INVO Bioscience, Inc. - Quarter Report: 2009 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 333-147330
INVO Bioscience, Inc.
(Exact name of registrant as specified in its charter)
|
Nevada |
20-4036208 | |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
100 Cummings Center Suite 421E, Beverly, MA 01915
(Address of principal executive offices, including zip code)
(978) 878-9505
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
|
Large accelerated filer o |
Accelerated filer o |
|
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Shares of common stock, par value $.0001 per share: 53,828,333 shares outstanding as of August 11, 2009.
INVO Bioscience, Inc.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2009
|
Item |
Page Number | |
|
Part I | ||
|
1. |
3 | |
|
1a. |
3 | |
| 1b. | 4 | |
|
1c. |
5 | |
|
1d. |
6 | |
|
1e. |
7 | |
|
2. |
14 | |
|
3. |
17 | |
|
4. |
17 | |
|
4a. |
17 | |
|
4b. |
18 | |
|
Part II | ||
|
1. |
19 | |
|
1A. |
19 | |
|
2. |
19 | |
|
3. |
19 | |
|
4. |
19 | |
|
5. |
19 | |
|
6. |
19 | |
|
20 | ||
2
PART I. FINANCIAL INFORMATION
|
June 30,
2009 (unaudited) |
December 31,
2008 |
|||||||
|
Assets |
||||||||
|
Current Assets: |
||||||||
|
Cash |
$ |
82 |
$ |
15,716 |
||||
|
Accounts receivable, net |
65,546 |
34,195 |
||||||
|
Other receivable |
- |
7,500 |
||||||
|
Inventory |
68,515 |
70,722 |
||||||
|
Prepaid expenses |
32,095 |
73,785 |
||||||
|
Total current assets |
166,238 |
201,918 |
||||||
|
Property and equipment, net |
37,041 |
41,245 |
||||||
|
Other Assets: |
||||||||
|
Capitalized patents, net |
65,576 |
68,392 |
||||||
|
Total other assets |
65,576 |
68,392 |
||||||
|
Total assets |
$ |
268,855 |
$ |
311,555 |
||||
|
Liabilities and Stockholders' Deficiency |
||||||||
|
Current Liabilities: |
||||||||
|
Accounts payable |
$ |
778,827 |
$ |
226,861 |
||||
|
Accrued expenses and salaries |
723,917 |
614,799 |
||||||
|
Note payable- related party |
88,000 |
- |
||||||
|
Line of credit |
50,000 |
50,000 |
||||||
|
Total current liabilities |
1,640,744 |
891,660 |
||||||
|
Long Term Liabilities: |
||||||||
|
Note payable- related party |
96,462 |
96,462 |
||||||
|
Total long term liabilities |
96,462 |
96,462 |
||||||
|
Total liabilities |
1,737,206 |
988,122 |
||||||
|
Commitments and Contingencies |
||||||||
|
Stockholders' Deficiency: |
||||||||
|
Preferred Stock, $.0001 par value; 100,000,000 shares authorized;
No shares issued and outstanding as of June 30, 2009 and December 31, 2008 |
- |
- |
||||||
|
Common Stock, $.0001 par value; 200,000,000 shares authorized; 53,828,333 and 53,620,000 issued and outstanding as of June 30, 2009 and December 31, 2008, respectively. |
5,383 |
5,362 |
||||||
|
Additional paid-in capital |
1,908,545 |
1,855,565 |
||||||
|
Stock subscription receivable |
(205,000) |
(450,000) |
||||||
|
Accumulated deficit during the development stage |
(3,177,279 |
) |
(2,087,494 |
) | ||||
|
Total stockholders' deficiency |
(1,468,351 |
) |
(676,567 |
) | ||||
|
Total liabilities and stockholders' deficiency |
$ |
268,855 |
$ |
311,555 |
||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
|
For the three
months ended
June 30, 2009 |
For the three
months ended
June 30, 2008 |
From January 5, 2007 (Inception) to
June 30, 2009 |
||||||||||
|
Revenue: |
|
|||||||||||
|
Product Revenue |
$ | 16,630 | $ | - | $ | 91,440 | ||||||
|
Cost of Goods Sold: |
||||||||||||
|
Product Costs |
6,177 | - | 36,934 | |||||||||
|
Gross Margin: |
10,453 | - | 54,506 | |||||||||
|
Operating Expenses: |
||||||||||||
|
Research and development |
17,500 | 90,061 | ||||||||||
|
Selling, general and administrative |
444,103 | 256,522 | 3,115,779 | |||||||||
|
Total Operating Expenses |
444,103 | 274,022 | 3,205,840 | |||||||||
|
Loss from operations |
(433,650 | ) | (274,022 | ) | (3,151,334 | ) | ||||||
|
Other Expenses: |
||||||||||||
|
Interest expense |
5,081 | 1,947 | 25,945 | |||||||||
|
Total other expenses |
5,081 | 1,947 | 25,945 | |||||||||
|
Loss before income taxes |
(438,731 | ) | (275,969 | ) | (3,177,279 | ) | ||||||
|
Provisions for income taxes |
- | - | - | |||||||||
|
Net Loss |
$ | (438,731 | ) | $ | (275,969 | ) | (3,177,279 | ) | ||||
|
Basic and diluted net loss per weighted average shares of common stock |
$ | (0.008 | ) | $ | (0.008 | ) | ||||||
|
Basic and diluted Weighted average number of shares of common stock |
53,786,667 | 36,419,937 | ||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
|
|
For the six months ended June 30, 2009 |
For the six months ended June 30, 2008 | From January 5, 2007
(Inception) to
June 30, 2009 |
|||||||||
|
Revenue: |
||||||||||||
|
Product Revenue |
$ | 53,445 | $ | - | $ | 91,440 | ||||||
|
Cost of Goods Sold: |
||||||||||||
|
Product Costs |
26,846 | - | 36,934 | |||||||||
|
Gross Margin: |
26,599 | - | 54,506 | |||||||||
|
Operating Expenses: |
||||||||||||
|
Research and development |
4,950 | 17,500 | 90,061 | |||||||||
|
Selling, general and administrative |
1,101,003 | 295,754 | 3,115,779 | |||||||||
|
Total Operating Expenses |
1,105,953 | 313,254 | 3,205,840 | |||||||||
|
Loss from operations |
(1,079,354 | ) | (313,254 | ) | (3,151,334 | ) | ||||||
|
Other Expenses: |
||||||||||||
|
Interest expense |
10,431 | 4,026 | 25,945 | |||||||||
|
Total other expenses |
10,431 | 4,026 | 25,945 | |||||||||
|
Loss before income taxes |
(1,089,785 | ) | (317,280 | ) | (3,177,279 | ) | ||||||
|
Provisions for income taxes |
- | - | - | |||||||||
|
Net Loss |
$ | (1,089,785 | ) | $ | (317,280 | ) | $ | (3,177,279 | ) | |||
|
