As indicated above, in May 2008 we received notice that the INVOcell device met 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. Since it has been over nine years since we first received the CE marking, we are currently in the re-certification process with the appropriate regulatory bodies and expect to have this completed in the near future. With CE marking, we will have the necessary regulatory authority to distribute our INVOcell device in the European Economic Area, subject to local registration regulations.
Currently, we are continuing to establish agreements with distributors and train physicians outside of the U.S. including South America, Central America, Europe, the Middle East, India and Africa. The international market will be secondary to the U.S. market for us since we believe the revenues from these secondary markets will not be as profitable as the U.S. market. Upon receiving additional funding, as to which there is no guaranty, the company’s ability to expand in the international market will be increased.
Competition
The infertility industry is highly competitive and characterized by technological improvements. New assisted 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 that 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 an 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 of 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. Currently 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 about 5,000 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 $800 to $4,000 per cycle in the U.S. and $500 to $2,000 in Europe. The intra-country differences in cost primarily 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 to purportedly 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 3-5 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. According to the U.S. Center for Disease Control (“CDC”), in the U.S. there are approximately 1,000 reproductive endocrinologists who collectively perform more than 161,000 IVF cycles per year at 497 specialized facilities. According to European Society of Human Reproduction & Embryology (“ESHRE”), 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 $4,000. 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 first IVF baby, Louise Brown was born in 1977, making the IVF treatment 40 years old. Our INVOcell device is the first new treatment option for patients in 40 years. 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 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. We expect that 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. Currently the Anecova device has not begun clinical studies in the United States that will be required for FDA approval, therefore the device will not be available for some time in the United States and many other areas of the world.
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. We estimate that an IVF center requires at least $500,000 of laboratory capital equipment as well as highly trained personnel. In contrast, the cost of laboratory capital equipment to set-up an INVOcell procedure is approximately $60,000 and does not require highly trained embryologists that are required for traditional IVF. According to the CDC, the United States success rate for IVF varies dramatically from 13% to 65% with an average of 42.6% pregnancy rate in women under age 35, a 36.4% pregnancy rate in woman age 35-37 with rates dropping as the women become older.
In 2015, according to a draft report prepared by the U.S. Center for Disease Control (“CDC”), there were 231,936 ART cycles. Out of these cycles 45,779 were performed for freezing of embryos for the future and 186,157 cycles were performed through embryo transfer. These cycles resulted in 60,778 live birth deliveries and 72,913 live born babies with a clinical pregnancy rate of 33%. (CDC 2015 draft ART Report). We foresee that the INVO device will be offered at approximately $6,500 per cycle with a pregnancy rate comparable to traditional IVF. According to Resolve, National Fertility Association, IUI cycles costs $275- $2,457 per cycle (variability due to drug costs and diagnostics inclusion on some cycles) and the average cost of IVF is $8,156 per cycle plus drug costs. Drug cost range from $3,000-$5,000 per cycle brining the average cost of IVF to $11,156 - $13,156 per cycle. The INVO procedure is being offered at $6,500 per cycle inclusive of medications thereby making it much more affordable than traditional IVF.
Similar cost than IUI with greater efficacy: It is estimated by Resolve that in the U.S. currently IUI averages $1,500 per cycle with approximately <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 and reproductive endocrinologists will benefit by providing a superior product than IUI with good financial margins, efficacy rates more than triple IUI while treating the full range of infertility indications. In Europe, according to ESHRE the average cost per pregnancy using IUI is $12,000. According to ESHRE 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: According to 2014 CDC Report, there are approximately 497 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. According to the American College of Gynecologists (ACOG) there are also approximately 5,000 Ob/Gyn physicians in the U.S. who offer infertility services such as the IUI treatment but lack the facilities to offer an 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 with the addition of minor capital equipment potentially expanding business for these physicians. 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 may free a couple 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 Intravaginal Culture System technology. These prices were determined after 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 billings the 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 Culture Device: We expect to sell the INVOcell device and its retention system for between $400 - $500 per unit in developed nations and $100 in extremely poor and underdeveloped countries. IVF centers or Ob/Gyn groups purchasing a large number of devices and promoting the INVO process may receive discounted prices and certain free advertising of their facility on our website. It is expected that the INVOcell will sell for $500 in the U.S., which would grant a user a single-use license under our patents. In Central and South America, the price of the device is expected to be reduced to between $250 and $400 to reflect a generally lower cost of infertility procedures in most of these countries and to make INVOcell available to populations with lower incomes.
INVOcell Retention Device: This is a single-use, modified diaphragm that includes holes to allow for natural drainage of vaginal fluids. The current model is an FDA cleared and CE Marked product purchased from a US company. This retention device currently sells for $70 each. In 2016 the Company began the process of developing its own single use product. This retention device specification is equivalent to the current modified diaphragm but will not be available for sale for some time until the completion of additional testing before being accepted and released by INVO Bioscience for commercial sale.
INVO 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 $500 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. The complete set up for the INVO procedure currently costs approximately $60,000 in the U.S.
Sales Strategy
As of December 31, 2016, sales and marketing activities are being performed by the Company’s CEO and VP of Global Operations. We anticipate building our sales team in 2017 and beyond, subject to raising additional capital sufficient to support such efforts (as to which there is no guaranty). Our sales efforts will follow three approaches:
Direct Sales to Physicians – In the United States our intention is to sell directly to physicians to keep our prices as low as possible
Distributor Sales to Physicians -- In foreign countries, we have and will continue 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: India, Canada, Colombia, and Brazil. We will be expanding our international sales & marketing presence upon receiving additional funding (as to which there is no guaranty).
Opening of INVO Centers – We are looking to open our own centers partnering with fertility doctors in areas of the US where there is demand but currently do not have IVF facilities.
Target Markets
The breadth and depth of our expansion in 2017 will be subject to the amount of additional capital we raise (as to which there is no guaranty). We expect to continue to launch the sale of the INVOcell Culture System in the United States, Canada, South & Central America and India.
Worldwide -- According to ESHRE, in 2014 there were more than 150 million infertile couples in the world and about 1.5 million IVF cycles were performed, which is 1% of the infertile couples worldwide. We believe that most infertile couples remain untreated due to cost, availability, awareness and other factors.
U.S. -- According to The National Survey of Family Growth from the Centers for Disease Control, in the year 2014, 7.5 million women in the U.S. had difficulty conceiving (12.4%) With only about 760,000 couples receiving fertility treatment (IUI, IVF and other treatments). This leaves more than six million couples receiving no treatment at all for their infertility. According to the ASRM’s 2015 Access to Care Summit White Paper, the largest barrier to patients seeking treatment is the cost of the treatment and the lack of insurance coverage for the cost. We are currently offering the INVO procedure in the U.S. at $6,500 dollars per cycle inclusive of medications. Our goal is to penetrate 5% of the currently untreated infertility market over the next few years, although no assurances can be made that we will achieve our goal in our target markets or at all.
Europe, -- ESHRE estimated in 2011 that Europe had approximately 10 million infertile couples, of which about 590,000 were estimated to have received IVF treatments and about 163,000 were estimated to have received IUI. That would leave over 9 million infertile couples untreated.
Preliminary Sales Strategy
Launching INVO in the U.S. market required US FDA DeNovo clearance, which we received in November 2015. Our strategy is to focus our resources primarily on US sales through 2018 to make INVO the standard of care in the United States. Currently we are working with doctors who are interested in offering the INVO Procedure at a low introductory price and providing training. This approach is working well so far as we have over 40 facilities offering or referring the INVO Procedure. As these doctors are adding our INVOcell to their existing services it is a slow process as we are the “new treatment on the block.” Some patients are willing to try it and are thrilled with the experience while others are sticking with the 20 year old more traditional routes. Based on our initial experience on average it appears to be taking physician’s practices 6-9 months to get up to speed. Some are taking less time others even longer than nine months. We are taking steps to assist those doctors who are having difficulty.
FDA clearance is required in many countries before they will allow U.S. products to be registered in those countries. The FDA approval granted in 2015 will allow the INVOcell to be registered and market in countries such as Mexico (which is in process), Australia, New Zealand, China and other countries in Asia.
The CE Mark, which is currently being renewed, allows us to sell our INVO device in Europe and certain countries in South America, the Middle East and Africa, subject to local registration requirements. Our strategy is to focus on the U.S. over the next two years and then go back out to international markets; when we go back to the international market, we expect to have additional resources to launch INVO in the developing world. These areas are in need of less costly fertility treatments due to the economics and high infertility rates of up to 25% and relatively low availability of IVF procedures.
Insurance Reimbursement for Infertility Treatment
In the United States there is generally minimal insurance coverage for infertility treatments, and what coverage there is varies on a state by state basis. 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. Some states have coverage for IUI and not IVF. In addition, we believe that fifteen other states are considering mandating some form of coverage for infertility treatment. We would approach these states first for possible insurance coverage since, we believe, an actual birth from INVO is less expensive than a birth that is obtained through IUI. We will begin this effort upon receiving sufficient additional financing (as to which there is no guaranty). Currently, many third-party payers require that an infertile patient have at least three cycles of IUI before going on to IVF. According to Society for Maternal-Fetal Medicine, in 2015 the pregnancy rate for each natural IUI cycle is about 4 to 5 percent, and when fertility drugs are used, the pregnancy rate is about 7 to 16 percent. There are no national statistics on live birth rates. Therefore, many of those patients are often referred to IVF when multiple IUI attempts are not successful. In the future, we estimate that third-party insurance payers could save more than $7,000 per pregnancy by requiring the patient to try INVOcell first.
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 UK and some counties provide almost no coverage. In 2010, in Canada, the Province of Quebec mandated the full payment of up to 3 ART cycles for residents; however, in November of 2016 they stopped the program.
We believe that the INVOcell process will be treated favorably by insurance companies because it lowers cost and has a high efficacy rate. According to the data we have found the Company has determined based on the typical number of cycles it take to get pregnant, in the US, the average cost per pregnancy using IUI is $12,000 and IUI is only indicated for approximately 40% of the infertile population. However, the INVO device, which based on the 450 clinical cycles submitted to the FDA in 2014 by the Company, has equivalent pregnancy rates as traditional IVF, and is a very effective treatment for a majority of infertile couples. According to ASRM, the average cost of and IVF cycle in the U.S. is $12,400 resulting in a per pregnancy IVF cost of $21,354. With the INVO procedure the price for an INVO pregnancy is approximately $11,180. Therefore, we believe that there is a savings of more than $10,174 (approximately 50% of the cost) per pregnancy by using INVO versus IVF.
Branding and Promotion
We have a logo associated with the INVOcell device that is refined for the infertility market. We have trademarked “INVO Bioscience”, “INVOCELL” and “INVO”. In 2016 we launched our new website. We have tried to make it user friendly and provide the information people are looking for, such as locations offering INVO and a comprehensive FAQ section. We are continuing to improve our website to include special pages for clinicians and patients. Subject to available capital, the improvements will include materials that medical professionals and patients can print, including status reports and news items. It would be expected to include training videos for potential customers, both physicians 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 secured a DeNovo Class II notification clearance in November 2015 to allow us to introduce them into the U.S. market.
Every company that develops, 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, the FDA and the Department of Justice 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; |
· | seek to enjoin future violations; and |
· | seek civil and criminal penalties against the company, its officers or its employees. |
· | issue a form 483 to initiate corrective actions by the company |
INVO Bioscience has successfully completed two comprehensive inspections by the US FDA occurring in January 2012 and November 2014 resulting in no action indicated (NAI), (we passed).
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 United States and European approvals, 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
With CE marking, we have had, and when we receive re-certification we anticipate we will have, the necessary regulatory authority to distribute our product after registration in the European Economic Area (i.e., Europe, Australia, and New Zealand). In addition, we have the ability to markets in some parts of the Middle East and South America as they do not have medical device regulations. Every country has different requirements; 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. In general, we are registering the product based on the size of the market and our ability to service it given our resources.
In 2009, INVO Bioscience received clearance from Health Canada to market, sell and train on the use of the INVOcell and INVO procedure in Canada. Although the Canadian government approved the INVOcell, in Canada the local physician collages must authorize the use of new products in each province. These governing colleges also want to see the product approved in the country of origin before moving forward in Canada. The fact that the INVOcell is deemed a disruptive technology has prevented our partner Invaron Pharmaceuticals from being able to effectively launch product in Canada over the past years. With the current FDA approval, Effortless IVF, CA with the approval of the local physician collage raised funds in 2016 to start the build of an INVO only center in Calgary Canada; that center is slated to open in April 2017.
In 2012 we received Brazil’s National Health Surveillance Agency (ANVISA) clearance approving the sale and use of the INVOcell throughout Brazil. The approval opens the door for INVO Bioscience to one of the largest markets and fastest growing economies in the world with over 190 million people. In 2016 we completed a new registration and added an additional distribution channel which was approved by ANVISA in 2017 as our current distributor is not proactive.
Again in 2012 we selected Sanzyme Ltd. as our partner and distributor for India. Since being selected Sanzyme has been marketing and training doctors though out the country. In late 2015 they added an embryologist to focus on INVO Procedure training and continue to add additional resources. In 2016, Sanzyme presented at fifteen conferences including two international conferences and one world congress, IFS. They are planning on opening an INVO specific training center in 2017 in Hyderabad. They have started expanding their geographical reach in India.
Intellectual Property
The INVOcell device was specially developed to optimize ease of use and effectiveness of an INVO procedure at an affordable price. During 2013-2015 more than 500 cases have been performed in Colombia, Peru, Bolivia and Brazil with effectiveness equivalent to IVF and significantly exceeding that of IUI. In 2014, a clinical study of 40 patients comparing INVO to IVF demonstrated the same clinical pregnancy efficacy rate of 60% in both groups. In addition 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 two active patents worldwide covering both the INVOcell device and the INVO process.
