Annual Report — Small Business — Form 10-KSB Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: 10KSB 2007 Annual Year End Report HTML 419K
2: EX-10.1 Employment Agreement Dated January 1, 2008 Between HTML 49K
Immunobiotics, Inc. and Thomas P .Lahey
(2)
3: EX-14.1 Code of Ethics HTML 32K
4: EX-31.1 Certification of Chief Executive Officer Pursuant HTML 12K
to Rule 13A-14(A)/15D-14(A)
5: EX-31.2 Certification of Chief Financial Officer Pursuant HTML 12K
to Rule 13A-14(A)/15D-14(A)
6: EX-32.1 Certification of Chief Executive Officer Pursuant HTML 9K
to Section 1350 of the Sarbanes-Oxley
Act of 2002.
7: EX-32.2 Certification of Chief Financial Officer Pursuant HTML 10K
to Section 1350 of the Sarbanes-Oxley
Act of 2002.
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par
value per share
(Title of
Class)
Indicate by check mark whether
the issuer: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. YES ý
No o
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not
contained herein, and will not be contained, to the best of issuer’s knowledge,
in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-KSB or any amendment to this Form 10-KSB.
ý
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o
No ý
State issuer’s revenues for its
most recent fiscal year: $2,500
The aggregate market value of the
issuer’s common stock held by non-affiliates of the registrant as of March 31,2008, was approximately $7,079,158, based on $1.00, the price at which the
registrant’s common stock was last sold on that date.
As of March 1, 2008, the issuer
had 15,460,000 shares of common stock outstanding.
Transitional
Small Business Disclosure Format (Check one): Yes o
No ý
PART
I
Forward
Looking Statements
Most of
the matters discussed within this report include forward-looking statements on
our current expectations and projections about future events. In some cases you
can identify forward-looking statements by terminology such as “may,”“should,”“potential,”“continue,”“expects,”“anticipates,”“intends,”“plans,”“believes,”“estimates,” and similar expressions. These statements are based on
our current beliefs, expectations, and assumptions and are subject to a number
of risks and uncertainties. Actual results and events may vary significantly
from those discussed in the forward-looking statements.
These
forward-looking statements are made as of the date of this report, and we assume
no obligation to update these forward-looking statements whether as a result of
new information, future events, or otherwise, other than as required by law. In
light of these assumptions, risks, and uncertainties, the forward-looking events
discussed in this report might not occur.
ITEM
1. DESCRIPTION OF BUSINESS
General
At the
present time, there is no public market for the common stock of ImmunoBiotics,
Inc. and our common stock is not traded on any exchange. In December 2007, our
registration statement on Form 10-SB was declared effective, and we are now
subject to the informational requirements of the Securities Exchange Act of
1934, and, in accordance therewith, file reports and information with the
Securities and Exchange Commission (the “SEC”). This Annual Report on Form
10-KSB for the year ended December 31, 2007 and other reports and other
information we file subsequently can be inspected and copied at the SEC Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Such reports and
other information may also be obtained from the web site that the SEC maintains
at http://www.sec.gov. Further information about the operation of the Public
Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.
We will
make available and voluntarily provide paper copies, free of charge upon written
request at the address on the cover of this Annual Report on Form 10-KSB for the
year ended December 31, 2007, a copy of our Registration Statement on Form
10-SB, and our quarterly reports on Form 10-QSB, current reports on Form 8-K,
and amendments to those reports filed or furnished pursuant to Section 13(a) of
the Securities Exchange Act of 1934 as soon as reasonably practicable after we
electronically file such material with, or furnish such material to, the
SEC.
The name
of our company is ImmunoBiotics, Inc. We were incorporated under the
laws of the State of Florida in 2004 under the name Multinational Merger
Corporation. Multinational Merger Corporation was originally formed
for the purpose of, and engaged in the business of conducting regulatory
compliance consulting, through our website, the archive of which can be seen at
http://web.archive.org/web/20050322155356/http://www.mmc2100.com/. The
Company discontinued its consulting operations in November 2005. In
2007, after learning of the opportunity to purchase the patent hereinafter
discussed, we changed our business to that of the licensing of the development,
marketing, distribution and sale of products manufactured under the
patent. In August 2007, we changed our name to ImmunoBiotics,
Inc.
To date,
we have had limited nutraceutical business activities. We are a
development stage entity in the process of establishing a business engaged in
the licensing of the manufacture distribution, and sale of nutraceutical
products that are made entirely of naturally occurring dietary
substances. These naturally occurring dietary substances have not
been chemically altered, and we believe have both health benefits and mass
appeal to people wanting natural and non-toxic healthcare. To date, our
nutraceutical business activities have been minimal and have included the
acquisition of the patent number 6,774,142 entitled “Inhibition by
3-Deoxyflavonoids of T-Lymphocyte Activation and Therapies Related Thereto” (the
“Patent”) which protects the compounds and formulas that the products
manufactured in accordance with our licensing agreements are based upon as well
as the use of Luteolin in the prevention and treatment of many
diseases. The Patent is the cornerstone of our
business. At the present time, we have one licensee who has developed
two lines of products based upon our patented compounds and formulas which
contain the bioflavonoids Luteolin and Rutin (LutiMax and
LutiSport). LutiMax is an antioxidant and anti-inflammatory product
that provides various health benefits and LutiSport is a performance-enhancing
sports product. Both product lines consist of products that are
intended for human consumption as well as consumption by household
pets. LutiMax and LutiSport, which are categorized as dietary
supplements under the Dietary Supplement Health and Education Act (“DSHEA”),
combine Luteolin and Rutin in a molecular complex to provide therapeutic health
benefits to consumers. LutiMax was designed to aid in the treatment
of diabetes, autoimmune disorders, neurological diseases including neurological
damage due to trauma, as well as inflammatory diseases, and
aging.
1
Luteolin,
and Rutin individually have both been proven in numerous scientific studies to
effectively prevent and treat the cause and symptoms of many autoimmune
disorders, inflammatory diseases, allergies, neurodegenerative diseases and
cancer. We believe, and our licensee has conducted research that
shows, that our LutiMax formula increases the absorption of Luteolin into the
bloodstream and tissue thereby aiding in the treatment of aforementioned medical
conditions and aging. This increased absorption of Luteolin
into the bloodstream provides significant economic advantage to us over other
providers of similar bioflavonoids when comparing the needs of the consumer to
achieve blood concentrations of Luteolin that are in the therapeutic range.
LutiSport was designed to enhance the body’s performance under the stress of
exercise and in competitive sports.
Background
We have
only recently commenced licensing operations of our nutraceutical products and
therefore we have derived only minimal revenue royalty fees from the sale of our
products by our licensee. Prior to December 2007, our only material
nutraceutical activities were the acquisition of the Patent and the development
of a business plan to exploit the Patent, which included the entry into of a
licensing agreement for the manufacture and sale of products covered by the
Patent. However, SYNORx, Inc., a company owned by the inventors of
the Patent which was created to license the manufacture and sale of products
covered by the Patent, did develop, test, manufacture and sell a limited
quantity of LutiMax prior to our acquisition of the Patent. In 2002,
the Patent was assigned by the inventors to SYNORx, Inc. Effective
May, 2007, the Patent was assigned by SYNORx, Inc. to us and we entered
into a nonexclusive license agreement with SYNORx, Inc., pursuant to which
SYNORx, Inc. was granted a nonexclusive license to research, develop, market,
distribute and sell LutiMax and related bioflavonoid-based products manufactured
under the Patent.
Prior to our acquisition of the Patent, approximately $480,000 of LutiMax had
been sold by SYNORx, Inc.
Company Objective and
Mission
We are in
the process of establishing a nutraceutical company specializing in the
licensing of the rights to manufacture, develop, market, distribute and sell
products based upon our own proprietary formulas and processes. These
products are made entirely of naturally occurring dietary
substances. These naturally occurring dietary substances have not
been chemically altered from their natural state and are intended for ingestion
by consumers as a supplement to their diet. Our licensee
is in the process of, and will continue to, develop and market products that
have both health benefits and mass appeal to people wanting natural and
non-toxic healthcare. We anticipate that our licensees will
manufacture and distribute products that are made using our patented compounds
and formulas. We also anticipate that we will sell, on our own,
products manufactured by the licensees, for direct sale to consumers. We own a
patent that was developed by our chief executive officer and chief financial
officer which involves the combination and preparation of certain specific
substances found in plants, known as bioflavonoids, in such a manner that the
result is better absorption into the bloodstream and target tissues of the
bioflavonoids ultimately having what we believe to be therapeutic effects in the
human body. These bioflavonoids have been proven in hundreds of
studies published in internationally recognized medical and scientific journals,
to effectively prevent and treat the cause and symptoms of many autoimmune
disorders, inflammatory diseases, allergies, neurodegenerative diseases and
cancer. Previous use of bioflavonoids for such prevention and
treatment of disease and aging has been frustrated by the fact that absorption
of bioflavonoids into the human body has been difficult as many bioflavonoids
are not uniformly absorbed by merely eating the plant containing the
bioflavonoids. One of our current lines of products, which is covered by
the Patent and is known as LutiMax, is manufactured and distributed by our
licensee SYNORx, Inc. and is manufactured and sold in the form of powder,
tablets, capsules and lozenges containing bioflavonoids specially created using
our Patent which we believe will increase the absorption and biological activity
of the bioflavonoids. Our other line of products which is covered by
the Patent and is known as LutiSport is also manufactured and distributed by
SYNORx, Inc. and is manufactured and sold as a powder, liquid, and as lozenges,
each containing bioflavonoids specially created using our Patent which we also
believe will increase the absorption and biological activity of the
bioflavonoids to enhance the body’s performance.
Our
business plan is to license the manufacture and sale of the products for human
consumption covered by the Patent to nutraceutical and possibly drug companies
for their sale of our products and to receive royalty payments from the sales of
such products. Our products that are for consumption by household pets are
currently sold to a pet food manufacturer. SYNORx, Inc., a
nutraceutical company formed and owned by our chief executive officer, Thomas P.
Lahey and our chief financial officer, Vithal Rajadhyaksha, has engaged in prior
sales of the LutiMax product line. In order to maintain the
continuity of existing sales of the LutiMax product line, we have granted a
non-exclusive license to SYNORx, Inc. for the research, development,
manufacturing, distribution, marketing and sale of the products covered by the
Patent. The license is for a period of five years and is renewable at
the option of SYNORx, Inc. for additional five- year intervals through the
effective dates of the Patent. SYNORx, Inc. will pay us a minimum
yearly royalty fee of $10,000 in addition to royalty fees which range between 5%
and 10% of sales based on sales volume of the patented
products. SYNORx, Inc. will also manufacture products for us to
market and sell ourselves. Furthermore, we believe the
continued research and development of new products by SYNORx, Inc. under our
Patent will minimize our expenses and liabilities, thus increasing our net
income and providing additional value to our shareholders.
2
We
believe our potential for growth involves the continued research and development
of products based on the Patent that can be marketed and sold through
physicians, retail channels in North America and through distributors
internationally in addition to wholesalers with respect to certain products such
as the pet food supplement. Retail channels would include independent
and chain health food stores, pharmacies, grocery and drug chains and other
direct to consumer retailers.
Existing
Products
We
currently have two product lines, the LutiMax product line and the LutiSport
product line, both of which are manufactured and sold by SYNORx, Inc. under a
license granted from us. In addition, both product lines include
products for human consumption and products for consumption by household
pets. The LutiMax line of products includes LutiMax 10mg tablets,
LutiMax 100mg Lozenges and LutiSynTM
Capsules for human consumption and a powder for canine
consumption. The recommended dosage of the 100 mg lozenges is one
lozenge taken 4 times per day. The starting price paid by consumers for these
products is $69.95 per bottle for a purchase of one to three bottles of the
lozenges, each bottle containing 120 lozenges, with discounts provided for
larger quantity purchases. LutiMax is a dietary supplement, the two
main ingredients of which are two bioflavonoids, Luteolin and
Rutin. LutiMax contains higher doses of Luteolin than any other
product currently on the market, and we believe that due to our patent
protection, it will remain the only product on the market containing such high
doses of Luteolin that can deliver therapeutic levels of Luteolin to the
consumer.
Our other
line of products that is also manufactured and sold by SYNORx, Inc. under the
license granted from us is the LutiSport
TM line of products. The LutiSport line of products
include a lozenge for human consumption and a powder for canine
consumption. The canine product is currently sold by SYNORx, Inc. to
a pet products manufacturer. The LutiSport products for human
consumption have not yet been sold in the market. As with
LutiMax
TM, LutiSport
TM is a dietary supplement, two of the main ingredients of
which are the bioflavonoids Luteolin and Rutin. LutiSport has not
been introduced into the market as yet, but the introductory starting price to
be paid by consumers for this product is expected to be $39.95 per bottle
containing 60 lozenges.