Basic and diluted net loss per weighted average shares of common stock |
$ | (0.020 | ) | $ | (0.010 | ) | ||||||
|
Basic and diluted Weighted average number of shares of common stock |
53,717,222 | 32,493,732 | ||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
For the six months ended
June 30, 2009 |
For the six months ended
June 30, 2008 |
From
January 5, 2007
(Inception) to
June 30, 2009 |
||||||||||
|
Net Loss |
$ |
(1,089,785 |
) |
$ |
(317,280 |
) |
$ |
(3,177,279 |
) | |||
|
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
|
Non-cash stock compensation issued for services |
53,000 |
- |
104,585 |
|||||||||
|
In kind contribution to employees |
- |
- |
251,686 |
|||||||||
|
Bad debt expense |
2,600 |
- |
6,400 |
|||||||||
|
Interest expense - related party |
1,850 |
7,838 |
||||||||||
|
Depreciation and amortization |
7,020 |
5,968 |
20,681 |
|||||||||
|
Changes in operating assets and liabilities: |
||||||||||||
|
Receivables |
(33,951 |
) |
- |
(79,446 |
) | |||||||
|
Inventories |
2,207 |
(4,150 |
) |
(68,515 |
) | |||||||
|
Prepaid expenses and other current assets |
49,190 |
(29,395 |
) |
(36,445 |
) | |||||||
|
Accounts payable |
551,967 |
32,045 |
778,558 |
|||||||||
|
Accrued salaries |
256,555 |
- |
256,555 |
|||||||||
|
Other accrued expense |
(149,287) |
153,382 |
404,078 |
|||||||||
|
Net cash used in operating activities |
(348,634 |
) |
(159,430 |
) |
(1,531,304 |
) | ||||||
|
Cash flows from investing activities: |
||||||||||||
|
Purchase of equipment |
- |
- |
(42,858 |
) | ||||||||
|
Purchase of intangible assets |
- |
(7,320 |
) |
(77,742 |
) | |||||||
|
Net cash used in investing activities |
- |
(7,320 |
) |
(120,600 |
) | |||||||
|
Cash flows from financing activities: |
||||||||||||
|
Proceeds from demand note payable |
- |
779 |
50,000 |
|||||||||
|
Proceeds from loan payable- insurance |
- |
70,587 |
||||||||||
|
Proceeds from loan payable- related party |
88,000 |
2,916 |
190,889 |
|||||||||
|
Repayment of loan payable- related party |
- |
- |
(6,428 |
) | ||||||||
|
Proceeds from issuance of common stock |
- |
163,055 |
1,101,938 |
|||||||||
|
Proceeds from subscription receivable |
245,000 |
- |
245,000 |
|||||||||
|
Net cash provided by financing activities |
333,000 |
166,750 |
1,651,986 |
|||||||||
|
Net increase in cash and cash equivalents |
$ |
(15,634 |
) |
$ |
- |
$ |
82 |
|||||
|
Cash and cash equivalents at beginning of period |
$ |
15,716 |
$ |
- |
$ |
- |
||||||
|
Cash and cash equivalents at end of period |
$ |
82 |
$ |
- |
$ |
82 |
||||||
|
Supplemental disclosure of non-cash financing activity: |
||||||||||||
|
Cash paid for interest |
$ |
10,431 |
$ |
4,026 |
$ |
25,945 |
||||||
|
Cash paid for taxes |
$ |
456 |
$ |
- |
$ |
456 |
||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A) Description of Business
INVO Bioscience, Inc. (“the Company”) intends to commercialize its proven and patented technology that will revolutionize the treatment of infertility. The Company’s device, the INVOcell and the INVO procedure are designed to provide an alternative infertility treatment for the patient and the clinician; it
is less expensive and simpler to perform than current infertility treatments. The simplicity of the INVO procedure relates to the ability to potentially perform the infertility procedure in a physician’s practice rather than in a specialized facility at a much lower cost overall than current infertility treatments. Therefore, the Company believes that the INVO procedure will be available in many more locations than conventional IVF especially outside the US. INVO also allows
conception and embryo development to take place inside the woman's body; an attractive feature for most couples.
We are a development stage company, as defined by Statement of Financial Accounting Standards (“SFAS”) No. 7. The Company’s activities during the development stage include developing the business plan, seeking regulatory clearance in the European Union and the United States and raising capital.
Through June 30, 2009, we have generated minimal sales revenues, have incurred significant expenses and have sustained losses. Consequently, our operations are subject to all the risks inherent in the establishment of a new business enterprise.
In May 2008, the Company received notice that the INVOcell product meets all the essential requirements of the relevant European Directive(s), and received CE Marking. The CE marking (also known as CE mark) is a mandatory conformity mark on many products placed on the single market in the European Economic Area (EEA). The
CE marking (an acronym for the French “Conformité Européenne”) certifies that a product has met EU health, safety and environmental requirements, which ensure consumer safety.
With CE Marking, the Company now has the ability and necessary regulatory authority to distribute its product in the European Economic Area (i.e., the European Union, Canada, Australia, New Zealand, and most parts of the Middle East). The Company has sold approximately
900 INVOcell units to date since we commenced sales in the late fall 2008.
(B) Basis of Presentation
On December 5, 2008, the Company completed a share exchange with Emy’s Salsa Aji Distribution Company, Inc. (“Emy’s”) a publicly registered shell corporation with no significant assets or operations. Emy’s was incorporated on July 11, 2005, under the laws of the State of Nevada under the name Certiorari
Corp. In connection with the share exchange, INVO Bioscience became Emy’s wholly-owned subsidiary and the INVO Bioscience Shareholders acquired control of Emy’s.
