UNITED STATES


SECURITIES AND EXCHANGE COMMISSION





Washington, D.C. 20549





FORM 20-F





oREGISTRATION STATEMENT PURSUANT TO SECTION 12(b)


OR(g) OF THE SECURITIES EXCHANGE ACT OF 1934





OR





xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended March 31, 2010





OR





oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





Commission file number 0-30858











VALCENT PRODUCTS INC.


(Exact name of Registrant as specified in its charter)





Not Applicable


(Translation of Registrant's name into English)





Alberta, Canada


(Jurisdiction of incorporation or organization)





789 West Pender Street, Suite 1010, Vancouver, British Columbia V6C 1H2


(Address of principal executive offices)





Robert Baker


789 West Pender Street, Suite 1010, Vancouver, B.C. Canada V6C 1H2


Phone: (604) 606-7979


Fax: (604) 606-7980


(Name, Telephone, Facsimile number and Address of Company Contact Person)






Securities registered or to be registered pursuant to Section 12(b) of the Act.





Title of each class

Name of each exchangeon which registered





Securities registered or to be registered pursuant to Section 12(g) of the Act.





Common Stock, no par value


(Title of Class)








1





Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.





None


(Title of Class)





Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.





52,175,329 common shares, without par value, issued and outstanding at March 31, 2010, after having given effect to the one for eighteen share consolidation effected July 16, 2009, and 57,389,550 common shares, without par value, issued and outstanding as of November 1, 2010.








Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.





Yes o No x








If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.





Yes o 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 o








Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 o  No x








Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):





Large Accelerated filer     o
Accelerated filer     o
Non Accelerated filer     x








Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:





U.S. GAAP
o
International Financial Reporting Standards as issued
o
Other
xby the International Accounting Standards Board








If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.





Item 17 x Item 18 o








If this is an annual report, indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).





Yes o No x








(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)








2





TABLE OF CONTENTS


Page

NumberPART IITEM 1

Identity of Directors, Senior Management and Advisors

5ITEM 2

Offer Statistics and Expected Timetable

5ITEM 3

Key Information

5ITEM 4

Information on the Company

14ITEM 5

Operating and Financial Review and Prospects

25ITEM 6

Directors, Senior Management and Employees

43ITEM 7

Major Shareholders and Related Party Transactions

48ITEM 8

Financial Information

51ITEM 9

The Offer and Listing

52ITEM 10

Additional Information

53ITEM 11

Quantitative and Qualitative Disclosures About Market Risk

62ITEM 12

Description of Securities Other than Equity Securities

62PART II



62ITEM 13

Defaults, Dividends, Arrearages and Delinquencies

62ITEM 14

Material Modifications to the Rights of Security Holders and Use of Proceeds

62ITEM 15 T

Control and Procedures

62ITEM 16

[Reserved]ITEM 16A

Audit Committee Financial Expert

65ITEM 16B

Code of Ethics

65ITEM 16C

Principal Accountant Fees and Services

65ITEM 16D

Exemptions from the Listing Standards for Audit Committee

65ITEM 16E

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

66ITEM 16F

Change in registrant’s certifying accountant

66ITEM 16G

Corporate governance

66PART III



F-1ITEM 17

Financial Statements

F-1ITEM 19

Exhibits

67





3












PART I





CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS





Certain written and oral statements made by our Company and subsidiaries of our Company may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. This includes statements made in this report, in other filings with the Securities and Exchange Commission (“SEC’), in press releases, and in certain other oral and written presentations. Generally, the words “anticipates”, “believes”, “expects”, “plans”, “may”, “will”, “should”, “seeks”, “estimates”, “projects”, “predicts”, “potential”, “continues”, “intends”, and other similar words identify forward-looking statements. All statements that address operating results, events or developments that we expect or anticipate will occur in the future, including statements related to sales, earnings per share results, and statements expressing general expectations about future operating results, are forward-looking statements and are based upon the Company’s current expectations and various assumptions. The Company believes there is a reasonable basis for its expectations and assumptions, but there can be no assurance that the Company will realize its expectations or that the Company’s assumptions will prove correct. Forward-looking statements are subject to risks that could cause them to differ materially from actual results. Accordingly, the Company cautions readers not to place undue reliance on forward-looking statements. We believe that these risks include but are not limited to the risks described in this report under Part I, Item 3, Subsection D entitled “Risk Factors” and Part I, Item 5, entitled “Operating and Financial Review and Prospects” and that are otherwise described from time to time in our SEC reports filed after this report. These statements appear in a number of places in this Form 20-F and include all statements that are not statements of historical fact regarding the intent, belief or current expectations of us, our directors or our officers, with respect to, among other things: (i) our liquidity and capital resources, (ii) our financing opportunities and plans, (iii) our ability to attract customers to generate revenues, (iv) competition in our business segment, (v) market and other trends affecting our future financial condition or results of operations, (vi) our growth strategy and operating strategy, and (vii) the declaration and/or payment of dividends.





This Form 20-F and in particular the “Outlook” section, contains forward-looking statements including, but not limited to, the ability to implement corporate strategies, the state of domestic capital markets, the ability to obtain financing, operating risks, changes in general economic conditions, and other factors are based on current expectations and various estimates, factors and assumptions and involve known and unknown risks, uncertainties and other factors.




It is important to note that:




·
Unless otherwise indicated, forward-looking statements in this Form 20-F describe the Company’s expectations as of March 31, 2010.




·
Readers are cautioned not to place undue reliance on these statements as the Company’s actual results, performance or achievements may differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements if known or unknown risks, uncertainties or other factors affect the Company’s business, or if the Company’s estimates or assumptions prove inaccurate.  Therefore, the Company cannot provide any assurance that forward-looking statements will materialize.




·
The Company assumes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or any other reason, except as required by law.




For a brief description of material factors that could cause the Company’s actual results to differ materially from the forward-looking statements in this Form 20-F, please see “RISK FACTORS”.




The risks and uncertainties that could affect future events or the Company's future financial performance are more fully described in the Company's annual reports (on Form 20-F filed in the U.S. and Canada) and the other recent filings in the U.S. and Canada. These filings are available at www.sec.gov in the U.S. and www.sedar.com in Canada.




Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The factors that might cause such differences include, among others, those set forth in this annual report, and we undertake no obligation to update any of the forward-looking statements in this annual report on Form 20-F after the date of this report.










4






ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS





Not applicable.








ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE





Not applicable.








ITEM 3. KEY INFORMATION





SELECTED FINANCIAL DATA





We are at present a life sciences development stage company focused primarily on:





(i)
the development and commercialization of our “High Density Vertical Growth System” (“Verticrop(TM)” or “HDVG System”)  designed to produce vegetables, herbs  and other plant crops,





(ii)
the development and commercialization of our “High Density Vertical Growth System” (“Alphacrop(TM)” or “HDVG System”) designed for smaller commercial growers looking for smaller but highly cost effective compact growing systems to produce vegetables, herbs and other plant crops.





Due to economic circumstances and to make our Company more conducive to investmentthe shareholders of the Company approved a special resolution to reorganize the capital structure of the Company by a share consolidation of its common shares on the basis of one new share for each eighteen old shares.  This share consolidation became effective July 16, 2009.  Also effective July 16, 2009 our trading symbol changed to “VCTZF” and our CUSIP number changed to 918881202.  Our website is located at www.valcent.net





Unless otherwise noted, all references to the number of common shares are stated on a post-consolidation basis.





As at November 1, 2010, 57,389,550 common shares were issued and outstanding, the Company had 9,597,846 warrants outstanding and 1,750,000 share options outstanding.  In addition, the Company has certain secured convertible promissory notes outstanding that may be converted at the election of the holders into common shares (see ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS, Liquidity and Capital Resources).





All amounts are stated in Canadian dollars unless otherwise noted.





The following selected financial data has been derived from our audited financial statements and related notes for the preceding five years and has been prepared and presented in accordance with Canadian generally accepted accounting principles. For comparative purposes this selected financial data for the years ended March 31, 2006, 2007, 2008, 2009 and 2010 is presented as though it were prepared under United States generally accepted accounting principles. Our audited financial statements for the year ended March 31, 2010 have been prepared in accordance with Canadian generally accepted accounting principles, which, except as noted in Note 19, conform in all material respects with those of the United States and with the requirements of the United States Securities and Exchange Commission.














5





ITEM 3. KEY INFORMATION - continued
  SELECTED FINANCIAL DATA - continued


Valcent Products Inc. Selected Financial Data (Expressed in CDN Dollars)March 312010



2009



2008



2007



2006Net operating revenues

$
-


$
-


$
-


$
-


$
-Loss from operations per CDN GAAP

$
4,997,089


$
14,451,993


$
12,028,222


$
8,171,090


$
3,442,933Net loss per CDN GAAP

$
6,838,849


$
17,855,490


$
12,712,358


$
8,138,393


$
3,466,888Net loss per US GAAP

$
13,566,861


$
15,089,918


$
13,292,888


$
9,749,339


$
2,844,879Loss per share, CDN GAAP

$
0.16


$
6.42


$
6.44


$
7.60


$
5.92Loss per share, U.S.GAAP

$
0.20


$
5.64


$
6.73


$
9.11


$
4.86Common shares issued


52,175,329



3,008,977



2,459,636



1,703,670



877,102Weighted average shares outstanding per CDN GAAP


42,354,279



2,782,284



1,974,763



1,070,066



586,002Weighted average shares outstanding per U.S. GAAP


42,354,279



2,782,284



1,974,763



1,070,066



586,002Total Assets per CDN GAAP

$
1,284,286


$
2,351,963


$
4,605,914


$
4,142,485


$
1,392,801Total Assets per U.S. GAAP

$
1,284,286


$
2,384,517


$
4,700,482


$
4,372,786


$
1,392,801Net assets (liabilities) per CDN GAAP

$
(2,882,454
)

$
(1,031,226
)

$
(4,009,472
)

$
(24,376
)

$
(441,099
)Net assets (liabilities) per U.S. GAAP

$
(3,711,845
)

$
955,774


$
(3,161,013)


$
(665,904
)

$
(590,697
)





Exchange Rates (CDN to 1 USD)

For the five most recent years ended March 31,

calculated on the average of 12 month end closing daysMarch 31, 2010

$
0.9219March 31, 2009

$
0.8969March 31, 2008

$
0.9708March 31, 2007

$
0.8789March 31, 2006

$
0.8385





Exchange Rates (CDN to 1 USD)

for eight most recent months

Period

High


Period

LowOctober 2010

$
1.0017


$
0.9645September 2010

$
0.9808


$
0.9368August 2010

$
0.9880


$
0.9374July 2010

$
0.9748


$
0.9367June 2010

$
0.9859


$
0.9378May 2010

$
0.9979


$
0.9217April 2010

$
1.0068


$
0.9788March 2010

$
0.9935


$
0.9458





Exchange Rate (CDN to 1 USD) November 1, 2010:  $0.9813





6


ITEM 3. KEY INFORMATION - continued
 
 CAPITALIZATION AND INDEBTEDNESS





Not Applicable.








REASONS FOR THE OFFER AND USE OF PROCEEDS





Not Applicable.








RISK FACTORS





Our business entails a significant degree of risk, and an investment in our securities should be considered highly speculative. An investment in our securities should only be undertaken by persons who can afford the loss of their entire investment. The following is a general description of material risks, which may adversely affect our business, our financial condition, including liquidity and profitability, and our results of operations, ultimately affecting the value of an investment in shares of our common stock.








General Business Risks





We are a development stage company and based on our historical operating losses and negative cash flows from operating activities there is uncertainty as to our ability to continue as a going concern.





We have a history of operating losses and negative cash flows from operating activities, resulting in our continued dependence on external financing arrangements. In the event that we are unable to achieve or sustain profitability or are otherwise unable to secure additional external financing, we may not be able to meet our obligations as they come due, raising substantial doubts as to our ability to continue as a going concern. Any such inability to continue as a going concern may result in our security holders losing their entire investment. Our financial statements, which have been prepared in accordance with Canadian GAAP, contemplate that we will continue as a going concern and do not contain any adjustments that might result if we were unable to continue as a going concern. Changes in our operating plans, our existing and anticipated working capital needs, the acceleration or modification of our expansion plans, lower than anticipated revenues, increased expenses, potential acquisitions or other events will all affect our ability to continue as a going concern.





From inception, we have historically generated minimal revenues while sustaining substantial operating losses and we anticipate incurring continued operating losses and negative cash flows in the foreseeable future resulting in uncertainty of future profitability and limitation on our operations.





From inception, we have generated minimal revenues and experienced negative cash flows from operating losses. We anticipate continuing to incur such operating losses and negative cash flows in the foreseeable future, and to accumulate increasing deficits as we increase our expenditures for (i) technology, (ii) infrastructure, (iii) research and development, (iv) sales and marketing, (v) interest charges and expenses related to previous equity and debt financings, and (v) general business enhancements. Any increases in our operating expenses will require us to achieve significant revenue before we can attain profitability. In the event that we are unable to achieve profitability or raise sufficient funding to cover our losses, we may not be able to meet our obligations as they come due, raising substantial doubts as to our ability to continue as a going concern.





We have historically had working capital shortages, even following significant financing transactions.





We have had working capital shortages in the past and, although we raised significant capital through debt and equity offerings, we have generated significant losses, which have impacted working capital. As of March 31, 2010, our balance sheet reflects a working capital deficit of $3,899,205.  This condition has continued since the date of those financial statements, and we expect that these conditions will continue for the foreseeable future unless we are able to raise a substantial amount of additional financing. In view of the matters described herein, our ability to continue to pursue our plan of operations as described herein is dependent upon our ability to raise the capital necessary to meet our financial requirements on a continuing basis.





Based on our expected negative cash flow from operations and investing activities, we anticipate that we will not be able to positively impact our working capital unless we are able to generate revenues.  As at June 30, 2010, the holders of US $698,426 (Net of an embedded derivative liability as at June 30, 2010 of US $302,488) of the Company's convertible promissory notes have a security interest in substantially all of our assets which could make it difficult for us to raise additional capital through the issuance of debt securities. If these convertible promissory notes are not repaid by the end of their term extended term of December 30, 2010, these notes are due on demand which could under certain circumstances cause the sale of our assets, or become convertible into shares of our common stock at a substantial discount to the market price.  The rate of interest on these notes effective July 01, 2010 was increased from 18% to 30% per annum.




7
  ITEM 3. KEY INFORMATION - continued
 
 RISK FACTORS - continued
 
 Our accumulated deficit and level of debt make it more difficult to borrow funds.





As of the year ended March 31, 2010, and as a result of historical operating losses from prior operations, we had a deficit from prior operations of $3,237,370, and a deficit of $49,011,978 from losses accumulated during our development stage resulting in a total accumulated deficit of $52,249,348. Lenders generally regard an accumulated deficit as a negative factor in assessing creditworthiness, and for this reason, the extent of our accumulated deficit, coupled with our historical operating losses will negatively impact our ability to borrow funds if and when required. Any inability to borrow funds, or a reduction in favorability of terms upon which we are able to borrow funds, including the amount available to us, the applicable interest rate and the collateralization required, may affect our ability to meet our obligations as they come due, and adversely affect on our business, financial condition, and results of operations, raising substantial doubts as to our ability to continue as a going concern.





In addition, the Company also has aggregate debt of $4,166,470 as at March 31, 2010 and total assets of only $1,284,286 making it unreasonable to obtain debt due to the imbalance of debt over assets; in addition, a first secured charge on our assets has already been pledged with one of our convertible promissory debt instruments currently outstanding thus increasing the costs of borrowing to new lenders and making debt instruments less desirable to potential lenders.





Our debt arrangements include the provision of a secured interest in our assets and may make it more difficult to borrow funds, or default of debt provisions may impact our assets and ability to operate; certain unsecured debt instruments are due upon demand and may cause financial liquidity difficulties for the Company.





During July 2008, the Company undertook a US$2.428 million financing through the issuance of secured convertible promissory note s that provides the holders with a secured interest in the Company’s assets.  Effective, March 27, 2009 the Company settled these notes through the issuance of shares and cash. The remaining convertible promissory note in the amount of US$1.323 million was due on December 31, 2009 and if not settled by the due date the note would be in default at a default rate of interest of 18 %, due on demand and the original conversion features of the instrument would be reinstated.  After partial repayment and conversion of these notes, an aggregate of US $698,426 remains outstanding as at June 30, 2010 inclusive of accrued and unpaid interest, but  net of an embedded derivative liability of US $302,488. On July 1, 2010 the Company agreed to issue 500,000 common shares as penalty to extend the terms of these notes to December 30, 2010 and to increase the default rate of interest from 18% to 30%.  If the Company defaults on material terms of the debt instrument, the lenders may be able to realize on their secured interest in our assets which would have a negative effect on our ability to operate and conduct our business raising substantial doubts as to our ability to continue as a going concern.





In addition, the Company has interest bearing promissory notes that are due upon demand in the aggregate of $1,053,169.  A demand by the debt holder(s) of such debt securities could cause financial hardship, litigation, and other negative influence on the financial condition of the Company that could cause disruption to our operations.





Our having recently undergone a significant restructuring coupled with our limited experience as a publicly traded company with substantial operations in several different industries, may increase our expenses and place significant demands on our management.





From inception we have undergone several changes in business direction and consequently have previously had only limited operations. Our most recent change in business direction and significant restructuring may make it difficult to respond to our regulatory and reporting obligations, and could increase our general, administrative, legal and auditing costs and place substantial time demands on our management. We anticipate that, due to the increased complexity of our corporate structure and increased reporting and governance obligations, and our simultaneous past pursuit of various product lines in different industries, our regulatory and reporting obligations will require further expenditures to train additional personnel and retain appropriate legal and accounting professional services. In the event that these expenditures precede, or are not subsequently followed by revenues, or that we are unable to raise sufficient funding to cover any increase in our expenses, we may not be able to meet our obligations as they come due, and our business, financial condition, and results of operations may be negatively affected, raising substantial doubts as to our ability to continue as a going concern.





We identified material weaknesses in our disclosure controls and procedures and our internal control over financial reporting.





Section 404 of the Sarbanes-Oxley Act of 2002 requires management to assess our internal control over financial reporting (“ICFR”) pursuant to a defined framework.  In making that assessment, management identified a material weakness in our disclosure controls as a result of several material weaknesses identified in our ICFR as described in Item 15T below.  There are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective ICFR can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect misstatements.  Material weaknesses make it more likely that a material misstatement of annual or interim financial statements will not be prevented or detected.  In addition, effective ICFR at any point in time may become ineffective in future periods because of changes in conditions or deterioration in the degree of compliance with our established policies and procedures.




8
  ITEM 3. KEY INFORMATION - continued
 
 RISK FACTORS - continued
 
 Lack of insurance coverage on fixed assets located in the United States





The Company cut back its operations in its US based research facilities last year.  As a result of lack of financing, insurance has lapsed on many of our key fixed assets.  As at March 31, 2010, the Company had a net book value of fixed assets located in the United States in the aggregate of approximately US$490,000 ($584,000), of which approximately 50% represents land.  As a result, and until such time as the Company obtains adequate and comprehensive insurance on its fixed assets located in the United States, a significant loss in excess of US$245,000 could result due to fire, theft, or other perils, and general third party liability costs due to accidents or other loss could greatly exceed this amount.  The Company maintains a high security anti-intruder fence around the perimeter of its US research facility with 24 hour computer controlled perimeter intrusion alarm as well as 24 hour on site security.





Disruptions in the Global Financial and Capital Markets May Impact Our Ability to Obtain Financing.





The global financial and capital markets have been experiencing extreme volatility and disruption, including the failures of financial services companies and the related liquidity crisis.  Although we expect to meet our near term liquidity needs with our working capital on hand and near term financing instruments, we will continue to need further funding to achieve our business objectives.  In the past, the issuance of debt and equity securities has been the major source of capital and liquidity for us.  The extraordinary conditions in the global financial and capital markets have currently limited the availability of this funding.  If the disruptions in the global financial and capital markets continue, debt or equity financing may not be available to us on acceptable terms, if at all.  If we are unable to fund future operations by way of financing, including public or private offerings of equity or debt securities, our business, financial condition and results of operations will be adversely impacted.








Risks Associated With Our Businesses And Industries





We face serious competition in our business segments from new market entrants as well as a number of established companies with greater resources and existing customer bases.





The markets for our potential products rapidly evolve and are intensely competitive as new products are regularly introduced. Competition in our market segments is based primarily upon:





•
brand name recognition;•
Availability of financial resources;•
the quality and efficiency of products;•
reviews received for products from independent reviewers who publish in magazines, websites, newspapers and other industry publications;•
Availability of access to markets;•
the price of each product; and•
the number of products then available.





We face competition from other industrial manufacturers, all of whom could generally sell through the same combination of channels as we intend to.





To remain competitive in the market for our products and potential products, we rely heavily upon what we believe to be our superior potential product quality, marketing and sales abilities, proprietary technology, product development capabilities and our management’s experience. However, we may not be able to effectively compete in these intensely competitive markets, as some of our competitors have longer operating histories, larger customer bases and greater financial, marketing, service, support, technical and other resources, affording them the ability to undertake more extensive marketing campaigns and adopt more aggressive pricing policies, than we can. Moreover, we believe that competition from new entrants will increase as the market for each of our potential products expands. If our potential product lines are not successful, our business, financial condition and results of operations will be negatively affected.




9
  ITEM 3. KEY INFORMATION - continued
 
 RISK FACTORS - continued
 
 Our intellectual property may not be adequately protected from unauthorized use by others, which could increase our litigation costs and adversely affect our sales.





Our intellectual property assets/rights are some of the most important assets that we possess in our ability to generate revenues and profits and we will rely very significantly on these intellectual property assets in being able to effectively compete in our markets. However, our intellectual property rights may not provide meaningful protection from unauthorized use by others, which could result in an increase in competing products and a reduction in our own sales. Moreover, if we must pursue litigation in the future to enforce or otherwise protect our intellectual property rights, or to determine the validity and scope of the proprietary rights of others, we may not prevail and will likely have to make substantial expenditures and divert valuable resources in any case. We may not have adequate remedies if our proprietary content is appropriated or if our intellectual property does not adequately protect unauthorized use by others.





Our intellectual property costs US$3,150,000 to acquire and failure to make payments may forfeit our rights to these technologies and amounts previously paid to acquire these rights.





Our intellectual property assets/rights are contingent upon the completion of US$3,150,000 in aggregate payments to acquire these intellectual property assets/rights.  They remain in escrow until fully paid.  Pursuant to the April 01, 2009 Intellectual Property Sales and Purchase Agreement, the Company agreed to pay a total of US $2,000,000 plus issue 3% of its common stock on conclusion of the purchase agreement.  The US $2,000,000 is payable on a cumulative basis as to US $65,000 on signing (paid) plus the greater of 3% of the gross monthly product sales less returns from exploitation of the Technologies or US $12,000 per month until US $2,000,000 has been paid.  The ownership of the Technologies will remain in escrow until fully paid or if the Company defaults in making payments.  The issuance of the 3% of its common stock is payable upon release of the Technologies from escrow to the Company.  The Company may at any time elect to pay out the remaining balance due.  Should the Company default under this agreement the Technologies will revert back to Glen Kertz and Pagic, the licensors of the rights.





During the last quarter of the fiscal year ended March 31, 2010, the Company and Pagic entered into negotiations to resolve certain disputes regarding the Purchase Agreement.  On March 8, 2010, an addendum to the Purchase Agreement (“Addendum”) was entered into by parties thereto whereby, a) the purchase price of technology to be acquired was amended to an aggregate of US $3.15 million (previously US $2 million) of which certain equipment was permitted to be used by Pagic as an incentive to enter into the Purchase Agreement (“Addendum”), b) US $100,000 was paid to Pagic by the Company at the date of the Addendum, c) calculated minimum IP payments increased to US $18,000 per month from US $12,000 per month effective August 1, 2010, and d) the term to complete the technology purchased was reduced from July 1, 2019 to July 12, 2014.





During the year ended March 31, 2010, $261,088 was paid or accrued to Pagic under the terms of the Purchase Agreement and its Addendum, and $318,250 was paid during the year ended March 31, 2009 under previous license arrangements, with such costs recorded as product development costs.





If our potential products infringe upon proprietary rights of others, lawsuits may be brought requiring us to pay large legal expenses and judgments and redesign or discontinue selling one or more of our potential products.





We are not aware of any circumstances under which our potential products infringe upon any valid existing proprietary rights of third parties. Infringement claims, however, could arise at any time, whether or not meritorious, and could result in costly litigation or require us to enter into royalty or licensing agreements. If we are found to have infringed the proprietary rights of others, we could be required to pay damages, redesign our potential products or discontinue their sale. Any of these outcomes, individually or collectively, would negatively affect our business, financial condition and results of operations.





If we are unable to successfully break into new markets, implement our growth strategy or manage our business as it does grow, our future operating results could suffer.





As a development stage company, we face several challenges in entering each of the industrial markets and consumer retail markets for our respective potential products, particularly consumers’ lack of awareness of our Company and our potential product lines, competing for market share with established consumer retail product manufacturers and difficulties in competing for, hiring and retaining representative personnel in each of our respective potential markets. In addition, we face several challenges common to any new market entrant, including problems typically associated with unfamiliarity of local market conditions and market demographics. Each new market we enter may also have different competitive conditions, consumer tastes and discretionary spending patterns, which may require us to adjust our growth strategy or modify the way in which we manage our business. To the extent that we are unable to break into or meet the challenges associated with establishing ourselves in a new market, our future operating results could suffer and our financial condition and business may be negatively affected.




10
  ITEM 3. KEY INFORMATION - continued
 
 RISK FACTORS - continued
 
 Changes in consumer and industrial preferences or discretionary spending may negatively affect our future operating results.





Within the industrial/retail businesses and industries in which we intend to operate, revenues are largely generated by industrial and retail consumer preferences and discretionary spending. Our success as a potential manufacturer and retailer of consumer and industrial products will depend, in part, on the popularity of each of our potential product offerings. Any shift in consumer sentiment away from our potential product or industrial product lines could have a negative effect on our ability to achieve future profitability. Our success also depends on a number of factors affecting levels of consumer discretionary income and spending, including, the following, among other, social and economic conditions:





•
general business conditions;•
interest rates;•
inflation;•
consumer debt levels;•
the availability of consumer credit;•
taxation;•
fuel prices and electrical power rates;•
unemployment trends;•
natural disasters;•
terrorist attacks and acts of war; and•
other matters that influences consumer confidence and spending.





Consumer and end user purchases of discretionary items, including our potential products and product lines, could decline during periods in which discretionary income is lower or actual or perceived unfavorable economic conditions exist. Should this occur, and if we are unable to introduce new products and product lines that consumers find appealing, our business, financial condition and results of operations will be negatively affected.





We may be subject to adverse publicity or claims by consumers arising out of use of our potential product lines.





We may be subject to complaints from or litigation by consumers, whether or not meritorious, relating to quality, health, efficiency, efficacy, or operational aspects of our potential consumer and industrial product lines including environmental impacts. Such claims could arise at any time and, should they arise, we may not be successful in defending them. Any litigation, regardless of the outcome, would entail significant costs and use of management time, which could impair our ability to generate revenue and profit. For these reasons or, should we be found liable with regard to a claim arising out of any of our potential product lines, our business, financial condition, and results of operations would be negatively affected.





We face substantial competition in attracting and retaining qualified senior management and key personnel and may be unable to develop and grow our business if we cannot attract and retain senior management and key personnel as necessary, or if we were to lose our existing senior management and key personnel.





As a development stage company, our success, to a large extent, depends upon our ability to attract, hire and retain highly qualified and knowledgeable senior management and key personnel who possess the skills and experience necessary to satisfy our business and client service needs. Our ability to attract and retain such senior management and key personnel will depend on numerous factors, including our ability to offer salaries, benefits and professional growth opportunities that are comparable with and competitive to those offered by more established consumer retail product manufacturers and industrial product manufacturers. We may be required to invest significant time and resources in attracting and retaining, as necessary, additional senior management and key personnel, and many of the companies with which we will compete for any such individuals have greater financial and other resources which afford them the ability to undertake more extensive and aggressive hiring campaigns than we can. Furthermore, an important component to the overall compensation offered to our senior management and key personnel will be equity. If our stock prices do not appreciate over time, it may be difficult for us to attract and retain senior management and key personnel. Moreover, should we lose any member of our senior management or key personnel, we may be unable to prevent the unauthorized disclosure or use of our trade secrets, including our technical knowledge, practices, procedures or client lists by such individuals. The normal running of our operations may be interrupted, and our financial condition and results of operations negatively affected as a result of any inability on our part to attract or retain the services of qualified and experienced senior management and key personnel.  If any member of our existing senior management or key personnel left and a suitable replacement was not found, or should any of our former senior management or key personnel disclose our trade secrets, the normal running of our operation may be negatively interrupted.





There is no certainty that our key projects will be operationally successful or profitable.





We are highly dependent upon the success of our high density vertical plant growing systems commercialization. The risks associated with the replication of laboratory results or prototype tests in the larger scale demonstration projects and commercialization projects are critical to the Company. If the expected results cannot be replicated on a commercial scale, the expected revenue from these ventures will not be realized and the investment in our pilot projects is unlikely to be recovered. This would have a very material adverse effect on the Company’s financial results.







11
  ITEM 3. KEY INFORMATION - continued
 
 RISK FACTORS - continued
 
 There is no certainty that our key projects will be operationally successful or profitable.





We are highly dependent upon the success of our Verticrop(TM) plant growing system – our core business. Although we are optimistic that there is a large amount of interest for these technologies, if that demand does not materialize to the extent that we project or we are not successful in promoting and distributing our technology, this will have a material adverse effect on the Company’s financial results.








Risks Associated With An Investment In Our Common Stock





Unless an active trading market develops for our securities, you may not be able to sell your shares.





Although, we are a reporting company and our common shares are listed on the OTC Bulletin Board (owned and operated by the Nasdaq Stock Market, Inc.) under the symbol “VCTZF”, currently, there is only a limited trading market for our common stock and a more active trading market may never develop or, if it does develop, may not be maintained. Failure to develop or maintain an active trading market will have a generally negative effect on the price of our common stock, and you may be unable to sell your common stock or any attempted sale of such common stock may have the effect of lowering the market price and therefore your investment could be a partial or complete loss.





Under certain circumstances, some of our outstanding common stock purchase warrants may be exercised without our receiving any cash.





As at March 31, 2010, we have outstanding warrants to purchase some of our common stock exercisable on a “net cashless” basis, which means they can be exercised, without payment of the stated exercise price, solely in exchange for cancellation of some number of common shares into which the warrants are exercisable. The number of shares for which any such warrant would be cancelled under a net cashless exercise would be the number of shares having a then current market value equal to the aggregate exercise price of the warrant, in whole or in part, based on its stated exercise price. In effect, a net cashless exercise of any such warrants would mean that, even though we would receive no cash, we would have to issue additional shares, thereby diluting, potentially significantly, our reportable earnings per share. Although the circumstances under which the net cashless exercise provision may be elected by the holders of our warrants may be limited, any such exercise could have a negative effect, directly or indirectly, on the trading market price of our common stock.





Since our common stock is thinly traded it is more susceptible to extreme rises or declines in price, and you may not be able to sell your shares at or above the price paid.





Since our common stock is thinly traded its trading price is likely to be highly volatile and could be subject to extreme fluctuations in response to various factors, many of which are beyond our control, including:





•
the trading volume of our shares;•
the number of securities analysts, market-makers and brokers following our common stock;•
changes in, or failure to achieve, financial estimates by securities analysts;•
new products introduced or announced by us or our competitors;•
announcements of technological innovations by us or our competitors;•
actual or anticipated variations in quarterly operating results;•
conditions or trends in our business industries;•
announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;•
additions or departures of key personnel;•
sales of our common stock; and•
general stock market price and volume fluctuations of publicly-traded, and particularly microcap, companies.





You may have difficulty reselling shares of our common stock, either at or above the price you paid, or even at fair market value. The stock markets often experience significant price and volume changes that are not related to the operating performance of individual companies, and because our common stock is thinly traded it is particularly susceptible to such changes. These broad market changes may cause the market price of our common stock to decline regardless of how well we perform as a company. In addition, securities class action litigation has often been initiated following periods of volatility in the market price of a company’s securities. A securities class action suit against us could result in substantial legal fees, potential liabilities and the diversion of management’s attention and resources from our business. Moreover, and as noted below, our shares are currently traded on the OTC Bulletin Board and, further, are subject to the penny stock regulations. Price fluctuations in such shares are particularly volatile and subject to manipulation by market-makers, short-sellers and option traders.




12
  ITEM 3. KEY INFORMATION - continued
 
 RISK FACTORS - continued
 
 Our common stock is subject to the “penny stock” regulations, which are likely to make it more difficult to sell.





Our common stock is considered a “penny stock,” which generally is a stock trading under US$5.00 and not registered on a national securities exchange. The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. These rules generally have the result of reducing trading in such stocks, restricting the pool of potential investors for such stocks, and making it more difficult for investors to sell their shares once acquired. Prior to a transaction in a penny stock, a broker-dealer is required to:





•
deliver to a prospective investor a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market;•
provide the prospective investor with current bid and ask quotations for the penny stock;•
explain to the prospective investor the compensation of the broker-dealer and its salesperson in the transaction;•
provide investors monthly account statements showing the market value of each penny stock held in their account; and•
make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.





These requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that is subject to the penny stock rules. Since our common stock is subject to the penny stock rules, investors in our common stock may find it more difficult to sell their shares.





We are a Canadian Company, and must ensure compliance with Canadian as well as American securities laws.  As a result, there may be securities regulations in the jurisdiction where our shareholders are resident that must be met, and such regulations may impact the ability of our shareholders to trade our securities.





As a foreign private issuer, we are exempt from certain informational requirements of the Exchange Act to which domestic United States issuers are subject.





As a foreign private issuer we are not required to comply with all of the informational requirements of the Exchange Act. As a result, there may be less information concerning our Company publicly available than if we were a domestic United States issuer. In addition, our officers, directors and principal shareholders are exempt from the reporting and short profit provisions of Section 16 of the Exchange Act and the rules promulgated thereunder. Therefore, our shareholders may not know on a timely basis when our officers, directors and principal shareholders purchase or sell shares of our common stock. See “ITEM 10. ADDITIONAL INFORMATION”.





As we are a Canadian company with much of our assets and key personnel located outside of the United States, you may have difficulty in acquiring United States jurisdiction or enforcing a United States judgment against us, our key personnel or our assets.





We are a Canadian company organized under the Business Corporations Act (Alberta). Many of our assets and certain of our key personnel, including our directors and officers, reside outside of the United States. As a result, it may be difficult or impossible for you to effect service of process within the United States upon us or any of our key personnel, or to enforce against us or any of our key personnel judgments obtained in United States’ courts, including judgments relating to United States federal securities laws. In addition, Canadian courts may not permit you to bring an original action in Canada or recognize or enforce judgments of United States’ courts obtained against us predicated upon the civil liability provisions of the federal securities laws of the United States or of any state thereof. Accordingly, you may have more difficulty in protecting your interests in the face of actions taken by our management, members of our board of directors or our controlling shareholders than you would otherwise as shareholder in a United States public company.





We do not intend to pay any common stock dividends in the foreseeable future.





We have never declared or paid a dividend on our common stock and, because we have very limited resources and a substantial accumulated deficit, we do not anticipate declaring or paying any dividends on our common stock in the foreseeable future. Rather, we intend to retain earnings, if any, for the continued operation and expansion of our business. It is unlikely, therefore, that the holders of our common stock will have an opportunity to profit from anything other than potential appreciation in the value of our common shares held by them. If you require dividend income, you should not rely on an investment in our common stock. See “Dividend Policy”.





Future issuances of our common stock from equity financing, exercise of existing and future warrants and options, and convertible and future debt settlements, and equity issuances for services may depress our stock price and dilute your interest. Our stock trades at less than US$0.20 per share leading to high levels of dilution from equity issuances.





We have US $698,426 (net of an embedded derivative liability of US $302,488) in secured convertible promissory notes outstanding as at June 30, 2010 that if not repaid by December 30, 2010, are due upon demand that may impact our assets and our ability to continue as a going concern; these promissory notes are convertible debt instruments convertible into common shares at a significant discount to the trading market.







13
  ITEM 3. KEY INFORMATION - continued
 
 RISK FACTORS - continued
 
 At current market prices at the date of this annual report, this may result in at least 9.5-11.5 million shares to be issued if the notes are fully converted.  The convertible notes have provisions that are dilutive and impose significant restriction on our ability to issue additional securities as these notes have equity conversion privileges that allow a 30%+ conversion to the then trading market at the date of conversion allowing at any date an unknown amount of shares to be issued in exchange for the conversion of principal, and accrued interest. As a result, a significant risk relates to the shareholder dilution that may be experienced in consequence with securities issued and those that might be issued in the future.  Interest accrues at the negotiated default rate of 30% per annum through December 30,  2010 and until paid.





As at November 1, 2010, we have outstanding warrants to purchase up to approximately 9,597,846 shares of our common stock and options issued to purchase up to approximately 1,750,000 shares of our common stock.





We may issue additional shares of our common stock in future financings or grant stock options to our employees, officers, directors and consultants under our stock option plan. We may issue common shares for services rendered.  Any such issuances could have the affect of depressing the market price of our common stock and, in any case, would dilute the percentage ownership interests in our Company by our shareholders. In addition, we could issue serial preferred stock having rights, preferences and privileges senior to those of our common stock, including the right to receive dividends and/or preferences upon liquidation, dissolution or winding-up in excess of, or prior to, the rights of the holders of our common stock. This could depress the value of our common stock and could reduce or eliminate amounts that would otherwise have been available to pay dividends on our common stock (which are unlikely in any case) or to make distributions on liquidation.





Additionally, if possible under terms that we believe to be appropriate given our financial condition and other circumstances, we will likely seek to raise additional financing during our fiscal year ending March 31, 2011. We may also issue additional shares, options, and warrants to obtain necessary services.





Some of the issuances we have made in the past, and are likely to make in the future, have been issued at prices below market and at prices below our historical market prices. Consequently, our shareholders have suffered dilution in the value of their shares and can expect that we will be issuing additional securities on similar terms. Further dilution can be expected to occur when our outstanding options and warrants are exercised or debentures are converted at prices below the market.





Future releases from voluntary lock up arrangements of our common stock may depress our stock price





An aggregate of US $10,806,780 of debt was settled on March 29, 2009 in exchange for 29,516,951 common shares issued on May 11, 2009.  Included in these shares are 24,232,816 common shares which are subject to lock up restrictions with quarterly equal releases beginning on January 1, 2010 and ending on September 1, 2010, and a further 2,634,135 common shares are subject to lock up restrictions until January 1, 2010.  Releases from lock up will increase supply of shares tradable and may depress the market price of our common shares trading in the market. Although the lock up provisions have ended as at September 1, 2010, not all shareholders have applied for release from restrictions.  The future release of these shares now unrestricted may negatively affect the trading price of the Company’s shares due to supply and demand issues and limited market liquidity.  See ITEM 4. INFORMATION ON THE COMPANY.








ITEM 4. INFORMATION ON THE COMPANY





Corporate History





Prior Business Operations - We were incorporated in accordance with the provisions of the Business Corporations Act (Alberta) on January 19, 1996, as 681673 Alberta Ltd., later changed to Ironclad Systems Inc. Beginning in 1996, following the completion of a public offering, the Company’s common shares began trading as a junior capital pool company on the Alberta Stock Exchange (later becoming part of the Canadian Venture Exchange, which was thereafter acquired and renamed the TSX Venture Exchange).





On May 8, 1999, while still operating the Company’s bicycle rental and eco-tour businesses through Bikestar Rentals Inc., we incorporated Nettron Media Group Inc., a wholly-owned subsidiary under the laws of the State of Texas, as a marketing enterprise focusing on products and services that could be effectively marketed through internet as well as more traditional business channels. Nettron Media Group Inc.’s primary focus was Cupid’s Web, an interactive online dating and marketing service. We also changed the Company’s name from Bikestar Rentals Inc. to AdventurX.com, Inc., and later to Nettron.com, Inc.





During 2000, and in connection with Cupid’s Web, we signed an agreement in principle to acquire all of the outstanding capital stock of a group of companies operating a worldwide dating service franchise, as well as a collection of dating magazines and websites.


14


ITEM 4. INFORMATION ON THE COMPANY - continued
  In January, 2001, in order to fully focus on the Company’s interactive dating and marketing services, we disposed of all of the outstanding capital stock of Arizona Outback Adventures LLC and Bikestar Rentals Inc.





On February 18, 2002, due to general weakness in the equity markets, we terminated the agreement in principle to acquire the dating service franchise and related businesses originally entered into in 2000.





Valcent Products Inc. - On March 24, 2004, we disposed of the Company’s interest in Nettron Media Group Inc. and began exploring business opportunities that might allow us to restart commercial operations. By certificate of amendment dated April 15, 2005, we changed the Company’s name from Nettron.com, Inc. to Valcent Products Inc. to reflect a newly adopted business plan. On May 3, 2005 we delisted the Company’s common stock from the TSX Venture Exchange, maintaining only the Company’s OTC Bulletin Board listing; the Company’s symbol changed to “VCTPF”. Effective May 3, 2005, and in order to render the Company’s capital structure more amenable to contemplated financing, we effected a consolidation of the Company’s common shares on a one-for-three-basis (1:3).