Employees
As of December 31, 2012 and 2011 we had three employees (who were our directors and officers Dr. Claude Ranoux and Kathleen Karloff, and our officer Robert J. Bowdring), and two consultants. All three of those employees were full-time employees of INVO Bioscience in 2011 and 2012. Excluding directors and officers, we had no employees in 2012 or 2011.
In March 2013 Mr. Bowdring resigned as Chief Financial Officer (and principal accounting officer) and a full time employee of INVO, was elected a Director of INVO, and became a consultant to INVO. Mr. Bowdring has remained a consultant to, and a Director of, INVO to date. However, Mr. Bowdring was elected as the Treasurer and Secretary of INVO in September 2016, and as the Acting Chief Financial Officer (and acting principal accounting officer) in March 2017. As a result, as of December 31, 2015, 2014 and 2013 we had two employees (our directors and officers Dr. Ranoux and Ms. Karloff), who were both full-time employees, and three consultants (Mr. Bowdring and two other consultants). As of December 31, 2016, we had two employees namely, Ms. Karloff who was a director and officer as well as, who was a full-time employee, and our VP of Global Operations, who was also a full time employee and one consultant, namely, Mr. Bowdring, who was a director and an officer. Excluding directors and officers, we had no employees in from 2011 through 2015, and one employee in 2016.
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. However, immediately prior to the filing of this Form 10-K,since 2012 the filings made by INVO with the SEC have been (a) its comprehensive Form 10-K for the years ended December 31, 2011 through 2015 filed on March17, 2017, (b) six Form 8-Ks filed on November 3, 2015, September 9, 2016, January 6, 2017, April 10, 2017, April 11, 2017 and April 13, 2017, respectively, and (c) a Form 12b-25 relating to this Form 10-K for fiscal year 2016 filed on March 31, 2017
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. 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 Results 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 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 a limited operating history, and needs additional capital to grow and finance its operations.
From the inception of our consolidated subsidiary BioXcell Inc. on January 5, 2007 through December 31, 2016, INVO Bioscience had an accumulated net loss of approximately $17,900,000. INVO Bioscience has a limited operating history and is essentially an early-stage operation. We will continue to be dependent on having access to additional new 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 insight into future activities, marketing costs, and customer acquisition and retention, which could lead to INVO missing targets for the 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 for the year end December 31, 2016, the Company is in its infancy with minimal revenues, had a net loss of approximately $2,100,000, a working capital deficiency of approximately $4,520,000, a stockholder deficiency of approximately $4,600,000, and cash used in operations of approximately $324,000. 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, and when such funds are raised, if ever, will determine how aggressively we can grow and when, and what additional projects we will be able to undertake and when. No assurance can be given that we will be successful in raising capital in the amounts needed or when needed, or at all, or that such capital, if available, will be available on terms acceptable to us. If we are not able to raise additional capital in the amounts needed and when needed, our business will likely suffer.
Our business is subject to significant competition.
The infertility industry is highly competitive and characterized by technological improvements. New assisted 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, and could force us to alter our planned pricing. Additionally, increased competitive pressures may require us to commit more resources to our marketing efforts, thereby increasing our cost structure and affecting our ability to achieve, or the timing of achieving, profitability. There can be no assurance that we will be able to compete effectively nor can there be any 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 medical device/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 and/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 basis and assumption that certain circumstances will or will not occur, as well as the inherent risks and uncertainties involved in various stages of market implementation. 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 U.S. and international 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. Further, our intellectual property rights may be found to infringe on intellectual property rights of third parties. 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 may be forced to defend our intellectual property rights from infringement through expensive legal action.
Third parties may in the future assert claims against us alleging that we infringe on 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 or terms otherwise acceptable to us.
We regard our trade secrets, patents and similar intellectual property as critical to our success. We rely on patent and trade secret laws, 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 and could adversely affect our ability to achieve and maintain 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 (if we have any) would 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 time, 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 as we currently rely on a single source for different aspects of our production process and if they are insufficient to produce an adequate supply of products at appropriate quality levels, our growth could be limited and our business could be harmed. If we experience significant or prolonged quality problems, our business and reputation may be harmed, which may result in the loss of customers, our inability to participate in future customer product opportunities and reduced revenue and earnings.
We heavily rely on third party package delivery services, and a significant disruption in these services or significant increases in prices may disrupt our ability to import or export materials, increase our costs and negatively affect our ability to achieve and maintain 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 management and directors. The loss of the services of any of our executive officers and/or directors could potentially have a material adverse effect on our business, operations, revenues or prospects. In 2016 the Board of Directors ended Dr. Claude Ranoux’s service as President, Treasurer and Chief Scientist, and in his place elected Kathleen Karloff as Chairman of the Board, President and CEO, and Robert Bowdring as Treasurer and Secretary; however, Dr. Ranoux, Ms. Karloff and Mr. Bowdring remained the sole members of our Board of Directors. Also, Mr. Bowdring, who served as our Chief Financial Officer (and principal accounting officer) from 2009 to March 2013, was elected our Acting Chief Financial Officer (and acting principal accounting officer) in March 2017. On April 5, 2017, Dr. Claude Ranoux resigned from the Board of Directors and on April 7, 2017 Dr. Kevin Doody, a world renowned fertility specialist was elected to the Board of Directors to fill the vacancy created by Dr. Ranoux’s resignation. We do not maintain key man life insurance on the lives of any 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 delivery of our products as well as clinical training personnel for the proper training of the INVO procedures. Upon receiving sufficient additional funding, we are planning to hire employees in these areas. However, we cannot be sure that we will able to obtain any additional funding or when, or that we will 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 have, and are expected to continue 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 any 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. Our results of operations could be affected by fluctuations in currency exchange rates, but we do not expect them to as we invoice in US dollars. Although we invoice in US dollars, our results of operations might still be negatively affected by foreign currency exchange rates if the dollar strengthens and the local currency weakens. Doctors and clinics may not be able to offer the INVOcell procedure and purchase INVOcells because patients might not be able to afford increased costs. As an international business we may 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.
Our business is subject to risks in connection with changes in international, national and local economic and market conditions, including the effects of global financial crises, effects of terrorist acts, and the war on terrorism. Such changes could negatively affect infertile couples’ ability to pay for fertility treatment around the world.
We anticipate that eventually international sales will account for a significant part of our revenue. At that time we will experience additional risks associated with these sales, which include:
| ● | political and economic instability; |
| ● | changes in international legal and regulatory requirements; |
| ● | United States and foreign government policy changes affecting the markets for our products; and |
| ● | changes in tax laws, duties and tariffs. |
Any of these factors could have a material adverse effect on our business, results of operations and financial condition. During the period 2011 through 2016 we sold products in certain international markets mainly through independent distributors, and this strategy is anticipated to continue for the foreseeable future. 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 sell directly to physicians in the U.S., and if we want to cease selling to any physician in the U.S. it may be difficult and expensive to find a replacement.
We sell our products directly to physicians in the United States market. If a physician fails to meet expected efficacy rates and annual sales goals, it may be difficult and costly to locate an acceptable substitute physician. If a change in our local physician becomes necessary, we may experience increased costs, as well as a disruption in operations and a resulting loss of revenue.
We have only three directors, which limits our ability to establish effective independent corporate governance procedures.
During the period from 2011 through March 2013, we had only two directors, one of which was also our President and Treasurer, and the other was our Chief Executive Officer (CEO) and Secretary. When our Chief Financial Officer (and principal accounting officer) resigned and became a consultant in March 2013, he was elected as our third director. We had no independent directors during this period. From March 2013 to September 2016 we had three directors, of whom two were officers and full-time employees and one was not then an officer but was a consultant. In September 2016 Dr. Claude Ranoux’s service as an officer was ended but he remained a director, Kathleen Karloff was elected Chairman, President and CEO and remained a director, and Robert Bowdring was elected Treasurer and Secretary and remained a director. In March 2017 Mr. Bowdring was also elected as the Acting Chief Financial Officer (and acting principal accounting officer) while remaining a consultant to INVO. In April 2017 Dr. Claude Ranoux resigned from the Board of Directors and, shortly thereafter Dr. Kevin Doody was elected to the Board to fill his vacancy. Accordingly, we have not established board committees comprised of independent members to oversee functions like governance, compensation or audit items. Otherwise stated, during the period 2011 through 2016, we did not have a compensation or audit committee and, since we did not have an audit committee, we did not have an audit committee financial expert serving on an audit committee.
Until we have a larger board of directors, which would include some independent members, there will be limited oversight of our current board’s decisions and activities, and the ability of minority shareholders to challenge or reverse those activities and decisions may be negatively affected, even if such activities and decisions 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.
The Company believes that the healthcare industry will continue to be subject to increasing regulation as well as political and legal action, as future proposals to reform the health care system are considered by Congress and state legislatures. In 2010, the United States enacted major health care reform legislation (the Patient Protection and Affordable Care Act). Various insurance market reforms have advanced and state and federal insurance exchanges were launched in 2014. By the end of the decade, the law is expected to expand access to health care to about 32 million Americans who did not previously have insurance coverage. The Company does not know how laws and regulations will change in the future and affect our business.
We are planning clinical trials related to newer technologies that may prove unsuccessful.
We will be conducting clinical trials related to expanding the use of the INVOcell indications and potentially lowering the cost of the INVOcell Intravaginal Culture System. While we anticipate positive outcomes of these clinical trials, an unsuccessful trial could adversely affect both a possible expanded market for this product and the receipt of FDA clearance for the particular indications and products being tested.
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. This could work in our favor unless more cost-effective devices become available, which eventuality 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 other purchasers of medical devices in the U.S. These purchasers appear to prefer to limit the number of suppliers from whom they purchase medical products, and they 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 the anticipated profitability of our 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. Some believe that 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 any disruption in the domestic and global financial markets and the related adverse economic conditions.
Recent health trends could adversely affect our financial performance.
Negative events in the human health could have a negative impact on future results of operations. Future sales of the INVOcell and training of doctors and distributors could be adversely affected by a number of risk factors including certain risks that are specific to the human health. For example, the outbreak of a disease such as the Zika Virus which directly impacts pregnant woman and woman thinking about becoming pregnant. This would reduce demand for ART services including INVO, which could adversely impact the Company’s results of operations. Also, the outbreak of any highly contagious diseases having an effect on woman could negatively affect our sales.
Social media platforms present risks and challenges.
The inappropriate and/or unauthorized use of certain media vehicles could cause brand damage or information leakage or could have negative legal implications, including from the improper collection and/or dissemination of personally identifiable information. In addition, negative or inaccurate posts or comments about the Company on any social networking web site could damage the Company’s reputation, brand image and goodwill. Further, identifying new methods of advertising and communication, such as social media, continues to expand presents new challenges.
Risks Related to Our Common Stock
Our directors own a substantial percentage of our common stock.
In 2016 and 2015 our Chief Executive Officer & Chairperson, Kathleen Karloff, our then President & Director, Dr. Claude Ranoux (until April 2017), and Robert Bowdring, our then CFO (until March 2013) & Director, own a considerable percentage of the Company’s common stock. As a result, if they acted together, our directors could have a significant impact, and could potentially exert some control over, matters requiring approval by our stockholders.
The following table represents the director’s ownership for 2016 and 2015 of outstanding common stock:
| | | 2016 | | | 2015 | |
| Kathleen Karloff | | | 8.6 | % | | | 8.9 | % |
| Claude Ranoux | | | 19.3 | % | | | 19.1 | % |
| Robert Bowdring | | | 7.5 | % | | | 6.9 | % |
| | | | | | | | | |
| Total Ownership | | | 35.4 | % | | | 34.9 | % |
| | | | | | | | | |
| Total shares Outstanding | | | 140,596,646 | | | | 137,085,646 | |
The interests of these three individuals may differ from the interests of other stockholders. As a result, these officers and directors, if they agree, may have the ability to control corporate actions requiring stockholder approval, irrespective of how 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.
A disagreement among the three members of our Board of Directors may also occur, especially since in late 2016 Ms. Karloff and Mr. Bowdring removed Dr. Ranoux as an employee and officer of the Company and April 2017 Dr. Ranoux resigned from the Board of Directors.
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 Securities Exchange Act of 1934, 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 control, 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.
This Form 10-K will not make the Company “current” in its filing obligations, which means it retains certain potential liability and is not eligible to use certain forms or rely on certain rules.
The Company’s failure to file all required reports (e.g., Form 10-Ks and Form 10-Qs) means the Company remains potentially liable under the Exchange Act for those delinquencies, and the filing of this Form 10-K for 2016 and the previous comprehensive Form 10-K for fiscal years 2011 to 2015 does not prevent the enforcement staff of the SEC from taking action as a result of those filing delinquencies. Until all of the missing reports are filed, the Company will not be “current” for purposes of Rule 144, Regulation S, and Form S-8 registrations statements, and the Company would not be eligible to use Form S-3 until it establishes the required history of making timely filings. Further, until all missing reports are filed, investors may not be able to review certain financial and other disclosures that would be contained in those missing reports.
Public company compliance risks 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 we 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 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 liabilities, including attorney’s fees and certain 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 any 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 was 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, 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.
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 2011 an OTC system change was made, as a result of which 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”). In May 2012 we moved to the OTC Pink category because we were no longer reporting to the SEC.
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, among other things, 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 or, if given, that it will be positive.