For accounting purposes, the Company accounted for the transaction as a recapitalization and the Company is the surviving entity. In connection with the share exchange, 14,937,500 shares were retained by Emy’s shareholders. Effective with the Agreement, all previously outstanding shares of common owned by the
Company's shareholders were exchanged for an aggregate of 38,307,500 shares of Emy’s common stock. Effective with the Agreement, Emy’s changed its name to INVO Bioscience Inc.
All references to Common Stock, share and per share amounts have been retroactively restated to reflect the exchange ratio of 357.0197 shares of INVO Bioscience common stock for one share of Emy’s common stock outstanding immediately prior to the merger as if the exchange had taken place as of the beginning of the earliest period
presented.
The accompanying unaudited condensed consolidated financial statements present the historical financial condition, results of operations and cash flows of the Company prior to the merger with Emys. The accompanying unaudited condensed consolidated financial statements present on a consolidated basis the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
7
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(C) Significant Accounting Policies
The financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report filed on Form 10K for the year ended December 31, 2008. The condensed consolidated balance sheet as of December 31, 2008 was derived from the audited financial statements for the year then ended.
In the opinion of the Company, all adjustments necessary to present fairly our financial position and the results of our operations and cash flows have been included in the accompanying unaudited condensed consolidated financial statements. The results of operations for interim periods are not necessarily indicative of the expected
results for the full year.
Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. As of June 30, 2009, and December 31, 2008, the Company had $100 and $15,700 in cash equivalents, respectively.
(D) Recent Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting. SFAS 168 represents the last numbered standard to be issued by FASB under the old (pre-Codification) numbering system, and amends the GAAP hierarchy. On July 1, FASB will launch new FASB’s
Codification (full name: the FASB Accounting Standards Codification TM.) The Codification will supersede existing GAAP for nongovernmental entities; governmental entities will continue to follow standards issued by FASB's sister organization, the Governmental Accounting Standards Board (GASB). This pronouncement has no effect on the Company’s financial statements.
In June 2009, the FASB issued SFAS No. 167, a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and will change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. Under SFAS No. 167, determining
whether a company is required to consolidate an entity will be based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. SFAS 167 is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The Company does not expect the adoption of SFAS No. 167 will
have a material effect on its financial position, results of operations or cash flows.
In June 2009, the FASB issued SFAS No. 166, a revision to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transferred of financial assets and where companies have continuing exposure to the risks related to transferred financial assets.
SFAS 166 is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The Company does not expect the adoption of SFAS No. 140 will have a material effect on its financial position, results of operations or cash flows.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 is intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through
which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The Company does not expect the adoption of SFAS No. 165 will have a material effect on its financial position, results of operations or cash flows.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company's present or future consolidated financial statements.
8
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
NOTE 2 GOING CONCERN
As reflected in the accompanying unaudited condensed consolidated financial statements, the Company is in the development stage and has just commenced operations in December 2008, has a net loss for the quarter of $439,000 and a cumulative net loss of $3,177,000, a working capital deficiency of $1,474,000, a stockholder deficiency
of $1,468,000 and cash used in operations of $349,000 for the six months ended June 30, 2009. This raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable 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.
NOTE 3 INVENTORY
As of June 30, 2009 and December 31, 2008, the Company recorded the following inventory balances:
|
June 30,
2009 |
December 31,
2008 |
|||||||
|
Raw Materials |
$ |
- |
$ |
- |
||||
|
Work in Process |
49,507 |
55,465 |
||||||
|
Finished Goods |
19,008 |
15,257 |
||||||
|
Total Inventory |
$ |
68,515 |
$ |
70,722 |
||||
NOTE 4 PROPERTY AND EQUIPMENT
The estimated useful lives and accumulated depreciation for furniture, equipment and software are as follows:
|
Estimated Useful Life | |
|
Molds |
3 to 7 years |
|
Computers and Software |
3 to 5 years |
|
June 30,
2009 |
December 31,
2008 |
|||||||
|
Manufacturing Equipment- Molds |
$ |
35,263 |
$ |
35,263 |
||||
|
Accumulated Depreciation |
(3,918 |
) |
(980 |
) | ||||
|
Network/IT Equipment |
7,595 |
7,595 |
||||||
|
Accumulated Depreciation |
(1,899 |
) |
(633 |
) | ||||
|
$ |
37,041 |
$ |
41,245 |
|||||
During the six months ended June 30, 2009 the Company recorded $4,204 and $0 in depreciation expense respectively.
9
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
NOTE 5. PATENTS
As of June 30, 2009 and December 31, 2008, the Company recorded the following patent balances:
|
June 30,
2009 |
December 31,
2008 |
|||||||
|
Total Patents |
$ |
77,743 |
$ |
77,743 |
||||
|
Accumulated Amortization |
(12,167 |
) |
(9,351 |
) | ||||
|
Patent costs, net |
$ |
65,576 |
$ |
68,392 |
||||
During the six months ended June 30, 2009 and 2008, the Company recorded $ 2,816 and $1,728, respectively in amortization expenses
NOTE 6 WORKING LINE OF CREDIT
At June 30, 2009, the Company had a $50,000 working capital line of credit with Century Bank with interest payable monthly at 0.24% above the bank’s prime lending rate. On July 1, 2009 the rate was 3.74%, maturing May 31, 2010. At June 30, 2009 and December 31, 2008, the balance outstanding on the line of
credit was $50,000.
NOTE 7 NOTE PAYABLE AND OTHER RELATED PARTY TRANSACTIONS
On September 18, 2008, the Company entered into a related party transaction with Dr. Claude Ranoux. Dr. Ranoux is the President, Director and Chief Scientific Officer of the Company. Dr. Ranoux had loaned funds to the Company to sustain its operations since January 5, 2007 (inception). Dr. Ranoux’s
total cumulative investment at June 30, 2009 is $96,462 in INVO Bioscience. On March 26, 2009, the Company and Dr Ranoux agreed to amend the agreement to a non-convertible note payable bearing interest at 5% per annum and extended the repayment date to March 31, 2010. The Company and Dr. Ranoux can jointly decide to repay the loan earlier without prepayment penalties.
On March 5, 2009, the Company entered into a related party transaction with Kathleen Karloff the CEO and a Director of the Company. Ms. Karloff provided a short-term loan in the amount of $75,000 at a 5% interest rate to the Company to fund operations. In May, Ms. Karloff loaned the Company an additional
$13,000 making her total cumulative investment at June 30, 2009, $88,000 in INVO Bioscience, the note is due on September 15, 2009.