On August 5, 2005, we completed a licensing agreement with Pagic LLP, formerly MK Enterprises LLC, (“Pagic”) for the exclusive worldwide marketing rights to certain potential products and a right of first offer on future potential products.





In order to facilitate the business plan, the Company formed a wholly-owned Nevada corporation, Valcent USA, Inc. to conduct operations in the United States in October 2005.  In turn, Valcent USA, Inc. organized Valcent Management, LLC, a wholly-owned limited liability corporation under the laws of Nevada, to serve as general partner to Valcent Manufacturing Ltd.; a limited partnership also formed by Valcent USA, Inc., under the laws of Texas, wherein Valcent USA, Inc. serves as limited partner to  Valcent Manufacturing Ltd.





Also during the fiscal year ended March 31, 2007, Valcent Products EU Limited (“Valcent EU”) was incorporated by Valcent Products Inc. in the domicile of England to conduct operations in Europe.  Valcent Products EU Limited has developed and commercialized the Company’s Verticrop(TM) vertical growing technology.





On May 5, 2008, Vertigro Algae Technologies LLC, a Texas limited liability corporation, was formed as a 50% owned subsidiary of each of Valcent, USA Inc. and Global Green Solutions Inc. to develop algae related technologies. To concentrate on its core vertical plant growing technologies, during July, 2010, Valcent Products Inc. and its subsidiary Valcent USA and Global Green Solutions Inc., Inc. agreed to the wind-up and dissolution of Vertigro Algae Technologies LLC, through which they had jointly pursued development of algae related research and development projects.





The shareholders of the Company approved a special resolution on June 22, 2009 to reorganize the capital structure of the Company through a consolidation of its common shares on the basis of one new share for each eighteen (1:18) old shares.  This share consolidation became effective July 16, 2009.  Also effective July 16, 2009, Valcent’s trading symbol changed to “VCTZF” and Valcent’s CUSIP number changed to 918881202.  Unless otherwise noted, all references to the number of common shares and or prices(s) per share are stated on a post-consolidation basis.





Current Corporate Focus - We are at present a life sciences targeted, development stage company focused primarily on the development and commercialization of the Company’s “High Density Vertical Growth System” (“Verticrop(TM)” and “Alphacrop(TM)”) designed to produce vegetables and other plant crops.





From inception, we have generated minimal cost recoveries, experienced negative cash flows from operating activities, and the Company’s history of losses has resulted in the Company’s continued dependence on external financing. Any inability to achieve or sustain profitability or otherwise secure additional external financing, will negatively impact the Company’s financial condition and raises substantial doubts as to the Company’s ability to continue as a going concern.





The Company and its management are working towards commercialization of its core technologies with emphasis on reaching break even business operations as soon as feasible.








15


ITEM 4. INFORMATION ON THE COMPANY - continued
 
 Organizational Structure





The following organizational chart sets forth the Company’s current corporate structure and reflects subsidiary interests relating to the Company’s various entities as at March 31, 2010.







Valcent Products, Inc. formed a wholly-owned Nevada corporation, Valcent USA, Inc. to conduct a range of business development initiatives in the United States in October 2005.  In turn, Valcent USA, Inc. formed Valcent Management, LLC, as a wholly-owned limited liability corporation under the laws of Nevada to serve as the general partner to Valcent Manufacturing Ltd. A limited partnership was also formed by Valcent USA, Inc. under the laws of Texas, wherein Valcent USA, Inc. serves as limited partner to Valcent Manufacturing Ltd.





Valcent Products EU Limited was incorporated in the domicile of England in November 2006 as a wholly owned subsidiary of Valcent Products Inc. to develop and sell vertical plant growing systems in Europe.





Vertigro Algae Technologies, LLC, a Texas Limited Liability Corporation was formed in May 2008 as a 50% owned subsidiary to each of Valcent, USA Inc. and Global Green Solutions Inc. to develop algae related technologies. During July, 2010, Valcent Products Inc. and its subsidiary Valcent USA and Global Green Solutions Inc., Inc. agreed to the wind-up and dissolution of Vertigro Algae Technologies LLC, through which they had jointly pursued development of algae related research and development projects.








Business Overview





Original Master License Agreements - On July 29, 2005, we entered into five related definitive agreements (the “Pagic Agreements”) with Pagic LP (formerly MK Enterprises LLC), an entity controlled by Malcolm Glen Kertz, the Company’s former Chief Executive Officer, and President, including:





(i)
a master license agreement for a term continuing so long as royalty payments continue to be made as required for the exclusive worldwide marketing and distribution rights to three unrelated and proprietary potential consumer retail products that had previously been developed (the “Pagic Master License”), certain of which are patent pending by Pagic, including the Nova Skin Care System, the Dust Wolf(TM), and the Tomorrow Garden® Kit (collectively, and together with any improvements thereon, the “Initial Products”);


16




ITEM 4. INFORMATION ON THE COMPANY - continued




(ii)
the Pagic Master License also included a license for a term continuing so long as royalty payments continue to be made as required for the exclusive worldwide marketing and distribution rights to any ancillary products developed and sold for use by consumers in connection with the Initial Products (the “Initial Ancillaries”);





(iii)
a product development agreement pursuant to which we were granted a right for an initial period of five years to acquire a license for a term continuing so long as royalty payments continue to be made as required for the exclusive worldwide marketing and distribution rights to any new products developed by Pagic (any such products, collectively, the “Additional Products”, and, the agreement itself, the “Pagic Product Development Agreement”);





(iv)
the Pagic Product Development Agreement also included a license for a term continuing so long as royalty payments continue to be made as required for the exclusive worldwide marketing and distribution rights to any ancillary products developed and sold for use by consumers in connection with the Additional Products (the “Additional Ancillaries”); and





(v)
a related services agreement pursuant to which Pagic shall provide consulting support in connection with the Initial Products, the Initial Ancillaries, the Additional Products and the Additional Ancillaries (the “Pagic Consulting Agreement”), in exchange for the following:




1)
1,111,112 shares of the Company’s common stock which have been issued;




2)
a one-time US$125,000 license fee (paid);




3)
reimbursement for US$125,000 in development costs associated with each of the Initial Products since March 17, 2005 (paid);




4)
consulting fees of US$156,000 per year, payable monthly in advance, which the Company has paid to date; and




5)
the greater of the following, payable annually beginning in the second license year (beginning April 1, 2007):




(i)
US$400,000 inclusive of all consulting fees, royalty and other fees; or


(ii)
the aggregate of the following:


a minimum amount of US$37,500 per Initial Product during the second year of the Pagic Master License, and $50,000 US$ each year thereafter, continuing royalties payable quarterly at a rate of:


Ø
US$10.00 US  per Nova Skin Care System unit sold;


Ø
US$2.00 per Dust Wolf(TM) unit sold;


Ø
4.5% of annual net sales of the Tomorrow Garden® Kit; and


Ø
3% of annual net sales of Initial Ancillaries.




6)
a one-time $50,000 US license fee for each Additional Product licensed (except for one pre-identified product); and




7)
subject to a minimum amount of US$50,000 per year commencing with the second year of each corresponding license, continuing royalties of 4.5% of annual net sales and 3% on annual net sales of any Additional Ancillaries.





As described below these agreements were terminated effective April 1, 2009.





Vertigro Algae Technologies LLC (“Vertigro Algae”) - Beginning on October 2, 2006, we granted certain rights to Global Green relating to a joint venture of the Company’s high density vertical bio-reactor technology named “Vertigro”, an algae biomass technology initiative. On May 5, 2008, the joint venture arrangement pertaining to the development of the algae biomass technology initiative was terminated and Vertigro Algae executed a separate Technology License Agreement (“Technology License”) together with Pagic, and West Peak. The Technology License licenses certain algae biomass technology and intellectual property to Vertigro Algae for purposes of commercialization and exploitation for all industrial, commercial, and retail applications worldwide “Algae Biomass Technology”. Vertigro Algae assessed its continued involvement in the Technology License; the Technology License was terminated in the quarter ended March 31, 2010.





Discontinued Product Development Lines and Settlement of Licensed Technologies - Of the Initial Products under license as defined above, the Company ceased development of Dust Wolf and Nova Skin Care Systems during the year ended March 31, 2009 due to economic conditions, project viability assessment, and increased corporate focus on life sciences plant growth technologies.  During the year ended March 31, 2010, the Company, decided to discontinue development of its Tomorrow Garden® retail plant sales project to concentrate on the commercialization and roll out of its Verticrop(TM) and further development of its Alphacrop(TM) Technology.





Verticrop(TM)Technology Purchase Agreement - Effective April 1, 2009, the Company executed a purchase agreement to acquire all ownership rights and intellectual property relating to certain vertical plant growing technology and Tomorrow Garden® kit technology (the “Technologies”) from Glen Kertz, Pagic, and West Peak and which provides the Company with all rights and knowhow to the Technologies (the “Purchase Agreement”).  Pursuant to this agreement, original master license agreements between the Company and Pagic were terminated and this agreement replaced all financial obligations the Company had with Pagic related to the original master license agreements, including annual payments, royalty burden, and all other associated licensing costs.




17
  ITEM 4. INFORMATION ON THE COMPANY - continued
  Pursuant to the Purchase Agreement, the Company agreed to pay a total of US$2,000,000 plus issue 3% of its common stock on conclusion of the purchase agreement.  The US$2,000,000 is payable on a cumulative basis as to US$65,000 on signing (paid) plus the greater of 3% of the gross monthly product sales less returns from exploitation of the technologies or US$12,000 per month until US$2,000,000 has been paid.  The ownership of the Technologies will remain in escrow until fully paid or if the Company defaults in making payments.  The issuance of the 3% of its common stock is payable upon release of the Technologies from escrow to the Company.  The Company may at any time elect to pay out the remaining balance due.  Should the Company default under this agreement the Technologies will revert back to Glen Kertz and Pagic and the Company’s obligations under the Purchase Agreement will cease.





During the last quarter of the fiscal year ended March 31, 2010, the Company and Pagic entered into negotiations to resolve certain disputes regarding the Purchase Agreement.  On March 8, 2010, an addendum to the Purchase Agreement (“Addendum”) was entered into by parties thereto whereby:





a) the purchase price of technology to be acquired was amended to an aggregate of US $3.15 million (previously US $2 million) of which certain equipment was permitted to be used by Pagic as an incentive to enter into the Purchase Agreement(“Addendum”).




b) US $100,000 was paid to Pagic by the Company at the date of the Addendum;




c) calculated minimum IP payments increased to US $18,000 per month from US $12,000 per month effective August 1, 2010; and




d) the term to complete the technology purchased was reduced from July 1, 2019 to July 12, 2014.





During the year ended March 31, 2010, $261,088 was paid or accrued to Pagic under the terms of the Purchase Agreement and its Addendum, and $318,250 was paid during the year ended March 31, 2009 under previous license arrangements, with such costs recorded as product development costs.








PLAN OF OPERATIONS





From inception we have generated minimal cost recoveries from the Company’s business operations and have traditionally met the Company’s ongoing obligations by raising capital through external sources of financing, such as private placement, convertible notes, demand and promissory notes, and director and shareholder advances.





At present, we do not believe that Valcent’s current financial resources are sufficient to meet the Company’s working capital needs in the near term or over the next twelve months and, accordingly, we will need to secure additional external financing to continue the Company’s operations. We anticipate raising additional capital though further private equity or debt financings and shareholder loans. If we are unable to secure such additional external financing, we may not be able to meet the Company’s obligations as they come due or to fully implement the Company’s intended plan of operations, as set forth below, raising substantial doubts as to the Company’s ability to continue as a going concern.





The Company’s primary business development directives are being carried out through the Company’s UK offices. Chris Bradford, the Managing Director, of Valcent Products EU Limited, and now President and Director of the Company, is responsible for UK business operations and the Company’s Verticrop(TM) and Alphacrop(TM) technologies, market development, and sales rollout.





The Company’s plan of operations over the course of the next twelve months, subject to adequate financing, is to focus on the continued development and marketing of the Company’s Verticrop(TM) and Alphacrop(TM) vertical plant growing systems.  The Company’s continued involvement with Vertigro Algae and Tomorrow Garden® technologies has been diminished.








Verticrop(TM)Commercial Plant Growth Systems





Valcent Products Inc. has introduced its “Verticrop(TM)” vertical farming system as developed by its UK operations which grows a wide variety of crop products.  The Company initially began experimenting with vegetable crops and urban agriculture growing system within its greenhouse production facilities in El Paso, Texas, however, during the year ended March 31, 2009, the Company’s development efforts shifted to Valcent EU where it conducted detailed research independent of its US operations, and subsequently developed its commercial scale growing systems.





Potential Markets – High Density Vertical Growth System for Vegetables:  Vertical growing systems have been proposed as possible solutions for increasing urban food supplies while decreasing the ecological impact of farming, and as a result, we expect the technology to compete with traditional growing techniques Vertical growing, hydroponics and greenhouse production have yet to be combined into an integrated commercial production system, but, such a system would have major potential for the realization of environmentally sustainable urban food and fuel production.




18
  ITEM 4. INFORMATION ON THE COMPANY - continued
  PLAN OF OPERATIONS- continued
 
 Verticrop(TM)Technology – Concept and Advantages:  The Verticrop(TM) technology provides a solution to rapidly increasing food costs caused by transportation/fuel due to the cost of oil and transport fuels. Under traditional farming practice, a reduction in availability and nutritional values results in the food people consume.  The Verticrop(TM) is designed to grow vegetables and other plants close to urban centers much more efficiently and with greater food value than in agricultural field conditions that require transportation of product to distant consumption markets.





As the world population increases, agricultural land and water resources rapidly diminish.  Alternative and innovative solutions have to be found to feed people and reduce the consumption of water, land, energy, and food miles.




Verticrop(TM) is an innovative and exciting vertical growing system which:




·
Produces up to 20 times the normal production volume for field crops




·
Requires approximately 5% of the normal water requirements for field crops




·
Can be built on non arable lands and close to major city markets




·
Can work in a variety of environments: urban, suburban, countryside, etc.




·
Minimizes or eliminates the need for herbicides and insecticides




·
Will have very significant operating and capital cost savings over field agriculture




·
Will drastically reduce transportation costs to market, resulting in further savings, higher quality and fresher foods on delivery and less transportation pollution




·
Is modular and easily scalable from small to very large food production situations




The Verticrop(TM)grows plants in closely spaced shelves vertically arranged on panels that are moving on an overhead conveyor system. The system is designed to provide maximum sunlight and precisely correct nutrients to each plant. Ultraviolet light and filter systems may exclude the need for herbicides and pesticides. Sophisticated control systems gain optimum growth performance through the correct distribution of nutrients, the accurate balancing of PH and the delivery of the correct amount of heat, light and water.




System Advantages





·
reduced global transport costs and associated carbon emissions·
food and fuel safety, security and sovereignty·
local food is better for public health·
building local economies·
control of externalities and true costs





In a rapidly urbanizing world where the majority of people now live in cities, localization requires that food and fuel be produced in an urban context. Urban agriculture presents a number of technological challenges. The main challenge is a lack of growing space.





Vertical growing is a new idea currently emerging in the sustainability discourse which offers great promise for increasing urban production. Vertical growing systems have been proposed as possible solutions for increasing urban food supplies while decreasing the ecological impact of farming. The primary advantage of vertical growing is the high density production it allows using a much reduced physical footprint and fewer resources relative to conventional agriculture. Vertical growing systems can be applied in combination with existing hydroponics, and greenhouse technologies which already address many aspects of the sustainable urban production challenge (i.e., soil-free, organic production, closed loop systems that maximize water and nutrient efficiencies, etc.). Vertical growing, hydroponics and greenhouse production have yet to be combined into an integrated commercial production system, but, such a system would have major potential for the realization of environmentally sustainable urban food and fuel production.





Reduced Global Transport and Associated Carbon Emissions : It is widely recognized that the transportation of food over long distances – compared to locally sourced foods – causes excessive energy use, air pollution and is a contributor to climate change.





19
 
 ITEM 4. INFORMATION ON THE COMPANY - continued
 
 PLAN OF OPERATIONS- continued
 
 Today, food products typically travel great distances between source and market. The energy used for food transport often far outweighs the human energy gained by the food. The associated need for long-haul refrigeration and packaging further increases the energy costs of food transport. Long-distance and cross-continental food trade is clearly on the rise with the tonnage of food shipped between nations having grown many times over in the last fifty years. Choosing local over global products has powerful potential to reduce energy consumption.





Food and Fuel Safety, Security and Sovereignty: We believe that the further that food is shipped from its growing source, the more vulnerable our food and energy systems become.  There are many factors that can interrupt global production and distribution systems including political instability, changes in government, fluctuations in international markets, oil shortages and depletion, war and conflict, acts of terrorism, and natural disasters such as floods, earthquakes, drought, or hurricanes. Localization of food and fuel production has important potential for daily security and emergency preparedness as every community should be able to supply at least a fraction of the food and fuel required by its residents.





Food that is transferred across borders does not necessarily meet the traditional safety standards of consumer countries.  Since local food is produced under tractable conditions, in adherence with local food safety standards, greater levels of food safety are ensured.





About 25,000 people die every day of hunger or hunger related causes according to the United Nations. In Africa, for example, it is agriculture itself that is in crisis; caused by years of wars, coups and civil strife, increases in population, and natural problems such as drought. Sub Saharan African soil quality is classified as degraded in about 72% of arable land and 31% of pasture land.





The High Density Vertical Growing System grows leafy lettuce, micro greens (small leafed plants of a wide variety), spinach, herbs, mints, beets, strawberries, wheatgrass, alfalfa and other grains. The HDVG System has the capability of, on average, growing up to 10-20 times the amount of vegetables per acre than conventional field production while using only 5% of the water. Field lettuce loses half its nutritional value within 24 hours and delivery to distant customers can take up to a week. Innovations inherent to the HDVG System will make it possible to deliver vegetables which are still alive to the consumer.





The Company believes that one-eighth acre replicable turnkey modules can be scaled up to meet output and crop diversity requirements. The system can be sited anywhere, in urban, suburban or even desert environments, wherever vegetables are needed. A primary advantage of vertical growing is the high density production it allows using a much reduced physical footprint and fewer resources relative to conventional agriculture. Initial production performance for the HDVG System is based on growing leafy lettuce.





Commercial Deployment of the Verticrop(TM)System – Paignton Zoo, Devon, UK:  The Company via its UK subsidiary has in the summer months of 2009 deployed its first commercial test installation of its Verticrop(TM) technology at the Paignton Zoo Environmental Park located in Devon, UK.  The Paignton Zoo is one of the largest zoos in the UK. The Zoo is part of South West Environmental Parks Ltd which is owned by the Whitley Wildlife Conservation Trust. It is a combined zoo and botanic garden that welcomes over half a million visitors a year.  The Verticrop(TM) System installed at Paignton Zoo is meant to grow more plants in less room using less water and less energy. It will help to reduce food miles and bring down the Zoo’s annual costs for animal feed, which is currently in excess of £200,000 a year.  The zoo will grow a whole range of herbs such as parsley and oregano, as well as leaf vegetables like lettuce and spinach, plus a range of fruits such as cherry tomato and strawberry. Reptiles, birds and most of the mammal collection - including primates and big cats -- will benefit from the production of year-round fresh food.  The system which was a joint arrangement between Valcent Products EU Limited and the Paignton Zoo Environmental Park became operational on August 5, 2009, and will supply necessary data to the Company of semi-commercial crop yields, and other data for further commercialization of the Verticrop(TM) System.





Verticrop(TM)Warehouse Systems:  The Company is also developing a new Verticrop(TM) product line for use in a warehouse environment. Using the latest horticultural lighting technologies, combined with state of the art irrigation and nutrient delivery systems, Valcent EU is in the final stages of developing a commercial application of its Verticrop(TM)system suitable for installing in industrial type warehouses, as an alternative to polytunnels or glasshouses.  A warehouse environment will provide a commercial grower with significant benefits, particularly in areas of climate extremes.  Growing crops in a glasshouse or polytunnel can involve high energy costs to maintain stable temperatures suitable for healthy plant growth. Growing in a warehouse environment with a Verticrop(TM) vertical farming system is designed to improve production and lower costs.  Valcent EU’s research team has been working with two strategic partners who are acknowledged experts in the field of industrial lighting. This research has lead to the development of a commercially viable eco-friendly system, particularly well suited to application in a warehouse environment.  The Verticrop(TM) warehouse growing system will also use a hybrid lighting system, harnessing and channeling heat free natural daylight, complemented by the latest LED horticultural lighting technology.





Foreign Market Development Initiative: During June, 2010, the Company’s wholly owned subsidiary, Valcent Products EU Limited signed an agreement to supply a Verticrop(TM) high density plant growing system to VF Innovations Ltd. (VFI), a new Hong Kong company specifically created to foster innovation in vertical farming. Valcent entered into discussions to form a Hong Kong-based partnership with VFI to manufacture and distribute the company's vertical growing systems for the Peoples Republic of China (PRC). The Verticrop(TM) system was intended to sell fresh produce to the Hong Kong market and to serve as a demonstration unit for future customers and partners in the PRC as well as other segments of the Asian market.  During ensuing negotiations, VFI decided not to proceed with the initiative, and as at the date of this report, the business relationship has been ended.







20
  ITEM 4. INFORMATION ON THE COMPANY - continued
  PLAN OF OPERATIONS- continued
 
 Manufacturing, Fulfillment and Suppliers:   Manufacture to date for Verticrop(TM) has been carried out in Valcent EU premises in Cornwall, UK.  As of the date of this annual report, we have no long-term written agreements and no intentions of entering into any such agreements with any suppliers or manufacturers, and we are not substantially dependent, nor do we anticipate becoming substantially dependent, upon any one or more suppliers, as we believe that there are many such suppliers available with the capabilities that we will require.








Restructuring Initiatives





The debt settlements, share lockup, and convertible debt restructuring (described below) were a part of the Company’s plans to substantially reduce its debt and restructure the Company’s capital structure to enable further funding initiatives pursuant to its business operations.  As part of its restructuring, the Company held a special meeting of its shareholders on June 22, 2009 who approved a stock consolidation of one new share for each eighteen old shares.  This share consolidation became effective on July 16, 2009.  At March 31, 2010, the Company continued to have obligations pursuant to the four convertible note holders in the aggregate of US$1,938,305, described below – “July 2008 Convertible Note Amendments and Reversion”, and in conjunction with its re-organization and funding efforts incurred additional debt also described below – “2009 Debt and Conversion of Debt to Equity”.





Debt Settlement Agreements and Lockup Agreements





Concluding on May 11, 2009, but effective for accounting purposes as of March 31, 2009, Valcent Products, Inc. (the “Company”) entered into agreements with a significant number of the Company’s creditors to settle or restructure a significant portion of the Company’s indebtedness in consideration for shares of the Company’s common stock. The Company settled an aggregate of US $11,806,527 ($14,816,663) representing these balances in exchange for 29,516,955 common shares issued on May 11, 2009.  Included in these shares are 24,232,816 common shares which are subject to pooling restrictions with quarterly equal releases beginning on January 1, 2010, a further 2,634,135 common shares were subject to pooling restrictions until January 1, 2010.  The Company used a value different from the quoted market price to value the restricted shares on issuance to reflect the discount the debt holder participants would require as a result of the 7 month holding period, the large share issuance and economic factors of the company. A loss of $1,154,308 was recorded to loss on settlement of debts for those debt holder participants who received shares at a value different than the restricted share value. The Company estimated the value of the restricted share of US $0.02 per share pre-consolidation (US $0.40 post consolidation). The value of the restricted stock was determined by using a valuation model and specific considerations of the Company’s trading volume, market risk and negotiations with arms length parties.  Also included in these shares are 1,316,424 shares issued in settlements of debts involving current officers or directors of the Company, and 391,298 were issued to a past director and officer of the Company, all of which are subject to the lockup agreements.





July 2008 Convertible Promissory Note Amendments and Reversion





As part of the overall debt restructuring, the Company also entered into agreements with each of the Company’s secured creditors and amended the terms of the four secured convertible promissory notes issued in July 2008 in the aggregate principal amount of US$2,428,160 (collectively the “Notes”).   One of the Notes is held by the Company’s past chief financial officer and ex-member of the board of directors (being a Note in the principal amount of US$188,160).





By their original terms the Notes were to be due on or before July 16, 2009, however all of the parties agreed to extend the maturity date of the Notes until March 31, 2009.  On June 2, 2009, pursuant to the modified contractual arrangements, the Company paid US$400,000 to certain of the holders of the Notes (with the exception of the Company’s chief financial officer and member of the board of directors) to pay down the principal amount due and owing under the Notes. All holders of the Notes also agreed to provide the Company or its designee an option to purchase on or before December 31, 2009 the Notes and the remaining amounts due under them, being US$1,323,000 as of December 31, 2009.  Further, through December 31, 2009 each Note holder has agreed not to effect any conversions of the Notes into shares of the Company’s common stock.





In consideration for the amendments and accommodations to the Notes, the Company agreed to pay each holder consideration that was comprised of the prepayment of interest that otherwise would have been due and owing on the Notes through December 31, 2009 and amounts that would have been due under the Notes pursuant to their terms, including the original issuance discount and prepayment premium.  This consideration was paid to each Note holder in the form of Company common stock.  In total the Company issued 2,892,036 shares of its common stock to the four Note holders.  However, each of the holders entered into an agreement whereby each agreed to not sell these shares until January 1, 2010.  The Company reserves the right to change lock up arrangements at its discretion.





Each Note holder also agreed to waive covenants relating to warrants issued such that the number warrants issued were subject to reverse share consolidation, but that the exercise price of the warrants issued to the holders as part of the July 2008 financing would continue, until March 31, 2010, to ratchet to the lowest price that the Company issues shares of its common stock excepting certain other contemplated Company issuances.  The contemplated issuances included standard exceptions relating to shares issued for technology, employee share option plan, and other known obligations.  The Company agreed that if before March 31, 2010 the Company issues shares of its common stock at a price less than the valuation of the shares issued to each Note holder (US$0.40 per share), that the Company would issue each holder additional shares of Company common stock in a number equal to the difference between the number of shares each holder would have received had the consideration paid to the holder been paid in shares at the lower valuation. No additional shares were required to be issued to the Note holders through March 31, 2010.  If the US$1,323,000 face amount required to retire these notes is not paid on or before December 31, 2009, the notes revert to the terms and conditions original secured convertible note transaction documents including security agreement originally executed in July 2008 which remain valid and in effect.




21
  ITEM 4. INFORMATION ON THE COMPANY - continued
  PLAN OF OPERATIONS- continued
 
 The Notes were not paid on December 31, 2009 and reverted to their original terms.  The convertible debenture was assessed based on the substance of the contractual arrangement in determining whether it exhibits the fundamental characteristics of a financial liability or equity. While the conversion feature represents an equity component, management has assessed that because the conversion feature can be settled with a variable number of shares and that settlement predicated on a variable number of instruments triggers liability accounting, the conversion feature has been recorded as a liability as at December 31, 2009 when the conversion privileges of the notes were reinstated.  The value of the liability to be recorded is based on the premium of the fair value of the shares to be delivered in the event of a conversion over the fair value of the underlying face value of the debt. The convertible note of $1,968,930 included an embedded derivative liability in the amount of US $567,000 ($575,958) as at March 31, 2010.





During the year ended March 31, 2010, US $10,000 was converted into 21,704 common shares of the Company.  As at March 31, 2010, a total of the US$1,313,000 in principal and US$58,305 remained outstanding.  Interest will continue to accrue on the US$1,313,000 face value of these notes at the default rate of interest of 18% per annum until repaid.  The Company plans to retire the notes and accrued interest from further equity financing.





July 2008 Convertible Note Partial Purchase and Conversion





On May 31, 2010, a third party purchased on a pro rata ownership basis from the existing convertible note holders, US $634,756 of the convertible notes and US $65,244 in accrued interest for aggregate proceeds of US $700,000. On June 15, 2010, the notes were converted by the purchaser into common shares at the rate of US $0.20 per share.  In conjunction with this transaction, 135,925 common shares were issued to the original convertible note holders at the rate of US $0.24 per share in exchange for remaining accrued interest of US $32,622 due to the original convertible note holders through May 31, 2010.  As at May 31, 2010, an aggregate of US $678,244 was outstanding on unconverted principal of these convertible notes with all interest paid through this date.





In return for conversion of the US $700,000 debt acquired by the third party at US $0.20 which was at a rate higher than the original convertible note terms of a 30% discount to bid price conversion covenant, an aggregate of 875,000 warrants exercisable at US $0.40 were issued to a third party exercisable until May 31, 2012.





2009 Financing and 2009 Debt Conversion to Equity





On March 26, 2009, the Company entered into a subscription agreement for an investment of up to US$2,000,000 in convertible units with a single subscriber. The subscription funds bear interest at 10% and the issuance of the units were subject to the completion of the Company’s reverse consolidation which occurred on July 16, 2009. The subscription advances and accrued interest were converted into units of common securities at the rate of US$0.125 per unit on July 17, 2009, the date upon which the Company effected a reverse share consolidation.  Each unit consisted of one restricted common share and one-third share purchase warrant with each whole warrant exercisable into one common share at an exercise price of US$0.45 per share until July 17, 2010.  On July 17, 2010 The Company extended the warrant exercise date to July 17, 2011. The warrants may be exercised on a cashless basis.





As at March 31, 2009, the Company had received US$500,000 ($630,650) which has been reflected as a promissory note payable in the financial statements. During the year ended March 31, 2009, the Company accrued US$685 interest on the principal balance of this advance. On May 22, 2009, the balance of US$1,500,000 was received.





The Company completed the reverse share consolidation on July 16, 2009 and on July 17, 2009, the Company issued 16,303,562 common shares pursuant to the conversion of US$2,000,000 in convertible subscription advances and interest of US$37,945 and also issued 5,434,521 warrants to purchase 5,434,521 common shares at an exercise price of US$0.45 per share until July 17, 2010.  Any shares issued to this subscriber upon the conversion of the notes would not be subject to lock up arrangements, but the subscriber was deemed an affiliate of the Company owing to shareholdings greater than 10% ownership and as such is subject to certain selling restrictions.







22
 
 ITEM 4. INFORMATION ON THE COMPANY - continued
 
 PLAN OF OPERATIONS- continued
 
 Equity Issuances





Private Placements - July, 2009 to March, 2010




Post consolidation, the Company engaged in the following financings:





Issued 458,139 units pursuant to the conversion of US $179,478 in convertible notes and interest of US $3,777.  Each unit is comprised of one common share and one share purchase warrant entitling the holder thereof to purchase 458,139 common shares at an exercise price of US $0.60 per share until July 17, 2011.  A value of $2,291 has been allocated to warrants under the residual method.





Closed private placements in four tranches and issued 2,153,492 units at a price of US $0.40 per common share for gross proceeds of $906,966. Included in the private placements value is US $1,397 of interest on subscriptions received.  Each unit consists of one common share and one share purchase warrant entitling the holder thereof to exercise each whole warrant into a common share of the Company at an exercise price of US $0.60 until varying dates from October 26, 2011 to December 30, 2011.  A value of $10,768 has been allocated to the warrants under the residual method.





In connection with the private placements closed in four tranches, the Company incurred issue costs including finders’ fees of $239,278 in cash and issued 35,000 finder’s warrants.  The fair value of $21,925 for the finder’s warrants was estimated using the Black-Scholes option pricing model and was charged to share issue costs and credited to contributed surplus.  The assumptions used in the option pricing model are as follows: risk-free interest rate- 1.98%; expected life – 2.0 years; expected volatility – 80%; and expected dividends – nil.





The Company closed a further private placement of US $50,000 and issued 125,000 units at a price of US $0.40 per common share.  Each unit consists of one common share and 1.67 share purchase warrants entitling the holder thereof to exercise each whole warrant into a common share of the Company at an exercise price of US $0.60 until February 15, 2012.  A value of $13,033 has been allocated to the warrants under the residual method.




Convertible Promissory Note Conversions





The Company issued 312,500 common shares pursuant to conversions of July 2008 convertible notes for US $250,000 face value of the original note.  Issued a further 21,704 common shares pursuant to the conversion of July 2008 convertible notes for US $10,000 face value of the reverted note.





Services Agreements





The Company issued an aggregate of 275,000 shares during the fiscal year ending March 31, 2010 in connection with investor relations services agreement and a consulting services agreement. The company also agreed to issue an additional 125,000 shares during the fiscal year ending March 31, 2011which are subject to cancellation with a thirty day notice period.








REGULATIONS





We are not currently subject to direct regulation by any foreign or domestic government agency, other than regulations applicable to businesses generally.








COMPETITION





Competition in each of the industries in which we intend to sell our potential products is based primarily upon:





•
brand name recognition;•
availability of financial resources;•
the quality of products;•
reviews received for products from independent reviewers who publish in magazines, websites, newspapers and other industry publications;•
the price of each product; and•
the number of products then available.





We will rely, for all of our potential product lines, on what we believe to be our superior product quality, product innovation, marketing and sales abilities, proprietary technology, product development capabilities, and our management’s experience to compete within each of our market segments. However, we may not be able to effectively compete in these intensely competitive markets. Moreover, some of our competitors have longer operating histories, larger customer bases and greater financial, marketing, service, support, technical and other resources, affording them the ability to undertake more extensive marketing campaigns and adopt more aggressive pricing policies, than we can. Furthermore, we believe that competition from new entrants will increase as the markets for each of our potential products expand.




23
  ITEM 4. INFORMATION ON THE COMPANY - continued
  INTELLECTUAL PROPERTY





Overview





We rely for our business on a combination of our pending patents, existing patents, trademarks and trade secrets in order to protect our intellectual property. Our pending patents, trademarks and trade secrets are among the most important assets we possess in our ability to generate revenue and profits and we will depend significantly on these intellectual property assets in being able to effectively compete in our markets.





We cannot be certain that the precautions we have taken to safeguard our pending patents, existing patents, trademarks and trade secrets will provide meaningful protection from unauthorized use. If we must pursue litigation in the future to enforce or otherwise protect our intellectual property rights, or to determine the validity and scope of the proprietary rights of others, we may not prevail and will likely have to make substantial expenditures and divert valuable resources in the process. Moreover, we may not have adequate remedies if our intellectual property is appropriated or our trade secrets are disclosed.





Patents Issued and Pending





As of the date of this annual report, we have received case and/or application numbers for each of the intellectual property assets for which we are seeking patents. Patent status for each division is provided as follows:





Division
Patents

Granted
U.S. Patent

Applications
International Patent

Applications
Published International ApplicationHigh Density Vertical Growth System
2
2
2
1





All other remaining patent applications are in the preliminary stages of the application process.





Trademarks





We are in the process of applying for registration of our trademarks in the United States in order to establish and protect our brand names as part of our intellectual property assets. To date we have received registration of Tomorrow Garden®, and “Valcent®” in the United States. All other remaining registrations are in the preliminary stages of the application process and remain pending.





Trade Secrets





Whenever we deem it important for purposes of maintaining competitive advantages, we require parties with whom we share, or who otherwise are likely to become privy to, our trade secrets or other confidential information to execute and deliver to us confidentiality and/or non-disclosure agreements. Among others, this includes employees, consultants and other advisors, each of whom we require to execute such an agreement upon commencement of their employment, consulting or advisory relationships. These agreements generally provide that all confidential information developed or made known to the individual by us during the course of the individual’s relationship with us, be kept confidential and not to be disclosed to third parties except under specific circumstances.





As of the date of this annual report, we have executed a confidentiality and non-disclosure agreement with Pagic LP and are in the process of drafting confidentiality and/or non-disclosure agreements for our other key employees, consultants and advisors.








SEASONALITY





We may experience slight seasonal fluctuations in the sale of our potential High Density Vertical Growth System however, we believe that the overall effects of any seasonal variations in sales activity will be insignificant due to the nature and intent of the products to provide year round growing capability.









24
  ITEM 4. INFORMATION ON THE COMPANY - continued
  PROPERTY, PLANT AND EQUIPMENT
  Our principal executive offices are located at Suite 1010 - 789 West Pender Street, Vancouver, British Columbia, Canada V6C 1H2.  Our telephone number is (604) 606-7979.





On November 16, 2007, our wholly owned subsidiary, Valcent Products EU Limited leased office and development space in Launceston, Cornwall, UK, under a ten-year lease beginning November 15, 2007 and ending on November 15, 2017 at a quarterly cost of GB£12,550 ($20,997).  There were 7 years and 7.5 months remaining on the lease as at March 31, 2010.  The Company has net property  of GB£270,850 (approximately $433,000) comprised of  leasehold improvements, computer equipment, furniture and fixtures, vehicles, equipment, and other assets located at this location as at March 31, 2010.





The Company previously acquired approximately six acres of land in El Paso, Texas for $275,240.  As at March 31, 2010 the Company had net property, totaling $584,023 comprising of land, computer equipment, furniture and fixtures, building, autos, equipment, and other assets at this location, bringing aggregate total depreciated product and equipment to $1,016,750.








ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS





The following discussion and analysis should be read together with our audited financial statements for the year ended March 31, 2010 and the notes to the financial statements. Our audited financial statements have been prepared in accordance with Canadian generally accepted accounting principles which, except as noted in Note 19 to our March 31, 2010 audited financial statements, conform in all material respects with those of United States generally accepted accounting principles and with the requirements of the U.S. Securities and Exchange Commission.








OPERATING LEGACY AND ACCUMULATED LOSSES





Fluctuations in Results





During the fiscal year ended March 31, 2010, operating results have fluctuated significantly and past performance should not be used as an indication of future performance.





Valcent Products Inc.Selected Financial Data [Annual](Expressed in Canadian Dollars)12 months ended March 302010


2009


2008Net Operating Revenues

$
0



0



0Loss  from operations

$
4,997,089



14,451,993



12,028,222Other Loss (Income)

$
1,841,760



3,403,497



684,136Net  loss per Canadian GAAP

$
6,838,849



17,855,490



12,712,358Loss per share

$
0.16



6.42



6.44Share capital

$
43,250,174



21,957,516



16,691,282Common shares issued


52,175,329



3,008,977



2,459,636Weighted average shares outstanding


42,354,279



2,782,284



1,974,763Total Assets

$
1,284,286



2,351,963



4,605,914Total Liabilities

$
4,166,740



3,383,189



8,615,386Cash Dividends Declared per Common Shares

$
0



0



0Exchange Rates (US $ = CDN $1)period average

$
0.92189



0.89689



0.97084Exchange Rates (British Pound £ = CDN $1)period average

$
0.57471



0.52433



0.48368








25




ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  YEAR ENDED MARCH 31, 2010 COMPARED WITH YEAR ENDED MARCH 31, 2009





Operating Results





For the year ended March 31, 2010, we focused on the following business initiatives:




(i)
the development and commercialization of Valcent’s “High Density Vertical Growth System” (“Verticrop(TM)”) designed to produce vegetables and other plant crops,




(ii)
the development and commercialization of our “High Density Vertical Growth System” (“Alphacrop(TM)” or “HDVG System”) designed for smaller commercial growers looking for smaller but highly cost effective compact growing systems to produce to produce vegetables, herbs  and other plant crops.




(iii)
the development and marketing of the Tomorrow Garden® consumer retail products in Valcent’s UK based subsidiary,




(iv)
restructuring activities as noted in this annual report, and




(v)
an assessment and rationalization of the development of a commercial algae growing technology via Vertigro Algae Technologies LLC.





For the year ended March 31, 2009, the Company focused on:





(i)
the development and commercialization of our Verticrop(TM)HDVG System  designed to produce vegetables and other plant crops,





(ii)
the development of a commercial algae growing technology via Vertigro Algae with Global Green Solutions, Inc., and





(iii)
the development and marketing of the Tomorrow Garden® consumer retail product by Valcent EU.





We incurred net losses of $6,838,849 for the twelve months ended March 31, 2010, compared to $17,855,490 for the twelve months ended March 31, 2009.  The decrease during the twelve months ended March 31, 2010 over the same interval in the previous year is largely a result of decreased number of active development projects, cost streamlining due to global economic circumstances, and decreased capital resources. Included in the loss is approximately $340,000 of direct costs related to discontinued products under development. Over the next 12 months the Company estimates to incur $1,500,000 in development costs on its VerticropTM and AlphacropTM  Systems.





For the twelve months ended March 31, 2010 and March 31, 2009, under Canadian GAAP, as the Company is in the development stage, test sales are credited to development costs. Under US GAAP, test sales are credited to revenue. During the year ended March 31, 2010, the Company had test sales of $28,908 (2009 - $219,483) related to Tomorrow Garden® products in fiscal 2010 and the Nova Skincare System in fiscal 2009.