Our
licensee obtains Luteolin from US distributors who import it from several
places, including China, where it is extracted from natural
sources. Our licensee purchases the Rutin from US distributors
of dietary supplements. The Luteolin, Rutin and certain other
substances are then combined in accordance with our process in a facility in
California. The ultimate products, LutiMax and LutiSport, are then
manufactured in the California facility in powder, pill, lozenge, or capsule
form (for LutiMax) and powder, lozenge and liquid form (for LutiSport) under our
specifications and guidelines. All of the ingredients in both LutiMax
and LutiSport are natural and none have been chemically altered or
modified.
Luteolin
(3’, 4’, 5, 7-tetrahydroxyflavone) is a flavonoid isolated from many plants
including Reseda luteola L.,
Achillea millefolium L., Chamomillae requitita, Cynara scolymus, Thymus
vulgaris, Limonium sinuatum, Arachis hypogaea L., Vitex rotundifolia, Erigeron
cadadensis L., Sophora angustifolia, Satureja obovata, Lonicera japonica.
The most commonly consumed plants containing Luteolin
are the peanut, artichoke, celery, red peppers and
broccoli. In its pure state, Luteolin is a yellow
microcrystalline powder. It is sparingly soluble in water, and is
slightly more soluble in alkali and alcohol and is therefore difficult to
absorb, which is the reason that we believe that Lutimax and LutiSport will be
products for which there is a demand.
Our
in-house, as well as internationally recognized and published research (which
includes, among others the following: Mast cells, T cells, and inhibition
by luteolin: implications for the pathogenesis and treatment of multiple
sclerosis . Adv
Exp Med Biol. 2007;601:423-30; Chemopreventive effects of minor
dietary constituents in common foods on human cancer cells . Biosci Biotechnol
Biochem. 2007 Jun;71(6):1500-4; Modulation of interleukin-1beta
mediated inflammatory response in human astrocytes by flavonoids: implications
in neuroprotection .Brain Res Bull. 2007 Jun 15;73(1-3):55-63; A critical role of luteolin-induced
reactive oxygen species in blockage of tumor necrosis factor-activated nuclear
factor-kappaB pathway and sensitization of apoptosis in lung cancer cells
.. Mol
Pharmacol. 2007 May;71(5):1381-8) has found that Luteolin has many health
related benefits. Our Patent protects the use of Luteolin as a treatment for the
prevention or cause of many diseases. Extracts from Chemomillae requitita
(chamomile) and Achillea
millefolium L. (yarrow), are rich in Luteolin and its
glycosides. They are well established for a wide range of beneficial
effects such as anti-oxidant activity. Luteolin, constituent of
artichoke leaf extract, showed a concentration-dependent inhibitory activity in
several models of oxidative stress. The antioxidant potential of
Luteolin, measured in Trolox test, is twice stronger than that of Vitamin
E. Luteolin is a significantly more potent antioxidant than the
synthetic antioxidant butylated hydroxytoluene (BHT), which is generally used in
oxygen sensitive processes to preserve foods. Luteolin has strong
scavenging properties for superoxide radicals. Luteolin is a potent
physical quencher of singlet oxygen. Luteolin inhibits single strand
breaks in DNA induced by singlet oxygen in a dose-dependent
manner. The enzyme xanthine oxidase is considered to be the most
prominent biological source of harmful superoxide radicals. Luteolin
is a strong competitive inhibitor of xanthine oxidase, which results in a
reduced formation of damaging free radicals including superoxide, the hydroxyl
radical, nitric oxide and peroxynitrate.
3
History
The
provisional patent application for the United States Patent No. 6,774,142 was
originally filed in 2001 by the inventors, Thomas P. Lahey and Vithal J.
Rajadhyaksha, two organic chemists, each of whom is currently an officer and
director of the Company. The U.S. Patent and Trademark Office granted
the patent in 2004. In 2002, all rights to the Patent were assigned by the
inventors to SYNORx, Inc., an entity owned by the inventors.
In 2007,
SYNORx, Inc. elected to transfer all rights to the Patent to
us. Effective May, 2007, we acquired the rights to the Patent and the
rights to the LutiMax formulas. In connection with such transaction,
we issued 8,794,042 shares of our common stock, representing approximately 59%
of our outstanding shares of common stock at the time to the shareholders of
SYNORx, Inc. Prior to that time, we had not engaged in any
nutraceutical business activities.
Funding
SYNORx
has provided inventory of LutiMax to us for resale and we intend to sell the
inventory dring the year.. We intend to generate working capital to fund our
business plan from royalty payments from our patent and sales of our products
manufactured for us by SYNORx, Inc. and other future licensees. If
such amounts are not adequate to cover our expenses, we intend to raise
additional capital form the sale of our securities. To date, we have
primarily derived our funding from capital investments from shareholders and to
a lesser extent from royalty fees.
RESEARCH
AND DEVELOPMENT
In the
United States SYNORx, Inc. currently conducts a portion of our research and
development of our products in small laboratories where chemical experimentation
and testing is done under the supervision of our Chief Executive Officer who is
also the Chief Executive Officer of SYNORx Inc. SYNORx, Inc. has also
outsourced our research and has provided grants to several institutions which
have larger research facilities including Stanford Research Institute, the
University of North Carolina at Chapel Hill, The VU University in Amsterdam, The
University of Illinois at Champaign Urbana, Massachusetts General Hospital, the
University of California, Irvine, and to several medical professionals, where
they have used our patented products or formulas to evaluate and test the
results of the combinations of various bioflavonoids. However, our research in
the United States is limited in scope and nature by regulations. SYNORx, Inc.
has conducted and continues to conduct extensive research in China, where the
scope of allowable testing is less expensive, broader in scope of testing, and
is approved at a faster pace than that of the United States. Although
our licensee does not conduct formal medical testing on humans in the United
States, our licensee has distributed products to consumers with various medical
conditions who have requested or purchased such products and have kept
testimonial records of the effects of our products reported to them by such
consumers while under the care of their personal physicians or medical
professionals. We expect our licensees to develop products by
identifying scientifically-supported ingredients that have broad therapeutic or
other health-related benefits which can be delivered through our patented
formulas. The research and development efforts in deciding on any
particular ingredient to include in any particular formula for any product will
primarily involve review of scientific literature and results of research
performed by our licensees and any outsourced research, active participation in
industry trade shows and seminars on new ingredients, gathering information
through relationships with existing suppliers and ongoing feedback from
sales and marketing personnel on current and future product
trends. We expect that the licensee(s) will include industry-accepted
ingredients into single-ingredient product formulas or complex formulas that
combine other natural-based dietary ingredients with added benefits to the
consumer seeking specific therapeutic activities. Although our
Company has only spent a minimal amount, $45,000, on research and
development of products, the inventors of the Patent and SYNORx, Inc. have spent
approximately $3,000,000 in the research and development in the processes and
formulas and efficacy of the products and formulas identified in the Patent that
resulted in the creation and improvements to the products known as LutiMax and
LutiSport.
MANUFACTURING
AND QUALITY CONTROL
The
manufacture of both LutiMax and LutiSport is a multi-step
process. The initial steps in the manufacturing process
are the isolation by extraction of the two main ingredients, Luteolin and
Rutin. SYNORx, Inc. purchases Luteolin from a US-based distributor
who imports the Luteolin from third-party manufacturers located in several
countries, including China. These third party manufacturers extract
Luteolin from natural food sources in accordance with our guidelines and Good
Manufacturing Practices (GMP). The Rutin is purchased from US-based
companies that import the Rutin from manufacturing companies located in China
and Brazil using GMP. The final steps of the process are conducted in
the United States in FDA-approved GMP facilities. The extracted Luteolin and
Rutin are then sent to a facility in California where they are combined with
other substances in accordance with our formulas and specifications and
manufactured under strict quality control and safety guidelines in the form of a
powder, pill, lozenge, or capsule in the case of LutiMax and the form of a
powder, lozenge and liquid in the case of LutiSport,, and then bottled, labeled,
and packaged for bulk distribution.
4
SYNORx,
Inc. is not substantially dependent on any single raw material supplier or
packaging supplier since alternative sources of materials, with equal quality,
could be quickly obtained if any of the current suppliers cease to supply them
adequately. Although SYNORx, Inc. currently uses only one
particular US-based distributor who currently relies on one third-party
manufacturer located in China to extract and provide us with the Luteolin used
in our product and one third–party raw material supplier located in the United
States to provide us with the extracted Rutin used in our products, we believe
that other distributors and contract manufacturers could be quickly secured if
these current manufacturers cease to perform adequately. Over the
past five years, SYNORx, Inc. has identified and evaluated several competitive
suppliers of Luteolin and Rutin within China, South America, and the United
States and is confident that the there is availability and supply of adequate
amounts of Luteolin and Rutin to meet the demand of SYNORx, Inc. and our
anticipated increased demand in the future should the existing suppliers
currently used cease to perform adequately.
SYNORx,
Inc. has also identified and tested the abilities of several contract
manufacturing companies to manufacture LutiMax and LutiSport and is confident
that manufacturing capacity, quality control, and pricing are substantially
redundant in the dietary supplement industry to meet our
needs. However, an unexpected interruption or a shortage in supply of
our key ingredients Luteolin and Rutin could adversely affect our
business.
DISTRIBUTION
We expect
to license the rights to market and distribute our products for human
consumption through licensees who utilize the internet for the placement of
orders, independent and chain health food stores, pharmacies, grocery and drug
chains and other direct-to-consumer retailers both internationally and in the
United States as well as directly to physicians for use with their
patients. In addition, with respect to our products for household
pets, we expect our licensee to continue to sell directly to pet food
wholesalers. To date, we have formalized arrangements for the
distribution of our products with one licensee, SYNORx, Inc., an entity founded
and owned by our chief executive officer and chief financial officer that was
the previous owner of the Patent. We have entered into a five- year non
exclusive patent license agreement (with an option by the licensee to renew for
additional five year periods through the effective dates of the Patent), with
SYNORx, Inc. pursuant to which we have granted them a license for the research,
development, marketing, distribution and sale of LutiMax and related
bioflavonoid-based products manufactured under the Patent. In
addition, the agreement states that any new patents applied for by us regarding
the utility of Luteolin or related compounds will be offered for license to
SYNORx, Inc. under a separate agreement. In consideration of the license,
SYNORx, Inc. has agreed to pay us an annual minimum royalty of $10,000 in
addition to royalty payments ranging from 5% to 10% of sales depending on sales
volume. To date, we have received minimal royalty fees on sales of
our products by SYNORx, Inc. The agreement does provide that we have
rights to inspect products for quality control and that all products must meet
minimum standards for dietary supplements. Prior to our acquisition
of the Patent from SYNORx, Inc., SYNORx, Inc. had limited distribution of
LutiMax through distributors on the internet and directly to physicians. SYNORx,
Inc. has ongoing sales of LutiMax with a substantial percentage of the customers
being repeat customers who have been using the product for many
years. The fulfillment of internet and phone orders from new
and existing customers is currently performed by SYNORx,
Inc. We generally expect to maintain sufficient inventories to
meet customer orders as received.
In
January 2008, SYNORx, Inc. entered into a three year exclusive agreement with a
manufacturer and distributor of canine supplements. The agreement
provides that the manufacturer-distributor will purchase certain minimum yearly
quantities (which minimum increases each year) of both LutiMax and LutiSport pet
food for use in canine supplements. The exclusivity is contingent
upon the distributor having purchased the minimum quantity in the prior
year.
COMPETITION
The
market for nutraceuticals is highly competitive. This market includes
manufacturers, distributors and physicians. Numerous manufacturers and
distributors compete with us and our licensee for customers throughout the
United States, Canada and internationally in the packaged nutritional supplement
industry selling products to retailers such as mass merchandisers, drug store
chains, independent pharmacies and health food stores. Many of the
competitors are substantially larger and more experienced than us and our
licensee, have longer operating histories, and have materially greater financial
and other resources than us and our licensee. We may not be able to
successfully compete with them in the marketplace nor may our
licensees.
The
principal competition in the health food store distribution channel that we and
our licensees will face comes from a limited number of large nationally known
manufacturers and many smaller manufacturers of dietary
supplements. Since neither we nor our licensee market products based
upon the Patent into mass-market distribution channels, neither of us
anticipate facing direct competition from broad line
manufacturers and major private label manufacturers and other
companies. However, we and our licensee face indirect competition
from mass-market distribution channels to the extent that consumers may choose
to forgo their purchases of certain dietary supplements in the health food store
distribution channels based on consumer purchasing practices, limited consumer
knowledge of the therapeutic benefits of products based upon the Patent or the
price and availability of products based upon the Patent. In
addition, we and our licensees will compete with several large pharmaceutical
companies for therapeutic and symptomatic relief of disease symptoms.
5
The main
competitors include, but are not limited to, Beyond a Century, Dr. Whittaker,
Unigen Pharma, Dr’s Best, Metagenics, Twin Labs,
Herbalife, Nutrilite, and Isagenix. We and our licensees
also face competition in the health food store distribution channels from
private label dietary supplements offered by health and natural food store
chains. In addition, we anticipate that there will be competition
from sellers that utilize electronic commerce.