For the three months ended June 30, 2009 and 2008, the Company recorded $5,081 and $1,947 in interest expense respectively, 2008 was charged as an in-kind contribution. Additionally for the six months ended June 30, 2009 and 2008, the Company recorded $10,431 and $4,026 in interest expense respectively, again with 2008 being
charged as an in-kind contribution.
NOTE 8 STOCKHOLDERS’ EQUITY
For the period from January 5, 2007 (inception) through December 31, 2007, BioXcell (INVO Bioscience) issued 70,000 shares of common stock for $20,000, at $.2857/share. This was retroactively restated to 24,991,379 shares due to the stock split on November 12, 2008 and the subsequent share exchange on December 5, 2008.
On December 29, 2008, the Company filed an amended and restated articles of incorporation with the Secretary of State of Nevada. The Company’s authorized capital stock was changed from 75,000,000 shares, all of which were shares of Common Stock,
par value $.0001 per share, to authorized Common Stock of 200,000,000 shares, par value $.0001, and 100,000,000 newly created shares of undesignated preferred stock, par value $.0001.
On November 7, 2008, Our predecessor’s Board of Directors approved a 5-1 forward stock split (the “Forward Split”) of our Common Stock with a record date of November 10, 2008 for the Company’s issued and outstanding shares and not its authorized shares. The Forward Split was payable on November 12,
2008. Emy’s had 12,387,500 shares outstanding prior to the Forward Split and 61,937,500 shares outstanding thereafter.
10
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
The Company had 61,937,500 shares issued and outstanding immediately prior to the Share Exchange. Pursuant to the Share Exchange Agreement, certain shareholders of Emy’s agreed to cancel 47,000,000 shares of Emy’s Common Stock and Emys agreed to issue 38,307,500 newly-issued shares of Common Stock to INVO Bioscience
shareholders. As of December 5, 2008 and immediately after Closing, an aggregate of 53,245,000 shares of Common Stock were outstanding, including shares issued pursuant to the Closing.
After the consummation of the transaction contemplated by the Share Exchange Agreement, on the day of the Closing, we entered into the Securities Purchase Agreement with investors pursuant to which, the investors contributed $375,000 in exchange for 375,000 shares of our Common Stock at a price of $1.00 per share. The investors
have piggyback registration rights that permit them to register their Common Stock on any registration statement filed by the Company, as well as anti-dilution protection.
During the period from January 1, 2008 through November 30, 2008, the Company issued an aggregate of 4,561,641 shares of Common Stock for cash totaling $706,938 for share prices ranging from $0.15 to $1.50.
In March 2008, the Company issued an aggregate of 8,488,857 shares of Common Stock (net of forfeitures) for services rendered totaling $11,259. In November 2008, the Company issued an aggregate of 265,623 shares of Common Stock for services rendered totaling $40,056.
In March 2009, the Company issued an aggregate of 83,333 shares of Common Stock for services rendered totaling $37,500.
In April, 2009, the Company received $45,000 against the outstanding stock subscription receivable. As of June 30, 2009, $205,000 remains outstanding.
In May 2009, the Company issued an aggregate of 125,000 shares of Common Stock for services rendered totaling $15,500.
Since January 1, 2008, the Company has signed agreements in place for certain of its officers, executives and service providers of the Company. As of December 31, 2008, a total of 303,500 shares of Common Stock and options to purchase an additional 637,000 (including 461,000 of employee incentive stock options) of the Company’s
Common Stock were agreed to be issued. As of June 30, 2009, the Company has not issued the committed shares but has recorded an accrued liability of $313,500. As of June 30, 2009, the Company has not deemed the 637,000 options as granted until the plan is approved.
Non-Statutory Options
The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s Common Stock issued. These options were agreed to be issued in lieu of cash compensation for services performed.
|
Options Outstanding |
Options Exercisable |
|||||||||||||||||
|
Exercise Prices |
Number
Outstanding |
Weighted Average
Remaining Contractual
Life (Years) |
Number
Exercisable |
Weighted
Average
Exercise Price |
||||||||||||||
|
$ |
1.00 |
70,000 |
2.9 |
$ |
- |
$ |
- |
|||||||||||
11
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Transactions involving warrants are summarized as follows:
|
Number of
Shares |
Weighted
Average Price
Per Share |
|||||||
|
Outstanding at January 5, 2007 |
- |
$ |
- |
|||||
|
Granted |
- |
- |
||||||
|
Exercised |
- |
- |
||||||
|
Canceled or expired |
- |
- |
||||||
|
Outstanding at December 31, 2007 |
- |
$ |
- |
|||||
|
Granted |
140,000 |
1.00 |
||||||
|
Exercised |
- |
- |
||||||
|
Canceled or expired |
- |
- |
||||||
|
Outstanding at December 31, 2008 |
140,000 |
$ |
1.00 |
|||||
|
Granted |
- |
- |
||||||
|
Exercised |
- |
- |
||||||
|
Canceled or expired |
70,000 |
1.00 |
||||||
|
Outstanding at June 30, 2009 |
70,000 |
$ |
1.00 |
|||||
Aggregate intrinsic value of options outstanding and exercisable at June 30, 2009 was $0. Aggregate intrinsic value represents the difference between the Company's closing stock price on the last trading day of the fiscal period, which was $0.11 as of June 30, 2009, and the exercise price multiplied by the number of options outstanding. As
of June 30, 2009, total unrecognized stock-based compensation expense related to stock options was $105,000. During the quarters ended June 30, 2009 and 2008, the Company did not charge to operations the related expense to recognized stock-based compensation for the above stock options.
NOTE 9 INCOME TAXES
The Company has adopted Financial Accounting Standard number 109, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined
based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant.
For income tax reporting purposes, the Company's aggregate unused net operating losses approximate $3,200,000, expire at various times through 2029, subject to limitations of Section 382 of the Internal Revenue Code, as amended. The deferred tax asset related to the carry forward is approximately $540,000. The
Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earning history of the Company, it is more likely than not that the benefits will not be realized.
