96,516) Loss on currency exchange rate (776) (302,217) ----------- ---------- Net loss for the period $ (85,253) $ (512,541) =========== ========== Net loss per common share, basic and fully diluted $ (0.00) $ (3.16) =========== ========== Weighted average number of common shares outstanding, basic and fully diluted 30,455,187 162,326 =========== ========== See Accompanying Notes to Financial Statements F2 VITAL PRODUCTS, INC. Statement of Changes in Stockholders' Deficit For the three months ended October 31, 2009 (Unaudited)
Accumulated Other Additional Compreh- Preferred Stock Common Stock Paid-In ensive Number Amount Number Amount Capital Deficit Income Total (Loss) ---------------------------------------------------------------------------------------------- Balance, July 31, 2009 40,000 $400 30,455,187 $ 3,045 $2,846,421 ($3,240,064) $92,263 $(297,935) Foreign currency translation - - - - - - 787 787 Net loss for the period - - - - - (85,253) - (85,253) ---------------------------------------------------------------------------------------------- Balance, October 31, 2009 40,000 $400 30,455,187 $ 3,045 $2,846,421 ($3,325,317) $93,050 $(382,401) ==============================================================================================
See Accompanying Notes to Financial Statements F3 VITAL PRODUCTS, INC. Statements of Cash Flows For the three months ended October 31, 2009 and 2008 (Unaudited) For The For The Three Three Months Months Ended Ended October October 31, 2009 31, 2008 ----------- ---------- Operating activities Net loss for the period $ (85,253) $(512,541) Adjustments to reconcile net loss to net cash used by operating activities: Gain on currency exchange rate - 302,217 Depreciation 2,078 2,041 Interest on notes payables - 88,310 Accretion on debt discount and interest 41,230 - Stock based expenses - 100,000 Change operating assets and liabilities: Accounts receivable 17,809 - Inventory 20,083 - Accounts payable and accrued liabilities (37,439) (7,154) Advances from related parties 34,179 - ----------- ---------- Net cash used in operating activities (7,312) (27,127) ----------- ---------- Financing activities Advance from bank overdraft - 4,385 ----------- ---------- Net cash provided by financing activities - 4,385 ----------- ---------- Foreign currency translation effect (413) 19,940 ----------- ---------- Net increase in cash (7,725) (2,802) Cash at beginning of period 8,046 2,802 ----------- ---------- Cash at end of period $ 321 $ 0 =========== ========== F4 See Accompanying Notes to Financial Statements VITAL PRODUCTS, INC. Notes to Interim Financial Statements October 31, 2009 and 2008 (Unaudited) NOTE 1 - NATURE OF OPERATIONS AND BASIS FOR PRESENTATION The accompanying unaudited financial statements of Vital Products, Inc. have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission requirements for interim financial statements. Therefore, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The financial statements should be read in conjunction with the annual financial statements for the year ended July 31, 2009 of Vital Products, Inc. The interim financial statements present the balance sheet, statements of operations, stockholders' equity and cash flows of Vital Products, Inc. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The interim financial information is unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position as of October 31, 2009 and the results of operations, stockholders' equity and cash flows presented herein have been included in the financial statements. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results of operations for the full year. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES Liquidity and Going Concern During the three months ended October 31, 2009 and 2008, the Company incurred losses of ($85,253) and ($512,541), respectively, and cash used in operations was ($7,312) and ($27,127), respectively. The Company financed its operations through loans payable and vendors' credit. Management believes that the current cash balances at October 31, 2009 and net cash proceeds from operations will not be sufficient to meet the Company's cash requirements for the next twelve months. Accordingly, these financial statements have been prepared on a going concern basis and do not include any adjustments to the measurement and classification of the recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company has experienced losses in the period and has negative working capital. The Company's ability to realize its assets and discharge its liabilities in the normal course of business is dependent upon continued support. The Company is currently attempting to obtain additional financing from its existing shareholders and other strategic investors to continue its operations. However, the Company may not obtain sufficient additional funds from these sources. These conditions cause substantial doubt about the Company's ability to continue as a going concern. A failure to continue as a going concern would require that stated amounts of assets and liabilities be reflected on a liquidation basis that could differ from the going concern basis. F5 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) ACCOUNTING PRINCIPLES The Company's accounting and reporting policies conform to generally accepted accounting principles and industry practice in the United States. The financial statements are prepared in United States dollars. USE OF ESTIMATES The preparation of 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 financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION The Company determined the functional currency to be the Canadian dollar and, accordingly, their financial information are translated into U.S. dollars using exchange rates in effect at year-end. Adjustments resulting from translation of foreign exchange are included as a component of other comprehensive income (loss) within stockholders' deficit. 