UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| | For the fiscal year ended December 31, 2010 |
or
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| | For the transition period from to |
INVO BIOSCIENCE, INC.
(Exact name of registrant as specified in Charter)
| Nevada | 333-147330 | 20-4036208 |
| (State or other jurisdiction of incorporation or organization) | (Commission File No.) | (IRS Employee Identification No.) |
100 Cummings Center, Suite 207P, Beverly, MA 01915
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: (978) 878-9505
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.0001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x
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). YES ¨ NO x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer ¨ | | Accelerated filer ¨ | | Non-accelerated filer ¨ | 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). YES ¨ NO x
The aggregate market value of the voting stock held by non-affiliates of the registrant, computed using the closing price as reported on the Over the Counter Bulletin Board for the Registrant’s Common Stock as of June 30, 2010, was $2,728,052
The number of shares outstanding of the Registrant’s Common Stock, $.0001 par value, as of April 11, 2011 was 77,625,120.
FORM 10-K
INVO BIOSCIENCE, INC.
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Part I
In this Annual Report on Form 10-K, INVO Bioscience, Inc. (INVO Bioscience, Inc., together with its subsidiaries, is referred to in this document as “we”, “us”, “INVO Bioscience”, INVO, or the “Company”), incorporates by reference certain information from parts of other documents filed with the Securities and Exchange Commission. The Securities and Exchange Commission allows us to disclose important information by referring to it in that manner. Please refer to all such information when reading this Annual Report on Form 10-K. All information is as of December 31, 2010 unless otherwise indicated. For a description of the risk factors affecting or applicable to our business, see “Risk Factors,” below.
The Company
INVO Bioscience was formed in January 2007 under the laws of the Commonwealth of Massachusetts under the name “Bio X Cell, Inc.,” after acquiring the assets of Medelle Corporation (“Medelle”). Dr. Claude Ranoux was the founder and a vice president of Medelle and Kathleen Karloff was also a vice president of Medelle. Between 2001 and 2006, Medelle raised $8 million in venture capital which was used to develop and validate a device called the “INVOcell.” Medelle conducted pre-clinical safety testing and performed a human efficacy clinical study. Due to a delay in obtaining U.S. Food and Drug Administration (“FDA”) clearance for the INVOcell venture capital investments ceased, resulting in both Dr. Ranoux and Ms. Karloff as well as others being terminated in the fall of 2006 and by the end of 2006, Medelle ceased operations. Medelle assigned all of its assets to a trustee who liquidated those assets and distributed the proceeds to creditors. In that process, Dr. Ranoux purchased all of the assets of Medelle for $20,000. He then contributed those assets to Bio X Cell, Inc. which included four patents relating to the INVOcell technology, upon its formation in January 2007.
On December 5, 2008, Bio X Cell, Inc., doing business as INVO Bioscience, and each of the shareholders of INVO Bioscience (the “INVO Bioscience Shareholders”) entered into a share exchange agreement (the “Share Exchange Agreement”) and consummated a share exchange (the “Share Exchange”) with Emy’s Salsa Aji Distribution Company, Inc. (“Emy’s”). Upon the closing of the Share Exchange on December 5, 2008 (the “Closing”), the INVO Bioscience Shareholders transferred all of their shares of Common Stock in INVO Bioscience to Emy’s. In exchange, Emy’s issued to the INVO Bioscience Shareholders an aggregate of 38,307,500 shares of Emy’s common stock, representing 71.9% of the shares issued and outstanding immediately after the Closing. As a result of the Share Exchange, INVO Bioscience became a wholly-owned subsidiary of Emy’s.
At Closing, Emy’s officers and directors resigned from their positions. Kathleen Karloff was appointed as Chief Executive Officer, Secretary and Director and Dr. Claude Ranoux was appointed as President, Treasurer and Director.
Immediately following the Closing, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with GRQ Consulting, LLC and Whalehaven Capital Fund Limited. Pursuant to the Securities Purchase Agreement, the investors invested $375,000 in exchange for 375,000 shares of our Common Stock at a price of $1.00 per share, subject to anti-dilution protection. After the Closing, the Company had 53,245,000 shares of Common Stock outstanding.
INVO Bioscience is a development stage company that began to commercialize its proven and patented technology in late 2008; we believe we will revolutionize the treatment of infertility in the coming years. Our 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, including in-vitro fertilization (“IVF”). Therefore, we believe that the INVO procedure will be available in many more locations than conventional IVF especially outside the United States. INVO also allows conception and embryo development to take place inside the woman's body; an attractive feature for most couples.
In May 2008, we 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, we possess the regulatory authority to distribute product in the European Economic Area, provided we comply with local registration requirements as discussed herein (i.e., the European Union, Canada, Australia, New Zealand, Africa and most parts of the Middle East and South America).
As with most start-up situations, one of the biggest challenges that INVO Bioscience is facing is raising the appropriate capital to implement its business plan while opening markets across the globe.
This discussion is qualified in its entirety by the more detailed discussion of our operations in the “Management’s Discussion and Analysis” section below.
The INVOcell Technology
Our product, the INVOcell medical device, is designed to treat infertility at a far lower cost than other treatments available in today’s marketplace, including IVF. The INVOcell technology is a fertility treatment where either mild ovarian stimulation or no ovarian stimulation is used. Using a mild stimulation protocol, 1-10 follicles are retrieved from a woman in a physician’s office with the patient under light sedation with or without local anesthesia. The follicle retrieval is performed using a vaginal probe under ultrasound guidance. Eggs are identified immediately after retrieval in the follicular fluid. During the INVO procedure, fertilization and embryo development occurs inside the woman’s vaginal cavity in a disposable single use device -- the INVOcell -- that holds the eggs, sperm and culture medium, a nutrient liquid.
Sperm collection and preparation generally occur before egg retrieval. Culture medium (~1ml) is placed in the inner vessel of the INVOcell. Eggs and a fraction of motile sperm are placed into the medium and the inner vessel is closed and secured in the protective outer vessel. The INVOcell is placed in the patient’s vaginal cavity for an incubation period of 2-3 days. A retention system can be used to maintain the INVOcell system in the vagina during the incubation period. The retention system consists of a diaphragm with holes in the membrane to allow natural elimination of vaginal secretions. The INVOcell is designed so that no vaginal fluids penetrate the outer vessel thus ensuring that the inner vessel is not contaminated. Obtaining eggs, sperm and media then inserting them into the INVOcell and then placing it in the vagina takes approximately 90 minutes.
After 2-3 days, the patient returns to the physician’s office where the retention system and the INVOcell are removed. The protective outer vessel is discarded and the inner vessel is placed in INVO Bioscience’s patented holding block in a vertical position for 15 minutes. Embryos are collected in the micro chamber located at the bottom of the inner vessel. The embryos can be directly viewed in the micro chamber in the holding block by using a microscope. Embryos can be loaded directly from the device in a transfer catheter from the INVOcell device. A trained clinician can readily identify the best embryos for transfer. The embryos to be transferred are aspirated into a standard catheter for transfer into the patient’s uterus. This second visit should take approximately 45 minutes. All INVO related medical procedures can be performed in a physician’s office thereby avoiding the requirement of an IVF facility and the associated costs to build and maintain such a facility.
Operations Strategy
INVO Bioscience operates by outsourcing many key operational functions in the development and manufacturing of the INVOcell device to keep fixed costs to a minimum. Our most critical management and leadership functions are carried out by our core team. We have contracted out manufacturing, packaging/labeling and sterilization of the device to a certified manufacturer; to a medical manufacturing company to assemble packages and label the product; and to a sterilization specialist to perform the gamma sterilization process. Our operations model expedites production and eliminates the need for in-house capital equipment expenditures.
To date, we have achieved a series of important steps in the development and manufacturing of the INVOcell including, in part:
| · | Manufacturing: Our parts and manufacturing processes have been validated. Manufacturing of inventory is ongoing. To date, we have 1,200 INVOcell devices ready for sale. We have an additional 8,500 devices molded and ready for assembly, sterilization and packaging. |
· | CE Mark: INVO Bioscience has obtained a CE Mark that permits the sale of devices in Europe, Canada and other countries that recognize the CE Mark, subject to local registration requirements. |
· | Clinical Trials: Safety and efficacy of the INVOcell device has been demonstrated and accepted by the European Union which has granted a CE Mark and ISO registration. |
· | Support of Practitioners: Clinicians and laboratory directors have used the INVO method and the feedback has been positive; practitioners appreciate the fact that it is a patient-friendly procedure, easy to perform and effective. |
· | Finalize FDA Clearance: INVO Bioscience has completed all developmental testing and pre-trial testing for the 510(k) submission. We are looking into 510k submission options in 2011. If required we intend to complete what we believe to be the final clinical study under the investigational device exemption (IDE) by the FDA, subject to receipt of additional funding in 2012. The anticipated expense related to this clinical study is $1 million dollars. |
· | Marketing Trials/Studies: A fertility clinic recently completed a clinical study in Colombia, South America, showing a 43% efficacy rate. Other studies are currently in the works in Peru, Brazil, and the Middle East by doctors using the INVOcell device. These trials will yield “local” data on patient efficacy and experience for marketing collateral and advertising. |
Current Market Opportunity
According to the European Society for Human Reproduction (“ESHRE”) in 2007, there are more than 100 million infertile couples in the world. While there have been large increases in the use of IVF, only about one million IVF cycles were performed in 2006, which amounts to a treatment of less than 1% of the infertile couples worldwide. Knowing that an average of 2-3 cycles of IVF is performed per infertile couple, there are only 300,000-500,000 couples treated by IVF. A survey by “Resolve: The National Infertility Association,” the number one reason couples do not use IVF is cost and geographical availability. We can provide a locally available treatment option at less than half of the cost of IVF that will help millions of infertile couples throughout the world where IVF is not currently available.
IVF is an effective treatment option for many infertile couples. Our patented and proven INVO technology is a low cost, unique fertility treatment option that is much simpler to perform than IVF. The procedure can be provided without an IVF center and therefore can be available in many more locations than IVF. We believe we are well positioned to capture a significant share of this unmet market. With our INVOcell device and technique, fertilization and early embryo development is done within the vaginal cavity rather than an incubator. Oocytes and sperm are fertilized and developed into embryos within the INVO device while contained by the woman’s vaginal cavity.
Currently, according to ESHRE (2007) less than 1% of infertile couples who receive infertility treatment, including IVF, intra uterine insemination (“IUI”) and other fertility treatment, represents a $6 billion worldwide market annually. This leaves 99% of the infertile couples untreated with an estimated unmet market opportunity of $594 billion, a portion of which, we believe will be met by the INVO device. Much of the unmet market is located in developing countries where many patients cannot afford, and have limited access to, IVF. We believe that developing countries offer a large and ready market for the INVOcell.
In May 2008, we received notice that the INVOcell device meets all of the essential requirements of the relevant European Directive, and received CE marking. The CE marking certifies that a product has met European health, safety and environmental requirements, which ensure consumer safety. Manufacturers in Europe and abroad must meet CE marking requirements where applicable in order to market their products in Europe. With CE marking, we now have the necessary regulatory authority to distribute our INVOcell device in the European Union, subject to local registration regulations.
Currently, we are continuing to establish agreements with distributors and train physicians outside of the U.S. including in Canada, South America, Central America, Europe, the Middle East, India and Africa. While we penetrate the infertility markets in Europe and Latin America, along with the other countries, we anticipate also 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 a small number of Class 1 and 3 devices) by filing a Premarket Notification with the FDA (i.e., an FDA 510(k) submission). 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 believe that we are presently halfway completed with our clinical trial and anticipate its completion by the end of 2012, subject to proper funding. However, there can be no assurance that we will be able to fund our clinical trial to completion, that our trial will be successful and that we will receive FDA clearance thereafter.
Competition
The infertility industry is highly competitive and characterized by technological improvements. New artificial reproductive technology (“ART”) services, devices and techniques may be developed that may render the INVOcell obsolete. Competition in the areas of infertility and ART services is largely based on pregnancy rates and other patient outcomes. Accordingly, the ability of our business to compete is largely dependent on our ability to achieve adequate pregnancy rates and patient satisfaction levels. The INVO procedure will offer an alternative treatment to couples who currently do not have access to treatments because of cost or location. Infertility clinics can expand their businesses by offering INVO in satellite centers that can be opened at a substantially lower cost than an IVF center. We are not aware of any direct competitors to INVO Bioscience or the INVO process using the INVOcell device. However, there are existing infertility treatment regimes that the INVOcell will compete with when the infertile couple, in conjunction with their physician, is choosing the treatment method for their infertility. We believe that the menu of currently available clinical infertility treatment methods generally is limited to IUI and IVF.
Competing Treatments
Intra Uterine Insemination (IUI): In IUI treatments, ovarian stimulation protocols with induction of ovulation are frequently used to recruit several follicles and improve clinical pregnancy rates. When monitoring ovulation indicates that the female patient is ready to ovulate, the male patient will produce a sperm sample in the fertility doctor’s office. The sperm is then prepared and delivered to the uterus through a catheter. IUI can only treat approximately 40% of the causes of infertility. For example, IUI does not address infertility causes such as tubal disease and other conditions that are treatable by IVF and the INVOcell device and process. In addition, IUI does not produce the diagnostic information such as fertilization that an IVF or INVO cycle produces. Approximately 600,000 IUI cycles are performed annually by a subset of 5,000 of the 40,000 fertility doctors in the U.S. as well as by IVF providers. In Europe, at least 550,000 IUI cycles are performed annually. The cost of a single IUI treatment can range from $500 to $4,000 per cycle in the U.S. and $500 to $2,000 in Europe. The intra-country differences in cost depend on the stimulation protocol and the ovulation monitoring used by the physician.
In Vitro Fertilization (IVF): IVF addresses tubal factor, ovulatory dysfunction, diminished ovarian reserve, endometriosis, uterine factor, male factor, unexplained infertility and other causes. IVF bypasses the function of the fallopian tube by achieving fertilization within a laboratory environment. Ovarian hyper-stimulation is common with IVF treatments to recruit numerous follicles and increase the chances for success. Follicles are retrieved trans-vaginally using a vaginal probe and ultrasound guidance. General anesthesia is frequently used due to the number of follicles retrieved and the resulting discomfort experienced by the patient. The eggs are identified in the follicular fluid and combined with sperm and culture medium in culture dishes, which are placed in an incubator with a temperature and gas environment designed to mimic the condition of the fallopian tubes. Once the embryos develop, typically over a 5 day period, they are transferred to the uterine cavity. The transfer of several embryos allows an average success rate for IVF of 37%, but it is also responsible for a high multiple birth rate of approximately 33% of IVF pregnancies. Multiple births bring risks to mother and babies and significant expenses for third party payers. In addition, due to the high number of embryos produced in IVF, cryo-preservation of excess embryos occurs in more than 30% of the cycles. In the U.S., there are approximately 1,000 reproductive endocrinologists who collectively perform more than 150,000 IVF cycles per year at 430 specialized facilities. In Europe, nearly 300,000 IVF cycles are reportedly performed at more than 1,000 facilities.
The cost to the patient for a single IVF cycle (including drugs) averages $12,400 in the U.S. and can go as high as $20,000 depending on the IVF center. The cost of drugs for an IVF cycle ranges from $2,500 to $3,500. The average cost per live birth using IVF can exceed $50,000 since the successful patient generally requires more than one cycle depending on the age of the patient. Many patients who would be good candidates for IVF are unable to access it because of the high cost and lack of insurance reimbursement. Additional obstacles to IVF often include significant distances to IVF clinics; travel costs; and time off from work. In addition, some couples experience concerns regarding IVF such as the possibility of laboratory errors resulting in receiving another person’s embryo.
Competitors
We operate in a highly competitive industry, which is subject to competitive pricing and rapid technological change. The market for fertility treatment and devices are highly competitive in terms of pricing, functionality and service quality, the timing of development and introduction of new products and services and terms of financing. We face competition from all ART practitioners and device manufacturers. Our competitors may implement new technologies before we do, allowing them to offer more attractively priced or enhanced products, services or solutions. Our competitors may have greater resources in certain business segments or geographic markets than we have. We may also encounter increased competition from new market entrants or alternative ART technologies. Our ability to compete in this market successfully will require us to adapt to economic or regulatory changes, to introduce new products to the market and to enhance the functionality while reducing the cost of new and existing products.
Our principal ART medical-device competitor is Anecova, a Swiss start-up life sciences company with an intrauterine device under development for infertility treatment. This device is a very small silicone tube with 360 micro perforations. Oocytes are fertilized outside the device and then placed in the tube, which is placed inside the woman’s uterus for early embryo development. After 1-5 days, the device is removed and the best embryo(s) are transferred back into the woman’s uterus. We believe that the device is much more difficult to use than the INVOcell due to its size and the requirement to place the device in the uterus, a sterile environment. The precision manufacturing of the Anecova device will drive its cost close to $1,500, which is higher than our price. The Anecova device would only be available in hospitals and IVF Centers at a significantly higher cost than the INVOcell.
Competitive Advantages
We believe that the INVOcell has the following competitive advantages:
Lower cost than IVF with similar efficacy: The INVOcell is substantially less expensive than IVF due to a lower cost of supplies, labor, capital equipment and overhead. An IVF center requires at least $500,000 of laboratory capital equipment and highly trained personnel. In contrast, the cost of laboratory capital equipment to set-up an INVOcell procedure is approximately $30,000 and does not require highly trained specialists beyond the traditional obstetrician and gynecological practice. The global success rate for IVF varies dramatically from 13% to 50.% with an average of 37% per cycle (US Center for Disease Control, CDC 2008 ART Report). We foresee that the INVO device will be offered at approximately $5,000 per cycle with a pregnancy rate comparable to traditional IVF. In Europe, IUI currently averages $1,000 per cycle. In Europe, the average cost per pregnancy for IVF is $21,354. INVO in Europe will be offered at approximately $2,500 per cycle.
Similar cost than IUI with greater efficacy: In the U.S. currently, IUI averages $1,500 per cycle with <10% pregnancy rate while IVF averages $12,400 per cycle with an average of 37% pregnancy rate. With INVO, we believe that the Ob/Gyn or reproductive endocrinologist practitioners will benefit by providing a superior product than IUI with good financial margins, efficacy rates more than double IUI while treating the full range of infertility indications. In Europe, the average cost per pregnancy using IUI is $12,000. The average cost per pregnancy for IVF is $21,354 while for INVO it is only $13,888: a savings of more than $7,000 per pregnancy. Using INVO could reduce annual infertility costs in Europe by more than $650 million.
Greater geographic availability: In Europe, there are more than 1,000 IVF centers, and there are approximately 430 IVF centers in the U.S. In addition, by having INVO geographically available in Ob/Gyn offices, couples will avoid the travel costs and absence from work associated with long-distance IVF treatments. The medical staff at these centers could easily learn the INVO technique and offer it as a lower cost treatment option for their patients through satellite centers. There are also 5,000 Ob/Gyn physicians in the U.S. who offer infertility services such as the IUI treatment but lack the facilities to offer the IVF treatment. Since INVO does not require a specialized lab facility, large costly equipment or highly specialized staff, the INVO treatment may be offered in a doctors’ office. Therefore, in the U.S. alone, INVO could be 10 times more available than conventional IVF. Ob/Gyn offices worldwide could offer INVO as an alternative or follow up treatment to IUI and generate a significant new revenue stream.
Greater patient involvement: With INVO, the patient uses her own body as the incubation environment. This creates a greater sense of involvement, comfort and participation for patients who know that the fertilization is happening within their own bodies. In some cases, this frees the couples from ethical or religious concerns, or fears of laboratory mix-ups that could result in a patient receiving another couple’s embryo(s).
