Item 2.01
Completion of Acquisition or
Disposition of Assets
As required by Item 2.01 of Form 8-K,
the following transactions were completed and are disclosed
hereby.
CLOSING
OF SHARE EXCHANGE AGREEMENT
The Share
Exchange.
As described in Item 1.01 above, on December 5,
2008, we entered into a Share Exchange Agreement with INVO Bioscience and INVO
Bioscience Shareholders.
At
Closing, pursuant to the terms of the Share Exchange Agreement, the INVO
Bioscience Shareholders transferred all of their shares of common stock in INVO
Bioscience to us in exchange for an issuance to them of an aggregate of
38,307,500 newly-issued shares of our Common Stock (or 71.9% of our Common
Stock), resulting in INVO Bioscience becoming our wholly-owned
subsidiary.
Prior to
the Share Exchange, Kathleen Karloff, our newly appointed CEO and director, and
Dr. Claude Ranoux, our newly appointed president and director, owned an
aggregate of 84,807 shares or 79% of the issued and outstanding capital stock of
INVO Bioscience. Following the Share Exchange, Kathleen Karloff and
Dr. Claude Ranoux own an aggregate of 31,363,632 shares or 58.49% of our issued
and outstanding Common Stock.
Changes Resulting from the Share
Exchange.
At this time, we intend to carry on INVO
Bioscience’s business as our sole line of business.
Changes to the Board of
Directors.
At Closing, the current officers and directors of
Emy’s resigned from their positions and Kathleen Karloff was appointed and
elected as chief executive officer, secretary and director. Dr.
Claude Ranoux was appointed and elected as president, treasurer and
director. All directors hold office for one-year terms until the
election and qualification of their successors. Officers are elected
by the board of directors and serve at the discretion of the board of
directors.
Accounting Treatment;
Change of Control
.
The Share Exchange is being accounted for as a
“reverse merger”
because
the
INVO Bioscience
Shareholders
now
own a majority of the outstanding
shares of
our
C
ommon
S
tock immediately following the Share
Exchange.
INVO
Bioscience
is
deemed the acquirer in the reverse
merger. Consequently, the assets and liabilities and the historical
operations that are reflected in the financial statements prior to the Share
Exchange are those of
INVO
Bioscience
and are
recorded at the historical cost basis of
INVO Bioscience
, and the consolidated financial
statements after completion of the Share Exchange include
our
assets and liabilities and
those of INVO Bioscience
, historical operations of
INVO Bioscience
, and
our
operations from the
C
losing of the Share Exchange.
Except as described in the previous paragraphs, no arrangements or
understandings exist among present or former controlling stockholders with
respect to the election of members of
our
board of directors and, to our
knowledge, no other arrangements exist that might result in a change of control
of
the Company.
Further,
because of the issuance of the shares of
our
C
ommon
S
tock pursuant to the Share Exchange, a
change in control of
the
Company
occurred on the
date of consummation of the Share Exchange.
We
will continue
to be a
“smaller reporting company,”
as defined under the Securities
Exchange Act of 1934, as amended (the
“Exchange Act”
), following the Share
Exchange.
Lock-Up Agreements
Lionshare
Venture Holdings, LLC (an affiliate of Lionshare Ventures, LLC), its assignees,
its directors, officers, Gerald Esposito, as managing director of Lionshare
Venture Holdings, LLC, and certain former and current officers of INVO
Bioscience have entered into a Shareholder Lock-Up Agreement, dated December 5,
2008 (the “Lockup Agreement”) relating to 2,000,000 shares of our Common Stock
(the “Lockup Shares”).
The Lockup Shares may not be transferred or
otherwise disposed of and will be held in a separate escrow until
January 31, 2009 pursuant to the Lockup Agreement.
FORM
10 INFORMATION
DESCRIPTION
OF BUSINESS
Company
Overview
INVO Bioscience
was
formed
in January 2007 under the laws of
the Commonwealth of
Massachusetts
under the
name “
Bio X
Cell
, Inc
,
”
which
wa
s the business s
uccessor to Medelle Corporation
(“
Medelle”
). Dr.
Claude
Ranoux was the founder and
vice p
resident of Medelle and
Kathleen
Karloff was a
v
ice
p
resident of
Medelle
.
Between 2001 and 2006,
Medelle
raised $
8
m
illion in venture capital
,
which was used to de
velop and validate
a device called
the
“
INVOcell
.”
Medelle
conduct
ed
pre-clinical safety testing
and
perform
ed
a human efficacy clinical
study
. Due to a
delay in obtaining
U.S.
Food and Drug Administration
(“
FDA
”
)
clearance for the INVOcell, venture
capi
tal invest
ment
s ceased
and
,
by
the end of 2006, Medelle ceased
operations. Medelle assigned all of its assets to a trustee who
liquidated those assets and distributed the proceeds to creditors. In
that process, Dr. Ranoux purchased
all
of
the assets
of
M
edelle
for $
20,000
and
contributed those assets to
Bio X Cell
,
Inc
. upon its formation
in January 2007
,
including four patents
related to the INVOcell
technology
.
On
December 5, 2008, INVO Bioscience completed the Share Exchange with Emy’s Salsa
Aji Distribution Company, Inc. (“Emy’s” or the “Company”). Emy’s was
incorporated on July 11, 2005, under the laws of the State of Nevada under the
name Certiorari Corp. In connection with the reverse merger, INVO
Bioscience became our wholly-owned subsidiary and the INVO Bioscience
Shareholders acquired control of Emy’s. We expect to change our name
to “INVO Bioscience, Inc.” as soon as the necessary filings can be
completed.
The
INVOcell Technology
Following
the Closing, our sole line of business is the distribution of the INVOcell
medical device designed to treat infertility at a far lower cost than in vitro
fertilization (“IVF”). The INVOcell technology is a fertility
treatment where either mild ovarian stimulation or no ovarian stimulation is
used. Using a mild stimulation protocol, 1-10 follicles are retrieved
in a physician’s office with the patient under light sedation with, or without,
local anesthesia. The follicle retrieval is performed using a vaginal
probe under ultrasound guidance. Eggs are identified immediately
after retrieval in the follicular fluid. During the INVO
procedure,
fertilization and embryo development occurs inside the woman’s vaginal cavity in
a disposable single use device, the INVOcell that holds the eggs, sperm and
culture medium.
Sperm
collection and preparation generally occur before egg
retrieval. Nutrient medium (~1ml) is placed in the inner vessel of
the INVOcell. Eggs and a fraction of motile sperm are placed into the
medium and the inner vessel is closed and secured in the protective outer
vessel. The INVOcell is placed in the patient’s vaginal cavity for an
incubation period of 2-3 days. A retention system can be used to
maintain the INVOcell system in the vagina during the incubation
period. The retention system consists of a diaphragm with holes in
the membrane to allow natural elimination of vaginal secretions. The
INVOcell is designed so that no vaginal fluids penetrate the outer vessel thus
ensuring that the inner vessel is not contaminated. Obtaining eggs,
sperm and media then inserting them into the INVOcell and then placing it in the
vagina takes approximately 90 minutes.
After 2-3
days, the patient returns to the physician’s office where the retention system
and the INVOcell are removed. The protective outer vessel is
discarded and the inner vessel is placed in INVO Bioscience’s patented holding
block in a vertical position for 15 minutes. Embryos are collected in
the micro chamber located at the bottom of the inner vessel. The
embryos can be directly viewed in the micro chamber in the holding block by
using a microscope. Embryos can be loaded directly from the device in
a transfer catheter from the INVOcell device. A trained operator can
readily identify the best embryos for transfer. The embryos to be
transferred are aspirated into a standard catheter for transfer into the
patient’s uterus. This second visit should take approximately 45
minutes. All INVO related medical procedures could be performed in a
physician’s office thereby avoiding the requirement of an IVF
facility.
SUMMARY
OF OPERATIONS
INVO
Bioscience’s principal business is providing its patented INVOcell technology to
help infertile couples have a baby. We will operate the INVOcell
business through our subsidiary
INVO Bio
science.
We have one principal product, the
manufacturing and distribution of the INVOcell technology.
No
sales of the INVO device occurred between the inception of INVO Bioscience
through September 30, 2008. I
n October 2008, INVO Bioscience invoiced
it
s first sales of the
INVOcell selling 95 units along with 11 INVO Blocks for
total
revenue of
$19,860. Further,
we have successfully
signed contracts for the purchase of
t
he INVO
cell device
in
Pakistan, India, Turkey, Austria and
the UK
.
To date, we have
taken orders for 5
,
875 INVOcell
devices.
INVO
Bioscience had no revenue for its first fiscal yearend December 31, 2007, which
is the year of its inception and through September 30, 2008, INVO Bioscience had
no revenue.
This
discussion is qualified in its entirety by the more detailed discussion of our
operations in the “Management’s Discussion and Analysis” section
below.
CURRENT
MARKET OPPORTUNITY
According
to the
European Society for
Human Reproduction
(“ESHRE”) in 2007, there are more than 100 million
infertile couples in the world. While there have been large increases
in the use of IVF, only about one million IVF cycles were performed in 2006,
which amounts to a treatment of less than 1% of the infertile couples
worldwide. Knowing that an average of 2-3 cycles of IVF is performed
per infertile couple, there are only 300,000-500,000 couples treated by
IVF. A survey by “
Resolve: The National Infertility
Association
,” the number one reason couples do not use IVF is cost and
geographical availability. INVO Bioscience can provide a locally
available treatment option at less than half the cost of IVF that will help
millions of infertile couples throughout the world where IVF is not currently
available.
IVF is an
effective treatment option for many infertile couples. INVO
Bioscience’s patented and proven INVO technology is a low cost, unique fertility
treatment option that is much simpler to perform than IVF. The
procedure can be provided without an IVF center and therefore can be available
in many more locations than IVF. INVO is well positioned to capture a
significant share of the unmet market needs. With INVO, fertilization
and early embryo development is done within the vaginal cavity rather than an
incubator. Oocytes and sperm are fertilized and developed into
embryos within the INVO device while contained by the woman’s vaginal
cavity.
Currently,
the 1% of infertile couples who receive infertility treatment, including IVF,
intra uterine insemination (“IUI”) and other fertility treatment, represents a
$6 billion worldwide market. This leaves 99% of the infertile couples
untreated with an estimated unmet market opportunity of $594 billion, a portion
of which, we believe will be met by the INVO device. Much of the
unmet market is located in developing countries where many patients cannot
afford, and have limited access to, IVF. We believe that developing
countries offer a large and ready market for the INVOcell.
In May
2008, we received notice that the INVOcell device meets all the essential
requirements of the relevant European Directive, and received CE
marking. The CE marking (also known as a CE mark) is a mandatory
conformity mark on many products placed on the single medical device market in
the European Economic Area (
i.e.,
Europe, Canada,
Australia, New Zealand and most parts of the Middle East)
(“EEA”). The CE marking (an acronym for the French "Conformité
Européenne") certifies that a product has met
Europe
health, safety and
environmental requirements, which ensure consumer safety.
Manufacturers in
Europe
and abroad must meet CE marking
requirements where applicable in order to market their products in
Europe
.
With CE marking, we now
have the necessary regulatory authority to distribute our INVOcell device in the
EEA. We had not sold any units of INVOcell from inception through
September 30, 2008. I
n
October 2008, INVO Bioscience invoiced its first sales of the INVOcell by
selling 95 units along with 11 INVO Blocks
.
Currently,
we are establishing agreements with distributors and beginning to train
physicians in the developing world including Asia, Latin America and the Middle
East. While we penetrate the infertility markets in Europe and Canada
along with the certain developing countries, we
anticipate also pursuing the
c
ompletion of
the FDA
’
s “
510(k)
”
process
.
We have completed
the first step for medical device
companies who manufacture Class 2 devices (and a small number of Class 1 and 3
devices)
, the
fil
ing of
a Premarket Notification with the
FDA
(
i.e.,
an FDA 510(k)
submission
)
.
Technically, the FDA does not "approve"
Class 1 and 2 medical devices for sale in the U
.
S
.
they give "clearance" for them to be
sold.
We
expect to receive clearance to market
in the U.S. by
2010 upon
completion of our clinical trial. We are
presently halfway completed with our
clinical trial and anticipate its completion by
the end of 2009
. H
owever, there can be no assurance that
we will receive such clearance by that date or ever
.