Consequently, investors may not be able to liquidate their investment or may be able to liquidate it only at a price that does not reflect 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, including such issuances of shares for services.
We have issued and may continue to issue shares of our common stock and we have incurred and may continue to incur debt, which may be convertible into shares of our common stock, to satisfy certain of 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 would 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-arm’s 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 per share 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. Because shares of INVO are penny stocks, the share price for INVO common stock may be adversely affected such frauds and abuses involving other penny stocks.
Shares 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 of shares of our common stock under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registrations of our shares of common stock, may have a depressive effect upon the price of our shares of common stock. Any such sale may also dilute the market, if any, for our shares.
We may never pay any dividends to shareholders.
We have never paid any dividends and have not declared any dividends through 2016 and to date. 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 the thin market and market price volatility for our shares of common stock.
Throughout 2016 there has been a thin market for our shares, and the market price for our shares has been volatile. 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. We 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 products and services may be dependent therefore upon our ability to obtain additional financing through debt and equity or other means, as to which there is no assurance. The thin market for our shares, and the volatility in the market price for our shares, may adversely affect our ability to raise needed additional capital.
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 is 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 and our ability to raise additional capital when and as needed.
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.
Item 1B. Unresolved Staff Comments.
We are not required to respond to this item as we are a smaller reporting company.
During 2011 through 2016 we did not own any real property, but operated from leased facilities. We are on a month to month lease for our principal executive office located at 407R Mystic Avenue, Suite 34C, Medford, MA 02155. We moved into this facility in November 2012. This facility is rented from a related-party. See Item 13 “Certain Relationships and Related Transactions, and Director Independence.” Prior thereto, we rented facilities at 100 Cummings Center, Beverly, MA, Our current leased facilities are sufficient for at least the near-term.
Item 3. Legal Proceedings
INVO Bioscience, Inc., and two of its directors have been, since 2010, defending litigation brought by investors in an alleged predecessor of INVO Bioscience. On March 24, 2010, INVO Bioscience, Inc. and its corporate affiliate, Bio X Cell, 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 terminated employees of Medelle Corporation (also named as a co-defendant but no longer active), who are also attorneys, and a former investor in and creditor of Medelle. These plaintiffs allege various claims of wrongdoing relating to the sale of assets of Medelle to Dr. Ranoux. Plaintiffs claim that Dr. Ranoux, Ms. Karloff, and Medelle (and therefore INVO Bioscience as an alleged successor corporation) violated alleged duties owed to plaintiffs in connection with the sale. Separate claims were also alleged against INVO Bioscience.
Dr. Ranoux, Ms. Karloff, and INVO Bioscience have challenged these allegations, which they believe are baseless. The 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 of 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 nor Ms. Karloff) to work with the third-party assignee and to get the best possible price for those assets. 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. After a private sale was deemed unlikely, the assignee of the assets elected to proceed with a sealed-bid auction of 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.Civ. P. 12(b)(6). In a 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 alleging 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.
The claims against Dr. Ranoux that survived the November 2010 dismissal order were submitted to binding arbitration. On February 15, 2013, the mutually-agreed arbitrator ruled in favor of Dr. Ranoux. The award held that Dr. Ranoux did not withhold information about the auction of Medelle’s assets and expressed doubt that the plaintiffs would have invested the resources necessary to make a beneficial use of the assets. The arbitrator’s award then was confirmed by the Superior Court on August 21, 2013. The Superior Court’s confirmation of the award was affirmed on appeal on October 20, 2013 by the Massachusetts Appeals Court. The Massachusetts Supreme Judicial Court then denied further appellate review.
On October 18, 2016, following motions and argument, the Superior Court issued a memorandum of decision and order denying plaintiffs’ motion for entry of default judgment and assessment of damages against Medelle and allowed the motion of INVO Bioscience, BioXcell, and Ms. Karloff for entry of final judgment of dismissal. The foregoing order was converted to a final judgment dismissing all claims against all defendants and entered on the docket on October 27, 2016.
On November 28, 2016, plaintiffs filed an amended notice of appeal from the Superior Court’s decision of October 17, 2016 and the subsequent judgment entered on October 27, 2016. The appeal further challenges the order of dismissal from November, 2010. Plaintiffs did not appeal from the dismissal of the claims against Ms. Karloff, so the judgment in her favor is now final, leaving claims against INVO Bioscience, Bio X Cell, Medelle, and Dr. Ranoux.
INVO Bioscience and Bio X Cell intend a vigorous opposition to the current appeal, consistent with their previous positions that no breach of duty occurred in the sale of Medelle’s assets. It is assumed by INVO Bioscience that Dr. Ranoux will oppose the appeal as well.
Outside of the above-mentioned litigation, neither INVO Bioscience nor Bio X Cell, 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 operation, financial position, or cash flows.
Item 4. Mine Safety Disclosures.
Not Applicable
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Trading of our shares of our common stock is on the OTC Pink tier of the over-the-counter (“OTC”) market under the symbol “IVOB.” The OTC Pink tier is the lowest tier of three marketplaces for over-the-counter stocks offered by OTC Market Group. In May 2012 trading of our shares moved to this OTC Pink category because we were no longer currently reporting to the SEC. Investors can find Real-Time quotes and market information on the Company on www.otcmarkets.com.
Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily reflect actual transactions.
The table below presents the range of high and low sales prices of shares of our common stock by calendar quarter for the last two full fiscal years, on the applicable market, as reported by Yahoo Finance.
| Dates | | High | | | Low | |
| | | | | | | |
| January 1, 2016 to March 31, 2016 | | $ | .72 | | | $ | .35 | |
| April 1, 2016 to June 30, 2016 | | $ | .52 | | | $ | .30 | |
| July 1, 2016 to September 30, 2016 | | $ | .45 | | | $ | .23 | |
| October 1, 2016 to December 31, 2016 | | $ | .45 | | | $ | .20 | |
| | | | | | | | | |
| January 1, 2015 to March 31, 2015 | | $ | .32 | | | $ | .21 | |
| April 1, 2015 to June 30, 2015 | | $ | .69 | | | $ | .10 | |
| July 1, 2015 to September 30, 2015 | | $ | .51 | | | $ | .36 | |
| October 1, 2015 to December 31, 2015 | | $ | 1.49 | | | $ | .37 | |
As of December 31, 2016 and 2015, there were 140,596,646 and 137,085,646 shares, of registrant’s common stock were outstanding, respectively.
Information required with respect to Equity Compensation Plans in this Item 5 is included in Item 12 on page 40 of this report on Form 10-K.
Stockholders
As of December 31, 2016 and 2015 the number of holders of record of Registrant’s Common Stock was approximately 132 and 120, respectively. However, registrant estimates that it has a significantly greater number of beneficial holders of its common stock because a number of shares of registrant’s common stock are held of record by broker-dealers for their customers in street name.
Dividend Policy
We have never declared or paid a dividend on our common stock. We intend to retain future earnings (if any) to fund development and growth of our business, rather than to pay them as dividends, for the foreseeable future.
Compensation Plan
During the periods of 2016 and 2015, we do not have any equity compensation plans in place. We intend to implement equity compensation plans in the future when and as we deem appropriate.
Submission of Matters to a Vote of Security Holders
From 2010 through 2016, the company’s shareholders were not asked to vote on any matters. The last shareholders vote was taken during the fourth quarter of the fiscal year ended December 31, 2008, when the shareholders of INVO Bioscience were requested to vote on the Share Exchange between Emy’s Salsa AJI Distribution Company, Inc. and Bio X Cell, Inc. See the Form 8-K filed December 8, 2008. The shareholders of both companies approved the transaction.
Recent Sales of Unregistered Securities
As detailed below, from time to time through 2017 the Company sold shares of its common stock to accredited investors to raise working capital, and issued shares of its common stock to employees and consultants who had not been paid in cash.
During 2009, pursuant to Section 4(2) of the Securities Act, we issued senior secured convertible notes (“Bridge Notes”) payable to investors for $545,000. The Bridge Notes carried interest at rates from 10% to 12% per annum, and were due in full one year from the date of their issuance. Principal and interest on the Bridge Notes was convertible into restricted shares of common stock at a conversion price of $0.10 per share (the “Original Conversion Price”), subject to adjustment. We also issued, pursuant to Section 4(2) of the Securities Act, warrants to purchase 5,750,000 shares of common stock at $0.20 per share. All of the warrants have expired unexercised. In November and December 2009, principal aggregating $235,000 of the Bridge Notes was converted into shares of restricted common stock. In May 2015 principal aggregating $300,000 of the Bridge Notes was converted into shares of restricted common stock, leaving an outstanding note balance of $10,000 as of December 31, 2016.
In May 2016, pursuant to Section 4(2) of the Securities Act, the company issued 500,000 shares of restricted common stock with a fair value of approximately $90,000 to consultants; and pursuant to Rule 701 the Company issued 3,011,000 shares of restricted common stock with a fair value of $1,174,000 to employees, and interns for services.
In March 2017, pursuant to Section 4(2) of the Securities Act, the company issued 196,000 shares of restricted common stock with a fair value of $37,770 to service providers.
In March 2017, pursuant to Section 4(2) of the Securities Act, we negotiated the conversion of $10,000 of past due Bridge Notes and accrued interest into 341,000 shares of restricted common stock.
In April 2017, pursuant to Section 4(2) of the Securities Act, the company issued 51,750 shares of restricted common stock with a fair value of $17,201 to service providers
Item 6. Selected Financial Data
We are not required to provide this information as we are 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 to acquire Bio X Cell, Inc., a Massachusetts company (d/b/a/ “INVO Bioscience”). Bio X Cell, Inc. had developed patented technology, the INVOcell and the INVO procedure, designed to be less expensive and an alternative to conventional IVF. As part of the Share Exchange, Emy’s ceased the salsa distribution business and was re-named INVO Bioscience, Inc., and Bio X Cell, Inc. became its’ wholly-owned subsidiary.
The Share Exchange was accounted for as a “reverse merger” because the former Bio X Cell shareholders owned a majority of the outstanding shares of common stock of Emy’s immediately following the Share Exchange. Bio X Cell was 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 were those of Bio X Cell and were recorded at the historical cost basis of Bio X Cell and the consolidated financial statements after completion of the Share Exchange include the assets and liabilities of Bio X Cell and historical operations of Bio X Cell. The financial results included in this Form10-K are based on INVO Bioscience’s audited balance sheet as of December 31, 2016 and 2015 and related audited statements of operations and stockholders’ deficiency and statements of cash flows for the periods ended December 31, 2016 and 2015 respectively.
Overview
We are a company that has begun to commercialize our proven and patented technology outside of the United States 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 traditional IVF. The simplicity of the INVO procedure relates to the ability to potentially perform the infertility procedure without the need of a complex embryology lab and at a much lower overall cost than 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; we believe this is 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. 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 authorized to sell the INVOcell device in the United States as of November 2015 after receiving DeNovo class II clearance from the US Food & Drug Administration (FDA) as well as in certain international markets. We have established agreements with distributors and have trained physicians around the world in places such as Canada, South and Central America, India, and the Middle East.
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 the timing of signing of agreements with physicians in the US and new distributors internationally along with the training of those physicians and distributors and their staffs in the INVO procedure. In 2016 and into 2017 we have been and will be continuing to focus our efforts in the US. We expect International sales will continue to expand slowly in the coming years. As we are just beginning to get into these markets both US and International sales are difficult to forecast as we do not have any significant history to support our assumptions. 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 2016, the Company has marketed its products strategically utilizing its limited resources in the most economical fashion possible. We focused most of our efforts on starting the sales in the United States after the FDA clearance in November 2015.
INVO Bioscience attended the American Society of Reproductive Medicine (ASRM) Congress in Baltimore MD in October of 2015 based on the assumption the US FDA would grant clearance of the INVOcell and INVO Procedure in the near future. At this meeting INVO met several physicians that were interested in being early adopters of the INVO Procedure as soon as FDA clearance was received, FDA clearance was granted in November 2015. During 2016, Dr. Ranoux traveled and trained a number of existing fertility centers in Utah, Arizona, Texas, New Hampshire, Vermont, Virginia and 3 centers in California that were contacts from the 2015 ASRM Conference.
INVO Bioscience presented at a booth for the first time post-FDA approval at the 2016 ASRM Congress. The INVOcell was well received by many physicians, embryologists and distributors. During the meeting many contacts were made to try to expand the sale of the INVOcell going forward. Dr. Ranoux held a roundtable discussion with physicians at both the 2015 and 2016 ASRM Congresses. This also helped to explain our process to physicians which we believe will help the market gain knowledge of our process and device
As mentioned, in September 2016 Dr. Ranoux is ceased to be involved in the day to day operations of INVO, and was therefore no longer conducting training for the company. The company entered into a consulting agreement with Dr. Kevin Doody of CARE / Effortless IVF in Bedford Texas in October 2016 to assume the role of our corporate INVO trainer. On November 19, 2016, Dr. Doody held the first training session in his facility in Bedford Texas for a group of doctors and embryologists recruited at the 2016 ASRM Conference. The training was successful and the participants were extremely positive about offering INVO to their patients. The Company plans on having training for physicians and embryologists by Dr. Doody every other month in his Bedford Texas facility, focusing on new participants offering of the INVOcell and INVO procedure.
The company’s main focus throughout 2017 will be to recruit doctors in the United States to offer the INVO procedure in their locations.
In 2016, a Canadian company, Effortless IVF Canada, started a build out of a new facility in Calgary Canada to offer the INVO procedure exclusively. The company raised money through an offering of pre-priced INVO cycles to patients. Over 100 woman signed up to have the INVO procedure when the clinic opens in Q2 of 2017. Effortless IVF is planning on building 10 Effortless IVF clinics throughout Canada over the next few years.