SALES AND MARKETING
Product Pricing
We anticipate employing the following pricing system for the INVOcell technology. These prices were determined through discussions with our advisory board of physicians and potential strategic partners and reflect the innovative features of the device, the savings in physician’s laboratory fixed costs and the amount that a physician will receive from patients to perform INVO. Our goal is to have the INVO procedure offered to infertile couples as a lower cost alternative with comparable success rates to IVF.
INVOcell device: We expect to sell the INVOcell device and its retention system for between $75 in extremely poor and underdeveloped countries and $400 per unit in developed nations. IVF centers or Ob/Gyn groups purchasing a large number of devices and promoting the INVO process will receive discounted prices and a limited amount of free advertising of their facility on our website. It is expected that the INVOcell will sell for $400 in the U.S., which grants a single-use license under our patents. In Central and South America, the price of the device will be reduced to between $100-$300 to reflect a generally lower cost of infertility procedures in most of these countries and to make INVOcell available to populations with lower incomes.
Holding/Warming Blocks: The holding blocks will be sold as a tool for viewing and retrieving the embryos from the inner chamber. Each physician will need a minimum of two blocks depending on the number of cycles he/she performs. The blocks will sell for $200-$300 each. These blocks may provide an additional revenue stream.
Fixed Laboratory Equipment: The equipment used in the INVO procedure (microscope with video system, bench centrifuge, incubator without CO2, bench warmer and laminar flow hood) is readily available in the market. We have had initial discussions with an international equipment supplier that has a mobile bench and hood with all the required equipment. We intend to establish an agreement with this company to provide our customers with a discount and financing to facilitate new customer entry into the INVO market in the future, however, there can be no assurance that we will be successful in this effort. The complete set up for the INVO procedure is approximately $18,000 in Europe and $30,000 in the U.S.
Our Sales Team
As of December 31, 2010, we employ two part time sales and marketing individuals who are charged with all of our sales efforts. We anticipate growing our sales team to 4 in 2011, subject to raising additional capital. Our sales efforts follow two approaches:
Direct Physician Sales through Distributors -- In foreign countries, we intend to establish local distributors to access the countries’ markets. With the distributor-to-physician model, the distributors will be selling to IVF centers, medical practices and physicians directly. We will support the distributors’ efforts with training, both to the distributors’ trainers as well as to the physicians directly. We currently maintain written distribution agreements in the following countries: Canada, Colombia, Venezuela, Ecuador, Panama, Argentina, Peru, Pakistan, Turkey, Bulgaria, Greece, Ukraine, South Africa and Taiwan. Additionally we are in discussions with potential distributor for Russia.
Direct Sales to Physicians -- We are also following a parallel path directly to leading infertility doctors in regions where there is demand but either distributors do not exist such as in Western Africa or we have not yet signed distribution agreements.
Target Markets
The breadth and depth of our expansion throughout 2011 will be subject to the amount of additional capital raised, we anticipate that we will continue to launch the sale of the INVOcell device in Europe, Canada, South & Central America and the Middle East. During 2012, or at such time that we receive FDA approval, we anticipate launching the INVOcell in the U.S. In 2011, we also anticipate the launch of the INVOcell device in South Africa, India and Russia. In 2012, we anticipate the launch of the INVOcell device in China and other countries that are currently under the registration process and where alternative treatment is needed. With the cost of the INVO procedure being less than half the cost of IVF, we expect to penetrate 5% of the currently untreated infertility market, although no assurances can be made in this regard or that will achieve our goals in our target markets on schedule, or at all.
Worldwide -- According to ESHRE, there are more than 100 million infertile couples in the world as of 2007. About one million IVF cycles were performed in 2006, which is less than 1% of the infertile couples worldwide. More than 99 million infertile couples remain untreated due to cost, availability, awareness and other factors.
U.S. -- According to the Centers for Disease Control, 7.3 million people in the U.S. have difficulty conceiving. With only 650,000 couples receiving fertility treatment, more than six million couples receive no treatment. According to Integramed, Inc., a U.S. based network of fertility centers, 97% of the untreated infertile couples do not receive treatment due to cost. Working with our advisory board, we estimate that an INVO procedure in the U.S. will cost approximately $5,000 dollars.
Europe -- Europe has approximately 10 million infertile couples, of which 460,000 are estimated to have received IVF treatment and 163,000 received IUI (ESHRE 2010) leaving over 9 million infertile couples untreated.
Preliminary Sales Strategy
The CE Mark allows us to sell our INVO device in Europe, Canada and certain countries in South America, the Middle East and Africa along with Russia, and India, subject to local registration requirements. Our strategy is to launch the product in the developing world first because of the high demand and relatively low availability of IVF procedures.
Launching INVO in the U.S. market requires 510(k) clearance, which we anticipate receiving in 2012 upon completion of our clinical trials if still required estimated for 2011-2012, provided that we receive additional funding. We have completed the required human confirmatory study. The births of normal babies have been confirmed in this study using the INVOcell. If the trial is required it will take one year and approximately $1,000,000 of funding to complete the clinical study including data collection on all required subjects, analysis of the data, have an independent audit and submit the full 510(k) report to the FDA. The FDA has 90 days to review the submission from INVO Bioscience. All preclinical data and testing has been completed and reviewed by FDA. We expect to receive approval to sell the INVOcell after completion of the clinical study and 510(k) submission. However, there is no assurance that will be the case. We intend to launch INVOcell through key doctors and clinics in the U.S. once FDA clearance is achieved, if at all.
Insurance Reimbursement for Infertility Treatment
Most European countries have some level of coverage for infertility treatment, but the level of coverage varies from country to country and even within countries. For example, the National Health Service in the UK covers 20% of most costs for infertility treatment. However, that standard is not applied universally throughout the country and some counties provide almost no coverage. In the U.S., fifteen states mandate some form of insurance reimbursement for infertility treatment. Three states mandate reimbursement for IVF, while other states cover some form of infertility treatment, but they may also specifically exclude IVF due to cost. In addition, fifteen other states are considering mandating some form of coverage for infertility treatment. In 2010, in Canada, the Province of Quebec mandated the full payment of up to 3 ART cycles for residents.
We believe that the INVOcell process will be treated favorably by insurance companies because it lowers cost and has a high efficacy rate. In Europe, the average cost per pregnancy using IUI is $12,000 and IUI is appropriate for only 40% of the infertile population. However, the INVO device, which is marginally more expensive at $13,888 per pregnancy, is a more effective treatment for a majority of infertile couples. The average cost per pregnancy for IVF is $21,354. Therefore, there is a savings of more than $7,000 (more than 33% of the cost) per pregnancy by using INVO versus IVF.
Currently, many third-party payers require that an infertile patient have at least three cycles of IUI before going on to IVF. The aggregate success rate of three IUI’s is 25%. Therefore, up to 75% of those patients are often referred to IVF. In the future, third-party insurance payers could save more than $7,000 per pregnancy by requiring the patient to try INVOcell first.
Branding and Promotion
We have a logo associated with the INVO device that is refined for the infertility market. We have trademarked the logo, device and technology. At the same time, we are developing a website that includes special pages for clinicians and patients. Subject to available capital, the next generation website will include materials that medical professionals and patients can print, including status reports and news items. It will include training videos for potential customers both physician and patients who want to learn exactly how the INVOcell works.
REGULATION
Domestic Regulations
The manufacture and sale of our products are subject to extensive regulation by numerous governmental authorities, principally by the FDA in the U.S. and corresponding foreign agencies. The FDA administers the Federal Food, Drug and Cosmetic Act and the regulations promulgated there under. We are subject to the standards and procedures with respect to the manufacture of medical devices and are subject to inspection by the FDA for compliance with such standards and procedures. The FDA classifies medical devices into one of three classes depending on the degree of risk associated with each medical device and the extent of control needed to ensure safety and effectiveness. The INVOcell device and process must secure a 510(k) pre-market notification clearance before it can be introduced into the U.S. market. The process of obtaining 510(k) clearance typically takes several months and may involve the submission of limited clinical data to support our assertions that the product is substantially equivalent to an already approved device or to a device that was on the market before the enactment of the Medical Device Amendments of 1976.
Every company that manufactures or assembles medical devices is required to register with the FDA and adhere to certain “good manufacturing practices” in accordance with the FDA’s Quality System Regulation, which regulates the manufacture of medical devices, prescribes record-keeping procedures and provides for the routine inspection of facilities for compliance with such regulations. The FDA also has broad regulatory powers in the areas of clinical testing, marketing and advertising of medical devices.
Medical device manufacturers are routinely subject to periodic inspections by the FDA. If the FDA believes that a company may not be operating in compliance with applicable laws and regulations, it can:
· | place the company under observation and re-inspect the facilities; |
· | issue a warning letter apprising of violating conduct; |
· | detain or seize products; |
· | mandate a recall; |
· | enjoin future violations; and |
· | assess civil and criminal penalties against the company, its officers or its employees. |
At present, we believe are more than halfway completed with the clinical trials requested by the FDA based on the work previously completed by Medelle. Subject to available capital, we anticipate completing those clinical trials by the end of 2012. Thus, we believe that we will receive FDA clearance by 2013, though there can be no assurance that we will be successful in doing so on a timely basis, if at all.
International Regulations
We are also subject to regulation in each of the foreign countries where our products are sold. Many of the regulations applicable to our products in such countries are similar to those of the FDA. The national health or social security organizations of certain countries require that our products be qualified before they can be marketed in those countries. Many of the countries we are targeting do not have a formal approval process of their own but rely on either FDA clearance or the European approval, the CE mark. Some countries require a registration process of listing the INVOcell with the governing body in addition to the CE mark.
Our activities during our development stage have included developing our business plan, seeking regulatory clearance in both inside and outside of the United States and raising capital. In May 2008, we received the CE mark.
With CE marking, we have the necessary regulatory authority to distribute our product after registration in the European Economic Area (i.e., Europe, Canada, Australia, New Zealand, along with most parts of the Middle East and South America). Every country is different; we have completed registrations in some, are in process with others. We continue to work with doctors and distributors submitting additional registrations. Certain other countries require that we first receive FDA clearance. We are registering the product based on the size of the market and our ability to service it given our resources.
Intellectual Property
The INVOcell device was specially developed to optimize the ease of use and effectiveness of the procedure at an affordable price. Recently more than 300 cases have been performed with effectiveness equal to that of IVF. Overall more than 800 cases of an INVO-type procedure have been documented in peer-reviewed journals since the 1980s, using an incubation device not specifically designed for the process but functionally capable of demonstrating success rates equivalent to IVF at that time. This product development process has resulted in five active patents worldwide covering both the INVOcell device and the INVO process.
Employees
As of December 31, 2010, we have three full-time and two part-time employees. We consider our relationship with our employees to be good.
Available Information
We maintain an Internet website at www.invobioscience.com. We make available, free of charge through our website, our annual report on Form 10-K, current reports on Form 8-K, quarterly reports on Form 10-Q and each amendment to these reports. Each such report is posted on our website as soon as reasonably practicable after such report is filed with the SEC via the EDGAR system.
The information on our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered a part of this Annual Report. Our website address is included in this Annual Report as an inactive textual reference only.
Investing in our Common Stock involves a high degree of risk. Prospective investors should carefully consider the risks described below, together with all of the other information included or referred to in this Annual Report on Form 10-K, before purchasing our Common Stock. There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. The risks described below are not the only ones we will face. If any of these risks actually occurs, our business, financial condition or results of operation may be materially adversely affected. In such case, the trading price of our Common Stock could decline and investors could lose all or part of their investment. The risks and uncertainties described below are not exclusive and are intended to reflect the material risks that are specific to us , material risks related to our industry and material risks related to companies that undertake a public offering or seek to maintain a class of securities that is registered or quoted on an over-the-counter market.
Except for historical matters, matters discussed in this Annual Report on Form 10-K contains forward looking statements that involve risks and uncertainties, principally in the sections entitled “Description of Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition or Plans of Operations.” All statements other than statements of historical fact contained in this Annual Report on Form 10-K, including statements regarding future events, our future financial performance, business strategy and plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy.
These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined here under “Risk Factors” or elsewhere in this Form 10-K, which may cause our, or our industry’s, actual results, levels of activity, performance or achievements expressed or implied by these forward-looking statements to differ. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for us to predict all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from those contained in any forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long-term business operations, and financial needs. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Form 10-K, and in particular, the risks discussed below and under the heading “Risk Factors” and those discussed in other documents we file with the SEC that are incorporated into this Form 10-K by reference.
The following discussion should be read in conjunction with our consolidated financial statements and notes thereto. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statement.
Our business has posted net operating losses, has limited operating history and needs capital to grow and finance its operations.
From the inception of our operating subsidiary, BioXcell Inc., until December 31, 2010, INVO Bioscience had a net loss of $6,902,000. INVO Bioscience has a limited operating history and is essentially an early-stage operation. We will continue to be dependent on having access to working capital that will allow us to finance operations during our growth. Continued net operating losses together with limited working capital make investing in our Common Stock a high-risk proposal. The adverse effects of a limited operating history include reduced management visibility into forward sales, marketing costs, customer acquisition and retention, which could lead to missing targets for achievement of profitability.
We require substantial additional capital to continue as a going concern which if not obtained could result in a need to curtail or cease operations.
As reflected in the accompanying financial statements, the Company is in the development stage with minimal revenues, had a net loss of $153,000, a working capital deficiency of $2,564,000, a stockholder deficiency of $2,482,000, and cash used in operations of $316,000 for the year ended December 31, 2010. These amounts raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
We require substantial additional funding to meet our future operating and capital expenditure requirements. To execute on our business plan successfully, we will need to raise additional money in the future. The exact amount of funds raised, if any, will determine how aggressively we can grow and what additional projects we will be able to undertake. No assurance can be given that we will be successful that we will be able to raise capital when needed or at all, or that such capital, if available, will be on terms acceptable to us. If we are not able to raise additional capital, our business will likely suffer.
Our business is subject to significant competition.
The infertility industry is highly competitive and characterized by technological improvements. New artificial reproductive technology (“ART”) services, devices and techniques may be developed that may render the INVOcell obsolete. Competition in the areas of infertility and ART services is largely based on pregnancy rates and other patient outcomes. Accordingly, the ability of our business to compete is largely dependent on our ability to achieve adequate pregnancy rates and patient satisfaction levels. Our business operates in highly competitive areas that are subject to continual change. New health care providers and medical technology companies entering the market may reduce our market share, patient volume and growth rates. Additionally, increased competitive pressures may require us to commit more resources to our marketing efforts, thereby increasing our cost structure and affecting our profitability. There can be no assurance that we will not be able to compete effectively nor can there be assurance that additional competitors will not enter the market, or that such competition will not make it more difficult for us to enter into additional contracts with fertility clinics or open profitable INVOcell clinics.
We need to manage growth in operations to maximize our potential growth.
In order to maximize potential growth in our current and potential markets, we believe that we must expand the scope of our services in the bioscience industry. This expansion will place a significant strain on our management and our operational and sales systems. We expect that we will need to continue to improve our INVO technology, operating procedures and management information systems. We will also need to effectively train, motivate and manage our employees. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating the revenues we expect.
Our internal growth strategy may not be successful which may negatively impact our growth, financial condition, results of operations and cash flow.
One of our strategies is to grow internally through increasing the customers we target. However, many obstacles to this expansion exist, including, but not limited to, increased competition from similar businesses, unexpected costs, costs associated with marketing efforts and maintaining a strong client base. Therefore, we cannot assure you that we will be able to overcome such obstacles successfully and establish our services in any additional markets. Our inability to implement this internal growth strategy successfully may have a negative impact on our growth, future financial condition, results of operations or cash flows.
We may be unable to implement our strategies in achieving our business objectives.
Our business plan is based on circumstances currently prevailing and the bases and assumptions that certain circumstances will or will not occur, as well as the inherent risks and uncertainties involved in various stages of development. However, there is no assurance that we will be successful in implementing our strategies or that our strategies, even if implemented, will lead to the successful achievement of our objectives. If we are not able to implement our strategies successfully, our business operations and financial performance may be adversely affected.
Our products incorporate intellectual property rights developed by us that may be difficult to protect or may be found to infringe on the rights of others.
While we currently own four patents, there can be no assurance that any of these patents will not be challenged, invalidated or circumvented, or that any rights granted under these patents will in fact provide competitive advantages to us. The U.S. or Europe could place restrictions on the patentability of medical devices. Any limitations on the patentability of medical devices may materially affect our business. We utilize a combination of trade secrets, confidentiality policies, non-disclosure and other contractual arrangements in addition to relying on patent, copyright and trademark laws to protect our intellectual property rights. However, these measures may not be adequate to prevent or deter infringement or other misappropriation. Moreover, we may not be able to detect unauthorized use or take appropriate and timely steps to establish and enforce our proprietary rights. In fact, existing laws of some countries in which we conduct business offer only limited protection of our intellectual property rights, if at all. As the number of market entrants as well as the complexity of the technology increases, the possibility of functional overlap and inadvertent infringement of intellectual property rights also increases.
We must defend our intellectual property rights from infringement through extensive legal action.
Third parties may assert in the future, claims against us alleging that we infringe their intellectual property rights. Defending such claims may be expensive, time consuming and divert the efforts of our management and/or technical personnel. Because of litigation, we could be required to pay damages and other compensation, develop non-infringing products or enter into royalty or licensing agreements. However, we cannot be certain that any such licenses, if available at all, will be available to us on commercially reasonable terms.
We regard our trade secrets, patents and similar intellectual property as critical to our success. We rely on patent and trade secret law, as well as confidentiality and license agreements with certain of our employees, customers and others to protect our proprietary rights. No assurance can be given that our patents will not be challenged, invalidated, infringed or circumvented, or that our intellectual property rights will provide competitive advantages to us. In addition, we intend to defend our intellectual property rights from infringement through legal action if needed, which could be very costly which would adversely affect our profitability. Our limited capital resources could put us at a disadvantage if we are required to take legal action to enforce our intellectual property rights.
We face potential liability as a provider of a medical device. These risks may be heightened in the area of artificial reproduction.
The provision of medical devices entails the substantial risk of potential claims of tort injury claims. The Company does not engage in the practice of medicine or assume responsibility for compliance with regulatory requirements directly applicable to physicians. There can be no assurance that product liability insurance will provide adequate coverage against potential claims or that we will be able to obtain such insurance on commercially reasonable terms in the future. Further, a claim asserted against us could be costly to defend, could consume management resources and could adversely affect our reputation and business, regardless of the merit or eventual outcome of such claim.
There are inherent risks specific to the provision of infertility and ART services. For example, the long-term effects on women of the administration of fertility medication, integral to most infertility and ART services, are of concern to certain physicians and others who fear the medication may prove to be carcinogenic or cause other medical problems. Currently, fertility medication is critical to most infertility and ART services and a ban by the FDA or foreign regulatory or other limitation on its use would have a material adverse effect on our business.
If we fail to maintain adequate quality standards for our products, our business may be adversely affected and our reputation harmed.
Our customers are expecting that our products will perform as we claim. Our manufacturing companies and packaging processes will be relied up on heavily. A failure to sustain the specified quality requirements could result in the loss of demand for our products. Delays or quality lapses in our production lines could result in substantial economic losses to us. Although we believe that our continued focus on quality throughout the Company adequately addresses these risks, there can be no assurance that we will not experience occasional or systemic quality lapses in our manufacturing and service operations. We have limited manufacturing capabilities, and maybe insufficient to produce an adequate supply of products at appropriate quality levels, our growth could be limited and our business could be harmed. If we experience significant or prolonged quality problems, our business and reputation may be harmed, which may result in the loss of customers, our inability to participate in future customer product opportunities and reduced revenue and earnings.