OPERATIONS
STRATEGY
INVO
Bioscience operates by outsourcing many key operational functions in the
development and manufacturing of the INVOcell device to keep fixed costs to a
minimum. Our most critical management and leadership functions are
carried out by our core team. We have contracted out the following
functions: manufacturing, packaging/labeling and sterilization of the device to
a certified manufacturer to mold the parts; to a medical manufacturing company
to assemble packages and label the product and to a sterilization specialist to
perform the gamma sterilization process. This expedites production
and eliminates the need for in-house capital equipment
expenditures.
To date,
we have completed a series of important steps in the development and
manufacturing of the INVOcell:
|
|
§
|
Development
: The
INVOcell
design
and development have been completed and released to
manufacturing.
|
|
|
§
|
Manufacturing
: All
parts and processes have been validated. Manufacturing of
inventory is ongoing. To date, we have 1,600 INVOcell devices
ready for sale. We have an additional 10,000 devices molded and
ready for sterilization and
packaging.
|
|
|
§
|
Clinical
Trials
: Safety and efficacy of the INVOcell device have
been tested on 84 patients at six investigational sites. We are
approximately 50 percent completed with our clinical
trials.
|
|
|
§
|
Support of
Practitioners
: Clinicia
n
s and laboratory
directors having used the INVO method
are enthusiastic
about the fact that it is a patient-friendl
y procedure, easy to perform,
simple and efficacious.
To date, we have taken orders for
5,875 INVOc
ell
d
evices
, however, we have 1,600 devices
ready for sale
.
|
|
|
§
|
CE
Mark
: INVO Bioscience has obtained a CE Mark that will
allow sales of INVO in Europe, Canada and many other
countries.
|
|
|
§
|
Initiate FDA
Clearance
: In parallel to the sale of products in Europe and Latin
America, INVO Bioscience intends to complete all clinical and non-clinical
studies by 2009 and thereafter intends to finalize its FDA 510 (k) filing
and receive FDA clearance by 2010.
|
COMPETITION
The
infertility industry is highly competitive and characterized by technological
improvements. New artificial reproductive technology (“ART”)
services, devices and techniques may be developed that may render the INVOcell
obsolete. Competition in the areas of infertility and ART services is
largely based on pregnancy rates and other patient
outcomes. Accordingly, the ability of our business to compete is
largely dependent on our ability to achieve adequate pregnancy rates and patient
satisfaction levels. The INVO procedure will offer an alternative
treatment to couples who currently do not have access to treatments because of
cost or location. Infertility clinics can expand their businesses by
offering INVO in satellite centers that can be opened at a substantially lower
cost than an IVF center. We are not aware of any direct competitors
to INVO Bioscience or the INVO process using the INVOcell
device. However, there are existing infertility treatment regimes
that the INVOcell will compete with when the infertile couple, in conjunction
with their physician, is choosing the treatment method for their
infertility. We believe that the menu of currently available clinical
infertility treatment methods is limited to IUI and IVF.
Competing
Treatments
Intra Uterine
Insemination
:
In
IUI treatments, ovarian stimulation protocols with induction of ovulation are
frequently used to recruit several follicles and improve clinical pregnancy
rates. When monitoring ovulation indicates that the female patient is
ready to ovulate, the male patient will produce a sperm sample in the fertility
doctor’s office. The sperm is then prepared and delivered to the
uterus through a catheter. IUI can only treat approximately 40% of
the causes of infertility. For example, IUI does not address
infertility causes such as tubal disease and other conditions that are treatable
by IVF and INVO. In addition, IUI does not produce the diagnostic
information such as fertilization that an IVF or INVO
cycle
produces. Approximately 600,000 IUI cycles are performed annually by
a subset of 5,000 of the 40,000 fertility doctors in the U.S. as well as by IVF
providers. In Europe, at least 550,000 IUI cycles are performed
annually. The cost of a single IUI treatment can range from $500 to
$4,000 per cycle in the U.S. and $500 to $2,000 in Europe. The
intra-country differences in cost depend on the stimulation protocol and the
accuracy of the ovulation monitoring used by physician.
In Vitro
Fertilization
:
IVF
addresses tubal factor, ovulatory dysfunction, diminished ovarian reserve,
endometriosis, uterine factor, male factor, unexplained infertility and other
causes. IVF bypasses the function of the fallopian tube by achieving
fertilization within a laboratory environment. Ovarian
hyper-stimulation is common with IVF treatments to recruit numerous follicles
and increase the chances for success. Follicles are retrieved
trans-vaginally using a vaginal probe and ultrasound
guidance. General anesthesia is frequently used due to the number of
follicles retrieved and the resulting discomfort experienced by the
patient. The eggs are identified in the follicular fluid and combined
with sperm and culture medium in culture dishes, which are placed in an
incubator with a temperature and gas environment designed to mimic the condition
of the fallopian tubes. Once the embryos develop, they are
transferred to the uterine cavity. The transfer of several embryos
allows an average success rate for IVF of 27%, but it is also responsible for a
high multiple birth rate of approximately 40% of IVF
pregnancies. Multiple births bring risks to mother and babies and
significant expenses for third party payers. In addition, due to the
high number of embryos produced in IVF, cryo-preservation of excess embryos
occurs in more than 30% of the cycles. In the U.S., there are
approximately 1,000 reproductive endocrinologists who collectively perform more
than 125,000 IVF cycles per year at 430 specialized facilities. In
Europe, nearly 300,000 IVF cycles are reportedly performed at more than 1,000
facilities.
The cost
to the patient for a single IVF cycle (including drugs) averages $12,400 in the
U.S. and can go as high as $20,000 depending on the IVF center. The
cost of drugs for an IVF cycle ranges from $2,500 to $3,500. The
average cost per live birth using IVF can exceed $50,000 since the successful
patient generally requires more than one cycle. Many patients who
would be good candidates for IVF are unable to access it because of the high
cost and lack of insurance reimbursement. Additional obstacles to IVF
often include significant distances to IVF clinics; travel costs; and time off
from work. In addition, some couples experience concerns regarding
IVF such as the possibility of laboratory errors resulting in receiving another
person’s embryo.
Competitors
We operate in a highly competitive
industry, which is
subject to competitive pricing and rapid
technological
change.
The market for
fertility treatment and
devices
are highly
competitive in terms of pricing,
functionality and service quality, the
ti
ming of development and
introduction
of new products and services and terms
of financing.
We face
competition from
all ART practitioners and device
manufacturers.
Our competitors may
implement new technologies before we do,
allowing them to offer more
at
tractively priced or enhanced products,
services or solutions than we
provide.
Some of our competitors may have greater
resources in certain
business segments or geographic markets
than we do.
We may also
encounter increased competition from new
market e
ntrants
or
alternative
ART
technologies
.
Our operating
results significantly depend on our
ability to compete in this market
environment, in particular on our
ability to adapt to economic
or regulatory changes, to introduce new
products to the market and
to
enhance the functionality while reducing
the cost of new
and existing
products.
Our
principal ART medical-device competitor is Anecova, a Swiss start-up life
sciences company with an intrauterine device under development for infertility
treatment. This device is a very small silicone tube with 360 micro
perforations. Oocytes are fertilized outside the device and then
placed in the tube, which is placed inside the woman’s uterus for early embryo
development. After 1-5 days, the device is removed and the best
embryo(s) are transferred back into the woman’s uterus. We believe
that the device is much more difficult to use than the INVOcell due to its size
and the requirement to place the device in the uterus, a sterile
environment. The precision manufacturing of the Anecova device will
drive its cost close to $1,500, which is higher than our price. If
the Anecova device is shown to be effective, it is likely that the device would
only be available in hospitals and IVF Centers at a significantly higher cost
than the INVOcell. This procedure still needs the complex equipment
of an IVF center.
Competitive
Advantages
We
believe that the INVOcell has the following competitive advantages:
|
|
·
|
Lower cost than IVF
with similar efficacy
: INVO will be substantially less
expensive than IVF due to the shorter time to execute the procedure, lower
costs of supplies, labor, capital equipment and overhead. An
IVF center requires at least $500,000 of laboratory capital equipment and
highly trained personnel. In contrast, the cost of laboratory
capital equipment to set-up an INVO procedure is approximately $30,000 and
does not require highly trained specialists beyond the traditional
obstetrician and gynecological practice (“Ob/Gyn”). The global
success rate for IVF varies dramatically from 13.6% to 40.5% with an
average of 27% per cycle (ESHRE, ICMART Committee, June 21,
2006). We foresee INVO will be offered at approximately $5,000
per cycle with a pregnancy rate comparable to traditional IVF (20% versus
27%, INVO to IVF, respectively). In Europe, IUI currently
averages $1,000 per cycle and IVF averages $5,000. INVO in
Europe will be offered at approximately $2,500 per cycle. In
Europe, the average cost per pregnancy for IVF is
$21,354.
|
|
|
·
|
Similar cost than IUI
with greater efficacy
: In the U.S. currently, IUI averages $1,500
per cycle with <10% pregnancy rate while IVF averages $12,400 per cycle
with an average of 27% pregnancy rate. With INVO, we believe
that the Ob/Gyn or reproductive endocrinologist practitioners will benefit
by providing a superior product than IUI with good financial margins,
efficacy rates more than double IUI while treating the full range of
infertility indications. In Europe, the average cost per
pregnancy using IUI is $12,000. The average cost per pregnancy
for IVF is $21,354 while for INVO it is only $13,888: a savings of more
than $7,000 per pregnancy. Using INVO could reduce annual
infertility costs in Europe by more than $650
million.
|
|
|
·
|
Greater geographic
availability
: There are approximately 430 IVF centers in the
U.S. In Europe, there are more than 1,000 IVF
centers. In addition, by having INVO geographically available
in Ob/Gyn offices, couples will not have the travel costs and absence from
work associated with IVF treatments. The medical staff at these
centers could easily learn INVO and offer it as a lower cost treatment
option for their patients through satellite centers. There are
also 5,000 Ob/Gyn physicians in the U.S. who offer infertility services
(IUI). Since INVO does not require a specialized lab facility,
large costly equipment or highly specialized staff, it can be offered in a
doctors’ office setting. Therefore, in the U.S. alone, INVO
could be 10 times more available than conventional IVF. This
also allows Ob/Gyn offices worldwide to offer INVO as an alternative or
follow up treatment to IUI and generate a significant new revenue
stream.
|
|
|
·
|
Greater patient
involvement
: With INVO, the patient uses her own body as the
incubation environment. This creates a greater sense of
involvement, comfort and participation for patients who know that the
fertilization is happening within their own bodies. In some
cases, this frees the couples from ethical or religious concerns, or fears
of laboratory mix-ups that could result in a patient receiving another
couple’s embryo(s).
|
SALES
AND MARKETING
Product
Pricing
We
anticipate employing the following pricing system for the INVOcell
technology. These prices were determined through discussions with our
informal advisory board of physicians and potential strategic partners and
reflect the innovative features of the device, the savings in physician’s
laboratory fixed costs and the amount that a physician will receive from
patients to perform INVO.
INVOcell device
:
Our
cost to manufacture,
package, sterilize, test and label the INVOcell device is less than $50 per
unit. We expect to sell the INVOcell device and its retention system
for between $175 and $850 per unit. IVF centers or Ob/Gyn groups
purchasing a large number of devices and promoting the INVO process will receive
discounted prices and a limited amount of free advertising of their facility on
our website. It is expected that the INVOcell will sell for $750 in
the U.S., which grants a single-use license under our patents. When
sold to infertility specialists located in Central and South America and Europe,
the price of the device will be reduced to between $200-$400 to reflect a
generally lower cost of infertility procedures in most of these countries and to
make INVOcell available to populations with lower incomes.
Holding/Warming
Blocks
:
The
holding blocks will be sold as a tool for viewing and retrieving the embryos
from the inner chamber. Each physician will need a minimum of two
blocks depending on the number of cycles he/she performs. The blocks
cost $100 per block and will sell for $200 and will constitute an additional
revenue stream.
Physician
Training
:
The price of the
training has been set at $1,500-$2,000 per physician practice /IVF center in
Europe and $3,000 in the U.S.