In the second quarter of 2016, the first post-FDA cleared US baby from the INVOcell and INVO procedure was born in Texas.
Physicians outside the United States have demonstrated that their patients would like to see current success rates within their own geographic and cultural areas. We have and will continue to assist them in sponsoring clinical and marketing trials for “in-country” data. One of the things we have found is that, without an INVO Bioscience employee or representative “in country” focused on the INVO technology, our sales and opportunities were limited. We have learned that we have to be continually following up with the doctors and distributors and have a regular in person presence to move the process forward in a particular country. In addition, because of the registration process for “local results” in certain geographic and cultural areas, along with limited resources to assist in moving things forward in countries, revenues were significantly less than we anticipated for the past five years. However, we are continuing to receive international registration requests and 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 to have people in country to follow up, and therefore we anticipate that revenues will continue to be lower than we originally anticipated for the next few years. Although some doctors from other countries have come to us for the INVO procedure and we are working with them to launch INVO, our primary internal focus will be the United States in 2017.
Operations
We operate by outsourcing many key operational functions in the development and manufacturing of the INVOcell device and its associated products 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, 2015, we generally require approximately $125,000 per month to fund our current normal operations. Over the years we have reduced this to an absolute basic amount by, among other things, officers and directors not taking salaries and not engaging in certain activities so that we could avoid incurring certain expenses (such as travel and marketing costs). This basic amount will 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 maintain the “only the basics” state we are in. Our cash needs are primarily attributable to funding our sales and marketing efforts, strengthening our training capabilities, satisfying existing obligations, funding a future U.S. FDA clinical trial for additional product indications, 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 ultimately provide the company with the capital resources we need to execute our business plan and grow the business. After filing this Annual Report on Form 10-K, we intend to quickly follow up by the filing of our quarterly results for 2016 on Forms 10-Q, and for the first quarter of 2017 on Form 10-Q. Then we intend to engage appropriate firms to assist us in seeking to raise new capital (as to which there can be no assurance we will be successful).
The exact amount of additional funds we are able to raise, if any, will determine how aggressively we can grow, what additional projects we will be able to undertake, and when. No assurance can be given that we will be able to raise any additional capital. If we are unable to raise additional capital, we will be required to continue at the same basic level of activity, slowly introducing INVO to doctors across the United States while we can.
Selling, general and administrative expenses were approximately $2,146,000 and $599,000 respectively for the years ended December 31, 2016 and 2015. Throughout this period, we continued to control our spending and use our resources carefully. The $1,500,000 of higher selling, general and administrative expenses in 2016 was due to increased spending in a number of areas; for example training increased by $17,000, tradeshows and advertising by $27,000, website and investor relations by $28,000, the addition of a person on accrued payroll $90,000, $140,000 in accounting and legal fees and the Board of Directors issued shares to the Board, Consultants and interns who were working without compensation for a total of $1,264,000.
Throughout the period 2015 to 2016 we incurred annual net losses as we continued to market our product and proprietary process as we endeavored to increase our revenue base. It is expected that we will continue to generate net losses through 2017.
We cannot accurately predict what our level of activity will be over the next 12-24 months. However, INVO Bioscience anticipates that it will continue to launch the sale of the INVOcell device and INVO procedure in the US, Canada, South & Latin America, and India through established and, to a lesser extent, new 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 in the coming years ahead, 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. There is no guaranty that we will be able to raise any additional financing or when, or that we will be able to raise such funds on terms acceptable to us.
Due to our early stage of growth, 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 to continue 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.
For the years ended December 31, 2016 and 2015, we had net losses of approximately $2,124,000 and $4,959,000, respectively. The net loss in 2015 was significantly higher than 2016 due to the loss on the settlement of the 2009 Notes; the loss is the difference between the market price of the stock in May of 2015 (when the 2009 Notes were converted) compared to the conversion price issued in 2009. We had a working capital deficiency in both 2016 and 2015. As of December 31, 2016 our stockholder’s deficiency was approximately $4,600,000 compared to $3,800,000 as of December 31, 2015 and cash used in operations was approximately $324,000 for 2016 compared $152,000 for the year ended December 31, 2015. This raises substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on, among other things, our ability to raise additional capital and implement our business plan. See “Risk Factors.” 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 is 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 immediate but sometimes over a vesting period. Warrants granted to non-employees are recorded as an expense over the requisite service period based on the grant date estimated fair value of the grant, determined using the Black-Scholes option pricing model.
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 product is shipped, the title, risks and rewards pass to the customer, 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.
Recent Accounting Pronouncements
In November 2016, the FASB issued ASU 2016-18 (Topic 230), Statement of Cash Flows: Restricted Cash, which provides guidance on the classification of restricted cash in the statement of cash flows. The amendments in this ASU are effective for the Company’s annual reporting for fiscal 2018, with early adoption permitted. The amendments in the ASU should be adopted on a retrospective basis. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.
In May 2016, FASB issued accounting standards update ASU-2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and add some practical expedients. These amendments are effective at the same time Topic 606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). The Company is currently evaluating the impact of the adoption of ASU 2016-12 on the Company’s financial statements.
In March 2016, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The amendments in this update simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We are currently evaluating the effect that the adoption of this standard will have on our financial statements.
In February 2016, the FASB issued FASB ASU 2016-02, “Leases (Topic 842)”. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. For operating leases, a lessee would be required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. We are currently evaluating the effect that the adoption of this ASU will have on our financial statements.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330), Simplifying the Measurement of Inventory”. This concept requires that an entity should measure inventory within the scope of this ASU at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Substantial and unusual losses that result from subsequent measurement of inventory should be disclosed in the financial statements. This new guidance is effective for the Company beginning in fiscal 2018. The Company is currently in the process of assessing the impact of this ASU on its consolidated financial statements.
In January 2015, the FASB issued ASU No. 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” This eliminates the concept of extraordinary items in an entity’s income statement. Extraordinary classification outside of income from continuing operations was previously considered only when evidence clearly supported its classification as an extraordinary item. Extraordinary items were events and transactions that were distinguished by their unusual nature and by the infrequency of their occurrence. The ASU eliminates the need to separately classify, present and disclose extraordinary events. The disclosure of events or transactions that are unusual or infrequent in nature will be included in other guidance. This new guidance is effective for the Company beginning in fiscal 2017. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.
In August 2014, the FASB issued Accounting Standards Update ASU 2014-15 “Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The amendments contained in this update are effective for public and nonpublic entities for annual periods ending after December 15, 2016. We are currently assessing the impact of the adoption of ASU 2014-15, and we have not yet determined the effect of the standard on our ongoing financial reporting.
There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s financial position, results of operations or cash flows.
Introduction
This Form 10-K includes, Supplementary Data including summarized quarterly financial condition and results of operations for the quarters ended March 31, June 30 and September 30, 2016,. This review should be read in conjunction with the Financial Statements and Supplementary Data, which are included in Item 8 of this comprehensive Form 10-K.
Results of Operations
Comparison of the years ended December 31, 2016 and 2015
Net Sales and Revenues
Net sales and revenues for year ended December 31, 2016 were approximately $51,000 compared to approximately $12,000 for the same twelve month period ended December 31, 2015. This improvement is the initial result of INVO Bioscience receiving FDA clearance of its INVOcell product in November 2015 a goal it had been working in since 2007. These revenues include the shipment of both free and lower introductory price products as we start to penetrate the U.S. reproductive market. We anticipate we will continue to offer these promotions as we continue to reach out to new doctors and embryologists so they may see the benefits of INVO’s new and disruptive technology.
Cost of goods sold for the twelve months ended December 31, 2016 were $15,000 or approximately 30% of revenues compared to $8,000 or approximately 67% of revenues for the year ended December 31, 2015. We believe that the 2016 costs are a more representative expectation of what our costs will be as we move forward. 2015’s costs at approximately 67% ($8,000) was the result of less sales causing our cost of sales percentage to be higher because we had less items sold to spread the fixed overhead costs over. We are taking steps to continually lower our costs and improve our gross margin while delivering high quality products for a fair price.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $2,146,000 increased over $1.5 million dollars in the year ended December 31, 2016 compared to the year ended December 31, 2015 from $599,000. This was the result of the issuance of 3,511,000 shares of restricted common stock, a non-cash expense of $1,264,000 to the employees, consultants and interns for their efforts and service to INVO in 2015 and 2016 without compensation. Due to the generosity of a few investors who believed in the long term opportunity the Company offered, these investors made direct investments for restricted common stock during the latter half of 2015 as outlined in the previous Annual Report filed on Form 10-K on March 17, 2017. During 2016 INVO Bioscience was able to start to market the INVOcell and INVO Procedure. We launched our new website, started small e-mail and direct mail campaigns along with an advertising piece to let doctors know we were now allowed to offer our products and services in the United States. In addition we were able to market and demonstrate the INVOcell for the first time at the Annual American Society Reproductive Medicine (ASRM) Congress held in Salt Lake City, Utah. The product and the Company were very well received and had a lot of visitors and interest during the three days of the Congress. We had increased expenses in the areas of training, distribution of free INVOcell devices for demonstration and practice, legal and accounting as we started the process of again becoming compliant with our SEC filings. Outside of these items as in all the years past, the Company kept tight control over spending and only purchased the required basic services.
The majority of the expenses incurred in 2015 back to 2011 were either paid for with restricted common stock or are still owed to some key partners who have been very supportive and willing to work with and wait for INVO Bioscience to be successful.
Research and Development Expenses
The Company did not spend any funds on research and development (“R&D”) in 2016 or 2015 as it believes its products are ready for market as is. Our limited resources were devoted to basic corporate expenses and training new distributors and physicians. We do not anticipate any spending in R&D in the foreseeable future as we expect to continue to focus our resources on training new doctors on our current products and patent protection.
Interest Expense, Financing Fees and Loss on Settlement of Debt
Interest expense and financing fees decreased to approximately $14,000 for the year ended December 31, 2016 compared to approximately $32,000 for the same period in 2015. This was the result of a majority of the 2009 noteholders converting their notes into restricted shares of common stock in the second quarter of 2015. The expense is the difference of the conversion price of the notes and accrued interest compared to the market price on the day of the conversion. See Notes 6 and 8 in the consolidated financial statements included herein. This 2015 transaction also caused a loss on the settlement of that debt in the amount of $4,332,000 in the twelve months ended December 31, 2015. The reduction in this expense area in 2016 is the result of not having a similar transaction in the year ended December 31, 2016.
Income Taxes
The Company had aggregate unused net operating losses at December 31, 2016 and 2015, of approximate $17,943,000 and $15,819,000, respectively, which expire at various times through 2036 and are subject to limitations of Section 382 of the Internal Revenue Code of 1986, as amended. The deferred tax asset related to the net operating loss carry forward was approximately $7,177,000 and $6,327,000 at December 31, 2016 and 2015, respectively.
The Company has provided valuation reserves 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.
Net Loss
The net loss for the twelve months ended December 31, 2016 was approximately $2,124,000 as compared to a net loss of approximately $4,959,000 for the same twelve month period in 2015. The primary reason for the decrease in net loss was due to finance charge the Company incurred as a result of a majority of the 2009 convertible note holders exercising their right to convert the notes and accrued interest into restricted shares of common stock during 2015. This event resulted in loss in the settlement of debt of $4,332,000.
Liquidity and Capital Resources
As stated in previous filings, our lack of financial resources continues to be our major challenge.
As of December 31, 2016, we had approximately $152,000 in cash compared to approximately $492,000 at December 31, 2015. Net cash used by operating activities in 2016 was approximately $324,000, as compared to net cash used by operating activities of approximately $152,000 for 2015. The increase in net cash used was due to having funds available after investments in shares of our restricted common stock made by three generous investors during 2015. We were able to start 2016 with funding for expanded training and promotions for the US market. It also allowed us to start the process of again becoming compliant in our filings with the SEC. In 2015 funds were used for patent protection, FDA related testing, audits and registrations, legal fees, and basic office support (such as rent, telephone and our website). Since early 2009, all current employees and directors have continued to assist INVO Bioscience in its funding requirements by deferring their compensation.
In 2016, INVO Bioscience invested $15,700 in a new mold to produce its own retention device to allow us to offer a lower cost alternative to our customers. Currently we are procuring the basic FDA cleared retention device from a noted and reputable third party and then having it customized to our specifications at a local ISO 13485 Certified and FDA inspected facility. No cash was used from 2011 to 2015 in investing activities.
During 2016 no cash was provided by financing activities. The Company did convert $131,722 in outstanding accounts payable invoices into a three year 5% note payable with a vendor who has been supportive of us since 2010. In 2015 net cash provided by financing activities was $625,000, as we received $645,000 from three existing shareholders. One shareholder exercised two warrants he received with his 2012 investments so as to contribute $120,000 in capital. One shareholder purchased $275,000 of restricted shares of common stock and the other shareholder purchased $250,000 of restricted shares of common stock. Offsetting these investments, $20,000 was used in 2015 to make a payment on a promissory note owed to a related-party.
Our registered independent certified public accountants have stated in their report dated April 20, 2017, 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. As reflected in their audit report, our registered independent certified public accountants indicated that these factors, among others, 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 2017. We continue to seek alternative funding 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.
Item 7A. Quantitative and Qualitative Disclosure about Market Risks
We are not required to provide this information as we are a smaller reporting company.
Item 8. Financial Statements and Supplementary Data
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
INVO Bioscience, Inc.