The
market is highly sensitive to the introduction of new products. As a
result, in order to remain competitive, we and our licensees will need to
successfully introduce new products.
We and
our licensees also face competition form many large drug companies who see
natural dietary supplements such as LutiMax as competitive to their medicines
and drugs. Many of these drug companies are substantially larger and
more experienced than us and our licensees, have longer operating histories, and
have materially greater financial and other resources than us and our
licensees. These drug companies also have substantially greater
political influence and regulatory support for the use of their products in the
treatment of diseases.
In
addition, our products that are added as supplements to pet food face
competition from many manufacturers of other pet food supplements. As
with the nutraceutical market, many of the pet food competitors are
substantially larger and more experienced than us, have longer operating
histories, and have materially greater financial and other resources than
us. Although our product line is unique, we may not be able to
successfully compete with them in the marketplace.
We are
also subject to competition in the attraction and retention of
employees. Many of our competitors have greater financial resources
and can offer employees compensation packages that are difficult for us to
compete with.
We
believe that we will be able to compete with other nutritional supplement, drug
companies and pet food supplement manufacturers because we believe that products
based upon our Patent are superior products because of their numerous health
benefits and we have patent protection within the United States.
TRADEMARKS
AND PATENTS
We regard
our patents, trademarks, copyrights, domain names, trade dress, trade secrets,
proprietary technologies, and similar intellectual property as important to our
success, and we rely on patent, trademark and copyright law, trade-secret
protection, and confidentiality and/or license agreements with our employees,
customers, partners, suppliers and others to protect our proprietary
rights.
We have
received patent protection in the United States for the individual compounds,
formulas and compositions in products manufactured and sold under the trade name
LutiMax and LutiSport. SYNORx, Inc. plans to register the
LutiMax name and the LutiSport name in the United States and plans to register
the trade name LutiMax and LutiSport in certain foreign countries SYNORx has
also filed patent applications in China, Korea, Japan, Brazil and the European
Union for the individual compounds, formulas and compositions in products
manufactured and sold under the trade name LutiMax and LutiSport. The steps we
take to protect our proprietary rights in our brand name may not be adequate to
prevent the misappropriation of our brand name in the United States or
abroad. Existing patent and trademark laws afford only limited
practical protection for our product lines. The laws and the level of
enforcement of such laws in certain foreign countries where we market our
products often do not protect our proprietary rights in our products to the same
extent as the laws of the United States. However, because of the
rapid pace of the natural product industry's development, we believe that the
legal protection for our product is less significant to our success than the
knowledge, technical expertise and marketing skills of our personnel, the
frequency of product expansion and pace of market penetration.
INDUSTRY
OVERVIEW
The
nutritional supplements industry is highly fragmented and intensely competitive.
It includes companies that manufacture and distribute products which are
generally intended to enhance the body's performance as well as to enhance well
being. Nutritional supplements include vitamins, minerals, dietary supplements,
herbs, botanicals and compounds derived therefrom. Opportunities in the
nutritional supplements industry were enhanced by the enactment of the Dietary
Supplement Health and Education Act of 1994 ("DSHEA"). Under DSHEA,
vendors of dietary supplements are now able to educate consumers regarding the
effects of certain component ingredients. However, they are subject
to many regulations regarding labeling and advertising of such products. See
“Regulation” below.
6
REGULATION
In both
the United States and foreign jurisdictions, we as well as our licensees are
subject to compliance with laws, governmental regulations, administrative
determinations, court decisions and similar constraints. Although the
products manufactured that are covered by our Patent are not deemed to be drugs,
they are deemed to be dietary supplements and therefore are subject to all
regulations regarding products ingested by consumers and dietary
supplements. Such laws, regulations and other constraints exist at
the federal, state and local levels in the United States and at all levels of
government in foreign jurisdictions. These regulations include
constraints pertaining to (i) the manufacturing, processing, formulating,
packaging, labeling, distributing and selling (ii) advertising of products and
product claims (iii) transfer pricing, and (iv) method of use.
In the
United States, the formulation, manufacturing, packaging, storing, labeling,
advertising, distribution and sale of products covered by the Patent are subject
to regulation by various governmental agencies, which include, among others (i)
the Food and Drug Administration (“FDA”), (ii) the Federal Trade Commission
(“FTC”), and (iii) the Consumer product Safety Commission. The most active
regulation has been administered by the Food and Drug Administration, which
regulates the formulation, manufacture and labeling of products pursuant to the
Federal Food, Drug and Cosmetic Act (‘FDCA”) and regulations promulgated
thereunder. Most importantly, the FDA has guidelines under the Dietary
Supplement Health and Education Act (DSHEA) to enable the manufacturing,
advertising, marketing, and sale of dietary supplements. In addition,
the FTC has overlapping jurisdiction with the FDA to regulate the interstate
labeling, promotion, advertising and sale of dietary supplements, over the
counter drugs, and foods.
Compliance
with applicable FDA and any state or local statutes is crucial. Although we
believe that we and our licensee are in compliance with applicable statutes,
should the FDA amend its guidelines or impose more stringent interpretations of
current laws or regulations, we or our licensees may not be able to comply with
these new guidelines. As an indirect marketer of a product that is ingested by
consumers, we are always subject to the risk that one or more of our products
that currently are not subject to regulatory action may become subject to
regulatory action. Such regulations could require the reformation of
certain products to meet new standards, market withdrawal or discontinuation of
certain products not able to be reformulated, imposition of additional record
keeping requirements, expanded documentation regarding the properties of certain
products, expanded or different labeling and/or additional scientific
substantiation. Failure to comply with applicable requirements could
result in sanctions being imposed on us, our licensees, or the manufacturers of
any of our products, including but not limited to fines, injunctions, product
recalls, seizures and criminal prosecution.
The FDCA
generally regulates ingredients added to foods and requires that such
ingredients making up a food product are themselves safe for their intended
uses. In this regard, generally when a company adds an ingredient to
a food, the FDCA requires that the ingredient either be determined by the
Company to be generally regarded as safe (“GRAS”) by qualified experts or go
through FDA’s review and approval process as a food additive.
The FDCA
has been amended with respect to dietary supplements by the Dietary Supplement
Health and Education Act of 1994 (“DSHEA”). The DSHEA provides a
statutory framework governing the safety, composition and labeling of dietary
supplements. It regulates the types of statements that can be made concerning
the effect of a dietary supplement. The DSHEA generally defines the
term “dietary supplement” to include products that contain a “dietary
ingredient” which may include vitamins, minerals, herbs or other botanicals,
amino acids, and metabolites. Our products contain bioflavonoids currently
consumed as part of a healthy and regular diet of human beings and therefore are
considered dietary supplements. Under the DSHEA, a dietary supplement
manufacturer is responsible for ensuring that a dietary supplement is safe
before it is marketed. Generally, under DSHEA, dietary ingredients that were on
the market before October 15, 1994 may be sold without FDA pre-approval and
without notifying the FDA. On the other hand, a new dietary
ingredient (one not lawfully on the market before October 15, 1994), such as
LutiMax, requires proof that it has been present in the food supply as an
article used for food without being chemically altered, or evidence of a history
of use or other evidence of safety establishing that it is reasonably expected
to be safe. With respect to products or supplements that are
manufactured and distributed on our behalf, we intend to comply with and will
endeavor to bring our operations and the operations of our licensees into
compliance with regulatory requirements relating to such products or
supplements. However, the FDA may not accept the evidence of safety
for any new dietary ingredients that we, or our licensees with our approval, may
decide to use, and the FDA’s refusal to accept such evidence could result in
regulation of such dietary ingredients as adulterated, until such time as
reasonable expectation of safety for the ingredient can be established to the
satisfaction of the FDA.
With
respect to labeling, DSHEA permits “statements of nutritional support” for
dietary supplements without FDA pre-approval. Such statements may describe how
particular dietary ingredients affect the structure, function or general well
being of the body, or the mechanism of action by which a dietary ingredient may
affect body structure, function or well being (but may not state that a dietary
supplement will diagnose, mitigate, treat, cure or prevent a disease). This,
therefore, severely limits the direct advertising of the healthcare benefits of
products based upon the Patent. A company making a statement of
nutritional support must possess substantiating evidence for the statement, and
disclose on the label that the FDA has not reviewed that statement and that the
product is not intended to diagnose, treat, cure or prevent a disease.
7
We intend
to cause our licensees to label products based upon the Patent with statements
of nutritional support and believe that we have adequate substantiating evidence
to support such statements. In fact, the label on the LutiMax and
LutiSport bottles contains the following statements “These statements have not
been evaluated by the FDA. This product is not intended to diagnose,
treat, cure or prevent any disease.” This or similar language is
specifically required to be on every label and advertisement of every dietary
supplement sold within the United States under DSHEA. However, the
FDA may determine that a given statement of nutritional support that we or our
licensees decide to make is a drug claim rather than an acceptable nutritional
support statement. Such a determination would require deletion or substantiating
proof of the drug claim.
In
addition, DSHEA allows the dissemination of “third party literature”,
publications such as reprints of scientific articles linking particular dietary,
ingredients with health benefits. Third party literature may be used
in connection with the sale of dietary supplements to consumers. Such
a publication may be so used if, among other things, it is not false or
misleading, no particular brand of dietary supplement is promoted and a balanced
view of available scientific information on the subject matter is presented.
There can be no assurance, however, that all pieces of third party literature
that may be disseminated in connection with our products will be determined by
the FDA to satisfy each of these requirements, and any such failure could
subject the product involved to regulation as a new drug or as a “misbranded”
product, causing us to incur substantial fines and penalties.
The
products covered by the Patent and product related activities may also be
subject to regulation by other regulatory agencies, including but not limited to
the Federal Trade Commission (“FTC”), the Consumer Products Safety Commission,
the United States Department of Agriculture, the United States Postal Service,
the United States Environmental Protection Agency and the Occupational Safety
and Health Administration. Advertising of dietary supplement products is subject
to regulation by the FTC under the Federal Trade Commission Act (“FTCA”). The
FTCA prohibits unfair methods of competition and unfair or deceptive trade acts
or practices in or affecting commerce. Furthermore, the FTCA provides that the
dissemination or the causing to be disseminated of any false advertising
pertaining to drugs or foods, which would include dietary supplements, is an
unfair or deceptive act or practice. Under the FTC’s Substantiation Doctrine, an
advertiser is required to have a “reasonable basis” for all objective product
claims before the claims are made. Pursuant to this FTC requirement, we are
required to have adequate substantiation of all material advertising claims made
for products covered by the Patent. Failure to adequately substantiate claims
may be considered either deceptive or unfair practices.
The FTC
is authorized to use a variety of processes and remedies for enforcement, both
administratively and judicially including compulsory process, cease and desist
orders, and injunctions. FTC enforcement can result in orders requiring, among
other things, limits on advertising, corrective advertising, consumer redress,
divestiture of assets, rescission of contracts and such other relief as may be
deemed necessary. State and local authorities can also regulate advertising and
labeling for dietary supplements and conventional foods.
Our
activities and those of our licensees are also regulated by various agencies of
the states and localities in which products based upon the Patent are
sold. The products covered by the Patent and product-related
activities may also be regulated by the applicable regulatory agencies in other
countries in which the products are sold. In foreign markets, prior to
commencement of operations and prior to making sales, our licensees may be
required to obtain approval, license or certification from the country’s agency
governing health. The approval process can be lengthy and costly and
may require reformulation of products or labeling. However, our
failure or the failure of our licensees to comply with foreign regulations could
result in products being rejected for sale in such country.
We
believe that current and reasonably foreseeable governmental regulation will
have minimal impact on our business and that of our licensees.
Our
licensee, SYNORx, Inc., previously applied for approval of synthetically
produced Luteolin (non-naturally occurring Luteolin manufactured by synthetic
organic chemistry) as a new dietary ingredient under DSHEA. Although
the application was rejected by the FDA, our licensee, SYNORx, Inc., believes
and we believe that adequate information exists in the currently published
medical and scientific literature to support the use of synthetically produced
Luteolin as a dietary supplement. Use of synthetically produced
Luteolin would result in an increase in the supply of Luteolin, which we believe
would result in a decrease in the cost of Luteolin. However,
without such approval, our licensee, SYNORx, Inc., and therefore we, do not use
synthetically produced Luteolin. As stated previously, our licensee SYNORx, Inc.
and we use only naturally occurring Luteolin isolated from natural food sources
that has not been chemically altered. Therefore, we believe we are in
full compliance will all FDA regulations and guidelines.
8
ITEM
1A. RISK FACTORS
An
investment in our securities is highly speculative and involves a high degree of
risk. Therefore, in evaluating us and our business you should carefully consider
the risks set forth below, which are only a few of the risks associated with
investing in our common stock. You should be in a position to risk the loss of
your entire investment.
Risks
Relating to Our Business
We
have a limited operating history.