Fixed Laboratory
Equipment
:
The equipment used in
the INVO procedure (microscope with video system, bench centrifuge, incubator
without CO
2
, bench
warmer and laminar flow hood) is readily available in the
market. INVO Bioscience has had initial discussions with an equipment
supplier that has a mobile bench and hood with all the required
equipment. We intend to establish an agreement with this company to
provide INVO Bioscience’s customers with a discount and financing to facilitate
new customer entry into the INVO market in the future, however, there can be no
assurance that we will be successful in this effort. The complete set
up for the INVO procedure is approximately $33,000 in Europe and $50,000 in the
U.S.
Our
Sales Team
We
currently employ a vice-president of sales and marketing
who is charged with all of our sales
efforts. We anticipate growing our sales team to six in 2009,
however, if we do not raise sufficient capital
or generate sufficient revenue
to do so we will
no
t be successful in
growing our sales team. Our sales efforts follow two
approaches:
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|
a.
|
Direct
Physician Sa
l
es
through Distributors
-- In many countries, we intend to establish local distributors to access
the countries
’
markets. With the
distributor-to-phy
sician model, the distributors
will be selling to IVF centers and physicians directly. In
Canada, we have a signed distribution
a
greement with the
country
’
s largest infertility products
distributor, Meditech 1
st
,
who
intends to conform to this
model.
We
have signed
agreements in the following
countries
: Turkey,
Syria,
Pakistan
and
Thailand
|
|
|
b.
|
Direct
Sales to Physicians
-- We are also following a parallel path directly to leading infertility
doctors in regions where there is demand but we
have
not yet sig
ned distribution
agreements. Part of this path is the tra
in
ing of physicians on the use of
the INVO. To date,
we
have completed training
infertility doctors in Aust
ria,
Germany
, India
and the U.K. We
believe that the
physicians in these countries are key opinion
leaders who are influential in the fertility industry, which can assist us
in our launch of the INVO in those
regions.
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Target
Markets
Currently
and through 2009, we anticipate that we will launch the sale of the INVOcell
device in Europe, Canada, India and the Middle East. During 2010, or
at such time that we receive FDA approval, we anticipate launching the INVOcell
in the U.S. In 2010, we also anticipate the launch of the INVOcell
device in Latin America. In 2011, we anticipate the launch of the
INVOcell product in China, Russia and other countries where an alternative
treatment is needed. With the cost of the INVO procedure being less
than half the cost of IVF, we expect to penetrate 5% of the currently untreated
infertility market.
Worldwide
--
According to the
European
Society for Human Reproduction
(ESHRE, 2007) there are more than 100
million infertile couples in the world. About one million IVF cycles
were performed in 2006, which is less than 1% of the infertile couples
worldwide. More than 99 million infertile couples remain untreated
due to cost, availability, awareness and other factors.
U.S.
-- According to
the Centers for Disease Control, 7.3 million people in the U.S. have difficulty
conceiving. With only 350,000 couples receiving fertility treatment,
more than six million couples receive no treatment. According to
Integramed, Inc., a U.S. based network of fertility centers, 97% of the
untreated infertile couples do not receive treatment due to
cost. Working with our advisory board, we estimate that an INVO
procedure in the U.S. will cost approximately $5,000 dollars. ( same
as page 5)
Europe
-- Europe has
approximately 10 million infertile couples of which 137,000 are estimated to
have received IVF treatment and 183,000 received IUI (ESHRE) leaving 9.5 million
infertile couples untreated.
Preliminary
Sales Strategy
INVO
Bioscience has received the CE Mark that allows us to sell product in Europe,
Canada and other countries such as Latin America, the Middle East, India and
other parts of Asia. Our strategy is to launch product in the
developing world first because of the high demand and relatively low IVF
infrastructure. INVO Bioscience has hired a sales and marketing
professional, Mr. Sean Paradis, who has experience in forming partnerships with
medical distributors throughout the world. (doesn’t make sense to me
any way)
Franchising
Model
We are
presently establishing and implementing a franchising model in addition to the
foregoing direct sales efforts. We believe that a franchising model
whereby we assist with the establishment of fertility centers offering the
INVOcell technology could be the quickest manner to generate revenue from the
INVOcell. The franchising method offers control and influence over
how our product is distributed, in contrast to a distribution sales force that
sells the product alone. Franchising allows the sale of a standard
and proven business model that is complete with training and marketing material,
equipment, site selection, brand name recognition and a business
plan. We believe that this model could generate greater revenue than
that of the sale of INVOcell alone. Our preliminary forecasts suggest
that we could achieve a benefit of 4-5times the standard sales model
by incorporating a franchising system.
Current
Franchising Agreements
We have a
signed franchise agreement currently with a Turkish IVF product distributor to
establish INVO centers in his regions. We anticipate that Turkey will
be establishing the first INVO center, which we estimate to be open and
operational in the first quarter of 2009. We will use the franchising
model primarily in the Middle East, Latin America and the developing nations
that do not have access to infertility treatments.
We are
currently in talks with many other physicians and distributors in many regions
of the world developing this model. Further, we entered into a
written agreement on August 26, 2008, with Galaxy Pharma to set up INVO Centers
in Pakistan. We anticipate up to 20 new INVO Centers in Pakistan in
2009-2010, however, there is no assurance that we can achieve this many clinics
in this period, if ever. Galaxy Pharma has ordered 5,000 INVOcells
for use in these future clinics to date.
Other
Models
Latin
America
: INVO Bioscience intends to launch INVO in the Latin
American market during 2010. We believe that these countries have
more than five million infertile couples. INVO Bioscience initially
will target Venezuela, Brazil, Peru and Argentina due to market size in these
countries. In order to sell a class two device, such as the
INVOcell
,
INVO
Bioscience will establish a contract with local distributors who sell medical
devices in these countries. The distributor will complete the
registration of the product, which process permits us to sell the
INVOcell. No clinical trials or FDA approvals are
required.
United
States
: Launching INVO in the U.S. market requires 510(k)
clearance, which we anticipate receiving in 2010 upon completion of our clinical
trials estimated for 2009.
INVO Bioscience has
completed the required human confirmatory study. The births of normal
babies have been confirmed in this study using the INVOcell. It will
take nine months and approximately $500,000 of funding to complete the data
collection on all required subjects, analyze the data, have an independent audit
and submit the full 510(k) to the FDA. The FDA has 90 days to review
the submission from INVO Bioscience. All preclinical data and testing
has been completed and reviewed by FDA. We expect to receive approval
to sell the INVO without further studies at that time. However, there
is no assurance that will be the case. INVO Bioscience will launch
INVO through key IVF centers in the U.S. once FDA clearance is
achieved. Our U.S.-based board of advisors and participants in our
clinical trials have indicated a desire to be among the first to offer INVO to
their patients. The success of these IVF centers with INVO will
assist in expanding INVO Bioscience’s share of the IVF center market in the
U.S. INVO Bioscience will also target the 5,000 Ob/Gyn doctors with
experience in infertility treatment.
Insurance
Reimbursement for Infertility Treatment
Most
European countries have some level of coverage for infertility treatment, but
the level of coverage varies from country to country and even within
countries. For example, the National Health Service in the UK covers
20% of most costs for infertility treatment. However, that standard
is not applied universally throughout the country and some counties provide
almost none.
In
the U.S.,
fifteen
states mandate some form of insurance reimbursement for infertility
treatment. Three states mandate reimbursement for IVF, while other
states cover some form of infertility treatment, they may specifically exclude
IVF due to cost. In addition, fifteen other states are considering
mandating some form of coverage for infertility treatment. Finally,
there are bills under consideration in the U.S. Congress for a federal mandate
to provide insurance coverage for infertility treatments universally across the
nation.
We
believe that the INVO treatment will be treated favorably by insurance companies
because it lowers cost and has a high efficacy rate. In Europe, the
average cost per pregnancy using IUI is $12,000 and IUI is appropriate for only
40% of the infertile population. However, for INVO, which is
marginally more expensive at $13,888 per pregnancy, is a more effective
treatment for a majority of infertile couples. The average cost per
pregnancy for IVF is $21,354. Therefore, there is a savings of more
than $7,000 (over 33%) per pregnancy by using INVO versus IVF. Using
INVO could reduce infertility costs in Europe by more than $650
million.
Currently,
many third-party payers require that an infertile patient have at least three
cycles of IUI before going on to IVF. The aggregate success rate of
three IUI’s is 25%. Therefore, up to 75% of those patients are often
referred to IVF. In the future, third-party insurance payers could
save more than $7,000 per pregnancy by requiring the patient to try INVO
first.
Branding
and Promotion
We have a
new logo refined for the infertility market. We have trademarked the
logo, device and technology. At the same time, we are developing a
website that includes special pages for clinicians and patients. The
next generation website will include materials that medical professionals and
patients can print, including status reports and news items. It will
include a training video for potential customers who want to learn exactly how
INVO works.
REGULATION
Domestic
Regulations
The
manufacture and sale of our products are subject to extensive regulation by
numerous governmental authorities, principally by the FDA and corresponding
foreign agencies. The FDA administers the Federal Food, Drug and
Cosmetic Act and the regulations promulgated there under. We are
subject to the standards and procedures with respect to the manufacture of
medical devices and are subject to inspection by the FDA for compliance with
such standards and procedures. The FDA classifies medical devices
into one of three classes depending on the degree of risk associated with each
medical device and the extent of control needed to ensure safety and
effectiveness. The INVOcell device and process must secure a 510(k)
pre-market notification clearance before it can be introduced into
the United States market. The process of obtaining 510(k) clearance
typically takes several months and may involve the submission of limited
clinical data supporting assertions that the product is substantially equivalent
to an already approved device or to a device that was on the market before the
enactment of the Medical Device Amendments of 1976.
Every
company that manufactures or assembles medical devices is required to register
with the FDA and adhere to certain “good manufacturing practices” in accordance
with the FDA’s Quality System Regulation, which regulates the manufacture of
medical devices, prescribes record-keeping procedures and provides for the
routine inspection of facilities for compliance with such
regulations. The FDA also has broad regulatory powers in the areas of
clinical testing, marketing and advertising of medical devices.
Medical
device manufacturers are routinely subject to periodic inspections by the
FDA. If the FDA believes that a company may not be operating in
compliance with applicable laws and regulations, it can:
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place
the company under observation and re-inspect the
facilities;
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issue
a warning letter apprising of violating
conduct;
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detain
or seize products;
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enjoin
future violations; and
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assess
civil and criminal penalties against the company, its officers or its
employees.
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Inspection
by the FDA
INVO
Bioscience (formerly, as Medelle) was inspected for the first time by the FDA in
May 2004 following complaints by two former employees whose employment was
terminated several months earlier. The FDA’s inspection did not
reveal any defect in the product but did reveal insufficient documentation was
in place. The FDA issued a warning letter and an integrity hold under
its
Application Integrity Policy
(
“
AIP
”
)
. The
AIP or integrity hold is
a process where the FDA will not review
a company
’
s submission until
c
orrective and
p
reventative
a
ctions are taken by the com
pany to resolve major non-compliances
sited by the FDA. This process also requires a follow
-
up inspection by the FDA to clear the
integrity hold.
Medelle
took corrective action
and showed compliance with regulations.
The FDA
then asked Medelle to perform a clinical trial using the INVOcell device to
demonstrate the efficacy and safety of the device. The local FDA
agency conducted a second inspection in May 2006, at the end of the clinical
enrollment, which resulted in a Form 483 requiring only minor modifications that
were immediately answered. Generally, the FDA prepares a report after
inspecting a food, drug, medical device or biologic establishment that is
intended for internal FDA use and is not provided to the inspected institution
at the conclusion of the on-site visit. To provide the facility with
its own written list of discrepancies noted during the inspection, FDA developed
Form 483, “Notice of Inspectional Observations.” The FDA investigator
issues the Form 483 to reveal those observations directly linked to a violation
of regulations—not suggestions, guidance, or other comments.
In August
2006, the FDA issued a second warning letter to Medelle after its review of the
inspection data that was copied by the inspector and reviewed
separately. The warning letter requested clarification of the
information that the FDA did not understand while reviewing the copied
data. Within one month of responding to the warning letter, Medelle
received a letter dated September 28, 2006, from the FDA, that Medelle are in
substantial compliance with IDE regulations and no further action was required
by the company.
At
present, we are more than halfway completed with the clinical trials requested
by the FDA. We anticipate completing those clinical trials by the end
of 2009. Thus, we believe that we will receive FDA clearance by 2010,
though there can be no assurance that we will be successful in doing so on a
timely basis, if at all.