We heavily rely on third party package delivery services, and a significant disruption in these services or significant increases in prices may disrupt our ability to import or export materials, increase our costs and lower our profitability.
We ship a significant portion of our products to our customers through independent package delivery companies. If any of our key third party package delivery providers experience a significant disruption such that any of our products, components or raw materials cannot be delivered in a timely fashion or such that we incur additional shipping costs that we could not pass on to our customers, our costs may increase and our relationships with certain of our customers may be adversely affected. In particular, if our third party package delivery providers increase prices and we are not able to find comparable alternatives or adjust our delivery network, our profitability could be adversely affected.
We depend on our key management personnel and the loss of their services could adversely affect our business.
We place substantial reliance upon the efforts and abilities of our executive officers, Kathleen Karloff, Dr. Claude Ranoux and Robert Bowdring. The loss of the services of our executive officers could have a material adverse effect on our business, operations, revenues or prospects. We do not maintain key man life insurance on the lives of these individuals.
We will need additional, qualified personnel in order to expand our business. Without additional personnel, we will not be able to expand our business.
Expanding our business entails increasing the number of persons engaged in activities for the sale, marketing, administration and operational delivery of our products as well as clinical training personnel for the proper training of the INVO procedures. Upon receiving funding, we are planning to hire employees in these areas. However, we cannot be sure that we will able to find, attract and retain potential employees with the proper background and training matching the skills required for the positions.
Our revenues and operating results could fluctuate significantly from quarter to quarter, which may cause our stock price to decline.
Since our inception, we have recognized minimal revenue. Our results from year-to-year and from quarter-to-quarter are expected to vary significantly based on ordering cycles of distributors and physicians who we plan to pursue for sales, and the payment cycle of such organizations. As a result of these and other factors, we believe that period-to-period comparisons of our operating results will not be meaningful and that you should not rely upon our performance in a particular historical period as an indication of our performance in any future period.
Currency exchange fluctuations may affect the results of our operations.
We intend to distribute our INVOcell product throughout the world. We intend to transact our international sales in U.S. dollars, and European, Latin American and Asian currencies. Our results of operations thus will be affected by fluctuations in currency exchange rates. Although we may enter into foreign currency exchange forward contracts from time to time to reduce our risk related to currency exchange fluctuation, our results of operations might still be negatively affected by foreign currency exchange rates. Because we do not anticipate that we will hedge against all of our foreign currency exposure, our business will continue to be susceptible to adverse foreign currency fluctuations.
We are subject to risks in connection with changes in international, national and local economic and market conditions because of global developments.
Our business is subject to risks in connection with changes in international, national and local economic and market conditions because of global developments. Beyond the risks of doing business internationally, there is also the potential impact of changes in the international, national and local economic and market conditions as a result of global developments, including the effects of global financial crisis, effects of terrorist acts and war on terrorism, U.S. and Canadian presence in Iraq, Afghanistan and Libya, potential conflict or crisis in the Middle East and current global credit crisis, negatively affecting infertile couples’ ability to pay for fertility treatment around the world.
International sales will account for a significant part of our revenue especially in this period as we pursue FDA clearance. We will experience additional risks associated with these sales, which include:
| | ● | political and economic instability; |
| | ● | export controls; |
| | ● | changes in legal and regulatory requirements; |
| | ● | United States and foreign government policy changes affecting the markets for our products; and |
| | ● | changes in tax laws and tariffs. |
| | ● | environmental crisis |
Any of these factors could have a material adverse effect on our business, results of operations and financial condition. We sell our products in certain international markets mainly through independent distributors. If a distributor fails to meet annual sales goals, it may be difficult and costly to locate an acceptable substitute distributor. If a change in our distributors becomes necessary, we may experience increased costs, as well as a substantial disruption in operations and a resulting loss of revenue.
We have only two directors, which limits our ability to establish effective independent corporate governance procedures and increases the control of our president.
We have only two directors, one of which is also our President and Treasurer and the other is our Chief Executive Officer (CEO). Accordingly, we have not established board committees comprised of independent members to oversee functions like compensation or audit issues.
Until we have a larger board of directors, which would include some independent members, there will be limited oversight of our President and CEO’s decisions and activities and little ability for minority shareholders to challenge or reverse those activities and decisions, even if they are not in the best interests of minority shareholders.
We are subject to significant regulation by the government and other regulatory authorities.
Our business is heavily regulated in the United States and internationally. In addition to the FDA, various other federal, state and local regulations also apply. If we fail to comply with FDA or other regulatory requirements, we could be subjected to civil and criminal penalties, or even required to suspend or cease operations. Any such actions could severely curtail our sales. In addition, more restrictive laws, regulations or interpretations could be adopted, which could make compliance more difficult or expensive or otherwise adversely affect our business. We devote substantial resources to complying with laws and regulations; however, the possibility cannot be eliminated that interpretations of existing laws and regulations will result in findings that we have not complied with significant existing regulations. Such a finding could materially harm the business. Moreover, healthcare reform is continually under consideration by regulators, and the Company does not know how laws and regulations will change in the future.
We are conducting clinical trials related to newer technologies that may prove unsuccessful and have a negative impact on future sales.
We are conducting clinical trials related to the INVOcell. While we are confident in the future outcomes of these trials, an unsuccessful trial could adversely affect the marketability of this product and the receipt of FDA clearance in particular.
Changes in the healthcare industry may require us to decrease the selling price for our products or could result in a reduction in the size of the market for our products, each of which could have a negative impact on our financial performance.
Trends toward managed care, healthcare cost containment and other changes in government and private sector initiatives in the U.S. and other countries in which we do business could place increased emphasis on the delivery of more cost-effective medical therapies, which could work in our favor unless more cost-effective devices become available, which could adversely affect the sale and/or the prices of our products. There are proposed and existing laws and regulations in domestic and international markets regulating pricing and profitability of companies in the healthcare industry. There have been initiatives by third-party payers to challenge the prices charged for medical products, which could affect our ability to sell products on a competitive basis in the future. There has been a consolidation among healthcare facilities and purchasers of medical devices in the U.S. who prefer to limit the number of suppliers from whom they purchase medical products, and these entities may decide to stop purchasing our products or demand discounts on our prices. Both the pressure to reduce prices for our products in response to these trends and the decrease in the size of the market because of these trends could adversely affect our levels of revenues and profitability of sales, which could have a material adverse effect on our business.
Recent economic trends could adversely affect our financial performance.
Economic downturns and declines in consumption in our markets may affect the levels of both our sales and profitability. As widely reported, the domestic and global financial markets have been experiencing extreme disruption in recent years, including severely diminished liquidity and credit availability. Concurrently, economic weakness has begun to accelerate. If these conditions exist for a sustained period, or if there is further deterioration in financial markets and major economies, our financial performance could be adversely affected. The current tightening of credit in financial markets may adversely affect the ability of our customers and suppliers to obtain financing, which could result in a decrease in, or deferrals or cancellations of, the sale of our products and services. In addition, weakening economic conditions and outlook may result in a decline in spending for ART and fertility assistance that could adversely affect our results of operations and liquidity. We are unable to predict the likely duration and severity of the current disruption in the domestic and global financial markets and the related adverse economic conditions.
Risks Related to Our Common Stock
Our directors own a substantial percentage of our common stock.
Our Chief Executive Officer, Kathleen Karloff, beneficially owns 9.3% and our President, Dr. Claude Ranoux, owns 33.3% and together they beneficially own 42.6 % of our outstanding Common Stock, which if they acted together, could exert substantial control over matters requiring approval by our stockholders.
The interests of these two individuals may differ from the interests of other stockholders. As a result, these officers and directors will have the right and ability to control corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the following actions:
| | ● | Electing or defeating the election of directors; |
| | ● | Amending or preventing amendment of our Articles of Incorporation or bylaws; |
| | ● | Effecting or preventing a merger, sale of assets or other corporate transaction; and |
| | ● | Controlling the outcome of any other matter submitted to the stockholders for vote. |
The Company’s stock ownership profile may discourage a potential acquirer from seeking to acquire shares of our Common Stock or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
As a publicly traded company, INVO Bioscience is subject to the reporting requirements of U.S. federal securities laws, which can be expensive.
INVO Bioscience is a public reporting company and, accordingly, is subject to the information and reporting requirements of the Exchange Act and other federal securities laws, including compliance with the Sarbanes-Oxley Act. Preparing and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders is costly. In addition, the Company may face time consuming and costly effects to develop and implement internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance personnel in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act, we may not be able to obtain the independent accountant certifications required by the Sarbanes-Oxley Act.
Public company compliance may make it more difficult to attract and retain officers and directors.
The Sarbanes-Oxley Act and new rules subsequently implemented by the SEC have required changes in corporate governance practices of public companies. As a public entity, we expect these rules and regulations to increase compliance costs and to make certain activities more time consuming and costly. As a public entity, we also expect that these new rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance in the future and it may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve as directors or as executive officers.
Our Articles of Incorporation provide for indemnification of officers and directors at our expense and limit their liability, which may result in major costs to us.
Our Articles of Incorporation and applicable Nevada law provide for the indemnification of our directors, officers, employees and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. We will also bear the expenses of such litigation for any of our directors, officers, employees, or agents, upon such person's written promise to repay us if it is ultimately determined that any such person shall not have been entitled to indemnification. This indemnification policy could result in substantial expenditures by us, which we will be unable to recoup.
We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act of 1933, as amended (the “Securities Act”) and is, therefore, unenforceable. In the event that a claim for indemnification for liabilities arising under federal securities laws, other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with the securities being registered, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The legal process relating to this matter if it were to occur is likely to be very costly and may result in us receiving negative publicity, either of which factors is likely to materially reduce the market and price for our shares, if such a market ever develop.
Our shares of Common Stock are very thinly traded, and the price may not reflect our value; there can be no assurance that there will be an active market for our shares now or in the future.
We have a trading symbol for our Common Stock (“IVOB”), which had permitted our shares to be quoted on the Over-the-Counter Bulletin Board (“OTCBB”) until February 23, 2011. On February 23, 2011 an OTC system change was made, we ceased trading on OTCBB and began trading on the middle tier of the OTC Markets Group Inc. (commonly referred to as the "OTCQB") under our same symbol (“IVOB”).
However, our shares of Common Stock are very thinly traded, and the price, if traded, may not reflect our value. There can be no assurance that there will be an active market for our shares of Common Stock either now or in the future. The market liquidity will be dependent on the perception of our operating business and any steps that our management might take to bring us to the awareness of investors. There can be no assurance given that there will be any awareness generated.
Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business. If a more active market should develop, the price may be highly volatile. Because there may be a low price for our shares of Common Stock, many brokerage firms may not be willing to effect transactions in the securities. Even if an investor finds a broker willing to effect a transaction in the shares of our Common Stock, the combination of brokerage commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of such shares of Common Stock as collateral for any loans.
Shareholders may be diluted significantly through our efforts to obtain financing and from issuance of additional shares of our Common Stock for services.
Apart from the Reserve Equity Financing Agreement (REF) entered into with AGS Capital Group, LLC on October 28, 2009, we have no committed source of financing. We cannot draw against the REF until we update our Form S-1, as filed with the SEC with a Post Effective Amendment with the information of this Annual Report on Form 10-K. Even after we update our Form S-1, we will have some limitations on our ability to draw against the REF. In addition, we may issue shares or incur debt, which may be convertible into shares of our Common Stock to satisfy our financial obligations. If a trading market develops for our Common Stock, we may attempt to raise capital by selling shares of our Common Stock, possibly with warrants, which may be issued or exercised at a discount to the market price for our Common Stock. These actions will result in dilution of the ownership interests of existing shareholders, and may further dilute the Common Stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to control INVO because the shares may be issued to our officers, directors, new employees, or related parties and may be on a non-arms length basis.
We may be subject to the penny stock rules, which will make the shares of our Common Stock more difficult to sell.
We may be subject now and in the future to the SEC’s “penny stock” rules if our shares of Common Stock sell below $5.00 per share. Penny stocks generally are equity securities with a price of less than $5.00. The penny stock rules require broker-dealers to deliver a standardized risk disclosure document prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information must be given to the customer orally or in writing prior to completing the transaction and must be given to the customer in writing before or with the customer's confirmation.
In addition, the penny stock rules require that prior to a transaction the broker dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. The penny stock rules are burdensome and may reduce purchases of any offerings and reduce the trading activity for shares of our Common Stock. As long as our shares of Common Stock are subject to the penny stock rules, the holders of such shares of Common Stock may find it more difficult to sell their securities.
The market for penny stocks has experienced numerous frauds and abuses, which could adversely affect investors in our stock.
We believe that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:
| | · | Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; |
| | · | Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; |
| | · | “Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons; |
| | · | Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and |
| | · | Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses. |
We believe that many of these abuses have occurred with respect to the promotion of low price stock companies that lacked experienced management, adequate financial resources, an adequate business plan and/or marketable and successful business or product.
Sales of our currently issued and outstanding Common Stock may become freely tradable pursuant to rule 144 and may dilute the market for your shares and have a depressive effect on the price of the shares.
A substantial majority of our outstanding shares of Common Stock are “restricted securities” within the meaning of Rule 144 under the Securities Act. As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Securities Act and as required under applicable state securities laws. A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registrations of our shares of Common Stock (which we filed pursuant to the REF and which we tend to pursue), may have a depressive effect upon the price of our shares of Common Stock in any active market that may develop.
We may never pay any dividends to shareholders.
We have never paid any dividends and have not declared any dividends to date through 2010. Our board of directors does not intend to distribute dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.
We may have difficulty raising necessary capital to fund operations because of market price volatility for our shares of Common Stock.
In recent years, the securities markets in the U.S. and around the world have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performances, underlying asset values or prospects of such companies. For these reasons, our shares of Common Stock can also be expected to be subject to volatility resulting from purely market forces over which we will have no control. If our business development plans are successful, we may require additional financing to continue to develop and exploit existing and new products and services related to our industries and to expand into new markets. The exploitation of our services may be dependent therefore upon our ability to obtain financing through debt and equity or other means.
Failure to comply with internal control attestation requirements could lead to loss of public confidence in our financial statements and negatively impact our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in this annual report, management’s assessment of the effectiveness of our internal control over financial reporting. Furthermore, beginning with the fiscal year ending on December 31, 2010, our independent registered public accounting firm will be required to attest to whether management’s assessment of the effectiveness of internal controls over financial reporting is fairly stated in all material respects and separately report on whether it believes we maintained, in all material respects, effective internal control over financial reporting. If we fail to timely complete the development of our internal controls and management is unable to make this assessment, or, once required, if the independent registered public accounting firm cannot timely attest to this assessment, we could be subject to regulatory sanctions and a loss of public confidence in our internal control and the reliability of our financial statements, which ultimately could negatively impact our stock price.
Any future acquisitions and other material changes in our operations likely will require us to expand and possibly revise our disclosure controls and procedures, internal controls and related corporate governance policies. In addition, the new and changed laws and regulations are subject to varying interpretations in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. If our efforts to comply with new or changed laws and regulations differ from the conduct intended by regulatory or governing bodies due to ambiguities or varying interpretations of the law, we could be subject to regulatory sanctions, our reputation may be harmed and our stock price may be adversely affected.
We currently do not own any property. Our principal executive office is located at 100 Cummings Center, Beverly, Massachusetts 01915. As of January 1, 2011, we are located in suite 207P, which is pursuant to a month to month rental agreement with Highland-March Executive Suites for the proper space we need to effectively manage our operations. Prior to January 1, we were in suite 421E pursuant to a lease entered into by INVO Bioscience in January 2007 (the “lease”) for 3,294 square feet of general office space. The lessor was Cummings Properties, LLC and the lease commenced in January 2007 and had been renewed to December 31, 2010. The Company paid a security deposit of $3,000, which was repaid to the Company in equal $500 installments over the first six months of the lease. The Company received no rent incentives or improvement allowances under this agreement. The lease requires the Company to pay minimum lease payments of $2,000 per month for the duration of the lease. The lease is subject to a cost of living increase equal to the Boston, Massachusetts Consumer Price Index at the beginning of each calendar year. As of January 1, 2010, the Company’s lease payments increased over the base year by 5.42% to $2,108.
On March 24, 2010, INVO Bioscience, Inc., Claude Ranoux and Kathleen Karloff were served an Amended Complaint, the original of which was filed on December 31, 2009 at the Suffolk Superior Court Business Litigation Session by two former employees of Medelle Corporation, and a former investor in and creditor of Medelle Corporation. These plaintiffs allege various claims of wrongdoing relating to the sale of the assets from Medelle to Dr. Ranoux. They claim that Dr. Ranoux, Ms. Karloff and Medelle Corporation (and therefore INVO Bioscience as an alleged successor corporation) violated alleged duties owed to them in connection with the sale.
Dr. Ranoux, Ms. Karloff and INVO Bioscience have challenged these allegations, which they believe are baseless. The sale and transfer of the assets of Medelle was professionally handled by an independent third party after approval by the Medelle Board of Directors representing a majority its shareholders. Medelle’s Board voted to proceed with an assignment for the benefit of creditors (AFBC) and gave complete authority to the President & CEO at that time (neither Dr. Ranoux or Ms. Karloff) to work with the third party and get the best possible price through a sealed bid auction. The third party was responsible for notifying all the appropriate parties and for filing notices in various professional publications and newspapers of Medelle’s intention to sell its assets. The third party also contacted numerous large medical device and bio-pharma companies to learn if they would be interested in acquiring the assets. On the day of the auction, Dr. Ranoux submitted the only bid and was awarded the assets upon full payment.
During 2010, Dr. Ranoux, Ms. Karloff and INVO Bioscience filed Motions to Dismiss as to all claims pursuant to M.R.C. P. 12(b)(6). In her written Decision rendered on November 12, 2010, the judge dismissed all claims against INVO, Bio X Cell and Ms. Karloff and also dismissed the claims against Dr. Ranoux for civil conspiracy and breach of M.G.L. c. 93A. The judge denied Dr. Ranoux’s motion to dismiss the remaining breach of fiduciary duty and fraud claims. The plaintiffs allege in their Amended Complaint that Dr. Ranoux committed fraud by failing to inform them of the details of the Medelle auction, which claims of non-disclosure are actionable under the law when there is a duty to disclose imposed, for instance, by a fiduciary relationship.
From the outset, Dr. Ranoux, Ms. Karloff and INVO have contended that the claims are without factual or substantive legal merit and have insisted on the strongest possible defense. Going forward as to Dr. Ranoux only at this time, we expect discovery will reveal, among other things, that Dr. Ranoux had no role or responsibility in the disposition and sale of Medelle’s assets, that Ranoux in fact had been terminated as a company employee in September 2006 (as had Ms. Karloff), that Medelle’s Board of Directors voted in its entirety to delegate authority to the CEO at that time to effect an AFBC, that the assignee and, to some extent, the former CEO, controlled the auction and sale process, including as to notice to shareholders, and that Dr. Ranoux had nothing to do with the sale except as the only bidder and ultimate purchaser of the assets.
We will continue to vigorously oppose the remaining claims. Although the Judge’s rulings as to INVO Bioscience and Karloff are subject to appeal, the Company remains confident there is no merit to the suit and intends to continue to resist the case and any appeal vigorously.
Outside of the above mentioned item neither INVO Bioscience, Inc., nor Bio X Cell, Inc, our wholly owned subsidiary, either directly or indirectly, are involved in any lawsuit outside the ordinary course of business, the disposition of which would have a material effect upon either our results of operations, financial position or cash flows.