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 discounts and returns. 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. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) INVENTORY Inventory comprises finished goods held for sale and is stated at lower of cost or market value. Cost is determined by the average cost method. The Company estimates the realizable value of inventory based on assumptions about forecasted demand, market conditions and obsolescence. If the estimated realizable value is less than cost, the inventory value is reduced to its estimated realizable value. If estimates regarding demand and market conditions are inaccurate or unexpected changes in technology affect demand, the Company could be exposed to losses in excess of amounts recorded. F6 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. 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 includes no dilution and 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. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) NEW ACCOUNTING PRONOUNCEMENTS Accounting Standards Codification ("Codification") and the Hierarchy of Generally Accepted Accounting Principles ("GAAP") In June 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") Subtopic 105, Generally Accepted Accounting Principles, which reorganizes the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. It also includes relevant SEC guidance that follows the same topical structure in separate sections in the Codification. In the first quarter of fiscal year 2010, the Company changed its historical U.S. GAAP references to comply with the Codification. The adoption of this guidance did not impact the Company's results of operations, financial condition or liquidity since the Codification is not intended to change or alter existing U.S. GAAP. F7 SUBSEQUENT EVENTS In May 2009, the FASB issued authoritative guidance included in FASB ASC Subtopic 855, Subsequent Events, which incorporates guidance on subsequent events into authoritative accounting literature and clarifies the time following the balance sheet date that must be considered for subsequent events disclosures in the financial statements. In the first quarter of fiscal year 2010, the Company adopted this guidance which requires disclosure of the date through which subsequent events have been reviewed. The Company has evaluated subsequent events occurring after the balance sheet through December 18, 2009, which is the date the financial statements were issued. This guidance did not change the Company's procedures for reviewing subsequent events. NOTE 3 - NOTE PAYABLE TO CELLULAR CONNECTION LTD. Date of Issuance Maturity Date Issue Amount ---------------- ------------- ------------ Promissory Note 1 Principal January 20, 2009 January 19, 2010 $100,000 Promissory Note 2 Principal April 30, 2009 April 30, 2010 50,000 Promissory Note 3 Principal June 12, 2009 June 12, 2010 22,000 Interest 30,176 Accretion 37,724 --------- $239,900 ========= The Company issued three convertible secured promissory notes to The Cellular Connection Ltd. The notes bear interest at 20% per annum, allow for the lender to secure a portion of the Company assets up to 200% of the face value of the loan and mature one year from the day of their respective issuance. As of October 31, 2009, the unamortized discount on the promissory notes payable amounts to $19,613. The Holder has the right to convert the Notes plus accrued interest into shares of the Company's common stock at any time prior to the Maturity Date. The number of common stock to be issued will be determined using a conversion price based on 75% of the average of the lowest closing bid price during the fifteen trading days immediately prior to conversion. NOTE 4 - RELATED PARTY BALANCES AND TRANSACTIONS For the three months ended October 31, 2009 and 2008, the Company had rent expense totaling $8,314 and $8,164, respectively and as of October 31, 2009 and July 31, 2009 advances of $41,748 and $7,579, respectively, and outstanding payables totaling $93,539 and $85,568, respectively, with a vendor to which the Company's Chief Executive Officer has a majority ownership interest. The balances are non-interest bearing, unsecured and have no specified terms of repayment. NOTE 5 - SUBSEQUENT EVENT On December 15, 2009, we filed a registration statement with the Securities and Exchange Commission that registered 65,000,000 shares of common stock to be issued as compensation to employees. We are authorized to issue 100,000,000 shares of common stock and as of December 15, 2009 we had 30,455,187 shares of common stock issued and outstanding. To preserve cash, we intend to issue up to 65,000,000 shares of common stock as compensation to our employees and consultants which will significantly dilute the equity interests of existing shareholders. F8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This report on Form 10-Q contains "forward-looking statements" that involve risks and uncertainties. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described in our Form 10-K filed November 13, 2009, for the year ended July 31, 2009, and other filings we make with the Securities and Exchange Commission. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law. The following discussion and analysis of financial condition and results of operations is based upon, and should be read in conjunction with our audited financial statements and related notes thereto included elsewhere in this report, and in our Form 10-K filed November 13, 2009, for the year ended July 31, 2009. OVERVIEW We incorporated in the State of Delaware on May 27, 2005. On July 5, 2005, we purchased the Childcare Division of Metro One Development, Inc., (formerly On The Go Healthcare, Inc.) which manufactured and distributed infant care products. At July 31, 2008, our sole business was to manufacture two products under the "On The Go" name: a padded training seat that helps toddlers with potty training, and a baby bath with a contoured shape to cradle babies 0-6 months old. 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 products that are affordable to develop, priced competitively for the consumer and 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. We believe that the addition of Den Packaging will undoubtedly strengthen our standing in the industrial packaging sector. We are currently in the process of renegotiating a final agreement to consummate the purchase of Den Packaging. 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 believe that DLW will work closely with us to develop new products for existing markets and establish product line extensions to further our market share. Most importantly DLW has experience in the development of environmentally friendly products and we expect that DLW will further our initiative to develop environmentally acceptable products. 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 will 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. 4 On January 13, 2009, we formally 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 January 30, 2009, we received a second purchase order for our Biofill(TM) 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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of 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 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 Financial Statements: VALUATION OF LONG-LIVED ASSETS We assess the recoverability of long-lived assets whenever events or changes in business circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognized when the sum of the expected undiscounted net cash flows over the remaining useful life is less than the carrying amount of the assets. REVENUE RECOGNITION We recognize 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. We generally recognize revenue at the time of delivery of goods. Sales are reflected net of discounts and estimated returns based on historical patterns. We record amounts billed to customers for shipping and handling as sales revenues. We include costs incurred for shipping and handling in cost of sales. 5 EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS Accounting Standards Codification ("Codification") and the Hierarchy of Generally Accepted Accounting Principles ("GAAP") In June 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") Subtopic 105, Generally Accepted Accounting Principles, which reorganizes the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. It also includes relevant SEC guidance that follows the same topical structure in separate sections in the Codification. In the first quarter of fiscal year 2010, the Company changed its historical U.S. GAAP references to comply with the Codification. The adoption of this guidance did not impact the Company's results of operations, financial condition or liquidity since the Codification is not intended to change or alter existing U.S. GAAP. SUBSEQUENT EVENTS In May 2009, the FASB issued authoritative guidance included in FASB ASC Subtopic 855, Subsequent Events, which incorporates guidance on subsequent events into authoritative accounting literature and clarifies the time following the balance sheet date that must be considered for subsequent events disclosures in the financial statements. In the first quarter of fiscal year 2010, the Company adopted this guidance which requires disclosure of the date through which subsequent events have been reviewed. The Company has evaluated subsequent events occurring after the balance sheet through December 18, 2009, which is the date the financial statements were issued. This guidance did not change the Company's procedures for reviewing subsequent events. RESULTS OF OPERATIONS COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED OCTOBER 31, 2009 AND 2008 REVENUES: We had revenues of $2,670 for the three months ended October 31, 2009, as compared to revenues of $0 for the three months ended October 31, 2008. The increase in revenues was primarily the result of our development of a new product line. COST OF SALES: Our cost of sales for the three months ended October 31, 2009 was $21,616, compared to $0 for the three months ended October 31, 2008. The increase in cost of sales was directly related to the increase in sales and the write off of certain inventory in the amount of $19,225. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Our selling, general and administrative costs were $23,014 for the three months ended October 31, 2009, compared to $111,767 for the three months ended October 31, 2008. The decrease in selling, general and administrative expenses was primarily the result of stock based expenses related to consulting services in the previous year. NET LOSS: Our net loss for the three months ended October 31, 2009 was $85,253, compared to a net loss of $512,541 for the three months ended October 31, 2008. The decrease in net loss was a result of our development of a new product line that increased our sales, a decreased loss due to foreign exchange, as well as a decrease in our selling, general and administrative expenses as described above. 6 TOTAL ASSETS: Our total assets as of October 31, 2009 were $51,942, a decrease of $48,091, as compared to the fiscal year ended July 31, 2009 which was $100,033. The decrease was a result of a decrease in accounts receivable from sales and inventory in 2009. Our total liabilities as of October 31, 2009 were $434,343, an increase of $36,375, as compared to $397,968 for the fiscal year ended July 31, 2009. The increase in our total liabilities compared to the prior year ended July 31, 2009 was primarily the result of the increased advances from related parties. LIQUIDITY AND CAPITAL RESOURCES As of October 31, 2009, we had total current assets of $29,065 and total current liabilities of $434,343, resulting in a working capital deficit of $405,278. At the end of the quarterly period ending October 31, 2009, we had cash of $321. Our cash flow from operating activities for the three months ended October 31, 2009 resulted in a deficit of $7,312. Our current cash balance and cash flow from operating activities will not be sufficient to fund our operations. Our cash flow from financing activities for the three months ended October 31, 2009 was $0. We believe we will need to raise capital of approximately $300,000 to $350,000 through either debt or equity instruments to fund our operations for the next 12 months. However, we may not be successful in raising the necessary capital to fund our operations. In addition to the amounts needed to fund our operations, we will need to generate an additional $500,000 to cover our current liabilities for the next 12 months. As of October 31, 2009, we have $239,900 of advances due to The Cellular Connection Ltd. payable on demand. The initial $172,000 advanced from The Cellular Connection, Ltd. is the aggregate amount due under three convertible secured promissory notes with an aggregate face amount of $206,400. We issued these notes to The Cellular Connection Ltd. during 2009. The aggregate face amount includes one year of interest totaling $34,400 and actual loan amount totaling $172,000. The convertible secured promissory notes accrue interest at a rate of 20% per year and have maturity dates of January 19, 2010, April 30, 2010 and June 12, 2010. The outstanding face amount of the convertible secured promissory notes increase by 20% in 2011, by an additional 20% in 2012 and again on each one year anniversary after 2012 until the notes have been paid in full. The notes entitle the holder to convert the note, plus accrued interest, anytime prior to the maturity date, at 75% of the average of the lowest closing bid price during the fifteen trading days immediately preceding the conversion date. Pursuant to the terms of the convertible secured promissory notes, The Cellular Connection Ltd. may elect to secure a portion of our assets not to exceed 200% of the face amount of the notes, including, but not limited to, accounts receivable, cash, marketable securities, equipment, or inventory. Until we are able to generate positive cash flows from operations in an amount sufficient to cover our current liabilities and debt obligations as they become due, if ever, we will remain reliant on borrowing funds or selling equity. We intend to raise funds through the issuance of debt or equity. Raising funds in this manner typically requires much time and effort to find accredited investors, and the terms of such an investment must be negotiated for each investment made. There is a risk that such additional financing may not be available, or may not be available on acceptable terms, and the inability to obtain additional financing or generate sufficient cash from operations could require us to reduce or eliminate expenditures for capital equipment, production, design or marketing of our products, or otherwise curtail or discontinue our operations, which could have a material adverse effect on our business, financial condition and results of operations. We may not be able to raise sufficient funds to meet our obligations. If we do not raise sufficient funds, our operations will be curtailed or will cease entirely and you may lose all of your investment. 7 Further, to the extent that we raise capital through the sale of equity or convertible debt securities, the issuance of such securities may result in dilution to our existing stockholders. If we raise additional funds through issuance of debt securities, these securities may have rights, preferences and privileges senior to holders our of common stock and the terms of such debt could impose restrictions on our operations. Regardless of whether our cash assets prove to be adequate to meet our operational needs, we may seek to compensate our service providers with stock in lieu of cash, which may also result in dilution to existing stockholders. OFF-BALANCE SHEET ARRANGEMENTS As of October 31, 2009, we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a Smaller Reporting Company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item. ITEM 4T. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are 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. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING There were no changes in our internal control over financial reporting that occurred during the quarter ended October 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 8 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We may be involved from time to time in ordinary litigation, negotiation and settlement matters that will not have a material effect on our operations or finances. We are not aware of any pending or threatened litigation against our Company or our officers and directors in their capacity as such that could have a material impact on our operations or finances. ITEM 1A. RISK FACTORS WE NEED EXTERNAL FUNDING TO SUSTAIN AND GROW OUR BUSINESS AND IF WE CANNOT FIND THIS FUNDING ON ACCEPTABLE TERMS, WE MAY NOT BE ABLE TO IMPLEMENT OUR BUSINESS PLANS AND THEREFORE MAY HAVE TO CEASE OUR OPERATIONS We may not be able to generate sufficient revenues from our existing operations to fund our capital requirements. At the end of the quarterly period ending October 31, 2009, we had a cash balance of $321. We will require additional funds to enable us to operate profitably and grow our business. We believe we will need $300,000 to $350,000 to run our business for the next twelve months. In addition to the amounts needed to fund our operations, we will need to generate an additional $500,000 to cover our current liabilities for the next 12 months. The financing we need may not be available on terms acceptable to us or at all. We currently have no bank borrowings and we may not be able to arrange any debt financing. Additionally, we may not be able to successfully consummate offerings of stock or other securities in order to meet our future capital requirements. If we cannot raise additional capital through issuing stock or creating debt, we may not be able to sustain or grow our business which may cause our revenues and stock price to decline. WE HAVE ISSUED CONVERTIBLE SECURED PROMISSORY NOTES THAT ARE FULLY SECURED BY OUR ASSETS AND IF WE ARE UNABLE TO PAY THE NOTES ON THE MATURITY DATES WE MAY HAVE TO CEASE OPERATIONS We have issued three convertible secured promissory notes to The Cellular Connection Ltd. that bear interest at 20% per annum and have maturity dates beginning on January 19, 2010. As of October 31, 2009 we had $239,900 due under the note issuances to The Cellular Connection and we may not be able to make payments under the notes when due. The holders of the notes also have the right to convert the notes plus accrued interest into shares of our common stock at any time prior to the maturity dates. If the holders elect to convert the notes this will further dilute the equity interests of existing shareholders. WE RECENTLY REGISTERED SHARES OF COMMON STOCK TO BE ISSUED TO EMPLOYEES PURSUANT TO OUR STOCK COMPENSATION THAT WILL SIGNIFICANTLY DILUTE THE EQUITY INTERESTS OF EXISTING SHAREHOLDERS IN OUR COMPANY We filed a registration statement with the Securities and Exchange Commission that registered 65,000,000 shares of common stock to be issued as compensation to employees. We are authorized to issue 100,000,000 shares of common stock and as of December 15, 2009 we had 30,455,187 shares of common stock issued and outstanding. To preserve cash, we intend to issue up to 65,000,000 shares of common stock as compensation to our employees and consultants which will significantly dilute the equity interests of existing shareholders. Consequently, the price of our common stock will likely fall and you may lose all or part of your investment. 9 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During the quarter ended October 31, 2009, we did not sell any unregistered securities. ITEM 3. DEFAULTS UPON SENIOR SECURITIES During the quarter ended October 31, 2009, we did not have any defaults upon senior securities. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the quarter ended October 31, 2009, we did not submit any matters to a vote of security holders. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS Exhibit Number Description of Exhibit 3.1 Certificate of Incorporation (included as exhibit 3.1 to the Form SB-2 filed August 29, 2005 and incorporated herein by reference). 3.2 By-laws (included as exhibit 3.2 to the Form SB-2 filed August 29, 2005 and incorporated herein by reference). 4.1 Form of Stock Certificate (included as exhibit 4.1 to the Form SB-2 filed October 26, 2006 and incorporated herein by reference). 4.2 Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock, dated April 20, 2009 (included as exhibit 4.1 to the Form 8-K filed April 24, 2009 and incorporated herein by reference). 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 10.6 Secured Promissory Note between the Company and The Cellular Connection Ltd. dated April 30, 2009 (included as exhibit 10.6 to the Form 10-Q filed June 19, 2009 and incorporated herein by reference). 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.1 Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: December 18, 2009 Vital Products, Inc. By:/s/ Michael Levine -------------------------- Michael Levine Principal Executive Officer Dated: December 18, 2009 By:/s/ Henry Goldberg ---------------------------- Henry Goldberg, Chief Financial and Principal Accounting Officer and Director 11