Operating Expenses





Product development - Product development expenses decreased by $6,086,574 to $2,152,425 for the twelve months ended March 31, 2010 as compared with the twelve months ended March 31, 2009.  The decrease is due to financial constraints which resulted in the scaled back operations including Vertigro Algae operations in the Company’s El Paso research facility, cost reductions and budget streamlining efforts, and fewer active projects under development.  During the twelve months ended March 31, 2010, the Company’s primary product development expenses were directed towards the commercialization of the Company’s Verticrop(TM) System and Tomorrow Garden® product lines operated from Valcent’s UK operating offices.  Product development expenses were $8,238,999 during the twelve months ended March 31, 2009, and were primarily focused on the development of the Company’s Verticrop(TM) System and Tomorrow Garden® product lines, Vertigro Algae technologies and the marketing of the Nova Skincare system, the development of which was terminated March 2009.  Tomorrow Garden® product line development and Vertigro Algae related research and development were concluded in the last quarter of fiscal 2010.





Insurance - Insurance expense increased by $2,037 to $21,677 during the 12 months ended March 31, 2010 (2009 - $19,640).





Interest and accretion - In conjunction with convertible debenture financings during the fiscal year ended March 31, 2009 and from other promissory note financings during fiscal 2010, the Company incurred $916,714 in interest, and financing charges on convertible and promissory notes in the twelve months ended March 31, 2010.  This represents a $2,300,512 decrease from the $3,217,226 that had been incurred during the twelve months ended March 31, 2009. The large decrease over the previous period in the prior year is due to the settlement as at March 31, 2009 of most debt instruments outstanding as of March 31, 2009 for equity as part of reorganization initiatives initiated during the last sixteen months, offset by accretion expense of $595,644 related to convertible notes during fiscal 2010.




26
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  YEAR ENDED MARCH 31, 2010 COMPARED WITH YEAR ENDED MARCH 31, 2009 - continued
  Investor relations - Investor relations fees decreased $500,484 to $282,265 (2009 - $782,749) for the twelve months ended March 31, 2010 as a result of a decreasing number of third party consultants in investor related advisory  activities.





Advertising and media development - Advertising and media development was $101,408 during the twelve months ended March 31, 2010 and  was significantly lower by $346,850 than for the same period in 2009 ($448,258) owing to the cessation of marketing costs related to the Nova Skin Care System and other decreased advertising media expenditures.





Professional fees - Professional fees increased by $25,568 to $549,784 for the twelve months ended March 31, 2010 from $524,216 for the twelve months ended March 31, 2009 reflecting complex accounting, regulatory, and legal costs inherent to near term operations.





Office and miscellaneous - Office and miscellaneous expenses decreased $46,196 to $342,932 for the twelve months ended March 31, 2010 from $389,128 for the twelve months ended March 31, 2009. The decrease is primarily due to the scale back of activity in the Company’s US subsidiary and cost streamlining in the current period.





Travel - Travel expenses decreased modestly by $17,423 to $219,018 (2009 - $236,441) for the twelve months ended March 31, 2010 as a result of decreased activity in all of the Company’s operations, decreased number of active development projects, as well as cost streamlining due to global economic circumstances. The number is still reasonably high relating to the international nature of interest and commercialization of the Company’s Verticrop(TM)product.





Amortization – Amortization increased modestly by $31,073 for the fiscal year ended March 31, 2010 (2009 - $181,618) due to some acquisitions in Valcent Products EU Limited





Rent - Rent expenses decreased $5,150 to $125,888 for the twelve months ended March 31, 2010 from $131,038 for the twelve months ended March 31, 2009, owing to foreign currency fluctuations.





Stock-based compensation - The Company issued 100,000 share options to a consultant of the Company incurring a charge of $19,861 in stock based compensation expenses during the twelve months ended March 31, 2010 (2009 - $260,530).  The decrease of $240,669 in stock based compensation reflects the reorganization initiatives and decrease in personnel involved in active projects. The weighted average fair value of stock options granted of $0.30 per option was estimated using the Black-Scholes option pricing model assuming a risk-free interest rate of 1.98%, expected life of 5.0 years, an expected volatility of 100%, with no dividends.





Filing and transfer agent fees - Filing and transfer agent fees increased $30,276 to $52,426 for the twelve months ended March 31, 2010, from $22,150 for the twelve months ended March 31, 2009. The increase is primarily attributable to costs associated with the increased activity relating to the Company’s restructuring initiatives.





Other Income and loss





Foreign exchange (loss) gain - Due to fluctuations, primarily, in the Canadian dollar and British Pound as related to the United States dollar, the Company incurred a foreign exchange loss of $19,395 during the twelve months ended March 31, 2010 as compared to a loss of $2,027,804 during the twelve months ended March 31, 2009.  Substantially, the reason for the change relates to the change in functional currency to the US dollar effective April 1, 2009.





Write off of receivable – During the year ended March 31, 2010, the Company has  written off  a receivable due  from Global Green Solutions Inc. (“GGS”) in the amount of $668,057 owing to GGS’s lack of capital and financial ability to repay the debt on a current basis (2009 - $ nil).





Interest income – During the year ended March 31, 2010, the Company did not recognize any interest income (2009 - $19,491).





Loss on settlement of debts - During the year ended March 31, 2010, the Company used a value different from the quoted market price to value the restricted shares on issuance to reflect the discount the debt holder participants would require as a result of the 7 month holding period, the large share issuance and economic factors of the company. A loss of $ 1,154,308 was recorded to loss on settlement of debts for those debt holder participants which received shares at a value different than the restricted share value based on objective evidence. The Company estimated the value of the restricted share of US $0.22222 pre-consolidation (US $0.40 post consolidation) at April 1, 2009 based on the estimated call option value using the Black-Scholes option pricing model with the following assumptions: share price - US 0.06 pre-consolidation; exercise price - $0.06; risk-free interest rate – 0.47%; expected life – 9 months ; expected volatility – 109%; and expected dividends – nil.  During the year ended March 31, 2009 the Company recorded a loss on settlement of debt of $885,292 due to a modification of the July 2008 Convertible Notes.








27
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  YEAR ENDED MARCH 31, 2010 COMPARED WITH YEAR ENDED MARCH 31, 2009 - continued
 
 Write-down of property and equipment - The Company recognized a write-down of property and equipment from El Paso related business operation assets held for future use.  The write-down amounting to $509,892 was recorded during the year ended March 31, 2009 and is included in accumulated amortization.





Comprehensive Loss and Accumulated Other Comprehensive Loss





Effective April 1, 2009, the functional currency of the Company was United States dollar (USD). The change in functional currency from Canadian dollar (CAD) to USD, resulted from increased business activities and monetary transactions conducted in USD. As a result of adopting this change prospectively, there is no impact to the results of previously reported financial periods. The Company decided to continue to report in CAD as this currency is more relevant to the Company’s investors and other users of the financial statements. The resulting net exchange rate differences due to this translation over the period was $296,515 and is included in shareholders’ equity as accumulated other comprehensive income (“AOCI”). The comprehensive loss for the year ended is $6,542,334.





Liquidity and Capital Resources





Because the Company is organized in Canada, the Company’s March 31, 2010 financial statements have been prepared by the Company’s management in accordance with Canadian GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.





The Company’s accumulated losses during the development stage increased by $6,838,849 to $49,011,978 for the twelve months ended March 31, 2010.





The Company’s working capital deficit as at March 31, 2010 was $3,899,205 which was greater than the $2,101,443 in working capital deficit as at March 31, 2009. This increase in working capital deficit was a result of increasing promissory debt instruments used to finance fiscal 2010 business activities as compared to debt settlements achieved at March 31, 2009 pursuant to restructuring initiatives; there still remains substantial doubt as to the Company’s ability to continue as a going concern.





As at March 31, 2010, we had $22,222 in cash (2009 - $224,769) and we currently have approximately $10,000 in cash as at  November 1, 2010. Management estimates that the Company will require approximately $4,200,000 to fund the Company‘s planned operations for the next twelve months. The Company is currently seeking additional funding to finance its operations and obligations. Management is considering all possible financing alternatives, including equity financing, debt financing, joint-venture, corporate collaboration and licensing arrangements.  However, there can be no assurance that the Company will be successful in its financing efforts or in the success of its products.








The Company’s ability to continue as a going-concern is dependent upon the economic development of its products, the attainment of profitable operations and the Company’s ability to obtain further financing.  The Company is currently seeking additional funding to finance its operations and obligations. Management is considering all possible financing alternatives, including equity financing, debt financing, joint-venture, corporate collaboration and licensing arrangements.  However, there can be no assurance that the Company will be successful in its financing efforts or in the success of its products.





During the twelve months ended March 31, 2010, the Company issued 29,516,955 common shares in settlement of $14,816,663 of debt, 334,204 common shares on the conversion of $326,216 in convertible notes and interest, 19,040,193 common shares for private placement in the aggregate of $3,411,036, 250,000 common shares for investor relations services received in the amount of $137,928, and 25,000 common shares issued for consulting services in the amount of $17,655.  The Company’s issued and outstanding shares as at March 31, 2010 were 52,175,329.  The Company recorded $239,278 in cash issue costs and warrants issued valued at $21,925 in connection with the receipt of private placement capital.





During the twelve months ended March 31, 2010, the Company used a total of $3,239,136 (2009 - $7,222,217) in cash related to its operations.  This cash was funded from the proceeds of private placements of $3,225,022 (2009 - $2,195,785), amounts received from related parties of $71,561 (2009 - $1,473,880) and amounts received from debt issuance of $1,111,485 (2009 - $4,334,702). These amounts were used to also fund $1,106,486 (2009- $nil) in repayment of promissory notes and $11,026 (2009 – $174,862) in convertible notes.  The Company also acquired $264,200 (2009 – $626,618) in property and equipment during the twelve months ended March 31, 2010.  In total the Company used a total of $202,547 more cash (2009 - $61,332 less cash) than it raised during the twelve months ended March 31, 2010 leaving it with a cash and cash equivalents balance of $22,222 at March 31, 2010 (2009 - $224,769).





As at March 31, 2010, accounts receivable of $127,897 (2009 - $920,235) consists of value added tax receivable by the Company’s subsidiary, Valcent Products EU Limited, and goods and services tax receivable by the Company. A prior year receivable in the amount of $668,057 due from Global Green Solutions Inc., the Company’s Joint Venture partner in Vertigro Algae product development was written off at March 31, 2010.






28
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  YEAR ENDED MARCH 31, 2010 COMPARED WITH YEAR ENDED MARCH 31, 2009 - continued
  Prepaid expenses as at March 31, 2010 of $105,751 (2009 - $102,670) includes $ 12,800 (2009 - $16,606) related to the deferred portion of business consulting and investor relations services agreements with the balance of $92,951 (2008 - $86,064) consisting of in prepaid insurance, rental deposits, and similar items.





As a result of the cessation of Nova Skin Care System development certain of our inventories were impaired by $644,463 as at March 31, 2009.  As at March 31, 2010, inventories related to the Company’s Tomorrow Garden® project were $11,665 (2009 - $34,072).





During the year ended March 31, 2010, the Company recorded $212,691 in amortization on assets.  During the year ended March 31, 2009, the Company determined that certain capital assets were not in use or impaired and accordingly wrote down the carrying value of those assets to their net recoverable amounts. The write-down amounting to $509,892 was effective March 31, 2009 and was in addition to$181,618 in amortization in the statement of operations for the year ended March 31, 2009.





Accounts payable and accrued liabilities increased to $886,435 at March 31, 2010 from $541,802 at March 31, 2009 due to  the Company’s current financial position the timing of paying payables has increased throughout the fiscal year.





Promissory notes decreased from $2,643,514 at March 31, 2009 to $1,053,169 at March 31, 2010 owing in part to reclassification of certain remaining principal portions of the July 2008 notes to convertible notes due to renegotiation of these instruments, provisions made by negotiation for the repayment of US$400,000 of the July 2008 convertible notes in cash on June 2, 2009, and the receipt of US$500,000 as part of a private placement with a single investor which was later converted to common shares on July 17, 2009.  In addition, $1,053,169 in new unsecured promissory notes were issued in the year ended March 31, 2010 for cash received to fund operations. The promissory notes bear interest at the rate of 8-10% simple interest.





Our advances and amounts due from related parties increased by $71,561 to $258,206 as at March 31, 2010 (2009 - $186,645).





Convertible notes increased as at March 31, 2010 to $1,392,972 from $11,228 at March 31, 2009 due to the reversion of US$1,323,000 in principal and US$58,305 in amounts previously classified as Promissory notes until December 31, 2009.  The promissory notes were not paid on December 31, 2009 and reverted to their original terms.  During the year ended March 31, 2010, US $10,000 was converted into 21,704 common shares of the Company.  As at March 31, 2010, a total of the US$1,313,000 in principal, US$567,000 derivative liability portion and US$58,305 in interest remained outstanding.  Interest will continue to accrue on the US$1,313,000 face value of these notes at the default rate of interest of 18% per annum until repaid.  The Company plans to retire the notes and accrued interest from further equity financing.





On May 31, 2010, a third party purchased on a pro rata ownership basis from the existing convertible note holders, US $634,756 of the convertible notes and US $65,244 in accrued interest for aggregate proceeds of US $700,000. On June 15, 2010, the notes were converted by the purchaser into common shares at the rate of US $0.20 per share.  In conjunction with this transaction, 135,925 common shares were issued to the original convertible note holders at the rate of US $0.24 per share in exchange for remaining accrued interest of US $32,622 due to the original convertible note holders through May 31, 2010.  As at May 31, 2010, an aggregate of US $678,244 was outstanding on unconverted principal of these convertible notes with all interest paid through this date.





In return for conversion of the US $700,000 debt acquired by the third party at US $0.20 which was at a rate higher than the original convertible note terms of a 30% discount to bid price conversion covenant, an aggregate of 875,000 warrants exercisable at US $0.40 were issued to a third party exercisable until May 31, 2012.
































29
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  YEAR ENDED MARCH 31, 2010 COMPARED WITH YEAR ENDED MARCH 31, 2009 - continued
  Details of the convertible notes are as follows:





Convertible note continuity:





US $


CDN$Balance


2010


2010





2010


2010


Balance


BalanceDate of Issue

March 31, 2009


Issued Principal and Transfers


Equity Portion


Derivative Liability Portion


Interest / Penalty


Conversion/ Repayments


March 31, 2010


March 31, 2010September 2007 (h)


8,902



-



-



-



-



(8,902
)


-



-July 2009 (Note 8(b)(i)


-



179,478



-



-



3,777



(183,255
)


-



-Dec 2009 (i) (Note 12)


-



1,323,000



-



567,000



58,305



(10,000
)


1,938,305



1,968,9308,902



1,502,478



-



567,000



62,082



(202,157
)


1,938,305



1,968,930
  US $


CDN$Balance


2009


2009





2009


2009


Balance


BalanceDate of Issue

March 31, 2008


Issued Principal


Equity Portion


Derivative Liability Portion


Interest / Penalty


Conversions/ Repayments*


March 31, 2009


March 31, 2009July/Aug 2005(a)


259,825



-



-



-



15,647



(275,472
)


-



-April 2006 (b)


534,442



-



-



-



29,287



(563,729
)


-



-April 2006 (c)


85,542



-



-



-



4,673



(90,215
)


-



-December 2006 (e)


1,659,782



-



-



-



150,544



(1,810,326
)


-



-January 2007 (f)


1,569,183



-



-



-



468,170



(2,037,353
)


-



-August 2007 (g)


678,567



-



-



-



102,260



(780,827
)


-



-September 2007 (h)


297,433



-



-



-



154,295



(442,826
)


8,902



11,228July 2008 (i)


-



2,168,000



(1,315,003
)


-



1,262,529



(2,115,526
)


-



-5,084,774



2,168,000



(1,315,003
)


-



2,187,405



(8,116,274
)


8,902



11,228





*Includes commitments to convert the remaining amounts into common shares








(a)
US $1,277,200 July – August 2005 Convertible Note





To provide working capital for product development, from July 25, 2005 to August 2005 the Company issued one-year, unsecured US $1,277,200 8% per annum convertible notes and three-year Class A and B warrants to acquire: (i) up to 50,741 common shares of the Company at a price per share of US $9.00; and (ii) up to an additional 50,741 common shares of the Company at a price per share of US $18.00.  The holders of the convertible notes may elect to convert the notes into common shares of the Company at the lesser of: (i) 70% of the average of the five lowest closing bid prices for the common shares for the ten trading days prior to conversion; and (ii) US $9.90. Accrued and unpaid interest may be converted into common shares of the Company at US $9.00 per share.  The Company may, subject to notice provisions and its common shares trading above US $27.00 per share for more than twenty consecutive trading days, elect to payout the notes and interest due by paying 130% of the amount due under the notes plus interest.  The share purchase warrants carry a “net cashless” exercise feature (“Cashless Conversion Feature”) allowing the holder thereof, under certain limited circumstances, to exercise the warrants without payment of the stated exercise price, but rather solely in exchange for the cancellation of that number of common shares into which sufficient warrants are exercisable, which will cover the exercise proceeds otherwise payable.  These convertible notes are unsecured and as they have passed their maturity date, as at March 31, 2009 are due on demand.





In conjunction with this financing, the Company paid consultants an amount equal to 10% of the gross proceeds and issued 23,651 common shares at a deemed value of $285,242. There are 14,192 finders’ A warrants outstanding whereby the holders have the right to purchase 14,192 common shares at US $9.00 per share until August 5, 2008 and 23,652 finders’ B warrants whereby the holders shall have the right to purchase 23,652 common shares at US $13.50 per share until August 5, 2008. A total of US $82,200 in registration penalties incurred in the year ended March 31, 2007 were converted to a new convertible debenture in the same amount on April 6, 2006 .





During the year ended March 31, 2009, principal of US $92,281 and interest of US $9,423 were converted to 14,845 common shares and interest of US $15,647 was accrued on the unconverted principal balance of these convertible notes.





Effective March 27, 2009, the Company agreed to settle the remaining unpaid principal, accrued interest and prepayment penalties aggregating US $173,768 for 595,006 common shares that were restricted from trading and pooled with equal quarterly releases beginning in January 2010. The 595,006 common shares were issued on May 11, 2009.





(b)
US $551,666 April 2006 Convertible Note





On April 6, 2006, the Company consummated a private offering transaction with and among a syndicated group of investors, pursuant to which the Company issued, in the aggregate, US $551,666 in 8% per annum convertible notes and three-year Class A and B warrants to acquire: (i) up to 40,864 common shares of the Company at a price per share of US $9.00; and (ii) up to an additional 40,864 common shares of the Company at a price per share of US $18.00. Subject to certain limitations, the principal amount of the notes, together with any accrued interest may be converted into common shares of the Company at the lesser of:




30
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  YEAR ENDED MARCH 31, 2010 COMPARED WITH YEAR ENDED MARCH 31, 2009 - continued




(a)
70% of the average of the five lowest closing bid prices for the common shares for the ten trading days prior to conversion; or


(b)
US $9.90. The convertible notes carry a redemption feature, which allows the Company to retire them, in whole or in part, for an amount equal to 130% of that portion of the face amount being redeemed, but only in the event that the common shares have a closing price of US $27.00 per share for at least twenty consecutive trading days and there has otherwise been no default. The warrants carry a Cashless Conversion Feature.





These convertible notes are unsecured and as they have passed their maturity date, as at March 31, 2009 were due on demand.





In conjunction with these private offering transactions, the Company paid consultants: (i) US $55,166 cash, representing 10% of the gross proceeds realized; (ii) 10,216 common shares; (iii) three-year warrants to purchase up to 6,129 common shares at a price per share of US $9.00; and (iv) three-year warrants to purchase up to 10,215 common shares at a price per share of US $13.50.





During the year ended March 31, 2009, convertible notes and interest of US $460,679 were converted to 111,751 common shares and interest of US $21,312 was accrued on the unconverted principal balance of these convertible notes.





Effective March 27, 2009, the Company agreed to settle the remaining unpaid principal, accrued interest and prepayment penalties aggregating US $103,050 for 473,101 common shares that will be restricted from trading and pooled with equal quarterly releases beginning in January 2010. The 473,101 common shares were issued on May 11, 2009.





(c)
US $82,200 April 2006 Penalty Convertible Note





On April 6, 2006, in conjunction with certain private placements, the Company reached a verbal agreement with investors wherein the Company agreed to convert US $82,200 in accrued penalties associated with the July 25, 2005 through August 5, 2005 convertible notes into US $82,200 convertible penalty notes carrying terms similar to the July 25, 2005 through August 5, 2005 convertible notes and 6,089 warrants. These warrants carry a Cashless Conversion Feature and each warrant entitles the holder to purchase additional common shares for three years at a price of US $13.50 per share. These convertible notes are unsecured and as they have passed their maturity date, as at March 31, 2009 are due on demand.





During the year ended March 31, 2009, convertible notes and interest of US $64,410 were converted to 17,994 common shares and interest of US $4,673 was accrued on the unconverted principal balance of these convertible notes.





Effective March 27, 2009, the Company agreed to settle the remaining principal, accrued interest and prepayment penalties aggregating US $25,715 for 106,443 common shares that were restricted from trading and pooled with equal quarterly releases beginning in January 2010. The 106,443 common shares were issued on May 11, 2009.





(d)
Warrant Exercise Price Reduction and Registration Penalty Interest





Certain of the July and August 2005 and the April 6, 2006 convertible notes contained registration rights whereby the Company agreed to pay a penalty of 2% for every thirty days that elapsed after the Company was required to have a registration statement effective, plus a reduction in the warrant price of certain of the warrants issued of US $1.80. As a result of the Company not filing the required registration statement until April 27, 2006, the Company incurred penalties, which have been included in interest expense. An aggregate of 189,299 previously issued share purchase warrants relating to certain of the July and August 2005 and the April 6, 2006 convertible notes have reduced exercise prices from US $9.00, US $13.50 and US $18.00 to US $7.20, US $11.70 and US $16.20, respectively. In 2007, the Company recognized $80,102 in interest expense with the corresponding amount to contributed surplus as a result of re-valuation of the warrants upon the change in the pricing.





(e)
US $1,500,000 December 2006 Convertible Note





On December 1, 2006, the Company accepted subscriptions of US $1,500,000 towards a private placement of 8% per annum, unsecured, convertible notes and three-year warrants to acquire: (i) up to an aggregate of 111,112 common shares of the Company at a price per share of US $9.00; and (ii) up to an additional 111,112 common shares of the Company at a price per share of US $18.00. Subject to certain limitations, the principal amount of the notes, together with any accrued interest may be converted into common shares of the Company, at the lesser of: (i) 70% of the average of the five lowest closing bid prices for the Company’s common shares for the ten trading days prior to conversion; or (ii) US $9.90. The convertible notes carry a redemption feature, which allows the Company to retire them, in whole or in part, for an amount equal to 130% of that portion of the face amount being redeemed, but only in the event that the common shares have a closing price of US $27.00 per share for at least twenty consecutive trading days and there has otherwise been no default. These convertible notes are unsecured and as they have passed their maturity date, as at March 31, 2009 are due on demand. The share purchase warrants may be exercised on a cashless basis. After December 31, 2007, this convertible note accrues interest at the rate of 15% per annum.






31
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  YEAR ENDED MARCH 31, 2010 COMPARED WITH YEAR ENDED MARCH 31, 2009 - continued





The right of the note holders to convert into the Company’s common shares is subject to the contractual agreement between the parties that any conversion by the note holders may not lead at the date of such conversion to an aggregate equity interest in the common shares of the Company greater than 9.99%, inclusive of any derivative securities including options, warrants, convertible debt, any other convertible debt securities or any other financial instruments convertible into common equity.





During the year ended March 31, 2009, the Company accrued US $150,544 in interest.





Effective March 27, 2009, the Company agreed to settle the remaining principal of US $1,500,000 and accrued interest of US $310,326 for 4,525,807 common shares that were restricted from trading and pooled with equal quarterly releases beginning in January 2010. The 4,525,807 common shares were subsequently issued on May 11, 2009.





(f)
US $2,000,000 January 2007 Convertible Note





On January 29, 2007, the Company completed a private placement comprised of $2,000,000 convertible notes. The 6% unsecured convertible notes matured on December 11, 2008. The notes were convertible into “Units” at the note-holders’ discretion at a conversion price of US $9.00 per Unit. Each “Unit” consisted of one common share and one purchase warrant to purchase an additional common share at US $12.60 per share until December 11, 2008. At the discretion of the note-holders, interest on the notes was payable in either cash or units at US $9.00 per unit. In connection with this financing, the Company paid consultants US $108,000 in cash and issued 7,500 units exercisable at US $9.00 per unit, with each unit consisting of one common share and one share purchase warrant to purchase a further common share at US $12.60 per share until December 11, 2008. These convertible notes are unsecured and as they have passed their maturity date, as at March 31, 2009 were due on demand. The Company was obligated to file a resale registration statement on the underlying securities within four months of closing, which it failed to do.





As a result of the failure to file the registration statement, the Company recorded penalties of US $120,000 during the year ended March 31, 2007 and a further US $289,973 during the year ended March 31, 2008.





During the year ended, March 31, 2009, principal and accrued interest in the amount of US $709,995 was converted into 78,888 common shares, and principal and accrued interest in the amount of US $28,238 was traded for new 10% convertible notes that convert automatically into units (at a conversion price of US $0.40 per unit on the effective date of the share consolidation, each unit comprised of one common share and one 2-year share purchase warrant to purchase an additional common shares at $0.60 per share for a two year term from the date of issue of the unit).





During the year ended March 31, 2009, the Company accrued US $468,170 in interest and accreted interest on the principal balance on the unconverted principal balance of these convertible notes.





Effective March 27, 2009, the Company agreed to settle the remaining unpaid principal and accrued interest aggregating US $1,299,120 for 3,247,797 common shares that were restricted from trading and pooled with equal quarterly releases beginning in January 2010. The 3,247,797 common shares were subsequently issued on May 11, 2009.





(g)
US $650,000 August 2007 Convertible Note





On August 10, 2007, the Company issued an unsecured convertible term promissory note in the amount of US $650,000 bearing interest at 6% per annum. The convertible note matured on November 15, 2007 and as at March 31, 2009 were due on demand with both interest and principal convertible at the option of the lender into units at US $10.80 per unit, with each unit consisting of one common share and one-half of one share purchase warrant, each whole share purchase warrant exercisable at US $13.50 to purchase an additional common share. After November 25, 2008, this convertible note accrues interest at the rate of 15% per annum.





The Company was required to register the resale of the securities underlying the conversion features of this convertible note on a best-efforts basis, but failed to do so within 180 days from the date of issuance as agreed. A one-time financial penalty of US $28,567 was incurred during the year ended March 31, 2008.





The right of the note holder to convert into the Company’s common shares is subject to the contractual agreement between parties that any conversion by the note-holder may not lead, at the date of such conversion, to an aggregate equity interest greater than 9.99% in the common shares of the Company, inclusive of any derivative securities including options, warrants, convertible debt, any other convertible debt securities or any other financial instruments convertible into common equity.




32
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  YEAR ENDED MARCH 31, 2010 COMPARED WITH YEAR ENDED MARCH 31, 2009 - continued





During the year ended March 31, 2009, the Company accrued US $102,260 in interest and accreted interest.





Effective March 27, 2009, the Company agreed to settle the remaining principal and accrued interest aggregating US $780,827 for 1,952,066 common shares that were restricted from trading and pooled with equal quarterly releases beginning in January 2010. The 1,952,066 common shares were subsequently issued on May 11, 2009.





(h)
US $391,000 September 2007 Convertible Note





On September 27, 2007, the Company issued unsecured one-year term convertible notes bearing interest at 6% per annum in the amount of US $391,000. The convertible notes matured on September 30, 2008 and as at March 31, 2009 were due on demand. Both interest and principal may be converted at the option of the lender at any time at US $10.80 per unit, with each unit consisting of one common share and one-half of one share purchase warrant, with each whole share purchase warrant exercisable at US $13.50 to purchase an additional common share for a two-year term from the date of conversion. The Company was required to register the resale of the securities underlying the conversion features of this convertible note on a best efforts basis, but failed to do so within 90 days from the date of issuance as agreed. A one-time financial penalty of US $23,460 was incurred during the year ended March 31, 2008.





During the year ended March 31, 2009, the Company accrued US $154,295 in interest and accreted interest on the principal balance on the unconverted principal balance of these convertible notes.





During the year ended March 31, 2009, the Company repaid US $7,500 of the principal on these convertible notes. The Company repaid an additional US $7,500 of principal and US $1,402 in interest during the year ended March 31, 2010.





Effective March 27, 2009, the Company agreed to settle the remaining principal and accrued interest aggregating US $435,326 for 1,024,667 common shares that was subject to pooling arrangements with equal quarterly releases beginning in January 2010. The 1,024,667 common shares were issued on May 11, 2009.





(i)
US $2,168,000 July 2008 Convertible Note





On July 21, 2008, the Company closed a financing of zero coupon, 12% interest, senior secured convertible promissory notes in the amount of US $2,428,160 with an aggregate purchase price of US $2,168,000 with four investors, one of which was the Company’s Chief Financial Officer. The debt is convertible into common shares at the lesser of US $9.18 per share (unless the conversion price has been adjusted pursuant to further contract covenants) and 70% of the average of the five lowest closing bid prices for the ten preceding trading days. The Company issued each purchaser in the private placement two warrants - one warrant redeemable by the Company and the other non-redeemable. The non-redeemable warrants are exercisable at US $9.90 and permit the holder to purchase 264,506 common shares. The redeemable warrants are exercisable at US $13.50 and permit the holder to purchase 132,253 common shares. Further, the Company issued 24,401 non-redeemable warrants, 12,201 redeemable warrants and US $160,000 in cash as transaction costs. The warrants carry a term of five years from the date of closing of the financing. The redeemable warrants may be redeemed by the Company at a price of US $0.18 per warrant only if certain conditions have been satisfied including the Company’s common shares having closed at $27.00 per share or greater for a period of 20 consecutive trading days and the warrant holder being able to resell the shares acquired upon exercise through a resale registration statement or under Rule 144 of the United States Securities Act. During the year ended March 31, 2009, interest and accretion of the convertible debenture in the aggregate of US $1,326,959 was accrued on the principal balance of these convertible notes.





Effective March 27, 2009, the Company settled these notes by:





•
Settlement of the non-cash portions of the convertible note including US $524,884 in prepayment penalty, US $260,160 in original issuer discounts, and US $371,771 in interest which includes the interest payable on the new note through December 31, 2009 for an aggregate settlement of US $1,156,815 and agreed to issue 2,892,036 common shares that will be restricted from trading and pooled until January 1, 2010;


•
Repayment of US $400,000 to subscribers (cash paid May 11, 2009); and


•
Conversion of US $250,000 face value of the original note into 312,500 common shares of the Company.


•
Recorded a loss on settlement of debt of $885,292 due to a modification of the original debt terms.





The terms of the new US $1,323,000 convertible promissory notes include the following:


•
If the promissory note was not settled by December 31, 2009, the note would be in default at the default rate of interest rate of 18%, be due on demand and require the re-instatement of the original conversion feature.






33
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  YEAR ENDED MARCH 31, 2010 COMPARED WITH YEAR ENDED MARCH 31, 2009 - continued


•
If prior to March 31, 2010, the Company issues common shares at a price less than the valuation of the shares issued to each note holder, the Company will issue to each note holder additional common shares based on the lower valuation.





The convertible debenture was assessed based on the substance of the contractual arrangement in determining whether it exhibits the fundamental characteristics of a financial liability or equity. While the conversion feature represents an equity component, management has assessed that because the conversion feature can be settled with a variable number of shares and that settlement predicated on a variable number of instruments triggers liability accounting, the conversion feature has been recorded as a liability as at December 31, 2009 when the conversion privileges of the notes were reinstated.  The value of the liability to be recorded is based on the premium of the fair value of the shares to be delivered in the event of a conversion over the fair value of the underlying face value of the debt. The convertible note of $1,968,930 included an embedded derivative liability in the amount of US $567,000 ($571,296) as at March 31, 2010.





During the year ended March 31, 2010, US $10,000 was converted into 21,704 common shares of the Company.  The Company accrued US $58,305 in interest on these convertible notes during the year ended March 31, 2010 on total principal outstanding of US $1,313,000 at March 31, 2010.





There were no transactions costs to be allocated between the embedded derivative and debt host contract.





On May 31, 2010, a third party purchased on a pro rata ownership basis from the existing convertible note holders, US $634,756 of the convertible notes and US $65,244 in accrued interest for aggregate proceeds of US $700,000. On June 15, 2010, the notes were converted by the purchaser into common shares at the rate of US $0.20 per share.  In conjunction with this transaction, 135,925 common shares were issued to the original convertible note holders at the rate of US $0.24 per share in exchange for remaining accrued interest of US $32,622 due to the original convertible note holders through May 31, 2010.  As at May 31, 2010, an aggregate of US $678,244 was outstanding on unconverted principal of these convertible notes with all interest paid through this date.





In return for conversion of the US $700,000 debt acquired by the third party at US $0.20 which was at a rate higher than the original convertible note terms of a 30% discount to bid price conversion covenant, an aggregate of 875,000 warrants exercisable at US $0.40 were issued to a third party exercisable until May 31, 2012.





The Company used the residual fair value method to allocate the proceeds received to the various components. The fair value of the liability component of convertible debentures is obtained by discounting future interest and principal payments by using a market rate equal to the rate of similar debentures having no conversion right. The residual value is allocated to the conversion components.





Interest expense related to the liability component is charged to operations, and the difference between the interest expense and its related disbursement representing the increase in the liability component value is credited to the convertible notes due to time-value of money.





During the year ended March 31, 2009, the Company revised its presentation of the conversion option that did not meet the definition of equity to more accurately present these as derivative liabilities and has restated the financial statements for the year ended March 31, 2008. This change in presentation had no material impact to the statement of operations.








SUBSEQUENT EVENTS TO MARCH 31, 2010





Unless otherwise noted in this 20 F, the following events occurred after March 31, 2010:





On June 1, 2010, the Company ratified the conditional issuance of 1,000,000 common shares to a third party as partial consideration for the purchase of technology related to the Company’s “Alphacrop” plant growing system.  The shares are conditional on the issue of certain patents from the UK patent office.





On June 1, 2010, the Company authorized the grant of 3,960,000 stock options at US $0.25 per share for an eight year period to consultants and employees of the Company.  Only 1,500,000 of these options were issued.  On July 31, 2010, a further 250,000 share options at US $0.25 per share for an eight year period were issued to a consultant of the Company.  On September 1, 2010, 100,000 share options were forfeited.  As at November  01, 2010, the Company had 1,750,000 share options outstanding of which 1,000,000 options had vested.





On June 15, 2010, the Company issued:




(a)
300,000 common shares as an employment bonus for the year ended March 31, 2010 to the Company’s CEO.  These shares were returned to treasury on September 15, 2010;






34
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  SUBSEQUENT EVENTS TO MARCH 31, 2010 - continued


(b)
500,000 common shares in connection with a business consulting services agreement for services to be performed from April 1, 2010 through December 31, 2010;




(c)
500,000 common shares in connection with an investor relations services agreement for services to be performed from April 1, 2010 through December 31, 2010;




(d)
100,000 common shares relating to existing investor relations services agreements;




(e)
3,500,000 common shares upon conversion of US $700,000 in convertible notes payable and accrued interest payable at US $0.20 per share;




(f)
135,925 common shares in payment of partial accrued interest on promissory notes at US $0.24 per share; and




(g)
875,000 share purchase warrants to purchase 875,000 common shares exercisable at US $0.30 per share until May 31, 2012 relating to a finders’ fee arrangement.





On July 7, 2010 the Company and its subsidiary Valcent USA and Global Green Solutions Inc. agreed to the wind-up and dissolution of Vertigro Algae Technologies LLC, a Texas Corporation (VAT), through which they had jointly pursued development of a project to use algae as a source for biofuel feedstock and other products. VAT’s technology license agreement with Pagic LP has been terminated. There were no assets or liabilities in VAT at the date of wind up.




On July 17, 2010, the Company extended the term of 5,534,521 warrants exercisable at US $0.45 per share originally expiring on July 17, 2010 by 12 months to July 17, 2011.




On September 1, 2010, 100,000 share options were forfeited.




On September 15, 2010, the Company returned 21,704 common shares to treasury from a rescinded convertible debenture conversion.




On September 15, 2010, the Company issued 500,000 common shares to the holders of US $698,426 in convertible notes as part of negotiated changes the term for repayment of these notes through December  30, 2010.








YEAR ENDED MARCH 31, 2009 COMPARED WITH YEAR ENDED MARCH 31, 2008





Operating Results





For the year ended March 31, 2009, we focused on the following business initiatives:





(i)
the development and commercialization of our Verticrop(TM)HDVG System  designed to produce vegetables and other plant crops,





(ii)
the development of a commercial algae growing technology via Vertigro Algae with Global Green Solutions, Inc., and





(iii)
the development and marketing of the Tomorrow Garden® consumer retail product by Valcent EU.





For the year ended March 31, 2008, the Company focused on:





(i)
the development of a commercial algae growing technology via a joint venture with Global Green,





(ii)
the development of our Verticrop(TM)HDVG System designed to more efficiently produce certain plant crops,





(iii)
the development and test marketing of the Tomorrow Garden® consumer retail product by Valcent EU,





(iv)
the development of product inventories and direct test and sales initiatives and product introduction promotion relating to our Nova Skin Care System, and





(v)
ongoing research and development with tissue culture technologies, plant growth stimulation technologies, and other product and technology development initiatives.





We incurred losses of $17,885,490 for the year ended March 31, 2009, as compared to $12,712,358 for the year ended March 31, 2008.







35
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  YEAR ENDED MARCH 31, 2009 COMPARED WITH YEAR ENDED MARCH 31, 2008 - continued
  Revenues





For the years ended March 31, 2009 and March 31, 2008, under Canadian GAAP, as the Company is in the development stage, test sales are credited to development costs. Under US GAAP, test sales are credited to revenue. During the year ended March 31, 2009, the Company had test sales of $219,483 (2008 - $985,779) related to the Nova Skincare System.





Interest income for the years ended March 31, 2009 and March 31, 2008 was $19,491 and $10,805 respectively.





The foreign exchange loss/(gain) for the years ended March 31, 2009 and March 31, 2008 was $2,027,804 and ($611,133) respectively.





Operating Expenses





Product development expenses increased by $4,157,564 to $8,238,999 for the year ended March 31, 2009 as compared with the year ended March 31, 2008.  The increase is due to write downs relating to, accounts receivable impairment, inventory impairment for the discontinuance of Nova Skin Care Products marketing and product testing, increased research and development costs relating to the commercialization of the Verticrop(TM) System, and the advent of costs relating to the Tomorrow Garden® product line.  Product development expenses were $4,081,435 during the year ended March 2008.





In conjunction with convertible debenture financings during the year ended 2008, the Company incurred $3,213,003 in interest, accretion, and financing on convertible notes in the twelve month period ended March 31, 2009.  This represents a $296,045 increase from the $2,916,958 that had been incurred during the year ended March 31, 2008 stemming primarily from amortization and accretion of convertible debenture funding activity during the 2009 and 2008 fiscal years.





The Company incurred a loss on the settlement of debts in the amount of $885,292 during the year ended March 31, 2009 (2008 $Nil) with respect to the renegotiation and settlement of certain portions of convertible notes issued in July 2008.





Investor relations fees decreased $88,793 to $782,749 (2008 - $871,542) for the year ended March 31, 2009 as a result of the Company employing an decreasing number of third party consultants in advisory, business consulting services, and  investor relations activities.





Professional fees increased by $92,946 to $524,216 for the year ended March 31, 2009 from $431,270 for the year ended March 31, 2008.  The increase is primarily attributable to costs associated with increased finance activity and costs relating to complex financial accounting issues, as well as intellectual property legal services, and technology acquisition negotiations between the respective years.





Advertising and media development was $448,258 during the year ended March 31, 2009 (2008 $1,953,998) with such decrease reflecting the cessation of marketing development relating to the Nova Skin Care System.





Office and miscellaneous expenses increased $154,312 to $389,129 for the year ended March 31, 2009 from $234,817 for the year ended March 31, 2008. The increase is due to emphasis on project development initiatives in the Company’s UK subsidiary.





As a result of the issuance of options to directors, officers, employees and consultants the Company incurred stock option compensation expenses of $260,530 during the year ended March 31, 2009 (2008 - $990,305).





Travel expenses decreased by $55,024 to $236,441 (2008 - $291,465) for the year ended March 31, 2009 as a result of decreased activity in all of the Company’s operations, decreased number of active development projects, as well as cost streamlining due to global economic circumstances.





Amortization increased $134,155 to $181,618 (2008 - $47,463) for the year ended March 31, 2009 as a result of an increasing asset base and depreciation charges related thereto.





Rent expenses increased $53,120 to $131,038 for the year ended March 31, 2009 from $77,918 for the year ended March 31, 2008. The increase in rent costs incurred relates to our new offices and operations located in the United Kingdom.





Filing and transfer agent expenses decreased $22,350 to $22,150 for the year ended March 31, 2009, from $44,500 for the year ended March 31, 2008. The decrease is primarily attributable to costs associated with the proportionate decrease of financing and business activity during the 2009 fiscal year.





Insurance expense decreased to $19,640 for the year ended March 31, 2009, from $71,071 for the year ended March 31, 2008. The decrease is primarily attributable to the rebate of 2008 insurance costs received in the year ended March 31, 2009 and associated decreased insurance coverage required which was prorated over both 2008 and 2009 fiscal years.