In 2010 and 2009, the shareholders were not asked to vote on any matters. During the fourth quarter of the fiscal year ended December 31, 2008, the shareholders of INVO Bioscience were requested to vote on the Share Exchange between Emy’s Salsa Aji Distribution Company, Inc. and BioXcell, Inc. The shareholders of both companies approved the transaction.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
During the period February 17, 2009 through February 22, 2011, the Company’s Common Shares traded on the OTC Bulletin Board service of (the "OTCBB"). As of February 23, 2011, the Common Shares ceased trading on the OCTBB and began trading on the middle tier of the OTC Markets Group Inc. (commonly referred to as the "OTCQB") both under the ticker symbol "IVOB". Prior to February 17, 2009, our symbol on the OTCBB was “EMYS.” The table below sets forth the high and low sales prices for the periods shown.
| | | 2010 | | | 2009 | |
| | | Fiscal Year | | | Fiscal Year | |
| | | High | | | Low | | | High | | | Low | |
| First Quarter | | $ | 0.22 | | | $ | 0.08 | | | $ | 5.50 | | | $ | 0.40 | |
| Second Quarter | | $ | 0.12 | | | $ | 0.05 | | | $ | 1.01 | | | $ | 0.05 | |
| Third Quarter | | $ | 0.12 | | | $ | 0.03 | | | $ | 0.46 | | | $ | 0.08 | |
| Fourth Quarter | | $ | 0.12 | | | $ | 0.03 | | | $ | 0.60 | | | $ | 0.17 | |
During 2010, the high and low closing price per share of our Common Stock was $0.22 and $0.03 respectively compared to the high and low closing price per share of our Common Stock in 2009 was $5.50 and $0.05 respectively.
Stockholders
On April 11, 2011, there were approximately 101 stockholders of record.
Dividend Policy
We have never declared or paid a dividend on our Common Stock. We intend to retain future earnings to fund development and growth of our business.
Compensation Plan
We do not have any equity compensation plans in place at this time. We intend to implement an equity compensation plan in the future.
We are not required to provide the information as to selected financial data as we are considered a smaller reporting company.
Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This discussion includes certain forward-looking statements about our business and our expectations, including statements relating to revenues, international revenues, revenue growth rates, gross margin, operating expenses, amortization expense, earnings per share, available cash and operating cash flow. Any such statements are subject to risk that could cause the actual results to vary materially from expectations. For a further discussion of the various risks that may affect our business and expectations, see the section titled “Risk Factors” contained in Item 1A of Part I of this Annual Report on Form 10-K. The risks and uncertainties discussed therein do not reflect the potential future impact of any mergers, acquisitions or dispositions. In addition, any forward-looking statements represent our estimates only as of the day this Annual Report was filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.
Background
The previous management of Emy’s (our predecessor) determined that it was in the best interests of Emy’s shareholders to agree to the Share Exchange and acquire Bio X Cell, Inc., a Commonwealth of Massachusetts company (d/b/a/ “INVO Bioscience”) that had developed its patented technology, the INVOcell and the INVO procedure, which are designed to be less expensive and an alternative to conventional IVF. As part of the Share Exchange, Emys ceased the salsa distribution business and INVO Bioscience became a wholly-owned subsidiary of Emy’s.
The Share Exchange was accounted for as a “reverse merger” because the INVO Bioscience Shareholders now own a majority of the outstanding shares of Common Stock immediately following the Share Exchange. INVO Bioscience is deemed the acquirer in the reverse merger. Consequently, the assets and liabilities and the historical operations that are reflected in the financial statements prior to the Share Exchange are those of INVO Bioscience and are recorded at the historical cost basis of INVO Bioscience and the consolidated financial statements after completion of the Share Exchange include the assets and liabilities of INVO Bioscience, historical operations of INVO Bioscience. The financial results summarized below are based on INVO Bioscience’s audited balance sheet as of December 31, 2010 and 2009 and related audited statements of operations and stockholders’ deficiency and statements of cash flows for the periods ended December 31, 2010, 2009 and from January 5, 2007 (inception) to December 31, 2010, respectively.
Overview
We are a development stage company that has begun to commercialize our proven and patented technology that we believe will revolutionize the treatment of infertility, assisting infertile couples in having a baby. Our 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, including in vitro fertilization (“IVF”). Therefore, we believe that the INVO procedure will be available in many more locations than conventional IVF especially outside the United States. INVO also allows conception and embryo development to take place inside the woman's body; an attractive feature for most couples.
Sales and Marketing
Our primary focus is the sale of the INVOcell device and training doctors and clinicians in the INVO technology to assist infertile couples in having a baby. We believe that our proven INVOcell procedure is an effective low cost alternative to current treatments. Along with being offered as an option in traditional IVF clinics, the INVO technique may be provided in a physician’s office or a small lab. Therefore, the INVO device and technique may be offered by physicians around the world to couples who do not have access to IVF facilities. Currently, we are only authorized to sell the INVOcell device in certain international markets. We do not expect to be able to sell the device in the United States until at least the third quarter of 2012, assuming we receive the necessary capital to complete our clinical trial and receive FDA clearance by such date. We are establishing agreements with distributors and beginning to train physicians around the world in places such as Canada, South and Central America, Eastern Europe, and the Middle East.
The Company is aware of a number of marketing studies being conducted in clinical environments; two are complete, one in Colombia and the second is in Peru. These are non regulatory studies but local validation of expected results. The Colombian study was being conducted by CECOLFES, Center of Fertility and Sterility located in Bogota, Colombia where 95 couples participated. The results of this study were excellent with a 43% efficacy rate per cycle and less than a 10% multiple birthrate. The Peru study was conducted by Dr. Julio Diaz Pinillos at the Lima Center for Human Reproduction in Lima, Peru. Dr. Diaz completed the study with over 100 couples, we are awaiting his results. The two ongoing studies are in Pakistan and Brazil. The marketing study in Pakistan started during the first quarter of 2010, is being conducted by Galaxy IVF in INVO only centers. Both the US National Institute of Health (NIH) and the World Health Organization (WHO) have approved this planned 100 patient study. We do not have anything to report as Galaxy IVF is holding the information until the study is complete. The most recent study is being sponsored and conducted by Dr. Francisco Augusto Colucci Coelho of the Center of Infertility and Fetal Medicine of North Rio de Janeiro, Brazil. This is a 40 patient trial which has been submitted for approval to the Federal Ethics Committee in Brazil. Upon completion, the results will be submitted to the National Health Surveillance Agency (ANVISA) for the purpose of gaining registration and approval for the sale of the INVOcell device in Brazil. It is our understanding that Dr. Coelho is more than half way done and is starting to collect all of the necessary paperwork required for a full submission to ANVISA.
While we penetrate the infertility markets in Europe and Latin America, we anticipate pursuing the completion of the FDA “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 the end of 2012 upon completion of our clinical trial, which we will commence upon achieving appropriate funding. 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 our 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 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. Subject to having available financial resources, we are committed in our ongoing sales, marketing and development activities to sustain and grow our sales and revenues from our products and services. However, there can be no assurance that we will be successful in doing so.
During the last year, we continued to market our products in strategic markets utilizing our limited resources in the most economical fashion possible. We focused most of our efforts on South America, holding training sessions and attending conferences in San Salvador, Cali and Bogotá Colombia as we see these as our best opportunities to introduce the INVO procedure to many willing physicians quickly. During this period, we continued to plan and schedule trips further in advance to benefit from travel discounts, which reduce our travel expenses considerably. We also conducted presentations and initial training in South Africa and Canada.
As a result of our efforts in 2010, we signed a distribution agreements with BioGenini Medical EOOD for distribution of the INVOcell in Bulgaria and Greece and with Biodar Plus who will be distributing our products in the Ukraine as well as utilizing the INVO procedure in its own clinic. In addition we have signed Invaron Pharmaceuticals of British Columbia as our exclusive distributor for Canada.
The INVOcell is cleared for use within countries that require a CE mark. We must undergo a registration process in certain countries in addition to having the CE mark, because it is a Class II medical device. In some countries, the process is relatively quick - approximately three to six weeks - while we have discovered in other countries it may take months. While we are continuing to tend to the needs of the regional health organizations for registering the INVOcell, INVO Bioscience has continued to train physicians actively and teach distributors in the INVOcell technology. Physicians have demonstrated that their patients would like to see current success rates within their own geographic and cultural areas and therefore we are assisting them in sponsoring clinical marketing trials. As of December 31, 2010, we have the necessary approvals to sell the INVOcell device in the following countries: Colombia, Peru, Bolivia, Panama, Guatemala, Dominican Republic, Canada, Belgium, Greece, Bulgaria, Turkey, Poland, Spain, Switzerland, Cyprus, Pakistan, Cameroon, Nigeria, South Africa and India. We have started the registration process in the following countries as well: Brazil, Argentina, Venezuela, Ukraine, Egypt, Russia and Taiwan.
Because of the registration process and delays to wait for “local results” in certain geographic and cultural areas, along with limited resources to assist in moving things forward in some countries, revenues were significantly less than anticipated for the year. However, we are continuing to receive registration notifications as well as receiving favorable initial local results that will be used for regional marketing campaigns. We believe that we will begin increasing revenues in the future; however, our growth is limited by both the registration processes that we must undertake as well as our limited capital resources, and therefore we anticipate that revenues will continue to be lower than originally anticipated for the next few quarters. The registration process differs from a clinical approval, which the INVOcell has in the form of the CE mark; instead, the process is more akin to a governmental tracking to monitor what products are sold and used within its borders.
Operations
We operate by outsourcing many key operational functions in the development and manufacturing of the INVOcell device to keep fixed costs to a minimum. Our most critical management and leadership functions are carried out by our core team. We have contracted out the following functions: manufacturing, packaging/labeling and sterilization of the device to a certified manufacturer to mold the parts; to a medical manufacturing company to assemble packages and label the product and to a sterilization specialist to perform the gamma sterilization process. This expedites production and eliminates the need for in-house capital equipment expenditures.
Our most significant challenge in growing our business has been our limited resources. As of December 31, 2010, we generally require approximately $175,000 per month to fund our planned 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 our sales and marketing efforts, strengthening our training capabilities, satisfying existing obligations, our US FDA clinical trial and building an administrative infrastructure, including costs and professional fees associated with being a public company.
We believe we are taking the necessary steps to provide the capital resources we need to execute our business plan and grow the business as expected, including through the Reserve Equity Financing Agreement (REF) with AGS Capital Group, LLC, although no assurances can be made that we will be able to draw down on the REF. At present, we are unable to draw-down on the REF equity line until we update our Form S-1 filed with the SEC with the update financials contained in this Form 10-K in a Post Effective Amendment. Since its initial filing we have made a couple of updates through Post Effective Amendments which have been declared effective by the SEC. The gross proceeds from the offering are to be up to $10,000,000 over a two-year period. In 2010 the Company started to draw down on some of these funds, to date we sold 1,714,500 shares of Common Stock bringing in $135,000 of new capital to assist in funding operations. Even with an effective Form S-1 in place, our ability to draw against this equity line is subject to conditions and limitations.
We have and continue to seek other sources of capital through private placements of our securities. During 2010 we issued 8% convertible notes to both Asher Enterprises and Mazuma Funding for $140,000 to also assist with operational needs. The money brought in through Mazuma allowed us to meet our credit line obligation with Century Bank. All of these notes have been satisfied and converted into 5,723,000 shares of 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, such as initiating the final required FDA clinical trial. No assurance can be given that we will be able to raise additional capital when needed. If we are unable to raise additional capital, we will be required to substantially curtail or cease operations or possible pursue exit strategies. Currently we are utilizing our restricted Common Stock to procure certain key services from strategic partners who are willing to do so. This is allowing us to take some of the steps we need to keep moving the company forward
Selling, general and administrative expenses were $1,561,000 and $1,857,000 for the years ended December 31, 2010 and 2009, respectively. In 2010, we continued to control our spending and use our resources carefully.
We currently are incurring a net loss as we continue to market our product and proprietary process as we endeavor to increase our revenue base. It is expected that we will continue to generate net losses through 2011.
We cannot predict what our level of activity will be over the next 12 months. However, INVO Bioscience anticipates that it will continue to launch the sale of the INVOcell device in Canada, Europe, Latin America, India and the Middle East through established distributors, IVF centers and physicians. With the cost of the INVO procedure being less than half the cost of IVF, we believe we can penetrate 5% of the currently untreated infertility market, though there can be no assurance that we will be successful in doing so.
To achieve this plan, we require additional financing. As we expand our distribution base, our costs and expenses will exceed the cash flow being generated and therefore we will require additional capital.
Due to our early stage of growth, each of the items from our Statement of Operations may not be indicative of future levels of activity. As such, we expect our costs and losses to increase in future periods as we seek to ramp up sales and incur infrastructure costs. As we move forward, the Company expects to expand its sales force and clinical trainers and continuing to travel to support our distributors and physicians.
The amounts and timing of our actual expenditures may vary significantly from our expectations depending upon numerous factors, including our results of operation, financial condition and capital requirements.
We had a net loss of $153,000, a working capital deficiency of $2,564,000, a stockholder deficiency of $2,482,000, and cash used in operations of $316,000 for the year ended December 31, 2010. This raises substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital and implement our business plan. Our financial statements attached do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Critical Accounting Policies and Estimates
The discussion and analysis of INVO Bioscience’s financial condition presented in this section are based upon the audited consolidated financial statements of INVO Bioscience, which have been prepared in accordance with the generally accepted accounting principles in the United States. During the preparation of the financial statements, INVO Bioscience is required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, INVO Bioscience evaluates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A summary of significant accounting policies are included below. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.
Stock Based Compensation
The Company accounts for stock-based compensation under the provisions of, ASC 718-10 Share-Based Payment (formerly SFAS 123R). This statement requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period in which the employee is required to provide service in exchange for the award, which is usually the vesting period.
Revenue Recognition
The Company will recognize revenue on arrangements in accordance with Accounting Standards Codification 605-10 formerly Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” and No. 104, “Revenue Recognition.” In all cases, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.
Fair Value of Financial Instruments
ASC 825-10-50, “Disclosures about Fair Value of Financial Instruments” (formerly SFAS No. 107) requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments.
Effective January 1, 2008, the Company adopted ASC 820-10, “Fair Value Measurements” (formerly SFAS 157), which provides a framework for measuring fair value under GAAP. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements and their effect on the Company, see “Recent Accounting Pronouncements” in Note 1 of the Notes to Consolidated Financial Statements contained herein.
Results of Operations
Fiscal 2010 Compared to Fiscal 2009
Net Sales and Revenues
Net sales and revenues for 2010 were $67,700 compared to $63,200 for the same period in 2009, a 7% increase. The increase was due to reorder shipments from existing customers and a few newly signed distributors in 2010 compared to a couple of larger shipments to new distributors in 2009. We are expecting to maintain the current shipping level as we go into 2011 as a result of older customers continuing to reorder and the addition of a few new customers starting out.
Cost of Sales and Revenues
Cost of sales as a percentage of revenues were 32% $21,800 in 2010 compared to $41,400 or 65% for 2009. This improvement is a result of finding alternative shipping resources to send our small shipments to international destinations as well as a slightly higher selling price. This is more in line with what we planned and are anticipating they will stay in this percentage range.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in 2010 and 2009 were $1,561,200 and $1,856,900 respectively. Our limited cash resources have forced us to keep a tight reign over spending in 2010 resulting in an 16% decrease. Our higher selling, general and administrative expenses in 2009 were due to starting to market our products and technology outside of the United States. Travel related costs were $149,700 in 2009 compared to only $31,400 for the same period this year, a $118,300 reduction. This 79% savings during 2010 was the result of travel being curtailed to only a few key trips for training to South America, to Pakistan, to follow up on the marketing study and to India to train a potential new clinic and distributor. Salaries and related expenses were down in 2010 by 9% ($76,000) as the Company only has five employees compared to seven employees at the start of 2009 all earning a salary as well as the associated expenses that relate to them. Salaries and benefits for the period were $760,400 compared to $836,400 for the comparable period in 2009. The Company continued to review its patents and associated costs in 2010 as a result was able to save $24,000 while still protecting its intellectual property base. As a concentrated effort to watch its expenses in 2010 the Company did not have any Advisory Board meetings or use regulatory specialists as it felt the guidance it received in 2009 was sufficient for its efforts in 2010 this resulted in an approximate savings of $86,000 in 2010.
Research and Development Expenses
The Company did not spend any funds on Research and Development in 2010 as it believes its products are ready for market as is. Our limited resources were devoted to sales and training of doctors and distributors. $0 was spent on Research in Development in 2010 compared to $7,600 in 2009. We do not anticipate any spending in R&D in the next 6-12 months as we focus our resources on marketing and training doctors on our current products.
Interest Income and Expense and Financing Fees
During 2010 we recorded significant non-cash financing liability gain related to the convertible loans with detachable warrants the Company issued to raise capital during 2009. See Notes 7 and 11 in the consolidated financial statements included herein. The Company generated $1,825,000 of revaluation gains from the depreciation of our Common Stock market price as of December 31, 2010 compared the market price on December 31, 2009, in 2009 we recorded $508,000 in revaluation gains. In 2009 the net liability incurred of $2,925,500 was due to the note’s conversion feature of $0.10 per share and warrant price per share of $0.20 compared to the Company’s stock market price appreciation at the end of the period. Additionally, we incurred note amortization fees in 2010 totaling $387,700. We had net interest expense of $58,600 in 2010, as compared to $39,700 in 2009 as a result of having a higher loan balance including the convertible loans in 2010 versus 2009 when they had just begun. In addition we incurred $16,700 in broker’s fees for fund raising activities in 2010 compared to $361,000 in 2009.
Income Taxes
The Company's aggregate unused net operating losses approximate $6,902,000, which expire at various times through 2030, 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 $2,800,000. 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.
Liquidity and Capital Resources
As stated in previous filings, our lack of financial resources continues to be our major challenge. As of December 31, 2010, we had $12,500 in cash and no cash equivalents compared to $79,000 at the same period in 2009. Net cash used by operating activities in 2010 was $316,000, compared to net cash used by operating activities of $927,000 for 2009. The decrease in net cash used was due to a reduction of staff and tightly controlling all expenses in 2010. In addition, all current employees continued to assist INVO Bioscience in its funding requirements by deferring their salaries for 2010.
No cash was used in either 2010 or 2009 in investing activities.
Net cash provided by financing activities was $249,500 for 2010 compared to $990,000 for 2009. During 2010 the sale of Common Stock to AGS Capital, per our REF financing agreement provided $128,300, another $90,000 was provided by two convertible notes to Asher Enterprises. Additionally $20,000 came in from a Latin American Doctor who purchased restricted shares and $50,000 was provided by the sale of stock to Mazuma Funding that was used to pay off our line of credit obligation with Century Bank.
The $990,000 provided by financing activities in 2009 came from the following; $88,000 was provided by a short term 5% loan by Kathleen Karloff, our CEO. We completed a 10% convertible notes bridge offering (the “Notes”) with a principal amount of $545,000 in September 2009. $100,000 came from a single investor who purchased 66,667 shares of our Common Stock for $0.15 per share, along with the investment they were also granted a warrant to purchase another 66,667 shares at $0.30, similar to the “Notes” arrangement.
The remaining $295,000 of cash from Lionshare Ventures (LSV) for its outstanding subscription receivable balance in an agreement dated December 5, 2008, and revised on June 10, 2009, for the previous sale of Common Stock to LSV. As of December 31, 2010, the agreement with LSV has been satisfied.