International
Regulations
We are
also subject to regulation in each of the foreign countries where our products
are sold. Many of the regulations applicable to our products in such
countries are similar to those of the FDA. The national health or
social security organizations of certain countries require that our products be
qualified before they can be marketed in those countries. Many of the
Asian and Latin American countries we are targeting do not have a formal
approval process.
CE
Mark
INVO
Bioscience’s activities during its development stage have included developing
the business plan, seeking regulatory clearance in Europe and the United States
and raising capital. In May 2008, INVO Bioscience received notice
that the INVOcell product met all the essential requirements of the relevant
European Directive(s), and received CE marking. The CE mark is a
mandatory conformity mark on many products placed on the single market in the
European Economic Area (EEA). The CE mark (an acronym for the French
"Conformité Européenne") certifies that a product has met EU health, safety and
environmental requirements, which ensure consumer safety.
With CE
marking, the Company now has the ability and necessary regulatory authority to
distribute its product in the European Economic Area (
i.e.,
Europe, Canada,
Australia, New Zealand, most parts of the Middle East and Latin
America).
INTELLECTUAL
PROPERTY
More than
800 cases of an INVO procedure have been documented in peer-reviewed journals
since the 1980s, using an incubation device not specifically designed for the
process but functionally capable of demonstrating success rates equivalent to
IVF at that time. The INVOcell device was specially developed and
manufactured to optimize the ease of use and effectiveness of the procedure at
an affordable price. This product development process has resulted in
five active patents worldwide covering both the INVOcell device and the INVO
process. These patents were transferred to and are the property of
Bio X Cell, Inc, a wholly own subsidiary of INVO Bio Science Inc.
LEGAL
PROCEEDINGS
Neither
we, nor any of our controlled affiliates, either direct or indirectly, including
INVO Bioscience are involved in any lawsuit outside the ordinary course of
business, the disposition of which would have a material effect upon either our
results of operations, financial position or cash flows.
PROPERTY
We
currently do not own any property. Our principal executive office is
located at
100 Cummings Center, Suite 421E,
Beverly, Massachusetts 01915,
pursuant to a lease entered into by INVO
Bioscience in January 2007 (the “lease”) for 3,294 square feet of general office
space. The lessor is Cummings Properties, LLC and the lease commenced
in January 2007 and concludes on December 31, 2008. The Company paid
a security deposit of $3,000, which was repaid to the Company in equal $500
installments over the first six months of the lease. The company
received no rent incentives or improvement allowances under this
agreement. The lease requires the Company to pay minimum lease
payments of $2,000 per month for the duration of the lease. The lease
is subject to a cost of living increase equal to the Boston, Massachusetts
Consumer Price Index at the beginning of each calendar year. We have
renewed this lease for an additional two-year term expiring on December 31,
2010. We are considering extending the lease for an additional 3
years, which would include a move to a larger office in the same building in
March 2009. The new office space comprises approximately 4,800 square
feet of general office space.
EMPLOYEES
As of
November 30, 2008, we have seven full-time employees. We consider our
relationship with our employees to be good.
FORWARD-LOOKING
STATEMENTS
This
Current Report on Form 8-K contains forward looking statements that involve
risks and uncertainties, principally in the sections entitled "Description of
Business,” “Risk Factors,” and “Management’s Discussion and Analysis of
Financial Condition or Plans of Operations.” All statements other
than statements of historical fact contained in this Current Report on Form 8-K,
including statements regarding future events, our future financial performance,
business strategy and plans and objectives of management for future operations,
are forward-looking statements. We have attempted to identify
forward-looking statements by terminology including “anticipates,” “believes,”
“can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,”
“potential,” “predicts,” “should,” or “will” or the negative of these terms or
other comparable terminology. Although we do not make forward-looking
statements unless we believe we have a reasonable basis for doing so, we cannot
guarantee their accuracy.
These
statements are only predictions and involve known and unknown risks,
uncertainties and other factors, including the risks outlined under “Risk
Factors” or elsewhere in this Current Report on Form 8-K, which may cause our or
our industry’s actual results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements. Moreover,
we operate in a very competitive and rapidly changing
environment. New risks emerge from time to time and it is not
possible for us to predict all risk factors, nor can we address the impact of
all factors on our business or the extent to which any factor, or combination of
factors, may cause our actual results to differ materially from those contained
in any forward-looking statements.
We have
based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy, short term
and long-term business operations, and financial needs. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in this Current Report on Form 8-K, and in particular, the risks
discussed below and under the heading “Risk Factors” and those discussed in
other documents we file with the Securities and Exchange Commission (“SEC”) that
are incorporated into this Current Report on Form 8-K by
reference.
The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto. We undertake no obligation to
revise or publicly release the results of any revision to these forward-looking
statements. In light of these risks, uncertainties and assumptions,
the forward-looking events and circumstances discussed in this Current Report on
Form 8-K may not occur and actual results could differ materially and adversely
from those anticipated or implied in the forward-looking statement.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
OR
PLAN OF OPERATIONS
Overview
The
following discussion is an overview of the important factors that management
focuses on in evaluating INVO Bioscience’s businesses, financial condition and
operating performance and should be read in conjunction with our financial
statements included in this Current Report on Form 8-K. This
discussion contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those
anticipated in these forward looking statements as a result of any number of
factors, including those set forth under the section entitled “Risk Factors” and
elsewhere in this Current Report on Form 8-K.
The Share Exchange is being accounted
for as a
“reverse
merger”
because
the
INVO Bioscience
Shareholders
now
own a majority of the outstanding
shares of
our
C
ommon
S
tock immediately following the Share
Exchange.
INVO
Bioscience
is
deemed the acquirer in the reverse
merger. Consequently, the assets and liabilities and the historical
operations that are reflected in the financial statements prior to the Share
Exchange are those of
INVO
Bioscience
and are
recorded at the historical cost basis of
INVO Bioscience
, and the consolidated financial
statements after completion of the Share Exchange include
our
assets and liabilities and
those of INVO Bioscience
, historical operations of
INVO Bioscience
, and
our
operations from the
C
losing of the Share Exchange.
The financial
results summarized below are based on INVO Bioscience’s audited balance
sheet as of December 31, 2007 and unaudited balance sheet as of September 30,
2008 and related audited statements of operations and retained
earnings and statements of cash flows.
Through
our wholly-owned subsidiary, INVO Bioscience, we operate in the biotechnology
industry and developed INVO technology to help infertile couples to have a
baby. In-vitro fertilization (IVF) is an effective treatment option
for most infertile couples. Our patented and proven INVOcell
technology is a low cost alternative to IVF that is much simpler to
perform. It can be provided in a physician’s office and, therefore,
can be available in many more locations than IVF. INVO uses a device,
the INVOcell, which we currently intend to price between $175-$450 to
distributors in the developing countries around the world and $400-$850 in
Europe and the U.S. We can manufacture, assemble, package, sterilize
and ship an INVOcell for under $50.
On
October 16, 2009, we entered into a signed an exclusive distributor agreement
with a distributor in Turkey providing for distribution throughout Turkey, North
Cyprus, Kosovo, Albania, Azerbaijan, Uzbekistan, Bulgaria and
Kazakhstan. We also have signed distribution agreements with
pharmaceutical distributors in Canada and Thailand and are in negotiations with
other distributers, including Galaxy Pharma, a distributor in India and parts of
the Middle East.
Results
of Operations
INVO Bioscience was founded in January
2007. We have generated no sales of our primary product, the INVOcell
device, through September 30, 2008.
We have been
focusing our efforts on
introduc
ing
the INVOcell into new markets as we
await FDA approval in the U.S. To that end, we have signed contracts for
the purchase of the INVOcell device in Pakistan, Turkey, Canada and Thailand.
To dat
e, we have taken orders for 5,875
INVOcell devices.
For the fourth quarter 2008 to date,
INVO Bioscience has revenues of approximately $45,000 for the sale of the
INVOcell, selling 195 units along with INVO Blocks and associated
accessories.
Operational,
general and administrative expenses were $210,520 for year ended December 31,
2007 and $,252,639 for the nine-month period ended September 30,
2008.
We
currently
are
incurring a net loss as
we
continue to market
our
product and
proprietary
pr
ocess
as we endeavor to
increase
our
revenue base. It is expected that
we
will continue to generate net losses
for the next few quarters.
We cannot predict what our level of
activity will be over the next 12 months.
However, INVO Bioscience
anticipates
that it will
launch the sale of the INVOcell device in Canada, Europe, India and the Middle
East through established distributors, IVF
c
enters and
p
hysicians. With the cost of
the INVO procedure being less than half the cost of IVF,
we believe we can
pen
etrate 5% of the currently untreated
infertility market
, though
there can be no assurance that we will be successful in doing so
.
To achieve this plan, we will require
additional financing.
As
we
expand
our
distribution base
, our
costs and expenses will
exceed the
cash flow
being generated and
therefore we
will
require additional
capital.
Due to our early stage of growth, each
of the items from our Statement of Operations may not be indicative of future
levels of activity.
As such, we expect our costs and
loss
es
to i
ncrease in future periods as we seek to
ramp up sales and incur infrastructure costs.
As we move forward
,
the
C
ompany
expects to
expand its sales force and clinical
trainers and continuing to travel to more continents.
Additionally
,
the
C
ompany
expects t
o
upgrad
e
its computer software in
2009 in
the areas of
customer relationship management,
material requirements planning/inventory tracking and financial
reporting
.
We had a
net loss of $652,508, a working capital deficiency of $58,713, a stockholder
deficiency of $309,173, and cash used in operations of $395,218 and $61,912 for
the nine-month periods ended September 30, 2008 and 2007. This raises
substantial doubt about our ability to continue as a going
concern. Our ability to continue as a going concern is dependent on
our ability to raise additional capital and implement our business
plan. Our financial statements attached do not include any
adjustments that might be necessary if we are unable to continue as a going
concern.
Liquidity
and Capital
Resources
As of
September 30, 2008, we had $26,452 in cash and no cash
equivalents. Historically, we were funded through sales of our common
stock and loans from or collateralized by Dr. Claude Ranoux. As of
December 31, 2007, the balance of Dr. Ranoux’s loan was $93,545. As
of September 30, 2008, Dr. Ranoux’s total loan amount with interest was $96,462
(the “Principal Amount”). We agreed to repay the Principal Amount,
plus interest that accrues at 5% per annum, to Dr. Ranoux by March 31,
2009. Dr. Ranoux may elect to convert the Principal Amount plus all
accrued interest into shares of our Common Stock at any time prior to payment
upon ten (10) days advance written notice before March 31, 2009. The
conversion price shall be the fair market value of a share of Common Stock on
the date of conversion.
In
addition to the funding we received by Claude Ranoux, on May 19, 2008, Lionshare
Ventures LLC (“LSV”) signed a term sheet in favor of the Company whereby it
agreed to invest $1,500,000 in exchange for shares of INVO Bioscience’s common
stock. As of November 30, 2008, LSV has invested $585,000 in INVO
Bioscience.
Following
the Share Exchange, LSV remains obligated to contribute $450,000 to the Company,
which amount is part of the $1,500,000 agreed to in May 2008, by February 28,
2009, as consideration for previously issued shares of Common
Stock. To secure the payment of the $450,000, Lionshare Venture
Holdings, LLC has pledged 2,000,000 shares of the Emy’s Common Stock it owns to
the Company.
Immediately
following the Closing, we entered into the Securities Purchase Agreement with
Barry Honig and Whalehaven Capital Fund Limited. Pursuant to the
Securities Purchase Agreement, the investors invested $375,000 in exchange for
375,000 shares of our Common Stock at a price of $1.00 per share, which amount
is part of the $1,500,000 commitment agreed to by LSV in May 2008 in view of
LSV’s introduction of these investors.
In
addition, we raised $90,000 from four investors between June 2008 and October
2008, which amount is part of the $1,500,000 commitment agreed to by LSV in May
2008 in view of LSV’s introduction of these investors.
The
Company maintains a $50,000 working capital line of credit with Century
Bank. Interest is payable monthly at the rate of .24% above the
bank’s prime lending rate. As of December 31, 2007, the rate was
7.99%. This line of credit matures May 31, 2010. At
December 31, 2007, the balance outstanding on the line of credit was
$49,221. At September 30, 2008, the interest rate was 5.49% and the
balance outstanding on the line of credit was $50,000.