36
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  YEAR ENDED MARCH 31, 2009 COMPARED WITH YEAR ENDED MARCH 31, 2008 - continued
  Interest relating to long term debt decreased to $4,223 (2008 - $15,480) due to the payout of all long term debt in July, 2008.





As a result of staffing cuts in our El Paso facility and due to the specialized nature of buildings and equipment, the Company impaired the carrying value of certain of its fixed assets relating to our El Paso, Texas operation; the Company’s fixed assets and land were valued at a net book value of $1,070,216 (2008 - $1,135,108) during the year ended March 31, 2009, and a onetime write down of assets in the amount of $509,892 was incurred (2008 - $Nil).





Due to fluctuations in the United States dollar in relation to the Canadian dollar, the Company incurred a foreign exchange loss of $2,027,804 as compared to a gain of ($611,133) during the year ended March 31, 2008.





Interest income offset our losses in the amount of $19,491 during the year ended March 31, 2009 (2008 $10,805)





Net Loss





Our reported net loss increased by $5,143,132 to $17,855,490 ($6.43 basic loss per share) for the year ended March 31, 2009 as compared to $12,712,358 ($6.23 basic loss per share) for the same period ending March 31, 2008. The increase during the 2008 fiscal year is largely a result of write downs relating to fixed asset impairment, accounts receivable impairment, inventory impairment for the discontinuance of Nova Skin Care Products marketing and product testing, costs relating to the valuation of convertible debentures utilized to finance the Company, increased research and development costs relating to the commercialization of the Verticrop(TM) System, and the advent of Valcent EU costs relating to the Tomorrow Garden®, all of which was further affected by a $2,027,804 loss relating to foreign exchange accounts.





Liquidity and Capital Resources





Because we are organized in Canada, our March 31, 2009 financial statements have been prepared by our management in accordance with Canadian GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.





Our accumulated losses during the development stage increased by $17,885,490 to $42,173,129 for the year ended March 31, 2009 from $24,317,639 for the year ended March 31, 2008.





Our working capital deficit decreased to $2,101,443 from $5,094,440 for the year ended March 31, 2009 representing a $2,992,997 decrease over the year ended March 31, 2008. Even though this decrease stemming from debt settlement and restructuring initiatives, as described in Note 1 to our March 31, 2009 financial statements, these conditions raise substantial doubt as to our ability to continue as a going concern.





The Company’s ability to continue as a going-concern is dependent upon the economic development of its products, the attainment of profitable operations and the Company’s ability to obtain further financing.  The Company is currently seeking additional funding to finance its operations and obligations. Management is considering all possible financing alternatives, including equity financing, debt financing, joint-venture, corporate collaboration and licensing arrangements.  However, there can be no assurance that the Company will be successful in its financing efforts or in the success of its products.





During the year ended March 31, 2009, the Company engaged in a series of private offering transactions with institutional and other investors, pursuant to which we raised US$1,951,600 through private placements of equity comprised of common shares and warrants, US$191,667 from warrant exercises, US$2,168,000 from convertible debentures issuances, and approximately $1,662,578 in promissory notes, and short term advances.





During the year ended March 31, 2008, the Company engaged in a series of private offering transactions with institutional and other investors, pursuant to which we raised US$5,218,173 through private placements of equity comprised of common shares and warrants, US$367,671 from warrant and share option exercises, and US$1,291,000 from convertible debentures, promissory notes, and short term advances.





During the year ended March 31, 2009, we issued 16,667 common shares for technology valued at US$180,000, and issued 275,731 common shares for convertible note conversions received of US$1,422,206 in interest and principal.





Long term debt decreased from $158,612 at March 31, 2008 to $0 at March 31, 2009 as a consequence of freeing a first secured interest in favour of holders of our July 2008 convertible note debt financing.





Our advances and amounts due from related parties decreased by $1,303,871 to $186,645 as at March 31, 2009 (2008 - $1,490,516) due to debt settlements made with debt holders on March 31, 2009 for common share equity as part of corporate restructuring initiatives.




37
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  YEAR ENDED MARCH 31, 2009 COMPARED WITH YEAR ENDED MARCH 31, 2008 - continued
  Convertible notes decreased as at March 31, 2009 to $11,228 from $5,202,741 at March 31, 2008 due to debt settlements made with debt holders on March 31, 2009 for common share equity as part of corporate restructuring initiatives.  Certain remaining principal portions of these notes were optioned relating to the July 2008 convertible notes through December 31, 2009 and were reclassified as secured promissory notes.





Promissory notes increased from $270,167 at March 31, 2008 to 2,643,514 at March 31, 2009 owing in part to reclassification of certain remaining principal portions of the July 2008 convertible notes to promissory notes due to renegotiation of these instruments, provisions made by negotiation for the repayment of US$400,000 of the July 2008 convertible notes in cash on June 2, 2009, and the receipt of US$500,000 as part of a private placement with a single investor which was later converted to common shares on July 17, 2009.





Accounts payable and accrued liabilities increased slightly to $541,802 at March 31, 2009 from $536,563 at March 31, 2009.





As a result of the cessation of Nova Skin Care System development certain of our inventories were impaired by $644,463 as at March 31, 2009.  As at March 31, 2009, inventories related to the Company’s Tomorrow Garden® project in the aggregate of $34,072 (2008 - $nil).





Prepaid expenses as at March 31, 2009 of $102,670 (2008 $2,119,546) include $16,606 (2008 - $2,015,837) related to the deferred portion of business consulting and investor relations services agreements with the balance of $86,064 (2008 - $103,709) consisting of in prepaid insurance and rental deposits.





As at March 31, 2009, accounts receivable of $920,235 consists of $812,048 due from Global Green Solutions, the Company’s joint venture partner in Vertigro Algae product development, with the balance primarily due from value added tax receivable by the Company’s subsidiary, Valcent Products EU Limited, and goods and services tax receivable by the Company, as well as receivables relating to Tomorrow Garden® sales.  As at March 31, 2008, accounts receivable of $462,156 consisted primarily of amounts due from the Company’s product fulfillment agent, GSI Commerce, Inc. (formerly Accretive Commerce Inc.) from test sales relating to the Company’s Nova Skin Care System, value added tax receivable by the Company’s subsidiary, Valcent Products EU Limited, and goods and services tax receivable by the Company.





Restricted cash as at March 31, 2008 consisted of certificates of deposit and interest earned of $108,471 that were pledged to secure long term debt relating to our purchased lands in El Paso. Restricted cash as at March 31, 2009 was $0 due to long term debt being paid in full in July, 2008 resulting in restricted cash being freed for corporate use.





During the year ended March 31, 2009, the Company determined that certain capital assets were not in use or impaired and accordingly wrote down the carrying value of those assets to their net recoverable amounts. The write-down amounting to $509,892 (2008 $0) was in addition to $181,618 (2008 $47,463) in amortization in the statement of operations for the year ended March 31, 2009.





As at March 31, 2009, we had $224,769 in cash (2008 - $163,437) and we currently have approximately $46,000 in cash as at September 15, 2009.





Due to uncertainty in determining future cash flows related to products under license, the Company, during the year ended March 31, 2008, wrote down the value of the product license by $1,306,074 to $1.








CAPITAL COMMITMENTS





Not applicable.





Fluctuations in Operating Results





Our annual operating results are likely to fluctuate significantly in the future as a result of numerous factors, including, among others:





•
The availability of adequate financing;•
Our ability to develop an organizational infrastructure and effective management systems;•
The success of our advertising and marketing plans;•
Market acceptance and general consumer demand for our products;•
The performance of our products;•
Our ability to effectively distribute our products;•
The introduction of products that compete with our own;•
The adoption of new disclosure and/or corporate governance requirements associated with the maintenance of our status as a publicly reporting issuer;•
Potential lawsuits involving our products or other matters; and•
General business and economic conditions;•
Currency valuation fluctuations





38
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  CAPITAL COMMITMENTS - continued
 
 Impact of Inflation





We do not believe that inflation has had a material effect on our business.





Research and Development, Patents and Licenses





The Company has engaged in a variety of different projects during the last three years as described in this annual report.  The Company has incurred product development costs in the aggregate as follows:





Year

Amount2008

$
4,081,4352009


8,238,9992010


2,152,425Total

$
14,472,859








OFF-BALANCE SHEET ARRANGEMENTS





We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material adverse affect on our financial condition or results of operations.








CONTRACTUAL OBLIGATIONS





As of March 31, 2010, we had the following known contractual obligations noted in this report or financial statements dated March 31, 2010:





On November 16, 2007, our wholly owned subsidiary, Valcent EU Limited leased office and development space in Launceston, Cornwall, UK, under a ten-year lease beginning November 15, 2007 and ending on November 15, 2017 at a quarterly cost of GB£12,550 (CDN$20,977).  There were 7 years and 7.5 months remaining on the lease as at March 31, 2010.The Company also entered into public relations and consulting agreements in the year that extended beyond March 31, 2010. The combined commitments as at March 31, 2010 are as follows:





Shares


Amount2011


125,000


$
76,2292012


-



76,2292013


-



76,2292014


-



76,229Thereafter


-



200,100125,000


$
505,015





Effective April 1, 2009, the Company executed a new purchase agreement (the “Purchase Agreement”) to acquire all ownership rights and intellectual property relating to its Verticrop(TM) vertical plant growing technology and Tomorrow Garden® Kit technology (the “Technologies”) from Glen Kertz, Pagic and West Peak. Pursuant to the Purchase Agreement, the Company agreed to pay a total of US $2,000,000 plus issue 3% of its common shares on conclusion of the purchase agreement.  The US $2,000,000 is payable on a cumulative basis as to US $65,000 on signing (paid) plus the greater of 3% of the gross monthly product sales less returns from exploitation of the technologies or US $12,000 per month until US $2,000,000 has been paid.  The ownership of the Technologies will remain in escrow until fully paid or if the Company defaults in making payments.  The issuance of 3% of its common shares is payable upon release of the Technologies from escrow to the Company.  The Company may at any time elect to pay out the remaining balance due.  Should the Company default under this agreement the Technologies will revert back to the vendors.





During the last quarter of the fiscal year ended March 31, 2010, the Company and Pagic entered into negotiations to resolve certain disputes regarding the Purchase Agreement.  On March 8, 2010, an addendum to the Purchase Agreement (“Addendum”) was entered into by parties thereto whereby:








39
 
 ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
 
 CONTRACTUAL OBLIGATIONS - continued
 
 a) the purchase price of technology to be acquired was amended to an aggregate of US $3.15 million (previously US $2 million) of which certain equipment was permitted to be used by Pagic as an incentive to enter into the Purchase Agreement (“Addendum”).




b) US $100,000 was paid to Pagic by the Company at the date of the Addendum;




c) calculated minimum IP payments increased to US $18,000 per month from US $12,000 per month effective August 1, 2010; and




d) the term to complete the technology purchased was reduced from July 1, 2019 to July 12, 2014.





During the year ended March 31, 2010, $261,088 was paid or accrued to Pagic under the terms of the Purchase Agreement and its Addendum, and $318,250 was paid during the year ended March 31, 2009 under previous license arrangements, with such costs recorded as product development costs.




Application of Critical Accounting Policies and Use of Estimates




Our consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles and reconciled to accounting principles generally accepted in the United States following Item 17 of Form 20-F. The preparation of these financial statements requires that we 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 revenue and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions. There have been no material changes to these estimates for the periods presented in this annual report.




We believe that of our significant accounting policies, which are described in Note 2 to our annual financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, the following policies are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.




Stock-Based Compensation




Stock options granted are recognized at the fair value of the options as determined by an option pricing model as the related services are provided and the options earned. US and Canadian accounting standards require public companies to recognize the cost of employee services received in exchange for equity instruments, based on the fair value of those instruments on the measurement date which generally is the grant date, with limited exceptions.  Stock-based compensation represents the cost related to stock-based awards granted to employees and non-employee consultants. We measure stock-based compensation cost at measurement date, based on the estimated fair value of the award, and generally recognize the cost as expense on a straight-line basis (net of estimated forfeitures) over the employee requisite service period or the period during which the related services are provided by the non-employee consultants and the options are earned. We estimate the fair value of stock options using a Black-Scholes option valuation model.




The expected volatility of options granted has been determined using the volatility of our company's stock. The expected volatility for options granted during the year ended March 31, 2010 was 100% . The expected life of options granted generally equals the term of the options.  For the year ended April 30, 2010, the weighted-average risk-free interest rate used was 1.98% . The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. In addition, companies are required to utilize an estimated forfeiture rate when calculating the expense for the period. We applied an estimated forfeiture rate of Nil% in the year ended March 31, 2010 in determining the expense recorded in our consolidated statement of operations.




Use of Estimates




The preparation of our financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions which affect the amounts reported in these consolidated financial statements, the notes thereto, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.







40
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  NEW ACCOUNTING PRONOUNCEMENTS
  Canadian GAAP





Business combinations, consolidated financial statements and non-controlling interest





In January 2009, the CICA issued CICA Handbook Section 1582, “Business Combinations”, Section 1601, “Consolidations”, and Section 1602, “Non-controlling Interests”. These sections replace the former CICA Handbook Section 1581, “Business Combinations” and Section 1600, “Consolidated Financial Statements” and establish a new section for accounting for a non-controlling interest in a subsidiary. CICA Handbook Section 1582 establishes standards for the accounting for a business combination, and states that all assets and liabilities of an acquired business will be recorded at fair value. Obligations for contingent consideration and contingencies will also be recorded at fair value at the acquisition date. The standard also states that acquisition-related costs will be expensed as incurred and that restructuring charges will be expensed in the periods after the acquisition date.





It provides the Canadian equivalent to International Financial Reporting Standard (“IFRS”) 3, “Business Combinations” (January 2008).  The section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011.





CICA Handbook Section 1601 establishes standards for the preparation of consolidated financial statements.





CICA Handbook Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in the preparation of consolidated financial statements subsequent to a business combination. It is equivalent to the corresponding provisions of International Financial Reporting Standard IAS 27, “Consolidated and Separate Financial Statements” (January 2008).





CICA Handbook Section 1601 and Section 1602 apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. Earlier adoption of these sections is permitted as of the beginning of a fiscal year. All three sections must be adopted concurrently. The Company is currently evaluating the impact of the adoption of these sections.





International Financial Reporting Standards (“IFRS”)




In 2006, the Canadian Accounting Standards Board (“AcSB”) published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five year transitional period. In February 2008, the AcSB announced that 2011 is the changeover date for publicly-listed companies to use IFRS, replacing Canada's own GAAP. The date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition date of April 1, 2011 will require the restatement for comparative purposes of amounts reported by the Company for the year ended March 31, 2011. The Company has begun an internal diagnostic review to understand, identify and assess the overall effort required to produce financial information under IFRS, however, at this time, the financial reporting impact of the transition to IFRS cannot be reasonably estimated.





US GAAP





Accounting Standards Codification





In June 2009, the FASB issued the FASB Accounting Standards Codification (“Codification”). The Codification became the single source for all authoritative generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009. The Codification does not change GAAP and did not have an effect on our financial position, results of operations or cash flows.  The adoption of this statement will have no material impact on the Company’s financial statements but will require that interim and annual filings include references to the Codification.





Variable Interest Entities





In June 2009, the ASC 810 – Consolidation (FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”) ASC 810 amends the accounting for variable interest entities (“VIE”) and changes the process as to how an enterprise determines which party consolidates a VIE. ASC 810 also defines the party that consolidates the VIE (the primary beneficiary) as the party with (1) the power to direct activities of the VIE that most significantly affect the VIE’s economic performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. Upon adoption of SC 810, the reporting enterprise must reconsider its conclusions on whether an entity should be consolidated, and should a change result, the effect on its net assets will be recorded as a cumulative effect adjustment to retained earnings. ASC 810 is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years and early application is prohibited. The adoption of this statement will have no material impact on the Company’s consolidated financial statements.




41
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  NEW ACCOUNTING PRONOUNCEMENTS - continued
  Transfers of Financial Assets
  In June 2009, the FASB issued ASC 860 – Transfers and Servicing (SFAS No. 166, “Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140”.) ASC 860 limits the circumstances in which a financial asset may be derecognized when the transferor has not transferred the entire financial asset or has continuing involvement with the transferred asset. The concept of a qualifying special-purpose entity, which had previously facilitated sale accounting for certain asset transfers, is removed by ASC 860. ASC 860 is effective for financial asset transfers occurring in fiscal years beginning after November 15, 2009, and interim periods within those fiscal years and early application is prohibited. The adoption of this statement is not expected to have a material effect on the Company’s consolidated financial statements.





Subsequent Events





In May 2009, the FASB issued ASC 855 (SFAS No. 165 “Subsequent Events”.) ASC 855 provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The statement sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. The statement also sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements.  Furthermore, this statement identifies the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim or annual periods ending after June 15, 2009. The adoption of this statement did not to have a material effect on the Company’s consolidated financial statements.





In February 2010, the FASB issued ASU 2010-09, which amends ASC 855 to address certain implementation issued related to an entity's requirement to perform and disclose subsequent event procedures. ASU 2010-09 requires entities to make filings with the Securities Exchange Commission (SEC) to evaluate subsequent events through the date the financial statements are issued. The new guidance became effective immediately for financial statements that are issued or available to be issued.





Business Combinations





In December 2007, ASC 805 Business Combinations was issued (SFAS No. 141R, “Business Combinations”.)  This statement replaces SFAS 141 and defines the acquirer in a business combination as the entity that obtains control of one or more businesses in a business combination and establishes the acquisition date as the date that the acquirer achieves control. ASC 805 requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. ASC 805 also requires the acquirer to recognize contingent consideration at the acquisition date, measured at its fair value at that date. This statement is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is prohibited. The adoption of this statement did not have a material effect on the Company's consolidated financial statements.





Contracts Indexed to the Company’s Stock




In June 2008, the Financial Accounting Standards Board (“FASB”) issued Emerging Issues Task Force (“EITF”) Issue 07-5 (EITF 07-5), “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” which is now included in the FASB Accounting Standards Codification at ASC 815-40-15. This guidance requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement provisions. Instruments not indexed to their own stock fail to meet the scope exception of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, paragraph 11(a), now included in the FASB Codification at ASC 815-10-15-74(a), and should be classified as a liability and marked-to-market. ASC 815-40-15 was effective for fiscal years beginning after December 15, 2008 and thus, upon its adoption on April 1, 2009, was applied to the Company’s outstanding convertible notes.




Fair value measurement





In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 810) Improving Disclosures About Fair Value Measurements. This ASU provides further disclosure requirements for recurring and non-recurring fair value measurements. These disclosure requirements include transfers in and out of Level 1 and 2 and additional information relating to activity in Level 3 fair value measurements. The ASU also provides clarification on the level of disaggregation for disclosure of fair value measurement. The new disclosures and clarifications are effective for interim and annual periods beginning after December 15, 2009, except for disclosures about activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company is reviewing the impact of this standard in its consolidated financial statements.






42
  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS - continued
  NEW ACCOUNTING PRONOUNCEMENTS - continued
  Stock Compensation
  In April 2010, FASB issued ASU No. 2010-13, Stock Compensation[“ASU 2010-13”]. ASU 2010-13 amends FASB ASC Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. ASU 2010-13 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. ASU 2010-13 should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings (deficit). The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.





Revenue Recognition





In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition— Milestone Method[“ASU 2010-17”]. ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions in FASB ASC Subtopic 605-25, Revenue Recognition, Multiple- Element Arrangements. An entity often recognizes these milestone payments as revenue in their entirety upon achieving a specific result from the research or development efforts. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. Determining whether a milestone is substantive is a matter of judgment made at the inception of the arrangement. ASU 2010-17 is effective for fiscal years and interim periods within those fiscal years beginning on or after June 15, 2010. Early application is permitted. Entities can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted.  The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.








ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES





DIRECTORS AND SENIOR MANAGEMENT





The following table sets forth our directors and executive officers and their ages as of the date of March 31, 2010. Unless otherwise stated, the address for each of our directors and executive officers is c/o Valcent Products Inc., Suite 1010 - 789 West Pender Street, Vancouver, British Columbia V6C 1H2  Canada.





Name

Age

PositionChris Bradford

70

Director, President, CEO1Gerry Jardine

58

Director, Acting CFO, Secretary2Naveen Aggarwal

52

Director




(1)
Appointed President, Chairman of the Board and a Director by resolution of the board of directors, in accordance with Section 111 of the Business Corporations Act (Alberta) on October 22, 2009. Appointed Chief Executive Officer by resolution of the board of directors in accordance with Section 121 of the Business Corporations Act (Alberta), and Section 6 of our bylaws on October 22, 2009.(2)
Appointed Acting CFO and Secretary by resolution of the board of directors, in accordance with Sections 121 and 111 respectively of the Business Corporations Act (Alberta) following the resignation of George Orr as CFO, Secretary, and director on January 15, 2010. (Mr. Jardine resigned June 1, 2010; Robert Baker was appointed as replacement Director, Acting CFO, Secretary on such same date).





Chris Bradford — President, Chief Executive Officer and Director





Mr. Chris Bradford has been a director and our Chief Executive Officer and President since October 22, 2009.  Mr. Bradford is also currently Managing Director of the Company’s wholly owned UK based subsidiary, Valcent Products (EU) Limited.  Mr. Bradford has worked within the agricultural sector continuously over the last 35 years in senior management positions in both large companies and smaller ventures. He also consulted with many programs to assist small agricultural businesses before joining Valcent Products (EU) Limited on a full time basis in April of 2007. Mr. Bradford has firsthand experience in most aspects of the agricultural sector and has successfully built Valcent Products (EU) Limited to be a productive Company that has been integral to the development and commercialization of the Company‘s core technologies. Chris Bradford joined Bradford & Sons Ltd., a family business post education, ultimately managing the Company’s Crop Services Division, supplying agricultural and horticultural markets in the South West of England.  Immigrating to Canada in 1977, Mr. Bradford worked at senior management level for three leading Canadian farm supply businesses, eventually setting up his own consulting business specializing in project management for startup companies in North America. Returning to the UK in 1996, Mr. Bradford joined the UK Government’s Business Link organization as a Business Development Adviser before returning to consulting in 2002, latterly developing the business plan and start-up strategy for Valcent Products (EU) Limited.








43




ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES - continued
 
 DIRECTORS AND SENIOR MANAGEMENT - continued
  Gerry Jardine — Acting Chief Financial Officer, Secretary and Director





Mr. Jardine was until June 1, 2010, a director of Valcent Products Inc. He was also the President/Chief Executive Officer and a director of Silica Resources Corp. from January 31, 2008 to August 16, 2010. Mr. Jardine was president and chief executive officer and a director of New Pacific Ventures from 2001 to 2006. From 1999 to 2004, he was the secretary/treasurer and a director of Prefco Enterprises Inc., a public Canadian construction/development company. From 1989 to 2003, Mr. Jardine was the president and chief executive officer and a director of Truax Venture Corporation, a Canadian public exploration company. Additionally, from 1996 to 2003, Mr. Jardine was the president of Amcan Fiscal Consultants Inc., a private consulting company. From 1986 to 1997, Mr. Jardine was the president and chief executive officer and a director of PowerTech Industries Inc., a Canadian public company involved in the manufacture and sales of HVAC equipment. Over the past twenty-four years, Mr. Jardine has also served as a director to more than half a dozen other companies, mainly operating in resource industries.





Naveen Aggarwal - Director





Naveen Aggarwal is currently engaged as an associate with Sweetwater Capital Corp., responsible for the evaluation of opportunities and the subsequent provision of advisory support to ensure success. Mr. Aggarwal is also a principal of Interactive Technologies Fund, based in Toronto, Ontario. He also serves on the Board of Directors of FourSpots Inc. and Infolinx Communications Ltd. and is a former director of Verrus Mobile Technologies Inc. He brings over twenty-five years experience with a variety of technologies (Hardware, Software, Consulting Services) and vertical markets (Telecom, Government, Finance, Retail) in the areas of development, sales, and marketing in senior management roles. Mr. Aggarwal has held senior level positions at many leading international companies including TIBCO Software (General Manager of Telecom Line of Business, Worldwide), Sun Microsystems, Netscape Communications, and Nortel. Naveen received degrees in Neurophysiology and Mathematics/Computer Science at the University of Toronto.








COMPENSATION





The following table sets forth the total compensation paid to each of our directors and executive officers serving during the fiscal year ended March 31, 2010.





Annual Compensation


Long Term CompensationName and Principal Position

Salary


Bonus/Fees


Awards

Restricted

Stock

Awards


Securities

Underlying

Options/SARs (#)$


$M. Glen Kertz (1)

Former CEO, President and Director

(resigned April 9, 2010)


—



261,088



—



—F. George Orr (2)

Former CFO, Secretary, and Director

(resigned January 15, 2010)


—



—



—



—Gerry Jardine (3)

Former Director, Acting CFO, Secretary (resigned June 1, 2010)


—



86,325



—



—Naveen Aggarwal (4)

Director


—



—



—



—George Stapleton (5)

Former Director

(resigned February 18, 2010)


—



—



—



—Chris Bradford (6)

CEO, President and Director


88,387



126,000



300,000



—






44
  ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES - continued
  COMPENSATION - continued




(1)
During the year ended March 31, 2010, Pagic LP, a company affiliated with Glen Kertz, was paid or accrued amounts as shown for payments under license agreements between the Company and Pagic LP. In addition, additional accrued amounts due as at March 31, 2009 in the amount of US$156,519 were settled on March 29, 2009 for 391,298 common shares to Pagic, with such shares issued on May 11, 2009. Mr. Kertz resigned as a director and officer of Valcent and related subsidiaries on April 9, 2010.(2)
Accrued amounts due as at March 31, 2010 for fees, interest, convertible debenture prepayment penalty, original issuer discount on convertible notes, debt advances and promissory notes paid to the Company, and other amounts due aggregating US$336,586 were settled on March 29, 2009 for 1,085,690 common shares to Mr. Orr, with such shares issued on May 11, 2009.  During the year ended March 31, 2010, $30,288 was accrued in accretion and interest owing on secured convertible debenture amounts owing to Mr. Orr.  Mr. Orr resigned as a director and officer of Valcent and related subsidiaries on January 15, 2010.(3)
Mr. Gerry Jardine received, or the Company accrued amounts owing for consulting services to a related company during the year ended March 31, 2010.  Mr. Jardine resigned as a director and officer of Valcent and related subsidiaries on June 1, 2010.(4)
Mr. Naveen Aggarwal previously received amounts for consulting services performed. Partial amounts accrued due as at March 31, 2009 in the amount of $23,428 were settled on March 29, 2009 for 46,875 common shares, with such shares issued on May 11, 2009.  On June 30, 2010, this director was assigned 500,000 fully vested share options exercisable at US$0.25 per share for an 8 year term.(5)
Amounts owing to Mr. George Stapleton from a convertible note and interest due as at March 31, 2009 in the amount of US$73,544 were settled on March 29, 2009 for 183,860 common shares, with such shares issued on May 11, 2009.(6)
Amounts shown are for salary received or accrued for during the year ended March 31, 2010. In addition, at March 31, 2010, the Company commitment to issue 300,000 common shares to Mr. Bradford for product development services performed during the year ended March 31, 2010. The 300,000 common shares to be issued were valued at $0.42 per share for an aggregate value of $126,000.  On September 15, 2010, these shares were cancelled and returned to treasury to be replaced at a future date by share options.








BOARD PRACTICES





In accordance with Section 106(3) of the Business Corporations Act (Alberta), each of our directors holds office for a term of one year or until their reappointment, unless otherwise removed or resigns, with such term expiring at the succeeding annual shareholders’ meeting. Officers are appointed by, and serve at the discretion of, our board of directors.





We currently have no arrangements in place for the provision of benefits upon the termination of our directors or officers.





Board of Director Committees





We have one standing committee, the audit committee, comprised of members of our board of directors. Our audit committee was formed in 1996 and in March 2005 adopted a formal written charter. The current members of our audit committee include all the members of the Board of Directors:  Naveen Aggarwal, Robert Baker, and Chris Bradford. We at present do not have a member of the audit committee with accreditation as “financial expert” (as defined in accordance with Item 16A(b) of Form 20-F). Our audit committee meets with our external auditors annually, prior to completion of our audited financial statements, and with our management at least quarterly throughout the fiscal year.  Only one member of the audit committee is an independent director; the Company acknowledges deficiencies exist resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures.





We have no formal compensation committee.








45
  ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES - continued
  EMPLOYEES





As at November  1, 2010, Valcent Manufacturing Ltd. had 1 full time employee, and also retained consultants as required.





As at November 1, 2010, Valcent Products EU Limited had 11 full time employees, 2 part time employees, and 2 consultants working on active projects.





As at November 1, 2010, Valcent Products Inc. had approximately 8 consultants, all of which provided services on a part time basis.








Key Employees and Consultants





Our key consultants and their primary responsibilities as at November 1, 2010 are as follows:





Chris Bradford, the Managing Director of Valcent Products EU Limited is responsible for UK business operations and the Company’s development of the Vertigro HDVG system, market development, and sales rollout.  Due to Mr. Bradford’s central role to the development of the Company’s core business High Density Vertical Growing Systems and its commercialization, he also acts as Valcent Products Inc.’s President and Chief Executive Officer providing corporate direction, leadership, and implementation for our business operations.





Stephen Kenneth Fane, consultant to Valcent Products Inc., has extensive experience in the commercial greenhouse industry that is invaluable as Valcent enters its commercial sales and marketing of both the Verticrop(TM) and Alphacrop(TM)Systems.  Fane, who was a partner at Coopers & Lybrand, a predecessor firm to PriceWaterhouseCoopers, became a hydroponic greenhouse entrepreneur twenty years ago. In 1990, Fane acquired a 5-acre hydroponic greenhouse operation that produced bell peppers which he expanded to over 75 acres under glass. Fane merged his operation with another large-scale producer and took the combined entity public as an Income Trust on the TSX. Fane was President & CEO of Hot House Growers Income Fund from December 2003 to October 2006 where he was responsible for the integration of two existing large-scale operations totaling more than 135 acres under glass and the raising of $70M through the public offering process. In late 2006, the Trust was merged with another large scale producer to form one of the world's largest greenhouse production and marketing companies.





Stephen Kennedy Smith and Emlink LLC, provide commercialization, product development, and consulting marketing services to Valcent Products, Inc. in the US market place essential to the sales development process and establishment of Verticrop(TM).  Consulting firm Emlink LLC include multi-faceted resource personnel to roll out the Company’s products.





Tim Brock – Mr. Brock holds a B.A. in Economics from the University of British Columbia and has in-depth experience in seed capital funding, initial public offerings and sponsorship on Canadian and American venture stock exchanges.








SHARE OWNERSHIP





The following table sets forth, as of September 15, 2010, information regarding the share ownership of our common stock for each of our directors and executive officers serving during the fiscal year ended March 31, 2010.  The number of shares beneficially owned is determined in accordance with Rule 13d-3 of the Securities and Exchange Act of 1934, and the information is not necessarily indicative of beneficial ownership for any other purpose.  Under such rule, beneficial ownership includes any shares as to which the shareholder has sole or shared voting power or investment power and also any shares which the shareholder has the right to acquire within 60 days.













46
  ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES - continued
  SHARE OWNERSHIP - continued


Name

Amount and

Nature of Ownership


Percent of Class*F. George Orr (1)

Former CFO, Secretary, and Director

(resigned January 15, 2010)


2,442,942



4.16
%Gerry Jardine (2)

Former Director, Acting CFO, Secretary

(resigned June 1, 2010)


-



-
%Naveen Aggarwal (3)

Director


585,763



1.02
%George Stapleton (4)

Former Director

(resigned February 18, 2010)


200,526



0.35
%Chris Bradford

CEO, President and Director


-



-
%M. Glen Kertz (5)

Former CEO, President and Director

(resigned April 9, 2010)


293,473



0.51
%3,522,704



6.05
%




*
No director or executive officer has different voting rights from any other holder of our common stock. Based on 57,389,550 shares issued and outstanding at September 15, 2010.  Includes derivative instruments of holder in numerator and denominator of “Percent” calculation.(1)
Consists of (i) 17,260 shares of common stock directly owned, issued in settlement of partial interest earned on a convertible note held by the shareholder, (ii) 63,492 shares of common stock directly owned, issued to the shareholder as a negotiated bonus for extension of term relating to a convertible note held by the shareholder, (iii) 6,668 shares of common stock issued pursuant to private placement of units at US$10.80 per share all directly owned, (iv) 1,085,690 shares issued on May 19, 2009 from debt settlements for amounts owed at March 31, 2009, and (v) 1,269,813 commons shares issuable based on the calculation of the conversion derivative as at September 15, 2010 on estimated interest and principal outstanding of US$94,220 and convertible according to the terms of the convertible note held by the shareholder (10 day average bid of US$0.106 discounted by 30% provides estimated conversion rate of US$0.0742 at September 15, 2010).  Share options issued previous to March 31, 2009 were cancelled effective March 31, 2009.(2)
Share options issued previous to March 31, 2009 were cancelled effective March 31, 2009.(3)
Consists of (i) 38,888 shares of common stock beneficially owned through this director’s spouse, and (ii) 46,875 shares issued on May 19, 2009 from debt settlements for certain partial amounts owed at March 31, 2009, and (iii) 500,000 share options issued on June 1, 2010 for an eight year term. Share options issued previous to March 31, 2009 were cancelled effective March 31, 2009.(4)
Consists of (i) 16,666 shares of common stock issued pursuant to private placement of units at US$10.80 per unit in a private company affiliated with this director; corresponding warrants to this private placement have expired, and (ii) 183,860 shares held jointly with a spouse issued on May 19, 2009 from debt settlements for certain partial amounts owed at March 31, 2009.(5)
Consists of (i) a portion of the 391,298 common shares issued for amounts due at March 31, 2009 in the amount of US$156,519 that were settled on March 29, 2009 for 391,298 common shares to Pagic, with such shares issued on May 11, 2009. Only 293,473 common shares remain in the name of Pagic a company controlled by Ketz the shareholder.






47
  ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES - continued
  2006 Stock Option Plan
  On December 14, 2006, the Company replaced its existing Canadian and US stock option plans with a new single stock option plan (the “2006 Stock Option Plan”). The 2006 Stock Option Plan was adopted by the Board of Directors on December 16, 2006 and adopted as amended by the Shareholders of the Company on February 15, 2008.  The 2006 Stock Option Plan allows for share options to be issued to Company employees, directors, officers, and consultants on both a qualified and non-qualified basis. The aggregate number of shares of Common Stock as to which options and bonuses may be granted from time to time under the Plan shall not exceed 20% (the “Plan Maximum”) of the Company’s issued and outstanding shares of Common Stock. In addition, the aggregate number of shares of Common Stock to which Incentive Stock Options may be granted shall not exceed 17% of the Company’s issued and outstanding shares of Common Stock. The plan is designed to encourage our directors, executive officers, consultants and other key employees to acquire a proprietary interest in the Company. The 2006 Stock Option Plan is administered by the Board of Directors, or a committee designated thereby, and reserve for issuance thereunder, in the aggregate, a total of 20% of our issued and outstanding common shares, on a non-diluted basis, to be increased or decreased as the number of our issued and outstanding shares change. The 2006 Stock Option Plan provides that the terms of the options and the option prices shall be fixed by the Board or committee and subject to the requirements of the exchange on which our common shares are traded, or any other governing regulatory body, at the time of exercise. Options granted shall expire after a period of five years or terminate three months after the recipient ceases to be our employee. In conjunction with restructuring initiatives, as at March 31, 2009, all share options previously granted were cancelled effective the same date.





During the year ended March 31, 2010, a total of 100,000 share options were issued at US$0.30 per share for a five year term.








ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS





MAJOR SHAREHOLDERS





As of September 15, 2010, there were 57,389,550 common shares issued and outstanding. The table below sets forth certain information, to the extent known or reasonably ascertainable, regarding our major shareholders, including beneficial owners of more than 5% of our common stock, as of September 15, 2010. The number of shares beneficially owned is determined in accordance with Rule 13d-3 of the Securities and Exchange Act of 1934, and the information is not necessarily indicative of beneficial ownership for any other purpose.  Under such rule, beneficial ownership includes any shares as to which the shareholder has sole or shared voting power or investment power and also any shares which the shareholder has the right to acquire within 60 days.





Shares Beneficially OwnedMajor Shareholders

Number


Percent*Larry Thompson (1)


16,738,083



26.64
%Agosto Corporation Limited (2)


9,726,245



16.95
%Platinum Long Term Growth VI, LLC (3)


9,035,020



13.9
%Paul Sturt (4)


5,000,000



8.71
%1538764 Alberta Inc. (5)


4,521,658



7.88
%Inspeck Crushing Ltd. (6)


2,948,982



5.14
%Total


47,969,988



79.25
%Total Shares outstanding at September 15, 2010


57,389,550





*Includes derivative instruments of holder in numerator and denominator of “Percent” calculation.





(1)
Consists of (i) 11,303,562 shares of common stock directly owned, and (ii) 5,434,521 warrants to purchase 5,434,521 common shares at US$0.45 until July 17, 2011 (these warrants originally expiring on July 17, 2010 were extended for a one year term.)








48





ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS - continued


MAJOR SHAREHOLDERS - continued




(2)
Consists of (i) 4,863,123 shares held by Dr. Murphy, (ii) 4,752,011 shares held by Agosto Corporation, and (iii) 111,111 shares held by EXOMS Ltd.  J. Gordon Murphy is the sole shareholder and a control person of both Agosto Corporation and EXOMS and therefore for the purposes of Rule 13d-3 Dr. Murphy may be deemed the beneficial owner of the shares beneficially held by Agosto Corporation and EXOMS. 4,602,012 shares of common stock beneficially owned by Agosto were acquired in May 2009 upon the settlement of certain debt owed to Agosto by Valcent Products Inc.(3)
Consists of (i) 1,109,967 shares of common stock directly acquired in debt settlements with the Company in May, 2009, (ii) 201,307 warrants to purchase 201,307 common shares until July 21, 2010 at US$0.20 per share, (iii) 101,654 warrants to purchase 100,654 common shares until July 21, 2013 at US$0.20 per share, (iv) 7,166,355 commons shares issuable based on the calculation of the conversion derivative as at September 15, 2010 on estimated interest and principal outstanding of US$531,744 and convertible according to the terms of the convertible note held by the shareholder (10 day average bid of US$0.106 discounted by 30% provides estimated conversion rate of US$0.0742 at September 15, 2010), (v) 97,411 shares of common stock directly owned, issued in settlement of partial interest earned on a convertible note held by the shareholder, and (vi) 358,326 shares of common stock directly owned, issued to the shareholder as a negotiated bonus for extension of term relating to a convertible note held by the shareholder. Contractual obligations exist for this shareholder to at no time exceed aggregate common share ownership greater than 9.99% of the total number of issued and outstanding shares of the Company.(4)
Consists of (i) 5,000,000 shares of common stock directly owned acquired in a private sale from a third party.(5)
Consists of (i) 3,500,000 shares of common stock directly owned acquired in a conversion of $700,000 in debt at US$0.20 per share, and (ii) 1,021,658 shares of common stock directly owned acquired in a private sale from a third party.(6)
Consists of (i) 2,948,982 shares of common stock directly acquired in debt settlements with the Company in May, 2009.





At of  September 15, 2010, we had 208 shareholders of record and an estimated 2,400 unregistered shareholders.  As of  September 15, 2010, there were 57,389,550 shares of common stock outstanding. United States shareholders held an estimated 13,775,903 shares of our common stock, representing approximately 24% of the issued and outstanding shares of our common stock.





We are not directly or indirectly owned or controlled by another corporation, by any foreign government or by another natural or legal person, severally or jointly and we have no knowledge of any arrangements, the operation of which may at a subsequent date result in a change in our control.








RELATED PARTY TRANSACTIONS





During the years ended March 31, 2010 and 2009, the Company incurred the following expenditures charged by directors and officers of the Company, former directors and officers of the Company, companies they owned or were significant shareholders of, and/or beneficial owners of more than 5% of the Company’s common shares:





2010


2009


2008Product Development

$
392,325


$
1,318,309


$
919,460Interest and accretion


107,642



-



-Professional fees


-



36,000



33,370Rent


25,000



37,800



30,000$
524,967


$
1,392,109


$
982,830





The related party transactions are in the ordinary course of business and are measured at the exchange amount which is the amount agreed upon by the transacting parties.





At March 31, 2010 and 2009, due to related parties was comprised of amounts owing to directors and officers of the Company, former directors and officers of the Company, companies they owned or were significant shareholders of, and/or beneficial owners of more than 5% of the Company’s common shares.  The amounts owing were non-interest bearing and had no specific terms of repayment.





At March 31, 2010, promissory notes payable included $1,001,851 (March 31, 2009 - $19,058) owing to beneficial owners of more than 5% of the Company’s common shares and directors and officers.





The Company has made payments to a company owned by former directors and officers of the Company pursuant to the Product License during the years ended March 31, 2010 and 2009.






49
 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS - continued
  RELATED PARTY TRANSACTIONS - continued
  At March 31, 2010, commitment to issue shares includes 300,000 common shares to be issued to an officer and director of the Company for product development services performed during the year ended March 31, 2010. The 300,000 common shares to be issued are valued at $0.42 per share for an aggregate value of $126,000 and was recorded to the product development cost.