Our $50,000 working capital line of credit with Century Bank came to maturity in 2010, it was paid in full and closed with the funds we received from Mazuma Funding. At December 31, 2010 and December 31, 2009, the balance outstanding on the line of credit was $0 and $50,000 respectively. The company has no other lending arrangements with Century Bank or any other banks at this time.
Our registered independent certified public accountants have stated in their report dated April 15, 2011, that we have generated negative cash outflows from operating activities, experienced recurring net operating losses, and are dependent on securing additional equity and debt financing to support our business efforts. These factors among others may raise substantial doubt about our ability to continue as a going concern.
Our existing cash resources, cash flow from operations and short-term borrowings or from management will not provide adequate resources for supporting operations during fiscal 2011. We intend to achieve additional funding through additional sales of our securities, including in connection with the $10 million REF from AGS Capital Group, LLC described elsewhere in this Annual Report on Form 10-K subject to certain conditions and limitations. Additionally we continue to seek alternative funding to compliment the REF to execute our business plan. Although there can be no assurance that an additional source of funding will materialize, we currently believe that we will be able to obtain the funding we need to continue to grow our business. However, if we do not raise additional capital in the near future we will have to further curtail our spending and downsize or cease our operations.
Off Balance Sheet Arrangements
Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:
| | - | Any obligation under certain guarantee contracts; |
| | - | Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; |
| | - | Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in stockholder’s equity in our statement of financial position; and |
| | - | Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us. |
We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.
Inflation
We believe that inflation has not had a material effect on our operations to date.
The financial statements and supplementary data are included herein under Item 6 and in the Consolidated Financial Statements and related notes thereto. See Item 15 of this Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) 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 SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
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 December 31, 2010. Based upon that evaluation and the identification of the material weakness in the Company’s internal control over financial reporting as described below under “Management’s Report on Internal Control over Financial Reporting,” the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2010 based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2010, 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 because of the Company’s limited resources and limited number of employees.
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. 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.
This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the SEC that permit the company to provide only management's report in this annual report.
Limitations on Effectiveness of Controls and Procedures
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.
Changes in Internal Control over Financial Reporting
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.
None.
Part III
The Company’s Directors are elected annually by our stockholders at the annual meeting. Each director holds his office until his successor is elected and qualified or his earlier resignation or removal. INVO Bioscience's executive officers are elected annually by our Board of Directors. Each executive officer holds his office until they resign, is removed by the Board, or their successor is elected and qualified. Information regarding our executive officers is presented below.
| NAME | | AGE | | POSITION |
| Ms. Kathleen Karloff | | | 55 | | Director and Chief Executive Officer, Secretary |
| | | | | | |
| Dr. Claude Ranoux, MD | | | 59 | | Director, President and Treasurer |
| | | | | | |
| Mr. Robert Bowdring | | | 53 | | Chief Financial Officer |
| | | | | | |
Kathleen Karloff, Chief Executive Officer, Secretary and Director
Ms. Karloff co-founded INVO Bioscience in January 2007. Since this time, Kathleen has obtained ISO certification and the CE mark for the INVOcell device and has implemented manufacturing and distribution systems. From 2004 until September 2006, Kathleen was the Vice President of Operations for Medelle Corporation. From 2000 through 2003, Kathleen was the Vice President of Operations for a start-up company Control Delivery Systems developing an intra-ocular drug therapy for Uveitis and Diabetic Macular Edema. The Company was acquired by Psivida LTD. Prior to that, she has held various positions at Boston Scientific during 13 years of dynamic growth from 1983 to 1997 her last position being the Director of Manufacturing. Since leaving Boston Scientific, she has been Vice President of Operations on start-up teams of three device/pharmaceutical companies. Ms. Karloff earned her B.S. in microbiology from Montana State University and attended Northeastern University for MBA coursework.
Claude Ranoux, M.D., M.S., President, Treasurer and Director
Dr. Ranoux co-founded INVO Bioscience in January 2007. He has more than 30 years of experience in the research and treatment of infertility; he is the inventor and developer of the INVO™ procedure and INVOcell device. From 2000 through 2005, Dr. Ranoux was president of Medelle Corporation and worked on development of the INVOcell. Dr. Ranoux has built and run 12 IVF centers worldwide and has established 12 reproductive centers worldwide. Before founding INVO Bioscience and recruiting the highly experience management team, Dr. Ranoux had 6 years of experience in creating and finding financing for a start-up company. He has been scientific consultant for a new instrument (Immuno1) from Bayer Corporation. During this collaboration, the North West area became the first area for the sales of the instrument two years in a row. Dr. Ranoux was the founder of several non-profit organizations and foreign trade advisor in the New England area. Dr. Ranoux earned his M.D. and his M.S. in Reproductive Biology from the Medical University of Paris (V & XI) where he was an Associate Professor. Dr. Ranoux has served as a scientific consultant for eight other centers and is the author of numerous scientific publications as first author. He has given numerous invited lectures, conferences and workshops and is the author of five medical and scientific theses and mentor for several others. He is co-author of six scientific and medical films. He received a prize for the one of the best scientific presentation at the Fifth World Congress in IVF, in Norfolk, VA, and is the recipient of several other awards. Dr. Ranoux is the main inventor in six international patents.
Robert J. Bowdring, Chief Financial Officer
Mr. Bowdring joined the Company as its Corporate Controller in October 2008. In January 2009, the Company appointed Mr. Bowdring as its Chief Financial Officer. From April 2003 to August 2008, Mr. Bowdring served as CFO & Vice President of Finance and Administration for Cyphermint, Inc., a software development firm. For the fourteen prior years, he was the Controller and Vice President of Lifeline Systems Inc., a public manufacturing and service company (NASDAQ: LIFE) in the personal emergency response market. Mr. Bowdring has a strong history in senior financial management with more than 25 years experience serving in capacities such as chief financial officer, vice president of finance and controller. Rob has been in both public and private manufacturing and service companies during his career. Mr. Bowdring has a Bachelors degree in Accounting from the University of Massachusetts in Amherst.
Code of Ethics
We currently have a code of ethics that applies to our officers, employees and directors, including our Chief Executive Officer and senior executives, it may be found on the Company’s website.
Cumulative voting is not provided for in our Articles of Incorporation or any amendments thereto, which means that the majority of the shares voted can elect all of the directors then standing for election. The Common Stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon the occurrence of a liquidation, dissolution or winding-up, the holders of shares of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and satisfaction of preferential rights of any outstanding preferred stock. There are no sinking fund provisions applicable to the Common Stock.
Summary Compensation Table
The following Summary Compensation Table sets forth, for the years indicated, all cash compensation paid, distributed or accrued for services, including salary and bonus amounts, rendered in all capacities by the Company’s officers who received or was entitled to receive remuneration in excess of $100,000 during the stated periods. As reflected below, none of our officers received cash compensation during fiscal 2007.
SUMMARY COMPENSATION TABLE
| Name and Principal Position | | Year | | Paid Salary ($) | | | Accrued Salary ($) | | | Stock Award ($) (5)(7) | | | Option Award ($) | | | Non-Equity Incentive Plan Compensation Earnings ($) | | | Non-Qualified Deferred Compensation Earnings ($) | | | All other Compensation ($) | | | Total ($) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Kathleen Karloff, | | 2010 | | | 0 | | | | 175,000 | | | | 42,628 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 217,628 | |
| CEO/Director | | 2009 | | | 29,167 | | | | 145,833 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 175,000 | |
| (1,5, 6 &7) | | 2008 | | | 93,074 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 93,074 | |
| | | 2007 | | | 0 | | | | 0 | | | | 4,498 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 4,498 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Claude Ranoux, | | 2010 | | | 0 | | | | 175,000 | | | | 6,500 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 181,500 | |
| President/Director | | 2009 | | | 29,167 | | | | 145,833 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 175,000 | |
| (2, 5, 6 & 7) | | 2008 | | | 91,974 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 91,974 | |
| | | 2007 | | | 0 | | | | 0 | | | | 19,731 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 19,731 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Robert Bowdring, | | 2010 | | | 0 | | | | 150,000 | | | | 25,000 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 175,000 | |
| CFO (4, 6 & 7) | | 2009 | | | 22,500 | | | | 123,750 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 146,250 | |
| | | 2008 | | | 25,312 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 25,312 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Philip Warren | | 2010 | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Former CEO | | 2009 | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| (3 & 5) | | 2008 | | | 43,980 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 43,980 | |
| | | 2007 | | | 0 | | | | 0 | | | | 2,761 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 2,761 | |
| (1) | Kathleen Karloff was elected as the Chief Executive Officer, Secretary and member of the Board of Directors of the Company effective upon the resignation of Andrew Uribe in connection with the acquisition of INVO Bioscience on December 5, 2008. During 2007, Ms. Karloff received shares of Common Stock valued at $0.2857 per share for services rendered in 2007 and awarded in 2008. |
| (2) | Claude Ranoux was elected as the President, Treasurer and member of the Board of Directors effective upon the resignation of Andrew Uribe, in connection with the acquisition of INVO Bioscience on December 5, 2008. During 2007, Dr. Ranoux received shares of Common Stock valued at $0.2857 per share for services rendered in 2007 and awarded in 2008. |
| (3) | Philip Warren served as the Chief Executive Officer of INVO Bioscience from May 2007 to September 2008. During 2007, Mr. Warren received shares of Common Stock valued at $0.2857 per share for services rendered in 2007 and awarded in 2008. |
| (4) | Robert Bowdring was elected as the Chief Financial Officer on January 2, 2009 after joining the Company in October 2008 as Controller. |
| (5) | The dollar value reported in 1, 2, & 3 was based upon a per share price of $0.2857. The per share price was determined in accordance with the relevant facts of BioXcell in February 2008. BioXcell was a start-up company, in a pre-revenue stage and without any third-party investment. |
| (6) | During 2009, the named Officers received only 17% of their 2009 salaries in order to assist the Company’s cash flow during the year. |
| (7) | During 2010 the named Officers did not received any of their 2010 salaries in order to assist the Company’s cash flow during the year, the amounts have been accrued until a time when the Company can afford to pay them. For this effort it was decided that the named Officers as well as the other employees would receive a stock grant. The per share price was based on the closing market price on the date of issue less a two cent discount. |
Compensation of Directors
None.
Stock Option Grants
Since January 1, 2008, the Company has signed agreements for officers, executives and service providers of the Company. As of December 31, 2008, a total of 303,500 shares of Common Stock and three-year vesting options to purchase an additional 500,000 of the Company’s Common Stock were agreed to be issued, the price will be determined on date of grant. As of December 31, 2009, the Company has issued the committed shares against the 2008 recorded accrued liability of $313,500. As of December 31, 2010, the Company has canceled all outstanding stock option grants.
Employment Contracts
Kathleen Karloff, chief executive officer, secretary and member of the Board of Directors, has executed an employment agreement with INVO Bioscience effective as of February 1, 2008. The agreement provides for an annual salary of $175,000 and health and life insurance and retirement plan along with the reimbursement of expenses. In the event that Ms. Karloff’s employment is terminated other than for cause (as defined in the employment agreement), she will receive her salary and full medical benefits for twelve (12) months thereafter. Kathleen Karloff voluntarily agreed to a salary reduction from February 1, 2008 through September 1, 2008 to $101,061 per year, however, that reduction is no longer in effect.
Dr. Claude Ranoux, president, Treasurer and member of the Board of Directors, has executed an employment agreement with INVO Bioscience effective as of February 1, 2008. The agreement provides for an annual salary of $175,000 and health and life insurance and retirement plan along with the reimbursement of expenses. In the event that Dr. Ranoux’s employment is terminated other than for cause (as defined in the employment agreement), he will receive his salary and full medical benefits for twelve (12) months thereafter. Claude Ranoux voluntarily agreed to a salary reduction from February 1, 2008 through September 1, 2008 to $86,478 per year, however, that reduction is no longer in effect.
Robert Bowdring, chief financial officer, has executed an employment agreement with INVO Bioscience effective as of October 27, 2008. His current agreement provides for an annual salary of $150,000 and health and life insurance and retirement plan along with the reimbursement of expenses. In the event that Mr. Bowdring’s employment is terminated other than for cause (as defined in the employment agreement), he will receive a severance package of 12 months of salary and full medical benefits.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth the names and beneficial ownership of the 77,625,120 shares of our Common Stock as of April 11, 2011, by each of our directors, all of our directors and executives as a group, and to the best of our knowledge, all holders of 5% or more of the issued and outstanding shares of the Company’s voting stock. Unless otherwise noted, the address of all of the individuals and entities named below is care of INVO Bioscience, Inc., 100 Cummings Center, Suite 207P, Beverly, Massachusetts 01915:
| Name and Address of Beneficial Owner (1) | | Nature of Security | | Number of Shares | | | Percentage of Common Stock | |
| | | | | | | | | |
| Directors and Officers: | | | | | | | | |
| | | | | | | | | |
| Kathleen Karloff | | Common Stock | | | 7,200,000 | | | | 9.27 | % |
| | | | | | | | | | | |
| Claude Ranoux | | Common Stock | | | 25,703,613 | | | | 33.11 | % |
| | | | | | | | | | | |
| All directors and executive officers as a group (3 persons) | | | | | 35,403,613 | | | | 45.61 | % |
| | | | | | | | | | | |
| (1) | Beneficial ownership is determined in accordance with Rule 13d-3(a) of the Securities Exchange Act of 1934 and generally includes voting or investment power with respect to securities. Except as indicated by footnotes and subject to community property laws, where applicable, the person named above has sole voting and investment power with respect to all shares of the Common Stock shown as beneficially owned by him or her. |
Changes in Control
There are no present arrangements or pledges of the Company’s securities, which may result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Conflicts of Interest
Certain potential conflicts of interest are inherent in the relationships between our officers and directors, and us. From time to time, one or more of our affiliates may form or hold an ownership interest in and/or manage other businesses both related and unrelated to the type of business that we own and operate. These persons expect to continue to form, hold an ownership interest in and/or manage additional other businesses which may compete with ours with respect to operations, including financing and marketing, management time and services and potential customers. These activities may give rise to conflicts between or among the interests of us and other businesses with which our affiliates are associated. Our affiliates are in no way prohibited from undertaking such activities, and neither our shareholders nor we will have any right to require participation in such other activities.
Further, because we intend to transact business with some of our officers, directors and affiliates, as well as with firms in which some of our officers, directors or affiliates have a material interest, potential conflicts may arise between the respective interests of us and these related persons or entities. We believe that such transactions will be effected on terms at least as favorable to us as those available from unrelated third parties.
With respect to transactions involving real or apparent conflicts of interest, we intend to require that: (i) the fact of the relationship or interest giving rise to the potential conflict be disclosed or known to the directors who authorize or approve the transaction prior to such authorization or approval, (ii) the transaction be approved by a majority of our disinterested outside directors, and (iii) the transaction be fair and reasonable to us at the time it is authorized or approved by our directors.
Effective March 2, 2009, our independent registered public accounting firm is RBSM LLP. Our independent registered public accounting firm was Webb & Company, P.A. prior to March 2, 2009. Set forth below are the fees and expenses invoiced by RBSM LLP. for audit services provided to us in 2010 and 2009. The following table summarizes the approximate aggregate fees billed to us or expected to be billed to us by our independent registered accounting firms for our 2010 and 2009 fiscal years:
| | | Fiscal Year Ended | | | Fiscal Year Ended | |
| | | December 31, 2010 | | | December 31, 2009 | |
| Audit Fees | | $ | 65,000 | | | $ | 67,400 | |
| Audit Related fees | | $ | 3,000 | | | $ | 13,000 | |
| All Other Fees | | $ | - | | | $ | - | |
Our Board of Directors has adopted a procedure for pre-approval of all fees charged by our independent auditors. Under the procedure, the Board approves the engagement letter with respect to audit and review services. Other fees are subject to pre-approval by the Board, or, in the period between meetings, by a designated member of Board. Any such approval by the designated member is disclosed to the entire Board at the next meeting. The audit fees paid to the auditors with respect to fiscal year 2010 and 2009 were pre-approved by the entire Board of Directors.
Part IV
The following are filed as a part of this report:
1. Financial Statements
| | | Page |
| | |
| | F-1 |
| | |
| | F-2 |
| | |
| | F-3 |
| | |
| | F-4 |
| | |
| | F-6 |
| | |
| | F-7 |
2. Financial Statement Schedules
Information required by Schedule II is shown in the Notes to Consolidated Financial Statements. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
The Exhibits filed as part of this Annual Report on Form 10-K are listed on the Exhibit Index following the audit report to this Annual Report on Form 10-K and are incorporated herein by reference.
Board of Directors
INVO Bioscience, Inc.
Beverly, MA
We have audited the accompanying consolidated balance sheets of INVO Bioscience, Inc. (“the Company”), a development stage company, as of December 31, 2010 and 2009, and the related consolidated statements of losses, stockholders' deficiency, and cash flows for each of the two years in the period ended December 31, 2010 and 2009 and the period January 5, 2007 (date of inception) through December 31, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based upon our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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 our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Invo Bioscience, Inc. a development stage company, at December 31, 2010 and 2009 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2010 and for the period January 5, 2007 (date of inception) through December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company has a generated negative cash flows 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 raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regards to this matter are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| | | | |
| /s/ RBSM LLP | | |
| | | | |
New York, New York April 15, 2011 | | | |
INVO Bioscience, Inc.
(A DEVELOPMENT STAGE COMPANY)
| Assets | |
| | | December 31, | | | December 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Current Assets: | | | | | | |
| Cash | | $ | 12,525 | | | $ | 79,052 | |
| Accounts receivable, net | | | 15,706 | | | | 3,064 | |
| Other receivable | | | - | | | | - | |
| Inventory | | | 69,272 | | | | 63,134 | |
| Prepaid expenses | | | 1,940 | | | | 46,991 | |
| Total current assets | | | 99,443 | | | | 192,241 | |
| | | | | | | | | |
| Property and equipment, net | | | 24,427 | | | | 32,836 | |
| | | | | | | | | |
| Other Assets: | | | | | | | | |
| Capitalized patents, net | | | 57,126 | | | | 62,759 | |
| Total other assets | | | 57,126 | | | | 62,759 | |
| | | | | | | | | |
| Total assets | | $ | 180,996 | | | $ | 287,836 | |
| | | | | | | | | |
| Liabilities and Stockholders' Deficiency | |
| | | | | | | | | |
| Current Liabilities: | | | | | | | | |
| Accounts payable | | $ | 628,249 | | | $ | 683,816 | |
| Accrued expenses | | | 340,602 | | | | 218,628 | |
| Accrued salaries | | | 1,062,913 | | | | 508,855 | |
| Note payable- related party | | | 136,962 | | | | 146,462 | |
| Line of credit | | | - | | | | 50,000 | |
| Convertible notes, net of debt discount of $18,875 and $297,897 respectively | | | 325,624 | | | | 12,103 | |
| Derivative liabilities | | | 168,555 | | | | 1,905,109 | |
| Total current liabilities | | | 2,662,905 | | | | 3,524,973 | |
| | | | | | | | | |
| | | | | | | | | |
| Total liabilities | | | 2,662,905 | | | | 3,524,973 | |
| | | | | | | | | |
| Commitments and Contingencies | | | | | | | | |
| Stockholders' Deficiency: | | | | | | | | |
Preferred Stock, $.0001 par value; 100,000,000 shares authorized; No shares issued and outstanding as of December 31, 2010 and 2009 | | | - | | | | - | |
Common Stock, $.0001 par value; 200,000,000 shares authorized; 74,536,286 and 58,926,322 issued and outstanding as of December 31, 2010 and 2009, respectively. | | | 7,454 | | | | 5,893 | |
| Additional paid-in capital | | | 4,413,030 | | | | 3,660,933 | |
| Stock subscription receivable | | | - | | | | (155,000 | ) |
| Accumulated deficit during the development stage | | | (6,902,393 | ) | | | (6,748,963 | ) |
| Total stockholders' deficiency | | | (2,481,909 | ) | | | (3,237,137 | ) |
| | | | | | | | | |
| Total liabilities and stockholders' deficiency | | $ | 180,996 | | | $ | 287,836 | |
The accompanying notes are an integral part of these consolidated financial statements.
