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, 2018
(unaudited)
Note 1 – Basis of Presentation
The accompanying consolidated balance sheet as of September 30, 2018, the consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017 of 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, 2017 Annual Report on Form 10-K previously filed by the Company with the Securities and Exchange Commission (SEC).
The Company considers events or transactions that have occurred after the unaudited consolidated balance sheet date of September 30, 2018, 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
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification.
The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined not to be applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein.
ASU 2014-09 supersedes existing guidance on revenue recognition with a five-step model for recognizing and measuring revenue from contracts with customers. The objective of the new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance also requires a number of disclosures regarding the nature, amount, timing, and uncertainty of revenue and the related cash flows. The guidance can be applied retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with a cumulative effect adjustment to retained earnings for initial application of the guidance at the date of initial adoption (modified retrospective method). The Company adopted the new standard effective January 1, 2018 using the modified retrospective method applied to those contracts that were not completed or substantially completed as of January 1, 2018. The timing and measurement of revenue recognition under the new standard is not materially different than under the old standard. The adoption of the new standard did not have an impact on the Company’s consolidated financial statements.
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”). The updated standard addresses eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. Early adoption is permitted. The Company adopted ASU 2016-15 as of January 1, 2018. The adoption of ASU 2016-15 did not have an impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) (“ASU 2016-18”). The updated standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The Company adopted ASU 2016-18 as of January 1, 2018. The adoption of ASU 2016-18 did not have a material effect on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718) (“ASU 2017-09”). The updated standard clarifies when an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award. ASU 2017-09 is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. Early adoption is permitted. The Company adopted ASU 2017-09 as of January 1, 2018. The adoption of ASU 2017-09 did not have a material effect on the Company’s consolidated financial statements.
In February 2016, FASB issued ASU 2016-02, Leases (“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements.
In July 2017, FASB issued ASU 2017-11 (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). The new standard simplifies the accounting for certain financial instruments with down round features. Part I of ASU 2017-11 changes the classification analysis of certain equity-linked financial instruments, such as warrants and embedded conversion features, such that a down round feature is disregarded when assessing whether the instrument is indexed to an entity’s own stock under Subtopic 815-40, Contracts in Entity’s Own Equity. As a result, a down round feature, by itself, no longer requires an instrument to be remeasured at fair value through earnings each period, although all other aspects of the indexation guidance under Subtopic 815-40 continue to apply. Part II of ASU 2017-11 recharacterizes the indefinite deferral of certain provisions of Topic 480, Distinguishing Liabilities from Equity, (currently presented as pending content in the Codification) as a scope exception. No change in practice is expected as a result of these amendments. The new standard is effective for fiscal years beginning after December 15, 2018, early adoption is permitted. The amendments in Part II have no accounting impact and therefore do not have an associated effective date. The Company decided to early adopt this ASU 2017-11 and applied it to the convertible notes it issued during the quarter which are reflected in this Form 10Q.
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
Note 3 – Going Concern
As reflected in the accompanying unaudited consolidated financial statements for the quarter ended September 30, 2018, the Company has started commercialization of its product in the past 2 years within the US with minimal revenues, had a net loss for the nine months of $2,304,711, and a cumulative net loss of $20,949,842, a working capital deficiency of $4,456,724, a stockholder deficiency of $4,428,359, and cash used in operations of $366,648 for the nine months ended September 30, 2018. 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, 2018 and December 31, 2017, the Company recorded the following inventory balances:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Work in Process
|
|
$
|
24,357
|
|
|
$
|
24,357
|
|
Finished Goods
|
|
|
20,245
|
|
|
|
34,522
|
|
Total Inventory
|
|
$
|
44,602
|
|
|
$
|
58,879
|
|
Note 5 – Property and Equipment
The estimated useful lives and accumulated depreciation for furniture, equipment and software are as follows as of September 30, 2018 and December 31, 2017:
|
Estimated Useful Life
|
Molds
|
3 to 7 years
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Manufacturing Equipment- Molds
|
|
$
|
50,963
|
|
|
$
|
50,963
|
|
Accumulated Depreciation
|
|
|
(35,524
|
)
|
|
|
(35,263
|
)
|
Total
|
|
$
|
15,439
|
|
|
$
|
15,700
|
|
During the nine months ended September 30, 2018 and 2017 the Company recorded depreciation expense of $261 and $0, respectively. The Company began shipping its new retention device in August which triggered the start of depreciating our retention device mold during the current quarter.