NOTE 10 COMMITMENTS
|
A) |
Operating Leases |
On January 1, 2007, the Company entered into an operating lease (the “lease”) with Cummings Properties, LLC, to lease 3,294 square feet of general office space. The lease commenced on January 1, 2007 and was automatically extended in October 2008 until December 31, 2010. The Company agreed to pay a security
deposit of $3,000 on January 1, 2007, which was repaid to the Company in equal $500 installments over the first six months of the lease. The Company received no rent incentives or improvement allowances under this agreement. The lease requires the Company to pay minimum lease payments of $2,000 per month for the duration of the lease. The lease is subject to a cost of living increase equal to the Boston, MA Consumer Price Index at the beginning of each calendar year. As
of January 1, 2009, the Company’s lease payments under this agreement increased 3.53% to $2,070.60.
|
B) |
Consulting agreements |
On December 5, 2008 in conjunction with the closing of the share exchange, the Company signed a letter agreement with Lionshare Ventures LLC (“LSV”). The terms of the letter agreement were such that LSV agreed to invest the balance of its original commitment to the Company dated May 19, 2008 for $450,000. Thereafter,
2,000,000 shares of Common Stock were escrowed until the money was funded to the Company. As of today, LSV has delivered $245,000 and the Company released 1,225,000 of the 2,000,000 common shares it held in escrow. On June 10, 2009 the Company and LSV agreed to extend the time period until December 5, 2009 in which LSV has to deliver the outstanding balance of $205,000.
12
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
On March 10, 2009, the Company entered into an agreement with Wakabayashi Fund, LLC of Tokyo, Japan for investor relation services focused on the Asian financial markets.
On April 17, 2009 the Company entered into an agreement with Red Chip Securities, Inc. of Alpharetta, Georgia to act as the Company’s investment banker and placement agent in assisting the Company in securing a private placement equity financing. In May Red Chip changed its name to Moody Capital, Inc.
On June 5, 2009, the Company engaged Hallmark Investments, Inc. to act as its placement agent on an exclusive basis in connection a private placement bridge offering of convertible promissory notes for an aggregate principal amount of up to $500,000. On July 15, 2009, the Company consummated the initial closing in the total
principal amount of $100,000 to one accredited investor. The Company expects to consummate additional closings for the bridge offering over the next 60 to 90 days, although no assurances can be made that the remaining amount of the bridge offering will be consummated.
|
C) |
Anti-Dilution and Piggyback Registration Rights |
On December 5, 2008, we entered into the Securities Purchase Agreement with the certain investors who have piggyback registration rights that permit them to register their Common Stock on certain registration statements filed by the Company. In addition, pursuant to certain anti-dilution rights granted under the Securities Purchase
Agreement to the investors, the Company may be obligated to issue additional shares of its Common Stock to the investors in the event it issues Common Stock to future investors at a per share purchase price less than $1.00. The number of additional shares to be issued in such event is equal to that number of shares that the investors would have acquired at such price had that price been offered at the time of their original investment, minus the number of shares acquired in their original investment. Further,
pursuant to the letter agreement, Lionshare Ventures (LSV) and its managing member, Christopher Esposito, have agreed to forfeit to us, one share of our Common Stock for every two shares we would be required to issue up to the maximum of 562,500 shares, which number of shares are being held in escrow by us until December 5, 2010.
In July 2009, the Company executed a $100,000 convertible note in connection with the bridge offering discussed above which has a conversion price of $0.10, in doing so the transition triggered the anti-dilution clause outlined above. The Company will be issuing 1,125,000 restricted shares of common stock to the investors
that are parties to the Securities Purchase Agreement. In addition the Company will take possession of the 562,500 shares pledged by LSV to meet this obligation.
|
D) |
Employee Agreements |
Since January 1, 2008, the Company has signed nine employee agreements for officers, executives and employees of the Company. Three of these agreements were with the founders of the Company. The remaining six of the agreements were executed with executives and staff of the Company. The Company agreed
to issue options and shares of common stock of the Company. Under the terms of these agreements, the shares and options are only issued the completion of the share exchange and the implementation of the Company’s employee stock plan. The share exchange closed on December 5, 2008, however, the Company has yet to implement an employee stock plan. The Company intends to implement an employee stock plan in the third quarter of 2009. As of June 30, 2009, a total of
336,560 shares of Common Stock and options to purchase an additional 637,000 shares of the Company’s Common Stock have been promised but not issued.
NOTE 11 SUBSEQUENT EVENT
The Company commenced a private placement offering of convertible promissory notes for an aggregate principal amount of up to $500,000 (the “Bridge Offering”). On July 15, 2009, the Company consummated the initial closing of the Bridge Offering in the total principal amount of $100,000 to one accredited investor.
The Company expects to consummate additional closings for the Bridge Offering over the next 60 to 90 days, although no assurances can be made that the remaining amount of the Bridge Offering will be consummated.
Each Note bears interest, payable in shares of common stock, at a rate equal to 9-12% per annum from the date of issuance of each note until paid in full on the Maturity Date. The Initial Investor’s Note has a 12% interest rate. All outstanding principal and accrued interest under each note is payable on the first to occur of
(i) one year following the original issue date or (ii) the follow-on financing of at least $2,500,000 (the “Maturity Date”). The Company can pre-pay the Note at any time without penalty or premium. The Notes are secured and carry detachable Common Stock purchase warrants. The notes rank junior to the Company’s SBA $50,000 Century Bank Line of Credit Loan and shall rank senior in all respects to all other existing and future indebtedness of the Company.
The Notes are convertible into common stock at a conversion price of $0.10 per common stock share. The Investor has the option to convert all or any portion of the principal amount of the note outstanding at any time, together with any accrued and unpaid interest hereunder into shares of common stock at the conversion price.
Additionally under the Purchase Agreement (the “Purchase Agreement”), effective as of July 15, 2009, by and among the Company and the Initial Investor, as additional consideration for the investment in the Notes, The Company issued a warrant to purchase the number of shares of Common Stock equal to 100% of the quotient of the principal amount of the note issued to such Investor divided by the Conversion Price, Price initially shall equal $0.10 per share and the exercise price of the Warrants
shall equal $0.20 per share. The Purchase Agreement also includes certain negative covenants of the Company, including, without limitation, limitations on: incurring additional indebtedness and liens, transactions with affiliates and payment of dividends.