We were
incorporated in 2004 and have a limited operating history in the nutraceutical
business. Our only nutraceutical business activities to date have
been the acquisition of the Patent, the development of a business plan to
exploit the Patent and a limited number of indirect sales of the
products which are covered by the Patent. We are subject to all of
the business risks and uncertainties associated with any new business
enterprise. In light of our lack of any operating history, there can be no
assurance that we will be able to implement any aspect of our business plan or
establish a successful business.
We
may not be profitable.
For the
year ending December 31, 2007, we have had limited indirect sales that provided
royalty revenue of $2,500, no income and sustained a net loss of
$230,123. During the year ended December 31, 2007, we did not pay or accrue
any salary expense; however commencing January 1, 2008 we expect to accrue
salary expense and to pay salaries at such time as we have adequate funds to
make such payments. Therefore, we expect to incur additional
expenses. In order to establish our business, we will need to rely on
the sales of the products and royalty fees and will incur expenses for
advertising, information systems, rent and additional personnel to support these
activities in addition to the salary expenses already mentioned. We
therefore expect to incur substantial operating losses for the foreseeable
future. Our ability to become profitable depends on our ability to
have successful operations and the ability of our licensees to generate and
sustain sales, while maintaining reasonable expense levels, all of which are
uncertain in light of our absence of any prior operating history.
We may not be able to continue as a
going concern.
During
the year ended December 31, 2007 we had minimal income from operations but
incurred $232,623 of operating expenses and at December 31, 2007 had
an accumulated deficit of $251,170 and stockholder’s deficit of
$100,763. During the year ended December 31, 2006 we had no income
from operations, and at December 31, 2006 had an accumulated deficit of $21,047
and a stockholder’s deficit of $7,800. The opinion of our independent
registered accounting firm for our fiscal years ended December 31, 2006 and
December 31, 2007 is qualified subject to substantial doubt as to our ability to
continue as a going concern. See “Report of Independent
Registered Public Accounting Firm” and the notes to our Financial
Statements.
We
face substantial uncertainties in establishing our business.
To date,
our only material business activities have been the acquisition of the Patent,
the development of our business plan and a limited number of indirect sales of
our products. We have not generated any income and have generated
minimal revenue.
We
believe that in order to establish a successful business we must, among other
things, hire personnel to run our day to operations, develop a distribution
network and establish a customer base. If we are unable to accomplish
one or more of these goals, our business may fail.
Our
licensee depends on third-party suppliers and manufacturers. Any
disruption or extended delay in product supply from any of our third-party
suppliers could have a significant adverse impact on our
operations.
There are
numerous companies that produce or supply nutraceutical products. We
do not manufacture any of our ingredients for our products or the products
themselves directly and our licensee depends entirely on third party
manufacturers and suppliers. Our licensee does not have guaranteed
supply or pricing arrangements with its suppliers, but submits purchase orders
and pays for ingredients and materials as needed. As a result, our licensee
risks increased cost of materials and difficulty in procuring
products.
To better
align its costs with market conditions and to increase productivity and
operational efficiency, our licensee has outsourced, and plans to increase the
outsourcing of, certain functions to third parties. Our licensee currently
utilizes one raw material supplier in the United States to provide it with
natural Luteolin extracted from plants that is used in the manufacture of our
products, one raw material supplier in the United States to provide it with the
extracted Rutin used in the manufacture of our products and one manufacturer in
California to combine the ingredients in accordance with our Patent to produce
the final end product, LutiMax in the form of a powder, pill, lozenge, or
capsule or LutiSport in the form of a powder, lozenge or
liquid.
9
The
ability of our licensee and any future licensees to enter new markets and
sustain satisfactory levels of sales in each market will be dependent in part
upon the ability of these suppliers and manufacturers or other suitable outside
suppliers and manufacturers to properly perform their functions and to comply
with local regulations or market environments, for introduction into such
markets. Finally, the development of additional new products in the future will
likewise be dependent in part on the research and services of SYNORx, Inc. While
outsourcing may reduce the cost of operations, it also reduces direct control by
our licensees over the services rendered. Although we attempt to
select reputable licensees and will conduct quality control tests, it is
possible that one or more of these providers could fail to perform as we expect.
In addition, the expanded role of third party providers has required and will
continue to require us to implement and adopt new procedures and processes for
retaining and managing these providers.
The
failure of any manufacturer to supply products as required by our licensees
could have a material adverse effect on our business, results of operations and
financial condition. If we and our licensees do not timely and effectively
develop and implement our outsourcing strategy or if third party providers do
not perform as anticipated, our licensees may experience operational
difficulties, increased costs, or even manufacturing delays, which could
materially and adversely affect our business, financial condition and results of
operations.
Although
we believe that a number of alternative manufacturers are available and that our
licensees could replace our main suppliers with alternative sources at
comparable prices and terms, any disruption or extended delay in raw material
products supply from any of our third party suppliers could have a significant
adverse impact on our operations. In addition, the time needed to
replace any main supplier could adversely affect our operations by delaying
shipments and potentially losing customers to our competition.
Our
results of operations may be significantly affected by the public’s perception
of our Company and similar companies. The products covered by the Patent have
not been approved by the FDA and have not been endorsed by any organization
searching for cures for the diseases that we believe such products treat or
prevent. Although the naturally occurring chemically unaltered
products covered by the Patent are not required to be approved by the FDA, many
consumers only purchase FDA approved products. In addition, our
business could be adversely affected if any of the products covered by the
Patent or similar products distributed by other companies proves to be harmful
to consumers or if scientific studies provide unfavorable findings regarding the
safety or effectiveness of our products or any similar products. The
dietary supplement products based upon our Patent contain vitamins, minerals,
extracts from herbs and other ingredients that we regard as safe when taken as
directed by us and that various scientific studies and literature have suggested
may offer health benefits. While quality control testing is conducted
on the ingredients in such products, we are highly dependent upon consumers'
perception of the overall integrity of the dietary supplements
business. The safety and quality of products made by competitors in
our industry may not adhere to the same quality standards that ours do, and may
result in a negative consumer perception of the entire industry. If
the products based upon the Patent suffer from this negative consumer
perception, it is likely our sales will slow and we will have difficultly
generating revenues.
If
the products sold by our licensees do not have the healthful effects intended,
our business may suffer.
In
general, the products sold on our behalf by our licensees consist of food,
nutritional supplements which are classified in the United States as “dietary
supplements” which we believe do not require approval from the FDA or other
regulatory agencies prior to sale. Although many of the ingredients
in such products are vitamins, minerals, herbs and other substances for which
there is a long history of human consumption, they contain innovative
ingredients or combinations of ingredients. Although we believe all
of such products and the combinations of ingredients in them are safe when taken
as directed by the Company, there is little long-term experience with human or
other animal consumption of certain of these innovative product ingredients or
combinations thereof in concentrated form. The products covered by
the Patent could have certain side effects if not taken as directed or if taken
by a consumer that has certain medical conditions. In addition, such
products have been proven to be more effective when taken in accordance with
certain instructions which include certain dietary
restrictions. Therefore, such products may not be effective if such
instructions are not followed. Furthermore, there can be no assurance
that any of the products covered by the Patent, even when used as directed, will
have the effects intended or will not have harmful side effects. We
perform research and/or safety and purity tests in connection with the
formulation and production of the products manufactured covered by the Patent,
and from time to time our licensees may conduct or sponsor clinical studies. If
any of such products were shown to be harmful or negative publicity resulted
from an individual who was allegedly harmed by one product, it could hurt our
business, profitability and growth prospects.
10
We and our licensees are at risk for
product liability claims and require adequate insurance to protect us against
such claims. If we are unable to secure the necessary insurance
coverage at affordable cost to protect our business against any claims, then our
exposure to liability will greatly increase and our ability to market and sell
our products will be more difficult since certain customers rely on this
insurance in order to distribute our products .
We and
our licensees are constantly at risk that consumers and users of our products
will bring lawsuits alleging product liability. Even though we do not
manufacture products, a consumer could bring a lawsuit against us alleging
product liability due to our ownership of the Patent. We are not
aware of any claims pending against us, our licensees or the products covered by
the Patent that would adversely affect our business. While we will
continue to attempt to take what we consider to be appropriate precautions,
these precautions may not protect us from significant product liability exposure
in the future. We currently do not have any product liability
insurance and there can be no assurance that even if we were to attempt to
obtain such insurance that we will be able to obtain, retain coverage or that
this coverage will be cost-justified or sufficient to satisfy any future
claims. If we are sued, we may not have sufficient resources to
defend against the suit or to pay damages. A material lawsuit could
negatively impact our business.
The
success of our business will depend upon our ability to create brand
awareness.
The
market for nutraceuticals is already highly competitive, with many well-known
brands leading the industry. Our ability to compete effectively and
generate revenue will be based upon our ability to create awareness of the
products based upon the Patent distinct from those of our competitors. However,
advertising and packaging and labeling of such products will be limited by
various regulations. We believe that LutiMax and LutiSport are
superior products that have many health benefits based upon our
research. Our success will be dependent upon our ability to convey
this to consumers.
We
must continue to develop and introduce new products to succeed.
The
nutraceutical industry is subject to rapid change. New products are constantly
introduced to the market. Our ability to remain competitive depends
on our ability and that of our licensees to enhance existing products, continue
to develop and manufacture new products in a timely and cost effective manner,
to accurately predict market transitions, and to effectively market our
products. Our future financial results will depend to a great extent
on the successful introduction of several new products. We cannot be certain
that we, or our licensees, will be successful in selecting, developing,
manufacturing and marketing new products or in enhancing existing
products.
The
success of new product introductions depends on various factors, including the
following:
·
proper
new product selection;
·
successful
sales and marketing efforts;
·
timely
delivery of new products;
·
availability
of raw materials;
·
pricing
of raw materials;
·
regulatory
allowance of the products; and
·
customer
acceptance of new products.
Our
licensees face challenges in developing new products, primarily with funding
development costs and diversion of management time. On a regular
basis, we and our licensees will evaluate opportunities to develop new products
through product line extensions and product modifications. However,
there is no assurance that we or our licensees will successfully develop product
line extensions or integrate newly developed products into our
business. In addition, newly developed products may not contribute
favorably to our operations and financial condition. Our failure to
develop, or have developed on our behalf, and introduce new products on a timely
basis would adversely affect our future operating results.
We may face significant competition
which could adversely affect our revenues, results of operations and financial
condition .
The
market for nutraceuticals is highly competitive. Numerous
manufacturers and distributors compete with us and our licensees for customers
throughout the United States, Canada and internationally in the packaged
nutritional supplement industry selling products to retailers such as mass
merchandisers, drug store chains, independent pharmacies, and health food
stores. Many of our competitors are substantially larger and more
experienced than we are. In addition, they have longer operating
histories and have materially greater financial and other resources than we or
our licensees do. They therefore have the advantage of having
established reputations, brand names, track records, back office and managerial
support systems and other advantages that we will be unable to duplicate in the
near future. Moreover, many competitors, by virtue of their longevity
and capital resources, have established lines of distribution to which neither
we nor our licensees have access, and are not reasonably likely to duplicate in
the near term, if ever. Many of these competitors are private companies, and
therefore, we cannot compare our revenues with respect to the sales volume of
each competitor. If we or our licensees cannot compete in the
marketplace, we may have difficulty selling our products and generating
revenues. Additionally, competition may drive down the prices of our
products, which could adversely affect our cost of goods sold and our
profitability, if any.
11
We are
also subject to competition from many drug companies due to the fact that our
product has what we believe to be health benefits that certain drugs are created
to produce.
The sale
of our products as pet food supplements is also subject to competition from
manufacturers of pet food supplements, many of whom are substantially larger,
have more experience, longer operating histories and greater financial and other
resources than us.
We are
also subject to competition in the attraction and retention of
employees. Many of our competitors have greater financial resources
and can offer employees compensation packages that are difficult for us to
compete with.
Our
success is dependent upon our ability to protect and promote our proprietary
rights.
Our
ability to compete effectively depends, to a significant extent, on our ability
to maintain the proprietary nature of our intellectual
property. We believe that our trademarks and patent have
significant value and are important in the manufacture and marketing of products
covered by the Patent. The inventors of the Patent were granted
patent protection for our formulas, applications for use, and the universal use
of several unique compounds in 2004 and assigned all rights to the Patent to us
in 2007, however, there can be no assurance that the scope of the Patent is
broad enough to protect all of our interests or that it cannot be circumvented,
that it will not violate the proprietary rights of others, or that we will not
be prevented from using our product and trademarks if
challenged. In fact, even if broad enough, others may still
infringe upon our rights, which will be costly to protect. We currently believe
that there are third parties infringing our rights and we are currently
evaluating whether the legal costs involved in protecting our rights outweigh
the benefits that we will derive from commencing such legal
action. Furthermore, the laws of other countries may less effectively
protect our proprietary rights than U.S. laws. Infringement of our rights by a
third party could result in uncompensated lost market and revenue
opportunities.
We
depend upon our executive officers and key personnel.