Off
Balance Sheet Arrangements
Under SEC
regulations, we are required to disclose our off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on our
financial condition, such as changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors. An off-balance sheet
arrangement means a transaction, agreement or contractual arrangement to which
any entity that is not consolidated with us is a party, under which we
have:
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Any
obligation under certain guarantee contracts;
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Any
retained or contingent interest in assets transferred to an unconsolidated
entity or similar arrangement that serves as credit, liquidity or market
risk support to that entity for such
assets;
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Any
obligation under a contract that would be accounted for as a derivative
instrument, except that it is both indexed to our stock and classified in
stockholder’s equity in our statement of financial position;
and
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Any
obligation arising out of a material variable interest held by us in an
unconsolidated entity that provides financing, liquidity, market risk or
credit risk support to us, or engages in leasing, hedging or research and
development services with us.
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We do not
have any off-balance sheet arrangements that we are required to disclose
pursuant to these regulations. In the ordinary course of business, we
enter into operating lease commitments, purchase commitments and other
contractual obligations. These transactions are recognized in our
financial statements in accordance with generally accepted accounting principles
in the United States.
Critical
Accounting Policies and Estimates
The
discussion and analysis of INVO Bioscience’s financial condition presented
in this section are based upon the audited consolidated financial statements of
INVO Bioscience, which have been prepared in accordance with the generally
accepted accounting principles in the United States. During the
preparation of the financial statements, INVO Bioscience is required to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, INVO Bioscience evaluates based
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions. A summary
of significant accounting policies are included below. Management
believes that the application of these policies on a consistent basis enables us
to provide useful and reliable financial information about our operating results
and financial condition.
Property,
Plant and Equipment
We record
property and equipment at cost. Depreciation and amortization are
provided using the straight-line method over the estimated economic lives of the
assets, which are from five to 40 years. We capitalize the
expenditures for major renewals and improvements that extend the useful lives of
property and equipment. Expenditures for maintenance and repairs are
charged to expense as incurred. We review the carrying value of
long-lived assets for impairment at least annually or whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of long-lived assets is measured by a
comparison of its carrying amount to the undiscounted cash flows that the asset
or asset group is expected to generate. If such assets are considered
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the property, if any, exceeds its fair market
value.
Stock
Based Compensation
In
December 2004, the FASB issued SFAS No. 123(R), "
Share-Based Payment,
" which
replaces SFAS No. 123 and supersedes APB Opinion
No. 25. Under SFAS No. 123(R), companies are required to
measure the compensation costs of share based compensation arrangements based on
the grant date fair value and recognize the costs in the financial statements
over the period during which employees are required to provide
services. Share based compensation arrangements include stock
options, restricted share plans, performance based awards, share appreciation
rights and employee share purchase plans. In March 2005, the SEC
issued Staff Accounting Bulletin (“SAB”) No. 107. SAB 107
expresses views of the staff regarding the interaction between SFAS
No. 123(R) and certain SEC rules and regulations and provides the staff's
views regarding the valuation of share based payment arrangements for public
companies. SFAS No. 123(R) permits public companies to adopt its
requirements using one of two methods. On April 14, 2005, the
SEC adopted a new rule amending the compliance dates for SFAS
123R. Companies may elect to apply this statement either
prospectively, or on a modified version of retrospective application under which
financial statements for prior periods are adjusted on a basis consistent with
the pro forma disclosures required for those periods under SFAS
123. Effective January 1, 2006, we fully adopted the provisions
of SFAS No. 123R and related interpretations as provided by SAB
107. As such, compensation cost is measured on the date of grant as
the excess of the current market price of the underlying stock over the exercise
price. Such compensation amounts, if any, are amortized over the
respective vesting periods of the option grant.
Revenue
Recognition
Revenue
is recognized when earned. Our revenue recognition policies comply
with the SEC's Staff Accounting Bulletin ("SAB") No. 104 "
Revenue Recognition.
"
Essentially, we recognize revenue when persuasive evidence of an
arrangement exists, services have been rendered or product delivery has
occurred, the sales price to the customer is fixed or determinable, and
collectability is reasonably assured.
Recently
Issued Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "
Business Combinations
" ("SFAS
No. 141R"). SFAS No. 141R is a revision to SFAS
No. 141 and includes substantial changes to the acquisition method
used to account for business combinations (formerly the "purchase accounting"
method), including broadening the definition of a business, as well as revisions
to accounting methods for contingent consideration and other contingencies
related to the acquired business, accounting for transaction costs, and
accounting for adjustments to provisional amounts recorded in connection with
acquisitions. SFAS No.141R retains the fundamental requirement of SFAS
No. 141 that the acquisition method of accounting be used for all
business combinations and for an acquirer to be identified for
each business combination. SFAS No. 141R is effective for
periods beginning on or after December 15, 2008, and will apply to all
business combinations occurring after the effective date. The Company
is currently evaluating the requirements of SFAS No. 141R.
In
December 2007, the FASB also issued SFAS No. 160, "
Non-controlling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51, Consolidated Financial Statements.
" This
Statement amends ARB No. 51 to establish new standards that will govern the
(1) accounting for and reporting of non-controlling interests in partially owned
consolidated subsidiaries and (2) the loss of control of
subsidiaries. Non-controlling interest will be reported as part of
equity in the consolidated financial statements. Losses will be
allocated to the non-controlling interest, and, if control is maintained,
changes in ownership interests will be treated as equity
transactions. Upon a loss of control, any gain or loss on the
interest sold will be recognized in earnings. SFAS No. 160 is
effective for periods beginning after December 15, 2008. The
Company is currently evaluating the requirements of SFAS
No. 160.
In
March 2008, FASB issued SFAS No. 161, “
Disclosures about Derivative
Instruments and Hedging Activities.”
The new standard is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to understand
their effects on an entity’s financial position, financial performance and cash
flows. It is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. We are currently evaluating the impact of
adopting SFAS No.161 on our consolidated financial statements.
RISK
FACTORS
Investing in
our
C
ommon
S
tock involves a high degree of risk.
Prospective investors should carefully consider the risks described below,
together with all of the other information included or referred to in this
Current Report on Form 8-K, before purchasing
our Common Stock
. There are numerous and varied
risks, known and unknown, that may prevent
us
from achieving
our
goals. The risks described below
are not the only ones
we
will face. If any of these risks
actually occurs,
our
business, financial condition or
results of operation may be materially adversely affected. In such
case, the trading price of
our C
ommon
S
tock could decline and investors could
lose all or part of their investment. The risks and uncertainties
described below are not exclusive and are intended to reflect the material risks
that are specific to
us
, material risks related
to
our
industry and material risks related to
companies that undertake a public offering or seek to maintain a class of
securities that is registered or
quoted on an
over-the-counter
market.
The Company’s future revenues will be
derived from the production
and distribution of the INVOcell
in the United
States
and around the
world
. There are
numerous risks, known and unknown, that may prevent
us
from achieving
our
goals including, but not limited to,
those described below. Additional unknown risks may also
impair
our
financial performance and business
operations.
Our
business, financial condition and/or
results of operations may be materially adversely affected by the nature and
impact of these risks. In such case, the market value of
our
securities could be detrimentally
affected, and investors may lose part or all of their investment. Please
refer to the information
in this report for further details
pertaining to
our
business and financial
condition.
Risks
Relating to Our Company
Our business has posted net operating
losses, has limited operating history and will need capital to grow and finance
its operations.
From the inception of our operating
subsidiary,
INVO
Bioscience
,
until
September 30, 2008,
INVO Bioscience
ha
d
a
net loss of
$652,508
.
INVO Bioscience has had
a
limited operating histor
y
and
is
essentially an early-stage
operation.
We
will continue to be dependent on having
access to working capital that will allow
us
to finance operations during its growth
period. Continued net operating losses together with limited working
capital make investing in
our Common Stock
a high-risk proposal. The
adverse effects of a limited operating history include reduced management
visibility into forward sales, marketing costs, customer acquisition and
retention
,
which could lead to missing targets for
achievement of profitability.
We
require substantial additional capital to continue as a going concern which if
not obtained could result in a need to curtail or cease operations.
As
reflected in the accompanying financial statements, the Company is in the
development stage with no revenues, has a net loss of $652,508, a working
capital deficiency of $58,713, a stockholder deficiency of $309,173, and cash
used in operations of $395,218 and $61,912 for the nine-month periods ended
September 30, 2008 and 2007. This raises substantial doubt about its
ability to continue as a going concern. The ability of the Company to
continue as a going concern is dependent on the Company’s ability to raise
additional capital and implement its business plan. The financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
We
require substantial additional funding to meet our future operating and capital
expenditure requirements. To execute on our business plan
successfully, we will need to raise additional money in the
future. The exact amount of funds raised, if any, will determine how
aggressively we can grow and what additional projects we will be able to
undertake. No assurance can be given that we will be successful that
we will be able to raise capital when needed or at all, or that such capital, if
available, will be on terms acceptable to us. If we are not able to
raise additional capital, our business will likely suffer.
Our business is subject to significant
competition.
The
infertility industry is highly competitive and characterized by technological
improvements. New artificial reproductive technology (“ART”)
services, devices and techniques may be developed that may render obsolete the
INVOcell. Competition in the areas of infertility and ART services is
largely based on pregnancy rates and other patient
outcomes. Accordingly, the ability of our business to compete is
largely dependent on our ability to achieve adequate pregnancy rates and patient
satisfaction levels. Our business operates in highly competitive
areas that are subject to continual change. New health care providers
and medical technology companies entering the market may reduce our market
share, patient volume and growth rates. Additionally, increased
competitive pressures may require us to commit more resources to our marketing
efforts, thereby increasing our cost structure and affecting our
profitability. There can be no assurance that we will be able to
compete effectively nor can there be assurance that additional competitors will
not enter the market, or that such competition will not make it more difficult
for us to enter into additional contracts with
fertility
clinics or open profitable vein care clinics.
We
need to manage growth in operations to maximize our potential
growth.
In order
to maximize potential growth in our current and potential markets, we believe
that we must expand the scope of our services in the bioscience
industry. This expansion will place a significant strain on our
management and our operational and sales systems. We expect that we
will need to continue to improve our INVO technology, operating procedures and
management information systems. We will also need to effectively
train, motivate and manage our employees. Our failure to manage our
growth could disrupt our operations and ultimately prevent us from generating
the revenues we expect.
Our
internal growth strategy may not be successful which may result in a negative
impact on our growth, financial condition, results of operations and cash
flow.
One of
our strategies is to grow internally through increasing the customers we
target. However, many obstacles to this expansion exist, including,
but not limited to, increased competition from similar businesses, unexpected
costs, costs associated with marketing efforts and maintaining a strong client
base. Therefore, we cannot assure you that we will be able to
successfully overcome such obstacles and establish our services in any
additional markets. Our inability to implement this internal growth
strategy successfully may have a negative impact on our growth, future financial
condition, results of operations or cash flows.
We
may be unable to implement our strategies in achieving our business
objectives.
Our
business plan is based on circumstances currently prevailing and the bases and
assumptions that certain circumstances will or will not occur, as well as the
inherent risks and uncertainties involved in various stages of
development. However, there is no assurance that we will be
successful in implementing our strategies or that our strategies, even if
implemented, will lead to the successful achievement of our
objectives. If we are not able to implement our strategies
successfully, our business operations and financial performance may be adversely
affected.
Our products
incorporate intellectual property rights
developed by us
that
may
be difficult to protect or
may be found to
infringe on the rights of others
.
While we
currently own
four
patents, there can be no assurance that
any
of these patents will not be challenged,
invalidated or circumvented,
or that any rights granted
unde
r these patents will in
fact provide competitive
advantages to us.
The
U.S. or
E
U could
plac
e
restrictions on the
patentability of
medical devices
.
A
ny limitations
on the patentability of
medical devices
may materially affect our
business.
We utilize a
combination of trade secrets,
confidentiality policies,
non-disclosure and other contractual
arrangements in addition to relying
on patent, copyright and trademark laws
to protect our intellectual
property rights.
However, these measures may not be
adequa
te to
prevent or deter infringement or other
misappropriation.
Moreover, we
may not be able to detect unauthorized
use or take appropriate and
timely steps to establish and enforce
our proprietary rights.