Note 6 – Patents
As of September 30, 2018 and December 31, 2017, the Company recorded the following patent balances:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Total Patents
|
|
$
|
77,743
|
|
|
$
|
77,743
|
|
Accumulated Amortization
|
|
|
(64,817
|
)
|
|
|
(61,415
|
)
|
Patent costs, net
|
|
$
|
12,926
|
|
|
$
|
16,328
|
|
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
During the three and nine months ended September 30, 2018, the Company recorded $1,134 and $3,402 in amortization expenses respectively. No amortization expenses were recorded during the three and nine months ended September 30, 2017, the Company recorded $1,428 in amortization expense.
Estimated amortization expense as of September 30, 2018 is as follows:
Years ended December 31,
|
|
|
|
|
2018
|
|
$
|
1,134
|
|
2019
|
|
|
4,536
|
|
2020
|
|
|
1,809
|
|
2021
|
|
|
1,809
|
|
2022 and thereafter
|
|
|
3,638
|
|
Total
|
|
$
|
12,926
|
|
Note 7 – 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 carried 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 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.
From November 2009 through May 2015 $535,000 of the principal of the Bridge Notes were converted into shares of Common stock.
In March 2017, the Company converted the last Bridge Note in the amount of $10,000 and accrued interest into shares of common stock. The Company negotiated this conversion at a price lower than the conversion price stated in the original Bridge Note documents because the Bridge Note was past due. This conversion was treated as a restructure of debt. $10,000 of the Bridge Notes and accrued interest were converted into 341,000 shares of common stock resulting in a loss on debt settlement in the amount of $40,869.
The principal balances of the Convertible Notes was $0 as of September 30, 2018 and 2017. The related interest for the three months ended September 30, 2018 and 2017 was $0. The related interest for the nine months ended September30, 2018 and 2017 was $0.
Notes Payable
In August 2016, INVO Bioscience converted a long time vendor’s outstanding accounts payable balance of $131,722 into a Promissory Note with a three year term that accrues interest at 5% per annum. 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 August _9, 2019. The Company has the right to prepay the note at any time without a premium or penalty. The interest on this note for the three and nine months ended September 30, 2018 and 2017 were the same at $1,647 and $4,940, respectively.
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
2018 Convertible Notes Payable
In April and May 2018, the Company issued convertible notes (the “2018 Convertible Notes”) payable to investors in the aggregate principal amount of $895,000. The 2018 Convertible Notes accrue interest at the rate of 9% per annum which is paid in stock. 2018 Convertible Notes with an aggregate principal amount of $550,000 are due on January 30, 2021, and 2018 Convertible Notes with an aggregate principal amount of $345,000 are due on March 31, 2021. The notes are convertible into shares of common stock at a price of $0.20 per share, provided, that if the Company completes a subsequent equity financing, the holders of the 2018 Convertible Notes can elect to convert the notes in shares of our common stock at a price equal to 75% of the price paid per share in such subsequent equity financing.
The Company calculated a beneficial conversion feature of the 2018 Convertible Notes based on ASU 17-11 in the form of a discount of $895,000; $79,771 and $136,217 of this amount was amortized to interest expense during the three and nine months ended September 30, 2018, respectively, based on the three year term of the notes. In addition $20,302 and $34,645 of interest was expensed in the three and nine months ended September 30, 2018, 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. Dr. Ranoux had loaned funds to the Company to sustain its operations since January 5, 2007 (inception). Dr. Ranoux’s loan outstanding as of September 30, 2018 and 2017 was $21,888 (“the Principal Amount”). The loan accrues interest at 5% per annum, the term of the note has been extended a several times, and 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 nine months ended September 30, 2018 and 2017, $21,888 of principal and $6,071 of interest, respectively, were paid on this loan. The interest on this note for the nine months ended September 30, 2018 and 2017 was $821. At September 30, 2018, this loan has been paid in full.
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. Payments totaling $61,257 were made against this note during the nine months ended September 30, 2018.
The interest on these notes for the nine months ended September 30, 2018 and 2017 was $4,120.
On December 28, 2009 James Bowdring, the brother of Director & Acting Chief Financial Officer Robert Bowdring invested $100,000 acquiring 666,667 shares of common stock. In April 2011, the Company issued a 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 extended 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.