INVO Bioscience, Inc.
(A DEVELOPMENT STAGE COMPANY)
| | | | | | | | | From January 5, 2007 | |
| | | Year Ended | | | Year Ended | | | (Inception) to | |
| | | December 31, 2010 | | | December 31, 2009 | | | December 31, 2010 | |
| | | | | | | | | | |
| Revenue: | | | | | | | | | |
| Product Revenue | | $ | 67,648 | | | $ | 63,204 | | | $ | 168,846 | |
| Cost of Goods Sold: | | | | | | | | | | | | |
| Product Costs | | | 21,828 | | | | 41,391 | | | | 73,306 | |
| | | | | | | | | | | | | |
| Gross Margin: | | | 45,820 | | | | 21,813 | | | | 95,540 | |
| | | | | | | | | | | | | |
| Operating Expenses: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Research and development | | | - | | | | 7,650 | | | | 92,761 | |
| Selling, general and administrative | | | 1,561,200 | | | | 1,856,904 | | | | 5,432,880 | |
| Total operating expenses | | | 1,561,200 | | | | 1,864,554 | | | | 5,525,641 | |
| | | | | | | | | | | | | |
| Loss from operations | | | (1,515,380 | ) | | | (1,842,741 | ) | | | (5,430,101 | ) |
| | | | | | | | | | | | | |
| Other (Income) Expenses: | | | | | | | | | | | | |
| Gain in fair value of derivative liability | | | (1,824,951 | ) | | | (507,424 | ) | | | (2,332,375 | ) |
| Interest expense and financing fees | | | 463,001 | | | | 3,326,152 | | | | 3,804,667 | |
| Total other ( income) expenses | | | (1,361,950 | ) | | | 2,818,728 | | | | 1,472,292 | |
| | | | | | | | | | | | | |
| Loss before income taxes | | | (153,430 | ) | | | (4,661,469 | ) | | | (6,902,393 | ) |
| | | | | | | | | | | | | |
| Provisions for income taxes | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
| Net Loss | | $ | (153,430 | ) | | $ | (4,661,469 | ) | | $ | (6,902,393 | ) |
| | | | | | | | | | | | | |
| Basic net loss per weighted average shares of common stock | | $ | (0.002 | ) | | $ | (0.085 | ) | | | | |
| Diluted net loss per weighted average shares of common stock – See Note 1 | | $ | (0.024 | ) | | $ | (0.034 | ) | | | | |
| Basic and diluted weighted average number of shares of common stock | | | 63,500,488 | | | | 54,736,168 | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
INVO Bioscience, Inc.
(A DEVELOPMENT STAGE COMPANY)CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCYFor the Period January 5, 2007 (Date of Inception) to December 31, 2010
| | | Common Shares | | | Stock Amount | | | Additional Paid in Capital | | | Subscription Receivable | | | Accumulated Deficit during Development Stage | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| Stock issuance to founder in January 2007 | | | 24,991,379 | | | $ | 2,499 | | | $ | 17,501 | | | | | | | - | | | $ | 20,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| In Kind contribution of services in December 2007 | | | - | | | | - | | | | 90,865 | | | | | | | - | | | | 90,865 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| In Kind contribution of interest in December 2007 | | | - | | | | - | | | | 2,298 | | | | | | | - | | | | 2,298 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Net Loss for the period January 5, 2007 (Inception) to December 31, 2007 | | | - | | | | - | | | | - | | | | | | | (214,089 | ) | | | (214,089 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2007 | | | 24,991,379 | | | $ | 2,499 | | | $ | 110,664 | | | | | | $ | (214,089 | ) | | $ | (100,926 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services in March 2008 | | | 10,728,442 | | | | 1,073 | | | | 11,978 | | | | | | | - | | | | 13,051 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash in April 2008 | | | 312,392 | | | | 31 | | | | 31,969 | | | | | | | - | | | | 32,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash in May 2008 | | | 365,588 | | | | 37 | | | | 54,963 | | | | | | | - | | | | 55,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash in June 2008 | | | 431,994 | | | | 43 | | | | 64,957 | | | | | | | - | | | | 65,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash in July 2008 | | | 399,148 | | | | 40 | | | | 59,960 | | | | | | | - | | | | 60,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash in August 2008 | | | 365,588 | | | | 37 | | | | 54,963 | | | | | | | - | | | | 55,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash in September 2008 | | | 1,136,751 | | | | 114 | | | | 174,886 | | | | | | | - | | | | 175,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| In Kind Contribution of services in September 2008 | | | - | | | | - | | | | 160,821 | | | | | | | - | | | | 160,821 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| In Kind Contribution of interest in September 2008 | | | - | | | | - | | | | 3,690 | | | | | | | - | | | | 3,690 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash in October 2008 | | | 1,118,186 | | | | 112 | | | | 199,826 | | | | | | | - | | | | 199,938 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services in November 2008 | | | 265,623 | | | | 27 | | | | 40,029 | | | | | | | - | | | | 40,056 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Forfeited common stock for services not fully rendered during 2008 | | | (2,239,585 | ) | | | (224 | ) | | | (1,568 | ) | | | | | | - | | | | (1,792 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash in November 2008 | | | 431,994 | | | | 43 | | | | 64,957 | | | | | | | - | | | | 65,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued to Registrant’s shareholders in December 2008 | | | 14,937,500 | | | | 1,494 | | | | 448,506 | | | | (450,000 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for Cash in December 2008 | | | 375,000 | | | | 38 | | | | 374,962 | | | | | | | | - | | | | 375,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Loss, for the year ended December 31, 2008 | | | - | | | | - | | | | - | | | | - | | | $ | (1,873,405 | ) | | | (1,873,405 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
(A DEVELOPMENT STAGE COMPANY)CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY (Continued)For the Period January 5, 2007 (Date of Inception) to December 31, 2010
| | | Common Stock | | | | | | | | | | | | | |
| | | Shares | | | Amount | | | Additional Paid in Capital | | | Subscription Receivable | | | Accumulated Deficit during Development Stage | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2008 | | | 53,620,000 | | | $ | 5,362 | | | $ | 1,855,565 | | | $ | (450,000 | ) | | $ | (2,087,494 | ) | | $ | (676,567 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash received for Subscription Receivable in January 2009 | | | | | | | | | | | | | | | 100,000 | | | | | | | | 100,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash received for Subscription Receivable in February 2009 | | | | | | | | | | | | | | | 60,000 | | | | | | | | 60,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services in March 2009 | | | 83,333 | | | | 8 | | | | 37,492 | | | | | | | | | | | | 37,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash received for Subscription Receivable in March 2009 | | | | | | | | | | | | | | | 40,000 | | | | | | | | 40,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash received for Subscription Receivable in April 2009 | | | | | | | | | | | | | | | 45,000 | | | | | | | | 45,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services in May 2009 | | | 125,000 | | | | 13 | | | | 15,487 | | | | | | | | | | | | 15,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued per favored nation agreement dated 12/5/08 in Sept. 09 | | | 1,125,000 | | | | 113 | | | | (113 | ) | | | | | | | | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services in Sept. 2009 | | | 857,000 | | | | 86 | | | | 299,864 | | | | | | | | | | | | 299,950 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Forfeited common stock per 12/5/08 Purchase Agreement in August 2009 | | | (562,500 | ) | | | (56 | ) | | | 56 | | | | | | | | | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services in November 2009 | | | 12,000 | | | | 1 | | | | 6,121 | | | | | | | | | | | | 6,122 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for Notes Payable (N.P.) Conversion in November 2009 | | | 2,100,000 | | | | 210 | | | | 209,790 | | | | | | | | | | | | 210,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for the interest related to N.P. Conversion in November 2009 | | | 42,930 | | | | 4 | | | | 4,289 | | | | | | | | | | | | 4,293 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for financing fees for broker services in November 2009 | | | 600,000 | | | | 60 | | | | 305,940 | | | | | | | | | | | | 306,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash received for Subscription Receivable in December 2009 | | | | | | | | | | | | | | | 50,000 | | | | | | | | 50,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for N.P. Conversion in December 2009 | | | 250,000 | | | | 25 | | | | 24,975 | | | | | | | | | | | | 25,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for the interest related to N.P. Conversion in December 2009 | | | 6,892 | | | | 1 | | | | 688 | | | | | | | | | | | | 689 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued to a related party for cash in December 2009 | | | 666,667 | | | | 67 | | | | 99,933 | | | | | | | | | | | | 100,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Convertible Option Liability Conversion in December 2009 | | | | | | | | | | | 800,845 | | | | | | | | | | | | 800,845 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Loss, for the year ended December 31, 2009 | | | | | | | | | | | | | | | | | | $ | (4,661,469 | ) | | | (4,661,469 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2009 | | | 58,926,322 | | | $ | 5,893 | | | $ | 3,660,933 | | | $ | (155,000 | ) | | $ | (6,748,963 | ) | | $ | (3,237,137 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash in January 2010 | | | 402,500 | | | | 40 | | | | 64,428 | | | | | | | | | | | | 64,468 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services in February 2010 | | | 220,000 | | | | 22 | | | | 21,978 | | | | | | | | | | | | 22,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued to employees for services in February 2010 | | | 810,000 | | | | 81 | | | | 80,919 | | | | | | | | | | | | 81,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash in February 2010 | | | 512,000 | | | | 51 | | | | 43,981 | | | | | | | | | | | | 44,032 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services in April 2010 | | | 203,500 | | | | 20 | | | | 16,260 | | | | | | | | | | | | 16,280 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services in May 2010 | | | 150,000 | | | | 15 | | | | 13,250 | | | | | | | | | | | | 13,265 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash in May 2010 | | | 200,000 | | | | 20 | | | | 19,980 | | | | | | | | | | | | 20,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services in June 2010 | | | 650,000 | | | | 65 | | | | 65,935 | | | | | | | | | | | | 66,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services in July 2010 | | | 1,663,000 | | | | 166 | | | | 161,404 | | | | | | | | | | | | 161,570 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash in August 2010 | | | 1,250,000 | | | | 125 | | | | 50,240 | | | | | | | | | | | | 50,365 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock returned for Subscription Receivable in August 2010 | | | (1,786,563 | ) | | | (179 | ) | | | (154,821 | ) | | | 155,000 | | | | | | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services in August 2010 | | | 230,000 | | | | 23 | | | | 11,477 | | | | | | | | | | | | 11,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services in September 2010 | | | 342,065 | | | | 35 | | | | 17,070 | | | | | | | | | | | | 17,105 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services in October 2010 | | | 1,220,000 | | | | 122 | | | | 101,178 | | | | | | | | | | | | 101,300 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash in October 2010 | | | 200,000 | | | | 20 | | | | 11,780 | | | | | | | | | | | | 11,800 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for Convertible Note in November 2010 | | | 811,587 | | | | 81 | | | | 25,419 | | | | | | | | | | | | 25,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash in November 2010 | | | 200,000 | | | | 20 | | | | 7,980 | | | | | | | | | | | | 8,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services in December 2010 | | | 2,095,474 | | | | 210 | | | | 97,186 | | | | | | | | | | | | 97,396 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued to employees for services in December 2010 | | | 4,677,841 | | | | 468 | | | | 46,310 | | | | | | | | | | | | 46,778 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for Convertible Note in December 2010 | | | 1,558,560 | | | | 156 | | | | 29,844 | | | | | | | | | | | | 30,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Convertible Option Liability Conversion in December 2010 | | | | | | | | | | | 20,299 | | | | | | | | | | | | 20,299 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Loss, for the year ended December 31, 2010 | | | | | | | | | | | | | | | | | | $ | (153,430 | ) | | | (153,430 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2010 | | | 74,536,286 | | | $ | 7,454 | | | $ | 4,413,030 | | | $ | - | | | $ | (6,902,393 | ) | | $ | (2,481,909 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
(A DEVELOPMENT STAGE COMPANY)
| | | | | | | | | From January 5, 2007 | |
| | | For the Year Ended December 31, 2010 | | | For the Year Ended December 31, 2009 | | | (Inception) to December 31, 2010 | |
| | | | | | | | | | |
| Net Loss | | $ | (153,430 | ) | | $ | (4,661,469 | ) | | $ | (6,902,393 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | |
| Non-cash stock compensation issued for services | | | 506,415 | | | | 665,072 | | | | 1,223,072 | |
| In kind contribution to employees | | | 127,778 | | | | - | | | | 379,464 | |
| Reserve for allowance for doubtful accounts | | | (7,528 | ) | | | 39,505 | | | | 35,777 | |
| Accretion of convertible debt discount | | | 279,021 | | | | 247,104 | | | | 526,125 | |
| Depreciation and amortization | | | 14,042 | | | | 14,042 | | | | 41,743 | |
| Non-cash financing and derivative (gains) losses | | | (1,736,554 | ) | | | 2,160,952 | | | | 424,398 | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
Receivables | | | (5,114 | ) | | | (874 | ) | | | (51,483 | ) |
| Inventories | | | (6,138 | ) | | | 7,588 | | | | (69,270 | ) |
| Prepaid expenses and other current assets | | | 45,050 | | | | 26,794 | | | | (13,790 | ) |
| Accounts payable | | | (55,567 | ) | | | 456,955 | | | | 627,978 | |
| Accrued compensation | | | 554,059 | | | | 508,855 | | | | 1,062,914 | |
| Other accrued expenses | | | 121,974 | | | | (391,188 | ) | | | 290,139 | |
| Net cash used in operating activities | | | (315,992 | ) | | | (926,664 | ) | | | (2,425,326 | ) |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Purchase of equipment | | | - | | | | - | | | | (42,858 | ) |
| Purchase of intangible assets | | | - | | | | - | | | | (77,742 | ) |
| Net cash used in investing activities | | | - | | | | - | | | | (120,600 | ) |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Proceeds from demand note payable | | | - | | | | - | | | | 50,000 | |
| Repayment from demand note payable | | | (50,000 | ) | | | | | | | (50,000 | ) |
| Proceeds from loan payable- insurance | | | - | | | | - | | | | 70,587 | |
| Proceeds from loan payable- related party | | | - | | | | 88,000 | | | | 190,889 | |
| Repayment of loan payable- related party | | | (9,500 | ) | | | (38,000 | ) | | | (53,928 | ) |
| Proceeds from convertible note payable | | | 34,500 | | | | 545,000 | | | | 579,500 | |
| Proceeds from the issuance of common stock | | | 274,465 | | | | 395,000 | | | | 1,771,403 | |
| Net cash provided by financing activities | | | 249,465 | | | | 990,000 | | | | 2,558,451 | |
| | | | | | | | | | | | | |
| Net (decrease) increase in cash and cash equivalents | | | (66,527 | ) | | | 63,336 | | | | 12,525 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at beginning of period | | | 79,052 | | | | 15,716 | | | | - | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 12,525 | | | $ | 79,052 | | | $ | 12,525 | |
| | | | | | | | | | | | | |
| Supplemental disclosure of non-cash financing activity: | | | | | | | | | | | | |
| Cash paid for interest | | $ | 16,568 | | | $ | 6,494 | | | $ | 32,560 | |
| Cash paid for taxes | | $ | 456 | | | | 1,084 | | | $ | 1,540 | |
| Common stock issued upon note payable and accrued interest conversion | | $ | 55,500 | | | | 239,982 | | | $ | 295,482 | |
The accompanying notes are an integral part of these consolidated financial statements.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
| NOTE 1 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION |
(A) General
INVO Bioscience, Inc. (“the Company”) offers novel solutions in assisted reproductive technologies while expanding geographic and affordable access to the global reproductive health care community. Our primary focus is the manufacture and sale of the INVOcell device and the INVO technology to assist infertile couples in having a baby. We designed our INVOcell device and our INVO procedure to provide an alternative infertility treatment for the patient and the clinician. The INVO procedure is less expensive and simpler to perform than most comparable infertility treatments currently. The simplicity of the INVO procedure relates to the ability to potentially perform the INVO procedure in a physician’s practice rather than in a specialized facility at a much lower cost overall than current infertility treatments.
We believe that the INVO procedure will make infertility treatment more readily available throughout the world. The INVO procedure is significantly less costly than conventional IVF. The INVOcell device and INVO procedure facilitates conception and embryo development inside the woman's body, rather than in a dish in a laboratory, which is an attractive feature for most couples.
We are a development stage company, as defined by Accounting Standards Codification (“ASC”) Topic 915, “Accounting and Reporting by Development Stage Enterprise” formerly (“SFAS”) No. 7. The Company’s activities during our development stage to date has included developing the business plan, seeking regulatory clearance in the European Union and the United States, raising capital, conducting beta tests, sales and marketing of the INVOcell device and offering instructions in the INVO technique to doctors in numerous foreign countries.
Through December 31, 2010, we have generated minimal 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 of 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 possess the necessary regulatory authority to distribute its product in the European Economic Area (Includes: The European Union, Canada, Australia, New Zealand, India, Africa and most parts of South America and the Middle East).
(B) Basis of Presentation (Share Exchange and Corporate Structure)
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.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
The Company accounted for the transaction as a recapitalization and the Company is the surviving entity. In connection with the share exchange, Emy’s shareholders retained 14,937,500 shares. Effective with the Agreement, all previously outstanding shares of Common Stock 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 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 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.
(C) 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.
(D) 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 December 31, 2010 and 2009, the Company had $12,000 and $79,000 cash equivalents, respectively.
(E) Inventory
Inventories consist of finished products and are stated at the lower of cost or market; using the first-in, first-out (FIFO) method as a cost flow convention.
(F) Property and Equipment
The Company records property and equipment at cost. Depreciation and amortization are provided using the straight-line method over the estimated economic lives of the assets, which are from 3 to 7 years. The Company capitalizes the expenditures for major renewals and improvements that extend the useful lives of property and equipment. Expenditures for maintenance and repairs are charged to expense as incurred. The Company reviews the carrying value of long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
(G) Stock Based Compensation
The Company accounts for stock-based compensation under the provisions of Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”). This statement requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period in which the employee is required to provide service in exchange for the award, which is usually the vesting period.
(H) Loss Per Share
We use ASC 260-10, “Earnings Per Share” for calculating the basic and diluted loss per share. We compute basic loss per share by dividing net loss and net loss attributable to common shareholders by the weighted average number of common shares outstanding.
Dilutive common stock equivalents consist of shares issuable upon conversion of debt and the exercise of our stock options and warrants. In accordance with ASC 260-45-20, common stock equivalents derived from shares issuable through the exercise of our warrants subject to derivative accounting are not considered in the calculation of the weighted average number of common shares outstanding because the adjustments in computing income available to common stockholders would result in a loss. Accordingly, the diluted EPS would be computed in the same manner as basic earnings per share.