During the year ended March 31, 2010, $206,950 of cash issue costs were charged by beneficial owners of more than 5% of the Company’s common shares.





During the year ended March 31, 2010, the Company settled commitments to issue shares of $8,172,135 by issuing 17,655,556 common shares.





Verticrop(TM)Technology Purchase Agreement - Effective April 1, 2009, the Company executed a purchase agreement to acquire all ownership rights and intellectual property relating to certain vertical plant growing technology and Tomorrow Garden® kit technology (the “Technologies”) from Glen Kertz, Pagic, and West Peak and which provides the Company with all rights and knowhow to the Technologies  (the “Purchase Agreement”).  Pursuant to this agreement, original master license agreements between the Company and Pagic were terminated and this agreement replaced all financial obligations the Company had with Pagic related to the original master license agreements, including annual payments, royalty burden, and all other associated licensing costs.





Pursuant to the Purchase Agreement, the Company agreed to pay a total of US$2,000,000 plus issue 3% of its common stock on conclusion of the purchase agreement.  The US$2,000,000 is payable on a cumulative basis as to US$65,000 on signing (paid) plus the greater of 3% of the gross monthly product sales less returns from exploitation of the technologies or US$12,000 per month until US$2,000,000 has been paid.  The ownership of the Technologies will remain in escrow until fully paid or if the Company defaults in making payments.  The issuance of the 3% of its common stock is payable upon release of the Technologies from escrow to the Company.  The Company may at any time elect to pay out the remaining balance due.  Should the Company default under this agreement the Technologies will revert back to Glen Kertz and Pagic and the Company’s obligations under the Purchase Agreement will cease.





During the last quarter of the fiscal year ended March 31, 2010, the Company and Pagic entered into negotiations to resolve certain disputes regarding the Purchase Agreement.  On March 8, 2010, an addendum to the Purchase Agreement (“Addendum”) was entered into by parties thereto whereby:





a) the purchase price of technology to be acquired was amended to an aggregate of US $3.15 million (previously US $2 million) of which certain equipment was permitted to be used by Pagic as an incentive to enter into the Purchase Agreement(“Addendum”).




b) US $100,000 was paid to Pagic by the Company at the date of the Addendum;




c) calculated minimum IP payments increased to US $18,000 per month from US $12,000 per month effective August 1, 2010; and




d) the term to complete the technology purchased was reduced from July 1, 2019 to July 12, 2014.





During the year ended March 31, 2010, $261,088 was paid or accrued to Pagic under the terms of the Purchase Agreement and its Addendum, and $318,250 was paid during the year ended March 31, 2009 under previous license arrangements, with such costs recorded as product development costs.





Global Green Joint Venture





On October 2, 2006, as amended June 25, 2007, the Company entered into a letter of agreement (“LOA”) with Pagic, West Peak and Global Green Solutions Inc. (“Global Green”), whereby Global Green agreed to fund the next phase of the development of a high density vertical bio-reactor technology.  Pursuant to the LOA, the Company and Global Green established a commercial joint venture (the “Vertigro JV”), in which Global Green agreed to provide up to US $3,000,000 in initial funding to continue the research and development of the bio-reactor technology, construct a working prototype of the bio-reactor and develop the technology for commercial uses. The Company is obligated to provide product support, research and development and the non-exclusive use of the Company’s properties and lands for which Global Green has agreed to reimburse the Company as part of its US $3,000,000 initial funding commitment. Until such time as the joint venture has fully repaid to Global Green the US $3,000,000, Global Green shall receive 70% of the net cash flow generated by anticipated future operations after which each of Global Green and the Company will  hold a 50% interest in the Vertigro JV, subject to an aggregate 4.5% royalty based on gross revenue as defined in the Vertigro JV, to Pagic and West Peak.





On May 5, 2008, the Company and Global Green concurrently incorporated Vertigro Algae Technologies, LLC (“VAT”) and entered into a revised operating agreement (“Operating Agreement”) which replaced the LOA. Pursuant to the Operating Agreement, Global Green and the Company each hold a 50% interest in VAT and have committed to fund project development costs according to ownership allocation. Further, the Company will retain assets of Vertigro JV, including buildings, laboratory, and equipment.  Global Green will receive 70% of the net cash flow generated by the VAT until it has received US $3,000,000 in excess of its 50% interest in such cash flow, and the Company will receive the remaining 30% net cash flow.







50
 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS - continued
 
 RELATED PARTY TRANSACTIONS - continued
 
 Also on May 5, 2008, VAT executed a Technology License Agreement (“Technology License”) together with Pagic and West Peak.  The Technology License licenses certain algae biomass technology and intellectual property to VAT for purposes of commercialization and exploitation for all industrial, commercial and retail applications worldwide (“Algae Biomass Technology”).  As consideration for the Technology License, the Company and Global Green agreed to issue 16,666 common shares and 300,000 common shares, respectively, to Pagic and also pay a one-time commercialization fee of US $50,000 upon the Algae Biomass Technology achieving commercial viability.  The Technology License is subject to royalty of 4.5% of gross customer sales receipts for use of the Algae Biomass Technology and aggregate annual royalty minimum amounts of US $50,000 in 2009, US $100,000 in 2010 and US $250,000 in 2011 and each year thereafter in which the Technology License is effective.  The Company issued the 16,667 common shares to Pagic on August 18, 2008 at a fair value of $190,746, which has been expensed to product development, and has accrued its share of the US $50,000 payment due on March 31, 2009. The Technology License has lapsed by agreement of the parties to the Technology License Agreement. VAT is no longer in operation by consent of the members of VAT, with each of the Company and Global Green pursuing their core business strategies; no royalty has been accrued or paid during the year ended March 31, 2010.





The main elements from VAT included in the consolidated financial statements are accounts payable of US $44,029 (2009 - US $39,466) and expenses of US $44,723 (2009 – US $1,099,148). There were no assets in VAT during the year ended March 31, 2010 or 2009.





On July 7, 2010, the Company and its subsidiary Valcent USA and Global Green Solutions Inc. agreed to the wind-up and dissolution of Vertigro Algae Technologies LLC, a Texas Corporation (VAT), through which they had jointly pursued development of a project to use algae as a source for biofuel feedstock and other products. VAT’s technology license agreement with Pagic LP has been terminated. There were no assets or liabilities in VAT at the date of wind up.








INTERESTS OF EXPERTS AND COUNSEL





Not applicable.








ITEM 8. FINANCIAL INFORMATION





CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION





See ITEM 17 and our financial statements and accompanying notes beginning on page F-1 of this Form 20-F.





Legal proceedings





There are no pending, and we are not aware of any contemplated, legal, governmental or arbitration proceedings, including those related to bankruptcy, receivership or those involving a third party which have, or may have, significant effects on our financial position or profitability.





Dividend Policy





We have never paid a dividend and have no intentions of doing so in the foreseeable future.








SIGNIFICANT CHANGES





•
July 2008 Convertible Note Partial Purchase and Conversion - On May 31, 2010, a third party purchased on a pro rata ownership basis from the existing convertible note holders, US $634,756 of the convertible notes and US $65,244 in accrued interest for aggregate proceeds of US $700,000. On June 15, 2010, the notes were converted by the purchaser into common shares at the rate of US $0.20 per share.  In conjunction with this transaction, 135,925 common shares were issued to the original convertible note holders at the rate of US $0.24 per share in exchange for remaining accrued interest of US $32,622 due to the original convertible note holders through May 31, 2010.  As at May 31, 2010, an aggregate of US $678,244 was outstanding on unconverted principal of these convertible notes with all interest paid through this date.



In return for conversion of the US $700,000 debt acquired by the third party at US $0.20 which was at a rate higher than the original convertible note terms of a 30% discount to bid price conversion covenant, an aggregate of 875,000 warrants exercisable at US $0.40 were issued to a third party exercisable until May 31, 2012.•
Alphacrop(TM)Technology Conditional Technology Acquisition - On June 1, 2010, the Company ratified the conditional issuance of 1,000,000 common shares to a third party as partial consideration for the purchase of technology related to the Company’s “Alphacrop(TM)” plant growing system.  The shares are conditional on the issue of certain patents from the UK patent office.




51
 
 ITEM 8. FINANCIAL INFORMATION - continued
 
 SIGNIFICANT CHANGES - continued




•
July 2008 Convertible Note Modification to Interest Rate and Equity Bonus to Extend Term – Effective July 1, 2010, and in order to extend the repayment terms of outstanding secured convertible promissory notes in the aggregate outstanding amount of US$698,426 as at June 30, 2010, the Company accepted the negotiated change to the nominal and effective rate of default interest from 18% per annum simple interest rate to 30% per annum simple interest.  In addition, on September 15, 2010, the Company issued an aggregate of 500,000 common shares to the four note holders prorate to their holdings as a bonus to extend the term of the notes through December 30, 2010.








ITEM 9. THE OFFER AND LISTING





The table below sets forth certain information regarding the price history of our common shares, including (i) annual high and low market prices for each of the three most recent fiscal years, (ii) quarterly high and low market prices for each full quarter of the two most recent fiscal years and to the date of this Annual Report, and (iii) monthly high and low market prices for each month of the six most recent months. The prices have been adjusted to reflect a one-for-three common share consolidation effective May 3, 2005 and the further one-for-eighteen common share consolidation effective July 16, 2009.





As of July 16, 2009, our common shares are presently quoted on the United States OTC Bulletin Board, under the symbol “VCTZF” (formerly “VCTCF” and “NTTRF”). Effective May 3, 2005, we changed our name from Nettron.com, Inc. to Valcent Products Inc. and delisted our common shares from the TSX-Venture Exchange, Inc. (formerly The Canadian Venture Exchange), where we had been trading under the symbol “NTT.H”, maintaining only our listing only on the United States OTC Bulletin Board.





Period

OTC Bulletin Board

(USD)High


LowFiscal year ended March 31,2006

$
17.10


$
4.502007

$
15.20


$
7.202008

$
16.74


$
8.102009

$
13.32


$
0.902010

$
2.50


$
0.21Quarter endedJune 30, 2008

$
13.32


$
9.00September 30, 2008

$
12.06


$
6.12December 31, 2008

$
8.10


$
3.60March 31, 2009

$
5.40


$
0.90June 30, 2009

$
2.34


$
0.54Stock split 18 - 1 July 16-09September 30, 2009

$
2.50


$
0.36December 31, 2009

$
1.20


$
0.57March 31, 2010

$
0.60


$
0.21Month endedMarch 31, 2010

$
0.52


$
0.21April 30, 2010

$
0.42


$
0.21May 31, 2010

$
0.25


$
0.15June 30, 2010

$
0.27


$
0.17July 31, 2010

$
0.19


$
0.12August 31, 2010

$
0.16


$
0.11September 30, 2010

$
0.14


$
0.10October 31, 2010

$
0.14


$
0.07













52




ITEM 9. THE OFFER AND LISTING - continued
  MARKETS
  We voluntarily delisted from the TSX Venture Exchange on May 3, 2005. Since May 3, 2005, our common shares were quoted solely on the OTC Bulletin Board, under the symbol “VCTPF”. Since July 16, 2009, our common shares were quoted on the OTC Bulletin Board, under the symbol “VCTZF”.








ITEM 10. ADDITIONAL INFORMATION





SHARE CAPITAL





Not applicable.








MEMORANDUM AND ARTICLES OF ASSOCIATION





Organization, Object and Purpose





We were incorporated in Canada on January 19, 1996, in accordance with the provision of the Business Corporations Act (Alberta). Article 5 of our articles of incorporation provides that we are neither restricted from carrying on any business nor required to carry on a certain business.





Directors





Voting Powers





In accordance with Section 4.19 of our bylaws and Section 120 of the Business Corporations Act (Alberta) if one of our directors is party to or has a material interest in a material contract or proposed material contract with us or with one of our subsidiaries, that director must disclose the nature and extent of their interest at the first meeting at which the proposed material contract is considered, or at the first meeting after which the director becomes an interested party, either in writing or, at the director’s request, entered into the meeting minutes. All material contracts or proposed material contracts in which one of our directors has a material interest must be referred to our board or shareholders for approval, even if not one which, in the ordinary course of business, would otherwise require approval. A director who is party to or has a material interest in a material contract or proposed material contract, shall refrain from voting on any resolution to approve the material contract unless it is one for (i) an arrangement by way of security for money lent to or obligations undertaken by the director for our benefit, (ii) a transaction relating primarily to the director’s remuneration, (iii) a contract for indemnity insurance, or (iv) a contract with an affiliate.





In accordance with our bylaws and the Business Corporations Act (Alberta) there are no limitations on the power of our directors, in the absence of an independent quorum, to vote compensation to themselves.





Borrowing Powers





In accordance with Section 3.01 of our bylaws and Section 103 of the Business Corporations Act (Alberta) our directors may, without shareholder authorization, (i) borrow money on our credit, (ii) issue, reissue, sell or pledge debt obligations, (iii) give a guarantee on our behalf to secure performance of an obligation, and (iv) mortgage, hypothecate, pledge or otherwise create a security interest in all or any of our property, owned or subsequently acquired, to secure any of our obligations. These powers can be modified by means of an amendment to our articles of incorporation or bylaws, or by unanimous shareholder consent.





Indemnification of Directors and Officers and Limitation of Liability





In accordance with Section 7 of our bylaws and Section 124 of the Business Corporations Act (Alberta), each of our directors and officers is relieved from liability for the acts, receipts or defaults of any other of our directors, officers or employees, notwithstanding any loss, damage or expense caused to us, provided, however, that such director or officer discharges their own duties honestly, in good faith and with a view toward our best interests, and exercises the care, diligence and skill that a reasonably prudent person would in comparable circumstances.





Subject to certain limitations as set forth in Section 124 of the Business Corporations Act (Alberta), we have undertaken to indemnify our current or former directors and officers against all reasonable costs, charges and expenses, including amounts paid to settle an action or satisfy a judgment, incurred in respect of any civil, criminal or administrative proceedings to which such director or officer is made party to by reason of being or having been a director or officer. Our board of directors may, from time to time, purchase and maintain insurance policies for the benefit of our directors and officers as against any such liabilities incurred, except with respect to liability arising out of a director or officer’s failure to act honestly, in good faith and with a view toward our best interests. We do not presently maintain a directors’ and officers’ insurance or reimbursement policy.







53




ITEM 10. ADDITIONAL INFORMATION - continued
  MEMORANDUM AND ARTICLES OF ASSOCIATION - continued
  Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or controlling persons under the forgoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable as a matter of United States law.





Qualifications





There is no mandatory retirement age required by our bylaws or the Business Corporations Act (Alberta) and no requirement that our directors be shareholders of our Company.





Common Shares





In accordance with Article 2 and Schedule A of our articles of incorporation filed January 19, 1996, and as amended, there are authorized an unlimited number of common shares which our directors may issue without nominal or par value.





Dividends





Holders of shares of our common stock are entitled, subject to the rights privileges, restrictions and conditions attached to our preferred shares, to receive such dividends as our directors may from time to time, by resolution, declare.





Voting Rights





Holders of shares of our common stock are entitled to receive notice of and vote, on the basis of one vote for each common share so held, at every meeting of the shareholders of our Company.





Liquidation Rights





Holders of shares of our common stock are entitled, subject to the rights, preferences and privileges, of any authorized and outstanding class and series of our preferred shares, to receive, in the event of liquidation, dissolution or winding up or upon the distribution of any of our assets among the holders of shares of our common stock, other than by way of dividends, their pro rata share of such distribution.





Preferred Shares





In accordance with Article 2 and Schedule B of our articles of incorporation filed January 19, 1996, and as amended, there are authorized an unlimited number of preferred shares, which our directors may, from time to time, issue without nominal or par value in one or more series consisting of such number of shares as our directors may determine. Currently there are no preferred shares outstanding. Our directors, by resolution, may fix the designation, rights, privileges, restrictions and conditions attached to the preferred shares of each series, including without limiting the generality of the foregoing, the rate, form, entitlement and payment of preferential dividends, the redemption price, terms, procedure and conditions for redemption, if any, voting rights and conversion rights, and sinking fund, purchase fund or other provisions attaching to the preferred shares of such series.





Dividends





Holders of shares of our preferred stock shall be entitled to preference over holders of shares of our common stock and any other of our shares ranking junior with respect to the payment of dividends as our directors may from time to time, by resolution, declare. No dividend shall at any time be declared or paid or set apart for payment on any shares ranking junior to shares of our preferred stock unless all dividends up to and including the dividends payable for the last completed period for which such dividends were payable on each series of preferred shares then issued and outstanding shall have been declared and paid or set apart for payment at the date, nor shall we call for redemption or redeem or purchase for cancellation or reduce or otherwise pay off any of our shares of preferred stock or any shares ranking junior to shares of our preferred stock unless all dividends up to and including the dividends payable for the last completed period for which such dividends were payable on each series of preferred shares then issued and outstanding shall have been declared and paid or set apart for payment as of the date of such call for redemption, purchase, reduction or other payment.





Holders of shares of our preferred stock shall rank on parity with holders of shares of all other series of our preferred stock with respect to payment of dividends, exclusive of any conversion rights, and if cumulative dividends are not paid in full in respect of a series of our preferred stock, the holders of shares of all series of our preferred stock shall participate ratably.







54
  ITEM 10. ADDITIONAL INFORMATION - continued
  MEMORANDUM AND ARTICLES OF ASSOCIATION - continued
  Voting Rights
  Holders of shares of our preferred stock shall be entitled to those voting rights which our directors may, by resolution, designate with respect thereto.





Liquidation Rights





Holders of shares of our preferred stock shall be entitled to preference over holders of shares of our common stock and any other of our shares ranking junior with respect to the distribution of our assets in the event of liquidation, dissolution or winding up, whether voluntary or involuntary, and may also be given such other preferences as our directors may fix, by resolution, prior to issuance.





Holders of shares of our preferred stock shall rank on parity with holders of shares of all other series of our preferred stock with respect to distribution of assets in the event of liquidation, dissolution or winding up, whether voluntary or involuntary, exclusive of any conversion rights, and if return of capital is not paid in full in respect of a series of our preferred stock, the holders of shares of all series of our preferred stock shall participate ratably.





Shareholder Action





In accordance with the provisions of the Business Corporations Act (Alberta) ordinary resolutions, such as those adopting amendments to our bylaws, must be passed by a majority of shareholders voting thereon, whereas special resolutions require a majority of not less than two-thirds of the votes cast by shareholders voting thereon. Special resolutions are required in (i) authorizing share splits where more than one class of shares exist, (ii) increasing stated capital with respect to a class or series of shares where the amount to be added is not received in consideration for the issuance of shares and where more than one class of shares exist, (iii) decreasing stated capital for any purpose, (iv) making certain amendments to or restating our articles of incorporation, (v) approving an amalgamation agreement, (vi) approving a continuance into another jurisdiction, (vii) selling, leasing or exchanging of all or substantially all of our property, other than in the ordinary course of business, or (viii) liquidating our assets and dissolving our Company.





Shareholders Meetings





Annual Meetings





We normally hold our annual shareholders’ meeting shortly after completion of the preceding fiscal year at our principal executive offices in Canada with the record date begin set and notice provided to our shareholders not less than twenty-one nor more than fifty days prior to the meeting. Only those shareholders entitled to vote at the meeting, the directors, auditors and any other persons required to attend under any provision of our articles of incorporation, bylaws or the Business Corporations Act (Alberta) are entitled to attend the meeting.





Special Meetings





Our board, the chairman of the board, managing director or president, have the power to call a special meeting at anytime, and notice of any special meeting shall state the text of any special resolutions to be submitted at the meeting.





Share Ownership





Although our shareholder are subject to certain beneficial ownership reporting requirements as a result of our having a class of securities registered under Section 12 of the Securities Exchange Act of 1934, there are no provisions in our bylaws governing the ownership threshold above which shareholder ownership must be disclosed.





With the exception of the Investment Canada Act, as amended, and the potential application of the Competition Act there are no limitations on the ability or right of persons to own our securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on our securities imposed by the Business Corporations Act (Alberta) or by our articles of incorporation or bylaws.





Investment Canada Act





The Investment Canada Act, as amended, generally prohibits implementation of any of a number of enumerated reviewable investments by an individual, government or agency thereof, corporation, partnership, trust or joint venture that is non-Canadian, as defined in the Investment Canada Act, unless the Minister responsible for administration of the Investment Canada Act is satisfied that the investment is likely to be of a net benefit to Canada.





In accordance with the provisions of the Investment Canada Act, an investment or series of investments to directly or indirectly acquire control of a Canadian company by a non-Canadian that is a “WTO Investor” or a Canadian company which was immediately prior to the investment controlled by a WTO Investor, is reviewable if the value of the assets of the company equal or exceed $256 million, the threshold established for the year 2006. In succeeding years, the threshold amount may be increased or decreased in accordance with the provisions of Section 14.1 of the Investment Canada Act. A WTO Investor is one who is a member of the World Trade Organization, currently comprised of one hundred forty-eight member countries, including the United States, or a WTO Investor-controlled entity, as defined in the Investment Canada Act.







55
  ITEM 10. ADDITIONAL INFORMATION - continued
  MEMORANDUM AND ARTICLES OF ASSOCIATION - continued
  An investment or series of investments to directly or indirectly acquire control of a Canadian company by a non-Canadian, other than a WTO Investor, is reviewable if the value of the assets of the company equal or exceed $5 million, or if an order for review is made by the Governor in Council on grounds that the investment is related to Canada’s cultural heritage or national identity.





Procedurally, the Investment Canada Act requires a non-Canadian who is establishing a new Canadian business or making an investment that will result in the acquisition of an existing Canadian business, to, depending on the transaction, file with the Director of Investments either notification of the transaction or an application for review.





Where an investment is reviewable in accordance with the provisions of the Investment Canada Act, an application for review must be filed prior to implementation of the investment, in response to which the non-Canadian investor will receive a receipt bearing a certified date. Within forty-five days following certified date the Minister responsible for administering the Investment Canada Act must either notify the non-Canadian investor that he is satisfied that the investment is likely to be of a net benefit to Canada or, if the Minister is unable to complete the review, notify the non-Canadian investor that the Minister shall, within thirty days unless a further period is agreed upon, complete consideration of the investment. Once the thirty day period has elapsed, the Minister will be deemed to be satisfied that the investment is likely to be of a net benefit to Canada and the investment may thereafter be implemented.





The notification procedure involves filing a brief statement of information at any time up to thirty days following implementation of the investment, in response to which the non-Canadian investor will receive a receipt bearing a certified date and advising the non-Canadian investor that the proposal is either unconditionally non-reviewable or that it will not be reviewed provided there is no additional notice of review issued within twenty-one days following the certified date.





Exempt from the notice and review provisions of the Investment Canada Act are, among other transactions, those acquisitions carried out (i) in the ordinary course of one’s business, (ii) in connection with the realization of security granted for a loan, (iii) for the purpose of facilitating financing, provided the acquirer divest himself of control within two years, and (iv) by reason of an amalgamation, merger, consolidation, or corporate reorganization, following which the ultimate control remains unchanged.





Exempt from the review provisions of the Investment Canada Act are investments to acquire control of Canadian businesses that (i) engage in the production of uranium, (ii) provide any financial services, (iii) provide transportation services, or (iv) constitute a cultural business.





Competition Act





The Competition Act, as amended, is designed to maintain and encourage competition while promoting efficiency and adaptability in the local Canadian economy, as well as to expand opportunities for Canadian participation in the world markets.





In accordance with the provisions of the Competition Act an investment giving rise to the acquisition or establishment, directly or indirectly, by one or more persons of control over or a significant interest in the whole or part of a business of a competitor, supplier, customer or other person may be subject to substantive review by the Commissioner of Competition, the officer responsible for administering the Competition Act.





Pre-investment notification must be made to the Commissioner of Competition by parties of a proposed transaction where certain party and transaction size thresholds are satisfied. The party size threshold requires that parties of a proposed transaction, together with their affiliates, have total assets in Canada or gross revenues from sales in, from or into Canada that exceed $400 million in the aggregate. The transaction size threshold requirements vary depending on the nature of the investment.





Transactions subject to pre-investment notification may not be completed until (i) the applicable statutory waiting periods have expired or have been earlier terminated by the Commissioner of Competition without his having taken action to prohibit the transaction’s implementation, or (ii) the Commissioner of Competition has issued an advance ruling certificate, or has waived the parties obligation to notify. Transactions involving only affiliates or those in the public interest, among others, are exempt from pre-investment notification requirements.





Regardless of whether pre-investment notification is required, the Commissioner of Competition may apply to the Competition Tribunal, a specialized tribunal established by Section 3 if the Competition Tribunal Act and empowered with the authority to hear and dispose of certain matters arising under the Competition Act, for substantive review of a transaction.





Where the Competition Tribunal finds the transaction likely to prevent or lessen competition substantially it may order the investment not proceed or, if it has been completed, may order its dissolution or the disposition of some of the assets or shares involved.






56
  ITEM 10. ADDITIONAL INFORMATION - continued
  MEMORANDUM AND ARTICLES OF ASSOCIATION - continued
  Change in Control





There are no provisions in our articles of incorporation or bylaws that would have an effect of delaying, deferring or preventing a change in our control with respect to a merger, acquisition or corporate restructuring.








EXCHANGE CONTROLS





There are no governmental laws, decrees, regulations or other legislation in Canada which restrict the import or export of capital, including the availability of cash and cash equivalents. With the exception of withholding tax requirements, there are no governmental laws, decrees, regulations or other legislation in Canada which affect the remittance of dividends, interest or other payments, to non-Canadian resident holders of shares of our securities.





Taxation





ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.





Material United States Federal Income Tax Consequences





The following is a general discussion of material United States federal income tax consequences that may apply to holders and prospective holders of shares of our common stock. This discussion is based on the Internal Revenue Code of 1986, as amended, (the Code), Treasury Department regulations promulgated thereunder, published Internal Revenue Service (IRS) rulings and administrative pronouncements and court decisions of current applicability, any or all of which may materially and adversely change at any time, possibly on a retroactive basis. In addition, this discussion does not consider the potential effects, adverse or beneficial, of any proposed changes in the governing tax law, whether by judicial, executive or legislative action, which, if effected, may be applied, possibly on a retroactive basis. Further, no opinion was requested by us, or has been provided by our counsel or independent registered public accounting firm, with respect to the United States income tax consequences described in the following discussion. Accordingly, we urge holders and prospective holders of shares of our common stock to consult with, and rely upon, their own tax advisors in analyzing the potential United States federal, state, local and non-United States tax consequences associated with purchasing, owning and disposing of shares of our common stock.





As used in this section the term "U.S. Holder" denotes the beneficial owner of one or more shares of our common stock who is:





·
an individual citizen or resident of the United States;





·
a corporation, or entity taxable as a corporation, that is created or organized under the laws of the United States or of any political subdivision thereof or the District of Columbia;





·
an estate whose income is taxable in the United States irrespective of source; or





·
a trust if: (a) a court within the United States is able to exercise primary supervision over the administration of the trust; and (b) one or more United States persons have the authority to control all substantial decisions of the trust.





This discussion does not address the tax consequences peculiar to, and the term U.S. Holder does not include, persons subject to special provisions of United States federal income tax law, such as tax-exempt organizations, qualified retirement plans, individual retirement accounts and other tax-deferred accounts, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, dealers in securities, persons or entities that have a functional currency other than the United States dollar, shareholders subject to the alternative minimum tax, shareholders who hold our common stock as part of a straddle, hedging or a conversion transaction, constructive sale or other arrangement involving more than one position, partners and other pass-through entities and persons holding an interest in such entities, and shareholders who acquired our common stock through the exercise of employee stock options or otherwise as compensation for services. This discussion is limited to U.S. Holders who own shares of our common stock as capital assets within the meaning of Section 1221 of the Code. This discussion does not address the consequences peculiar to persons or entities holding an interest in a shareholder or the consequences peculiar to a person of the ownership, exercise or disposition of any options, warrants or other rights to acquire shares of our common stock. If a partnership (including an entity treated as a partnership for United States federal income tax purposes) holds shares of our common stock, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership. If you are a partnership, or a partner in a partnership, holding shares of our common stock, we urge you to consult with, and rely upon, your own tax advisor in analyzing the potential United States federal, state, local and non-United States tax consequences associated with purchasing, owning and disposing of shares of our common stock.




57
  ITEM 10. ADDITIONAL INFORMATION - continued
  EXCHANGE CONTROLS - continued
  Dividends





Though we do not anticipate paying any cash dividends in the foreseeable future, should U.S. Holders of shares of our common stock receive dividend distributions:





·
to the extent such distributions are paid out of our current or accumulated earnings and profits, as determined for United States federal income tax purposes, subject to any applicable foreign tax credit, and without a reduction for any Canadian income tax withheld from such distributions, such holders would generally be required to include, in their gross income for United States federal income tax purposes, an amount equal to the United States Dollar value of such distributions on the date of receipt (based on the exchange rate on such date).





·
to the extent such dividend distributions exceed our current or accumulated earnings and profits, as determined for United States federal income tax purposes, the amount of any distribution so received will:  (i) first be applied to reduce a U.S. Holder's adjusted basis in our common stock, and, as a return of basis, will not be subject to United States federal income tax; and (ii) thereafter, any residual amount of such distribution will be treated as a gain from the sale or exchange of our common stock, which amount is taxable as a capital gain.





·
Any taxable dividends received on shares of our common stock by a U.S. Holder who is an individual, a trust or an estate (an "Individual Holder") will be treated as qualified dividend income, which is subject to tax at preferential rates through December 31, 2010, provided that:





·
we are a qualified foreign corporation—one eligible for the benefits of a comprehensive income tax treaty with the United States, which the United States Treasury Department has determined to be satisfactory for this purpose and which includes an exchange of information program—for which purposes the Canada-US Income Tax Convention (1980) qualifies;





·
we are not a passive foreign investment company for the taxable year during which the dividend is paid or the immediately preceding taxable year (which we do not believe we are, have been or anticipate that we will be);





·
the Individual Holder has held the common stock for more than 60 days during the 121-day period beginning 60 days prior to the date on which the common stock become ex-dividend; and





·
the Individual Holder is not obligated to make related payments with respect to positions in substantially similar or related property.





Special rules may apply to any extraordinary dividend—a dividend equal to or in excess of 10 percent of a shareholder's adjusted basis, or, under certain circumstances, the fair market value, of a share of common stock—requiring that such a distribution be treated as qualified dividend income. Any loss from the sale or exchange of shares of our common stock with respect to which an Individual Holder has received an extraordinary dividend treated as qualified dividend income will be deemed a long-term capital loss to the extent of such dividend. Taxable extraordinary dividends not treated as qualified dividend income will be taxed as ordinary income, rather than as capital gains.





Foreign Tax Credit





A U.S. Holder who pays, or has withheld from distributions, Canadian income tax with respect to the ownership of shares of our common stock may be entitled, at his election, to either a deduction or a tax credit for such foreign tax paid or withheld. Furthermore, a U.S. Holder that is a domestic corporation owning 10 percent or more of our voting stock may be eligible to claim a deemed paid foreign tax credit based on any underlying non-United States income taxes paid by us. The election to credit or deduct foreign taxes is made on a yearly basis and applies to all foreign income taxes paid by, or withheld from, the U.S. Holder during the year.





There are significant and complex limitations applicable to the foreign tax credit and as such we urge you to consult with, and rely upon, your own tax advisor regarding the availability of the foreign tax credit, the deemed paid foreign tax credit available to certain corporations and the application of limitations on the credit in light of your particular circumstances.





Sale, Exchange or other Disposition of Common Stock





Generally, a U.S. Holder will recognize a taxable gain or loss upon the sale, exchange or other disposition of shares of our common stock in an amount equal to the difference between the amount realized by the U.S. Holder from such sale, exchange or other disposition and the U.S. Holder's tax basis in such shares. Subject to certain qualifications and limitations, such gain or loss will be treated as a long-term capital gain or loss if the U.S. Holder has held the common stock for more than one year at the time of the sale, exchange or other disposition. Preferential tax rates for long-term capital gains may apply to certain U.S. Holders who satisfy this minimum holding period. There are presently no preferential tax rates for long-term capital gains recognized by a corporation.





58
  ITEM 10. ADDITIONAL INFORMATION - continued
  EXCHANGE CONTROLS - continued
  Special Rules





Special United States federal income tax rules apply to shareholders of passive foreign investment companies and controlled foreign corporations. The preceding discussions do not address the United States federal income tax consequences to a U.S. Holder in the event that we were treated as a passive foreign investment company or controlled foreign corporation. While our management does not believe that we are, or that we are likely to become, a passive foreign investment company or a controlled foreign corporation, the circumstances which would result in our becoming such are not entirely within our control and as such there always exists the possibility, however remote, that we may become a passive foreign investment company or controlled foreign corporation in the future.





Passive Foreign Investment Company





The status of being a passive foreign investment corporation (a PFIC) depends upon the composition of a company's income and assets and the market value of its assets and shares from time to time.  There is no assurance that we will be considered, or not be considered a PFIC for any taxable year.  If we were treated as a PFIC for any taxable year during which a U.S. Holder held shares, certain adverse tax consequences could apply to the U.S. Holder.





If we are treated as a PFIC for any taxable year, gains recognized by such U.S. Holder on a sale or other disposition of shares would be allocated ratably over the U.S. Holder's holding period for the shares.  The amount allocated to the taxable year of the sale or other exchange and to any year before we became a PFIC would be taxed as ordinary income.  The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as applicable, and an interest charge would be imposed on the amount allocated to such taxable year.  Further, any distribution in respect of shares in excess of 125 percent of the average of the annual distributions on shares received by the U.S. Holder during the preceding three years or the U.S. Holder's holding period, whichever is shorter, would be subject to taxation as described above.  Certain elections may be available to U.S. Holders that may mitigate some of the adverse consequences resulting from PFIC status.  However, regardless of whether such elections are made, dividends paid by a PFIC will not be "qualified dividend income" and will generally be taxed at the higher rates applicable to other items of ordinary income.





U.S. Holders and prospective holders should consult their own tax advisors regarding the potential application of the PFIC rules to their ownership of our common stock.





Controlled Foreign Corporation





A controlled foreign corporation is a foreign corporation of which more than 50 percent of the stock, by vote or value, is owned, directly, indirectly or constructively, by U.S. Holders each of whom, directly, indirectly or constructively, owns 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation (each a "CFC Shareholder"). If we are a controlled foreign corporation, a CFC Shareholder would be treated as receiving current distributions of an allocable share of certain types of our income at the end of each year. Additionally, such a CFC Shareholder would recognize ordinary income to the extent of an allocable share of our earnings and profits, rather than capital gain, on the sale of his common stock. Our management does not believe that we are a controlled foreign corporation, because U.S. Holders who directly, indirectly or constructively own 10 percent or more of the total voting power of our outstanding common stock do not own more than 50 percent of shares of our common stock.





United States Federal Income Taxation of Non-U.S. Holders





For purposes of this discussion, a beneficial owner of our common stock that is not a U.S. Holder (other than a partnership or entity treated as a partnership for United States federal income tax purposes) is a "Non-U.S. Holder". If you are a partnership, or a partner in a partnership, holding shares of our common stock, we urge you to consult with, and rely upon, your own tax advisor in analyzing the potential United States federal, state, local and non-United States tax consequences associated with purchasing, owning and disposing of shares of our common stock.





Distributions on our Common Stock





Any distributions we pay to a Non-U.S. Holder will not be subject to United States federal income tax or withholding tax if the Non-U.S. Holder is not engaged in a United States trade or business. If the Non-U.S. Holder is engaged in a United States trade or business, any distributions we pay will be subject to United States federal income tax at regular graduated rates if:  (a) those distributions are treated as dividends or capital gains (as previously described with respect to U.S. Holders); (b) are effectively connected with the Non-U.S. Holder's United States trade or business; and (c) if an income tax treaty applies, are attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States. In addition, a branch profits tax may be imposed at a 30 percent rate, or at such lower rate under an applicable income tax treaty, on the effectively connected earnings of a Non-U.S. Holder that is a corporation.







59
  ITEM 10. ADDITIONAL INFORMATION - continued
  EXCHANGE CONTROLS - continued
  Sale, Exchange or other Disposition of Common Stock





Non-U.S. Holders generally will not be subject to United States federal income tax on any gain recognized on the disposition of shares of our common stock unless the gain is effectively connected with the Non-U.S. Holder's conduct of a trade or business in the United States and, if an income tax treaty applies, is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States. If the Non-U.S. Holder is engaged in a United States trade or business and a gain recognized on the disposition of shares of our common stock is effectively connected with that trade or business, and, if a tax treaty applies, is attributable to a permanent establishment maintained by such Non-U.S. Holder in the United States, such gain will be subject to United States federal income tax at regular graduated rates and, if the Non-U.S. Holder is a corporation, a branch profits tax may be imposed at a 30 percent rate, or at such lower rate established under an applicable income tax treaty. A Non-U.S. Holder who is: (i) an individual; (ii) present in the United States for 183 days or more in a taxable year; and (iii) who meets certain other requirements will also be subject to United States federal income tax on capital gains recognized during such year, including such gains realized from a disposition of our stock.





Information Reporting and Backup Withholding Tax





Generally, dividend payments or other taxable distributions made within the United States will be subject to information reporting requirements and a United States backup withholding tax if a U.S Holder fails to provide an accurate taxpayer identification number certified under penalties of perjury, as well as certain other information, or otherwise establish an exemption from backup withholding.





Non-U.S. Holders may be required to establish their exemption from information reporting and backup withholding by certifying their status on an IRS Form W-8BEN, W-8ECI or W-8IMY as applicable.





If a Non-U.S. Holder sells shares to or through the United States office of a United States or foreign broker, the payment of proceeds generally will be subject to information reporting requirements and a backup withholding tax unless the Non-U.S. Holder properly certifies its non-United States status under penalties of perjury or otherwise establishes an exemption and the payer or broker does not have actual knowledge or reason to know that the holder is a United States person. Information reporting requirements and backup withholding taxes generally will not apply to the payment of proceeds of the sale of common shares effected outside the United States by a foreign office of a broker. Information reporting requirements (but not backup tax withholding requirements) will apply, however, to the payment of the sale proceeds if the broker is a United States person or has certain other contacts with the United States.





Backup withholding is not an additional tax. Rather, a holder generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed such holder's United States federal income tax liability by timely filing a properly completed claim for refund with the IRS.





Material Canadian Federal Income Tax Consequences





The following summary is a general discussion of material Canadian federal income tax consequences that may apply to holders and prospective holders of shares of our common stock that are non-residents of Canada (Non-Canadian Holders). This discussion is based on the Income Tax Act (Canada), the regulations promulgated thereunder, all amendments thereto publicly proposed by or on behalf of the Minster of Finance (Canada) prior to the date hereof, the published administrative practices of the Canada Revenue Agency and on the current provisions Canada-United States Income Tax Convention (1980), as amended (the Canada-US Treaty), any or all of which may materially and adversely change at any time, possibly on a retroactive basis. In addition, this discussion does not consider the potential effects, adverse or beneficial, of any proposed changes in the governing tax law, whether by judicial, executive or legislative action, which, if effected, may be applied, possibly on a retroactive basis. No opinion was requested by us, or has been provided by our counsel or independent registered public accounting firm, with respect to the Canadian income tax consequences described in the following discussion. Accordingly, we urge holders and prospective holders of shares of our common stock to consult with, and rely upon, their own tax advisors in analyzing the potential Canadian federal, provincial, local and non-Canadian tax consequences associated with purchasing, owning and disposing of shares of our common stock.





As used in this section the term "Non-Canadian Holder" denoted the beneficial owner of one or more shares of our common stock who is:





·
a non-resident of Canada;





·
holds our common shares as capital property;







60
  ITEM 10. ADDITIONAL INFORMATION - continued
  EXCHANGE CONTROLS - continued


·
deals with us at arm's length; and





·
does not use or hold our common shares in or in the course of carrying on business in Canada.





Dividends





Though we do not anticipate paying any cash dividends in the foreseeable future, should a Non-Canadian Holder of shares of our common stock receive dividend distributions, such holder will be subject to a Canadian withholding tax equal to 25 percent, subject to such lower rate as may be available under an applicable tax treaty, of the gross amount of any distributions paid or deemed to be paid.





In accordance with the Canada-US Treaty the rate of withholding tax applicable to distributions paid to a Non-Canadian Holder who is a resident of the United States is:





·
to the extent such holder beneficially owns at least 10 percent of our voting stock, 5 percent of the gross amount of such distribution paid; or





·
to the extent such holder beneficially owns less than 10 percent of our voting stock, 15 percent of the gross amount of such distribution paid.





We are required to withhold the applicable amount from each distribution paid and remit the withheld amount directly to the Receiver General for Canada for the account of the Non-Canadian Holder.





In accordance with the Canada-US Treaty, certain tax-exempt entities residing in the United States may be exempt from Canadian withholding taxes, including any withholding taxes levied in respect of dividends received on our common shares.