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
In November 2011, the Company issued another convertible note (“Q411 Note”) payable to James Bowdring in the amount of $10,000. The Q411 Note carries a 10% interest rate and was 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.
The Company has been renting our corporate office from Forty Four Realty Trust which is owned by James Bowdring, the brother of Director & Acting Chief Financial Officer, Robert Bowdring since November 2012. It is a month to month rental arrangement for what the Company believes is less than the fair market real estate rental rate for comparable leases. We have been paying $4,800 annually since 2012. In September 2018, however, the rent increased to $600 per month, or $7,200 annually. 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 $1,471 and $669 with Superior during the first nine months of 2018 and 2017, respectively.
Principal balances of the Related Party loans were as follows:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Claude Ranoux Note
|
|
$
|
-
|
|
|
$
|
21,888
|
|
|
|
|
|
|
|
|
|
|
James Bowdring Family - 2011 Notes
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
James Bowdring Family – 2018 Convertible Notes
|
|
|
40,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Kathleen Karloff Note
|
|
|
92,743
|
|
|
|
154,000
|
|
Less discount
|
|
|
(34,382
|
)
|
|
|
-
|
|
Total, net of discount
|
|
$
|
133,361
|
|
|
$
|
210,888
|
|
Interest expense on the Related Party loans was $8,765 and $8,729 for the nine months ended September 30, 2018 and 2017, 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:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accounts payable and accrued liabilities
|
|
$
|
96,000
|
|
|
$
|
127,000
|
|
During the nine months ended September 30, 2018, the Company sold 150,000 shares of common stock at a price of $0.20 per share for proceeds of $30,000 to Charles Mulrey and family, the brother-in-law of Robert J. Bowdring, Director & Acting Chief Financial Officer as part of the recent financing.
During the second quarter of 2018, INVO Bioscience settled a commitment it had with one of its Directors, Dr. Kevin Doody for the services he and his team performed prior to and following INVOcell’s FDA clearance related to clinical guidance and support. Dr. Doody and his team performed clinical studies and provided papers, lectures and discussions with regulatory bodies and key opinion leaders in the industry. The Company believes without Dr. Doody’s services and support during his tenure the Company would not be where it is today. The Company issued Dr. Doody 3 million shares of our common stock with a fair value of $1,530,000.
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
Note 9 – Stockholders’ Equity
Nine Months Ended September 30, 2018
In January and March 2018, pursuant to Section 4(a)(2) of the Securities Act, the Company sold 260,000 shares of common stock to accredited investors in a private placement for cash of $47,000.
In January 2018, pursuant to Section 4(a)(2) of the Securities Act, the Company issued 1,200,000 shares of common stock with a fair value of $138,000 to management and board members.
In January and March 2018, pursuant to Section 4(a)(2) of the Securities Act, the Company issued 352,326 shares of common stock with a fair value of $43,664 to service providers.
In April and May 2018, pursuant to Section 4(a)(2) of the Securities Act, the Company issued 340,000 shares of common stock with a fair value of $174,800 to service providers.
In May 2018, pursuant to Section 4(a)(2) of the Securities Act, the Company sold 150,000 shares of common stock to accredited investors who are family members of Robert J Bowdring, a Board Member in a private placement for cash of $30,000.
In May 2018, pursuant to Section 4(a)(2) of the Securities Act, the Company issued 3,020,000 shares of common stock with a fair value of $1,540,000 to a board member, Dr. Kevin Doody for services previously provided to the Company.
Nine Months Ended September 30, 2017
In March 2017, pursuant to Section 4(a)(2) of the Securities Act, the company issued 196,000 shares of common stock with a fair value of $59,242 to service providers.
In March 2017, pursuant to Section 4(a)(2) of the Securities Act, the Company negotiated the conversion of $10,000 of past due Bridge Notes and accrued interest into 341,000 shares of common stock resulting in a loss on debt settlement in the amount of $40,869.
In April 2017, pursuant to Section 4(2) of the Securities Act, the company issued 51,750 shares of common stock with a fair value of $17,201 to service providers.
In June 2017, pursuant to Section 4(2) of the Securities Act, the company issued 99,412 shares of common stock with a fair value of $30,898 to service providers.
In September 2017, pursuant to Section 4(2) of the Securities Act, the company issued 133,960 shares of restricted common stock with a fair value of $28,576 to service providers.
In September 2017, pursuant to Section 4(2) of the Securities Act, the company issued 262,500 shares of restricted common stock for cash proceeds of $44,626.