Our
performance depends substantially on the performance of our executive officers
and other key personnel. Our chief executive officer and our chief
financial officer, each organic chemists, are the inventors of the process and
formulas used to manufacture the products sold by us and our
licensee. They also are in control of our licensee and therefore we
anticipate that they will be the developers of any additional products that are
manufactured by our licensee. The loss of services of
either of them could have a material adverse effect on our business, revenues,
and results of operations or financial condition. We do not maintain
key person life insurance on the lives of our officers or key
employees.
The
success of our business in the future will depend on our ability to attract,
train, retain and motivate high quality personnel. Competition for
talented personnel is intense, and we may not be able to continue to attract,
train, retain or motivate other highly qualified technical and managerial
personnel in the future. In addition, market conditions may require
us to pay higher compensation to qualified management and technical personnel
than we currently anticipate. Any inability to attract and retain
qualified management and technical personnel in the future could have a material
adverse effect on our business, prospects, financial condition, and/or results
of operations.
Our current management may control
the right to vote our common stock and they may be able to control our company
indefinitely.
The
members of our Board and management team will collectively own or control the
right to vote over 54% of our outstanding common stock. As a result,
our Board and management may collectively be able to effectively control our
management and affairs and all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions,
for an indefinite period of time. This concentration of ownership
might have the effect of delaying or preventing a change in control and might
adversely affect the market value of our common stock in the future and the
voting and other rights of our other stockholders.
12
Mr.
Lahey and Dr. Rajadhyaksha do not currently devote all of their time to our
Company.
Acting as
our President and Chief Executive Officer is not the sole business activity of
Mr. Lahey nor is Dr. Rajadhyaksha’s sole business activity acting that of acting
as our Chief Financial Officer, Vice President, Secretary and
Treasurer. Each of Mr. Lahey and Dr. Rajadhyaksha have complete
discretion to decide how much time they will devote to our
business.
We
need to obtain funding in order to implement our business plan.
To date,
for our funding, we have relied on limited capital contributions from our
current shareholders. For the year ended December 31, 2007 we
had minimal revenue from royalty payments. As of December 31, 2007, we had very
minimal cash and cash equivalents. We will continue to rely on
contributions from our shareholders until such time that the Company is selling
products and generating revenues.
If our
anticipated sales for the next few months do not meet our expectations, our
existing resources will not be sufficient to meet our cash flow requirements for
the next few months. Furthermore, if our expenses exceed our
anticipations, we will need additional funds to implement our business
plan. We will not be able to fully establish our business if we do
not have adequate working capital and if we do not have adequate working capital
we may need to raise additional funds, whether through a stock offering or
otherwise.
We may
encounter significant difficulties in raising capital in light of the fact that
we have limited operations and have not yet generated substantial
revenues. If we are unable to obtain the necessary funding, we would
need to modify our business plan or discontinue our business.
We
currently do not have the personnel required to implement our business
plan.
As of
December 31, 2007, we had no employees and retained a few outside consultants
during the course of the year. Additionally, our two officers devote
a substantial portion of their business time and effort to other
businesses.
To date,
the Company has no sales or marketing capability. We still need to hire
personnel in the areas of accounting, customer service and marketing in order to
operate our business as planned. Furthermore, our future performance
will be substantially dependant on our ability to hire and retain employees with
the experience and skills to implement our business plan. The
creation of an infrastructure to commercialize our technology may be difficult,
expensive and time consuming. If we are unable to attract and retain
these personnel, it would have a material adverse effect on our business
prospects, financial condition, and results of operations.
The
Company’s management may experience difficulty managing its growth.
The
Company's officers have had limited experience in managing large companies.
Further growth and expansion of the Company's business would place additional
demands upon the Company's current management and other resources and would
require additional production capacity, working capital, information systems,
management, operational and other financial resources. Further growth of the
Company will depend on various factors, including, among others, its ability to
attract and retain new employees, the development of new products, competition
and federal and state regulation of the nutritional supplements
industry. Not all of the foregoing factors are within the control of
the Company. No assurance can be given that the Company's business will grow in
the future and that the Company will be able to effectively manage such growth.
If the Company is unable to manage growth effectively, the Company's business,
results of operations and financial condition would be materially adversely
affected.
We
do not have an experienced chief financial officer.
At the
present time, Dr. Rajadhyaksha serves as our Chief Financial
Officer. He does not have significant experience in this area and he
does not devote his full time to the Company’s business. We have
retained an outside consultant to aid Dr. Rajadhyaksha in this role, however the
consultant also does not devote his full time and attention to our business nor
is he involved in our day to day operations. Our ability to generate
accurate financial statements on a timely basis may be impaired by our current
situation. Furthermore, our ability to establish appropriate
accounting controls and systems may also be impaired. This could
result in the failure to collect revenues that are due, overpayment for products
and other accounting related problems. These problems could have a
material adverse effect on our business, financial condition or results of
operations.
13
We will be subject to potential
conflicts of interest due to the control of our Company by our principal
shareholders.
Our
principal shareholders, Thomas P. Lahey and Vithal J. Rajadhyaksha,
currently control more than 54% of our outstanding stock and serve as our only
directors. Mr. Lahey and Mr. Rajadhyaksha currently own a controlling
interest in SYNORx, Inc., and Mr. Lahey currently owns a controlling interest in
Vapor Extraction Technology, Inc. SYNORx, Inc. is currently the only licensee,
manufacturer, and distributor of our product. As a result, it is
possible that the business activities of our principal shareholders with SYNORx,
Inc. and our activities may overlap and compete. If this occurs, our
directors may be subject to conflicts of interests in determining how to address
such competition. These conflicts could result in a loss of revenues
to our company and adversely affect our potential profitability.
We
have not paid, and do not intend to pay, cash dividends in the foreseeable
future.
The
payment of cash dividends is dependent upon our revenues and earnings, if any,
capital requirements and our general financial conditions, as well as
requirements for surplus under state law. At present, we are unable
to pay any cash dividends to any shareholder and we do not intend to do so in
the immediate future. We intend to reinvest any future earnings in
developing and expanding our business.
We
are subject to and affected by extensive laws, governmental regulations,
administrative determinations, court decisions and similar
constraints at the federal, state and local markets in both the
United States and foreign countries, which could impose limitations on our
business practices and cause us to incur costs.
The
manufacturing, processing, formulation, packaging, labeling, distributing,
selling and advertising of our products are subject to regulation by one or more
federal agencies, including the Food and Drug Administration, the Federal Food,
Drug and Cosmetic Act, the Dietary Supplement Health and Education Act, and the
Federal Trade Commission. We believe that we and our licensee are in compliance
with applicable statutes and regulations, however, should such statutes and
guidelines be amended or interpreted more stringently, then we or the licensee
may be unable to remain in compliance. Amendments could require
us or our licensee to incur additional costs for the reformation of certain
products to meet new standards and the imposition of additional record keeping
requirements, as well as fines and penalties for noncompliance. In
addition, we would experience a reduction in revenue if we are forced to
withdraw from the market or our licensees were forced to discontinue certain
products. Furthermore, our ability to advertise the health benefits
of the products manufactured based upon our Patent will be severely limited by
these various regulations.
We
will be subject to laws regarding the use of the internet that could have an
adverse impact on our current business practices.
The
applicability to the internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such
new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the internet and online commerce
could have a material adverse effect on our business, prospects, financial
condition and results of operations. If we were alleged to have
violated federal, state or foreign, civil or criminal law, even if we could
successfully defend such claims, it could have a material adverse effect on our
business, prospects, financial condition and results of operations.
The ability of our licensees to
manufacture products
based upon our Patent is subject to availability of raw
materials.
Our
licensee currently obtains our two main ingredients, Luteolin and Rutin from
third parties. At the present time, the Luteolin and Rutin used in
the products sold by our licensee are extracted from
plants. Therefore, the ability of our licensee to manufacture LutiMax
and LutiSport
could be subject to availability of various plant sources, which could be
impacted by weather conditions. In addition, the operating results of our
licensees will be subject to fluctuations in the prices of ingredients for
products, labor, as well as the prices of diesel and gasoline fuel which could
impact the costs they incur in obtaining the ingredients and importing them to
the United States to the facility where LutiMax and LutiSport are manufactured
and therefore cause them to request lower royalty payments to us.
Failure to establish and maintain
distributor relationships could negatively impact sales of our
products.
We plan
to license the distribution of products based upon our Patent in the United
States through various distributors as well as internationally through
independent distributors. Our success will in part depend upon our ability to
recruit, retain and motivate licensees and distributors. In our efforts to
attract and retain licensees and distributors, we will compete with other
companies that are more established. Our operating results will be
harmed if our products do not generate sufficient interest to attract and retain
distributors.
14
We
will not be able exert full control over our licensees and distributors and this
could lead to harmful claims against us.
In order
to keep our costs at a minimum, we have non-exclusively licensed the
manufacturing and sales of products based upon the Patent to a third
party. Since our licensees and distributors will be independent
contractors, we will not be able to exert the same level of control over them as
we do with employees. Therefore, we will be subject to the risk that
the licensees and distributors will not comply with our policies and procedures,
which could result in harmful claims against us.
Our
non-U.S. sales and operations will be subject to risks inherent in conducting
business abroad, many of which are outside our control, including:
o
periodic
regional economic downturns and unstable political
environments,
o
multiple,
conflicting and changing governmental laws and regulations,
including import/export controls and other trade
barriers, and
o
different
customs and ways of doing business.
Many of
these challenges are present in China, the country where one of the main
ingredients in the products manufactured by our US distributors is
obtained. Instability in China and other foreign economies may
continue and recur again in the future, which could have a material adverse
effect on our business. In addition, political instability, terrorism, acts of
war or epidemics in regions where we operate may adversely affect our business
and results of operations.
We
are subject to foreign currency exchange risks.
We will
be exposed to foreign currency exchange rate risks that are inherent in our
anticipated sales that are denominated in currencies other than the United
States dollar. Although we attempt to mitigate our exposure to fluctuations in
currency exchange rates, these hedging activities may not always be available or
adequate to eliminate, or even mitigate, the impact of our exchange rate
exposure. Failure to sufficiently hedge or otherwise manage foreign currency
risks properly could materially and adversely affect our revenues and gross
margins.
No
market currently exists for our securities and we cannot assure you that such a
market will ever develop, or if developed, will be sustained.
There is
currently no trading market for our securities. We have applied for
quotation on the over-the-counter bulletin board. Even if our common
stock is quoted in the over-the-counter-market, an active trading market for the
common stock may not develop. Consequently, we cannot assure you when
and if a trading market in our shares will be established, or whether any such
market, if established, will be sustained or sufficiently liquid to enable
holders of shares of our common stock to liquidate their investment in our
company. If a public market should develop in the future, the sale of
unregistered and restricted securities by current shareholders may have a
substantial impact on any such market.
We
have incurred increased costs as a result of being a public
company.
As a
public company, we have incurred significant legal, accounting and other
expenses that we did not incur as a private company. In addition, the
Sarbanes-Oxley Act of 2002, as well as related rules adopted by the Securities
and Exchange Commission, has imposed substantial requirements on public
companies, including certain corporate governance practices and requirements
relating to internal control over financial reporting. We expect these rules and
regulations to increase our legal and financial compliance costs and to make
some activities more time-consuming and costly. In addition, in the future we
will be required to document, evaluate, and test our internal control procedures
under Section 404 of the Sarbanes-Oxley Act and the related rules of the
Securities and Exchange Commission which will be costly and time consumming.
Effective internal controls are necessary for us to produce reliable financial
reports and are important in helping prevent financial fraud. If we are unable
to achieve and maintain adequate internal controls, our business and operating
results could be harmed.
15
We
will be subject to Penny Stock Regulation that may make it less appealing for a
broker-dealer to engage in transactions involving our securities.
The
Commission has adopted regulations which generally define a “penny stock” to be
any equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to certain exceptions. As a
result, our common stock will be subject to rules that impose additional sales
practice requirements on broker dealers who sell such securities to persons
other than established customers and accredited investors (generally those with
assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with their spouse). For transactions covered by such rules, the broker
dealer must make a special suitability determination for the purchase of such
securities and have received the purchaser’s written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the transaction,
of a risk disclosure document mandated by the Commission relating to the penny
stock market. The broker dealer must also disclose the commission payable to
both the broker dealer and the registered representative, current quotations for
the securities and, if the broker dealer is the sole market maker, the broker
dealer must disclose this fact and the broker dealer’s presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Broker-dealers must wait two business days after
providing buyers with disclosure materials regarding a security before effecting
a transaction in such security. Consequently, the “penny stock” rules will
restrict the ability of broker dealers to sell our securities and affect the
ability of investors to sell our securities in the secondary market and the
price at which such purchasers can sell any such securities, thereby affecting
the liquidity of the market for our common stock.
Stockholders
should be aware that, according to the Commission, the market for penny stocks
has suffered in recent years from patterns of fraud and abuse. Such patterns
include:
·
control
of the market for the security by one or more 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
·
the
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
may issue shares of preferred stock with greater rights than our common
stock.
Our
articles of incorporation authorize our board of directors to issue up to twenty
million shares of preferred stock in one or more series and determine the price
for those shares without seeking any further approval from our stockholders.