Sale, Exchange or other Disposition of Common Shares





A Non-Canadian Holder who disposes of shares of our common stock, including by deemed disposition upon death, will not be subject to Canadian federal income tax on any capital gain (or capital loss) thereby realized unless the common shares constitute "taxable Canadian property" as defined by the Income Tax Act (Canada) and no relief is afforded under any applicable tax treaty. Generally, our common shares will not constitute taxable Canadian property of a Non-Canadian Holder unless:  (i) the common shares are held as capital property used in carrying on a business (other than an insurance business) in Canada; or (ii) the Non-Canadian Holder or persons with whom the Non-Canadian Holder did not deal at arm's-length alone or together held or held options to acquire, at any time within the five years preceding the disposition, 25 percent or more of the shares of any class of our capital stock.





A Non-Canadian Holder who is resident of the United States and realizes a capital gain on disposition of common shares that are taxable Canadian property will nevertheless, by virtue of the Canada-US Treaty, generally be exempt from Canadian tax thereon unless:  (i) more than 50 percent of the value of the common shares are derived from, or forms an interest in, Canadian real estate, including Canadian mineral resource properties, (ii) the common shares formed part of the business property of a permanent establishment that the Non-Canadian Holder has or had in Canada within the twelve months preceding disposition, or (iii) the Non-Canadian:  (A) was a resident of Canada at any time within the ten years immediately preceding the disposition and for a total of 120 months during the twenty years, preceding the disposition, and (B) owned the common share when he ceased to be a resident of Canada.





A Non-Canadian Holder who is subject to Canadian tax in respect of a capital gain on disposition of common shares must include one-half of the capital gain in computing his taxable income earned in Canada. The Non-Canadian Holder may, subject to certain limitations, deduct one half of any capital loss arising on disposition of taxable Canadian property from taxable capital gains realized in the year of disposition in respect of taxable Canadian property and, to the extent not so deductible, from such taxable capital gains of any of the three preceding years or any subsequent year.





A Non-Canadian Holder whose common shares constitute taxable Canadian property and who is a resident of the United States and entitled to benefits under the Canada-US Treaty generally would be exempt from Canadian tax on any capital gain realized on a disposition of those shares in any event, provided such shares do not derive their value principally from Canadian real property (including Canadian resource properties). Our management is of the view that our common shares do not derive their value principally from Canadian real property. A Non-Canadian Holder claiming exemption under the Treaty will, however, have Canadian tax filing obligations with respect to a disposition of common shares.








61
  ITEM 10. ADDITIONAL INFORMATION - continued
  DOCUMENTS ON DISPLAY
  All documents referred to in this annual report may be inspected at our offices during regular business hours located at Suite 1010 - 789 West Pender Street, Vancouver, British Columbia V6C 1H2 (Canada), telephone (604) 606-7979.








ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not applicable.








ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES





Not applicable.








PART II





ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES





Not applicable.








ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS





Effective July 16, 2009, we effected a one-for-eighteen (1:18) reverse stock split which affected all of our shareholders equally but did not modify the rights of our shareholders.








ITEM 15T.  CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures





As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “1934 Act”), as of March 31, 2010, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures.  This evaluation was carried out under the supervision and with the participation of our CFO (our principal financial officer) and our acting CEO (our principal executive officer), who concluded, that because of the material weakness in our internal control over financial reporting (“ICFR”) described below, our disclosure controls and procedures were not effective as of March 31, 2010.





Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.





Internal Control Over Financial Reporting





Our management is also responsible for establishing ICFR as defined in Rules 13a-15(f) and 15(d)-15(f) under the 1934 Act.  Our ICFR are intended to be 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 ICFR are expected to include those policies and procedures that management believes are necessary that:





(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;





(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and our directors; and





(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.











62





ITEM 15T.  CONTROLS AND PROCEDURES - continued
  Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect of financial statement preparation and may not prevent or detect misstatements. In addition, effective internal control at a point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures.





Evaluation of Internal Controls and Procedures Over Financial Reporting





As of March 31, 2010, management assessed the effectiveness of the Company's internal control over financial reporting (ICFR) based on the criteria for effective ICFR established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and SEC guidance on conducting such assessments by smaller reporting companies and non-accelerated filers.





Based on that assessment, management concluded that, during the period covered by this report, such internal controls and procedures were not effective as of March 31, 2010 and that material weaknesses in ICFR existed as more fully described below.





As defined by Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements and Related Independence Rule and Conforming Amendments,” established by the Public Company Accounting Oversight Board ("PCAOB"), a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.  In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses as of March 31, 2010:





(1)
Lack of an independent audit committee, audit committee financial expert, and no independent directors.  Although our audit committee functions with two officer/directors and one director who is not a corporate officers, the non-officer director was a paid consultant to the Company and as such may not be deemed truly independent.  These factors may be counter to corporate governance practices as defined by the various stock exchanges and may lead to less effective or conflicted supervision over management;





(2)
Inadequate staffing and supervision within our bookkeeping operations combined with complex accounting transactions. We have two employees or consultants involved in bookkeeping functions in two separate operating business units where transactional volumes require such services, and we utilize independent consultants on a part-time basis to supplement our accounting staff.  The relatively small number of people who are responsible for bookkeeping functions makes more difficult segregation of duties within our internal control system. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews which may result in a failure to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements and related disclosures as filed with the SEC.  In addition complex transactions encountered in the year relating to convertible debentures, and revaluation issues in conjunction with re-structuring initiatives made the accounting function more complex requiring the services of third party outside accounting consultants;





(3)
Outsourcing of significant portions of the accounting operations of our Company.  Because there are no employees at the corporate level in our administration, we have outsourced a portion of the accounting functions of our Company to an independent accounting and bookkeeping firm where particular skills are required due to the nature of complex financial transactions especially relating to convertible debenture financings. The employees of this accounting firm are managed by supervisors within the accounting firm, and are not answerable to the Company's management. This is a material weakness because it could result in disconnect between the accounting policies adopted by our Board of Directors and the accounting practices applied by the accounting firm;





(4)
Insufficient installation of information technology to assist in our accounting functions.  Because of a lack of working capital and personnel, we have been unable to upgrade our information technology software and hardware to assist in providing effective controls;





(5)
Insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements.  A lack of country specific controls and written protocols leading to timely reporting of previously budgeted expenditures;





(6)
Ineffective controls over period end financial disclosure and reporting processes;





(7)
Infrequent ongoing monitoring and a lack of separate evaluations when an effective monitoring and evaluative system is deemed necessary for corporate integrity;








63
 
 ITEM 15T.  CONTROLS AND PROCEDURES - continued
 
 As of March 31, 2010, management assessed the effectiveness of our ICFR and based on that evaluation, they concluded that, as of March 31, 2010, the internal controls and procedures were not effective due to deficiencies that existed in the design or operation of our ICFR. However, management believes these weaknesses did not have a material effect on our financial results. During the course of their evaluation, management did not discover any fraud involving management or any other personnel who play a significant role in our disclosure controls and procedures or internal controls over financial reporting.





Due to a lack of financial and personnel resources, we are not able to, and do not intend to, immediately take any action to remediate these material weaknesses.  We will not be able to do so until, if ever, we acquire sufficient financing and staff to do so.  We will implement further controls as circumstances, cash flow, and working capital permit.  Notwithstanding the assessment that our ICFR was not effective and that there were material weaknesses as identified in this report, we believe that our consolidated financial statements contained in our Annual Report on Form 20-F for the fiscal year ended March 31, 2010, fairly presents our financial position, results of operations and cash flows for the years covered thereby in all material respects.





The Company relies on the part time involvement of its Acting Chief Financial Officer who is not deemed a financial expert as well as consultants for period end financial disclosure and the reporting process.  This risk is mitigated by the active involvement of the audit committee and the board of directors in reviewing the financial statements.  However, the lack of full time personnel who have technical experience and knowledge is an internal control weakness and may result in the failure to timely report financial results.





It is unlikely that the above noted internal control weakness can be properly addressed until the Company grows to a significant size to warrant the expense, such as the hiring of additional personnel, associated with implementing additional segregation of duties.  We are committed to improving our financial organization and internal controls.  As part of this commitment, we intend to hire an additional person on a full time basis, when sufficient funds are available to us, with technical experience and knowledge in accounting to better segregate duties consistent with control objectives and will increase our personnel resources and technical accounting expertise within the accounting function.





Management believes that the material weaknesses set forth above were the result of the scale of our operations and are intrinsic to our small size.  Management believes these weaknesses did not have an effect on our financial results.





We are committed to improving our financial organization. As part of this commitment, we will pending the availability of sufficient funds, (1) appoint one or more outside directors to our board of directors who shall be appointed to the audit committee of the Company resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures; (2) create a position to segregate duties consistent with control objectives and will increase our personnel resources; and (3) hire independent third parties to perform expert advice.  We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.





This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report.





Changes in Internal Control over Financial Reporting





There have been no significant changes in our internal controls over financial reporting that occurred during fiscal year ended March 31, 2010 that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.





There were no changes in our internal control over financial reporting during the year ended March 31, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





Inherent Limitations on Effectiveness of Controls





Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization, and personnel factors. Internal control over financial reporting is a process which involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 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 the policies or procedures may deteriorate.


64


ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT





We presently do not have one audit committee member who is a “financial expert” (as defined in accordance with Item 16A(b) of Form 20-F); our Acting CFO is not “independent” as that term is defined in Section 803A of the NYSE AMEX Company Guide and SEC Rule 10A-3 under the Exchange Act of 1934.








ITEM 16B. CODE OF ETHICS





As of the date of the filing of this annual report on Form 20-F we have not adopted a code of ethics (as defined in accordance with Item 16B(a) of Form 20-F), however, we intend to, as soon as practicable, form a committee to advise on the content and adoption of a code of ethics.








ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES





Our independent auditors for the fiscal years ended March 31, 2009 and 2008 were Smythe Ratcliffe LLP, Chartered Accountants of Vancouver, British Columbia.  Our auditors for the fiscal year ended March 31, 2010 was BDO Canada LLP, Chartered Accountants of Vancouver, B.C.








AUDIT FEES





The aggregate audit fees billed for the fiscal years ended March 31, 2010 for professional services rendered by BDO Canada LLP, Chartered Accountants, for the audit of our annual financial statements was $169,000.  The aggregate audit fees billed for the fiscal years ended March 31, 2009 for professional services rendered by Smythe Ratcliffe LLP, Chartered Accountants, for the audit of our annual financial statements was $142,000.








AUDIT RELATED FEES





BDO Canada LLP fees for the audit and review of financial statements not included in “Audit Fees” for the 2010 fiscal year was nil.  Smythe Ratcliffe LLP fees for the audit and review of financial statements not included in “Audit Fees” for the 2009 fiscal year was $30,903.








TAX FEES





The aggregate fees billed in the fiscal years ended 2010 and 2009 for professional tax compliance advice and planning was nil.








ALL OTHER FEES





Smythe Ratcliffe LLP fees for other services performed for the 2009 fiscal year not included in “Audit Fees” or “Audit Related Fees” was nil.  Smythe Ratcliffe LLP fees for other services performed for the 2010 fiscal year not included in “Audit Fees” or “Audit Related Fees” was nil.  BDO Canada LLP fees for other services performed for the 2010 fiscal year not included in “Audit Fees” or “Audit Related Fees” was nil.








AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES





Our audit committee charter requires us to request the prior approval of our audit committee on every occasion for which we engage our principal accountants or their associated entities to render any audit or non-audit services.








ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE





Not applicable.








65


ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS





Not applicable.








ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT




In March 2010, our board of directors approved the appointment of BDO Canada LLP as our independent accountants to audit our financial statements and dismissed Smythe Ratcliffe LLP, Chartered Accountants, as our independent accountants.




During our most recent fiscal year, and any subsequent interim periods preceding the change in accountants, there were no disagreements with Smythe Ratcliffe LLP, Chartered Accountants, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope procedure. The report on the financial statements prepared by Smythe Ratcliffe LLP, Chartered Accountants, for the last fiscal year did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles, except that such report on our financial statements for the year ended March 31, 2009 contained an explanatory paragraph in respect to uncertainty as to our ability to continue as a going concern.  The decision to change independent accountants was based on the determination by our board of directors that such a step was appropriate given the growth of our company and the related growth in our demands, and that such expertise required can be provided by a national accounting firm.




We have engaged the firm of BDO Canada LLP, as of March 2010. During our two most recent fiscal years, and any subsequent interim periods preceding the change in accountants, BDO Canada LLP was not consulted on any matter relating to application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements.








ITEM 16G. CORPORATE GOVERNANCE





Companies listed on a US Stock Exchange must comply with certain standards regarding corporate governance. Listed companies that are foreign private issuers are permitted to follow home country practice in lieu of these standards, except that such companies are required to comply with the following requirements:


(i)
establish an independent audit committee that has specified responsibilities


(ii)
provide prompt certification by its CEO of any non-compliance with any corporate governance rules


(iii)
provide a brief description of significant differences between its corporate governance practices and those followed by US companies.





We feel we comply with the above requirements and note there is no significant corporate governance practice differences between the standards for a US listed company and our practice.













66





PART III





ITEM 17. FINANCIAL STATEMENTS














Valcent Products Inc.


(A Development Stage Company)


Consolidated Financial Statements


(Expressed in Canadian Dollars)


March 31, 2010 and 2009









Index
PageAuditors’ Report to the Shareholders
F-2 - F-4Consolidated Financial Statements
F-5Consolidated Balance Sheets
F-5Consolidated Statements of Operations and Deficit
F-6Consolidated Statement of Comprehensive loss and Accumulated OtherComprehensive Income
F-7Consolidated Statements of Cash Flows
F-8Notes to the Consolidated Financial Statements
F-9 - F-49





















F-1





Tel: 604  688 5421

Fax: 604  688 5132

www.bdo.ca
BDO Canada LLP

600 Cathedral Place

925 West Georgia Street

Vancouver BC  V6C 3L2  Canada







Report of Independent Registered Public Accounting Firm







To the Shareholders of
 Valcent Products Inc. (A development stage company)
  We have audited the consolidated Balance Sheet of Valcent Products Inc. (a Development Stage Company) as at March 31, 2010 and the consolidated Statements of Operations and Deficit, Comprehensive Loss and Accumulated Other Comprehensive Income and Cash Flows for the year ended March 31, 2010.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
  We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
  In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at March 31, 2010 and the results of its operations and its cash flows for the year ended March 31, 2010 in accordance with Canadian generally accepted accounting principles.
  /s/ BDO Canada LLP
  Chartered Accountants
  Vancouver, Canada
 July 29, 2010 (except for Notes 19 and 20 which are as of November 15, 2010)





































BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
 F-2





Tel: 604  688 5421

Fax: 604  688 5132

www.bdo.ca
BDO Canada LLP

600 Cathedral Place

925 West Georgia Street

Vancouver BC  V6C 3L2  Canada

















Comments by Auditors for U.S. Readers

On Canada-U.S. Reporting Differences








In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern, such as those described in Note 1 to the consolidated financial statements. PCAOB reporting standards also require the addition of an explanatory paragraph when changes in an accounting policy, such as the Company’s adoption of ASC Topic 815 Derivatives and Hedging (EITF Issue No. 07-5), Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity‘s Own Stock (EITF 07-5) as described in Note 19(a), have a material effect on the consolidated financial statements.
 
 Although we conducted our audit in accordance with both Canadian generally auditing standards and the standards of PCAOB, our report to the shareholders dated July 29, 2010 (except for Notes 19 and 20 which are as of November 15, 2010) is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors’ report when these are adequately disclosed in the consolidated financial statements.
  We also have audited the adjustment for the correction of the error described in Note 19(d) that were applied to restate the 2009 reconciliation from Canadian generally accepted accounting principles to accounting principles generally accepted in the United States set out in Note 19.  In our opinion, such adjustments are appropriate and have been properly applied.  We were not engaged to audit, review or apply any procedures to the March 31, 2009 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any form of assurance on the March 31, 2009 consolidated financial statements taken as a whole.
  /s/ BDO Canada LLP
  Chartered Accountants
  Vancouver, Canada
  July 29, 2010 (except for Notes 19 and 20 which are as of November 15, 2010)
























BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.


F-3













INDEPENDENT AUDITORS' REPORT




TO THE SHAREHOLDERS OF VALCENT PRODUCTS INC.
 (A Development Stage Company)
 
 We have audited the consolidated balance sheet of Valcent Products Inc. (a development stage company) as at March 31, 2009 and the consolidated statements of operations and deficit, comprehensive loss and accumulated other comprehensive income and cash flows for the years ended March 31, 2009 and 2008.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.
 
 We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board of the United States of America.  Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
 
 In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at March 31, 2009 and the results of its operations and its cash flows for the years ended March 31, 2009 and 2008, in accordance with Canadian generally accepted accounting principles.
 
 “Smythe Ratcliffe LLP” (signed)
 Chartered Accountants
 Vancouver, Canada
 September 18, 2009, except for note 19 which
 is as at October 9, 2009
 
 COMMENTS BY AUDITORS FOR US READERS ON CANADA-US REPORTING DIFFERENCES
 
 In the United States, reporting standards of the Public Company Accounting Oversight Board for auditors require the addition of explanatory paragraphs when there is a correction of an error such as those disclosed in note 19(d) in respect of the US GAAP treatment of the convertible debt.
 
 We were not engaged to audit, review or apply any procedures to the adjustments for the correction of the error as described in note 19(d) of the March 31, 2010 consolidated financial statements and accordingly we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Such adjustments were audited by BDO Canada LLP.
 
 Our report to the shareholders dated September 18, 2009, except for note 19 which is as at October 9, 2009 is expressed in accordance with Canadian reporting standards, which do not permit a reference to such events and conditions in the auditors’ report when these are adequately disclosed in the financial statements.
 
 
 “Smythe Ratcliffe LLP” (signed)
 Chartered Accountants
 Vancouver, Canada
 September 18, 2009, except for note 19 which
 is as at October 9, 2009












F-4
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Balance Sheets
 (Expressed in Canadian Dollars)
 March 31, 2010 and 2009





2010

Restated – see Note 20)


2009ASSETSCurrentCash and cash equivalents

$
22,222


$
224,769Receivables (Note 5)


127,897



920,235Prepaid expenses


105,751



102,670Inventories (Note 6)


11,665



34,072267,535



1,281,746Property and Equipment (Note 3)


1,016,750



1,070,216Product License (Note 4)


1



1$
1,284,286


$
2,351,963LIABILITIES AND SHAREHOLDERS’ DEFICIENCYCurrent LiabilitiesAccounts payable and accrued liabilities

$
886,435


$
541,802Promissory notes payable (Notes 10 and 12)


1,053,169



2,643,514Due to related parties (Note 10)


258,206



186,645Convertible notes (Note 7)


1,968,930



11,2284,166,740



3,383,189Shareholders' DeficiencyShare capital (Note 8)


43,250,174



21,957,516Contributed surplus (Note 8)


5,694,205



5,462,219Commitment to issue shares (Note 8)


126,000



16,955,228Equity component of convertible notes (Note 8)


-



4,310Accumulated other comprehensive income


296,515



-Accumulated deficit from prior operations


(3,237,370
)


(3,237,370
)Accumulated deficit during the development stage


(49,011,978
)


(42,173,129
)(2,882,454
)


(1,031,226
)$
1,284,286


$
2,351,963


Nature of Business and Ability to Continue as a Going Concern (Note 1)


Commitments (Notes 4, 5, 7, 8, 11 and 12)


Subsequent events (Note 18)







On behalf of the Board:







(signed)“Chris Bradford”
Director

(signed)“Robert Baker”
Director







See notes to the Consolidated Financial Statements
 F-5
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 For the Years Ended March 31, 2010, 2009 and 2008





2010

(Restated - see note 20)


2009


2008ExpensesProduct development (Notes 9 and 10)

$
2,152,425


$
8,238,999


$
4,081,435Insurance


21,677



19,640



71,071Interest, accretion and fees (Notes 7 and 10)


916,714



3,217,226



2,916,958Investor relations


282,265



782,749



-Advertising and media development


101,408



448,258



871,542Professional fees (Note 10)


549,784



524,216



431,270Office and miscellaneous


342,932



389,128



234,817Travel


219,018



236,441



291,465Amortization


212,691



181,618



47,463Rent (Note 10)


125,888



131,038



77,918Stock-based compensation (Note 8)


19,861



260,530



990,305Filing and transfer agent fees


52,426



22,150



44,500Loss from Operations


(4,997,089
)


(14,451,993
)


(12,028,222
)OtherForeign exchange (loss) gain


(19,395
)


(2,027,804
)


611,133Write-off of  receivable


(668,057
)


-



-Interest income


-



19,491



10,805Loss on settlement of debts (Notes 7(i) and 8(c))


(1,154,308
)


(885,292
)


-Write-down of property and equipment (Note 3)


-



(509,892
)


-Write-down of product license


-



-



(1,306,074
)Net Loss for the Year


(6,838,849
)


(17,855,490
)


(12,712,358
)Deficit During Development Stage, Beginning of the Year


(42,173,129
)


(24,317,639
)


(11,605,281
)Deficit During Development Stage, End of the Year

$
(49,011,978
)

$
(42,173,129
)

$
(24,317,639
)Loss Per Share – Basic and Diluted

$
(0.16
)

$
(6.42
)

$
(6.44
)Weighted Average Number of Common Shares Outstanding


42,354,279



2,782,284



1,974,763














See notes to the Consolidated Financial Statements
 F-6
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Comprehensive Loss and Accumulated Other Comprehensive Income
 (Expressed in Canadian Dollars)
 Years Ended March 31, 2010, 2009 and 2008











2010

(Restated – see Note 20)


2009


2008Statement of Comprehensive Loss

$



$



$Net loss for the year


(6,838,849
)


(17,855,490
)


(12,712,358
)Other comprehensive income:Foreign exchange adjustment on change in currency  (Note 2 (q))


296,515



-



-Comprehensive loss


(6,542,334
)


(17,855,490
)


(12,712,358
)








2010

(Restated – See Note 20)


2009Statement of Accumulated Other Comprehensive Income

$



$Balance, beginning of year


-



-Other comprehensive income:Currency translation adjustment


296,515



-Balance, end of year


296,515



-








See notes to the consolidated financial statements
 F-7
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Cash Flows
 (Expressed in Canadian Dollars)
 For the Years Ended March 31, 2010, 2009 and 2008





2010


2009


2008Cash Provided By (Used In)Operating ActivitiesNet loss for the year

$
(6,838,849
)

$
(17,855,490
)

$
(12,712,358
)Items not involving cash:Interest and accretion


753,835



3,031,746



2,839,430Loss on settlement of debts


1,154,308



885,292



-Stock-based compensation


19,861



260,530



990,305Write-down of property/product license


-



509,892



1,306,074Write-off of receivable


668,057



-



-Common shares issued for product develop


-



190,747



506,869Common shares issued for services


155,583



360,038



398,397Commitment to issue shares for services


126,000



764,257



-Extension of warrants


-



181,048



-Shares issued for interest and penalties


-



65,333



4,195Amortization


212,691



181,618



47,463Foreign exchange loss


-



1,947,142



(630,984
)Changes in non-cash working capital items (Note17)


509,378



2,255,630



732,607(3,239,136
)


(7,222,217
)


(6,518,002
)Investing ActivityChange in property and equipment, net


(264,200
)


(626,618
)


(834,084
)Financing ActivitiesAdvances from related parties


71,561



1,473,880



560,341Proceeds from issuance of common shares, net


3,225,022



2,195,785



5,448,774Repayment of promissory notes payable


(1,106,486
)


-



-Proceeds from promissory notes payable


1,111,485



2,163,016



150,512Repayments of long-term debt


-



(174,862
)


(34,252
)Proceeds from issuance of convertible notes


-



2,171,686



1,100,108Repayment of convertible notes


(11,026
)


-



-3,290,556



7,829,505



7,225,483Effect of Foreign Exchange on cash


10,233



80,662



(24,932
)(Decrease) Increase in Cash During the Year


(202,547
)


61,332



151,535Cash and Cash Equivalents, Beginning of the Year


224,769



163,437



314,972Cash and Cash Equivalents, End of the Year

$
22,222


$
224,769


$
163,437Supplemental cash-flow informationShares issued on conversion of convertible notes

$
10,334


$
5,030,345


$
532,295Interest paid

$
3,097


$
4,223


$
15,480Taxes paid

$
-


$
-Fair value of agent warrants on share issuance

$
21,925


$
-Fair value of warrant extension

$
132,625


$
-








See notes to the Consolidated Financial Statements
 F-8
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





1.
Nature of Business and Ability to Continue as a Going Concern





Valcent Products Inc. (the “Company”) was incorporated under the Alberta Business Corporations Act on January 19, 1996.  The Company’s current plan of operations is to focus on the continued development and marketing of the Company’s High Density Vertical Growth System (“VerticropTM”) designed to produce vegetables and other plant crops.





These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year. Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern. At March 31, 2010 the Company had not yet achieved profitable operations, has an accumulated deficit of $52,249,348 (2009 - $45,410,499) has a working capital deficiency of $3,899,205 (2009 - $2,101,443) and expects to incur further losses in the development of its business, all of which casts substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate and maintain future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should the Company not be able to continue as a going concern.





The Company is currently seeking additional funding to finance its operations and obligations.  Management is considering all possible financing alternatives, including equity financing, debt financing, joint-venture, corporate collaboration and licensing arrangements.  However, there can be no assurance that the Company will be successful in its financing attempts.





These consolidated financial statements do not include any adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern.





On June 22, 2009, the shareholders of the Company approved a special resolution to reorganize the capital structure of the Company by a share consolidation of its common shares on the basis of eighteen old shares for one new share (18:1) which became effective July 16, 2009.





All references to common shares, stock options and warrants and their related pricing in these financial statements give effect to the share consolidation, unless otherwise noted.





2.
Significant Accounting Policies




These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and are stated in Canadian dollars. Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of the financial statements necessarily involves the use of estimates, which have been made using careful judgement. Actual results may differ from these estimates.





The consolidated financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policiessummarized below:











F-9
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





2.
Significant Accounting Policies(continued)





(a) Principles of consolidation





These financial statements include the accounts of the Company and its wholly-owned, integrated subsidiaries, Valcent Products EU Limited and Valcent USA, Inc. and Valcent USA’s wholly-owned, integrated subsidiaries, Valcent Management LLC and Valcent Manufacturing Ltd.  All significant inter-company transactions and balances have been eliminated.





These consolidated financial statements also include the Company’s 50 %proportionate share interest of the assets, liabilities, income and expenses of the Vertigro Joint Venture, as described in Note 5.





(b) Research and product development costs





Research costs are expensed as incurred.  Development costs, which meet Canadian GAAP criteria including reasonable assurance regarding recoverability, are capitalized and amortized over the expected economic useful life of the product.  No development costs have been deferred to date.  As the Company is in the development stage, any revenue derived from the test marketing and development of products is considered to be an expense recovery and is, therefore, netted against product development costs.





(c) Intangible assets





Intangible assets of the Company include technology and product licenses acquired from third parties.  Technology and product licenses are initially recorded at the fair value based on consideration paid and are amortized on a straight-line basis over the estimated useful life of the underlying technologies.  The Company reviews the estimated useful lives and carrying values of its technology and product licenses as part of its periodic assessment for impairment of long-lived assets.





The amount shown for technology and product licenses do not necessarily reflect present or future value and the ultimate amount recoverable will be dependent upon the successful development and commercialization of products based on these underlying technologies.





(d) Cash and cash equivalents





The Company considers all highly liquid financial instruments with a maturity of 90 days or less from the date purchased to be cash equivalents.  At March 31, 2010 and 2009, cash and cash equivalents consisted of cash on deposit.





(e) Inventories





The Company records inventories at the lower of cost or net realizable value. Cost includes the allocation of fixed overhead.  Any previous write-downs are required to be reversed when the value of the inventory increases.  The amount of the reversal is limited to the amount of the original write-down. There were no reversals of write-downs recognized during the year presented in these consolidated financial statements.





Inventories are valued at the lower of cost and net realizable value, with cost being determined on an average cost basis.








F-10
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





2.
Significant Accounting Policies(continued)





(f) Property and equipment





The Company amortizes its leasehold improvements on a straight-line basis over the life of the lease.  Other assets are amortized using the straight-line method over 10 years for building, 5 years for equipment, 3 1/3 years for computer equipment and 5 years for furniture and fixtures and automobiles.





During the year of acquisition, amortization is 50% of amounts otherwise determinable.





(g) Foreign currency transactions and translation





The Company presents its financial statements in Canadian dollars. The Company’s functional currency is the US dollar for 2010.  Transactions undertaken by the Company and the accounts of the Company’s integrated subsidiaries in foreign currencies are re-measured into United States dollars as follows:





(i)
Monetary assets and liabilities, at the year-end exchange rates;


(ii)
Non-monetary assets and liabilities, at historical exchange rates; and


(iii)
Income and expense items, at the exchange rate in effect on the date of the transaction.





All consolidated assets and liabilities have been translated into Canadian dollars using the exchange rate at the balance sheet dates, while income and expense items have been translated using the prevailing average exchange rate for the period.  Gains and losses arising from the re-measurement of transactions to the functional currency are included in operations for the year.  Gains and losses arising from the translation from the functional currency to the presentation currency are recorded as other comprehensive income.





(h) Use of estimates





The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of estimates include the net realizable value of accounts receivable and inventories, impairment of property and equipment, rates of amortization, fair value of product license, amount of accrued liabilities, the variables used to calculate interest, accretion and financing costs on convertible notes, the variables used to calculate the fair value of stock-based compensation and the determination of the valuation allowance for future income tax assets.  While management believes the estimates are reasonable, actual results could differ from those estimates and could impact future results of operations and cash flows.





(i) Loss per share





Loss per share is calculated using the weighted average number of common shares outstanding during the year.  The Company uses the treasury stock method for calculating diluted earnings per share.  Under this method, the dilutive effect on earnings per share is recognized on the use of the proceeds that could be obtained upon exercise of options, warrants and similar instruments.  It assumes that the proceeds would be used to purchase common shares at the average market price during the period.  However, the calculation of diluted loss per share excludes the effect of various conversions and the exercise of options and warrants and similar instruments totaling 68,583,576 (2009 – 34,685,711) that would be anti-dilutive.








F-11
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





2.
Significant Accounting Policies(continued)




(j) Stock-based compensation





The Company accounts for all grants of options and equity instruments to employees, non-employees and directors in accordance with the fair value method for accounting for stock-based compensation.





Compensation expense for employees is generally amortized using the straight-line method over the period from the grant date to the date the options or equity instruments vest.  Compensation expense for non-employees is recognized immediately for past services and pro-rata for future services over the service provision period.  Compensation for non-employees is re-measured at each balance sheet date until the earlier of the vesting date or the date of completion of the service. Upon exercise of share purchase options, the consideration paid by the option holder, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital.





The Company uses the Black-Scholes option valuation model to calculate the fair value of share purchase options at the date of grant. Option pricing models require the input of highly subjective assumptions, including the expected price volatility.  Changes in these assumptions can materially affect the fair value estimate.





(k) Income taxes





The Company follows the asset and liability method of accounting for income taxes.  Under this method of tax allocation, future income tax assets and liabilities are determined based on differences between the financial statement carrying values and their respective income tax basis (temporary differences).  Future income tax assets and liabilities are measured using the tax rates expected to be in effect when the temporary differences are likely to reverse.  The effect on future income tax assets and liabilities of a change in tax rates is included in operations in the period in which the change is enacted or substantially assured.  The amount of future income tax assets recognized is limited to the amount of the benefit that is more likely than not to be realized.





(l) Non-monetary consideration





In situations where common shares are issued and the fair value of the goods or services received is not readily determinable, the fair value of the common shares is used to measure and record the transaction.  The fair value of the common shares issued in exchange for the receipt of goods and services is based on the share price as of the earliest of:





(i)
the date at which the counterparty’s performance is complete;


(ii)
the date at which a commitment for performance by the counterparty to earn the common shares is reached; or


(iii)
the date at which the common shares are issued if they are fully vested and non-forfeitable at that date.











F-12
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





2.
Significant Accounting Policies(continued)





(m) Financial Instruments
 
 Financial instruments must be classified into one of these five categories: held-for-trading, held-to- maturity, loans and receivables, available-for-sale financial assets or other financial liabilities.  All financial instruments are measured in the balance sheet at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities, which are measured at amortized cost.  Subsequent measurement and changes in fair value will depend on their initial classification as follows: held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net income; available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the investment is no longer recognized or impaired, at which time the amounts would be recorded in net income. See Note 15 for classification the Company’s financial instruments.





Transaction costs that are directly attributable to the acquisition or issue of financial instruments that are classified as other than held-for-trading, which are expensed as incurred, are included in the initial carrying value of such instruments and amortized using the effective interest method.





(n) Impairment of long-lived assets





Long-lived assets are reviewed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If changes in circumstances indicate that the carrying amount of an asset that an entity expects to hold and use may not be recoverable, future cash flows expected to result from the use of the asset and its disposition must be estimated.  If the undiscounted value of the future cash flows is less than the carrying amount of the asset, impairment is recognized, and is measured as the excess of the carrying amount of the asset and its fair value.  Management determined that there has been no impairment of the Company’s long-lived assets as at March 31, 2010 (2009 - $509,892; 2008 - $Nil).





(o) Revenue recognition





Revenue from the sales of products is recognized when the product has been delivered to the purchaser, the price is fixed or determinable and when collectability is reasonably assured.  Sales during the development stage are netted against product development costs (Note 9).





Interest income is recognized on an accrual basis as earned at the effective rate of interest of the investment over the term to maturity.





(p) Accounting for embedded derivative





Current accounting principles requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as conversion features, warrants and non-employee stock-options to determine whether they should be considered a derivative liability and subject to re-measurement each period at their fair value with the changes in the fair value each period charged or credited to the statement of operations. Conversion features and other equity instruments with such provisions may no longer be recorded to equity. In estimating the appropriate fair value, the Company uses a valuation model such as the black-scholes option pricing model.





(q) Change in Functional Currency





Effective April 1, 2009, the functional currency of the Company became the United States dollar (USD). Prior to that date, the Company’s functional currency was the Canadian dollar.  The change in functional currency from Canadian dollar (CAD) to USD resulted from increased business activities and monetary transactions conducted in USD. As a result of adopting this change prospectively, previously reported financial results have not been adjusted. The translated amounts for non-monetary items at the end of the prior period become the historical basis for those items in the period of the change and subsequent period. In addition, unrealized gains and losses due to movements in exchange rates on balances held in foreign currencies are shown separately on the Consolidated Statement of Cash Flows.








F-13
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





2.
Significant Accounting Policies(continued)





The Company continues to report in CAD as this currency is more relevant for the Company’s investors and other users of the financial statements.





Recently adopted accounting pronouncements





Goodwill and intangible assets





The CICA issued new Handbook Section 3064, “Goodwill and Intangible Assets”, which will replace Section 3062, “Goodwill and Other Intangible Assets”.  The new standard establishes revised standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets.  The new standard also provides guidance for the treatment of preproduction and start-up costs and requires that these costs be expensed as incurred.  The Company adopted the new standard on April 1, 2009.  The adoption of this standard has not had any significant impact on these consolidated financial statements.





Financial Instruments – Disclosure





In 2009, the CICA amended Section 3862, “Amendment to Financial Instruments – Disclosures” to require disclosures about the inputs to fair value measurements, including their classification within a hierarchy that prioritizes the inputs to fair value measurement.


The three levels of the fair value hierarchy are:





Level 1 –                   Unadjusted quoted prices in active markets for identical assets or liabilities;


Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and


Level 3 –                   Inputs that are not based on observable market data





The adoption of this standard resulted in additional disclosure in Note 15.





Future accounting and reporting changes





Business combinations, consolidated financial statements and non-controlling interest





In January 2009, the CICA issued CICA Handbook Section 1582, “Business Combinations”, Section 1601, “Consolidations”, and Section 1602, “Non-controlling Interests”. These sections replace the former CICA Handbook Section 1581, “Business Combinations” and Section 1600, “Consolidated Financial Statements” and establish a new section for accounting for a non-controlling interest in a subsidiary. CICA Handbook Section 1582 establishes standards for the accounting for a business combination, and states that all assets and liabilities of an acquired business will be recorded at fair value. Obligations for contingent consideration and contingencies will also be recorded at fair value at the acquisition date. The standard also states that acquisition-related costs will be expensed as incurred and that restructuring charges will be expensed in the periods after the acquisition date.





F-14
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





2.
Significant Accounting Policies(continued)




It provides the Canadian equivalent to International Financial Reporting Standard (“IFRS”) 3, “Business Combinations” (January 2008).  The section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011.





CICA Handbook Section 1601 establishes standards for the preparation of consolidated financial statements.





CICA Handbook Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in the preparation of consolidated financial statements subsequent to a business combination. It is equivalent to the corresponding provisions of International Financial Reporting Standard IAS 27, “Consolidated and Separate Financial Statements” (January 2008).





CICA Handbook Section 1601 and Section 1602 apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. Earlier adoption of these sections is permitted as of the beginning of a fiscal year. All three sections must be adopted concurrently. The Company is currently evaluating the impact of the adoption of these sections.





International Financial Reporting Standards (“IFRS”)




In 2006, the Canadian Accounting Standards Board (“AcSB”) published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five year transitional period. In February 2008, the AcSB announced that 2011 is the changeover date for publicly-listed companies to use IFRS, replacing Canada's own GAAP. The date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition date of April 1, 2011 will require the restatement for comparative purposes of amounts reported by the Company for the year ended March 31, 2011. The Company has begun an internal diagnostic review to understand, identify and assess the overall effort required to produce financial information under IFRS, however, at this time, the financial reporting impact of the transition to IFRS cannot be reasonably estimated.















































F-15
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





3.
Property and Equipment




March 31, 2010Cost


Accumulated Amortization


Net Book ValueLand

$
275,240


$
-


$
275,240Building


681,481



444,582



236,899Equipment


638,476



252,872



385,604Computer equipment


156,197



132,884



23,313Furniture and fixtures


90,291



61,100



29,191Automobiles


45,257



17,869



27,388Leasehold improvements


199,534



55,444



144,090Currency Translation


(71,254
)


33,721



(104,975
)$
2,015,222


$
998,472


$
1,016,750




March 31, 2009Cost


Accumulated Amortization


Net Book ValueLand

$
275,240


$
-


$
275,240Building


686,750



417,930



268,820Equipment


394,056



162,642



231,414Computer equipment


144,154



97,528



46,626Furniture and fixtures


89,429



48,361



41,068Automobiles


54,696



10,254



44,442Leasehold improvements


199,534



36,928



162,606$
1,843,859


$
773,643


$
1,070,216




During the year ended March 31, 2009, the Company terminated further development of its Nova Skincare Systems and Dust Wolf products and determined that certain equipment used for development of those products had no continuing value to the Company and therefore wrote down the carrying value of those assets to their net recoverable amounts based on management’s estimate.





The write-down amounting to $509,892 recorded during the year ended March 31, 2009 is included in accumulated amortization.








F-16
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





4.
Product License and Technology Purchase





On July 29, 2005, the Company completed a licensing agreement (“Agreement”) for the exclusive worldwide marketing rights to the Nova Skincare System, the Dust Wolf, the Tomorrow Garden Kit and a right of first offer on future products developed by Pagic LP (“Pagic”), formerly MK Enterprises LLC, a private company with a former director in common.





In conjunction with the Agreement, by March 31, 2007 the Company had issued to Pagic and its assignees an aggregate of 1,111,112 common shares at a cost of US $1,000,000, based on the historical cost of the license.  Of the 1,111,112 common shares issued, 523,789 common shares were issued to parties that became related parties to the Company. During the year ended March 31, 2008, due to uncertainty in determining future cash flows related to products under license, the Company wrote-down the value of the product license by $1,306,074 to $1.





The Agreement requires the Company to pay Pagic and its assignees, royalties of US $10 per Nova Skincare System unit sold, US $2 per Duster unit sold and 4.5% of Tomorrow Garden Kit net sales.  In addition, the Company was required to pay a royalty of 3% of net sales related to ancillary product sales from these products.  In order to keep the products under license, the Company was to pay a minimum royalty for each of the Nova Skincare System, Dust Wolf and Tomorrow Garden Kit products and their related ancillary products of US $37,500 beginning April 1, 2007 and US $50,000 per year thereafter. To keep the overall master license in good standing, the total of royalties and all other fees paid to Pagic was to be at least US $400,000 per year beginning April 1, 2007.





During the year ended March 31, 2009, the Company discontinued development of its Nova Skincare System and Dust Wolf products and allowed the product license rights to revert to Pagic and its assignees.  The Company retains a 3% overriding royalty on gross sales generated by Pagic or its assignees from any future product sales in exchange for system developments to date. Previously outstanding royalty and other accrued amounts owing to Pagic in the amount of US $156,519 were settled via a letter of agreement dated March 29, 2009 for a commitment to issue 391,298 common shares, with such shares subject to quarterly pooling releases beginning January 1, 2010.





Effective April 1, 2009, the Company terminated the Agreement and executed a new purchase agreement (the “Purchase Agreement”) to acquire all ownership rights and intellectual property relating to its VertiCrop vertical plant growing technology and Tomorrow Garden Kit technology (the “Technologies”) from a former director and officer of the Company, Pagic and West Peak.