13
Statements made in this Quarterly Report on Form 10-Q, including without limitation this Management's Discussion and Analysis of Financial Condition and Results of Operations, other than statements of historical information, are forward looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may sometimes be identified by such words as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue" or similar words. We believe that it is important to communicate our future expectations to investors. However, these forward-looking statements involve many risks and uncertainties including those referred to herein and in our Annual Report on Form
10-K for the year ended December 31, 2008. Our actual results could differ materially from those indicated in such forward-looking statements as a result of certain factors. We are under no duty to update any of the forward-looking statements after the date of this Report on Quarterly Form 10-Q to conform these statements to actual results.
Overview
Our primary focus is the manufacture and sale of the INVO technology to assist infertile couples in having a baby. In-vitro fertilization (IVF) is an effective treatment option for most infertile couples. Our patented and proven INVOcell technology is an effective low cost alternative to current treatments. It
may be provided in a physician’s office and, therefore, may be offered by physicians around the world who do not have access to IVF facilities. INVO uses a device, the INVOcell, which we currently price between $75-$225 to distributors in the developing countries around the world and $125-$300 in Europe and the U.S. We can manufacture, assemble, package, sterilize and ship an INVOcell for less than $50.
Currently, we are establishing agreements with distributors and beginning to train physicians around the world in places such as Latin America, Europe, Africa and the Middle East. While we penetrate the infertility markets in Europe and Canada along with certain developing countries, additionally we anticipate pursuing the completion
of the FDA's “510(k)” process. We have completed the first step for medical device companies who manufacture Class 2 devices and the filing of a Premarket Notification with the FDA (i.e., an FDA 510(k) submission). Technically, the FDA does not “approve” Class 1 and 2 medical devices for sale in the U.S. they give “clearance” for them to be sold. We are hoping to receive clearance
to market in the U.S. by 2010 upon completion of our clinical trial. However, there can be no assurance that we will receive such clearance by that date or ever.
We anticipate that we will experience significant quarterly fluctuations in our sales and revenues as a result of the Company’s efforts to expand the sales of the INVO technology to new markets. Operating results will depend upon and upon the timing of signing of new distributor contracts and the training of the physicians
and their staffs in the INVO procedure. International sales will continue to be our only source of revenue for the coming year. We are aware of many significant international opportunities and we expect international revenues to continue to grow. International sales are, however, difficult to forecast. We are committed in our ongoing sales, marketing and development activities to sustain and grow our sales and revenues from our products and services. We expect
our sales and marketing, research and development and general and administrative expenses to increase in 2009 as compared to 2008.
During the three months ended June 30, 2009 the company continued to market its products in strategic markets utilizing its limited resources in the most economical fashion possible. We focused our efforts on South America and Europe as we see these as our best opportunities to quickly introduce the INVO procedure to many willing physicians
requesting the product be brought into their area. During the period travel was reduced and planned in advance taking advantage of discounts reducing travel expenses considerably. The Company actively participated in the 25th annual meeting of The European Society of Human Reproduction and Embryology (ESHRE) in June, setting the stage for introducing the INVOcell across Europe. This annual meeting is the largest
infertility conference of physicians in Europe and was felt to be a key component in gaining name recognition and viewed a success. During the period two employees left the organization and the Company is holding off hiring replacements until additional financial capital is raised. As a result revenues were slightly less than anticipated as we could not be in as many places as originally planned. The Company is continuing to actively take and plan sales and training trips it believes necessary to achieve its
goals with the resources it has.
As of June 30, 2009, we require approximately $175,000 per month to fund our operations. This amount may increase as we expand our sales and marketing efforts and develop new products and services; however, if we do not raise additional capital in the near future we will have to curtail our spending and downsize our operations. Our
cash needs are primarily attributable to funding sales and marketing efforts, strengthening our training capabilities, satisfying existing obligations and building an administrative infrastructure, including costs and professional fees associated with being a public company.
We are currently seeking up to $5 million in capital through a private placement of our common stock. The exact amount of funds raised, if any, will determine how aggressively we can grow and what additional projects we will be able to undertake. No assurance can be given that we will be able to raise additional
capital, when needed or at all, or that such capital, if available, will be on terms acceptable to us. If we are unable to raise additional capital in the current private offering, we could be required to substantially reduce operations, terminate certain products or services or pursue exit strategies.
To support ongoing operations while seeking the above mentioned $5 million dollar capital raise the Company has also initiated a $500,000 convertible bridge loan agreement as identified in our Current Report on Form 8-K filed with the SEC on July 15, 2009. The Company engaged Hallmark Investments, Inc. (“Hallmark”)
to act as its placement agent on an exclusive basis in connection with this private placement. The Company expects this financing will meet its short term cash requirements while securing its larger private placement.
Our registered independent certified public accountants have stated in their report dated April 15, 2009, filed with the Company’s Annual report on form 10-K that the Company has a generated negative cash outflows from operating activities, experienced recurring net operating losses, and is dependent on securing additional equity
and debt financing to support its business efforts. These factors among others may raise substantial doubt about our ability to continue as a going concern.
14
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon the condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles as recognized in the United States of America. The preparation of these financial statements requires
that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. Our estimates include those related to revenue recognition, the valuation of inventory, and valuation of deferred tax assets and liabilities, useful lives of intangible assets, warranty obligations and accruals. We base our estimates on historical experience and on various other assumptions that management believes to be
reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For a complete description of accounting policies, see Note 1 to our financial statements included in our Form 10K for the year ended December 31, 2008. There were no significant changes in critical accounting estimates.
Results of Operations
Three months ended June 30, 2009, compared to the three months ended June 30, 2008
Net Sales and Revenues
Net sales and revenue for the second quarter of 2009 increased 100% to $16,600 compared to no revenue for the same period in 2008. The increase was due to starting international shipments of small orders to our newly signed distributors as well as direct shipments to physicians who want to use the INVOcell. The Company has received
positive feedback and acceptance of the INVO procedure and INVOCell device almost instantaneously following the completion of an initial procedure. The Company expects this trend to continue as we introduce the technology into our newly targeted countries over the next few months (i.e., Spain, Italy and Peru). The Company expects revenues to grow slowly as we move into these new countries adding to our current customer base in
Turkey, the Mid-East and Colombia.
