Misrepresentations Related to Microsafe from SEC Document:
Sometime in 1995, Arata, who was then an SAP (Superior Aqua Products)
technician, informed Klenovic that he had invented a non toxic disinfectant which later became known as Microsafe. Applying the technology used in the ionization units, Arata had formulated in his home workshop what he hoped could be used as a non toxic, hard surface
disinfectant. In mid-1995, SAP hired an outside research facility, ABC Research, to determine whether Microsafe could effectively perform as a hard surface disinfectant. Tests conducted by ABC Research in late 1995 revealed that Microsafe was not effective as a hard surface disinfectant.
Once it was determined that the formula provided by Arata was ineffective, ABC Research began working with Arata to develope a new chemical formulation that could be used as a hard surface disinfectant or in some other application. Under numerous government regulations, before a product can be sold to the general public it must survive a battery of tests, any one of which may reveal a problem
with a product previously believed to be perfected. NO FORMULATION OF MICROSAFE HAS EVER UNDERGONE, LET ALONE SURVIVED, THE SERIES OF TESTS NECESSARY FOR A DISINFECTANT PRODUCT TO GO TO MARKET. In fact, as of December 31 1996, ABC Research had only developed one formulation of Microsafe that had undergone and passed the initial tests conducted on disinfectant, effectivenss, and shelf life testing. However, that formulation went on to fail virus testing.
Arata was the only NVID employee working on the development of Microsafe. In fact, according to Arata, he was the NVID employee that understood Microsafe.
As of December 31, 1996, only three formulations of Microsfae were considered by NVID and ABC Research to have potential: Formulations F-5, F-7, and F-8. Formulations F-5 initially was abandoned because it did not possess all of the properties necessary for a hard surface disinfectant. Later in 1996, however, NVID began considering the possibility of testing F-5 for Veterinary uses. The F-5 formulation went on to fail the only virus test ever performed on a formulation of Microsafe.
As of January 6 1998, the F-7 formulation of Microsafe had never undergone shelf life testing. Thus, the F-7 formulation of Microsafe remains in the initial stages of testing. In late 1996, testing was halted on the F-8 formulation, which was designed to be a pool disinfectant, because of questions surrounding the demand for a new pool disinfectant.
Misleading Press Releases
While ABC Research was working to develope a workable formulation of Microsafe, NVID issues a series of at least eleven press releases touting Microsafe as a completed product. For example, on November 15, 1995, NVID issued a press release announcing that it had "invented a non-toxic, environmentally safe, and cost effective disinfectant, the first of it's kind anywhere in the world." The "First of it's Kind" press release was disseminated despite ABC Research's tests in late 1995 revealing that Microsafe was not effective because it could not kill all the bacteria necessary in a hard surface disinfectant. Similarly on Aug 22, 1996, NVID issued a press release stating that Microsafe is NVID's new environmentally safe, non-toxic liquid disinfectant." In fact, as of August 22, 1996, no formulation of Microsafe had undergone and passed even initial testing. Therefore, both of these press releases, as well as nine other press releases issued throughout 1996, contained the same or similar statements, misleading readers into believing that a final, marketable Microsafe formula existed.
NVID also exaggerated and mistated test results in it's press releases. For example, on August 14, 1996, after two Veterinarian acquaintances of Arata had applied Microsafe to five animals under their care, including a horse and a stud goat, NVID issued a press release announcing "that in trial applications with several Veterinarians, NVID's Microsafe F-5 has shown to be effective in the treatment of large animals." Six days later, on August 20, 1996, NVID issued a press release claiming that Microsafe had miraculously cured a horse and a goat in clinical testing and "will be available for general veterinary use within the next couple of months." A Clinical test is a scientific term of art indicating test performed under controlled conditions and on a wide scale, not informal application to five animals in a non-controlled setting. Moreover, Arata acknowledged that, contrary to NVID's claims, the veterinary formulation of Microsafe could not feasibly have been available for general use by the end of 1996.
Similarly, NVID mistated the results of Microsafe and Lysol. On September 11, 1996, NVID issued a press release claiming that "Microsafe F-7 equaled or exceeded LYSOL BRAND disinfectant spray in killing dangerous bacteria WITHOUT the toxic effects and environmental hazards of LYSOL." According to ABC Research, Microsafe never exceeded Lysol in limited comparison testing. As a final example of NVID's false and misleading statements concerning test results, on February 21, 1996 NVID issues a press release claiming that Microsafe could be delivered in granular concentrate form when, in fact, Microsafe only existed in liquid form. NVID repeated this granular misstatement in several subsequent press releases.
At some point, NVID, not content to misstate the results of the tests it had performed, began touting the results of tests it had not even conducted. Sometime during 1996, a person who had been promoting NVID stock over the internet called Bunte to suggest that NVID explore the possibility of using Microsafe to treat bees afflicted with mites and fungi. Without performing one test on the application of Microsafe to bees, on October 1, 1996, NVID issued a press release stating: "All our initial studies give us a very high level of confidence that we will be able to kill the fungi and mites without harming the bees or plants. The worldwide potential and need for this product is tremendous.
NVID also made false claims about USDA interest in Microsafe. On May 14, 1996, NVID issued a press release claiming that it would "be conducting pilot tests (on Microsafe) with the USDA shortly." On August 7, 1996, NVID issued a press release stating that "USDA testing and evaluation (of Microsafe) for non consumable uses in the food processing industry will begin within 30 days. However, Arata and ABC Research, the only parties involved in the development of Microsafe, were never aware of any planned USDA testing. In fact, NVID's statements about USDA testing could not be true because, according to ABC Research, the USDA does not test developmental products like Microsafe.
In addition to misleading test results and USDA interest in Microsafe, NVID falsly claimed that Microsafe soon would be available for general use. For example, although no formulation of Microsafe had yet undergone and passed tests necessary for a product to be available for public use, on November 26, 1996, NVIDissued a press release stating "that by the the second quarter of 1997 we can produce an "environmentally friendly/reduced halogen product that will revolutionize the industry." One day later, on November 27, 1996, NVID issued a press release stating that NVID "will produce Microsafe (F-7) as a topical spray to be used in similar applications to LYSOL R without the toxicity" Microsafe F-7 had never undergone and passed shelf-life testing, let alone all the tests necessary for a Lysol-like product to be manufactured and sold. Thus, when it issued the Lysol 2 press release, NVID did not even know if Microsafe F-7 would survive testing, let alone be manufactured as a competitor to Lysol.
NVID also made preposterous statements about the revenue NVID expected to derive from Microsafe in it's press releases. Despite the fact that NVID never had developed a final formulation of Microsafe that had undergone the tests necessary in a final, marketable prodict, NVID issued press releases alternately stating that the market for Microsafe was worth $700 million, $117 million, and $30 billion. Thus, NVID misrepresented that a product that did not exist in a final form, and may never exist in final form was worth multi-millions of dollars to shareholders.
(More later.) |