In fact,
existing laws of some countries in
which
we conduct business
offer only
limited protection of our intellectual
property rights, if at all
.
As the number of market entrants as well
as the
complexity of the technology increases,
the possibility of functional
overlap and inadvertent infringement
o
f intellectual property
rights also
increases
.
We
must defend our intellectual property rights from infringement through extensive
legal action.
Third parties
m
ay assert in the future,
claims against us alleging that we
infringe their intellectual proper
ty
rights.
Defending such claims may be expensive,
time consuming and
divert the efforts of our management
and/or technical personnel.
As a
result of litigation, we could be
required to pay damages and other
compensation, develop non-infringing
products
or
enter
into royalty or licensing agreements.
However, we cannot be
certain
that any such licenses, if available at
all, will be available to us on commercially
reasonable terms.
We regard
our trade secrets, patents and similar intellectual property as critical to our
success. We rely on patent and trade secret law, as well as
confidentiality and license agreements with certain of our employees, customers
and others to protect our proprietary rights. No assurance can be
given that our patents will not be challenged, invalidated, infringed or
circumvented, or that our intellectual property rights will provide competitive
advantages to us. In addition, we intend to defend our intellectual
property rights from infringement through legal action if needed, which could be
very costly which would adversely affect our profitability. Our
limited capital resources could put us
at a disadvantage if we
are
required to take legal action
to enforce our intellectual
property
rights
.
We
face potential liability as a provider of a medical device. These
risks may be heightened in the area of artificial reproduction.
The
provision of medical devices entails the substantial risk of potential claims of
tort injury claims. The Company does not engage in the practice of
medicine or assume responsibility for compliance with regulatory requirements
directly applicable to physicians. Although we currently maintain
product liability insurance that we believe is adequate as to risk and amount,
successful claims could exceed the limits of our insurance and could have a
material adverse effect on our business, financial condition or operating
results. Moreover, there can be no assurance that we will be able to
obtain such insurance on commercially reasonable terms in the future or that any
such insurance will provide adequate coverage against potential
claims. In addition, a claim asserted against
us could be costly to
defend, could consume management resources and
could adversely affect our reputation and
business, regardless of the merit or eventual outcome of such
claim.
There are
inherent risks specific to the provision of infertility and ART
services. For example, the long-term effects on women of the
administration of fertility medication, integral to most infertility and ART
services, are of concern to certain physicians and others who fear
the medication may prove to be carcinogenic or cause other medical
problems. Currently, fertility medication is critical to most
infertility and ART services and a ban by the FDA or foreign regulatory or other
limitation on its use would have a material adverse effect on our
business.
If we fail to
maintain adequate quality standards for our products, our business may be
adversely affected and our reputation harmed.
Our customers are
expecting that our
products
will perform as we
claim. Our
manufacturing
companies and
packaging
processes
will be relied up
on
heavily.
A failure to sustain the specified
quality requirements could result in the loss of
demand for our
products.
Delays
or quality lapses in our production lines could result in substantial economic
losses to us.
Although we believe that our continued
focus on quality throughout the Company adequately addresses these risks, there
can be no assurance that we will not experience occasional or systemic quality
lapses in our manufacturing and service operations.
We have limited manufacturing
capabilities, and if our manufacturing capabilities are insufficient to produce
an adequate supply of products at appropriate quality levels, our growth could
be limited and our business could be harmed
.
If we experience significant or
prolonged quality problems, our business and reputation may be harmed, which may
result in the loss of customers, our inability to participate in future customer
product opportunities and reduced revenue and
earnings.
We heavily rely on third party package
delivery services, and a significant disruption in these services or significant
increases in prices may disrupt our ability to import or export materials,
increase our costs and lower our profitability.
We ship a significant portion of our
products to our customers through independent package delivery
companies.
If any of our key third party package
delivery providers experience a significant disruption such that any of our
products, components or raw materials cannot be delivered in a timely fashion or
such that we incur additional shipping costs that we could not pass on to our
customers, our costs may increase and our relationships with certain of our
customers may be adversely affected.
In particular, if our third party
package delivery providers increase prices and we are not able to find
comparable alternatives or make adjustments to our delivery network, our
profitability could be adversely affected.
We
depend on our key management personnel and the loss of their services could
adversely affect our business.
We place
substantial reliance upon the efforts and abilities of our executive officers,
Kathleen Karloff and Claude Ranoux. The loss of the services of our
executive officers could have a material adverse effect on our business,
operations, revenues or prospects. We do not maintain key man life
insurance on the lives of these individuals.
We
may never pay any dividends to shareholders.
We have
never paid any dividends and have not declared any dividends to date in
2008. Our board of directors does not intend to distribute dividends
in the near future. The declaration, payment and amount of any future
dividends will be made at the discretion of the board of directors, and will
depend upon, among other things, the results of our operations, cash flows and
financial condition, operating and capital requirements, and other factors as
the board of directors considers relevant. There is no assurance that
future dividends will be paid, and, if dividends are paid, there is no assurance
with respect to the amount of any such dividend.
We
may have difficulty raising necessary capital to fund operations because of
market price volatility for our shares of Common Stock.
In recent
years, and indeed in recent months in particular, the securities markets in the
U.S. and around the world have experienced a high level of price and volume
volatility, and the market price of securities of many companies have
experienced wide fluctuations that have not necessarily been related to the
operations, performances, underlying asset values or prospects of such
companies. For these reasons, our shares of Common Stock can also be
expected to be subject to volatility resulting from purely market forces over
which we will have no control. If our business development plans are
successful, we may require additional financing to continue to develop and
exploit existing and new products and services related to our industries and to
expand into new markets. The exploitation of our services may be
dependent therefore upon our ability to obtain financing through debt and equity
or other means.
Currency
exchange fluctuations may affect the results of our operations.
We intend
distribute our INVOcell product throughout the world. We intend to
transact our international sales in U.S. dollars, and European, Latin American
and Asian currencies. Our results of operations thus will be affected
by fluctuations in currency exchange rates. Although we may enter
into foreign currency exchange forward contracts from time to time to reduce our
risk related to currency exchange fluctuation, our results of operations might
still be impacted by foreign currency exchange rates. Because we do
not anticipate that we will hedge against all of our foreign currency exposure,
our business will continue to be susceptible to foreign currency
fluctuations.
We are subject to risks in connection
with c
hanges in
international, national and local economic and market conditions because of
global developments
.
Our business is
subject to risks in connection with
changes in international, national and local economic and market conditions
because of global developments.
Beyond the risks of doing business
in
ternationally
, there is also the potential impact of
changes in the international, national and local economic and market conditions
as a result of global developments, including the effects of global financial
crisis, effects of terrorist acts and war on terrorism, U
.
S
.
and Canadian presence in Iraq and
Afghanistan, potential conflict or crisis in North Korea or Middle East and
current global credit
crisis
, negatively
affecting
infertile
couples’ ability to pay for fertility treatment around the
world.
International sales
will
account for
a significant part of our
revenue
especially in the ensuing period before
we obtain FDA clearance, if ever. We will experience additional
r
isks associated with these
sales include:
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instability;
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export
controls;
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changes in legal and regulatory
requirements;
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United States and foreign
government policy changes affecting the markets for our
products; and
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changes in tax laws and
tariffs.
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Any of these factors could have a
material adverse effect on our business, results of operations and financial
condition.
We sell our products in certain
international markets mainly through independent distributors.
If a distributor fails to meet annual
sales goals, it may be difficult and costly to locate an acceptable substitute
distributor.
If a change in our distributors becomes
necessary, we may experience increased costs, as well as a substantial
disruption in operations and a resulting loss of
revenue.
We are subject to
significant regulation by the government and other regulatory
authorities.
Our business is heavily regulated in the
United States and internationally.
In addition to the FDA, various other
federal, state and local regulations also apply.
If we fail to comply with FDA or other
regulatory requirements, we could be subjected to civil and criminal penalties,
or even required to suspend or cease operations.
Any such actions could severely curtail
our sales.
In addition, more restrictive laws,
regulations or interpretations could be adopted, which could make compliance
more difficult or expensive or otherwise adversely affect our business.
We devote substantial resources to
complying with laws and regulations; however, the possibility cannot be
eliminated that interpretations of existing laws and regulations will result in
findings that we have not complied with significant existing regulations.
Such a finding could materially harm the
business.
Moreover, healthcare reform is
continually under consideration by regulators, and the Company does not know how
laws and regulations will change in the future.
We
are conducting clinical trials related to newer technologies that may prove
unsuccessful and have a negative impact on future sales.
We are
conducting clinical trials related to the INVOcell. While we are
confident in the future outcomes of these trials, an unsuccessful trial could
affect the marketability of this product in the future and to the receipt of FDA
clearance in particular.
Changes
in the healthcare industry may require us to decrease the selling price for our
products or could result in a reduction in the size of the market for our
products, each of which could have a negative impact on our financial
performance.
Trends
toward managed care, healthcare cost containment and other changes in government
and private sector initiatives in the U.S. and other countries in which we do
business could place increased emphasis on the delivery of more cost-effective
medical therapies, which could work in our favor unless more cost-effective
devices become available, which could adversely affect the sale and/or the
prices of our products. There are proposed and existing laws and
regulations in domestic and international markets regulating pricing and
profitability of companies in the healthcare industry. There have
been initiatives by third-party payers to challenge the prices charged for
medical products, which could affect our ability to sell products on a
competitive basis in the future. There has been a consolidation among
healthcare facilities and purchasers of medical devices in the U.S. who prefer
to limit the number of suppliers from whom they purchase medical products, and
these entities may decide to stop purchasing our products or demand discounts on
our prices. Both the pressure to reduce prices for our products in
response to these trends and the decrease in the size of the market because of
these trends could adversely affect our levels of revenues and profitability of
sales, which could have a material adverse effect on our business.
General
economic conditions, which are largely out of our control, may adversely affect
our financial condition and results of operations.
The
Company’s businesses may be affected by changes in general economic conditions,
both nationally and internationally. Recessionary economic cycles,
higher interest rates, higher fuel and other energy costs, inflation, higher
levels of unemployment, changes in the laws or industry regulations or other
economic factors may adversely affect the demand for the Company’s
products. Additionally, these economic factors, as well as higher tax
rates, increased costs of labor, insurance and healthcare, and changes in other
laws and regulations may increase the Company’s cost of sales and operating
expenses, which may adversely affect the Company’s financial condition and
results of operations. Our primary business is the sale of capital
equipment. While customers may delay their purchases of capital
equipment in the near-term due to the current economic environment, the
equipment will ultimately need to be replaced as defibrillator products are a
standard of care. However, we cannot be sure as to how long such
delays may continue.
Recent economic trends could adversely affect
our financial performance.
Economic
downturns and declines in consumption in our markets may affect the levels of
both our sales and profitability. As widely reported, the domestic
and global financial markets have been experiencing extreme disruption in recent
months, including severely diminished liquidity and credit
availability. Concurrently, economic weakness has begun to
accelerate. We could be negatively impacted if these conditions exist
for a sustained period, or if there is further deterioration in financial
markets and major economies. The current tightening of credit in
financial markets may adversely affect the ability of our customers and
suppliers to obtain financing, which could result in a decrease in, or deferrals
or cancellations of, the sale of our products and services. In
addition, weakening economic conditions and outlook may result in a decline in
spending for ART and fertility assistance that could adversely affect our
results of operations and liquidity. We are unable to predict the
likely duration and severity of the current disruption in the domestic and
global financial markets and the related adverse economic
conditions.
Risks Relating to
the Share Exchange
Our Chief Executive Officer,
Kathleen
Karloff, beneficially owns
11.01%
and our
President
, Dr. Claude Ranoux, owns
47.90
% of our outstanding Common
Stock
, which gives them
control over certain major decisions on which our stockholders may
vote.
Because of the Share Exchange,
two of our
officers and directors beneficially
own
58.90
% of
our
outstanding shares. The interests
of th
ese two individuals
may differ from the
interests of other stockholders. As a result, th
ese
officer
s
and director
s
will have the right and ability to
control virtually all corporate actions requiring stockholder approval,
irrespective of how
our
other stockholders may
vote, including the following actions:
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Electing
or defeating the election of
directors;
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Amending
or
preventing amendment of our
Articles of Incorporation or
bylaws;
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Effecting or preventing a merger,
sale of assets or other corporate transaction;
and
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Controlling the outcome of any
other matter submitted to the stockholders for
vote.