Cost of Sales and Revenues
Cost of sales as a percentage of revenues for three months ended June 30, 2009 was 37%, there were no sales or corresponding cost of sales for the same period in 2008. This is higher than we expect in the future as we are producing small lot quantities and have higher shipping costs per unit as a result of the small volume shipments.
Additionally, as we open new markets we are finding the need to provide samples of the INVOcell for demonstration and training, as markets mature this practice will not be necessary. As the Company’s products become an accepted method of assisting couples with infertility, we expect to be manufacturing larger quantities of our devices that is expected to reduce our costs of sales. .
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended June 30, 2009 were $444,000 as compared to $257,000 for the three months ended June 30, 2008. Our higher general and administrative expenses in 2009 were due to starting to market our products and technology outside of the United States. During
the three months of 2008 the Company had three employees, just starting to take a salary in the third month of the quarter. In 2009, the Company had grown to six employees all earning a salary as well as all the associated expenses that relates to them, including benefits and travel. Salaries and benefits for the period were $211,000 compared to $39,000 for the same three months ending June 30 last year. The Company incurred considerable travel costs as its employees continued to go
across the globe to introduce the INVOcell and the INVO process to physicians and distributors in Europe and South America, travel related expenses for the three months ending June 30, 2009 were $48,000 compared to no expense in the same period during 2008. The Company continued to protect its patent rights around the world with legal and filing fees totaling $11,600 for the three months ended June 30, 2009 compared to the $7,400 for the three months ended June 30, 2008. Some of the
new expenses incurred by the Company during the three months ended June 30, 2009 relate to being a public entity, including investor relations, insurance, accounting and legal costs, which together were $55,000. For the three months ended June 30, 2008, $156,000 was spent on accounting services in preparing the Company’s books and records for its first external independent audit. In the second quarter for the three months ended June 30, 2009 the Company started to invest some
monies in marketing related activities in the amount of $27,000 for items such as making changes to its corporate website while developing a new design with an outside firm along with creating and printing brochures.
Research and Development Expenses
Research and development expenses were decreased to $0 for the three months ended June 30, 2009, as compared to $17,500 spent in the three months ended June 30, 2008. The decrease in research and development expense was due to the Company’s belief that the product was fully ready for market as it is, and its limited resources
were devoted to sales, marketing and training new distributors and customers
15
Interest Income and Expense, Net
The Company had net interest expense of $5,100 for the three months ended June 30, 2009, as compared to $1,900 for the three months ended June 30, 2008 as a result of having higher loans in 2009 versus 2008.
Six months ended June 30, 2009, compared to the six months ended June 30, 2008
Net Sales and Revenues
Net sales and revenue for the six months ending June 30, 2009 was $53,400 compared to no revenue for the same period in 2008. The increase was due to starting international shipments of small orders to our newly signed distributors as well as direct shipments to physicians who want to use the INVOcell. The Company expects
this trend to continue as we introduce the INVO technology into our targeted countries over the next few months including, Spain, Italy and Peru while continuing to nurture our current customer base in the Mid-East and South America
Cost of Sales and Revenues
Cost of sales as a percentage of revenues for the six months ended June 30, 2009 was 50%. This is significantly higher than we expect in the future as we are producing small lot quantities and have higher shipping costs per unit as a result of the small volume shipments. There were no sales or costs for the comparative period
of 2008 with which to compare our results. As the Company’s products become an accepted method of assisting couples with infertility, we expect to be manufacturing larger quantities of our devices that we expect will reduce our cost of sales. Further, shipping larger quantities to distributors via common carriers will reduce our shipping costs. Collectively, the Company anticipates that these volume discounts would reduce our cost of sales by approximately 50%
down to 25% compared to the 50% shown for the six months ended June 30, 2009.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended June 30, 2009 and 2008 were $1,101,000 and $296,000 respectively. Our higher general and administrative expenses in 2009 were due to starting to market our products and technology outside of the United States. During the six months of 2008, the Company
had three employees, during which most of the period they did not take a salary. In 2009 the Company had grown to six employees all earning a salary as well as all the associated expenses that relate to them, including benefits and travel. Salaries and benefits for the period were $484,000 compared to $49,000 for the same period ending June 30 last year. The Company incurred considerable travel costs as its employees continued to go across the globe to introduce the INVOcell and the
INVO process to physicians and distributors in Europe and South America, travel related expenses for the six months ending June 30, 2009 $119,000 compared to nothing in the same period in 2008. The Company continued to protect its patent rights around the world with legal and filing fees totaling $30,000 for the six months ended June 30, 2009 compared to the $18,000 for the six months ended June 30, 2008. . Some of the new expenses incurred by the Company during the six months
ended June 30, 2009 relate to being a public entity, including investor relations, insurance, accounting and legal costs, which together were $181,000. For the six months ended June 30, 2008, $156,000 was spent on accounting services in preparing the Company’s books and records for its first external independent audit.
Research and Development Expenses
Research and development expenses were decreased to $5,000 for the six months ended June 30, 2009, as compared to $17,500 spent in the six months ended June 30, 2008. The decrease in research and development expense was due to the Company’s belief that the product was fully ready for market as it is, and its limited resources
were devoted to sales, marketing and training new distributors and customers.
Interest Income and Expense, Net
The Company had net interest expense of $10,400 for the six months ended June 30, 2009, as compared to $4,000 for the six months ended June 30, 2008 as a result of having higher loans in 2009 versus 2008.
Income Taxes
The Company's aggregate unused net operating losses approximate $3,200,000, which expire at various times through 2029, subject to limitations of Section 382 of the Internal Revenue Code of 1986, as amended. The deferred tax asset related to the carry forward is approximately $540,000. The Company has provided a valuation
reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earning history of the Company, it is more likely than not that the benefits will not be realized.
16
Liquidity and Capital Resources
As of June 30, 2009, we had $100 in cash and no cash equivalents.
Net cash used by operating activities was $349,000 for the six months ended June 30, 2009, compared to net cash used by operating activities of $159,000 for the six months ended June 30, 2008. The increase in net cash used was due to the significant costs of staffing, compliance, introducing our products into new markets and
the establishment of an Advisory Board and consulting in preparation of our FDA 510k submission. In addition, all of the current employees have assisted INVO Bioscience in its funding requirements by deferring their salaries for the last four months ending June 30, 2009.