Pursuant to the Purchase Agreement, the Company agreed to pay a total of US $2,000,000 plus issue 3% of its common stock on conclusion of the purchase agreement.  The US $2,000,000 is payable on a cumulative basis as to US $65,000 on signing (paid) plus the greater of 3% of the gross monthly product sales less returns from exploitation of the Technologies or US $12,000 per month until US $2,000,000 has been paid.  The ownership of the Technologies will remain in escrow until fully paid or if the Company defaults in making payments.  The issuance of the 3% of its common stock is payable upon release of the Technologies from escrow to the Company.  The Company may at any time elect to pay out the remaining balance due.  Should the Company default under this agreement the Technologies will revert back to Glen Kertz and Pagic.





During the last quarter of the fiscal year ended March 31, 2010, the Company and Pagic entered into negotiations to resolve certain disputes regarding the Purchase Agreement.  On March 8, 2010, an addendum to the Purchase Agreement (“Addendum”) was entered into by parties thereto whereby:





F-17
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





4.
Product License and Technology Purchase (continued)





a)
the purchase price of technology to be acquired was amended to an aggregate of US $3.15 million (previously US $2 million) of which certain equipment was permitted to be used by Pagic as an incentive to enter into the Purchase Agreement (“Addendum”).




b)
US $100,000 was paid to Pagic by the Company at the date of the Addendum;




c)
calculated minimum IP payments increased to US $18,000 per month from US $12,000 per month effective August 1, 2010; and




d)
the term to complete the technology purchased was reduced from July 1, 2019 to July 12, 2014.





During the year ended March 31, 2010, $261,088 was paid or accrued to Pagic under the terms of the Purchase Agreement and its Addendum, and $318,250 was paid during the year ended March 31, 2009 under previous license arrangements, with such costs recorded as product development costs.





5.
Vertigro Joint Venture





On October 2, 2006, as amended June 25, 2007, the Company entered into a letter of agreement (“LOA”) with Pagic, West Peak and Global Green Solutions Inc. (“Global Green”), whereby Global Green agreed to fund the next phase of the development of a high density vertical bio-reactor technology.  Pursuant to the LOA, the Company and Global Green established a commercial joint venture (the “Vertigro JV”), in which Global Green agreed to provide up to US $3,000,000 in initial funding to continue the research and development of the bio-reactor technology, construct a working prototype of the bio-reactor and develop the technology for commercial uses. The Company is obligated to provide product support, research and development and the non-exclusive use of the Company’s properties and lands for which Global Green has agreed to reimburse the Company as part of its US $3,000,000 initial funding commitment. Until such time as the joint venture has fully repaid to Global Green the US $3,000,000, Global Green shall receive 70% of the net cash flow generated by anticipated future operations after which each of Global Green and the Company will  hold a 50% interest in the Vertigro JV, subject to an aggregate 4.5% royalty based on gross revenue as defined in the Vertigro JV, to Pagic and West Peak.





On May 5, 2008, the Company and Global Green concurrently incorporated Vertigro Algae Technologies, LLC (“VAT”) and entered into a revised operating agreement (“Operating Agreement”) which replaced the LOA. Pursuant to the Operating Agreement, Global Green and the Company each hold a 50% interest in VAT and have committed to fund project development costs according to ownership allocation. Further, the Company will retain assets of Vertigro JV, including buildings, laboratory, and equipment.  Global Green will receive 70% of the net cash flow generated by the VAT until it has received US $3,000,000 in excess of its 50% interest in such cash flow, and the Company will receive the remaining 30% net cash flow.





Also on May 5, 2008, VAT executed a Technology License Agreement (“Technology License”) together with Pagic and West Peak.  The Technology License licenses certain algae biomass technology and intellectual property to VAT for purposes of commercialization and exploitation for all industrial, commercial and retail applications worldwide (“Algae Biomass Technology”).  As consideration for the Technology License, the Company and Global Green agreed to issue 16,666 common shares and 300,000 common shares, respectively, to Pagic and also pay a one-time commercialization fee of US $50,000 upon the Algae Biomass Technology achieving commercial viability.  The Technology License is subject to royalty of 4.5% of gross customer sales receipts for use of the Algae Biomass Technology and aggregate annual royalty minimum amounts of US $50,000 in 2009, US $100,000 in 2010 and US $250,000 in 2011 and each year thereafter in which the Technology License is effective.  The Company issued the 16,667 common shares to Pagic on August 18, 2008 at a fair value of $190,746, which has been expensed to product development, and has accrued its share of the US $50,000 payment due on March 31, 2009. The Technology License has lapsed by agreement of the parties to the Technology License Agreement. VAT is no longer in operation by consent of the members of VAT, with each of the Company and Global Green pursuing their core business strategies; no royalty has been accrued or paid during the year ended March 31, 2010.








F-18
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





5.
Vertigro Joint Venture (continued)





The main elements from VAT included in the consolidated financial statements are accounts payable of US $44,029 (2009 - US $39,466) and expenses of US $44,723 (2009 – US $1,281,712; 2008 - $5,735,893). There were no assets in VAT during the year ended March 31, 2010 or 2009.





Receivables during the year ended March 31, 2010 included a receivable due from Global Green in the amount of $668,057.  The Company has written off this receivable as at Mach 31, 2010.





On July 7, 2010, the Company and its subsidiary Valcent USA and Global Green Solutions Inc. agreed to the wind-up and dissolution of Vertigro Algae Technologies LLC, a Texas Corporation (VAT), through which they had jointly pursued development of a project to use algae as a source for biofuel feedstock and other products. VAT’s technology license agreement with Pagic LP has been terminated. There were no assets or liabilities in VAT at the date of wind up.





6.
Inventories





As at March 31, 2010, inventories in the aggregate of $11,665 (2009 - $34,072) consisting of product relating to the Company’s Tomorrow Garden project were impaired to its net realizable value pursuant to initiatives in process to terminate and sell this product line. Inventories are valued at lower of cost and net realizable value.





During the year ended March 31, 2009, the Company discontinued product development relating to its Nova Skincare System and Dust Wolf products and any inventory related thereto amounting to raw materials of $314,012, and finished goods inventory of $330,451 were expensed to product development.








F-19
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





7.
Convertible Notes





Details of the convertible notes are as follows:





Convertible note continuity:





US $


CDN$Balance


2010


2010





2010


2010


Balance


BalanceDate of Issue

March 31, 2009


Issued Principal and Transfers


Equity Portion


Derivative Liability Portion


Interest / Penalty


Conversion/ Repayments


March 31, 2010


March 31, 2010September 2007 (h)


8,902



-



-



-



-



(8,902
)


-



-July 2009 (Note 8(b)(i)


-



179,478



-



-



3,777



(183,255
)


-



-Dec 2009 (i) (Note 12)


-



1,323,000



-



567,000



58,305



(10,000
)


1,938,305



1,968,9308,902



1,502,478



-



567,000



62,082



(202,157
)


1,938,305



1,968,930





US $


CDN$Balance


2009


2009





2009


2009


Balance


BalanceDate of Issue

March 31, 2008


Issued Principal


Equity Portion


Derivative Liability Portion


Interest / Penalty


Conversions/ Repayments*


March 31, 2009


March 31, 2009July/Aug 2005(a)


259,825



-



-



-



15,647



(275,472
)


-



-April 2006 (b)


534,442



-



-



-



29,287



(563,729
)


-



-April 2006 (c)


85,542



-



-



-



4,673



(90,215
)


-



-December 2006 (e)


1,659,782



-



-



-



150,544



(1,810,326
)


-



-January 2007 (f)


1,569,183



-



-



-



468,170



(2,037,353
)


-



-August 2007 (g)


678,567



-



-



-



102,260



(780,827
)


-



-September 2007 (h)


297,433



-



-



-



154,295



(442,826
)


8,902



11,228July 2008 (i)


-



2,168,000



(1,315,003
)


-



1,262,529



(2,115,526
)


-



-5,084,774



2,168,000



(1,315,003
)


-



2,187,405



(8,116,274
)


8,902



11,228




*Includes commitments to convert the remaining amounts into common shares





(a)
US $1,277,200 July – August 2005 Convertible Note





To provide working capital for product development, from July 25, 2005 to August 2005 the Company issued one-year, unsecured US $1,277,200 8% per annum convertible notes and three-year Class A and B warrants to acquire: (i) up to 50,741 common shares of the Company at a price per share of US $9.00; and (ii) up to an additional 50,741 common shares of the Company at a price per share of US $18.00.  The holders of the convertible notes may elect to convert the notes into common shares of the Company at the lesser of: (i) 70% of the average of the five lowest closing bid prices for the common shares for the ten trading days prior to conversion; and (ii) US $9.90. Accrued and unpaid interest may be converted into common shares of the Company at US $9.00 per share.  The Company may, subject to notice provisions and its common shares trading above US $27.00 per share for more than twenty consecutive trading days, elect to payout the notes and interest due by paying 130% of the amount due under the notes plus interest.  The share purchase warrants carry a “net cashless” exercise feature (“Cashless Conversion Feature”) allowing the holder thereof, under certain limited circumstances, to exercise the warrants without payment of the stated exercise price, but rather solely in exchange for the cancellation of that number of common shares into which sufficient warrants are exercisable, which will cover the exercise proceeds otherwise payable.  These convertible notes are unsecured and as they have passed their maturity date, as at March 31, 2009 are due on demand.








F-20
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





7.
Convertible Notes(continued)





In conjunction with this financing, the Company paid consultants an amount equal to 10% of the gross proceeds and issued 23,651 common shares at a deemed value of $285,242. There are 14,192 finders’ A warrants outstanding whereby the holders have the right to purchase 14,192 common shares at US $9.00 per share until August 5, 2008 and 23,652 finders’ B warrants whereby the holders shall have the right to purchase 23,652 common shares at US $13.50 per share until August 5, 2008. A total of US $82,200 in registration penalties incurred in the year ended March 31, 2007 were converted to a new convertible debenture in the same amount on April 6, 2006 .





During the year ended March 31, 2009, principal of US $92,281 and interest of US $9,423 were converted to 14,845 common shares and interest of US $15,647 was accrued on the unconverted principal balance of these convertible notes.





Effective March 27, 2009, the Company agreed to settle the remaining unpaid principal, accrued interest and prepayment penalties aggregating US $173,768 for 595,006 common shares that were restricted from trading and pooled with equal quarterly releases beginning in January 2010. The 595,006 common shares were issued on May 11, 2009 (Note 8(c)).





(b)
US $551,666 April 2006 Convertible Note





On April 6, 2006, the Company consummated a private offering transaction with and among a syndicated group of investors, pursuant to which the Company issued, in the aggregate, US $551,666 in 8% per annum convertible notes and three-year Class A and B warrants to acquire: (i) up to 40,864 common shares of the Company at a price per share of US $9.00; and (ii) up to an additional 40,864 common shares of the Company at a price per share of US $18.00. Subject to certain limitations, the principal amount of the notes, together with any accrued interest may be converted into common shares of the Company at the lesser of:





I.
70% of the average of the five lowest closing bid prices for the common shares for the ten trading days prior to conversion; or




II.
US $9.90. The convertible notes carry a redemption feature, which allows the Company to retire them, in whole or in part, for an amount equal to 130% of that portion of the face amount being redeemed, but only in the event that the common shares have a closing price of US $27.00 per share for at least twenty consecutive trading days and there has otherwise been no default. The warrants carry a Cashless Conversion Feature.





These convertible notes are unsecured and as they have passed their maturity date, as at March 31, 2009 were due on demand.





In conjunction with these private offering transactions, the Company paid consultants: (i) US $55,166 cash, representing 10% of the gross proceeds realized; (ii) 10,216 common shares; (iii) three-year warrants to purchase up to 6,129 common shares at a price per share of US $9.00; and (iv) three-year warrants to purchase up to 10,215 common shares at a price per share of US $13.50.





During the year ended March 31, 2009, convertible notes and interest of US $460,679 were converted to 111,751 common shares and interest of US $21,312 was accrued on the unconverted principal balance of these convertible notes.








F-21
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





7.
Convertible Notes(continued)





Effective March 27, 2009, the Company agreed to settle the remaining unpaid principal, accrued interest and prepayment penalties aggregating US $103,050 for 473,101 common shares that will be restricted from trading and pooled with equal quarterly releases beginning in January 2010. The 473,101 common shares were issued on May 11, 2009 (Note 8(c)).





(c)
US $82,200 April 2006 Penalty Convertible Note





On April 6, 2006, in conjunction with certain private placements, the Company reached a verbal agreement with investors wherein the Company agreed to convert US $82,200 in accrued penalties associated with the July 25, 2005 through August 5, 2005 convertible notes into US $82,200 convertible penalty notes (Note 7(a)) carrying terms similar to the July 25, 2005 through August 5, 2005 convertible notes and 6,089 warrants. These warrants carry a Cashless Conversion Feature and each warrant entitles the holder to purchase additional common shares for three years at a price of US $13.50 per share. These convertible notes are unsecured and as they have passed their maturity date, as at March 31, 2009 are due on demand.





During the year ended March 31, 2009, convertible notes and interest of US $64,500 were converted to 17,994 common shares and interest of US $4,673 was accrued on the unconverted principal balance of these convertible notes.





Effective March 27, 2009, the Company agreed to settle the remaining principal, accrued interest and prepayment penalties aggregating US $25,715 for 106,443 common shares that were restricted from trading and pooled with equal quarterly releases beginning in January 2010. The 106,443 common shares were issued on May 11, 2009 (Note 8(c)).





(d)
Warrant Exercise Price Reduction and Registration Penalty Interest





Certain of the July and August 2005 and the April 6, 2006 convertible notes contained registration rights whereby the Company agreed to pay a penalty of 2% for every thirty days that elapsed after the Company was required to have a registration statement effective, plus a reduction in the warrant price of certain of the warrants issued of US $1.80. As a result of the Company not filing the required registration statement until April 27, 2006, the Company incurred penalties, which have been included in interest expense. An aggregate of 189,299 previously issued share purchase warrants relating to certain of the July and August 2005 and the April 6, 2006 convertible notes have reduced exercise prices from US $9.00, US $13.50 and US $18.00 to US $7.20, US $11.70 and US $16.20, respectively. In 2007, the Company recognized $80,102 in interest expense with the corresponding amount to contributed surplus as a result of re-valuation of the warrants upon the change in the pricing.





(e)
US $1,500,000 December 2006 Convertible Note





On December 1, 2006, the Company accepted subscriptions of US $1,500,000 towards a private placement of 8% per annum, unsecured, convertible notes and three-year warrants to acquire: (i) up to an aggregate of 111,112 common shares of the Company at a price per share of US $9.00; and (ii) up to an additional 111,112 common shares of the Company at a price per share of US $18.00. Subject to certain limitations, the principal amount of the notes, together with any accrued interest may be converted into common shares of the Company, at the lesser of: (i) 70% of the average of the five lowest closing bid prices for the Company’s common shares for the ten trading days prior to conversion; or (ii) US $9.90. The convertible notes carry a redemption feature, which allows the Company to retire them, in whole or in part, for an amount equal to 130% of that portion of the face amount being redeemed, but only in the event that the common shares have a closing price of US $27.00 per share for at least twenty consecutive trading days and there has otherwise been no default. These convertible notes are unsecured and as they have passed their maturity date, as at March 31, 2009 are due on demand. The share purchase warrants may be exercised on a cashless basis. After December 31, 2007, this convertible note accrues interest at the rate of 15% per annum.





F-22
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





7.
Convertible Notes(continued)




The right of the note holders to convert into the Company’s common shares is subject to the contractual agreement between the parties that any conversion by the note holders may not lead at the date of such conversion to an aggregate equity interest in the common shares of the Company greater than 9.99%, inclusive of any derivative securities including options, warrants, convertible debt, any other convertible debt securities or any other financial instruments convertible into common equity.





During the year ended March 31, 2009, the Company accrued US $150,544 in interest.





Effective March 27, 2009, the Company agreed to settle the remaining principal of US $1,500,000 and accrued interest of US $310,326 for 4,525,807 common shares that were restricted from trading and pooled with equal quarterly releases beginning in January 2010. The 4,525,807 common shares were subsequently issued on May 11, 2009 (Note 8(c)).





(f)
US $2,000,000 January 2007 Convertible Note





On January 29, 2007, the Company completed a private placement comprised of $2,000,000 convertible notes. The 6% unsecured convertible notes matured on December 11, 2008. The notes were convertible into “Units” at the note-holders’ discretion at a conversion price of US $9.00 per Unit. Each “Unit” consisted of one common share and one purchase warrant to purchase an additional common share at US $12.60 per share until December 11, 2008. At the discretion of the note-holders, interest on the notes was payable in either cash or units at US $9.00 per unit. In connection with this financing, the Company paid consultants US $108,000 in cash and issued 7,500 units exercisable at US $9.00 per unit, with each unit consisting of one





common share and one share purchase warrant to purchase a further common share at US $12.60 per share until December 11, 2008. These convertible notes are unsecured and as they have passed their maturity date, as at March 31, 2009 were due on demand. The Company was obligated to file a resale registration statement on the underlying securities within four months of closing, which it failed to do.





As a result of the failure to file the registration statement, the Company recorded penalties of US $120,000 during the year ended March 31, 2007 and a further US $289,973 during the year ended March 31, 2008.





During the year ended, March 31, 2009, principal and accrued interest in the amount of US $709,995 was converted into 78,888 common shares, and principal and accrued interest in the amount of US $28,238 was traded for new 10% convertible notes that convert automatically into units (at a conversion price of US $0.40 per unit on the effective date of the share consolidation, each unit comprised of one common share and one 2-year share purchase warrant to purchase an additional common shares at $0.60 per share for a two year term from the date of issue of the unit).








F-23
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





7.
Convertible Notes(continued)




During the year ended March 31, 2009, the Company accrued US $468,170 in interest and accreted interest on the principal balance on the unconverted principal balance of these convertible notes.





Effective March 27, 2009, the Company agreed to settle the remaining unpaid principal and accrued interest aggregating US $1,299,120 for 3,247,797 common shares that were restricted from trading and pooled with equal quarterly releases beginning in January 2010. The 3,247,797 common shares were subsequently issued on May 11, 2009 (Note 8(c)).





(g)
US $650,000 August 2007 Convertible Note





On August 10, 2007, the Company issued an unsecured convertible term promissory note in the amount of US $650,000 bearing interest at 6% per annum. The convertible note matured on November 15, 2007 and as at March 31, 2009 were due on demand with both interest and principal convertible at the option of the lender into units at US $10.80 per unit, with each unit consisting of one common share and one-half of one share purchase warrant, each whole share purchase warrant exercisable at US $13.50 to purchase an additional common share. After November 25, 2008, this convertible note accrues interest at the rate of 15% per annum.





The Company was required to register the resale of the securities underlying the conversion features of this convertible note on a best-efforts basis, but failed to do so within 180 days from the date of issuance as agreed. A one-time financial penalty of US $28,567 was incurred during the year ended March 31, 2008.





The right of the note holder to convert into the Company’s common shares is subject to the contractual agreement between parties that any conversion by the note-holder may not lead, at the date of such conversion, to an aggregate equity interest greater than 9.99% in the common shares of the Company, inclusive of any derivative securities including options, warrants, convertible debt, any other convertible debt securities or any other financial instruments convertible into common equity.





During the year ended March 31, 2009, the Company accrued US $102,260 in interest and accreted interest.





Effective March 27, 2009, the Company agreed to settle the remaining principal and accrued interest aggregating US $780,827 for 1,952,066 common shares that were restricted from trading and pooled with equal quarterly releases beginning in January 2010. The 1,952,066 common shares were subsequently issued on May 11, 2009 (Note 8(c)).





(h)
US $391,000 September 2007 Convertible Note





On September 27, 2007, the Company issued unsecured one-year term convertible notes bearing interest at 6% per annum in the amount of US $391,000. The convertible notes matured on September 30, 2008 and as at March 31, 2009 were due on demand. Both interest and principal may be converted at the option of the lender at any time at US $10.80 per unit, with each unit consisting of one common share and one-half of one share purchase warrant, with each whole share purchase warrant exercisable at US $13.50 to purchase an additional common share for a two-year term from the date of conversion. The Company was required to register the resaleof the securities underlying the conversion features of this convertible note on a best efforts basis, but failed to do so within 90 days from the date of issuance as agreed. A one-time financial penalty of US $23,460 was incurred during the year ended March 31, 2008.





F-24
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





7.
Convertible Notes(continued)




During the year ended March 31, 2009, the Company accrued US $154,295 in interest and accreted interest on the principal balance on the unconverted principal balance of these convertible notes.





During the year ended March 31, 2009, the Company repaid US $7,500 of the principal on these convertible notes. The Company repaid an additional US $7,500 of principal and US $1,402 in interest during the year ended March 31, 2010.





Effective March 27, 2009, the Company agreed to settle the remaining principal and accrued interest aggregating US $435,326 for 1,024,667 common shares that was subject to pooling arrangements with equal quarterly releases beginning in January 2010. The 1,024,667 common shares were issued on May 11, 2009 (Note 8(c)).





(i)
US $2,168,000 July 2008 Convertible Note





On July 21, 2008, the Company closed a financing of zero coupon, 12% interest, senior secured convertible promissory notes in the amount of US $2,428,160 with an aggregate purchase price of US $2,168,000 with four investors, one of which was the Company’s Chief Financial Officer. The debt is convertible into common shares at the lesser of US $9.18 per share (unless the conversion price has been adjusted pursuant to further contract covenants) and 70% of the average of the five lowest closing bid prices for the ten preceding trading days. The Company issued each purchaser in the private placement two warrants - one warrant redeemable by the Company and the other non-redeemable. The non-redeemable warrants are exercisable at US $9.90 and permit the holder to purchase 264,506 common shares. The redeemable warrants are exercisable at US $13.50 and permit the holder to purchase 132,253 common shares. Further, the Company issued 24,401 non-redeemable warrants, 12,201 redeemable warrants and US $160,000 in cash as transaction costs. The warrants carry a term of five years from the date of closing of the financing. The redeemable warrants may be redeemed by the Company at a price of US $0.18 per warrant only if certain conditions have been satisfied including the Company’s common shares having closed at $27.00 per share or greater for a period of 20 consecutive trading days and the warrant holder being able to resell the shares acquired upon exercise through a resale registration statement or under Rule 144 of the United States Securities Act.





During the year ended March 31, 2009, interest and accretion of the convertible debenture in the aggregate of US $1,262,529 was accrued on the principal balance of these convertible notes.





Effective March 27, 2009, the Company settled these notes by:





•
Settlement of the prepayment penalty, original issuer discounts and interest portions of the convertible note including US $524,884 in prepayment penalty, US $260,160 in original issuer discounts, and US $371,771 in interest which includes the interest payable on the new note through December 31, 2009 for an aggregate settlement of US $1,156,815 and agreed to issue 2,892,036 common shares that were restricted from trading and pooled until January 1, 2010;





F-25
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





7.
Convertible Notes(continued)





•
Repayment of US $400,000 to subscribers (cash paid May 11, 2009); and


•
Conversion of US $250,000 face value of the original note into 312,500 common shares of the Company (Note 8(c)).


•
Recorded a loss on settlement of debt of $885,292 due to a modification of the original debt terms.





The terms of the remaining US $1,323,000 convertible promissory notes include the following:





•
If the promissory note was not settled by December 31, 2009, the note would be in default at the default rate of interest rate of 18%, be due on demand and the original conversion feature of the instrument would be reinstated. The debt was not settled by December 31, 2009, and was thus in default.


•
If prior to March 31, 2010, the Company issues common shares at a price less than the valuation of the shares issued to each note holder, the Company will issue to each note holder additional common shares based on the lower valuation.





The convertible debenture was assessed based on the substance of the contractual arrangement in determining whether it exhibits the fundamental characteristics of a financial liability or equity. While the conversion feature represents an equity component, management has assessed that because the conversion feature can be settled with a variable number of shares and that settlement predicated on a variable number of instruments triggers liability accounting, the conversion feature has been recorded as a liability as at December 31, 2009 when the conversion feature was reinstated. The value of the liability to be recorded is based on the premium of the fair value of the shares to be delivered in the event of a conversion over the fair value of the underlying face value of the debt. The convertible note of $1,968,930 included an embedded derivative liability in the amount of US $567,000 ($571,296) as at March 31, 2010.





During the year ended March 31, 2010, US $10,000 was converted into 21,704 common shares of the Company.  The Company accrued US $58,305 in interest on these convertible notes during the year ended March 31, 2010 on total principal outstanding of US $1,313,000 at March 31, 2010.





There were no transactions costs to be allocated between the embedded derivative and debt host contract.





On May 31, 2010, a third party purchased on a pro rata ownership basis from the existing convertible note holders, US $634,756 of the convertible notes and US $65,244 in accrued interest for aggregate proceeds of US $700,000. On June 15, 2010, the notes were converted by the purchaser into common shares at the rate of US $0.20 per share.  In conjunction with this transaction, 135,925 common shares were issued to the original convertible note holders at the rate of US $0.24 per share in exchange for remaining accrued interest of US $32,622 due to the original convertible note holders through May 31, 2010.  As at May 31, 2010, an aggregate of US $678,244 was outstanding on unconverted principal of these convertible notes with all interest paid through this date.





In return for conversion of the US $700,000 debt acquired by the third party at US $0.20 which was at a rate higher than the original convertible note terms of a 30% discount to bid price conversion covenant, an aggregate of 875,000 warrants exercisable at US $0.40 were issued to a third party exercisable until May 31, 2012. (Note 18(c))





F-26
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





7.
Convertible Notes(continued)





The Company used the relative fair value method to allocate the proceeds received in the convertible debt issuance to the convertible debt instrument and the other detachable instruments.





Subsequent the relative fair value allocation of the proceeds, the Company used the residual method was used to determine the fair value of the equity component by which the fair value of the liability component of convertible debentures was obtained by discounting future interest and principal payments using a market rate equal to the rate of similar debentures having no conversion feature. The residual balance is then allocated to the conversion feature of the instrument.





As required by Canadian GAAP, management assesses the convertible debt instruments based on the substance of the contractual arrangement in determining whether it exhibits the fundamental characteristics of a financial liability or equity. During the year ended March 31, 2009, management has assessed that the debenture instrument mainly exhibits characteristics that are liability in nature; as well, the conversion feature has been assessed as being a liability primarily due to the conversion feature being able to be settled with a variable number of shares. Therefore, in 2009, the Company revised its presentation of the conversion feature that did not meet the definition of equity to more accurately present these as derivative liabilities and has restated the financial statements for the year ended March 31, 2008. This change in presentation had no material impact to the statement of operations.





8.
Share Capital





(a)
Authorized:





Unlimited number of common shares without par value


Unlimited number of preferred shares without par value – none issued





(b)
Issued and outstanding:





The common share issuances consisted of the following transactions:





F-27
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





8.
Share Capital(continued)




Number





Contributedof Shares


Amount


SurplusBalance, as at March 31, 2007


1,703,670






3,253,333$
8,196,982


$Private placement, net of share issue costs (i) (ii)


473,486







-Issued for financial consulting services  (iii)


192,333



5,081,103



-Conversion of convertible notes (vi)


41,542



2,414,233



-Reallocation of equity upon conversion of notes


-



323,392



-Stock options exercised  (v)


9,722



232,808



-Stock based compensation for options exercised


-



83,834



-75,093Warrants exercised (iv)


38,883



75,093



-Issuance of warrants on convertible debentures


-



283,837



34,849Stock-based compensation


-



-



990,305-Balance, as at March 31, 2008


2,459,636


$
16,691,282


$
4,203,394Private placement, net of share issue costs (i)


180,703



1,991,795



-Shares issued for promissory note interest (ii)


5,555



65,333



-Issued for financial consulting services (iii)


35,776



360,030



-Issued for technology license (iv)


16,667



190,746



-Conversion of convertible notes (v)


289,344



1,772,363



-Warrants exercised (vi)


21,296



203,990



-Reallocation upon exercise of warrants


-



71,869



-71,869Reclassification from equity portion on conversion of convertible notes


-



610,108



-Reclassification from equity portion on repayment of convertible notes


-



-



21,999Issuance of warrants on convertible debentures


-



-



867,117Warrant modifications during the year


-



-



181,048Stock-based compensation


-



-



260,530Balance, as at March 31, 2009


3,008,977


$
21,957,516


$
5,462,219Issue for cash:Private placements, net of share issue costs (i)


19,040,193



3,411,036



53,265Less:  Issue costs – cash


-



-239,278



-Issue costs – warrants


-



-21,925



21,925Issued for investor relations services


250,000



137,928



-Issued for consulting services


25,000



17,655



-Shares issued for debt settlements (ii)


29,516,955



14,816,663



-Conversion of convertible notes (iii)


334,204



326,216



-Reclassification from equity portion on conversion of convertible notes


-



2,976,988



-


F-28
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31


8.
Share Capital(continued)





Number

of Shares


Amount


Contributed

SurplusReclassification from equity portion on repayment of convertible notes


-



-



4,310Stock-based compensation (d)


-



-



19,861Warrant modification (e)






(132,625
)


132,625Balance, as at March 31, 2010


52,175,329


$
43,250,174


$
5,694,205





During the year ended March 31, 2010, the Company:





(i)
Issued 16,303,562 units pursuant to the conversion of US $2,000,000 in subscription advances (Note 12) and interest of US $37,945.  Each unit is comprised of one common share and one third of one share purchase warrant entitling the holder thereof to purchase 5,434,521 common shares at an exercise price of US $0.45 per share until July 17, 2010.  A value of $27,173 has been allocated to the warrants under the residual method.





Issued 458,139 units pursuant to the conversion of US $179,478 in convertible notes and interest of US $3,777. (Note 7) Each unit is comprised of one common share and one share purchase warrant entitling the holder thereof to purchase 458,139 common shares at an exercise price of US $0.60 per share until July 17, 2011.  A value of $2,291 has been allocated to warrants under the residual method.





Closed private placements in four tranches and issued 2,153,492 units at a price of US $0.40 per common share for gross proceeds of US $906,966. Included in the private placements value is US $1,397 of interest on subscriptions received.  Each unit consists of one common share and one share purchase warrant entitling the holder thereof to exercise each whole warrant into a common share of the Company at an exercise price of US $0.60 until varying dates from October 26, 2011 to December 30, 2011.  A value of $10,768 has been allocated to the warrants under the residual method.





In connection with the private placements closed in four tranches, the Company incurred issue costs including finders’ fees of $239,278 in cash and issued 35,000 finder’s warrants.  The fair value of $21,925 for the finder’s warrants was estimated using the Black-Scholes option pricing model and was charged to share issue costs and credited to contributed surplus.  The assumptions used in the option pricing model are as follows: risk-free interest rate- 1.98%; expected life – 2.0 years; expected volatility – 80%; and expected dividends – nil.





The Company closed a further private placement of US $50,000 and issued 125,000 units at a price of US $0.40 per common share.  Each unit consists of one common share and 1.67 share purchase warrants entitling the holder thereof to exercise each whole warrant into a common share of the Company at an exercise price of US $0.40 until February 15, 2012.  A value of $13,033 has been allocated to the warrants under the residual method.





F-29
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31


8.
Share Capital(continued)


(ii)
In conjunction with certain restructuring initiatives effective March 27, 2009, the Company entered into a series of debt settlement agreements whereby it agreed to issue restricted common shares in settlement of convertible debentures, debenture related interest, original issuer discounts, prepayment penalties, future interest, certain accounts payable and related party amounts owing (Note 10) certain advances, unpaid finders’ fees and demand and term promissory notes.  An aggregate of US $11,806,527 ($14,816,663) representing these balances was settled in exchange for 29,516,955 common shares issued on May 11, 2009 (after allowing for consolidation rounding).  Included in these shares are 24,232,816 common shares which are subject to pooling restrictions with quarterly equal releases beginning on January 1, 2010, a further 2,634,135 common shares were subject to pooling restrictions until January 1, 2010.





(iii)
Issued 312,500 common shares pursuant to conversions of July 2008 convertible notes for US $250,000 face value of the original note.  Issued a further 21,704 common shares pursuant to the conversion of July 2008 convertible notes for US $10,000 face value of the reverted note.





During the year ended March 31, 2009, the Company:





(i)
Completed a private placement of units whereby a total of 180,703 units were issued at US $10.80 per unit for gross proceeds of US $1,951,600. Each unit consists of one common share and one-half common share purchase warrant with each whole warrant exercisable at US $13.50 to purchase an additional common share of the Company;





(ii)
Issued 5,555 common shares in connection with interest charges regarding a promissory note at a fair value of $65,333;





(iii)
Issued the following common shares for consulting services:




•23,333 common shares in connection with two financial consulting services agreements for investor relations and product development services at an aggregate fair value of US $285,000;




•7,443 common shares for services rendered under a public relations agreement at a fair value of US $43,594;




•5,000 common shares for services rendered under an internet services contract at a fair value of US $16,500.





(iv)
Issued 16,667 common shares valued at US $180,000 ($190,746) to Pagic relating to the Technology License (Note 4);





(v)
Issued 289,344 common shares upon conversion of US $1,597,609 of convertible note principal, interest and penalties to convertible debenture holders;





(vi)
Issued 21,296 common shares upon the exercise of 21,296 warrants at US $9.00 per share.





F-30
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31


8.
Share Capital(continued)


During the year ended March 31, 2008, the Company:





(i)
Completed a private placement of units whereby a total of 465,549 units were issued at US $10.80 per unit for gross proceeds of US $5,029,636.  Each unit consists of one common share and one-half common share purchase warrant with each whole warrant exercisable at US $13.50 to purchase one common share.  The Company paid US $88,438 cash to consultants in connection with this private placement;





(ii)
Completed a private placement of units whereby a total of 7,937 units were issued at US $12.60 per unit for gross proceeds of US $100,000.  Each unit consist of one common share and one-half common share purchase warrant with each whole warrant exercisable at US $15.30 to purchase an additional common share of the Company;





(iii)
Issued 192,333 shares in connection with seven financial consulting services agreements for administrative, investor relations, business and financial consulting services at an average deemed value of US $12.24 per share;





(iv)
Issued 38,883 common shares on exercise of 38,883 share purchase warrants at an average exercise price of US $7.20 per warrant;





(v)
Issued 9,722 common shares on exercise of 9,722 stock options at an exercise price of US $9.00 per option by a past director of the Company; and





(vi)
Issued 41,542 common shares upon conversion of US $275,000 of convertible notes, interest of US $4,521 and a registration penalty of US $11,668 from holders.





(c)
Commitment to Issue Shares:





At March 31, 2010, commitment to issue shares includes 300,000 common shares to be issued to an officer and director of the Company for product development services performed during the year ended March 31, 2010. The 300,000 common shares to be issued at $0.42 per share, which is equivalent to the quoted market price as at the performance completion date of March 31, 2010 for an aggregate value of $126,000 (Note 10).





During the year ended March 31, 2009, and in conjunction with certain restructuring initiatives, effective March 27, 2009, the Company entered into a series of debt settlement agreements whereby it agreed to issue restricted common shares in settlement of convertible debentures, debenture related interest, original issuer discounts, prepayment penalties, future interest, certain accounts payable and related party amounts owing, certain advances, unpaid finders’ fees and demand and term promissory notes. An aggregate of US $11,806,527 ($14,816,663) representing these balances was settled in exchange for 29,516,955 common shares issued on May 11, 2009. Included in these shares are 24,232,816 common shares which are subject to pooling restrictions with quarterly equal releases beginning on January 1, 2010, and a further 2,634,135 common shares are subject to pooling restrictions until January 1, 2010. The Company used a value different from the quoted market price to value the restricted shares on issuance to reflect the discount the debt holder participants would require as a result of the 7 month holding period, the large share issuance and economic factors of the company. A loss of $ 1,154,308 was recorded to loss on settlement of debts for those debt holder participants who received shares at a value different than the restricted share value. The Company estimated the value of the restricted share of US $0.02 per share pre-consolidation (US $0.40 post consolidation). The value of the restricted stock was determined by using a valuation model and specific considerations of the Company’s trading volume, market risk and negotiations with arms length parties.





F-31
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31


8.
Share Capital(continued)





Also included in commitment to issue shares as at March 31, 2009 is the conversion of US $250,000 of convertible notes into 312,500 common shares which were issued on May 9, 2009.





(d)
Stock options





The Company has a stock option plan (“Plan”) that allows for stock options to be issued to employees, directors, officers and consultants on both a qualified and non-qualified basis. The aggregate number of common shares as to which options and bonuses may be granted from time to time under the Plan shall not exceed 20% of the Company’s issued and outstanding number of common shares and the number of common shares as to which options and bonuses may be granted under the US incentive portion of the Plan shall not exceed 17% of the Company’s issued and outstanding common shares. The Company’s Plan provides that the terms of the options and the option prices shall be fixed by the board of directors or committee and subject to the requirements of the exchange on which the Company’s common shares are traded or any other governing regulatory body, at the time of exercise. Options granted shall expire after a period of five years or terminate three months after the recipient ceases to be an employee of the Company.





The following summarizes stock option activity for the years ended March 31, 2010, 2009 and 2008:





Number of Options


Weighted

Average

US PriceOptions outstanding and exercisable, March 31, 2007


213,056


$
10.44Granted


139,722



12.42Forfeited


(13,056
)


10.80Exercised


(9,722
)


9.00Options outstanding and exercisable, March 31, 2008


330,000



11.34Granted


24,444



9.90Forfeited


(58,611
)


11.24Cancelled


(295,833
)


11.16Options outstanding and exercisable, March 31, 2009


-



-Granted


100,000



0.30Options outstanding and exercisable, March 31, 2010


100,000


$
0.30





Effective March 31, 2009, the Company cancelled all outstanding stock options in conjunction with restructuring initiatives.





During the year ended March 31, 2010, the weighted average fair value of stock options granted of $0.30 per option was estimated using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate – 1.98%; expected life – 5.0 years ; expected volatility – 100%; and expected dividends – nil.  The Company recorded stock-based compensation expense of $19,861.


F-32
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31


8.
Share Capital(continued)
 During the year ended March 31, 2009, 24,444 stock options were granted to directors, officers, employees and consultants. The fair value of these stock options is recognized as a stock-based compensation expense over the vesting period of the options.  The total fair value of these stock options was calculated at $121,530, all of which was recognized as stock-based compensation during the year ended March 31, 2009. Stock-based compensation expense includes $139,000 for the fair value of options granted in fiscal 2008, which vested in fiscal 2009.





As at March 31, 2010, the weighted average life of outstanding stock options was 4.85 years (2009 – nil).  The Company had 100,000 stock options outstanding expiring on February 17, 2015.





(e)
Warrants





Each of the Company’s share purchase warrants is exercisable into one common share. The following summarizes warrants activity for the years ended March 31, 2010, 2009 and 2008:





Number of Warrants


Weighted Average US PriceWarrants outstanding and exercisable, March 31, 2007


652,990


$
13.14Granted


261,019



17.64Exercised


(38,883
)


7.38Warrants outstanding and exercisable, March 31, 2008


875,126



13.32Granted


581,869



11.62Exercised


(21,296
)


9.00Expired


(286,183
)


9.66Warrants outstanding and exercisable, March 31, 2009


1,149,516



12.38Issued


8,289,485



0.50Expired


(625,801
)


13.30Warrants outstanding and exercisable, March 31, 2010


8,813,200


$
0.63





As at March 31, 2010, the following share purchase warrants were outstanding:





Expiry Date

US Exercise Price


2010

Number of WarrantsMay 1, 2010

$
13.50



83,241
*June 6, 2010

$
13.50



5,418
*July 17, 2010

$
0.45



5,434,521
**July 22, 2010

$
13.50



1,695
*July 17, 2011

$
0.60



458,139October 26, 2011

$
0.60



753,492October 27, 2011

$
0.60



535,000November 18, 2011

$
0.60



100,000December 2, 2011

$
0.60



712,500December 30, 2011

$
0.60



87,500February 16, 2012

$
0.60



208,333July 20, 2013

$
0.40



433,361
***Total






8,813,200


F-33
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31





8.
Share Capital(continued)


*
Subsequent to year end, warrants expired un-exercised


**
Subsequent to year end, the warrant terms were extended to July 17, 2011


***
On July 17, 2009, the Company issued units of securities causing the contracted decrease in exercise prices of these warrants to US $0.40 from 288,907 warrants at $9.90 and 144,454 warrants at $12.60. The weighted average fair value of these warrants was estimated using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate – 1.98%; expected life – 4.0 years ; expected volatility – 100%; and expected dividends – nil.  The Company recorded warrant modification of $132,625.





On July 15, 2008, the Company amended the terms of certain warrants issued previously as part of various private placements.  77,444 warrants exercisable at US $7.20 to US $18.00 per share expiring in July 2008 were extended to April 9, 2009 and 159,573 warrants expiring in July and August 2008 were extended to December 31, 2008.  The Company applies the fair value method using Black-Scholes option pricing model in accounting for warrants utilizing a risk-free interest rate of 1.8% and expected volatility of 64%.  The warrant extensions resulted in additional compensation expense of $181,048 which was charged to expenses with a corresponding credit to contributed surplus.  These warrants have expired unexercised.  In addition, warrants expiring in April through July 2009 expired unexercised.