Further, under Florida law, the board of directors may at its discretion, and
without stockholder approval, set the other terms of the preferred stock. Any
preferred stock that is issued may rank ahead of our common stock, in terms of
dividends, liquidation rights and voting rights that could adversely affect the
voting power or other rights of the holders of our common stock. In the event of
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of our
company. Such provisions could have the effect of depriving stockholders of an
opportunity to sell their shares at a premium over prevailing market prices. Any
delay or prevention of, or significant payments required to be made upon, a
change of control transaction or changes in our board of directors or management
could deter potential acquirers or prevent the completion of a transaction in
which our stockholders could receive a substantial premium over the then current
market price for their shares.
We
are subject to anti-takeover provisions under Florida law that could delay or
prevent an acquisition of our company, even if the acquisition would be
beneficial to our shareholders.
Provisions
of Florida law could make it more difficult and expensive for a third party to
pursue a change in control transaction or takeover attempt that is opposed to by
our board. Shareholders who wish to participate in these transactions
may not have the opportunity to do so. If a change in control
transaction or takeover attempt is prevented or delayed, the price that that a
potential purchaser would be willing to pay for our common stock may
decline. Even in the absence of a takeover attempt, these provisions
may adversely affect the market price of our common stock if they are viewed as
discouraging takeover attempts.
16
ITEM
2. DESCRIPTION OF PROPERTY
Our
principal office is located at 1060 Calle Negocio, Suite B, San Clemente,
California. This space consists of approximately 7500 square feet, a portion of
which is used by SYNORx, Inc. to conduct research and development
activities. We lease this space on a month-to-month basis at a price
of $3,500 per month. For the year ended December 31, 2007 we did not pay any
rent expense and instead accrued the rent expense as a
liability. However, commencing January 2008 we began to accrue amount
for rent payments. We believe these facilities are adequate to serve our present
needs.
ITEM
3. LEGAL PROCEEDINGS
We are
not a party to any legal proceedings.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of stockholders during the last quarter of the
year ended December 31, 2007.
PART
II
ITEM
5. MARKET FOR COMMON EQUITY; RELATED SHAREHOLDER MATTERS; AND SMALL
BUSINESS ISSUERS OF EQUITY SECURITIES
We have
not paid any cash dividends on our common stock to date, and we have no
intention of paying cash dividends in the foreseeable future. Whether we declare
and pay dividends is determined by our board of directors at their discretion,
subject to certain limitations imposed under Florida corporate law. The timing,
amount and form of dividends, if any, will depend on, among other things, our
results of operations, financial condition, cash requirements and other factors
deemed relevant by our board of directors.
We do not
have any equity compensation plans.
Recent
Sales of Unregistered Securities; Uses of Proceeds from Registered
Securities
The
following information sets forth certain information with respect to all
securities which we have sold during the year ended December 31, 2007 and a
subsequent sale in 2008. We did not pay any commissions in connection
with any of these sales.
In May,
2007, we issued 8,794,042 shares to the 59 shareholders of SYNORx, Inc. in
connection with the acquisition of the Patent. These shares were
issued in reliance upon Section 4(2) of the Securities Act of
1933. The offering and sale of the common stock qualified for
exemption under Section 4(2) of the Securities Act of 1933, as amended (“the
Act”), and Regulation D under the Act since the issuance by us did not involve a
public offering and the requirements of Regulation D were met. This offering was
done with no general solicitation or advertising by us. Fifty four of
the investors were accredited investors, the remaining investors were all
employees of SYNORx and all of the investors had an opportunity to ask questions
of our management. The offering was not a public offering as defined
in Section 4(2) because the offer was made to an insubstantial number of persons
and because of the manner of the offering. In addition, these
investors had the necessary investment intent as required by Section 4(2) since
they agreed to, and received, share certificates bearing a legend stating that
such shares are restricted. This restriction ensures that these
shares will not be immediately redistributed into the market and therefore not
part of a public offering. Based on the analysis of the above
factors, the Registrant has met the requirements to qualify for exemption under
Section 4(2) of the Act for this transaction.
On
October 23, 2007, we issued 60,000 shares to 5 individuals in exchange for
services. These shares were issued in reliance upon Section 4(2) of
the Securities Act of 1933. The offering and sale of the common stock qualified
for exemption under Section 4(2) of the Securities Act of 1933, as amended (“the
Act”), since the issuance did not involve a public offering This offering was
done with no general solicitation or advertising. The offering
was not a public offering as defined in Section 4(2) because the offer was made
to an insubstantial number of persons and because of the manner of the offering.
In addition, these investors had the necessary investment intent as required by
Section 4(2) since they agreed to, and received, share certificates bearing a
legend stating that such shares are restricted. This restriction ensures that
these shares will not be immediately redistributed into the market and therefore
not part of a public offering. Based on the analysis of the above factors, the
Issuer met the requirements to qualify for exemption under Section 4(2) of the
Act for this transaction.
17
On
January 10, 2008, we issued 400,000 shares to an individual investor for
consideration of $400,000. These shares were issued in
reliance upon Regulation S of the Securities Act of 1933. The offering and sale
of the common stock in this transaction qualified for exemption under Regulation
S of the Securities Act of 1933, as amended (“the Act”), because the offer and
sale occurred outside the United States without any direct selling efforts in
the United States. In addition, the investor had the necessary investment intent
as required by Regulation S since it agreed to, and received, share certificates
bearing a legend stating that such shares are restricted. This restriction
ensures that these shares will not be immediately redistributed into the market
and therefore not part of a public offering.
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The
following discussion of our financial condition and results of operations should
be read in conjunction with the financial statements and the notes to those
statements included elsewhere in this prospectus. This discussion includes
forward-looking statements that involve risks and uncertainties. As a result of
many factors, such as those set forth under “Risk Factors” and elsewhere in this
prospectus, our actual results may differ materially from those anticipated in
these forward-looking statements.
Financial
Operations Overview
We are a
development stage company and have only recently commenced operations and
have generated only minimal revenues. Our
principal business activities to date have been the acquisition of the
Patent. From our inception to September 30, 2007, we had incurred an
accumulated deficit of $64,182. Our accumulated deficit through
September 30, 2007 is primarily attributable to the lack of business activity
and product sales.
Since
inception, we have financed our operations from the sale of common stock and
contribution from related parties. If our anticipated sales for the next few
months do not meet our expectations, our existing resources will not be
sufficient to meet our cash flow requirements for the next few
months. Furthermore, if our expenses exceed our anticipations, we
will need additional funds to implement our business plan. We will
not be able to fully establish our business if we do not have adequate working
capital and if we do not have adequate working capital we may need to raise
additional funds, whether through a stock offering or
otherwise.
We
will need to raise additional money in order to establish a distribution network
for the manufacture and distribution of products based upon our Patent and to
advertise such products. In addition, we will need to hire personnel
to run our day to day operations. We plan to obtain the necessary funds through
a combination of revenue derived from royalties and direct sales of products and
an offering of our common stock. If we are unable to obtain this
additional working capital, or if we encounter unexpected expenses, we may not
have enough working capital to implement our business plan.
Critical
Accounting Policies
In
December 2001, the SEC requested that all registrants discuss their most
“critical accounting policies” in management’s discussion and analysis of
financial condition and results of operations. The SEC indicated that a
“critical accounting policy” is one which is both important to the portrayal of
the company’s financial condition and results and requires management’s most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Revenue.
For the year ended December 31, 2007, we had revenue of $2,500 which is
attributable to royalty payments under the terms of our license agreement with
SYNORx, Inc. For the year ended December 31, 2006 we had no
revenue.
Research
and development expenses. For the year ended December 31, 2007, research and
development expense was $45,000 as compared to $0 for the year ended December31, 2006. The increase is due primarily to expenses incurred by us with regard
to safety testing for the oral toxicity of LutiMax.
General
and administrative expenses. For the year ended December 31, 2007, general and
administrative expense was $410 as compared to $200 for the year ended December31, 2006.
Professional
Fees. For the year ended December 31, 2007, professional fees were $76,321 as
compared to $3,750 for the year ended December 31, 2006. The increase is due
primarily to fees incurred by us as a reporting company under the Securities
Exchange Act of 1934 for our required regulatory filings and on going corporate
governance.
Consulting
Fees. For the year ended December 31, 2007, consulting fees were $95,892 as
compared to $0 for the year ended December 31, 2006. The increase is due
primarily to fees incurred by us in order to pay outside consultants with regard
to structuring the acquisition of the Patent, setting up our controls and
procedures for maintaining regulatory compliance under the Securities Exchange
Act of 1934, fees paid to an outside consultant with regard to specialty and
niche marketing advice for our LutiSport product and for fees paid to an outside
consultant with regard to advice on setting up our manufacturing.
18
Net loss.
Net loss for the year ended December 31, 2007, was $230,123 as compared to
$3,950 for the year ended December 31, 2006. This increase in net loss is
attributable to an increase in operating expenses, more specifically an increase
in research and development expenses , professional fees and consulting
fees.
Liquidity
and Capital Resources
Revenues
To date,
we have generated minimal revenue from our nutraceutical business. We
expect to generate most of our revenues from the royalties derived from
licensing third parties to sell our products and from the direct sale of our
products. If our anticipated sales for the next few months do not meet our
expectations, our existing resources will not be sufficient to meet our cash
flow requirements for the next few months. Furthermore, if our
expenses exceed our anticipations, we will need additional funds to implement
our business plan. We will not be able to fully establish our
business if we do not have adequate working capital and if we do not have
adequate working capital we may need to raise additional funds, whether through
a stock offering or otherwise.
Expenses
To date,
our expenses have consisted primarily of research and development, consulting
fees and professional fees. We anticipate that our principal expenses in the
next year will consist of professional fees and consulting fees as well as
advertising and marketing, and personnel required to operate our
business.
Accounts Receivable and
Accounts Payable
We do not
anticipate that we will have any significant level of accounts receivable in
connection with the operation of our business. We will require each
customer to pay us via credit card or cash equivalent prior to the time that any
product is shipped to the customer. Additionally, we do not
anticipate that we will have a significant level of accounts payable, because
most of the vendors that our licensee derives products from will not have a
direct relationship with us but we anticipate that they will require our
licensee to pay them before products are shipped
Capital
Expenditures
We expect
to purchase additional office furniture, equipment and computers during the next
12 months. We have budgeted approximately $50,000 for capital
expenditures during this period.
During
the year ended December 31, 2007, we had cash from financing activities of
$75,357 which was attributable to a capital contribution from a related
party. Our cash used in operations was also $75,357.
In
January 2008 we issued 400,000 shares of our common stock in a private placement
for proceeds of $400,000. We expect that such funds will enable us to
continue to operate our business for the short term.
Our
continued operations in the long term will depend on whether we are able to
raise additional funds through various potential sources, such as equity and
debt financing. Such additional funds may not become available on acceptable
terms and there can be no assurance that any additional funding that we do
obtain will be sufficient to meet our needs in the long term. We will continue
to fund operations from cash on hand and through the similar sources of capital
previously described. We can give no assurances that any additional capital that
we are able to obtain will be sufficient to meet our needs.
Current and Future Financing
Needs
We have
incurred an accumulated deficit of $251,170 through December 31, 2007. We have
incurred negative cash flow from operations since we started our business. We
have spent, and expect to continue to spend, substantial amounts in connection
with implementing our business strategy, including our planned product
development efforts, our clinical trials, and our research and
development efforts and fees in connection with regulatory compliance
and corporate governance. The actual amount of funds we will need to operate is
subject to many factors, some of which are beyond our control. If our
anticipated sales for the next few months do not meet our expectations, our
existing resources will not be sufficient to meet our cash flow requirements for
the next few months. Furthermore, if our expenses exceed our
anticipations, we will need additional funds to implement our business
plan. We will not be able to fully establish our business if we do
not have adequate working capital and if we do not have adequate working capital
we may need to raise additional funds, whether through a stock offering or
otherwise.
19
Other
factors that may impact our financing needs include the following:
• the
progress of the development efforts of parties with whom we have entered into
research and development agreements;
• our
ability to maintain current research and development programs and to establish
new research and development and licensing arrangements;
• the
costs involved in prosecuting and enforcing patent claims and other intellectual
property rights; and
• the
costs and timing of regulatory approvals.
We have
based our estimate on assumptions that may prove to be wrong. As previously
stated, we may need to obtain additional funds in the next couple of months or
in greater amounts than we currently anticipate. Potential sources of financing
include strategic relationships, public or private sales of our shares or debt
and other sources. We may seek to access the public or private equity markets
when conditions are favorable due to our long-term capital requirements. We do
not have any committed sources of financing at this time, and it is uncertain
whether additional funding will be available when we need it on terms that will
be acceptable to us, or at all. If we raise funds by selling additional shares
of common stock or other securities convertible into common stock, the ownership
interest of our existing stockholders will be diluted. If we are not able to
obtain financing when needed, we may be unable to carry out our business plan.