No cash was used during the first six months of 2009 in investing activities, compared to $7,300 cash used by investing activities for the same six months ended June 30, 2008. The cash used during 2008 was for the purchase of patents to protect our proprietary products. During 2009 the Company is maintaining its current patents
across the globe and currently does not believe it is necessary to expand any of them at this time.
Net cash provided by financing activities was $333,000 for the six months ended June 30, 2009, of that amount $88,000 was provided by a four month 5% loan by Kathleen Karloff, the Company’s CEO. The remaining $245,000 was from Lionshare Ventures LLC per their subscription receivable agreement dated December 5, 2008 and
revised on June 10, 2009 for the previous sale of Common Stock. As of August 11, 2009, $205,000 is still due to the Company from Lionshare.
The Company maintains a $50,000 working capital line of credit with Century Bank. Interest is payable monthly at the rate of 0.24% above the bank’s prime lending rate. As of June 30, 2009, the rate was 3.74%. This line of credit matures May 31, 2010. At June 30, 2009 and December 31, 2008
the balance outstanding on the line of credit was $50,000.
Our registered independent certified public accountants have stated in their report dated April 15, 2009, filed with the Company’s Annual report on form 10K that the Company has a generated negative cash outflows from operating activities, experienced recurring net operating losses, and is dependent on securing additional equity and
debt financing to support its business efforts. These factors among others may raise substantial doubt about our ability to continue as a going concern.
The Company’s existing cash resources, cash flow from operations and short-term borrowings on the existing credit line or from management will not provide adequate resources for supporting operations during fiscal 2009. The Company is actively seeking the funding it needs to continue to execute its business plan. It
is doing so in two steps, first with a $500,000 10% convertible note bridge offering while it lines up a $5 million dollar Private Investment in a Public Entity (PIPE) Common Stock offering. On July 15, 2009, the Company consummated the initial closing of the bridge offering in the total principal amount of $100,000 to one accredited investor. Although there can be no assurance that we will find additional sources of funding, management believes that it will be able to find sources of funds on
commercially acceptable terms. However, if we do not raise additional capital in the near future we will have to further curtail our spending and downsize our operations.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements and their effect on the Company, see “Recent Accounting Pronouncements” in Note 1 of the Unaudited Notes to Condensed Consolidated Financial Statements contained herein.
Not Applicable
The Company’s management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial (and principal accounting) Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) of the Exchange Act) as of June 30, 2009, the end of the fiscal period covered by this Form 10Q. We maintain disclosure controls and procedures that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is
accumulated and communicated to our management to allow timely decisions regarding required disclosure. Based upon that evaluation and the identification of the material weakness in the Company’s internal control over financial reporting as of December 31, 2008 (described below) which has not been remediated as of of the end of the period covered by this Quarterly Report, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure
controls and procedures were ineffective as of the end of the period covered by this Quarterly Report.
17
Because of the Company’s limited resources and limited number of employees, management concluded that, as of December 31, 2008, our internal control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with U.S. generally accepted accounting principles.
To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals. The Company is taking steps to create effective procedures and controls throughout the organization. The Company is in the process of establishing
procedures and segregating duties where it can. Over the past six months, it has implemented a new accounting system and has outsourced its accounts payable function. It has implemented an approval processes, created a number of policies, reporting processes, a standard customer contract and has introduced an employee manual. We will continue to monitor our disclosure controls and procedures and will address areas of potential concern. As we grow, we expect to increase
our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited
to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
From time to time we may be a party to various legal proceedings arising in the ordinary course of our business. We are not currently subject to any material legal proceedings.
You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. There have
been no material changes from the factors disclosed in our 2008 Annual Report on Form 10-K, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the Securities and Exchange Commission.
During the period covered by this Report, the Company issued 83,333 shares of restricted Common Stock for investor relations services in Asia to Wakabayashi Fund, LLC, 75,000 shares of restricted Common Stock to Moody Capital (formerly Red Chip Securities) for acting as a non-exclusive agent for the Company in securing future capital
for INVO Bioscience and 50,000 shares of restricted Common Stock were issued to Investor Awareness, Inc. for investor relations services in the United States. We claimed the exemption from registration set forth in Section 4(2) of the Securities Act and the rules there under, as private transactions not involving a public distribution. The facts we relied upon to claim the exemption include: (i) Wakabayashi Fund, LLC, Moody Capital and Investor Awareness all represented that they acquired
the shares from the Company for investment and not with a view to distribution to the public; (ii) each certificate issued for unregistered securities contains a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities; (iii) Wakabayashi Fund, LLC , Moody Capital and Investor Awareness all represented that they are accredited investors and familiar with our business activities; and (iv) Wakabayashi
Fund, LLC, Moody Capital and Investor Awareness were all given full and complete access to any corporate information they requested.
None.
None.
None.
ITEM 6. Exhibits
|
10.1 |
Form of Senior Secured Convertible Promissory Note(1) |
|
10.2 |
Form of Purchase Agreement(1) |
|
10.3 |
Form of Warrant Purchase Agreement(1) |
|
10.4 |
Hallmark Investments, Inc. Agreement(1) |
|
10.5 |
|
|
10.6 |
|
|
31.1 |
|
|
31.2 |
|
|
32.0 |
(1) Incorporated by reference to our Current Report Form 8-K filed with the SEC on July 15, 2009
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 14, 2009.
|
INVO Bioscience, Inc. |
|||
|
Date: August 14, 2009 |
By: |
/s/Kathleen Karloff |
|
|
Kathleen Karloff |
|||
|
Chief Executive Officer
(Principal Executive Officer)
|
|||
|
Date: August 14, 2009 |
By: |
/s/ Robert J. Bowdring |
|
|
Robert J. Bowdring |
|||
|
Chief Financial Officer
(Principal Financial and Accounting Officer) |
|||
EXHIBIT INDEX
|
10.1 |
Form of Senior Secured Convertible Promissory Note(1) |
|
10.2 |
Form of Purchase Agreement(1) |
|
10.3 |
Form of Warrant Purchase Agreement(1) |
|
10.4 |
Hallmark Investments, Inc. Agreement(1) |
|
10.5 |
|
|
10.6 |
|
|
31.1 |
|
|
31.2 |
|
|
32.0 |
(1) Incorporated by reference to our Current Report Form 8-K filed with the SEC on July 15, 2009
20