9.
Product Development Costs





As the Company is in the development stage, test sales are credited to development costs.  During the year ended March 31, 2010, the Company had test sales of $28,908 (2009 - $219,483; 2008 - $985,779) related to Tomorrow Garden products in fiscal 2010 and the Nova Skincare System in fiscal 2009 and 2008.





10.
Related Party Transactions – Note 4





During the years ended March 31, 2010 and 2009, the Company incurred the following expenditures charged by directors and officers of the Company, former directors and officers of the Company, companies they owned or were significant shareholders of, and/or beneficial owners of more than 5% of the Company’s common shares:





2010


2009


2008Product Development

$
392,325


$
1,318,309


$
919,460Interest and accretion


107,642



-



-Professional fees


-



36,000



33,370Rent


25,000



37,800



30,000$
524,967


$
1,392,109


$
982,830





The related party transactions are in the ordinary course of business and are measured at the exchange amount which is the amount agreed upon by the transacting parties.





At March 31, 2010 and 2009, due to related parties was comprised of amounts owing to directors and officers of the Company, former directors and officers of the Company, companies they owned or were significant shareholders of, and/or beneficial owners of more than 5% of the Company’s common shares.  The amounts owing were non-interest bearing and had no specific terms of repayment.





At March 31, 2010, promissory notes payable included $1,001,851 (March 31, 2009 - $19,058) owing to beneficial owners of more than 5% of the Company’s common shares and directors and officers.


F-34
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31


10.
Related Party Transactions – Note 4 (continued)





The Company has made payments to a company owned by former directors and officers of the Company pursuant to the Product License during the years ended March 31, 2010 and 2009 (Note 4).





At March 31, 2010, commitment to issue shares includes 300,000 common shares to be issued to an officer and director of the Company for product development services performed during the year ended March 31, 2010. The 300,000 common shares to be issued are valued at $0.42 per share for an aggregate value of $126,000 and was recorded to the product development cost (Note 8(c))





During the year ended March 31, 2010, $206,950 of cash issue costs (Note 8(i)) were charged by beneficial owners of more than 5% of the Company’s common shares.





During the year ended March 31, 2010, the Company settled commitments to issue shares of $8,172,135 by issuing 17,655,556 common shares.





11.
Commitments





Commitments not disclosed elsewhere in these financial statements are as follows:





The Company leases office and development space in Launceston, Cornwall, UK under a ten-year lease ending on November 15, 2017 at a quarterly cost of $20,977 (GB£12,550). The Company also entered into public relations and consulting agreements in the year that extended beyond March 31, 2010. The combined commitments as at March 31, 2010 are as follows:





Shares


Amount2011 (Note 18)


125,000


$
76,2292012


-



76,2292013


-



76,2292014


-



76,229Thereafter


-



200,100125,000


$
505,015





F-35
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31


12.
Promissory Notes Payable





As at March 31, 2010 and 2009, promissory notes payable consisted of the following due to third party lenders:





2010


20098% and 10% simple interest, unsecured, due on demand (a)

$
1,001,851


$
-8% simple interest, unsecured, due February 15, 2012 (b)


51,318



-12% simple interest, US$1,323,000 note payable, due December 31, 2009 (c)


-



1,473,06010% simple interest, US $500,000 subscription advance, unsecured, due August 31, 2009 (d)


-



630,650Mandatorily convertible note, to be converted upon achievement of 18:1 common share reverse consolidation (e)


-



35,28412% simple interest, US $400,000 note payable, unsecured, due on demand (Note 7(i)) (f)


-



504,520$
1,053,169


$
2,643,514





(a)
An aggregate of $1,001,851 in demand notes are due to related parties who are beneficial owners of more than 5% of the Company’s common shares and a former director and officer of the Company. Total interest accrued at March 31, 2010 was $28,228.





(b)
On February 16, 2010, the Company issued to a third party, an unsecured promissory note bearing interest at the rate of 8% per annum whose terms change on May 15, 2010 to an unsecured convertible note with a term to February 15, 2012 bearing interest at 8% per annum.  Both interest and principal may be converted at the option of the lender at any time after May 15, 2010 at US $0.20 per unit, with each unit consisting of one common share and one share purchase warrant exercisable at US $0.40 per share for a two-year term from the date of conversion. During the year ended March 31, 2010, the Company accrued US $520 (2009 – US $nil) in interest on the principal balance of promissory note.





(c)
During the year ended March 31, 2010, a promissory note due on December 31, 2009 was not repaid and, pursuant to the original July 2008 agreement, became a convertible note (Note 7(i)).





(d)
On March 26, 2009, the Company entered into a subscription agreement for an investment of up to US $2,000,000 convertible into units. The subscription funds bear interest at 10% (convertible at the rate of US $0.125 per unit on the date upon which the Company effects a share consolidation). Each unit consists of one restricted common share and one-third share purchase warrant with each whole warrant exercisable into one common share at a post consolidation exercise price of US $0.45 per share for a one year term from the date of issue.





As at March 31, 2009, the Company had received US $500,000 ($630,650) which has been reflected as a promissory note payable in the financial statements. During the year ended March 31, 2009, the Company accrued US $685 interest on the principal balance of this advance. On May 22, 2009, the balance of US $1,500,000 was received.





The Company completed the share consolidation on July 16, 2009, and on July 17, 2009, issued 16,303,562 common shares pursuant to the conversion of US $2,000,000 in subscription advances and interest of US $37,945, and also issued 5,434,521 warrants to purchase 5,434,521 common shares at an exercise price of US $0.45 per share expiring July 17, 2010.


F-36
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31


12.
Promissory Notes Payable (continued)





(e)
The mandatorily convertible note was converted to shares on consolidation.





(f)
On June 2, 2009, this note was paid to the note holders on a pro-rata basis.





During the year ended March 31, 2009, the Company repaid the principal and accrued interest and in addition, committed to issue 5,555 common shares in full settlement of two promissory notes which were outstanding at March 31, 2008.





13.
Income Taxes





No provision for Canadian, U.S. or UK federal, provincial, or state income taxes has been recorded. The Company is in arrears on filing its statutory income tax returns and is therefore unable to practicably determine the amount of its loss carry forwards at this time.





The Company expects to have net operating loss carry forwards to offset any taxable income that may exist for the years ended March 31, 2010 and 2009. As at March 31, 2010, the Company expects to have significant net operating loss carry forwards for income tax purposes available to offset future taxable income. Future income tax assets as of March 31, 2010 and 2009 consist primarily of the tax effect of net operating loss carry forwards.





The Company has provided a full valuation allowance on the future income tax assets as of March 31, 2010 and 2009 to reduce such future income tax assets to zero, as it is management’s belief that realization of such amounts is not considered more likely than not.





In the ordinary course of business the Company transacts in multiple foreign jurisdictions and is subject to the tax regime of each foreign jurisdiction. The Company records tax contingencies for specific transaction when it determines that the likelihood of an unfavorable outcome is likely and the loss is reasonably estimable. Management currently believes that the Company is not exposed to tax contingencies that could have a material impact on the liquidity results of operations or financial condition of the Company. As at March 31, 2010, the Company has not recorded an accrual for any tax contingencies.





14.
Segmented Information





The Company operates in one industry segment being the operations are in the research, product development and resale sectors. The Company’s segment comprises of three geographic locations with revenue during all years reported of $nil.





By geographic location(In $ dollars)

United States


United Kingdom


CanadaMarch 31, 2009Property and equipment


697,825



372,391



-March 31, 2010Property and equipment


517,307



499,443



-





F-37
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31


15.
Financial Instruments





The Company has designated its cash and cash equivalents as held-for-trading, which is measured at fair value.  Receivables are designated as loans and receivables, which are measured at amortized cost.  Accounts payable and accrued liabilities, promissory notes payable, due to related parties and convertible notes are designated as other financial liabilities, which are measured at amortized cost.  Derivative instruments are recorded on the balance sheet at fair value and changes in fair value are recorded in the statement of operations. The fair value of these financial instruments approximates their carrying value due to their short-term maturity.





Fair Value of Financial Instruments





The Canadian Institute of Chartered Accountants Handbook Section 3862 “Financial Instruments – Disclosures” requires disclosure of a three-level hierarchy for fair value measurements based upon transparencyof inputs to the valuation of financial instruments carried on the balance sheet at fair value. The fair value hierarchy of financial instruments measured at fair value on a recurring basis by the lowest level of input that is significant to the fair value measurement is as follows.





As at March 31, 2010





Level 1


Level 2


Level 3


TotalLiabilitiesDerivative liability

$
-


$
575,958


$
-


$
575,958$
-


$
575,958


$
-


$
575,958





There are no assets or liabilities transferred from one level to another in the hierarchy during the year ended March 31, 2010.





The Company’s embedded derivative liability, included within convertible notes (Note 7) is classified within Level 2 of the fair value hierarchy as it is determined using the difference between face value of the principle and the conversion premium, which uses readily observable market inputs.





In assessing the fair value of other financial instruments, the Company uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date.





The face values less any estimated credit adjustments for financial assets and financial liabilities with a maturity of less than one year are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate available to the Company for similar financial instruments.





Interest Rate Risk





Interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates.  The risk that the Company will realize a loss is limited because at present the Company holds all of its surplus cash in an interest bearing account and has no other interest bearing financial assets.  Interest bearing financial liabilities includes promissory notes payable and convertible notes.  These are current financial liabilities and subject to limited interest rate risk due to their short-term nature and their fixed rate interest rates.





F-38
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31


15.
Financial Instruments(continued)





Foreign Exchange Risk





The Company operates internationally and is therefore exposed to foreign exchange fluctuations in the value of foreign currencies in relation to the US dollar. The Company’s foreign currency exposures comprise cash and cash equivalents, receivables and accounts payable denominated in British pounds (expressed in Canadian dollars) and Canadian dollars as follows:





British

pounds


CAD

$Cash and cash equivalents


12,895



4,655Accounts payable and accrued liabilities


256,690



377,234Promissory notes payable


-



214,729





A 5% change in the foreign currency between the Canadian dollar and British Pound Sterling exchange rate to the US Dollar at March 31, 2010 would have an insignificant effect on net loss of the Company in respect the above financial instruments. Due to the short-term nature of these instruments, the risk is not considered material by management and no hedging is considered necessary Items exposed to foreignexchange risk.





Credit Risk





Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit risk with respect to its cash and cash equivalents and receivables. The credit risk associated with cash is minimal as cash has been placed with major financial institutions. The Company is exposed to significant credit risk with respect to receivables as the majority of the amount is due from a joint venture partner. The receivable from the joint venture partner has been fully provided for at March 31, 2010. Management periodically assesses the recoverability of the accounts receivables at a detailed level to mitigate the credit risk.





Liquidity Risk





The following are the contractual maturities of financial liabilities as at March 31, 2010:





Total


1-12 months


1-2 years


ThereafterAccounts payable

$
886,435


$
886,435



-



-Promissory notes


1,053,169



1,053,169



-



-Due to related parties


258,206



258,206



-



-Convertible notes


1,968,930



1,968,930



-



-





Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk by monitoring closely its funding requirements through the use of operational and capital budgeting. The Company believes it does not have sufficient current cash resources and financing commitments in place to fully fund the development and commercialization of its Verticrop product, and will have to raise additional funds. While it has been successful in doing so in the past, there can be no assurance that it will be able to do so in the future. The Company expects that revenues from the commercialization of its Verticrop product will help finance the operations of the Company in the future.





F-39
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31


16.
Management of Capital





The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to pursue the development of its products.  The Company relies mainly on equity and debt instrument issuances to raise new capital.  In the management of capital, the Company includes the components of shareholders’ equity and convertible debt, promissory notes and long-term debt.  Management estimates anticipated research and development expenditures to ensure that there is sufficient capital on hand to meet ongoing obligations.  Management reviews the Company’s capital management policy regularly.  As part of the strategy to preserve liquidity, the Company has restructured its capital structure and agreed to settle convertible notes, certain convertible notes, certain promissory notes and certain related party balances as of March 31, 2009 with shares (Note 8 (ii)).  The Company’s investment policy is to invest its excess cash in highly liquid short‐term deposits with terms of one year or less and which can be liquidated after thirty days without interest penalty. The Company currently does not have sufficient capital to cover its administrative costs or fund research and development programs for the next twelve months. The Company will only be able to continue to develop its products with additional equity or debt instrument financing.





17.
Changes in Non-cash Working Capital Items





2010


2009Receivables

$
124,281


$
(349,608
)Prepaid


(3,081
)


2,016,876Inventory


22,407



583,123Accounts payable


344,633



5,239$
509,378


$
2,255,630





18.
Subsequent Events





Subsequent events not disclosed elsewhere in these financial statements are as follows:





(a)
On June 1, 2010, the Company ratified the conditional issuance of 1,000,000 common shares to a third party as partial consideration for the purchase of technology related to the Company’s “Alphacrop” plant growing system.  The shares are conditional on the issue of certain patents from the UK patent office.





(b)
On June 1, 2010, the Company granted 3,960,000 stock options at US $0.25 per share for an eight year period to consultants and employees of the Company.





(c)
On June 15, 2010, the Company issued:




-300,000 common shares as an employment bonus for the year ended March 31, 2010 to the Company’s CEO (Note 10). These shares were returned to treasury on September 15, 2010;




-500,000 common shares in connection with a business consulting services agreement for services to be performed from April 1, 2010 through December 31, 2010;




-500,000 common shares in connection with an investor relations services agreement with services to be performed from April 1, 2010 through December 31, 2010;




-100,000 common shares relating to existing investor relations services agreements (Note 11);


F-40
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31


18.
Subsequent Events(continued)




-3,500,000 common shares upon conversion of US $ 700,000 in convertible notes payable and accrued interest payable at US $0.20 per share;




-135,925 common shares in payment of partial accrued interest on promissory notes at US $0.24 per share;




-875,000 share purchase warrants to purchase 875,000 common shares exercisable at US $0.30 per share until May 31, 2012 relating to a finders’ fee arrangement;




(d)
On July 17, 2010, the Company extended the term of 5,534,521 warrants exercisable at US $0.45 per share originally expiring on July 17, 2010 by 12 months to July 17, 2011;




(e)
On July 31, 2010, 250,000 share options at US $0.25 for an eight year period were issued to a consultant of the Company




(f)
On September 1, 2010, 100,000 share options were forfeited;




(g)
On September 15, 2010, the Company returned 21,704 common shares to treasury from a rescinded convertible debenture conversion;




(h)
On September 15, 2010, the Company issued 500,000 common shares to the holders of US $698,426 in convertible notes as part of negotiated changes the term for repayment of these notes through December 30, 2010.







19.
Generally Accepted Accounting Principles in Canada and the United States





Reconciliation of Net Loss Under Canadian GAAP to US GAAP





The effect of the material measurement differences between generally accepted accounting principles in Canada and the United States on the Company’s net loss is summarized as follows:





2010


2009

(Restated – Note 19(d))


2008Net loss under Canadian GAAP

$
6,838,849


$
17,855,490


$
12,712,358Add (deduct):Interest and accretion expense


2,053,414



(1,362,976
)


399,496Debt issue costs (b)


32,554



94,568



135,733Reversal of loss on settlement of debt


-



(885,292
)


-Share settlement expense (a)


645,712



-



-Debt conversion expense (h)


4,150,269



-



-Change in fair value of derivative liability (a)


(153,937
)


-



-Foreign exchange gain/loss


-



(611,872
)


45,301Net loss under US GAAP

$
13,566,861


$
15,089,918


$
13,292,888


F-41
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31




19.
Generally Accepted Accounting Principles in Canada and the United States(continued)


Net loss under US GAAP

$
13,566,861


$
15,089,918


$
13,292,888Foreign currency translation per Canadian GAAP


(296,515
)


-



-Foreign currency impact of derivative liability per US GAAP (a)


(350,821
)


-



-Comprehensive loss under US GAAP

$
12,919,525


$
15,089,918


$
13,292,888Loss per share under US GAAP – basic and diluted

$
0.32


$
5.42


$
6.73Weighted average number of shares


42,354,279



2,782,284



1,974,763





Reconciliation of total assets, liabilities and shareholders’ equity to US GAAP:


2010


2009

restated – Note 19(d)Total assets under CDN GAAP

$
1,284,286


$
2,351,963Adjustments:Deferred financing costs


-



32,554Total assets under US GAAP

$
1,284,286


$
2,384,517Total liabilities under CDN GAAP

$
4,166,740


$
3,383,189Adjustments:Reverse accretion recorded on convertible debt discount


-



(1,954,446
)Derivative liability arising under US GAAP (a)


1,400,687



-Reverse derivative liability calculated under CDN GAAP


(571,296
)


-Total liabilities under US GAAP

$
4,996,131


$
1,428,743Total shareholders’ equity (deficiency) under CDN GAAP

$
(2,882,454
)

$
(1,031,226
)Adjustments:Deferred financing costs


-



32,554Convertible debt


-



1,954,446Cumulative adjustment as a result of ASC 815 (a)


(1,905,445
)


-Derivative liability, including foreign exchange


1,076,054



-Total shareholders’ equity (deficiency) under US GAAP

$
(3,711,845
)

$
955,774Total liabilities and shareholders’ equity (deficiency) under US GAAP

$
1,284,286


$
2,384,517





F-42
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31


19.
Generally Accepted Accounting Principles in Canada and the United States(Continued)





(a)
Convertible Notes



Under Canadian GAAP, the convertible notes were assessed based on the substance of the contractual arrangement in determining whether they contained an equity component. As a result of this assessment, the embedded conversion feature was recorded as a liability because settlement of the conversion feature was based on issuing a variable number of shares.




Under US GAAP, the principal amount of financial liabilities convertible in common shares of an entity are not bifurcated between its liability and equity components unless the debtor’s option to convert the financial liability into common shares of the entity is in-the-money on the date of issuance, which results in a beneficial conversion feature. The value of the beneficial conversion feature, calculated on an intrinsic value basis, is classified in equity and presented as additional paid-in-capital, the US GAAP equivalent of contributed surplus, unless the embedded conversion feature meets the definition of a derivative in which case it is fair valued and presented as a derivative liability. The difference between the principal amount of a financial liability and the value of the beneficial conversion feature is classified in liabilities. The discounted financial liability is accreted over its estimated life to the principal amount using the effective interest method. Upon conversion of the financial liability to common shares of the entity, the difference between the carrying value of the financial liability and the principal amount, if any, is recognized in income as interest expense and the principal amount and amount of the beneficial conversion feature are transferred to share capital. In the event that the convertible debt is settled with common shares, the Company uses the fair value of the common shares issued to determine the gain or loss on settlement.



Under US GAAP, the settlement of convertible debt pursuant to the terms described in Note 7 of $645,712 has been recognized in the Company’s year ended March 31, 2010.



Lastly under US GAAP and in accordance with adoption of ASC 815-40-15 (see Note 19(i)(VI)),  The Company’s outstanding convertible notes include embedded conversion options that, prior to the adoption of this accounting policy, were not accounted for as derivative liabilities. Effective April 1, 2009, these conversion options met the criteria of a derivative instrument liability because the terms of the promissory notes require that the conversion price be adjusted in certain circumstances that do not meet the “fixed-for-fixed” criteria in ASC 815-40-15-5.  As a result, the Company is now required to separately account for the embedded conversion option as a derivative instrument liability, carried at fair value and marked-to-market each period, with changes in the fair value each period charged or credited to income. The discount resulting from separating the embedded conversion feature is accreted via a charge to income using the effective interest method over the term of the debt.



The transition provisions of ASC 815-40-15 require cumulative effect adjustments as of April 1, 2009 to reflect the amounts that would have been recognized if derivative fair value accounting had been applied from the original issuance date of an equity-linked financial instrument through the implementation date of the revised guidance. Thus, the Company calculated the value of the derivative liability associated with the embedded conversion feature as at the date of its issuance, recorded the accretion expense applicable to the debt discount arising upon the bifurcation of the derivative liability and recorded the change in the fair value of the derivative liability from the date of the issuance of the convertible notes, July 16, 2008, up to April 1, 2009. Additionally, in conjunction with the foregoing, the previously calculated amounts in respect of the beneficial conversion feature and the accretion expense on the beneficial conversion debt discount was reversed.




F-43
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31




19.
Generally Accepted Accounting Principles in Canada and the United States(Continued)





The cumulative effect of this change in accounting principle of $1,905,445 has been recognized as an increase of the opening balance of shareholders’ deficiency as of April 1, 2009, with corresponding adjustments at April 1, 2009 to recognize a derivative liability under US GAAP of $1,905,445.  During the year ended March 31, 2010, the derivative liability was reduced to $1,400,687 as a result of a change in fair value ($153,937) and for the change in the exchange rate between the Canadian and US dollar ($350,821).





(b)
Debt Issue Costs



Under Canadian GAAP, an entity may make an accounting policy choice to either defer transaction costs that are directly attributable to the issue of a financial liability classified as other than held for trading or to recognize all transaction costs in net income as incurred. The Company’s accounting policy is to recognize all transaction costs in net income as incurred. Under US GAAP, transaction costs that are directly attributable to the issue of a financial liability are deferred and amortized on a straight-line basis over the life of the financial liability. During the year ended March 31, 2010, debt issue costs of $32,554 (2009 – $94,568) (2008 – $135,733) was amortized in the statement of operations for US GAAP purposes. There were no debt issue costs remaining to be amortized as at March 31, 2010.





(c)
Proportionate Consolidation



Under Canadian GAAP, investments in jointly-controlled entities are accounted for using the proportionate consolidation method. Under U.S. GAAP, investments in jointly-controlled entities are accounted for using the equity method. Although there are material differences between these accounting methods, the Company relies on an accommodation of the United States Securities and Exchange Commission [“SEC”] permitting the Company to exclude the disclosure of such differences which affect only the display and classification of financial statement items excluding shareholders’ equity (deficiency) and net income (loss). Vertigro Algea Technologies LLC meets the requirements of this accommodation.



There were no assets in the joint venture as at March 31, 2010.  The only asset at March 31, 2009 was $812,048 owed from the co-venturer in respect of costs recoverable.  This receivable was written off during the year ended March 31, 2010.



Total liabilities included in these financial statements in respect of the joint venture consist of  accounts payable of approximately $46,000 (2009 - $44,000).



Net loss for the year ended March 31, 2010 was approximately $715,000, primarily consisting of the write-off of amounts recoverable from the co-venturer in the amount of $668,057.  During the year ended March 31, 2009, net loss was $1,170,000. There were no revenues earned by the joint venture during the years ended March 31, 2010 and 2009.





F-44
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31


19.
Generally Accepted Accounting Principles in Canada and the United States(Continued)





(d)
Restatement of 2009 US GAAP amounts



Subsequentto the issuance of the March 31, 2009 consolidated financial statements, the Company has corrected an error in respect to the US GAAP convertible debt balance.  The transaction was initially recorded as extinguished on March 31, 2009 whereby the un-accreted balance of the convertible debt should have been accreted and charged as an expense in the Company’s March 31, 2010 year end.



Thefollowing represents the Company’s US GAAP net loss as previously reported and after giving effect to the restatement adjustment in Note 19 for the year ended March 31, 2009.
  Net Loss for the year per US GAAPAs previously reported

$
(18,000,141
)Revision of convertible debt accounting


2,910,223As restated

$
(15,089,918
)Loss per share – basic and diluted – per US GAAPAs previously reported

$
(6.47
)Revision of convertible debt accounting


1.05As restated

$
(5.42
)


The following represents the effect of the Company’s US GAAP Total Assets, Total Liabilities and Shareholders’ Equity (Deficiency) as previously reported and after giving effect to the restatement adjustment as of March 31, 2009:





Total assets per US GAAP, as previously stated

$
2,351,963Deferred issue costs


32,554Total assets per US GAAP, as restated

$
2,384,517Total liabilities per US GAAP, as previously stated

$
3,383,189Convertible debt reduction


(1,954,446
)Total liabilities per US GAAP, as restated

$
1,428,743Shareholders’ Deficiency, as previously reported

$
(1,031,226
)Revision of convertible debt accounting and share issue costs


1,987,000Shareholders’ Equity, as restated

$
955,774








F-45
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31


19.
Generally Accepted Accounting Principles in Canada and the United States(Continued)





(e)
Statement of Operations presentation





For US GAAP purposes, certain amounts presented as non-operating items under Canadian GAAP would be included in the determination of loss from operations including write-off of receivables (presented as an equity investment loss per US GAAP), loss on settlement of debt (presented as compensation expense per US GAAP) and write-down of property and equipment.




(f)
Stock-based compensation





For US GAAP purposes, all share-based payments to employees, including grants of employee stock options, are recognized in results from operations based on the fair values of options expected to vest. In calculating compensation to be recognized, US GAAP requires the Company to estimate forfeitures. For Canadian GAAP, the Company accounts for forfeitures as they occur. The effect of forfeitures is not material. Accordingly no adjustments for any of the periods were required.





(g)
Netting of costs





Under Canadian GAAP, revenues realized during the pre-operating period should be recorded as reduction of the product development expenditure.





Under US GAAP, such revenue should be recorded separate from expenses. Such would consist of $28,908 (2009 - $219,483; 2008 – 985,779) from product development to revenue for US GAAP purposes.





(h)
Induced Conversions of Convertible Debt





Under Canadian GAAP, the Company did not recognize a gain or loss on the issuance of shares to settle its outstanding convertible notes as the shares to these debt-holders were issued at fair value.





Under US GAAP, in accordance with the guidance of ASC 470, “Debt with Conversion and Other Options”, the Company recognizes a debt conversion expense to the extent that the fair value of the shares issued to settle outstanding convertible notes exceeds the fair value of the shares that would have been issuable under the original conversion terms of the note. During the year ended March 31, 2010, the Company settled convertible notes for which it recognized a debt conversion expense of $4,150,269 resulting from the settlement price being lower than the contractual conversion price pursuant to the debt agreements.





(i)
Recently Issued Accounting Pronouncements





I.
Accounting Standards Codification





In June 2009, the FASB issued the FASB Accounting Standards Codification (“Codification”). The Codification became the single source for all authoritative generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009. The Codification does not change GAAP and did not have an effect on our financial position, results of operations or cash flows.






F-46
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31




19.
Generally Accepted Accounting Principles in Canada and the United States(Continued)





The adoption of this statement will have no material impact on the Company’s financial statements but will require that interim and annual filings include references to the Codification.





II.
Variable Interest Entities





In June 2009, the ASC 810 – Consolidation (FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”) ASC 810 amends the accounting for variable interest entities (“VIE”) and changes the process as to how an enterprise determines which party consolidates a VIE. ASC 810 also defines the party that consolidates the VIE (the primary beneficiary) as the party with (1) the power to direct activities of the VIE that most significantly affect the VIE’s economic performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. Upon adoption of SC 810, the reporting enterprise must reconsider its conclusions on whether an entity should be consolidated, and should a change result, the effect on its net assets will be recorded as a cumulative effect adjustment to retained earnings. ASC 810 is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years and early application is prohibited. The adoption of this statement will have no material impact on the Company’s consolidated financial statements.





III.
Transfers of Financial Assets





In June 2009, the FASB issued ASC 860 – Transfers and Servicing (SFAS No. 166, “Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140”.) ASC 860 limits the circumstances in which a financial asset may be derecognized when the transferor has not transferred the entire financial asset or has continuing involvement with the transferred asset. The concept of a qualifying special-purpose entity, which had previously facilitated sale accounting for certain asset transfers, is removed by ASC 860. ASC 860 is effective for financial asset transfers occurring in fiscal years beginning after November 15, 2009, and interim periods within those fiscal years and early application is prohibited. The adoption of this statement is not expected to have a material effect on the Company’s consolidated financial statements.





IV.
Subsequent Events





In May 2009, the FASB issued ASC 855 (SFAS No. 165 “Subsequent Events”.) ASC 855 provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The statement sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. The statement also sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements.  Furthermore, this statement identifies the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim or annual periods ending after June 15, 2009. The adoption of this statement did not to have a material effect on the Company’s consolidated financial statements.





F-47
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31




19.
Generally Accepted Accounting Principles in Canada and the United States(Continued)





In February 2010, the FASB issued ASU 2010-09, which amends ASC 855 to address certain implementation issued related to an entity's requirement to perform and disclose subsequent event procedures. ASU 2010-09 requires entities to make filings with the Securities Exchange Commission (SEC) to evaluate subsequent events through the date the financial statements are issued. The new guidance became effective immediately for financial statements that are issued or available to be issued.





V.
Business Combinations





In December 2007, ASC 805 Business Combinations was issued (SFAS No. 141R, “Business Combinations”.)  This statement replaces SFAS 141 and defines the acquirer in a business combination as the entity that obtains control of one or more businesses in a business combination and establishes the acquisition date as the date that the acquirer achieves control. ASC 805 requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. ASC 805 also requires the acquirer to recognize contingent consideration at the acquisition date, measured at its fair value at that date. This statement is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is prohibited. The adoption of this statement did not have a material effect on the Company's consolidated financial statements.





VI.
Contracts Indexed to the Company’s Stock





In June 2008, the Financial Accounting Standards Board (“FASB”) issued Emerging Issues Task Force (“EITF”) Issue 07-5 (EITF 07-5), “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” which is now included in the FASB Accounting Standards Codification at ASC 815-40-15. This guidance requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement provisions. Instruments not indexed to their own stock fail to meet the scope exception of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, paragraph 11(a), now included in the FASB Codification at ASC 815-10-15-74(a), and should be classified as a liability and marked-to-market. ASC 815-40-15 was effective for fiscal years beginning after December 15, 2008 and thus, upon its adoption on April 1, 2009, was applied to the Company’s outstanding convertible notes. See Note 19(a)





VII.
Fair value measurement





In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 810) Improving Disclosures About Fair Value Measurements. This ASU provides further disclosure requirements for recurring and non-recurring fair value measurements. These disclosure requirements include transfers in and out of Level 1 and 2 and additional information relating to activity in Level 3 fair value measurements. The ASU also provides clarification on the level of disaggregation for disclosure of fair value measurement. The new disclosures and clarifications are effective for interim and annual periods beginning after December 15, 2009, except for disclosures about activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company is reviewing the impact of this standard in its consolidated financial statements.




F-48
 Valcent Products Inc.
 (A Development Stage Company)
 Consolidated Statements of Operations and Deficit
 (Expressed in Canadian Dollars)
 Years Ended March 31
  19.
Generally Accepted Accounting Principles in Canada and the United States(Continued)




VIII.
Stock Compensation





In April 2010, FASB issued ASU No. 2010-13, Stock Compensation[“ASU 2010-13”]. ASU 2010-13 amends FASB ASC Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. ASU 2010-13 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. ASU 2010-13 should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings (deficit). The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.





IX.
Revenue Recognition





In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition— Milestone Method[“ASU 2010-17”]. ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions in FASB ASC Subtopic 605-25, Revenue Recognition, Multiple- Element Arrangements. An entity often recognizes these milestone payments as revenue in their entirety upon achieving a specific result from the research or development efforts. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. Determining whether a milestone is substantive is a matter of judgment made at the inception of the arrangement. ASU 2010-17 is effective for fiscal years and interim periods within those fiscal years beginning on or after June 15, 2010. Early application is permitted. Entities can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted.  The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.




20.
Restatement of Previously Issued Canadian Accounts





Subsequent to the issuance of the Company’s March 31, 2010 Canadian GAAP accounts, management reviewed the determination of its functional currency in accordance with both Canadian GAAP and US GAAP for the year then ended and determined that the US dollar is the functional currency of the Company rather than the Canadian dollar as previously determined.  The March 31, 2010 consolidated financial statements have been restated for the effect of this change as follows:





Total assets, as previously reported

$
1,389,261Currency translation effect on property and equipment


(104,975
)Total assets, as restated

$
1,284,286Total shareholders' deficiency, as previously reported

$
(2,777,479
)Currency translation effect on property and equipment


(104,975
)Total shareholders' deficiency, as restated

$
(2,882,454
)Net loss, as previously reported

$
(6,437,359
)Currency translation effect on foreign exchange loss


(401,490
)Net loss, as restated


(6,838,849
)Loss per share, as previously reported


(0.15
)Currency translation effect on foreign exchange loss


(0.01
)Loss per share, as restated

$
(0.16
)







F-49





ITEM 19. EXHIBITS.




No.
Description of Exhibit1(i)(1)
Articles of Incorporation of Valcent Products Inc., dated January 19, 1996, incorporated by reference to Exhibit 1(a)(i) on Form 20-F filed October 13, 2005.1(i)(2)
Amendment to Articles of Incorporation of Valcent Products Inc., dated March 12, 1996, incorporated by reference to Exhibit 1(a)(ii) on Form 20-F filed October 13, 2005.1(i)(3)
Amendment to Articles of Incorporation of Valcent Products Inc., dated August 19, 1996, incorporated by reference to Exhibit 1(a)(i) on Form 20-F filed October 13, 2005.1(i)(4)
Amendment to Articles of Incorporation of Valcent Products Inc., dated June 30, 1998, incorporated by reference to Exhibit 1(a)(iv) on Form 20-F filed October 13, 2005.1(i)(5)
Amendment to Articles of Incorporation of Valcent Products Inc., dated July 8, 1999, incorporated by reference to Exhibit 1(a)(v) on Form 20-F filed October 13, 2005.1(i)(6)
Amendment to Articles of Incorporation of Valcent Products Inc., dated September 28, 1999, incorporated by reference to Exhibit 1(a)(vi) on Form 20-F filed October 13, 2005.1(i)(7)
Amendment to Articles of Incorporation of Valcent Products Inc., dated April 15, 2005, incorporated by reference to Exhibit 1(a)(vii) on Form 20-F filed October 13, 2005.1(i)(8)
Amendment to Articles of Incorporation of Valcent Products Inc., dated June 24, 2009 incorporated by reference to Exhibit 3.1 on Form 6-K filed July 16, 2009.1(ii)
By-laws of Valcent Products Inc., dated March 26, 1996, incorporated by reference to Exhibit 1(b) on Form 20-F filed October 13, 2005.1(iii)
Audit Committee charter of Valcent Products, Inc., dated March 2005, incorporated by reference to Exhibit 15.A on Form 20-F filed October 31, 2005.4.1
Master license agreement between Valcent Products Inc. and MK Enterprises LLC, dated July 29, 2005, incorporated by reference to Exhibit 4(a)(i) on Form 20-F filed October 13, 2005.4.2
Product development agreement between Valcent Products Inc. and MK Enterprises LLC, dated July 29, 2005, incorporated by reference to Exhibit 4(a)(ii) on Form 20-F filed October 13, 2005.4.3
Invention license agreement between Valcent Products Inc. and MK Enterprises LLC, dated July 29, 2005, incorporated by reference to Exhibit 4(a)(iii) on Form 20-F filed October 13, 2005.4.4
Consulting agreement between Valcent Products Inc. and M. Glen Kertz, dated July 29, 2005, incorporated by reference to Exhibit 4(a)(iv) on Form 20-F filed October 13, 2005.4.5
Consulting agreement between Valcent Products Inc. and MK Enterprises LLC, dated July 29, 2005, incorporated by reference to Exhibit 4(a)(v) on Form 20-F filed October 13, 2005.4.6
Form of liquidated damages convertible note agreement between Valcent Products Inc., and certain institutional note holders, dated April 6, 2006, incorporated by reference to Exhibit 10.12 on Form F-1/A filed June 30, 2006.4.7
Form of liquidated damages warrant agreement between Valcent Products Inc., and certain institutional note holders, dated April 6, 2006, incorporated by reference to Exhibit 10.13 on Form F-1/A filed June 30, 2006.4.8
Letter of Agreement between Valcent Products, Inc., Global Green Solutions Inc., Pagic LP, and West Peak Ventures of Canada Limited, dated October 2, 2006, incorporated by reference to Exhibit 10.17 on Form F-1/A filed February 7, 2007.4.9
Corporate Support Agreement between Valcent Products, Inc., and Sweetwater Capital Corporation dated November 1, 2006, incorporated by reference to Exhibit 4.14 on Form 20-F filed October 10, 2008.




67
 
 ITEM 19. EXHIBITS - continued


4.10
Limited Liability Company Operating Agreement of Vertigro Algae Technologies, LLC, between Valcent USA, Inc., and Global Green Solutions Inc., dated May 5, 2008, incorporated by reference to Exhibit 10.1 on Form 6-K filed May 14, 2008.4.11
Vertigro Algae Technologies LLC Technology License Agreement, between Valcent Products, Inc., Pagic LP, and West Peak Ventures of Canada Ltd., dated May 7, 2008, incorporated by reference to Exhibit 10.2 on Form 6-K filed May 14, 2008.4.12
Vertigro Algae Technologies LLC Amendment to the Technology License Agreement, between Valcent Products, Inc., Pagic LP, and West Peak Ventures of Canada Ltd., dated May 5, 2008 incorporated by reference to Exhibit 4.23 on Form 20-F filed October 10, 2008.





4.13
Form of convertible note agreement between Valcent Products Inc., and certain institutional note holders, dated July 16, 2008, incorporated by reference to Exhibit 4.1 on Form 6-K filed July 25, 2008.4.14
Form of Series A Warrant between Valcent Products Inc., and certain institutional note holders, dated July 16, 2008, incorporated by reference to Exhibit 4.2 on Form 6-K filed July 25, 2008.4.15
Form of Series B Warrant between Valcent Products Inc., and certain institutional note holders, dated July 16, 2008, incorporated by reference to Exhibit 4.3 on Form 6-K filed July 25, 2008.4.16
Note and Warrant Purchase Agreement, between Valcent Products, Inc., and certain institutional note holders, dated July 16, 2008, incorporated by reference to Exhibit 10.1 on Form 6-K filed July 25, 2008.4.17
Security Agreement, between Valcent Products, Inc., and Platinum Long Term Growth VI, LLC, dated July 16, 2008, incorporated by reference to Exhibit 10.2 on Form 6-K filed July 25, 2008.4.18
Patent Trademark and Copyright Security Agreement, between Valcent Products, Inc., Valcent USA Inc., Valcent Manufacturing, Ltd., Vertigro Algae Technologies LLC, Valcent Products EU Limited, and Platinum Long Term Growth VI, LLC, dated July 16, 2008 and incorporated by reference to Exhibit 4.29 on Form 20-F filed October 10, 2008.4.19
Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing, between, Valcent Products, Inc., Valcent Manufacturing, Ltd., Deborah P. Everett, and Platinum Long Term Growth VI, LLC, dated July 16, 2008, and incorporated by reference to Exhibit 4.30 on Form 20-F filed October 10, 2008.4.20
Hazardous Substances Indemnity Agreement between Valcent Products, Inc., Valcent USA Inc., Valcent Manufacturing, Ltd., Valcent Management LLC, Vertigro Algae Technologies LLC, Valcent Products EU Limited, and Platinum Long Term Growth VI, LLC, dated July 16, 2008, and incorporated by reference to Exhibit 4.31 on Form 20-F filed October 10, 2008.4.21
Purchase and Sale Agreement between Valcent USA Inc., Global Green Solutions, Inc., and Vertigro Algae Technologies LLC, dated September 26, 2008, incorporated by reference to Exhibit 10.1 on Form 6-K filed October 1, 2008.4.22
Intellectual Property Sales and Purchase Agreement between Pagic LP, Malcolm Glen Kertz, West Peak Ventures of Canada Ltd., and Valcent Products Inc.,  dated March 30, 2009, incorporated by reference to Exhibit 10.1 on Form 6-K filed July 13, 2009.4.23
Addendum dated March 8, 2010 to the Intellectual Property Sales and Purchase Agreement dated April 1, 2010 between Pagic LP, Malcolm Glen Kertz, West Peak Ventures of Canada Ltd., and Valcent Products Inc. incorporated by reference to Exhibit 10.1 on Form 6-K filed March 11, 2010.4.24
Form of Settlement Agreement and Lock up Agreement dated April, 2009 and May 11, 2009 respectively between Valcent Products and various individuals and entities being debt holders of the Company, incorporated by reference to Exhibit 10.1 and 10.2 on Form 6-K filed May 15, 2009.4.25
Settlement Agreement – Nova Skincare System / Dust Wolf dated March 30, 2009 between Valcent Products Inc., Pagic LP, Malcolm Glen Kertz, and West Peak Ventures of Canada Ltd. incorporated by reference to Exhibit 4.36 on Form 20-F filed on October 15, 2009.5.1
Subsidiaries of Valcent Products Inc., as of September 30, 2008 incorporated by reference to Exhibit 5.1 on Form 20-F filed October 10, 2008.12.1
Certification of Chief Executive Officer pursuant to Rule 13A-14(A) in Accordance with Section 302 of the Sarbanes-Oxley Act of 2002 FILED HEREWITH.12.2
Certification of Chief Financial Officer pursuant to Rule 13A-14(A) in Accordance with Section 302 of the Sarbanes-Oxley Act of 2002 FILED HEREWITH.13.1
Certification of Chief Executive Officer  pursuant to 18 U.S.C. Section 1350 as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 FILED HEREWITH.13.2
Certification Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 FILED HEREWITH.







68




SIGNATURES





The registrant here certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.





VALCENT PRODUCTS, INC.Date: November 17, 2010
By:
/s/ Chris BradfordChris Bradford

Chief Executive Officer

And Director















69