As a result, we may have to significantly limit our operations and our business,
financial condition and results of operations would be materially
harmed.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
Employees
As of
December 31, 2007, we had no employees and one consultant. During the
course of the year we hired a number of consultants in the areas of accounting,
marketing and advertising. We currently expect to hire approximately
3 employees over the next 12 months, which will cause us to incur additional
costs.
Report
of Independent Registered Public Accounting Firm
F-2
Balance
Sheets
F-3
Statements
of Operations
F-4
Statement
of Changes in Stockholders' Deficit
F-5
Statements
of Cash Flows
F-6
Notes
to Financial Statements
F-7-13
F-1
Report
of Independent Registered Public Accounting Firm
To The
Board of Directors and Stockholders
of
Immunobiotics, Inc.
We
have audited the accompanying balance sheet of Immunobiotics, Inc. (a Florida
corporation) as of December 31, 2007 and 2006 and the related statements of
operations, changes in stockholders’ deficit and cash flows for the year then
ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provided a reasonable basis
for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Immunobiotics, Inc. as of December31, 2007 and 2006, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States.
The
accompanying financial statements referred to above have been prepared assuming
that the Company will continue as a going concern. As more fully
described in Note 1, the Company’s need to seek new sources or methods of
financing or revenue to pursue its business strategy, raise substantial doubt
about the Company’s ability to continue as a going
concern. Management’s plans as to these matters are also described in
Note 1. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Preferred
stock, $0.001 par value, 20,000,000 shares authorized, none
issued and outstanding
-
-
Common
stock, no par value, 100,000,000 shares authorized, 15,060,000 and
6,205,958 shares issued and outstanding, respectively and additional paid
in capital
150,407
13,247
Deficit
accumulated during the development stage
(251,170
)
(21,047
)
TOTAL
STOCKHOLDERS’ DEFICIT
(100,763
)
(7,800
)
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
$
4,303
$
-
The accompanying notes are an integral part of these financial
statements.
Adjustments
to reconcile net loss to net cash used in operating
activities:
Common
stock issued for services
60,000
-
60,000
Changes
in operating assets and liabilities:
Accounts
receivable
(2,500
)
-
(2,500
)
Accrued
liabilities
97,266
3,900
105,066
Net
cash used in operating activities
(75,357
)
(50
)
(88,604
)
CASH
FLOWS FROM FINANCING ACTIVITIES:
Proceeds
from issuance of common stock
-
-
100
Capital
contribution from a related party
75,357
50
88,504
Net
cash provided by financing activities
75,357
50
88,604
CHANGE
IN CASH
-
-
-
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
-
-
-
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
$
-
$
-
$
-
Supplemental
disclosure of non cash investing & financing
activities:
Cash
paid for income taxes
$
-
$
-
$
-
Cash
paid for interest expense
$
-
$
-
$
-
Issuance
of stock for patent
$
1,803
$
-
$
-
The accompanying notes are an integral part of these financial
statements.
F-6
IMMUNOBIOTICS,
INC.
(F/K/A
MULTINATIONAL MERGER CORPORATION)
(A
Development Stage Company)
NOTES TO
FINANCIAL STATEMENTS
NOTE 1 –
ORGANIZATION
Organization
Immunobiotics,
Inc. (the “Company”) was incorporated under the laws of the State of Florida on
April 1, 2004 under the name Multination Merger Corporation. The
Company was originally formed for the purpose of, and engaged in the business
of, conducting regulatory compliance consulting, throught its website, the
archive of which can be seen at http://archive.org/web/20050322155356/http://www.mmc2100.com/.
The
Company discontinued its consulting operations in November 2005. The
Company changed its name to Immunobiotics, Inc. in May 2007 when it acquired US
Patent number 6,774,142 entitled “Inhibition by 3-Deoxyflavonoids of
T-Lymphocyte Activation and Therapies Related Thereto” which protects the
compounds and formulas that the products manufactured in accordance with its
licensing agreements are based upon as well as the use of Luteolin in the
prevention and treatment of many diseases. The Company is in the
business of licensing the manufacture, distribution, and sale of nutraceutical
products that are made entirely of naturally occurring dietary
substances.
Activities during the development stage include developing the business
plan and raising capital. Management believes that actions presently
being taken to obtain additional funding and implement its strategic plans
provide the opportunity for the Company to continue as a going
concern.
Going
Concern
As
reflected in the accompanying financial statements, the Company is in the
development stage with limited operations, a stockholders' deficiency of
$100,763, a working capital deficiency of $102,566 and used cash in
operations from inception of $88,604. 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.
In
January 2008, the Company sold a total of 400,000 shares of common stock to an
unrelated third party for net proceeds of $400,000 ($1.00 per
share).
Management
believes that actions presently being taken to obtain additional funding and
implement its strategic plans provide the opportunity for the Company to
continue as a going concern.
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
These
financial statements and related notes are presented in accordance with
accounting principles generally accepted in the United States and are expressed
in United States (US) dollars. The Company has produced minimal revenue from its
principal business and is a development stage company as defined by the
Statement of Financial Accounting Standards (SFAS) No. 7. “Accounting and
Reporting by Development Stage Enterprises.”
F-7
IMMUNOBIOTICS,
INC.
(F/K/A
MULTINATIONAL MERGER CORPORATION)
(A
Development Stage Company)
NOTES
TO FINANCIAL STATEMENTS
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statement and the reported amounts of revenues and
expenses during the reporting period. Estimates that are critical to the
accompanying financial statements arise from the determination of the fair value
of the Company’s investment. Because such determination involves subjective
judgment, it is at least reasonably possible that the Company’s estimates could
change in the near term with respect to this matter.
Revenue
Recognition
The
Company derives its revenue from sales and royalties generated under its
Non-exclusive Patent License. The Company records and presents
revenue in accordance with Staff Accounting Bulletin (SAB) No. 104 “Revenue
Recognition in Financial Statements”. Under SAB 104, revenue is
realized when persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed or determinable and collectibility is reasonably
assured.
Cash and Cash
Equivalents
The
Company considers all highly liquid investments with maturities of three months
or less at the time of purchase to be cash equivalents.
Accounts
Receivable
The
Company is required to estimate the collectibility of its accounts receivable.
The Company's reserve for doubtful accounts is estimated by management based on
a review of historic losses and the age of existing receivables from specific
customers.
Concentration of Credit
Risk
During
the year ended December 31, 2007 one customer accounted for 100% of the
Company's sales.
Income
Taxes
The
Company accounts for income taxes under Statement of Financial Accounting
Standards (SFAS) No. 109, “Accounting for Income Taxes” (SFAS No. 109).
Deferred income tax assets and liabilities are determined based upon differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Due to the net loss incurred in all
periods, there is no provision for income taxes provided as a full valuation
allowance has been established.
F-8
IMMUNOBIOTICS,
INC.
(F/K/A
MULTINATIONAL MERGER CORPORATION)
(A
Development Stage Company)
NOTES TO
FINANCIAL STATEMENTS
Net Loss per
Share
Basic and
diluted net losses per common share are presented in accordance with SFAS
No.128, “Earning Per Share” (SFAS No. 128), for all periods presented. Preferred
stock conversions to common stock and warrants have been excluded from the
calculation of the diluted loss per share for the year ended December 31,2007 and 2006 because all such securities were anti-dilutive.
Long-Lived
Assets
The
Company accounts for long-lived assets under the Statements of Financial
Accounting Standards Nos. 142 and 144 “Accounting for Goodwill and Other
Intangible Assets” and “Accounting for Impairment or Disposal of Long-Lived
Assets” (SFAS No. 142 and 144). In accordance with SFAS No. 142 and
144, long-lived assets, goodwill and certain identifiable intangible assets held
and used by the Company are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. For purposes of evaluating the recoverability of
long-lived assets, goodwill and intangible assets, the recoverability test is
performed using undiscounted net cash flows related to the long-lived
assets.
NOTE 3 –
RECENT ACCOUNTING PRONOUNCEMENTS
Stock-Based
Compensation
In
December 2004, Financial Accounting Standards Board (FASB) issued SFAS No. 123
(revised 2004), “Share-Based Payment,” (SFAS No. 123(R)) which is a revision of
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS No.
123(R) supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, (APB No. 25). SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. Additionally, SFAS No. 123(R) amends the
presentation of the statement of cash flows and requires additional annual
disclosures. SFAS No. 123(R) is effective for public companies beginning with
the first interim period that begins after June 15, 2005. In April 2005, the
Securities and Exchange Commission adopted a new rule that postponed the
effective date for SFAS No. 123(R) to the fiscal year beginning after June 15,2005. The Company adopted SFAS No. 123(R) on January 1, 2006, but as the Company
does not have an option plan, there was no effect upon
implementation.
FASB Staff Position (FSP) FAS 123(R)-5
was issued on October 10, 2006. The FSP provides that instruments that were
originally issued as employee compensation and then modified, and that
modification is made to the terms of the instrument solely to reflect an equity
restructuring that occurs when the holders are no longer employees, then no
change in the recognition or the measurement (due to a change in classification)
of those instruments will result if both of the following conditions are met:
(a). There is no increase in fair value of the award (or the ratio of intrinsic
value to the exercise price of the award is preserved, that is, the holder is
made whole), or the antidilution provision is not added to the terms of the
award in contemplation of an equity restructuring; and (b). All holders of the
same class of equity instruments (for example, stock options) are treated in the
same manner. The provisions in this FSP shall be applied in the first reporting
period beginning after January 1, 2007. The Company does not expect the adoption
of FSP FAS 123(R)-5 to have a material impact on its results of operations and
financial condition.
F-9
IMMUNOBIOTICS,
INC.
(F/K/A
MULTINATIONAL MERGER CORPORATION)
(A
Development Stage Company)
NOTES TO
FINANCIAL STATEMENTS
Accounting Changes and Error
Correction
In May
2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154,
"Accounting Changes and Error Corrections" (SFAS 154), which replaces Accounting
Principles Board (APB) Opinion No. 20, "Accounting Changes," and SFAS No. 3,
"Reporting Accounting Changes in Interim Financial Statements - An Amendment of
APB Opinion No. 28." SFAS 154 provides guidance on the accounting for and
reporting of accounting changes and error corrections, and it establishes
retrospective application, or the latest practicable date, as the required
method for reporting a change in accounting principle and the reporting of a
correction of an error. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company adopted SFAS 154 in the first quarter of fiscal year 2007 and it has
not had a material impact on its results of operations and financial
condition.
Effects of Prior Year
Misstatements
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, "Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements" (SAB 108). SAB 108 provides guidance on the
consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of a materiality assessment. SAB 108
establishes an approach that requires quantification of financial statement
errors based on the effects of each on a company's balance sheet and statement
of operations and the related financial statement disclosures. Early application
of the guidance in SAB 108 is encouraged in any report for an interim period of
the first fiscal year ending after November 15, 2006, and was adopted by the
Company in the first quarter of fiscal year 2007. The Company does not expect
the adoption of SAB 108 to have a material impact on its results of operations
and financial condition
Fair Value
Measurements
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
157). SFAS 157 provides guidance for using fair value to measure assets and
liabilities. SFAS 157 addresses the requests from investors for expanded
disclosure about the extent to which companies measure assets and liabilities at
fair value, the information used to measure fair value and the effect of fair
value measurements on earnings. SFAS 157 applies whenever other standards
require (or permit) assets or liabilities to be measured at fair value, and does
not expand the use of fair value in any new circumstances. SFAS 157 is effective
for financial statements issued for fiscal years beginning after November 15,2007 and will be adopted by the Company in the first quarter of fiscal year
2008. The Company is unable at this time to determine the effect that its
adoption of SFAS 157 will have on its results of operations and financial
condition.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115.” This statement permits entities to choose to
measure many financial instruments and certain other items at fair
value. Most of the provisions of SFAS No. 159 apply only to entities
that elect the fair value option. However, the amendment to SFAS No.
115 “Accounting for Certain Investments in Debt and Equity Securities” applies
to all entities with available-for-sale and trading securities. SFAS
No. 159 is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007, provided
the entity also elects to apply the provision of SFAS No. 157, “Fair Value
Measurements.” The adoption of this statement is not expected to have
a material effect on the Company’s financial statements.
F-10
IMMUNOBIOTICS,
INC.
(F/K/A
MULTINATIONAL MERGER CORPORATION)
(A
Development Stage Company)
NOTES TO
FINANCIAL STATEMENTS
Accounting for Uncertainty
in Income Taxes
In July
2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109" (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes by prescribing the
recognition threshold a tax position is required to meet before being recognized
in the financial statements. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The cumulative effects, if any, of applying FIN 48
will be recorded as an adjustment to retained earnings as of the beginning of
the period of adoption. FIN 48 is effective for fiscal years beginning after
December 15, 2006, and the Company is required to adopt it in the first quarter
of fiscal year 2008. The Company is currently evaluating the effect that the
adoption of FIN 48 will have on its results of operations and financial
condition and is not currently in a position to determine such effects, if
any.
