The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)
Note 1 – Basis of Presentation
The accompanying consolidated balance sheet as of September 30, 2016, the consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015, changes in stockholders’ deficiency for the nine months ended September 30, 2016 and cash flows for the nine months ended September 30, 2016 and 2015 INVO Bioscience, Inc. (the “Company”), and the related information contained in these notes have been prepared by management and are unaudited. Certain prior year balances have been reclassified to conform to the current year presentation. These reclassifications did not affect previously reported net loss or stockholders’ deficiency. In the opinion of management, all adjustments (which include normal recurring and nonrecurring items) necessary to present fairly the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles for the periods presented have been made. Interim operating results are not necessarily indicative of operating results for a full year.
The preparation of our unaudited consolidated financial statements requires management 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 unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2015 Annual Report on Form 10-K previously filed by the Company with the Securities and Exchange Commission.
The Company considers events or transactions that have occurred after the unaudited consolidated balance sheet date of September 30, 2016, but prior to the filing of the unaudited consolidated financial statements with the SEC on this Quarterly Report on Form 10-Q, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure, as applicable. Subsequent events have been evaluated through the date of the filing of this Quarterly Report on Form 10-Q with the SEC.
Note 2 – Recent Accounting Pronouncements
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 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.
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment:
In January 2017, the FASB issued ASU 2017-04, which simplifies the test for goodwill impairment. This new guidance is effective for the Company beginning in fiscal year 2021. The Company is currently in the process of assessing the impact of this ASU on its consolidated financial statements.
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flow.
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)
Note 3 – Going Concern
As reflected in the accompanying unaudited consolidated financial statements for the quarter ended September 30, 2016, the Company is in its infancy with minimal revenues, had a net loss for the quarter of $210,822 for the three months ended September 30, 2016, had a net loss of $1,847,843 for the nine months ended September 30, 2016 and a cumulative net loss of $17,666,559, a working capital deficiency of $4,236,652, a stockholder deficiency of $4,341,236 and cash used in operations of $225,405 for the nine months ended September 30, 2016. This raises substantial doubt about its ability to continue as a going concern. The unaudited consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement its business plan.
Note 4 – Inventory
As of September 30, 2016 and December 31, 2015, the Company recorded the following inventory balances:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Work in Process
|
|
$
|
25,214
|
|
|
$
|
31,997
|
|
Finished Goods
|
|
|
60,251
|
|
|
|
33,423
|
|
Total Inventory
|
|
$
|
85,465
|
|
|
$
|
65,420
|
|
Note 5 – Property and Equipment
The estimated useful lives and accumulated depreciation for furniture, equipment and software are as follows as of September 30, 2016 and December 31, 2015:
|
Estimated Useful Life
|
Molds
|
3 to 7 years
|
Computers and Software
|
3 to 5 years
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Manufacturing Equipment- Molds
|
|
$
|
43,263
|
|
|
$
|
35,263
|
|
Accumulated Depreciation
|
|
|
(35,263
|
)
|
|
|
(35,263
|
)
|
|
|
|
8,000
|
|
|
|
-
|
|
Network / IT Equipment
|
|
|
7,595
|
|
|
|
7,595
|
|
Less: Accumulated Depreciation
|
|
|
(7,595
|
)
|
|
|
(7,595
|
)
|
|
|
$
|
8,000
|
|
|
$
|
-
|
|
During the three and nine months ended September 30, 2016 and 2015 the Company recorded $0 in depreciation expense during both periods. The Company received a new mold during the third quarter of 2016 but has not yet put it into production.
Note 6 – Patents
As of September 30, 2016 and December 31, 2015, the Company recorded the following patent balances:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Total Patents
|
|
$
|
77,743
|
|
|
$
|
77,743
|
|
Accumulated Amortization
|
|
|
(58,605
|
)
|
|
|
(56,727
|
)
|
Patent costs, net
|
|
$
|
19,138
|
|
|
$
|
21,016
|
|
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)
During the three months ended September 30, 2016 and 2015, the Company recorded $0 and $1,409 in amortization expenses, respectively. During the nine months ended September 30, 2016 and 2015, the Company recorded $1,878 and $2,817 respectively in amortization expenses.
Note 7 – Convertible Notes and Notes Payable
Convertible 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 and $10,000 as of September 30, 2016 and 2015 respectively. The related interest for the three months ended September 30, 2016 and 2015 was $252 and $252, respectively. The related interest for the nine months ended September 30, 2016 and 2015 was $750 and $14,500, respectively.
Note 8 – Notes 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, 2015 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, 2015, $20,000 respectively were repaid on the principal of the loan.
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)
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 $669 and $1,311with Superior Printing during both of the three and nine months ended September 30, 2016 and 2015 respectively.
Principal balances of the Related Party loans were as follows:
|
|
September 30, 2016
|
|
|
December 31, 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 $3,200 and $4,400 for the quarter ended September 30, 2016 and 2015, respectively and for the nine month periods of 2016 and 2015 the expense was $10,076 and $13,234 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 interest owed on their notes to the Company are $121,400 and $142,000 as of September 30, 2016 and December 31, 2015 respectively.
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)
Note 9 – Stockholders’ Equity
Nine months ended September 30, 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.
Nine months ended September 30, 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.
Note 10 – Stock Options and Warrants
As of September 30, 2016 and 2015, the Company did not have any options or warrants to acquire shares of Common Stock outstanding.
Note 11 – Income Taxes
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 at September 30, 2016 and December 31, 2015 are as follows:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Total deferred tax assets
|
|
$
|
7,066,000
|
|
|
$
|
6,327,000
|
|
Less valuation allowance
|
|
|
(7,066,000
|
)
|
|
|
(6,327,000
|
)
|
Total deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
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.
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)
Note 12 – 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.
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)
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.
Note 13 – Subsequent Events
On April 20, 2017 the Company filed its Annual Report on Form 10K for the year ended December 31, 2016 and on May 15, 2017 file it Current Report on Form 10Q for the three months ended March 31, 2017 any subsequent events are incorporated by reference in those two filings.
The Company has evaluated subsequent events through the date the financial statements were released.