Medford, MA 02155
We have audited the accompanying consolidated balance sheets of INVO Bioscience, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of losses, statement of stockholders’ deficiencies, and cash flows for each of the years ended December 31, 2016 and 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated 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 audit 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 audit 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of INVO Bioscience, Inc. at December 31, 2016 and 2015 and the results of its operations and its cash flows for each of the years ended December 31, 2016 and 2015 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 to the consolidated financial statements, the Company had a stockholders’ deficiency of $4,618,000 as of December 31, 2016, and will require additional cash to fund and continue operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| | /s/ Liggett & Webb, P.A. | |
| | Liggett & Webb, P.A. | |
April 20, 2017
New York, New York
INVO Bioscience, Inc.
CONSOLIDATED
BALANCE SHEETS
| | | As of December 31, | | | As of December 31, | |
| | | 2016 | | | 2015 | |
| ASSETS | | | | | | |
| Current assets | | | | | | |
| Cash | | $ | 152,404 | | | $ | 492,004 | |
| Accounts receivable, net | | | 2,794 | | | | 1,346 | |
| Inventory | | | 85,210 | | | | 65,420 | |
| Prepaid expense | | | 10,980 | | | | - | |
| Total current assets | | | 251,388 | | | | 558,770 | |
| | | | | | | | | |
| Property and equipment, net | | | 15,700 | | | | - | |
| | | | | | | | | |
| Other Assets: | | | | | | | | |
| Capitalized patents, net | | | 19,138 | | | | 21,016 | |
| Total other assets | | | 19,138 | | | | 21,016 | |
| | | | | | | | | |
| Total assets | | $ | 286,226 | | | $ | 579,786 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable and accrued liabilities, including related parties | | $ | 974,872 | | | $ | 1,025,510 | |
| Accrued compensation | | | 3,576,390 | | | | 3,090,390 | |
| Note payable - related party | | | 210,888 | | | | 210,888 | |
| Convertible notes | | | 10,000 | | | | 10,000 | |
| Total current liabilities | | | 4,772,150 | | | | 4,336,788 | |
| | | | | | | | | |
| Notes payable - longterm | | | 131,722 | | | | - | |
| | | | | | | | | |
| Total liabilities | | | 4,903,872 | | | | 4,336,788 | |
| | | | | | | | | |
Commitments and contingencies (Note 11) | | | | | | | | |
| | | | | | | | | |
| Stockholder’s deficiency | | | | | | | | |
Preferred Stock, $.0001 par value; 100,000,000 shares authorized;
No shares issued and outstanding as of December 31, 2016 and 2015 | | | - | | | | - | |
Common Stock, $.0001 par value; 200,000,000 shares authorized; 140,596,646 and
137,085,646 issued and outstanding as of December 31, 2016 and December 31, 2015, respectively. | | | 14,059 | | | | 13,708 | |
| Additional paid-in capital | | | 13,311,263 | | | | 12,048,006 | |
| Accumulated deficit | | | (17,942,968 | ) | | | (15,818,716 | ) |
| Total stockholder’s deficiency | | | (4,617,646 | ) | | | (3,757,002 | ) |
| | | | | | | | | |
| Total liabilities and stockholders’ deficiency | | $ | 286,226 | | | $ | 579,786 | |
The accompanying notes are an integral part of these consolidated financial statements.
INVO Bioscience, Inc.
CONSOLIDATED STATEMENTS OF
LOSSES
| | | Year Ended | | | Year Ended | |
| | | December 31, | | | December 31, | |
| | | 2016 | | | 2015 | |
| | | | | | | |
| Revenue | | $ | 50,901 | | | $ | 11,689 | |
| Cost of goods sold | | | 15,094 | | | | 7,810 | |
| | | | | | | | | |
| Gross margin | | | 35,807 | | | | 3,879 | |
| | | | | | | | | |
| Selling, general and administrative expenses | | | 2,146,221 | | | | 598,953 | |
| Total operating expenses | | | 2,146,221 | | | | 598,953 | |
| | | | | | | | | |
| Loss from operations | | | (2,110,414 | ) | | | (595,074 | ) |
| | | | | | | | | |
| Other (Income) Expenses: | | | | | | | | |
| Loss on settlement of debt | | | - | | | | 4,332,155 | |
| Interest expense | | | 13,838 | | | | 32,018 | |
| Total other expenses | | | 13,838 | | | | 4,364,173 | |
| | | | | | | | | |
| Loss before income taxes | | | (2,124,252 | ) | | | (4,959,247 | ) |
| | | | | | | | | |
| Provisions for income taxes | | | - | | | | - | |
| | | | | | | | | |
| Net loss | | $ | (2,124,252 | ) | | $ | (4,959,247 | ) |
| | | | | | | | | |
| Basic net loss per weighted average shares of common stock | | $ | (0.02 | ) | | $ | (0.04 | ) |
| | | | | | | | | |
| Diluted net loss per weighted average shares of common stock | | $ | (0.02 | ) | | $ | (0.04 | ) |
| | | | | | | | | |
| Basic weighted average number of shares of common stock | | | 139,186,557 | | | | 128,567,615 | |
| | | | | | | | | |
| Diluted weighted average number of shares of common stock | | | 139,186,557 | | | | 128,567,615 | |
The accompanying notes are an integral part of these consolidated financial statements.
INVO Bioscience, Inc.
CONSOLIDATED STATEMENT OF
STOCKHOLDERS’ DEFICIENCY
For the Period January 1, 2015 to December 31, 2016
| | | Common Stock | | | | | | | | | | |
| | | Shares | | | Amount | | | Additional Paid-in Capital | | | Accumulated Deficit | | | Total | |
| | | | | | | | | | | | | | | | |
| Balance, December 31, 2014 | | | 119,732,270 | | | $ | 11,973 | | | $ | 6,488,527 | | | $ | (10,859,469 | ) | | $ | (4,358,969 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash in February 2015 | | | 125,000 | | | | 13 | | | | 24,987 | | | | - | | | | 25,000 | |
| Common stock issued for convertible notes & interest May 2015 | | | 12,470,900 | | | | 1,247 | | | | 4,823,649 | | | | - | | | | 4,824,896 | |
| Common stock issued for cash of warrant conversion in June 2015 | | | 750,000 | | | | 75 | | | | 59,925 | | | | - | | | | 60,000 | |
| Common stock issued for cash of warrant conversion in Sept 2015 | | | 1,000,000 | | | | 100 | | | | 59,900 | | | | - | | | | 60,000 | |
| Common stock issued for services in October 2015 | | | 119,000 | | | | 11 | | | | 53,537 | | | | - | | | | 53,548 | |
| Common stock issued for cash in October 2015 | | | 1,000,000 | | | | 100 | | | | 499,900 | | | | - | | | | 500,000 | |
| Common stock issued for services in December 2015 | | | 1,888,476 | | | | 189 | | | | 37,581 | | | | - | | | | 37,770 | |
| Net loss for the twelve months ended December 31, 2015 | | | - | | | | - | | | | - | | | | (4,959,247 | ) | | | (4,959,247 | ) |
| Balance, December 31, 2015 | | | 137,085,646 | | | | 13,708 | | | | 12,048,006 | | | | (15,818,716 | ) | | | (3,757,002 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services | | | 3,511,000 | | | | 351 | | | | 1,263,257 | | | | - | | | | 1,263,608 | |
| Net loss for the twelve months ended December 31, 2016 | | | - | | | | - | | | | - | | | | (2,124,252 | ) | | | (2,124,252 | ) |
| Balance, December 31, 2016 | | | 140,596,646 | | | $ | 14,059 | | | $ | 13,311,263 | | | $ | (17,942,968 | ) | | $ | (4,617,646 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
INVO Bioscience, Inc.
CONSOLIDATED STATEMENTS OF
CASH FLOWS
| | | Year Ended | | | Year Ended | |
| | | December 31, | | | December 31, | |
| | | 2016 | | | 2015 | |
| | | | | | | |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (2,124,252 | ) | | $ | (4,959,247 | ) |
| Adjustments to reconcile net (loss) to net cash used in operating activities: | | | | | | | | |
| Loss on settlement of debt | | | - | | | | 4,332,155 | |
| Common stock issued for services | | | 1,263,608 | | | | 91,318 | |
| Depreciation and amortization | | | 1,878 | | | | 5,633 | |
| Changes in assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (1,448 | ) | | | (1,025 | ) |
| Inventory | | | (19,790 | ) | | | (2,965 | ) |
| Prepaid expenses and other current assets | | | (10,980 | ) | | | - | |
| Accounts payable and accrued expenses | | | 82,814 | | | | (6,291 | ) |
| Accrued interest - related party | | | (1,730 | ) | | | | |
| Accrued compensation | | | 486,000 | | | | 388,800 | |
| Net cash used in operating activities | | | (323,900 | ) | | | (151,622 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Payments for property and equipment | | | (15,700 | ) | | | - | |
| Net cash used in investing activities | | | (15,700 | ) | | | - | |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Principal payments on loans payable to related parties | | | - | | | | (20,000 | ) |
| Proceeds from the sale of common stock | | | - | | | | 645,000 | |
| Net cash provided by financing activities | | | - | | | | 625,000 | |
| | | | | | | | | |
| (Decrease) Increase in cash and cash equivalents | | | (339,600 | ) | | | 473,378 | |
| | | | | | | | | |
| Cash and cash equivalents at beginning of period | | | 492,004 | | | | 18,626 | |
| | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 152,404 | | | $ | 492,004 | |
| | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | | |
| | | | | | | | | |
| Cash paid during the period for: | | | | | | | | |
| Interest | | $ | - | | | $ | - | |
| | | | | | | | | |
| Taxes | | $ | - | | | $ | - | |
| | | | | | | | | |
| Common stock issued upon note payable and accrued interest conversion | | $ | - | | | $ | 4,824,896 | |
Note payable issued for accounts payable | | $ | 131,722 | | | $ | - | |
The accompanying notes are an integral part of these consolidated financial statements.
INVO BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
| 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.
Through December 31, 2016, 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 “Conformitй Europйenne”) certifies that a product has met EU health, safety and environmental requirements, which ensure consumer safety.
On November 3, 2015, the Company issued a press release reporting the U.S. Food and Drug Administration (“FDA”) has granted the Company’s de novo request for the INVOcell to allow the marketing, sale and use in the United States.
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, and New Zealand); we can also distribute in 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.
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. The Company had the following amounts of cash and cash equivalents on its balance sheets as of December 31, 2016 and 2015 of $152,404 and $492,004 respectively.
(E) Inventory
Inventories consist of work in process (WIP) and 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.
(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
Basic loss per share calculations are computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include securities or other contracts to issue common stock that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the years ended December 31, 2016 and 2015, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.
| | | Twelve Months Ended December 31, | |
| | | 2016 | | | 2015 | |
| Loss to common shareholders (Numerator) | | $ | (2,124,252 | ) | | $ | (4,959,247 | ) |
| Basic and diluted weighted-average number of common shares outstanding (Denominator) | | | 139,186,557 | | | | 128,567,615 | |
The Company has excluded the following dilutive securities from the calculation of fully-diluted shares outstanding because the result would have been anti-dilutive:
| | | Twelve Months Ended December 31, | |
| | | 2016 | | 2015 | |
| Effect of dilutive common stock equivalents: | | | |
| Warrants | | | - | | | | - | |
| Convertible notes and interest | | | 3,430,547 | | | | 3,239,180 | |
| Total | | | 3,430,547 | | | | 3,239,180 | |
(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
Cash includes amounts deposited in financial institutions in excess of insurable Federal Deposit Insurance Corporation (FDIC) limits. As of December 31, 2015, the Company had cash balances in excess of FDIC limits of approximately $292,000.
(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.
(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, 2016.
(O) Reclassifications
Certain reclassifications have been made in prior year’s financial statements to conform to classifications used in the current year.
(P) Recent Accounting Pronouncements
In November 2016, the FASB issued ASU 2016-18 (Topic 230), Statement of Cash Flows: Restricted Cash, which provides guidance on the classification of restricted cash in the statement of cash flows. The amendments in this ASU are effective for the Company’s annual reporting for fiscal 2018, with early adoption permitted. The amendments in the ASU should be adopted on a retrospective basis. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.
In May 2016, FASB issued accounting standards update ASU-2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and add some practical expedients. These amendments are effective at the same time Topic 606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). The Company is currently evaluating the impact of the adoption of ASU 2016-12 on the Company’s financial statements.
In March 2016, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The amendments in this update simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We are currently evaluating the effect that the adoption of this standard will have on our financial statements.
In February 2016, the FASB issued FASB ASU 2016-02, “Leases (Topic 842)”. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. For operating leases, a lessee would be required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. We are currently evaluating the effect that the adoption of this ASU will have on our financial statements.
In August 2014, the FASB issued Accounting Standards Update ASU 2014-15 “Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The amendments contained in this update are effective for public and nonpublic entities for annual periods ending after December 15, 2016. We are currently assessing the impact of the adoption of ASU 2014-15, and we have not yet determined the effect of the standard on our ongoing financial reporting.
There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s financial position, results of operations or cash flows.
The Company commenced operations in December 2008. In During the year ended December 31, 2016, the Company had a net loss of $2,124,252 and cash used in operations $323,900. At December 31, 2016, the Company had a working capital deficiency of $4,520,762 and a stockholder deficiency of $4,617,646. 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.