The following is a reconciliation of net income and share amounts used in the computation of loss per share for the years ended December 31, 2010 and 2009:
| | | December 31, 2010 | | | December 31, 2009 | |
| Net loss used in computing basic net income per share | | $ | (153,430 | ) | | $ | (4,661,469 | ) |
| Impact of assumed assumptions: | | | | | | | | |
| Gain on warrant liability marked to fair value | | | (1,736,554 | ) | | | - | |
| Net loss used in computing diluted net loss per share | | $ | (1,889,984 | ) | | $ | (4,661,469 | ) |
There were 1,354,466 common share equivalents at December 31, 2010 and 1,630,000 at December 31, 2009. For the years ended December 31, 2010 and 2009, these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
(I) Fair Value of Financial Instruments
ASC 825-10-50, “Disclosures about Fair Value of Financial Instruments,” (formerly SFAS No. 107) requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments.
Effective January 1, 2008, the Company adopted ASC 820-10, “Fair Value Measurements” (SFAS 157), which provides a framework for measuring fair value under GAAP. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
(J) Income Taxes
The Company accounts for income taxes under the ASC 740-10-05, “Accounting for Income Taxes” (SFAS 109). Under ASC 740-10, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In July 2006, the FASB issued ASC 740-10, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (FIN 48). ASC 740-10 clarifies the recognition threshold and measurement of a tax position taken on a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. ASC 740-10 also requires expanded disclosure with respect to the uncertainty in income taxes.
(K) Business Segments
The Company operates in one segment and therefore segment information is not presented.
(L) Concentration of Credit Risk
The Company at times has cash in banks in excess of FDIC insurance limits. The Company had no amounts in excess of FDIC insurance limits as of December 31, 2010 and December 31, 2009.
(M) Revenue Recognition
The Company will recognize revenue on arrangements in accordance with ASC 605-10 formerly Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” and No. 104, “Revenue Recognition.” In all cases, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
(N) Long- Lived Assets
Long-lived assets and certain identifiable assets related to those assets are periodically reviewed for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the non-discounted future cash flows of the enterprise are less than their carrying amount, their carrying amounts are reduced to the fair value and an impairment loss recognized. There was no impairment recorded from January 5, 2007 (inception) to December 31, 2010.
(O) Research and Development
The Company accounts for research and development costs in accordance with the ASC 730-10 “Accounting for Research and Development Costs” (SFAS 2). Research and development costs include expenses incurred by the Company for research, design and development of our proprietary technology and are charged to operations as incurred. Accordingly, internal research and development costs are expensed as incurred. Total expenditures on research and product development for 2010 and 2009 were approximately $0 and $7,600 respectively.
(P) Reclassifications
Certain reclassifications have been made in prior year's financial statements to conform to classifications used in the current year.
(Q) Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
As reflected in the accompanying consolidated financial statements, the Company is in the development stage and commenced operations in December 2008, in 2010 has a net loss of $153,000, a working capital deficiency of $2,564,000, a stockholder deficiency of $2,482,000 and cash used in operations of $316,000 for the year ended December 31, 2010. 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.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
As of December 31, 2010 and 2009, the Company recorded the following inventory balances:
| | | December 31, 2010 | | | December 31, 2009 | |
| Raw Materials | | $ | - | | | $ | - | |
| Work in Process | | | 40,971 | | | | 49,507 | |
| Finished Goods | | | 28,301 | | | | 13,627 | |
| Total Inventory | | $ | 69,272 | | | $ | 63,134 | |
| 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 |
| | | December 31, 2010 | | | December 31, 2009 | |
| Manufacturing Equipment- Molds | | $ | 35,263 | | | $ | 35,263 | |
| Less: Accumulated Depreciation | | | (12,734 | ) | | | (6,857 | ) |
| Network/IT Equipment | | | 7,595 | | | | 7,595 | |
| Less: Accumulated Depreciation | | | (5,696) | | | | (3,165) | |
| | | $ | 24,427 | | | $ | 32,836 | |
During the periods ended December 31, 2010 and 2009, the Company recorded $8,409 in depreciation expense.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
As of December 31, 2010 and 2009, the Company recorded the following patent costs:
| | | December 31, 2010 | | | December 31, 2009 | |
| Total Patents | | $ | 77,743 | | | $ | 77,743 | |
| | | | | | | | | |
| Less: Accumulated Amortization | | | (20,617) | | | | (14,984) | |
| | | | | | | | | |
| Patent costs, net | | $ | 57,126 | | | $ | 62,759 | |
During the periods ended December 31, 2010 and 2009, the Company recorded $5,633 in amortization expenses.
Estimated amortization expense as of December 31, 2010 is as follows:
| Years ended December 31, | | | |
| | | | |
| 2011 | | $ | 5,633 | |
| 2012 | | | 5,633 | |
| 2013 | | | 5,633 | |
| 2014 | | | 5,633 | |
| 2015 and thereafter | | | 34,594 | |
| Total | | $ | 57,126 | |
| NOTE 6 | WORKING LINE OF CREDIT |
At December 31, 2010, the Company has paid and closed its $50,000 working capital line of credit with Century Bank, the line matured May 31, 2010. At December 31, 2010 and 2009, the balance outstanding on the line of credit was $0 and $50,000 respectively.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
During 2009, the Company issued convertible notes payable (“Bridge Notes”) to investors in the aggregate amount of $545,000. The Bridge Notes carry interest rates ranging from 10-12% and were due in full in one year from the date of issuance. Bridge Notes with a value of $235,000 have been converted into shares of the Company’s Common Stock, the remaining Bridge Notes terms have been extended. The Bridge Notes and accrued interest are convertible into Common Stock of the Company at a conversion price of $0.10 per share, subject to adjustments. In addition to the Bridge Notes, the Company issued warrants to purchase 5,750,000 shares of the Company’s Common Stock at a price of $0.20 per share. The Company valued the conversion feature of the Bridge Notes and the warrants issued as consideration for the notes payable via the Black-Scholes valuation method. The total fair value calculated for the conversion was $1,493,710, which is recorded as a derivative liability on the Company’s balance sheet. Of this amount, $151,826 was allocated to the discount on the Bridge Notes and $1,341,884 was charged to operations. The total fair value calculated for the warrants was $1,719,666, which is recorded as a derivative liability on the Company’s balance sheet. Of this amount, $393,174 was allocated to the discount on the Bridge Notes, and $1,326,492 was charged to operations. The aggregate discount on the Bridge Notes was $545,000, and the aggregate amount initially charged to operations was $2,668,376. For the year ended December 31, 2010 we recorded a gain of $ 1,736,554 as compared to an expense of $2,160,652 in the same period of 2009. Additionally for the years ended December 31, 2010 and 2009 we recorded a net reduction of $1,824,951 and $507,424 respectively, related to the fair value of the derivative liability.
During 2010, $235,000 of the Bridge Notes were converted into shares of Common Stock and the fair value of the derivative liability was recalculated and reduced to $593,997 with adjustments to revaluation expense of $248,997 and $800,845 to additional paid in capital.�� As of December 31, 2010 the discount of $545,000 has been fully amortized to interest expense over the one year term of the Bridge Notes using the effective interest method. As of December 31, 2010 and 2009, the Company recorded $297,896 and $247,104 respectively in amortization expense of the discount on the Bridge Notes. Interest in the aggregate amount of $34,823 and $18,329 was accrued on the Bridge Notes during 2010 and 2009 respectively.
During 2010, the Company reached an agreement with one of the Bridge Note investors who had converted their notes into shares to cancel those 1, 750,000 shares and the corresponding 1,750,000 warrants and apply the proceeds to an existing debt, a stock subscription receivable with the company.
During May and June 2010, the Company issued convertible notes (“Q2 Notes”) payable to investors in the aggregate amount of $90,000. The Q2 Notes carry an 8% interest rate and are due in full nine months from the date of issuance. The Q2 Notes are convertible into Common Stock of the Company starting 90 days after the issuance date until maturity or when paid whichever is later. The conversion price is variable, based on a fifty percent discount per share on the average of the three lowest trading prices for the ten trading days ending one trading day prior to the date the conversion notice is sent to the Company, subject to adjustments. The Company valued the conversion feature of the Q2 Notes via the Black-Scholes valuation method. The total fair value calculated for the conversion was $55,900, which is recorded as a derivative liability on the Company’s balance sheet. Of this amount, $25,900 was allocated to the discount on the Q2 Notes and $30,000 was charged to operations during the quarter.
As of December 31, 2010, the Company recorded $37,025 in amortization expense of the discount on the Q2 Notes. Interest in the aggregate amount of $3,570 was accrued on the Q2 Notes during 2010.
| NOTE 8 | 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 original cumulative investment as of December 31, 2008 was $96,462, as of December 31, 2010 it is $48,962 (“the Principal Amount”) in INVO Bioscience. On March 26, 2009, the Company and Dr. Ranoux agreed to re-write the agreement to a non-convertible note payable bearing interest at 5% per annum, the term of the note has been extended, the repayment date is October 31, 2011. The Company and Dr. Ranoux can jointly decide to repay the loan earlier without prepayment penalties. During 2010, $9,500 was repaid on the principal of the loan.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
On March 5, 2009, the Company entered into a related party transaction with Kathleen Karloff, the Chief Executive Officer and a Director of the Company. Ms. Karloff provided a short-term loan in the amount of $75,000 bearing interest at 5% per annum to the Company to fund operations. In May 2009, Ms. Karloff loaned to the Company an additional $13,000, making her total cumulative loan $88,000 as of December 31, 2009. This note was due on September 15, 2009, which has since been extended to October 31, 2011.
For the years ended December 31, 2010 and 2009, the Company charged interest expense totaling $7,006 and $5,496 respectively.
| NOTE 9 | STOCKHOLDERS’ EQUITY |
For the period from January 5, 2007 (inception) through December 31, 2007, Bio X Cell, Inc., formerly a Commonwealth of Massachusetts corporation doing business as INVO Bioscience and before the merger on December 5, 2008 with Emy’s Salsa Distribution Company, Inc. (Emy’s) a State of Nevada corporation issued 70,000 shares of Common Stock for $20,000, at $.2857/share. The 70,000 shares were retroactively restated to 24,991,379 shares following the stock split on November 12, 2008 and the subsequent share exchange on December 5, 2008.
On November 7, 2008, Emy’s Board of Directors approved a 5-1 forward stock split (the “Forward Split”) of Common Stock with a record date of November 10, 2008 for the Company’s issued and outstanding shares. The Forward Split was effective on November 12, 2008. Emy’s had 12,387,500 shares of Common Stock outstanding before the Forward Split and 61,937,500 shares outstanding thereafter.
The Company had 61,937,500 shares issued and outstanding immediately before 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.
Directly following the consummation of 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 per section 7.5.
As of the Closing of the Share Exchange, Lionshare Ventures, Inc. (LSV), a shareholder in INVO Bioscience and the Company, executed a pledge agreement between the two parties reaffirming LSV‘s original agreement dated May 18, 2008, the outstanding balance as of the original agreement was $450,000 for shares of Common Stock previously issued but not paid for noted in the Company’s financial statements as a subscription receivable in its equity section of the balance sheet. The agreement called for two million shares to be held in escrow by the Company until the $450,000 balance was paid in full by the due date. On June 10, 2009, the two parties executed an extension of the time in which the balance outstanding of $205,000 was to be paid to December 5, 2009. As of December 31, 2009, LSV had delivered $295,000 and the Company released 1,000,000 of shares of Common Stock from escrow. LSV then took an additional 225,000 shares without authorization. During 2010 the Company and LSV reached a settlement and as of December 31, 2010 all olbigations are considered met.
In the same pledge agreement between the Company and LSV dated December 5, 2008, LSV committed to forfeiting a maximum of 562,500 Common Stock shares if the Company is required to issue additional shares of Common Stock per the anti-dilution clause (section 7.5) of the Securities Purchase Agreement mentioned previously.
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.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
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.
On December 29, 2008, the Company filed 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.
In March 2009, the Company issued an aggregate of 83,333 shares of Common Stock for services rendered totaling $37,500.
During the 3 months ended March 30, 2009, the Company received $200,000 against the outstanding stock subscription receivable.
In April 2009, the Company received $45,000 against the outstanding stock subscription receivable.
In May 2009, the Company issued an aggregate of 125,000 shares of Common Stock for services rendered totaling $15,500.
In September 2009, the Company issued an aggregate of 1,125,000 shares of Common Stock in connection with the execution by the Company of a $100,000 convertible note as part of a bridge offering, as discussed on the Company’s Current Reports on Form 8-K filed July 17, 2009 and September 17, 2009. The convertible notes have a conversion price of $0.10. This transaction triggered the anti-dilution clause of the Securities Purchase Agreement executed on December 5, 2008 with the certain investors. In addition, the Company took possession of the 562,500 shares pledged by Lionshare Ventures to meet this obligation, resulting in a net issuance of 562,500 shares of Common Stock.
In September 2009, the Company issued an aggregate of 857,000 shares of Common Stock for services rendered totaling $299,950.
On October 28, 2009, we entered into a Reserve Equity Financing Agreement, or REF, with AGS Capital Group LLC, pursuant to which AGS committed to purchase, from time to time over a period of two years, shares of our Common Stock for cash consideration of up to $10 million, subject to certain conditions and limitations. In connection with the REF, we also entered into a registration rights agreement with AGS, dated October 28, 2009. For a period of 24 months from the effectiveness of the registration statement we may, from time to time, at our discretion, and subject to certain conditions that we must satisfy, draw down funds under the REF by selling shares of our Common Stock to AGS up to an aggregate of $10 million. The purchase price of these shares will be 92% of the “VWAP” of the Common Stock during the five consecutive trading days after we give AGS a notice of an advance of funds (an “Advance”) under the REF (the “Pricing Period”). “VWAP” generally means, as of any date, the daily dollar volume weighted average price of our Common Stock as reported by Bloomberg, L.P. or comparable financial news service. The amount of an Advance will automatically be reduced by 50% if on any day during the Pricing Period, the VWAP for that day does not meet or exceed 85% of the VWAP for the five trading days prior to the notice of Advance (the “Floor Price”).
We have not engaged in prior securities transactions with AGS or any affiliates of AGS. The REF does not prohibit us from raising additional debt or equity financings, other than financings similar to the REF.
Our ability to require AGS to purchase our Common Stock is subject to various conditions and limitations even after we updated our S-1 registration statement. The maximum amount of each Advance is 100% of the average daily trading volume for the five days immediately preceding the notice of Advance, as reported by Bloomberg or comparable financial news service (the “Maximum Advance Amount”). In addition, unless AGS agrees otherwise, a minimum of five calendar days must elapse between each notice of Advance.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
On December 21, 2009, we submitted a Registration Statement on Form S-1 to the Securities and Exchange Commission for the sale of up to 8,790,000 shares of our Common Stock to AGS. The shares of Common Stock that may be issued to AGS under the REF will be issued pursuant to an exemption from registration under the Securities Act. The registration statement will provide for the possible resale by AGS of a portion of the shares that we may issue to AGS under the REF. Upon the Registration statement being declared effective by the SEC, the selling shareholder may offer to the public for resale shares of our Common Stock that we may issue to AGS pursuant to the REF.
The registration statement covers only a portion of the shares of our Common Stock issuable pursuant to the REF with AGS. We may file subsequent registration statements covering the resale of additional shares of our Common Stock issuable pursuant to the REF with AGS beginning approximately 60 days after we have substantially completed the sale to AGS under the REF of the shares subject to this registration statement.
On December 30, 2009, the SEC declared the Registration Statement filed on Form S-1 effective.
In November 2009, the Company issued an aggregate of 612,000 shares of Common Stock for brokers fees associated with the REF and accounting services rendered totaling $312,122.
In November 2009, the Company issued 2,142,930 shares of Common Stock for the conversion and interest of $214,293 of the Convertible Notes Payable it issued in its bridge financing offering earlier in the year.
In December 2009, the Company received $50,000 against the outstanding stock subscription receivable. As of December 31, 2009, $155,000 remains outstanding.
In December 2009, the Company issued an aggregate of 666,667 shares of Common Stock to a related party for cash totaling $100,000.
In December 2009, the Company issued 256,892 shares of Common Stock for the conversion and interest of $25,689 of the Convertible Notes Payable it issued in its bridge financing offering earlier in the year.
In January and February 2010, we issued 914,500 shares to AGS Capital Group LLC for shares they purchased under the Reserve Equity Financing Agreement for $108,500. The share prices ranged between $0.168 to $0.086.
In February 2010, the Company issued an aggregate of 220,000 shares of Common Stock for consulting, legal and accounting services rendered totaling $22,000. Also in February, the Company issued an aggregate of 810,000 shares of Common Stock with a value of $81,000 to certain of its employees.
In April 2010, the Company issued an aggregate of 103,500 shares of Common Stock to a former employee per his original consulting contract and employment agreement with the Company as well as 100,000 shares of Common Stock to a consultant for presentation services.
In May 2010, the Company raised $20,000 by issuing an aggregate of 200,000 shares of Common Stock to a private investor pursuant to an exemption from registration set forth in Section (4)(2) of the Securities Act. Additionally, the Company issued 150,000 shares of Common Stock for consulting and accounting services to two parties.
In June 2010, the Company issued an aggregate of 650,000 shares of Common Stock for consulting services rendered and the payment of outstanding accounts payable invoices totaling $66,000.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
In July 2010, the Company issued an aggregate of 1,603,000 shares of Common Stock for accounting and investor relation services rendered and the payment of outstanding accounts payable invoices totaling $161,570.
In July 2010, INVO Bioscience agreed with Christopher Esposito and Lionshare Ventures to apply the proceeds originally provided to the Company for $175,000 in Bridge Notes issued to Mr. Esposito to the outstanding subscription receivable of $155,000 and the 1,786,563 shares issued upon the conversion of the Bridge Note have been cancelled along with the corresponding warrants.
In August 2010, the Company issued an aggregate of 1,250,000 shares of Common Stock to a private investor pursuant to an exemption from registration set forth in Section (4)(2) of the Securities Act for $50,365 that was used to immediately payoff the $50,000 SBA backed working line of credit with Century Bank, fulfilling its obligation with the bank.
In August 2010, the Company issued an aggregate of 230,000 shares of Common Stock for strategic partnership development services with a value totaling $11,500.
In September 2010, the Company issued an aggregate of 342,065 shares of Common Stock for the payment of outstanding accounts payable invoices for tax and advisory services rendered, the total value of the issuance was $17,100.
In October 2010, the Company issued an aggregate of 1,220,000 shares of Common Stock for consulting and investor relation services having a value of $98,500.
In October 2010 and again in November 2010, we requested that AGS Capital purchase 200,000 shares of Common Stock for resale under our Reserve Equity Financing Agreement. We received cash of $11,800 and $8,000 respectively.
In November 2010, Asher Enterprises requested the conversion of $25,500 of its convertible notes (Q2 Notes) with the Company and 811,587 shares of Common Stock were issued. These shares were exempt from registration pursuant to Section (4)(2) of the Securities Act.
In December 2010, the Company issued an aggregate of 4,677,841 shares of Common Stock with a value of $46,778 to all of its employees for services performed above and beyond what was expected over the past years. Upon the issuance of these shares all previous commitments were canceled.
In December 2010, Asher Enterprises requested the conversion of $30,000 of its convertible notes (Q2 Notes) with the Company and 1,558,560 shares of Common Stock were issued. These shares were exempt from registration pursuant to Section (4)(2) of the Securities Act.