Note 10 – Stock Options and Warrants
As of September 30, 2018 and December 31, 2017, the Company does not have any outstanding or committed and unissued stock options or warrants.
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
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, 2018 and December 31, 2017 are as follows:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Total deferred tax assets
|
|
$
|
4,260,000
|
|
|
$
|
3,730,000
|
|
Less valuation allowance
|
|
|
(4,260,000
|
)
|
|
|
(3,730,000
|
)
|
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.
Note 12 – Commitments and Contingencies
In November 2012, INVO Bioscience entered into a 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 & Acting Chief Financial Officer Robert Bowdring. The annual rent under the agreements was increased from $4,800 annually to $7,200 annually in September 2018.
There has been no change in the status of the litigation INVO Bioscience, Inc., and two of its directors have been involved in 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.
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
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 have received shares of stock as compensation for not being paid. 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 & Acting Chief Financial Officer, 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.
Note 13 – Contracts with Customers
We have adopted ASC 606,
Revenue from Contracts with Customers
effective January 1, 2018 using the modified retrospective method applied to those contracts which were not substantially completed as of January 1, 2018
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These standards provide guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenues for 2018 are reported under ASC 606, while prior period amounts are not adjusted and continue to be reported under ASC 605,
Revenue Recognition
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INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
We routinely enter into agreements with customers that include general commercial terms and conditions, notification requirements for price increases, shipping terms and in most cases prices for the products that we offer. However, these agreements do not obligate us to provide goods to the customer and there is no consideration promised to us at the onset of these arrangements. For customers without separate agreements, we have a standard list price established by geography and by currency for all products and our invoices contain standard terms and conditions that are applicable to those customers where a separate agreement is not controlling. Our performance obligations are established when a customer submits a purchase order or e-mail notification (in writing, electronically or verbally) for goods, and we accept the order. We identify performance obligations as the delivery of the requested product(s) in appropriate quantities and to the location specified in the customer’s e-mail/or purchase order. We generally recognize revenue upon the satisfaction of these criteria when control of the product has been transferred to the customer at which time we have an unconditional right to receive payment. Our prices are fixed and are not affected by contingent events that could impact the transaction price. We do not offer price concessions and do not accept payment that is less than the price stated when we accept the purchase order, except in rare credit related circumstances. We do not have any material performance obligations where we are acting as an agent for another entity.
Revenues for products, including: INVOcell
®
, INVO
TM
Retention System, and INVO Microscope Holding Block are typically recognized at the time the product is shipped, at which time the title passes to the customer, and there are no further performance obligations. Revenues from consignment are recognized when the medical device is shipped from the Consignor to the customer.
Sources of Revenue
We have identified the following revenues disaggregated by revenue source:
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1.
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Domestic Physicians – direct sales of products.
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2.
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International Distributors – direct sales of products.
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For the nine months ended September 30, 2018 and 2017 the source of revenue was only from Domestic Physicians.
Contract Balances
We incur agreement obligations on general customer purchase orders and e-mails that have been accepted but unfulfilled. Due to the short duration of time between order acceptance and delivery of the related product, we have determined that the balance related to these obligations is generally immaterial at any point in time. We monitor the value of orders accepted but unfulfilled at the close of each reporting period to determine if disclosure is appropriate.
Warranty
Our general product warranties do not extend beyond an assurance that the product delivered will be consistent with stated specifications and do not include separate performance obligations.
Significant Judgments in the Application of the Guidance in ASC 606
There are no significant judgments associated with the satisfaction of our performance obligations. We generally satisfy performance obligations upon delivery of the product to the customer. This is consistent with the time in which the customer obtains control of the products. Therefore the value of unsatisfied performance obligations at the end of any reporting period is generally immaterial. We consider variable consideration in establishing the transaction price. Forms of variable consideration applicable to our arrangements include sales returns, rebates, volume based bonuses, and prompt pay discounts. We use historical information along with an analysis of the expected value to properly calculate and to consider the need to constrain estimates of variable consideration. Such amounts are included as a reduction to revenue from the sale of products in the periods in which the related revenue is recognized and adjusted in future periods as necessary.
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
Commissions and Contract Costs
We do not use or offer sales commissions of any type at this time. We generally do not incur incremental charges associated with securing agreements with customers which would require capitalization and recovery over the life of the agreement.