The Company had inventory in the following amounts:
| | | December 31, | |
| | | 2016 | | | 2015 | |
| Work in Process | | $ | 27,986 | | | $ | 31,997 | |
| Finished Goods | | | 57,224 | | | | 33,423 | |
| Total Inventory | | $ | 85,210 | | | $ | 65,420 | |
| 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 |
| | | December 31, | |
| | | 2016 | | | 2015 | |
| Manufacturing Equipment - Molds | | $ | 50,963 | | | $ | 35,263 | |
| Less: Accumulated Depreciation | | | (35,263 | ) | | | (35,263 | ) |
| Total Property and Equipment, net | | $ | 15,700 | | | $ | - | |
The Company recorded $0 depreciation expense in 2016 and 2015 as its earlier equipment was fully depreciated. The 2016 asset addition has not been put into production as of December 31, 2016.
The Company capitalizes the initial expense related to establishing the patent by country and then amortizes the expense over the life of the patent, typically 20 years. It then expenses annual filing fees to maintain the patents. The Company regularly reviews the value of the patent in the market place in proportion to the expense it must spend to maintain the patent.
The Company has recorded the following patent costs:
| | | December 31, | |
| | | 2016 | | | 2015 | |
| Patent Costs | | $ | 77,743 | | | $ | 77,743 | |
| Less: Accumulated Depreciation | | | (58,605 | ) | | | (56,727 | ) |
| Patent Costs, net | | $ | 19,138 | | | $ | 21,016 | |
The Company recorded amortization expense as follows:
| Twelve Months Ended December 31, | |
| 2016 | | 2015 | |
| | $ | 1,878 | | | $ | 5,633 | |
In 2011, the decision was made to not to pay the renewal fees and expedite the amortization of the original patent which expired in 2012. It was also decided to not spend its limited funds in defending the INVO Block patent as it only has value to the Company. The Company continues to pay the annual renewal fees on its active patents.
Estimated amortization expense as of December 31, 2016 is as follows:
| Years ended December 31, | | | |
| 2017 | | $ | 4,536 | |
| 2018 | | | 4,536 | |
| 2019 | | | 4,536 | |
| 2020 | | | 4,536 | |
| 2021 and thereafter | | | 994 | |
| Total | | $ | 19,138 | |
| NOTE 6 | CONVERTIBLE NOTES AND NOTES PAYABLE |
Convertible Notes - Bridge Notes
During 2009, the Company issued senior secured convertible notes (“Bridge Notes”) payable to investors in the aggregate amount of $545,000. The Bridge Notes carry interest rates ranging between 10-12% and were due in full one year from the date of issuance and are past due. Both the Bridge Notes and the accrued interest thereon are convertible into Restricted Common Stock of the Company at a conversion price of $0.10 per share (the “Original Conversion Price”). If the Company were to issue any new shares of common stock within 24 months of the date of the Bridge Notes at a price below the Original Conversion Price, then the conversion price of the Bridge Notes would be adjusted to reflect the new lower price. 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 as of the date of this filing. All the warrants have expired. The Company valued the conversion feature of the Bridge Notes and the warrants issued via the Black-Scholes valuation method. The total fair value calculated for the conversion feature was $1,473,710; $151,826 was allocated to 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; $393,174 was allocated to discount on the Bridge Notes, and $1,326,492 was charged to operations. The aggregate discount on the Bridge Notes for the conversion feature and the warrants was $545,000, and the aggregate amount charged to operations was $2,668,371 which was recorded as a derivative liability on the Company’s consolidated balance sheet.
In November and December 2009, principal in the aggregate amount of $235,000 of the Bridge Notes was converted into shares of Common Stock and the fair value of the derivative liability was recalculated and reduced to $108,000 with adjustments to revaluation expense of $486,000. The remaining discount of $545,000 was amortized to interest expense over the original one-year term of the Bridge Notes using the effective interest method; as of September 30, 2010 the full amount has been amortized.
In July 2010, INVO Bioscience reached an agreement with one of the investors who had converted his bridge notes into shares to cancel those related 1,750,000 shares and the corresponding 1,750,000 warrants and apply the proceeds to the open subscription receivable balance he carried with the company.
In May 2015, the Company negotiated the conversion of certain of the Bridge Notes and accrued interest into shares of common stock. The Company negotiated these conversions at a price lower than the conversion price stated in the original Bridge Note documents because the Bridge Notes were past due. These conversions were treated as a restructure of debt on the Company’s financial statements for the twelve months ended December 31, 2015. $300,000 of the Bridge Notes and accrued interest were converted into 12,470,900 shares of restricted common stock resulting in a loss on debt settlement in the amount of $4,332,155.
The principal balances of the Convertible Notes was $10,000 for both 2016 and 2015. This last note was converted in March 2017. The related interest for the twelve months ended December 31, 2016 and 2015 was $750 and $14,286 respectively.
In August 2016, INVO Bioscience converted a long time vendor’s outstanding accounts payable balance of $131,722 into a three (3) year 5% notes payable. The note provides for interest only payments on the first and second anniversaries of the note. The note is payable in full along with any outstanding accrued interest on the third anniversary. The Company has the right to prepay the note at any time without a premium or penalty. The interest on this note for the year ended December 31, 2016 was $2,760.
| NOTE 7 | NOTE PAYABLE AND OTHER RELATED PARTY TRANSACTIONS |
On September 18, 2008, the Company entered into a related party transaction with Dr. Claude Ranoux. Dr. Ranoux was then the President, Director and Chief Scientific Officer of the Company; as of the date of this filing he is a Director. 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, 2016 it is $21,888 (“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 had been extended, and has been extended a couple of additional times, the current repayment date is October 31, 2018. The Company and Dr. Ranoux can jointly decide to repay the loan earlier without prepayment penalties. During the twelve months ended December 31, 2016 and 2015, $0 and $20,000 respectively were repaid on the principal of the loan.
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, 2011. This note was due on September 15, 2009, which has since been extended a few times to its current date of October 31, 2018. During the twelve months ended December 31, 2014, Ms. Karloff loaned the Company an additional $66,000 at an interest rate of 0% by entering into a note payable agreement in satisfaction of expenses incurred by her for amounts previously advanced to the Company. This note currently has the same expiration date as the others which is October 31, 2018.
On December 28, 2009 James Bowdring, the brother of Director Robert Bowdring invested $100,000 acquiring 666,667 shares of restricted common stock. In April 2011, the Company issued a new short term convertible note (“Q211 Note”) payable to James Bowdring in the amount of $50,000. The Q211 Note carries a 10% interest rate and was due in full, two months from the date of issuance. The note was past due and is partially still open, as of this date the balance is $25,000. The Q211 Note is convertible into Common Stock of the Company at a conversion price of $0.03 per share, subject to adjustments. In addition to the Q211 Note, the Company issued warrants to purchase 1,666,667 shares of the Company’s Common Stock at a price of $0.03 per share, as of this date the warrants have expired. The Company valued the Q211 Note’s warrants issued as consideration for the notes payable via the Black-Scholes valuation method. The total fair value calculated for the conversion was approximately $39,500, and for the warrants was approximately $45,500 both of which were recorded as a derivative liability on the Company’s balance sheet. In September 2011, the Company made a principal payment on the Q211 Note in the amount of $25,000.
In November 2011, the Company issued a new convertible note (“Q411 Note”) payable to James Bowdring in the amount of $10,000. The Q411 Note carries a 10% interest rate and is due in full, two months from the date of issuance. The Q411 Note is convertible into Common Stock of the Company at a conversion price of $0.01 per share, subject to adjustments. In addition to the Q411 Note, the Company issued warrants to purchase 500,000 shares of the Company’s Common Stock at a price of $0.02 per share, as of this date the warrants have expired. The Company valued the Bridge Note’s warrants issued as consideration for the notes payable via the Black-Scholes valuation method. The total fair value calculated for the conversion option was $2,345, and for the warrants was $4,076 both of which were recorded as a derivative liability on the Company’s balance sheet.
In Other Related Party Transactions, we have been renting our corporate office from Forty Four Realty Trust which is owned by James Bowdring, the brother of Director, Robert Bowdring since November 2012. It is a month to month rental arrangement for less than the going fair market real estate rental rate. We have been paying $4,800 annually since 2012. In addition the Company purchases stationary supplies and marketing items at discounted rates from Superior Printing & Promotions which is also owned by James Bowdring and is in the same building as our corporate office. INVO Bioscience spent $4,100 and $5,000 with Superior during 2016 and 2015 respectively.
Principal balances of the Related Party loans were as follows:
| | | December 31, | |
| | | 2016 | | | 2015 | |
| Claude Ranoux Note | | $ | 21,888 | | | $ | 21,888 | |
| | | | | | | | | |
| James Bowdring – Q211 Note | | | 25,000 | | | | 25,000 | |
| | | | | | | | | |
| James Bowdring- Q411 Note | | | 10,000 | | | | 10,000 | |
| | | | | | | | | |
| Kathleen Karloff Note | | | 154,000 | | | | 154,000 | |
| | | | | | | | | |
| Total | | $ | 210,888 | | | $ | 210,888 | |
Interest expense on the Related Party loans was $13,088 and $20,195 for the years ended December 31, 2016 and 2015, respectively.
Accounts payable and accrued liabilities balances include expenses reports for Ms. Karloff, Dr. Ranoux and Mr. Bowdring for expenses they paid for personally related to travel or normal business expenses and are represented in the following table:
| | | December 31, | |
| | | 2016 | | | 2015 | |
| Accounts payable and accrued liabilities | | $ | 39,000 | | | $ | 68,002 | |
| NOTE 8 | STOCKHOLDERS’ EQUITY |
Twelve Months Ended December 31, 2016
In May 2016, the Company issued 3,000,000 shares of common stock with a fair value of $1,080,000 to officers for compensation.
In May 2016, the Company issued 511,000 shares of common stock with a fair value of $183,608 to service providers for services performed.
Twelve Months Ended December 31, 2015
In February 2015, the Company sold 125,000 shares of common stock for cash of $25,000.
In May 2015, investors requested the conversion of principal of convertible notes (Bridge Notes) with the Company in the amount of $300,000 and accrued interest and 12,470,900 shares of Common Stock were issued. The Company recorded a loss on settlement of debt in the amount of $4,322,155 with regard to this transaction.
In June 2015, the Company issued 750,000 shares of common stock for cash proceeds of $60,000 pursuant to the exercise of warrants by an investor.
In September 2015, the Company issued 1,000,000 shares of common stock for cash proceeds of $60,000 pursuant to the exercise of warrants by an investor.
In October 2015, the Company issued 119,000 shares of common stock with a fair value of $53,548 to service providers.
In October 2015, the Company sold 1,000,000 shares of common stock for cash of $500,000.
In December 2015, the Company issued 1,888,476 shares of common stock with a fair value of $37,770 to service providers.
| NOTE 9 | STOCK OPTIONS AND WARRANTS |
Stock Options
As of December 31, 2016 and 2015, the Company does not have any outstanding or committed and unissued stock options.
Warrants
As of December 31, 2016 and 2015, the Company does not have any outstanding or committed and unissued warrants.
Transactions involving warrants are summarized as follows:
| | | | | | Weighted- | |
| | | Number of | | | Average Price | |
| | | Shares | | | per Share | |
| Outstanding at December 31, 2014 | | | 1,750,000 | | | $ | 0.15 | |
| Granted | | | - | | | | - | |
| Exercised | | | - | | | | - | |
| Cancelled or Expired | | | (1,750,000 | ) | | $ | 0.15 | |
| Outstanding at December 31, 2015 | | | - | | | $ | - | |
| Granted | | | - | | | | - | |
| Exercised | | | - | | | | - | |
| Outstanding at December 31, 2016 | | | - | | | $ | - | |
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.
The Company’s total deferred tax liabilities, deferred tax assets, and deferred tax asset valuation allowances are as of December 31 are as follows:
| | | December 31, | |
| | | 2016 | | | 2015 | |
| Total deferred tax assets | | $ | 7,177,000 | | | $ | 6,327,000 | |
| | | | | | | | | |
| Less valuation allowance | | | (7,177,000 | ) | | | (6,327,000 | ) |
| | | | | | | | | |
| Net deferred tax asset | | $ | - | | | $ | - | |
Those amounts have been presented in the company’s financial statements as of December 31, as follows:
| | | December 31, | |
| | | 2016 | | | 2015 | |
| Noncurrent deferred tax asset | | $ | - | | | $ | - | |
| | | | | | | | | |
| Current deferred tax liability | | | - | | | | - | |
| | | | | | | | | |
| Net deferred tax asset (liability) | | $ | - | | | $ | - | |
The company has a loss carry forward of $17,943,000 that may be offset against future taxable income. Substantially all of the carry forwards expire in 2036.
Income tax provision (benefit) consists of the following components:
| | | December 31, | |
| | | 2016 | | | 2015 | |
| Noncurrent deferred tax asset | | $ | - | | | $ | - | |
| | | | | | | | | |
| Current deferred tax liability | | | - | | | | - | |
| | | | | | | | | |
| Net deferred tax asset (liability) | | $ | - | | | $ | - | |
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.
| NOTE 11 | COMMITMENTS AND CONTINGENCIES |
In November 2012, INVO Bioscience entered into a below market, month to month rental agreement with Forty Four Realty Trust with for the space it requires. Forty Four Realty Trust is owned by investor James Bowdring, the brother of Director Robert Bowdring.
INVO Bioscience, Inc., and two of its directors have been, since 2010, defending litigation brought by investors in an alleged predecessor of INVO Bioscience. On March 24, 2010, INVO Bioscience, Inc. and its corporate affiliate, Bio X Cell, 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 terminated employees of Medelle Corporation (also named as a co-defendant but no longer active), who are also attorneys, and a former investor in and creditor of Medelle. These plaintiffs allege various claims of wrongdoing relating to the sale of assets of Medelle to Dr. Ranoux. Plaintiffs claim that Dr. Ranoux, Ms. Karloff, and Medelle (and therefore INVO Bioscience as an alleged successor corporation) violated alleged duties owed to plaintiffs in connection with the sale. Separate claims were also alleged against INVO Bioscience.