In December 2010, the Company issued an aggregate of 2,095,474 shares of Common Stock for the payment of outstanding accounts payable invoices for legal, accounting and advisory services rendered, the total value of the issuance was $97,396.
| NOTE 10 | STOCK OPTIONS AND WARRANTS |
Stock Options
Since January 1, 2008, the Company has signed agreements for officers, executives and service providers of the Company to receive stock grants and options. As of December 31, 2008, a total of 303,500 shares of Common Stock and options to purchase an additional 500,000 of the Company’s Common Stock were agreed to be issued and the Company recorded an accrued liability of $313,500. During 2009, the Company made commitments to grant another 107,000 options to a new employee and consultants. In September 2009, the Company issued or canceled all of its committed stock grants and options and as of December 31, 2010, the Company does not have any committed and unissued shares.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
Warrants
The following table, as of December 31, 2010, summarizes the changes in warrants outstanding and the related prices for the shares of the Company's Common Stock issued to non-employees of the Company. These warrants were granted in lieu of cash compensation for services performed or financing expenses in connection with placement of convertible debentures and sale of Common Stock shares.
| Warrants Outstanding | | | Warrants Exercisable | |
| | | | | | | Weighted | | | | | | | | | Weighted | |
| | | | | | | Average | | | Weighted | | | | | | Average | |
| | | | | | | Remaining | | | Average | | | | | | Remaining | |
| Exercise | | | Number | | | Contractual | | | Exercise | | | Number | | | Contractual | |
| Prices | | | Outstanding | | | Life (years) | | | Price | | | Exercisable | | | Life (years) | |
| $ | 0.10 | | | | 300,000 | | | | 3.69 | | | $ | 0.10 | | | | 300,000 | | | 3.69 | |
| $ | 0.20 | | | | 3,900,000 | | | | 3.36 | | | $ | 0.20 | | | | 3,900,000 | | | 3.36 | |
| $ | 0.30 | | | | 666,667 | | | | 3.98 | | | $ | 0.30 | | | | 666,667 | | | 3.98 | |
| | Total | | | | 4,866,667 | | | | 3.46 | | | | 0.21 | | | | 4,866,667 | | | 3.46 | |
Transactions involving warrants are summarized as follows:
| | | Number of Shares | Weighted Average Price Per Share |
| Outstanding at December 31, 2008 | | - | | $ | - | |
| 2009 Granted | | 6,416,667 | | | 0.21 | |
| 2009 Exercised | | - | | | - | |
| 2009 Cancelled or expired | | - | | | - | |
| Outstanding at December 31, 2009 | | 6,416,667 | | $ | 0.21 | |
| 2010 Granted | | 200,000 | | | 0.20 | |
| 2010 Exercised | | - | | | - | |
| 2010 Cancelled or expired | | (1,750,000) | | | 0.20 | |
| Outstanding at December 31, 2010 | | 4,886,667 | | $ | 0.21 | |
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
The estimated value of the compensatory warrants granted to non-employees in exchange for financing expenses was determined using the Black-Scholes pricing model and the following assumptions:
| | | December 31, | |
| | | 2010 | |
| Expected volatility | | | 150 | % |
| Expected life (years) | | | 1.6 - 4.3 | |
| Risk free interest rate | | | 2.3 | % |
| Forfeiture rate | | | - | |
| Dividend rate | | | - | |
| NOTE 11 | DERIVATIVE LIABILITY |
In June 2008, the FASB issued new accounting guidance, which requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement provisions. Instruments not indexed to their own stock fail to meet the scope exception of ASC 815 “Derivative and Hedging” and should be classified as a liability and marked-to-market. The statement is effective for fiscal years beginning after December 15, 2008 and is to be applied to outstanding instruments upon adoption with the cumulative effect of the change in accounting principle recognized as an adjustment to the opening balance of retained earnings.
ASC 815-40 mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is indexed to the entity’s own stock. As disclosed in Note 7, during 2009, the Company entered into short term convertible loans with attached warrants, which contain a strike price adjustment feature. The anti-dilution provisions in the convertible notes and warrants trigger liability treatment. At the end of each quarter since their issuance in 2009, the liability has been adjusted for the change in fair value of the warrants. In accordance with ASC 815-40, a derivative liability of $168,555 and $1,905,109 related to the loan conversion feature and warrants is included in our consolidated balance sheets as of December 31, 2010 and 2009 respectively. During 2009, we recorded an expense of $2,668,376 related to the expense in excess of the discount on the loan conversion feature and warrants and a decrease in that expense of $507,424 related to the change in fair value of the loan conversion feature and warrants as of December 31, 2009. In 2010 we recorded an additional decrease in that expense of $1,824,951 related to the change in fair value of the loan conversion feature and warrants through December 31, 2010.
| NOTE 12 | FAIR VALUE MEASUREMENTS |
Our short-term financial instruments, including cash, accounts payable and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate their book value. The fair value of long term convertible notes is based on management estimates and reasonably approximates their book value after comparison to obligations with similar interest rates and maturities. The fair value of the Company’s derivative instruments is determined using option pricing models.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
As a result of the adoption of ASC 815-40, the Company is required to disclose the fair value measurements required by ASC 820, “Fair Value Measurements and Disclosures.” The other liabilities recorded at fair value in the balance sheet as of December 31, 2010 are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 are directly related to the amount of subjectivity associated with the inputs to fair valuations of these liabilities are as follows:
| Level 1 — | Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; |
| | |
| Level 2 — | Inputs other than Level 1 inputs that are either directly or indirectly observable; and |
| | |
| Level 3 — | Unobservable inputs, for which little or no market data exist, therefore requiring an entity to develop its own assumptions. |
The following table summarizes the financial liabilities measured at fair value on a recurring basis as of December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| | | | | | | | | | | | Liabilities | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | at fair value | |
| Derivative liability | | | - | | | | - | | | | 169,000 | | | | 169,000 | |
Warrant derivative liability — these instruments consist of certain of our warrants with anti-dilution provisions. These instruments were valued using pricing models, which incorporate the Company’s stock price, volatility, U.S. risk free rate, dividend rate and estimated life.
The following is a reconciliation of the derivative liability for which Level 3 inputs were used in determining fair value:
| Beginning balance as of January 1, 2010 | | $ | 1,905,000 | |
| Fair value of conversion features and warrants issued | | | 109,000 | |
| Gain on cancellation of warrants | | | (115,000 | ) |
| Gain in change in fair value | | | (1,730,000 | ) |
| Ending balance as of December 31, 2010 | | $ | 169,000 | |
The Company has adopted ASC 740-10, 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 statements 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.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
The Company’s total deferred tax liabilities, deferred tax assets, and deferred tax asset valuation allowances are as follows:
| | | December 31, 2010 | | | December 31, 2009 | |
| Total deferred tax assets | | $ | 2,755,000 | | | $ | 2,715,000 | |
| Less valuation allowance | | | (2,755,000 | ) | | | (2,715,000 | ) |
| Total deferred tax liabilities | | | - | | | | - | |
| Net deferred tax asset (liability) | | $ | - | | | $ | - | |
Those amounts have been presented in the company’s financial statements as follows:
| Noncurrent deferred tax asset | | $ | - | | | $ | - | |
| Current deferred tax liability | | | - | | | | - | |
| Net deferred tax asset (liability) | | $ | - | | | $ | - | |
The company has a loss carry forward of $6,902,000 that may be offset against future taxable income. Substantially all of the carry forwards expire in 2030.
Income tax provision (benefit) consists of the following components:
| | | 2010 | | | 2009 | |
| Current | | $ | - | | | $ | - | |
| Deferred | | | - | | | | - | |
| Tax benefit of net operating loss carry forward | | | - | | | | - | |
| Total tax expense (benefit) | | $ | - | | | $ | - | |
Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which is uncertain. Those amounts are therefore presented on the Company's balance sheets as a non-current asset. Utilization of the net operating loss carry forwards may be subject to substantial annual limitations, which may result in the expiration of net operating loss carry forwards before utilization.
INVO BIOSCIENCE, INC.(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
| NOTE 14 | COMMITMENTS AND CONTINGENCIES |
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 29, 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 monthly lease payments under this agreement increased 5.42% from inception to $2,108.
On January 1, 2011, the Company entered into a month to month rental agreement with Highland- March Executive Suites within its current location at the Cummings Center for the space and services it requires.
| Fiscal Year | | Minimum Future Lease Payments | |
| | | | |
| 2011 | | $ | 0 | |
On March 24, 2010, INVO Bioscience, Inc., Claude Ranoux and Kathleen Karloff were served an Amended Complaint, the original of which was filed on December 31, 2009 at the Suffolk Superior Court Business Litigation Session by two former employees of Medelle Corporation, and a former investor in and creditor of Medelle Corporation. These plaintiffs allege various claims of wrongdoing relating to the sale of the assets from Medelle to Dr. Ranoux. They claim that Dr. Ranoux, Ms. Karloff and Medelle Corporation (and therefore INVO Bioscience as an alleged successor corporation) violated alleged duties owed to them in connection with the sale.
Dr. Ranoux, Ms. Karloff and INVO Bioscience have challenged these allegations, which they believe are baseless. The sale and transfer of the assets of Medelle was professionally handled by an independent third party after approval by the Medelle Board of Directors representing a majority its shareholders. Medelle’s Board voted to proceed with an assignment for the benefit of creditors (AFBC) and gave complete authority to the President & CEO at that time (neither Dr. Ranoux or Ms. Karloff) to work with the third party and get the best possible price through a sealed bid auction. The third party was responsible for notifying all the appropriate parties and for filing notices in various professional publications and newspapers of Medelle’s intention to sell its assets. The third party also contacted numerous large medical device and bio-pharma companies to learn if they would be interested in acquiring the assets. On the day of the auction, Dr. Ranoux submitted the only bid and was awarded the assets upon full payment.
During 2010, Dr. Ranoux, Ms. Karloff and INVO Bioscience filed Motions to Dismiss as to all claims pursuant to M.R.C. P. 12(b)(6). In her written Decision rendered on November 12, 2010, the judge dismissed all claims against INVO, Bio X Cell and Ms. Karloff and also dismissed the claims against Dr. Ranoux for civil conspiracy and breach of M.G.L. c. 93A. The judge denied Dr. Ranoux’s motion to dismiss the remaining breach of fiduciary duty and fraud claims. The plaintiffs allege in their Amended Complaint that Dr. Ranoux committed fraud by failing to inform them of the details of the Medelle auction, which claims of non-disclosure are actionable under the law when there is a duty to disclose imposed, for instance, by a fiduciary relationship.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
From the outset, Dr. Ranoux, Ms. Karloff and INVO have contended that the claims are without factual or substantive legal merit and have insisted on the strongest possible defense. Going forward as to Dr. Ranoux only at this time, we expect discovery will reveal, among other things, that Dr. Ranoux had no role or responsibility in the disposition and sale of Medelle’s assets, that Ranoux in fact had been terminated as a company employee in September 2006 (as had Ms. Karloff), that Medelle’s Board of Directors voted in its entirety to delegate authority to the CEO at that time to effect an AFBC, that the assignee and, to some extent, the former CEO, controlled the auction and sale process, including as to notice to shareholders, and that Dr. Ranoux had nothing to do with the sale except as the only bidder and ultimate purchaser of the assets.
We will continue to vigorously oppose the remaining claims. Although the Judge’s rulings as to INVO Bioscience and Karloff are subject to appeal, the Company remains confident there is no merit to the suit and intends to continue to resist the case and any appeal vigorously.
Outside of the above mentioned item neither INVO Bioscience, Inc., nor Bio X Cell, Inc, our wholly owned subsidiary, either directly or indirectly, are involved in any lawsuit outside the ordinary course of business, the disposition of which would have a material effect upon either our results of operations, financial position or cash flows.
In July 2010, we entered into a public and investor relations and awareness agreement with Equititrend Advisors LLC of San Diego, CA, who will provide public relations, communications, advisory and consulting services for four months for 1 million shares of the Company’s Common Stock. In October the Company extended the contract for an additional 9 months for 1 million shares.
| | D) | 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 any registration statement filed by the Company. In addition, pursuant to certain anti-dilution rights granted under the Securities Purchase Agreement to the investors, the Company may be obligated to issue additional shares of its Common Stock to the investors in the event it issues Common Stock to future investors at a per share purchase price less than $1.00. The number of additional shares to be issued in such event is equal to that number of shares that the investors would have acquired at such price had that price been offered at the time of their original investment, minus the number of shares acquired in their original investment. Further, pursuant to the letter agreement, LSV and its managing member, Christopher Esposito, have agreed to forfeit to us, one share of our Common Stock for every two shares we would be required to issue up to the maximum of 562,5000 shares, which number of shares are being held in escrow by us until December 5, 2010.
As discussed above, in July 2009, the Company executed a $100,000 convertible note in connection with the initial closing of its bridge offering (discussed in Note 7), which has a conversion price of $0.10. The conversion price triggered the anti-dilution clause contained in the Securities Purchase Agreement entered into with previous investors. In September 2009, the Company issued 1,125,000 shares of Common Stock to the investors that were parties to the Securities Purchase Agreement. In addition, the Company took possession and cancelled the 562,500 shares pledged by LSV as noted previously.
The Company has employee agreements for officers, executives and employees of the Company. The Company has agreements with its five current employees.
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
In January 2011, we issued 400,000 shares to AGS Capital Group LLC for shares they purchased under our Reserve Equity Financing Agreement with them for a value of $6,800, these funds were used to pay patent annuities.
In January 2011, Asher Enterprises requested the conversion of $16,900 of its convertible notes (Q2 Notes) and accrued interest with the Company and 938,864 shares of Common Stock were issued. These shares were exempt from registration pursuant to Section (4)(2) of the Securities Act.
In February 2011, Asher Enterprises requested the conversion of $21,200 of its convertible notes (Q2 Notes) and accrued interest with the Company and 1,163,637 shares of Common Stock were issued. These shares were exempt from registration pursuant to Section (4)(2) of the Securities Act. With the issuance of these shares, the Q2 Notes are closed.
In March 2011, the Company issued a convertible note (“Q111 Note”) payable to Asher Enterprises in the amount of $37,500. The Q111 Note carries an 8% interest rate and is due in full nine months from the date of issuance. The Q 111 Note is convertible into Common Stock of the Company starting 90 days after the issuance date until maturity or when paid whichever is later. The conversion price is variable, based on a fifty percent discount per share on the average of the three lowest trading prices for the ten trading days ending one trading day prior to the date the conversion notice is sent to the Company, subject to adjustments.
In April 2011, the Company issued a short term convertible note (“Note”) payable to a current investor in the amount of $50,000. This note is similar to the “Bridge Notes” previously issued and discussed; it is a 10% short term convertible note. The Company can pre-pay the Note at any time without penalty or premium. The Note is secured and carries detachable Common Stock purchase warrants.
The Note is convertible into common stock at a conversion price of $0.03 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”) 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 the Investor divided by the Conversion Price or $0.03 per share. The exercise price of the Warrants shall equal $0.06 per share, or 100% times that of the conversion price. 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.
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, thereunto duly authorized on April 15, 2011.
| | INVO Bioscience, Inc. | |
| | | | |
| Date April 15, 2011 | By: | /s/ Kathleen Karloff | |
| | | Kathleen Karloff | |
| | | Chief and Principal Executive Officer | |
| | | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 15, 2011.
| | | |
| Signature | | Capacity |
| | |
| /s/ Kathleen Karloff | | Chief and Principal Executive Officer, Director |
| Kathleen Karloff | |
| | |
| /s/ Dr. Claude Ranoux | | President, Treasurer and Director |
| Dr. Claude Ranoux | | |
| | |
| /s/ Robert J. Bowdring | | Chief Financial Officer (Principal Financial and Accounting Officer) |
| Robert J. Bowdring | | |
| | | | |
| Exhibit No. | | Description | |
| 2. 1 | | Share Exchange Agreement, dated December 5, 2008, by and amongst INVO Bioscience and INVO Bioscience Shareholders(3) | |
| 2. 2 | | Securities Purchase Agreement dated December 5, 2008, between INVO Bioscience and the investors named therein(3) | |
| 3. 1 | | Articles of Incorporation (1) | |
| 3. 2 | | Certificate of Amendment to Articles of Incorporation of INVO Bioscience(1) | |
| 3. 3 | | By-Laws of INVO Bioscience (2) | |
| 3. 4 | | Certificate of Amendment to Articles of Incorporation of INVO Bioscience dated December 22, 2008(4) | |
| 4. 1 | | Form of Senior Secured Convertible Promissory Note(9) | |
| 4. 2 | | Form of Purchase Agreement(9) | |
| 4. 3 | | Form of Warrant Purchase Agreement(9) | |
| 4. 4 | | Reserve Equity Financing Agreement, dated October 28, 2009, by and between AGS Capital Group, LLC and Invo Bioscience, Inc(11) | |
| 4. 5 | | Registration Rights Agreement, dated October 28, 2009, by and between AGS Capital Group, LLC and Invo Bioscience, Inc.(11) | |
| 4. 6 | | Registration Statement for the prospectus to sell shares of INVO Bioscience’s Common Stock to AGS Capital Group, LLC dated December 21, 2009 (13) | |
| 4. 7 | | Amended Registration Statement for the prospectus to sell shares of INVO Bioscience’s Common Stock to AGS Capital Group, LLC dated December 29, 2009 (14) | |
| 10. 1 | | Distribution Agreement between the company and Orbital Group, LLC.(2) | |
| 10. 2 | | Employment Agreement for the Registrant’s President(7) | |
| 10. 3 | | Employment Agreement for the Registrant’s Chief Executive Officer(7) | |
| 10. 4 | | Employment Agreement for the Registrant’s Chief Financial Officer(7) | |
| 10. 5 | | Customer Distribution Agreement – Canada – MediTech First(7) | |
| 10. 6 | | Customer Distribution Agreement – Turkey – Gonagen(7) | |
| 10. 7 | | Customer Distribution Agreement – Peru – CRHL(7) | |
| 10. 8 | | Claude Ranoux Loan Agreement(8) | |
| 10. 9 | | Claude Ranoux Revised Loan Amendment(8) | |
| 10.10 | | Wakabayashi Fund, LLC Agreement(8) | |
| 10.11 | | Red Chip Securities, Inc. Agreement(8) | |
| 10.12 | | Kathleen Karloff Loan Agreement(8) | |
| 10.13 | | Hallmark Investments, Inc. Agreement(9) | |
| 10.14 | | Kathleen Karloff Revised Loan Agreement(10) | |
| 10.15 | | Lionshare Ventures Revised Agreement(10) | |
| 10.16 | | Placement Agent Agreement, dated September 22, 2009, by and between Gilford Securities, Inc. and Invo Bioscience, Inc.(11) | |
| 10.17 | | College Stock, Inc. Agreement(12) | |
| 21.01 | | | |
| 31.01 | | | |
| 31.02 | | | |
| 32.00 | | | |
| | | | |
(1) Incorporated by reference to INVO Bioscience’s predecessor EMY’S Registration Statement on Form SB-2/A filed with the Securities and Exchange Commission on January 25, 2008
(2) Incorporated by reference to the INVO Bioscience’s predecessor EMY’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on November 13, 2007
(3) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 12, 2008
(4) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 5, 2009
(5) Incorporated by reference to the Registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on February 17, 2009
(6) Incorporated by reference to the Registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on March 19, 2009
(7) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and filed with the Securities and Exchange Commission on April 15, 2009
(8) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2009 filed with the Securities and Exchange Commission on May 15, 2009
(9) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 17, 2009
(10) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the three months ended June 30, 2009 filed with the Securities and Exchange Commission on August 15, 2009
(11) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 3, 2009
(12) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the three months ended September 30, 2009 filed with the Securities and Exchange Commission on November 16, 2009
(13) Incorporated by reference to the Company’s Registration Statement on Form S-1, File No. 333-163882, as filed on December 21, 2009.
(14) Incorporated by reference to the Company’s amended Registration Statement on Form S-1/A, File No. 333-163882, as filed on December 29, 2009.
(15) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and filed with the Securities and Exchange Commission on April 6, 2010