NOTE 4 –
INTANGIBLE ASSETS
In May
2007, the Company transferred 8,794,042 shares of common stock in connection
with the purchase of US Patent number 6,774,142 entitled “Inhibition by
3-Deoxyflavonoids of T-Lymphocyte Activation and Therapies Related Thereto”
which protects the compounds and formulas that the products manufactured in
accordance with its licensing agreements are based upon as well as the use of
Luteolin in the prevention and treatment of many diseases. This
patent was acquired from a related party. The Company valued the
historical basis of the patent at $1,803.
On
September 1, 2007, the Company entered into a license agreement with SYNORx, a
related party company, whereby ImmunoBiotics, Inc. granted SYNORx Inc, a company
controlled by the majority shareholders in ImmunoBiotics, Inc., a non-exclusive
license to research, develop, market, distribute and sell Luteolin and
related bioflavonoid-based products covered by ImmunoBiotics, Inc.’s patent
number 6,774,142.
NOTE 5 –
EQUITY
Common
Stock
During
2004 the Company issued 1,000,000 shares of common stock to founders for cash
consideration of $100.
During
2004 the Company issued 5,205,958 shares of common stock to founders in
consideration for capital contributions made on behalf of the Company in the
amount of $12,936.
Capital
contributions
During
the year ended December 31, 2005 a related party paid $161 on behalf of the
Company.
During
the year ended December 31, 2006 a related party paid $50 on behalf of the
Company.
During
the year ended December 31, 2007 a related party paid $75,357 on behalf of the
Company.
F-11
IMMUNOBIOTICS,
INC.
(F/K/A
MULTINATIONAL MERGER CORPORATION)
(A
Development Stage Company)
NOTES TO
FINANCIAL STATEMENTS
Common stock issued for
services
During
the year ended December 31, 2007the Company issued 60,000 shares of common
stock valued at $60,000 ($1.00 per share) for services. The Common stock was
valued at the most recent cash offering price of $1.00 per share.
NOTE 6
- INCOME TAXES
The
provision (benefit) for income taxes from continued operations for the years
ended December 31, 2007 and 2006 consist of the following:
Deferred
income taxes result from temporary differences in the recognition of income and
expenses for the financial reporting purposes and for tax
purposes. The net deferred tax assets and liabilities are
comprised of the following:
2007
Deferred
income tax asset:
Net
operating loss carry-forwards
$
97,300
Valuation
allowance
(97,300
)
Deferred
income tax asset
$
-
F-12
IMMUNOBIOTICS,
INC.
(F/K/A
MULTINATIONAL MERGER CORPORATION)
(A
Development Stage Company)
NOTES TO
FINANCIAL STATEMENTS
The
Company has a net operating loss carryforward of $243,260 available to offset
future taxable income through 2019.
The
Company has made a 100% valuation allowance of the deferred income tax asset at
December 31, 2007, as it is not expected that the deferred tax assets will be
realized. The net increase in valuation allowance during the year
ended December 31, 2006 was $87,410.
NOTE 7 –
SUBSEQUENT EVENTS
In
January 2008, the Company sold a total of 400,000 shares of common stock to an
unrelated third party for net proceeds of $400,000 ($1.00 per
share).
F-13
ITEM
8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There
have been no disagreements on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure with our
independent auditors for the period ended December 31, 2007.
ITEM
8A(T). CONTROLS AND PROCEDURES
Internal
control over financial reporting refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, and
effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those policies and
procedures that:
§
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
§
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorization of our management and
directors; and
§
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisitions, use or disposition of our assets that could
have a material effect on the financial
statements.
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. It is
a process that involves human diligence and compliance and is subject to lapses
in judgment and breakdowns resulting from human failures. It also can be
circumvented by collusion or improper management override.
Because
of such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the
process certain safeguards to reduce, thought not eliminate, this risk.
Management is responsible for establishing and maintaining adequate internal
control over our financial reporting.
Management
has used the framework set forth in the report entitled Internal Control – Integrated
Framework published by the Committee of Sponsoring Organizations of the
Treadway Commission, known as COSO, to evaluate the effectiveness of our
internal control over financial reporting. Based upon this assessment,
management has concluded that our internal control over financial reporting was
effective as of and for the year ended December 31, 2007 with the following
exceptions:
§
As
a part of our year end review of our disclosure controls and procedures,
we determined that several of our procedures require additional
documentation. It is our belief that those control procedures are
being performed, however documentation of their execution is not
available. We are implementing additional documentation procedures
in order to address this weakness.
Management
has concluded that other than as described above, our internal control over
financial reporting was effective as of and for the year ended December 31,2007.
ITEM
9. DIRECTORS AND EXECUTIVE OFFICERS; PROMOTERS; CONTROL PERSONS; AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 15(A) OF THE EXCHANGE
ACT
Below is
certain information regarding our directors and executive officers. The
following table states who are our directors and officers, as well as
biographical information regarding our directors and management.
Name
Age
Positions
with Company
Thomas P.
Lahey
50
President,
Chief Executive Officer, and Director
Vithal
J. Rajadhyaksha, Ph.D.
67
Vice-President,
Chief Financial Officer, Secretary Treasurer and
Director
The
background of our directors and executive officers is as follows:
Thomas
P. Lahey
Mr.
Lahey, an organic chemist, has served as our President, Chief Executive Officer
and Director since July 20, 2007. Since 1988, Mr. Lahey has served as
the President of Vapor Extraction Technology, Inc., an environmental remediation
company and Mr. Lahey continues to serve in such capacity. He is also the
President and majority owner of SYNORx, Inc., the licensee of the rights to
manufacture, research, develop, market, sell and distribute of products covered
by the Patent. He is one of the co-inventors of the
Patent. He received a bachelors degree from the University of
California, San Diego, and attended graduate school in organic chemistry at the
University of California, Irvine. .{update}
Vithal
Rajdhyaksha
Mr.
Rajadhyaksha has served as our Vice-President, Chief Financial Officer,
Secretary, Treasurer and Director since July 20, 2007. He also served
as a Senior Director of Paramount BioSciences, LLC from
2006-2007. From 1997 to 2006, he was the Associate Director of
Licensing, Office of Technology Alliances at the University of California,
Irvine. He is also one of the co-inventors of the Patent and the Vice
President and an owner of SYNORx, Inc. He received a bachelors degree
from the University of Barclay, India, and a doctorate degree from the Swiss
Federal Institute of Technology, Zurich, Switzerland.
Directors’
Term of Office
Directors
will hold office until the next annual meeting of shareholders and the election
and qualification of their successors. Officers are elected annually by our
board of directors and serve at the discretion of the board of
directors.
Director
Independence
Our board
members are not “independent” in accordance with rule 4200(a)(14) of the Nasdaq
Marketplace Rules.
Audit
Committee
Our board
of directors currently serves as our audit committee. The audit committee is
responsible for recommending independent auditors and reviewing management
actions in matters relating to audit functions. The committee reviews, with
independent auditors, the scope and results of its audit engagement, the system
of internal controls and procedures and reviews the effectiveness of procedures
intended to prevent violations of laws.
The audit
committee, consistent with the Sarbanes-Oxley Act of 2002 and the rules adopted
thereunder, meets with management and the auditors prior to filing of officers’
certifications with the SEC to receive information concerning, among other
things, significant deficiencies in the design or operation of internal
controls.
22
Our board
members are not “independent” in accordance with rule 4200(a)(14) of the Nasdaq
Marketplace Rules. Our board of directors does not have an “audit committee
financial expert,” within the meaning of that phrase under applicable
regulations of the Securities and Exchange Commission, serving on the audit
committee. The board of directors believes that each member is financially
literate and experienced in business matters and is capable of
(1) understanding generally accepted accounting principles (“GAAP”) and
financial statements, (2) assessing the general application of GAAP
principles in connection with our accounting for estimates, accruals and
reserves, (3) analyzing and evaluating our financial statements,
(4) understanding our internal controls and procedures for financial
reporting, and (5) understanding audit committee functions, all of which
are attributes of an audit committee financial expert. However, the board of
directors believes that no audit committee member has obtained these attributes
through the experience specified in the SEC's definition of “audit committee
financial expert.” Further, as is the case with many small companies, it would
be difficult for us to attract and retain board members who qualify as “audit
committee financial experts,” and competition for such individuals is
significant. The board of directors believes that its current audit committee is
able to fulfill its role under SEC regulations despite not having a designated
“audit committee financial expert.”
CODE
OF ETHICS
We have
recently adopted a code of ethics that applies to our principal executive
officers, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, which is attached hereto as
an exhibit.
Section
16(a) of the Securities Exchange Act of 1934 requires our officers, directors,
and persons who beneficially own more than 10% of our common stock to file
reports of securities ownership and changes in such ownership with the
Securities and Exchange Commission ("SEC"). Officers, directors and greater than
10% beneficial owners are also required by rules promulgated by the SEC to
furnish us with copies of all Section 16(a) forms they file.
Based
solely upon a review of the copies of such forms furnished to us, or written
representations that no Form 5 filings were required, we believe that during the
fiscal year ended December 31, 2007, there was compliance with all Section 16(a)
filing requirements applicable to our officers, directors and greater than 10%
beneficial owners.
ITEM
10. EXECUTIVE COMPENSATION
During
the years ended December 31, 2006 and 2007 there was no compensation earned by,
awarded to or paid to any of our executive officers or directors. We expect to
begin accruing compensation for our officers and directors in January 2008 and
paying such salaries after we obtain sufficient funds from either operations or
financing services to pay compensation to these
individuals.
In
January 2008 we entered into employment agreements with Thomas Lahey to serve in
his positions as President and Chief Executive Officer.
Our
agreement with Mr. Lahey provides that he will serve as our President and Chief
Executive Officer for an annual salary of $75,000 with annual increases in the
salary of at least 5% and an annual bonus equal to a percentage of net income
(as defined in the agreement) . Mr. Lahey also receives medical
benefits and is entitled to a car allowance of $300 per month. The
agreement also provides for life insurance in the amount of $2,000,000, with Mr.
Lahey having the right to name the beneficiary for $1,000,000. The agreement
expires December 31, 2009 and is automatically renewed unless either party
notifies the other 90 days prior to expiration.
23
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The
following table sets forth, as of March 1, 2008, the number and percentage of
shares of our outstanding common stock which are beneficially owned, directly or
indirectly, by each director, executive officer and shareholder who owns more
than 5% of the outstanding shares.
We
determine beneficial ownership based on the rules of the Securities and Exchange
Commission. In general, beneficial ownership includes shares over
which a person has sole or shared voting or investment power and shares which
the person has the right to acquire within 60 days. Unless otherwise
indicated, the persons listed below have sole voting and investment power over
the shares beneficially owned.
Chief
Financial Officer Secretary, Treasurer and Director
2,550,000
16.49 %
(1)
These
shares consist of 4,780,842 shares owned directly by Mr. Lahey, 1,000,000
shares owned by members of his immediate family, and 50,000 shares owned
by entities and trusts controlled by Mr.
Lahey.
We were
formed in April 2004 by prior officers of the Company. We initially
had four shareholders who received an aggregate of 1,000,000 shares of common
stock in consideration of their capital contribution of $ 100.
At the
end of April, we issued 5,205,958 shares of common stock to 69 individuals in
exchange for $12,936.
In May,
2007, we issued 8,794,042 shares of our common stock to the shareholders of
SYNORx, Inc. in connection with the transaction pursuant to which we acquired
all rights to the Patent. None of these individuals were affiliates
of our company at the time of the transfer.
In
September 2007, we entered into an agreement with SYNORx, Inc. pursuant to which
we granted SYNORx, Inc. a continued non-exclusive license to research develop,
manufacture, market, advertise, distribute, and sell LutiMax and related
bioflavonoid-based products covered by the Patent. Under this
agreement, SYNORx, Inc. is obligated to pay us a minimum royalty equal to
$10,000 per year in addition to royalty payments ranging from 5% to 10% of the
net sales by SYNORx, Inc. from the sales of LutiMax and
other products covered by the Patent. Two of the owners of SYNORx,
Inc. are Thomas P. Lahey, who is also our President and Chief Executive Officer
and Vithal Rajadhyaksaha, who is also our Vice President, Chief Financial
Officer, Secretary and Treasurer. During the year ended December 31,2007the Company received royalty payments of $2,500 on sales of
products by SYNORx,
24
ITEM
13. EXHIBITS
(a)
Financial Statements
1. These
financial statements are set forth in Item 8.
During
2007, our registered public accounting firm, billed us a total of $17,500 for
audit and other services as follows:
• Audit
fees of $17,500 which consist of fees related to professional services rendered
in connection with the audit of our consolidated financial statements from
inception through the period ending December 31, 2007;
• Audit-related
fees of $0 which consist of fees for assurance and related services that are
reasonably related to the performance of the audit and the review of our
financial statements and which are not reported under “Audit Fees.” In 2007,
these services related to the registration statement on Form 10-SB dated
November 28, 2007 in connection with our registration of our securities under
the Securities Exchange Act of 1934.
25
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned.
Pursuant
to the requirements of the Securities Act of 1934, this report has been signed
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