Dr. Ranoux, Ms. Karloff, and INVO Bioscience have challenged these allegations, which they believe are baseless. The 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 of 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 nor Ms. Karloff) to work with the third-party assignee and to get the best possible price for those assets. 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. After a private sale was deemed unlikely, the assignee of the assets elected to proceed with a sealed-bid auction of 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.Civ. P. 12(b)(6). In a 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 alleging 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.
The claims against Dr. Ranoux that survived the November 2010 dismissal order were submitted to binding arbitration. On February 15, 2013, the mutually-agreed arbitrator ruled in favor of Dr. Ranoux. The award held that Dr. Ranoux did not withhold information about the auction of Medelle’s assets and expressed doubt that the plaintiffs would have invested the resources necessary to make a beneficial use of the assets. The arbitrator’s award then was confirmed by the Superior Court on August 21, 2013. The Superior Court’s confirmation of the award was affirmed on appeal on October 20, 2013 by the Massachusetts Appeals Court. The Massachusetts Supreme Judicial Court then denied further appellate review.
On October 18, 2016, following motions and argument, the Superior Court issued a memorandum of decision and order denying plaintiffs’ motion for entry of default judgment and assessment of damages against Medelle and allowed the motion of INVO Bioscience, Bio X Cell, and Ms. Karloff for entry of final judgment of dismissal. The foregoing order was converted to a final judgment dismissing all claims against all defendants and entered on the docket on October 27, 2016.
On November 28, 2016, plaintiffs filed an amended notice of appeal from the Superior Court’s decision of October 17, 2016 and the subsequent judgment entered on October 27, 2016. The appeal further challenges the order of dismissal from November, 2010. Plaintiffs did not appeal from the dismissal of the claims against Ms. Karloff, so the judgment in her favor is now final, leaving claims against INVO Bioscience, Bio X Cell, Medelle, and Dr. Ranoux.
INVO Bioscience and Bio X Cell intend a vigorous opposition to the current appeal, consistent with their previous positions that no breach of duty occurred in the sale of Medelle’s assets. It is assumed that Dr. Ranoux will oppose the appeal as well.
Outside of the above-mentioned litigation, neither INVO Bioscience nor Bio X Cell, 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 operation, financial position, or cash flows.
The Company had employment agreements for officers, executives and employees of the Company in place. The agreements have since expired and have not been renewed as the Company has not had the proper funds to meet its commitment but has continued to accrue amounts annually for the work that has been performed. The employees and directors are continuing to work based on good faith and belief in the Company and the INVOcell product.
The Company has a verbal agreement beginning in March, 2013 with its former CFO, Robert Bowdring, who is currently a Director, to assist where necessary in the financial and administrative areas of the Company for compensation to be equivalent to the others working in the organization.
The Company had an agreement beginning in August, 2011 with an Advisory Board Member who assisted the Company in its sales and marketing areas for stock compensation. This members’ agreement was not renewed in September 2016 when it expired.
In March 2017, pursuant to Section 4(2) of the Securities Act, the company issued 196,000 shares of restricted common stock with a fair value of $37,770 to service providers.
In March 2017, pursuant to Section 4(2) of the Securities Act, we negotiated the conversion of $10,000 of past due Bridge Notes and accrued interest into 341,000 shares of restricted common stock.
In April 2017, pursuant to Section 4(2) of the Securities Act, the company issued 51,750 shares of restricted common stock with a fair value of $17,201 to service providers.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
There were no disputes or disagreements of any nature between the Company or its management and its public auditors with respect to any aspect of accounting or financial disclosure.
Item 9A. Controls and Procedures
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 Acting Chief Financial Officer (and acting 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, 2015 and 2016. However, Robert Bowdring only served as the Company’s Chief Financial Officer and principal accounting officer until March 2013. From Mr. Bowdring’s resignation in March 2013 through December 31, 2015, Mr. Bowdring, as a consultant and a Director, supervised the Company’s financial situation. While remaining a consultant to the Company, Mr. Bowdring was elected Treasurer and Secretary in September 2016, and as Acting Chief Financial Officer (and acting principal accounting officer) in March 2017, and continues to hold those offices. 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 Acting Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of each year 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. However, as indicated under “Evaluation of Disclosure Controls and Procedures” above, the Company did not have a Chief Financial Officer (and principal accounting officer) from when Robert Bowdring resigned as such in March 2013 to when he was elected Acting Chief Financial Officer (and acting principal accounting officer) in March 2017. Management, with the participation of our Chief Executive Officer and Acting Chief Financial Officer, has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2015 and 2016 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 Acting Chief Financial Officer concluded that, as of December 31, 2015 and 2016, our internal control over financial reporting was 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, and because the Company lacked a full time Chief Financial Officer (and principal accounting officer) from Robert Bowdring’s resignation as such in March 2013 until he was elected Acting Chief Financial Officer (and acting principal accounting officer) in March 2017.
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 Acting 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.
Item 9B. Other Information
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
The Company’s Directors are to be elected annually by our stockholders at their annual meeting. Each director holds his office until his successor is elected and qualified or his earlier resignation or removal. However, the directors of INVO Bioscience were last elected in connection with the Share Exchange in December 2008, as INVO Bioscience has not subsequently held an annual stockholders meeting, INVO Bioscience’s executive officers are elected annually by our Board of Directors. Each executive officer holds his office until they die or resign, is removed by the Board, or their successor is elected and qualified. Information regarding our executive officers for the period 2011 through 2016, and currently, is presented below.
| NAME | | AGE* | | POSITION |
| Ms. Kathleen Karloff | | 61 | | Director and Chief Executive Officer and Secretary, from 2011 through 2015, and from January 1 through September 19, 2016. From September 20, 2016 to date, Ms. Karloff has served as Director, Chairman of the Board, President and Chief Executive Officer. |
| | | | | |
| Dr. Claude Ranoux, MD | | 65 | | Director, President and Treasurer from 2011 through 2015, and from January 1 through September 19, 2016. From September 20, 2016 to April 5, 2017, Dr. Ranoux has served as a Director. |
| | | | | |
| Mr. Robert Bowdring | | 59 | | Director from March 2013 through 2015, and from January 1, 2016 to date. From 2011 to March 2013, Mr. Bowdring served as Chief Financial Officer (and principal accounting officer). Further, from September 20, 2016 to date Mr. Bowdring has served as Treasurer and Secretary. Finally, from March 6, 2017 to date Mr. Bowdring has served as Acting Chief Financial Officer (and acting principal accounting officer). |
*As of December 31, 2016.
Kathleen Karloff, Chairperson, Chief Executive Officer and Director
Ms. Karloff co-founded INVO Bioscience in January 2007. Since 2007 Ms. Karloff has served as, and she continues to serve as, a Director of INVO Bioscience. Further, she served as Chief Executive Officer and Secretary from 2008 through September 19, 2016, and since September 20, 2016 has served, and continues to serve, as Chairman of the Board, President and Chief Executive Officer of INVO Bioscience. Since 2007, 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 and Treasurer (until September 20, 2016) and Director (until April 5, 2017)
Dr. Ranoux co-founded INVO Bioscience in January 2007. Since 2007 Dr. Ranoux has served as, and he continues to serve as, a Director of INVO Bioscience. From 2007 through September 19, 2016, he served as President and Treasurer of INVO Bioscience. 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. . 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, Director, Secretary, Treasurer and former 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 (and principal accounting officer), and he served in this capacity until March 2013. When his service as Chief Financial Officer (and principal accounting officer) ended in March 2013, he became a member of the Board of Directors and a consultant. Mr. Bowdring has served, and continues to serve, as a Director of and consultant to INVO Bioscience. Further, on September 20, 2016, he was elected Treasurer and Secretary of INVO Bioscience, and on March 6, 2017 he was elected Acting Chief Financial Officer (and acting principal accounting officer), all positions in which he has continued to serve and currently serves. Currently Mr. Bowdring is the Chief Financial Officer of Dynasil Corporation of America, he joined Dynasil in March 2013. 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 35 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 Bachelor’s Degree in Accounting from the University of Massachusetts in Amherst.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s executive officers, directors, and persons who own more than 10% of the Company’s common stock to file reports of ownership and change in ownership with the SEC. Such persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the Company or representations of reporting persons, the Company has determined that during the fiscal years ended December 31, 2011 through 2016, no reporting persons complied with all such filings requirements.
During the period from 2011 through 2015 Dr. Claude Ranoux filed three Form 144s, (a) the first filed on June 1, 2011 relating to 392,000 shares to be sold in blocks of 10,000 shares, and reflecting sales during those past three months aggregating 129,480 shares in ten transactions, (b) the second filed on September 2, 2011 relating to 700,000 shares to be sold in blocks of 10,000 shares, and reflecting sales during those past three months aggregating 323,595 shares in 18 transactions, and (c) the third filed on December 7, 2011 relating to 700,000 shares to be sold in blocks of 10,000 shares, and reflecting sales during those past three months aggregating 483,609 shares in 22 transactions.
During the period 2011 through 2015 neither Dr. Ranoux, Ms. Karloff nor Mr. Bowdring filed any Forms 3, 4 or 5 although Dr. Ranoux should have filed one Form 3, fourteen Form 4s and seven Form 5s, Ms. Karloff should have filed one Form 3, six Form 4s and four Form 5s, and Mr. Bowdring should have filed one Form 3, two Form 4s and three Form 5s. There were no other executive officers during this period. Further, during the period 2011 through 2015, other than Dr. Ranoux and (in 2011 only) Ms. Karloff, we are not aware of any other person who owned more than 10% of the Company’s common stock. Promptly after the filing of this Form 10-K it is anticipated that the Officers and Directors will file their respective missing forms with the SEC.
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. Directors are elected by a plurality vote. 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 outstanding 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.
Item 11. Executive and Director Compensation
Summary Compensation Table
The following Summary Compensation Table sets forth, for the years indicated, all cash compensation paid, distributed or accrued for services, including salary and bonus amounts, rendered in all capacities by the Company’s officers & directors who received or was entitled to receive remuneration in excess of $100,000 during the stated periods. As reflected below, none of our officers received cash compensation during fiscal 2007 and the years 2010 through 2016.