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The Company’s stock ownership profile
may discourage a potential acquirer from seeking to acquire shares
of
our C
ommon
S
tock or otherwise attempting to obtain
control of
us
, which in turn could reduce
our
stock price or prevent
our
stockholders from realizing a premium
over
our
stock price
.
Because of the Share Exchange,
INVO Bioscience
bec
a
me a wholly-owned subsidiary of a
company that is subject to the reporting requirements of U.S. federal securities
laws, which can be expensive.
Because of the Share
Exchange,
INVO Bioscience
has become an indirect
wholly-owned subsidiary of a company that is a public reporting company and,
accordingly, is subject to the information and reporting requirements of the
Exchange Act and other federal securities laws, including compliance with the
Sarbanes-Oxley Act. The costs of preparing and filing annual and quarterly
reports, proxy statements and other information with the SEC (including
reporting of the Share Exchange) and furnishing audited reports to stockholders
will cause
our
expenses to be higher than they would
be if
INVO Bioscience
had remained privately-held
and did not consummate the Share Exchange. In addition, it may be time
consuming, difficult and costly for
us
to develop and implement the internal
controls and reporting procedures required by the Sarbanes-Oxley
Act.
We
may need to hire additional financial
reporting, internal controls and other finance personnel in order to develop and
implement appropriate internal controls and reporting procedures. If
we are
unable to comply with the internal
controls requirements of the Sarbanes-Oxley Act,
we
may not be able to obtain the
independent accountant certifications required by the Sarbanes-Oxley
Act.
Public company compliance may make it
more difficult to attract and retain officers and directors.
The Sarbanes-Oxley Act and new rules
subsequently implemented by the SEC have required changes in corporate
governance practices of public companies. As a public entity,
we
expect these rules and regulations to
increase compliance costs and to make certain activities more time consuming and
costly. As a public entity,
we
also expect that these new rules and
regulations may make it more difficult and expensive for
us
to obtain director and officer
liability insurance in the future and it may be required to accept reduced
policy limits and coverage or incur substantially higher costs to obtain the
same or similar coverage. As a result, it may be more difficult
for
us
to attract and retain qualified persons
to serve as directors or as executive officers.
Because
INVO Bioscience
became public by means of a share
exchange,
we
may not be able to attract the
attention of major brokerage firms.
There may be risks associated with
INVO Bioscience
becoming public through a
share exchange.
Specifically, securities analysts of
major brokerage firms may not provide coverage of
our business
since there is no incentive to brokerage
firms to recommend the purchase of
our C
ommon
S
tock. No assurance can be given
that brokerage firms will, in the future, want to conduct any secondary
offerings on
our
behalf.
Risks
Related to Our Common Stock
Our
Articles of Incorporation provide for indemnification of officers and directors
at our expense and limit their liability, which may result in major costs to us.
Our
Articles of Incorporation and applicable Nevada law provide for the
indemnification of our directors, officers, employees and agents, under certain
circumstances, against attorney's fees and other expenses incurred by them in
any litigation to which they become a party arising from their association with
or activities on our behalf. We will also bear the expenses of such
litigation for any of our directors, officers, employees, or agents, upon such
person's written promise to repay us if it is ultimately determined that any
such person shall not have been entitled to indemnification. This
indemnification policy could result in substantial expenditures by us, which we
will be unable to recoup.
We have
been advised that, in the opinion of the SEC, indemnification for liabilities
arising under federal securities laws is against public policy as expressed in
the Securities Act of 1933, as amended (the “Securities Act”) and is, therefore,
unenforceable. In the event that a claim for indemnification for
liabilities arising under federal securities laws, other than the payment by us
of expenses incurred or paid by a director, officer or controlling person
in the successful defense of any action, suit or proceeding, is asserted by a
director, officer or controlling person in connection with the securities being
registered, we will (unless in the opinion of our counsel, the matter has been
settled by controlling precedent) submit to a court of appropriate jurisdiction,
the question whether indemnification by us is against public policy as expressed
in the Securities Act and will be governed by the final adjudication of such
issue. The legal process relating to this matter if it were to occur is likely
to be very costly and may result in us receiving negative publicity, either
of which factors is
likely to materially reduce the market and price for our shares, if such a
market ever develop.
Our
shares of Common Stock are very thinly traded, and the price may not reflect our
value; there can be no assurance that there will be an active market for our
shares now or in the future.
We have a
trading symbol for our Common Stock ("EMYS"), which permits our shares to be
quoted on the Over-the-Counter Bulletin Board (“OTCBB”), which is a quotation
medium for subscribing members, not an issuer listing
service. However, our shares of Common Stock are very thinly traded,
and the price, if traded, may not reflect our value. There can be no
assurance that there will be an active market for our shares of Common Stock
either now or in the future. The market liquidity will be dependent
on the perception of our operating business and any steps that our management
might take to bring us to the awareness of investors. There can be no
assurance given that there will be any awareness
generated. Consequently, investors may not be able to liquidate their
investment or liquidate it at a price that reflects the value of the
business. If a more active market should develop, the price may be
highly volatile. Because there may be a low price for our shares of
Common Stock, many brokerage firms may not be willing to effect transactions in
the securities. Even if an investor finds a broker willing to effect
a transaction in the shares of our Common Stock, the combination of brokerage
commissions, transfer fees, taxes, if any, and any other selling costs may
exceed the selling price. Further, many lending institutions will not
permit the use of such shares of Common Stock as collateral for any
loans.
We
may be subject to the penny stock rules, which will make the shares of our
Common Stock more difficult to sell.
We may be
subject now and in the future to the SEC’s “penny stock” rules if our shares of
Common Stock sell below $5.00 per share. Penny stocks generally are
equity securities with a price of less than $5.00. The penny stock
rules require broker-dealers to deliver a standardized risk disclosure document
prepared by the SEC, which provides information about penny stocks and the
nature and level of risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson, and monthly account statements showing the market value of each
penny stock held in the customer's account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information must
be given to the customer orally or in writing prior to completing the
transaction and must be given to the customer in writing before or with the
customer's confirmation.
In
addition, the penny stock rules require that prior to a transaction the broker
dealer 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. The penny stock rules are burdensome and may reduce
purchases of any offerings and reduce the trading activity for shares of our
Common Stock. As long as our shares of Common Stock are subject to
the penny stock rules, the holders of such shares of Common Stock may find it
more difficult to sell their securities.
Sales
of our currently issued and outstanding Common Stock may become freely tradable
pursuant to rule 144 and may dilute the market for your shares and have a
depressive effect on the price of the shares.
A
substantial majority of our outstanding shares of Common Stock are "restricted
securities" within the meaning of Rule 144 under the Securities
Act. As restricted shares, these shares may be resold only pursuant
to an effective registration statement or under the requirements of Rule 144 or
other applicable exemptions from registration under the Securities Act and as
required under applicable state securities laws. A sale under Rule
144 or under any other exemption from the Securities Act, if available, or
pursuant to subsequent registrations of our shares of Common Stock, may have a
depressive effect upon the price of our shares of Common Stock in any active
market that may develop.
The
market for penny stocks has experienced numerous frauds and abuses, which could
adversely affect investors in our stock.
We
believe that the market for penny stocks has suffered from patterns of fraud and
abuse. Such patterns include:
|
|
·
|
Control
of the market for the security by one or a few broker-dealers that are
often related to the promoter or
issuer;
|
|
|
·
|
Manipulation
of prices through prearranged matching of purchases and sales and false
and misleading press releases;
|
|
|
·
|
“Boiler
room" practices involving high pressure sales tactics and unrealistic
price projections by inexperienced sales
persons;
|
|
|
·
|
Excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
|
|
|
·
|
Wholesale
dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired level, along with the inevitable
collapse of those prices with consequent investor
losses.
|
We
believe that many of these abuses have occurred with respect to the promotion of
low price stock companies that lacked experienced management, adequate financial
resources, an adequate business plan and/or marketable and successful business
or product.
Our
controlling stockholders may take actions that conflict with your
interests.
Certain
of our officers and directors beneficially own approximately 58.90% of our
Common Stock pursuant to the terms of the Share Exchange Agreement. In
this case, all of our officers and directors will be able to exercise control
over all matters requiring stockholder approval, including the election of
directors, amendment of our certificate of incorporation and approval of
significant corporate transactions, and they will have significant control over
our management and policies. The directors elected by these
stockholders will be able to influence decisions affecting our capital structure
significantly. This control may have the effect of delaying or
preventing changes in control or changes in management, or limiting the ability
of our other stockholders to approve transactions that they may deem to be in
their best interest. For example, our controlling stockholders will
be able to control the sale or other disposition of our operating businesses and
subsidiaries to another entity.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following Summary Compensation Table sets forth, for the years indicated, all
cash compensation paid, distributed or accrued for services, including salary
and bonus amounts, rendered in all capacities by the Company’s chief executive
officer and president who received or was entitled to receive remuneration in
excess of $100,000 during the stated periods. As reflected below,
none of our officers received cash compensation during fiscal 2007.
SUMMARY
COMPENSATION TABLE
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
($)
|
Stock
Award
($)
|
Option
Award ($)
|
Non-Equity
Incentive Plan Compensation Earnings ($)
|
Non-Qualified
Deferred Compensation Earnings ($)
|
All
other Compensation ($)
|
Total
($)
|
|
Kathleen
Karloff, CEO/Director(1)
|
2007
|
0
|
0
|
$
4
,498
|
0
|
0
|
0
|
0
|
0
|
|
Claude
Ranoux
President/Director(2)
|
2007
|
0
|
0
|
$
19,731
|
0
|
0
|
0
|
0
|
0
|
|
Philip
Warren (3)
|
2007
|
0
|
0
|
$
2,761
|
0
|
0
|
0
|
0
|
0
|
|
(1)
|
Kathleen
Karloff was elected as the chief executive officer, secretary and member
of the Board of Directors of the Company effective upon the resignation of
Andrew Uribe in connection with the acquisition of INVO Bioscience on
December 5, 2008. During 2007, Ms. Karloff received shares of
common stock valued at $.2857/ share.
|
|
(2)
|
Claude
Ranoux was elected as the president, treasurer and member of the Board of
Directors effective upon the resignation of Andrew Uribe, in connection
with the acquisition of INVO Bioscience on December 5,
2008. During 2007, Dr. Ranoux received shares of common stock
valued at $.2857/ share.
|
|
(3)
|
Philip
Warren served as the Chief Executive Officer of INVO Bioscience from May
2007 to September 2008. During 2007, Mr. Warren received shares
of common stock valued at $.2857/
share.
|
Stock Option
Grants
No stock
option grants have been awarded to the named executive officers since the
inception of the Company.
MANAGEMENT
Directors
and Executive Officers
Concurrent
with the Closing, Andrew Uribe, Emy’s president, chief executive officer,
secretary, treasurer and director, resigned from these positions, Jean Young
resigned from his position as a director and we appointed new officers and
directors
The
following table sets forth the names, ages and positions of our new executive
officers and directors as of the Closing. Executive officers are
elected annually by our Board of Directors. Each executive officer
holds his office until he resigns, is removed by the Board, or his successor is
elected and qualified. Directors are elected annually by our
stockholders at the annual meeting. Each director holds his office
until his successor is elected and qualified or his earlier resignation or
removal. A brief biography of each officer and director are more
fully described in Item 5.02(c). The information therein is hereby
incorporated in this section by reference.
|
NAME
|
AGE
|
POSITION
|
|
Kathleen
Karloff
|
53
|
Chief
Executive Officer, Secretary and Director
|
|
|
|
|
|
Claude
Ranoux
|
57
|
President,
Treasurer and Director
|
|
|
|
|
Employment
Contracts
Kathleen
Karloff, chief executive officer, secretary and member of the Board of
Directors, has executed an employment agreement with INVO Bioscience effective
as of February 1, 2008. The agreement provides for an annual salary
of $175,000 and health and life insurance and retirement plan along with the
reimbursement of expenses. In the event that Ms. Karloff’s employment
is terminated other than for good cause (as defined in the employment
agreement), she will receive his salary and full medical benefits for twelve
(12) months thereafter. Kathleen Karloff voluntarily agreed to a
salary reduction from February 1, 2008 through September 1, 2008 to $101,061.75
per year, however, that reduction is no longer in effect.