Practical Expedients
Our payment terms for sales direct to customers and distributors are substantially less than the one year collection period that falls within the practical expedient in determination of whether a significant financing component exists.
Shipping and Handling Charges
Fees charged to customers for shipping and handling of products are included as an offset to the costs for shipping and handling of products included as a component of cost of products.
Taxes Collected from Customers
As our products are used in another service and are exempt, to this point we have not collected taxes. If we were to collect taxes they would be on the value of transaction revenue and would be excluded from product revenues and cost of sales and would be accrued in current liabilities until remitted to governmental authorities.
Effective Date and Transition Disclosures
Adoption of the new standards related to revenue recognition did not have a material impact on our consolidated financial statements, and is not expected to have a material impact in future periods.
Note 14 – Subsequent Events
In October 2018, the Company issued the following shares of common stock for payment of services and to settle a portion of the outstanding accrued compensation and convertible notes payable to improve the balance sheet:
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380,000 shares of common stock with a fair value of $153,800 were issued to service providers for services performed;
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1,233,719 shares of common stock with a fair value of $481,150 were issued to employees reducing accrued compensation;
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2,056,107 shares of common stock with a fair value of $801,882 were issued to officers for previously accrued compensation;
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625,250 shares of common stock with a fair value of $244,000 were issued to directors as bonuses;
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600,000 shares of common stock with a fair value of $234,000 were issued to directors as compensation for 2019;
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1,099,560 shares of common stock with a fair value of $219,912 were issued in connection with the conversion of notes payable.
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On November 12, 2018, INVO Bioscience, Inc (the “Company”) entered into a Distribution Agreement with Ferring International Center S.A. (“Ferring”), pursuant to which, among other things, the Company granted to Ferring an exclusive license in the United States (the “Territory”) with rights to sublicense under patents related to the Company’s proprietary intravaginal culture device known as INVOcell™, together with the retention device and any other applicable accessories (collectively, the “Licensed Product”) to market, promote, distribute and sell the Licensed Product with respect to all therapeutic, prophylactic and diagnostic uses of medical devices or pharmaceutical products involving reproductive technology (including infertility treatment) in humans (the “Field”). Ferring is responsible, at its own cost, for all commercialization activities for the Licensed Product in the Field in the Territory. The Company does retain a limited exception to the exclusive license granted to Ferring allowing the Company, subject to certain restrictions, to establish up to five clinics that will commercialize INVO cycles in the Territory. The Company retains all commercialization rights for the Licensed Product outside of the United States.
INVO BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
Under the terms of the Distribution Agreement, Ferring is obligated to make an initial payment to the Company of $5,000,000 upon satisfaction of certain closing conditions, including an agreement from all current manufacturers of the Licensed Product that upon a material supply default by the Company, Ferring can assume a direct purchase relationship with such manufacturers. The Closing under the Distribution Agreement will not occur prior to January 14, 2019 without consent of the Company and Ferring. Ferring is obligated to make a second payment to the Company of $3,000,000 provided that the Company is successful in obtaining a five (5) day label enhancement from the FDA for the current incubation period for the Licensed Product at least three (3) years prior to the expiration of the term of the license for the Licensed Product and provided further that Ferring has not previously exercised its right to terminate the Distribution Agreement for convenience. In addition, under the terms of a separate Supply Agreement, attached as an exhibit to the Distribution Agreement, Ferring is obligated to pay the Company a specified supply price for each Licensed Product purchased by Ferring for distribution.
The Distribution Agreement has an initial term expiring on December 31, 2025 and at the end of the initial term it may be terminated by the Company if Ferring fails to generate specified minimum revenues to the Company from the sale of the Licensed Product during the final two years of the initial term. Provided that no such termination occurs at the end of the initial term, thereafter the term of the Distribution Agreement shall automatically be renewed for successive three (3) years terms unless terminated by mutual consent. The Distribution Agreement is subject to termination upon a material breach by either party, or by Ferring for convenience. In addition, if the closing under the Distribution Agreement does not occur within seventy five (75) days, a non-breaching party may elect to terminate the Distribution Agreement.
The foregoing summary of the terms of the Distribution Agreement does not purport to be complete and is qualified in its entirety by reference to the Distribution Agreement, copies of which will be filed with the Securities and Exchange Commission by the Company with its Annual Report on Form 10-K for the fiscal year ending December 31, 2018, requesting confidential treatment for certain portions.
The Company has evaluated subsequent events through the date the financial statements were released and there were no others.