SUMMARY COMPENSATION TABLE
| Name and Principal Position | | | Year | | | Paid Salary ($) | | | Accrued Compensation ($) | | | Stock Award ($) (5)(7) | | | All other Compensation ($) | | | Total ($) | |
| | | | | | | | | | | | | | | | | | | | |
| Kathleen Karloff | | | 2016 | | | | 0 | | | | 120,000 | | | | 359,900 | | | | 0 | | | | 479,900 | |
| CEO & Director | | | 2015 | | | $ | 0 | | | $ | 120,000 | | | $ | 0 | | | $ | 0 | | | $ | 120,000 | |
| (1,4,5,6 & 7) | | | 2014 | | | | 0 | | | | 120,000 | | | | 300,000 | | | | 0 | | | | 420,000 | |
| | | | 2013 | | | | 0 | | | | 120,000 | | | | 20,000 | | | | 0 | | | | 140,000 | |
| | | | 2012 | | | | 0 | | | | 120,000 | | | | | | | | 0 | | | | 120,000 | |
| | | | 2011 | | | | 0 | | | | 116,000 | | | | 0 | | | | 0 | | | | 116,000 | |
| | | | 2010 | | | | 0 | | | | 175,000 | | | | 42,628 | | | | 0 | | | | 217,628 | |
| | | | 2009 | | | | 29,167 | | | | 145,833 | | | | 0 | | | | 0 | | | | 175,000 | |
| | | | 2008 | | | | 93,074 | | | | 0 | | | | 0 | | | | 0 | | | | 93,074 | |
| | | | 2007 | | | | 0 | | | | 0 | | | | 4,498 | | | | 0 | | | | 4,498 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Claude Ranoux | | | 2016 | | | | 0 | | | | 90,000 | | | | 359,900 | | | | 0 | | | | 449,900 | |
| | | | 2015 | | | $ | 0 | | | $ | 120,000 | | | $ | 0 | | | $ | 0 | | | $ | 120,000 | |
| President & Director | | | 2014 | | | | 0 | | | | 120,000 | | | | 300,000 | | | | 0 | | | | 420,000 | |
| (2,4,5,6 & 7) | | | 2013 | | | | 0 | | | | 120,000 | | | | 20,000 | | | | 0 | | | | 140,000 | |
| Until September 2016 | | | 2012 | | | | 0 | | | | 120,000 | | | | 0 | | | | 0 | | | | 120,000 | |
| | | | 2011 | | | | 0 | | | | 175,000 | | | | 0 | | | | 0 | | | | 175,000 | |
| | | | 2010 | | | | 0 | | | | 175,000 | | | | 6,500 | | | | 0 | | | | 181,500 | |
| | | | 2009 | | | | 29,167 | | | | 145,833 | | | | 0 | | | | 0 | | | | 175,000 | |
| | | | 2008 | | | | 91,974 | | | | 0 | | | | 0 | | | | 0 | | | | 91,974 | |
| | | | 2007 | | | | 0 | | | | 0 | | | | 19,731 | | | | 0 | | | | 19,731 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Robert Bowdring | | | 2016 | | | | 0 | | | | 120,000 | | | | 359,900 | | | | 0 | | | | 479,900 | |
| | | | 2015 | | | $ | 0 | | | $ | 120,000 | | | $ | 0 | | | $ | 0 | | | $ | 120,000 | |
| Director (March 2013 to date) & consultant | | | 2014 | | | | 0 | | | | 120,000 | | | | 450,000 | | | | 0 | | | | 570,000 | |
Director (March 2013 to Date), CFO (January 2009 to March 2013), ) | | | 2013 | | | | 0 | | | | 120,000 | | | | 20,000 | | | | 0 | | | | 140,000 | |
| CFO (3, 5, 6 & 7) | | | 2012 | | | | 0 | | | | 120,000 | | | | 0 | | | | 0 | | | | 120,000 | |
| CFO (3, 5, 6 & 7) | | | 2011 | | | | 0 | | | | 150,000 | | | | 0 | | | | 0 | | | | 150,000 | |
| CFO (3, 5, 6 & 7) | | | 2010 | | | | 0 | | | | 150,000 | | | | 25,000 | | | | 0 | | | | 175,000 | |
| CFO & (until January 2009) Controller (3 & 5) | | | 2009 | | | | 22,500 | | | | 123,750 | | | | 0 | | | | 0 | | | | 146,250 | |
| Controller (3) | | | 2008 | | | | 25,312 | | | | 0 | | | | 0 | | | | 0 | | | | 25,312 | |
| (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 Share Exchange between Emy’s and INVO Bioscience on December 5, 2008. She served in these positions until September 20, 2016, when she was elected Chairman of the Board, President and Chief Executive Officer in addition to her position as a director. In 2008 Ms. Karloff was awarded shares of common stock valued at $0.2857 per share for services rendered in 2007. |
| (2) | Dr. 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 Share Exchange between Emy’s and INVO Bioscience on December 5, 2008. Dr. Ranoux served in these positions until September 20, 2016, when all his officer positions were terminated, but he remained a director until his resignation on April 5, 2017. In 2008 Dr. Ranoux was awarded shares of common stock valued at $0.2857 per share for services rendered in 2007. |
| | |
| (3) | Robert Bowdring was elected as the Chief Financial Officer (and principal accounting officer) on January 2, 2009 after joining the Company in October 2008 as Controller. He resigned as CFO in March 2013 and was appointed to the Board of Directors. From March 2013 to date Mr. Bowdring served the Company as a consultant providing guidance to the financial and administrative areas, with compensation accrued at a rate of $10,000 per month. On September 20, 2016, he was elected Treasurer and Secretary, and in March 2017 he was elected Acting Chief Financial Officer (and acting principal accounting officer), in all of which positions he continues to serve to date in addition to remaining a Director. |
| (4) | The dollar value reported in 1 & 2 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. |
| (5) | During 2009, the named officers received only 17% of their 2009 salaries in order to assist the Company’s cash flow during the year. |
| (6) | From 2010 through 2015 the named officers and directors did not receive any of their compensation in order to assist the Company’s cash flow during this time period, 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 consultants would receive stock grants. The per share price was based on the closing market price on the date of issue less a two cent discount. |
| (7) | The dollar value reported in 6 for the issuance of shares was a per share price of $0.005 in 2013 and $0.150 in 2014. |
Compensation of Directors
None. Pursuant to an oral consulting agreement with Robert Bowdring, he has been accruing compensation for his oversight of the financial and administrative areas of the company at a rate of $10,000 per month as reflected in the table above.
Stock Option Grants
None.
Employment Contracts
Kathleen Karloff, who was Chief Executive Officer, Secretary and member of the Board of Directors during the period 2011 through 2015, executed an employment agreement with INVO Bioscience effective as of February 1, 2008. The agreement provided for an annual salary of $175,000, health and life insurance, and a retirement plan along with the reimbursement of certain expenses. In the event that Ms. Karloff’s employment is terminated other than for cause (as defined in the employment agreement), she would receive her salary and full medical benefits for twelve (12) months thereafter. Ms. Karloff voluntarily agreed to a salary reduction from January 1, 2008 to September 1, 2008, then again in 2011 to present, to reduce her compensation to $120,000 per year until sufficient financing has been obtained by the Company. However, this employment agreement expired but is anticipated to be re-established after the Company has obtained sufficient funding. Due to the lack of funding, Ms. Karloff’s salary has only been accrued and not paid to Ms. Karloff.
Dr. Claude Ranoux, who was President, Treasurer and member of the Board of Directors during the period 2011 through 2015, executed an employment agreement with INVO Bioscience effective as of February 1, 2008. The agreement provided for an annual salary of $175,000, health and life insurance, and a retirement plan along with the reimbursement of certain expenses. In the event that Dr. Ranoux’s employment is terminated other than for cause (as defined in the employment agreement), he would receive his salary and full medical benefits for twelve (12) months thereafter. Dr. Ranoux voluntarily agreed to a salary reduction from February 1, 2008 through September 1, 2008 to $86,478 per year, then again in 2012 to September 30, 2016 to $120,000 per year, until sufficient financing has been obtained by the company. However, this employment agreement expired but is anticipate to be re-established after the Company has obtained sufficient funding. Due to the lack of funding, Dr. Ranoux’s salary has only been accrued and not paid to Dr. Ranoux.
Robert Bowdring, a member of the Board of Directors from March 2013 through 2015, Controller from October 2008 to January 2009, Chief Financial Officer from January 2009 to March 2013, an employee from 2009 to March 2013, a consultant from March 2013 to date, Treasurer and Secretary from September 2016 to date, and Acting Chief Executive Officer (and acting principal accounting officer) from March 2017 to date, had executed an employment agreement with INVO Bioscience effective as of October 27, 2008. That employment agreement provided for an annual salary of $150,000, health and life insurance, and a retirement plan along with the reimbursement of certain expenses.
In the event that Mr. Bowdring’s employment was terminated other than for cause (as defined in the employment agreement), he would receive a severance package of 12 months of salary and full medical benefits. In 2012 to March 2013 Mr. Bowdring voluntarily agreed to a salary reduction to $120,000 until sufficient financing had been obtained by the Company. Due to the lack of funding, Robert Bowdring’s salary has only been accrued and not paid to him. In March 2013 Mr. Bowdring resigned as CFO, became a consultant to the Company, and was appointed as a member of the Board of Directors. From March 2013 Mr. Bowdring has been accruing compensation for his oversight of the financial and administrative areas of the Company at a rate of $10,000 per month, which has not been paid.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table and notes set forth the beneficial ownership of the common stock of the Company as of December 31, 2016 and 2015, respectively, by each person who was known by the Company to beneficially own more than 5% of the common stock, by each director and named executive officer, and by all directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or dispositive power with respect to the securities. Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and dispositive power with respect to their shares of our common stock, except to the extent authority is shared by spouses under applicable law. Unless otherwise noted, the address of all of the individuals and entities named below is care of INVO Bioscience, Inc., 407R Mystic Avenue, Suite 34C, Medford, Massachusetts 02155:
| Name and Address of Beneficial Owner (1) | | Nature of Security | | Number of Shares | | | Percentage of Common Stock | |
| | | | | | | | | |
| Claude Ranoux | | Common Stock | | | 27,073,122 | | | | 19.3 | % |
| | | | | | | | | | | |
| Kathleen Karloff | | Common Stock | | | 12,160,000 | | | | 8.6 | % |
| | | | | | | | | | | |
| Robert Bowdring | | Common Stock | | | 10,500,000 | | | | 7.5 | % |
| | | | | | | | | | | |
Jean Jacques Gabanelle (2) 622 Union Street, Duxbury, MA 02322 | | Common Stock | | | 9,251,254 | | | | 6.6 | % |
| | | | | | | | | | | |
| All directors and executive officers as a group (3 persons) | | | | | 49,733,122 | | | | 35.04 | % |
(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. The number of shares outstanding on December 31, 2016 was 140,596,646.
(2) Includes shares held in the name of Mr. Gabanelle and his wife.
| Name and Address of Beneficial Owner (1) | | Nature of Security | | Number of Shares | | | Percentage of Common Stock | |
| | | | | | | | | |
| Claude Ranoux | | Common Stock | | | 26,155,933 | | | | 19.1 | % |
| | | | | | | | | | | |
| Kathleen Karloff | | Common Stock | | | 12,160,000 | | | | 8.9 | % |
| | | | | | | | | | | |
| Robert Bowdring | | Common Stock | | | 9,500,000 | | | | 6.9 | % |
| | | | | | | | | | | |
Jean Jacques Gabanelle (2) 622 Union Street, Duxbury, MA 02322 | | Common Stock | | | 9,175,000 | | | | 6.7 | % |
| | | | | | | | | | | |
| All directors and executive officers as a group (3 persons) | | | | | 47,815,933 | | | | 34.9 | % |
(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. The number of shares outstanding on December 31, 2015 was 137,085,646.
Changes in Control
There are no present arrangements, including pledges of the Company’s securities, known to the Company, the operation of which may result at a subsequent date 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.
In particular, the Company has entered into several transactions with James Bowdring, the brother of the Company’s Director, Treasurer and Secretary Robert Bowdring. In the first such transaction, in December 2008, James Bowdring invested $100,000 to acquire 666,667 shares of the Company’s restricted common stock.
Then in April 2011 James Bowdring acquired the Q211 Note for $50,000. The Q211 Note, which now has a principal balance of $25,000, is convertible into shares of common stock at $.03 per share (subject to adjustment) and is now overdue. In addition, the Company issued James Bowdring warrants to purchase 1,666,667 shares of common stock at $.03 per share (subject to adjustment), which warrants have now expired unexercised. See “Note 7 Notes Payable and Other Related Party Transactions.”
Then in November 2011 the Company issued James Bowdring for $10,000 the Q411 Note, which is convertible into shares of restricted common stock at $.01 per share (subject to adjustment). James Bowdring also received warrants to purchase 500,000 shares of common stock at $.02 per share (subject to adjustment), which warrants have now expired unexercised. See “Note 7 Notes Payable and Other Related Party Transactions.”
Further, since November 2012 the Company has rented its corporate offices from Forty Four Realty Trust, which is owned by James Bowdring. This month to month lease has been for $4,800 per year since 2012, which we believe is a less than the going fair market rental rate. The Company also acquires stationary supplies and marketing materials at discounted rates from Superior Painting and Promotions, which is also owned by James Bowdring. The Company spent $4,100 and $5,000 with Superior Painting and Promotions in 2016 and 2015. See “Note 7 Notes Payable and Other Related Party Transactions.”
Item 14. Principal Accountant Fees and Services
Effective October 10, 2016, our independent registered public accounting firm is Liggett & Webb P.A. Our independent registered public accounting firm was RBSM LLP from March 2, 2009 to October 10, 2016. Set forth below are the fees and expenses invoiced Liggett & Webb P.A. for audit services provided to us in 2015 and by RBSM LLP for audit services provided to us in 2010. 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 2015 and 2010 fiscal years:
| | | Fiscal Years Ended December 31, 2016 | | | Fiscal Year Ended December 31, 2015 | |
| Audit Fees | | $ | 48,000 | | | $ | 50,000 | |
| Audit Related fees | | $ | -0- | | | $ | 14,000 | |
| Tax Fees | | $ | -0- | | | $ | -0- | |
| 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 2016 and 2015 were pre-approved by the entire Board of Directors.
Part IV
Item 15. Exhibits and Financial Statement Schedules
The following are filed as a part of this report:
1. Financial Statements
| | | Page |
| | |
| Report of Independent Registered Public Accounting Firm | | F-1 |
| | |
| Consolidated Balance Sheets as of December 31, 2016 and 2015 | | F-2 |
| | |
| Consolidated Statements of Losses for the Years Ended December 31, 2016 and 2015 | | F-3 |
| | |
| Consolidated Statement of Changes in Shareholders’ Deficit for the Period from January 1, 2015 to December 31, 2016 | | F-4 |
| | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015 | | F-5 |
| | |
| Notes to Consolidated Financial Statements | | F-6 |
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.
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 20, 2017.
| | INVO Bioscience, Inc. | |
| | | | |
| Date April 20, 2017 | 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 20, 2017.
| | | |
| Signature | | Capacity |
| | |
/s/Kathleen Karloff | | Chief and Principal Executive Officer and Director |
| Kathleen Karloff | |
| | |
| /s/Robert J Bowdring | | Director and Acting Chief Financial Officer (and acting principal accounting officer) |
| Robert J. Bowdring | | |
| | | |
/s/Kevin Doody | | Director |
| Kevin Doody, MD | | |
| 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(6) |
| 4.2 | | Form of Purchase Agreement(6) |
| 4.3 | | Form of Warrant Purchase Agreement(6) |
| 4.4 | | Reserve Equity Financing Agreement, dated October 28, 2009, by and between AGS Capital Group, LLC and INVO Bioscience, Inc(8) |
| 4.5 | | Registration Rights Agreement, dated October 28, 2009, by and between AGS Capital Group, LLC and INVO Bioscience, Inc.(8) |
| 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 (9) |
| 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 (9) |
| 10.1 | | Claude Ranoux Loan Agreement(5) |
| 10.2 | | Kathleen Karloff Loan Agreement(5) |
| 10.3 | | Claude Ranoux Revised Loan Amendment(5) |
| 10.4 | | Kathleen Karloff Revised Loan Agreement(7) |
| 21.01 | | |
| 31.01 | | |
| 31.02 | | |
| 32.01 | | |
| 32.02 | | |
| 101 | XBRL Interactive Data File |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
(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 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.
(6) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 17, 2009.
(7) 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.
(8) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 3, 2009.
(9) 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.