Dr.
Claude Ranoux, president, Treasurer and member of the Board of Directors, has
executed an employment agreement with INVO Bioscience effective as of February
1, 2008. The agreement provides for an annual salary of $175,000 and
health and life insurance and retirement plan along with the reimbursement of
expenses. In the event that Dr. Ranoux’s employment is terminated
other than for good cause (as defined in the employment agreement), he will
receive his salary and full medical benefits for twelve (12) months
thereafter. Claude Ranoux voluntarily agreed to a salary reduction
from February 1, 2008 through September 1, 2008 to $86,478.42 per year, however,
that reduction is no longer in effect.
Directors’
and Officers’ Liability Insurance
We have
an insurance policy to insure directors and officers against certain
liabilities.
Code
of Ethics
We
currently do not have a code of ethics that applies to our officers, employees
and directors, including our Chief Executive Officer and senior executives,
however, we intend to adopt one in the near future.
Conflicts
of Interest
Certain
potential conflicts of interest are inherent in the relationships between our
officers and directors, and us.
From time
to time, one or more of our affiliates may form or hold an ownership interest in
and/or manage other businesses both related and unrelated to the type of
business that we own and operate. These persons expect to continue to
form, hold an ownership interest in and/or manage additional other businesses
which may compete with ours with respect to operations, including financing and
marketing, management time and services and potential
customers. These activities may give rise to conflicts between or
among the interests of us and other businesses with which our affiliates are
associated. Our affiliates are in no way prohibited from undertaking
such activities, and neither our shareholders nor we will have any right to
require participation in such other activities.
Further,
because we intend to transact business with some of our officers, directors and
affiliates, as well as with firms in which some of our officers, directors or
affiliates have a material interest, potential conflicts may arise between the
respective interests of us and these related persons or entities. We
believe that such transactions will be effected on terms at least as favorable
to us as those available from unrelated third parties.
With
respect to transactions involving real or apparent conflicts of interest, we
intend to require that: (i) the fact of the relationship or interest giving rise
to the potential conflict be disclosed or known to the directors who authorize
or approve the transaction prior to such authorization or approval, (ii) the
transaction be approved by a majority of our disinterested outside directors,
and (iii) the transaction be fair and reasonable to us at the time it is
authorized or approved by our directors.
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
Claude
Ranoux, co-founder of INVO Bioscience, loaned funds to INVO Bioscience to
sustain its operations since inception. As of December 31, 2007, the
Principal Amount of Dr. Ranoux’s loan was $93,545. By September 30,
2008, the Principal Amount of Dr. Ranoux’s loan was $96,462. On
September 8, 2008, INVO Bioscience memorialized the loan transactions by
executing a promissory note (the “Promissory Note”) with Dr. Ranoux, in which
INVO Bioscience agreed to repay the Principal Amount, plus interest at 5% per
annum, by March 31, 2009. The Promissory Note provides that at Dr.
Ranoux’s election, the Principal Amount plus all accrued interest is convertible
into shares of INVO Bioscience common stock at any time prior to the repayment
of the Principal Amount upon ten (10) days advance written notice.
On
December 1, 2008, Dr. Ranoux executed a letter agreement with the Company to
amend the Promissory Note to allow conversion into shares of Emy’s Common Stock
following the Closing. For purposes of the Promissory Note, the
conversion price shall be the fair market value of a share of Common Stock,
defined as the average of the closing bid and asked prices of the shares quoted
on the OTCBB (if not on the NASDAQ system) or the closing price quoted on the
Nasdaq Stock Market or any exchange on which the shares are listed, whichever is
applicable, as published in the Wall Street Journal for the ten (10) trading
days prior to the date of determination of fair market value, or if the shares
are not traded over-the-counter or on an exchange, the fair market value of a
share shall be as determined by an independent appraiser appointed in good faith
by the Board of Directors. The Principal Amount and all accrued
interest must be converted at one time. The letter agreement did not
modify the determination of the conversion price.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS
AND MANAGEMENT
The
following table sets forth the names and beneficial ownership of the 53,620,000
shares of our Common Stock as of December 10, 2008, and after giving effect to
the Share Exchange requiring the issuance of 38,307,500 shares to the INVO
Bioscience Shareholders and 375,000 shares to certain investors pursuant to the
Securities Purchase Agreement, by each of our directors, all of our directors
and executives as a group, and to the best of our knowledge, all holders of 5%
or more of the issued and outstanding shares of the Company’s voting
stock. Unless otherwise noted, the address of all of the individuals
and entities named below is care of Emy’s Salsa Aji Distribution Company, Inc.,
100 Cummings Center, Suite 421E, Beverly, Massachusetts 01915:
|
Name
and Address of Beneficial Owner (1)
|
|
Nature
of
Security
|
|
Number
of
Shares
|
|
|
Percentage
of Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kathleen
Karloff
|
|
Common
Stock
|
|
|
5,862,159
|
|
|
|
10.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claude
Ranoux
|
|
Common
Stock
|
|
|
25,501,473
|
|
|
|
47.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
directors and executive officers as a group (2 persons)
|
|
|
|
|
31,363,632
|
|
|
|
58.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other 5% or more
Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phillip
Warren
|
|
Common
Stock
|
|
|
3,570,778
|
|
|
|
6.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher
Esposito
|
|
Common
Stock
|
|
|
4,806,200
|
|
|
|
8.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
5% or more shareholders
|
|
|
|
|
8,376,978
|
|
|
|
15.62
|
%
|
|
(1)
|
Beneficial ownership is determined
in accordance with
Rule 13d-3(a) of the Securities
Exchange Act of 1934 and generally includes voting or investment power
with respect to securities. Except as indicated by footnotes
and subject to community property laws, where applicable, the person named
above has sole
v
oting and investment power with
respect to all shares of the common stock shown as beneficially owned by
him or her.
|
DESCRIPTION
OF SECURITIES
As of
December 10, 2008, our authorized capital stock consists of 75,000,000 shares of
Common Stock, par value $0.0001 per share. The Company had 61,937,500
shares issued and outstanding immediately prior to the Share
Exchange. Our charter does not authorize any shares of preferred
stock. Pursuant to the Share Exchange Agreement, certain shareholders
of Emy’s agreed to cancel 47,000,000 shares of Emy’s Common Stock and Emy’s
agreed to issue 38,307,500 newly-issued shares of Common Stock to INVO
Bioscience shareholders. As of December 5, 2008 and immediately after
Closing, an aggregate of 53,245,000 shares of Common Stock were outstanding,
including shares issued pursuant to the Closing.
On
November 7, 2008, Emy’s Board of Directors approved a 5-1 forward stock split
(the “Forward Split”) of our Common Stock with a record date of November 10,
2008 for the Company’s issued and outstanding shares and not its authorized
shares. The Forward Split was payable on November 12,
2008. Emy’s had 12,387,500 shares outstanding prior to the Forward
Split and 61,937,500 shares outstanding thereafter.
On
December 5, 2008, we entered into the Securities Purchase Agreement with the
certain investors who have piggyback registration rights that permit them to
register their Common Stock on any registration statement filed by the
Company. In addition, pursuant to certain anti-dilution rights granted
under the Securities Purchase Agreement to the investors, the Company may be
obligated to issue additional shares of its Common Stock to the investors in the
event it issues Common Stock to future investors at a per share purchase price
less than $1.00. The number of additional shares to be issued in such
event is equal to that number of shares that the investors would have acquired
at such price had that price been offered at the time of their original
investment, minus the number of shares acquired in their original
investment. Further, pursuant to the letter agreement, LSV and its
managing member, Christopher Esposito, have agreed to forfeit to us, one share
of our Common Stock for ever two shares we would be required to issue up to the
maximum of 562,5000 shares, which number of shares are being held in escrow by
us until December 5, 2010.
With the
issuance of the 375,000 shares of Common Stock pursuant to the Securities
Purchase Agreement, effective as of December 11, 2008, we have 53,620,000 shares
issued and outstanding.
Common
Stock
The
holders of outstanding shares of Common Stock are entitled to receive dividends
out of assets legally available at times and in amounts as our board of
directors may determine. Each stockholder is entitled to one vote for
each share of Common Stock held on all matters submitted to a vote of the
stockholders.
Cumulative
voting is not provided for in our articles of incorporation or any amendments
thereto, which means that the majority of the shares voted can elect all of the
directors then standing for election. The Common Stock is not
entitled to preemptive rights and is not subject to conversion or
redemption. Upon the occurrence of a liquidation, dissolution or
winding-up, the holders of shares of Common Stock are entitled to share ratably
in all assets remaining after payment of liabilities and satisfaction of
preferential rights of any outstanding preferred stock. There are no
sinking fund provisions applicable to the Common Stock.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
INVO
Bioscience is, and has always been, a privately-held company and now is
a wholly-owned subsidiary of the Company. There is not, and never has
been, a public market for the securities of INVO Bioscience. Our Common
Stock is approved for quotation on the OTCBB under the symbol “EMYS,” but there
is currently no liquid trading market. After the Closing, we intend
to change our ticker symbol.
The SEC
has adopted regulations, which generally define “penny stock” to be any equity
security that has a market price less than $5.00 per share or an exercise price
of less than $5.00 per share, subject to certain exceptions. Our
Common Stock is currently a “penny stock” as defined in the Exchange
Act. As a result, an investor may find it more difficult to dispose
of or obtain accurate price quotations. In addition, the “penny
stock” rules adopted by the SEC subject the sale of the shares of the common
stock to certain regulations which impose sales practice requirements on
broker-dealers such as requiring that they provide their customers with
documentation of the risks of investing in such securities before effecting the
transaction, along with:
|
o
|
The
bid and offer price quotes for the penny stock,
|
|
o
|
The
number of shares to which the quoted prices
apply,
|
|
o
|
The
brokerage firm’s compensation for the trade, and
|
|
o
|
The
compensation received by the brokerages firm’s salesperson for the
trade.
|
In
addition, the brokerage firm must send to the investor monthly account statement
that gives an estimate of the value of each penny stock in the investor’s
account, and a written statement of the investor’s financial situation and
investment goals. These disclosure and other requirements may have
the effect of reducing the level of trading activity in the secondary market for
the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. The penny stock rules may discourage investor interest in
and limit the marketability of our Common Stock.
Transfer
Agent and Registrar
Island
Stock Transfer is currently the transfer agent and registrar for our Common
Stock. Its address is 100 Second Avenue South, Suite 705S, St.
Petersburg, Florida 33701. Its phone number is (727)289-0010 and its
fax number is (727) 289-0069.
Dividend
Policy
Any
future determination as to the declaration and payment of dividends on shares of
our Common Stock will be made at the discretion of our board of directors out of
funds legally available for such purpose. We are under no contractual
obligations or restrictions to declare or pay dividends on our shares of Common
Stock. In addition, we currently have no plans to pay such
dividends. Our board of directors currently intends to retain all earnings
for use in the business for the near future. See “Risk
Factors.”
INDEMNIFICATION
OF OFFICERS AND DIRECTORS
Our
articles of incorporation provide that the Company will indemnify any person who
is or was a director, officer, employee, agent or fiduciary of the Company to
the fullest extent permitted by applicable law. Nevada law permits a
Nevada corporation to indemnify its directors, officers, employees and agents
against liabilities and expenses they may incur in such capacities in connection
with any proceeding in which they may be involved, if (i) such director or
officer is not liable to the corporation or its stockholders due to the fact
that his or her acts or omissions constituted a breach of his or her fiduciary
duties as a director or officer and the breach of those duties involved
intentional misconduct, fraud or a knowing violation of law, or (ii) he or she
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the Company, or that with respect to any criminal
action or proceeding, he or she had no reasonable cause to believe that his or
her conduct was unlawful.
In
addition, the Company’s bylaws include provisions to indemnify its officers and
directors and other persons against expenses, judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with the action,
suit or proceeding against such persons by reason of serving or having served as
officers, directors, or in other capacities, if such person either is not liable
pursuant to Nevada Revised Statutes 78.138 or acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of
nolo contendere
or its
equivalent will not, of itself, create a presumption that the person is liable
pursuant to Nevada Revised Statutes 78.138 or did not act in good faith and in a
manner which such person reasonably believed to be in or not opposed to the best
interests of the Company and, with respect to any criminal action or proceeding,
had reasonable cause to believe that such person’s conduct was
unlawful.
