UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q
 
 
  x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2009
 
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from                             to                                        
        
Commission file number 333-147330
 
INVO Bioscience, Inc.
(Exact name of registrant as specified in its charter)

Nevada
 
20-4036208
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
100 Cummings Center Suite 421E, Beverly, MA 01915
(Address of principal executive offices, including zip code)

  (978) 878-9505
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes   o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x  Yes   o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o
Accelerated filer   o
Non-accelerated filer  o (Do not check if a smaller reporting company)
Smaller reporting company     x
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes   x No
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Shares of common stock, par value $.0001 per share:  53,828,333 shares outstanding as of August 11, 2009.
 
 
 
 
 
INVO Bioscience, Inc.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2009
 
TABLE OF CONTENTS
 
Item
 
Page Number
Part I
     
1.
3
1a.
3
1b.  4
1c.
5
1d.
6
1e.
7
2.
14
3.
17
4.
17
4a.
17
4b.
18
     
Part II
     
1.
19
1A.
19
2.
19
3.
19
4.
19
5.
19
6.
19
 
20

 
 
2
 
 
PART I.  FINANCIAL INFORMATION

ITEM I.  Financial Statements
   
June 30,
2009 (unaudited)
   
December 31,
2008
 
Assets
 
Current Assets:
           
  Cash
 
$
82
   
$
15,716
 
  Accounts receivable, net
   
65,546
     
34,195
 
  Other receivable
   
-
     
7,500
 
  Inventory
   
68,515
     
70,722
 
  Prepaid expenses
   
32,095
     
73,785
 
   Total current assets
   
166,238
     
201,918
 
                 
  Property and equipment, net
   
37,041
     
41,245
 
                 
Other Assets:
               
  Capitalized patents, net
   
65,576
     
68,392
 
   Total other assets
   
65,576
     
68,392
 
                 
  Total assets
 
$
268,855
   
$
311,555
 
                 
Liabilities and Stockholders' Deficiency
 
                 
Current Liabilities:
               
  Accounts payable
 
$
778,827
   
$
226,861
 
  Accrued expenses and salaries
   
723,917
     
614,799
 
  Note payable- related party
   
88,000
     
-
 
  Line of credit
   
50,000
     
50,000
 
   Total current liabilities
   
1,640,744
     
891,660
 
                 
Long Term Liabilities:
               
  Note payable- related party
   
96,462
     
96,462
 
   Total long term liabilities
   
96,462
     
96,462
 
                 
  Total liabilities
   
1,737,206
     
988,122
 
                 
Commitments and Contingencies
               
Stockholders' Deficiency:
               
Preferred Stock, $.0001 par value; 100,000,000 shares authorized;
No shares issued and outstanding as of June 30, 2009 and December 31, 2008 
   
-
     
-
 
 Common Stock, $.0001 par value; 200,000,000 shares authorized; 53,828,333 and 53,620,000 issued and outstanding as of June 30, 2009 and December 31, 2008, respectively.
   
5,383
     
5,362
 
Additional paid-in capital
   
1,908,545
     
1,855,565
 
Stock subscription receivable
   
(205,000)
     
(450,000)
 
  Accumulated deficit during the development stage
   
(3,177,279
)
   
(2,087,494
)
   Total stockholders' deficiency
   
(1,468,351
)
   
(676,567
)
                 
  Total liabilities and stockholders' deficiency
 
$
268,855
   
$
311,555
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
3
 
 
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
  CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
 
   
For the three
 months ended
June 30, 2 009
   
For the three
months ended
June 30, 2008
   
From January 5, 2007 (Inception) to
June 30, 2009
 
Revenue:
 
 
             
Product Revenue
  $ 16,630     $ -     $ 91,440  
Cost of Goods Sold:
                       
Product Costs
    6,177       -       36,934  
                         
Gross Margin:
    10,453       -       54,506  
                         
Operating Expenses:
                       
   Research and development
          17,500       90,061  
   Selling, general and administrative
    444,103       256,522       3,115,779  
   Total Operating Expenses
    444,103       274,022       3,205,840  
                         
Loss from operations
    (433,650 )     (274,022 )     (3,151,334 )
                         
Other Expenses:
                       
   Interest expense
    5,081       1,947       25,945  
   Total other expenses
    5,081       1,947       25,945  
                         
Loss before income taxes
    (438,731 )     (275,969 )     (3,177,279 )
                         
Provisions for income taxes
    -       -       -  
                         
Net Loss
  $ (438,731 )   $ (275,969 )     (3,177,279 )
                         
Basic and diluted net loss per weighted average shares of common stock
  $ (0. 008 )   $ (0.008 )        
Basic and diluted Weighted average number of shares of common stock
    53,786,667       36,419,937          
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
4
 
 
INVO BIOSCIENCE , INC.
(A DEVELOPMENT STAGE COMPANY)
  CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
 
 
 
For the six months ended June 30, 2009
    For the six months ended June 30, 2008     From January 5, 2007
(Inception) to
June 30, 2009
 
Revenue:
                 
Product Revenue
  $ 53,445     $ -     $ 91,440  
Cost of Goods Sold:
                       
Product Costs
    26,846       -       36,934  
                         
Gross Margin:
    26,599       -       54,506  
                         
Operating Expenses:
                       
   Research and development
    4,950       17,500       90,061  
   Selling, general and administrative
    1,101,003       295,754       3,115,779  
    Total Operating Expenses
    1,105,953       313,254       3,205,840  
                         
Loss from operations
    (1,079,354 )     (313,254 )     (3,151,334 )
                         
Other Expenses:
                       
   Interest expense
    10,431       4,026       25,945  
    Total other expenses
    10,431       4,026       25,945  
                         
Loss before income taxes
    (1,089,785 )     (317,280 )     (3,177,279 )
                         
Provisions for income taxes
    -       -       -  
                         
Net Loss
  $ (1,089,785 )   $ (317,280 )   $ (3,177,279 )
                         
Basic and diluted net loss per weighted average shares of common stock
  $ (0.020 )   $ (0.010 )        
Basic and diluted Weighted average number of shares of common stock
    53,717,222       32,493,732          
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
5
 
 
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
For the six months ended
June 30, 2009
   
For the six months ended
June 30, 2008
   
From
January 5, 2007
(Inception) to
June 30, 2009
 
                         
Net Loss
 
$
(1,089,785
)
 
$
(317,280
)
 
$
(3,177,279
)
Adjustments to reconcile net loss to net cash used in operating activities:
                       
  Non-cash stock compensation issued for services
   
53,000
     
-
     
104,585
 
  In kind contribution to employees
   
                -
     
-
     
251,686
 
    Bad debt expense
   
2,600
     
-
     
6,400
 
  Interest expense - related party
   
          1,850
             
7,838
 
  Depreciation and amortization
   
7,020
     
5,968
     
20,681
 
Changes in operating assets and liabilities:
                       
  Receivables
   
(33,951
)
   
-
     
(79,446
)
  Inventories
   
2,207
     
(4,150
) 
   
(68,515
)
  Prepaid expenses and other current assets
   
49,190
     
(29,395
) 
   
(36,445
)
  Accounts payable
   
551,967
     
32,045
     
  778,558
 
  Accrued salaries
   
256,555
     
-
     
256,555
 
  Other accrued expense
   
(149,287)
     
153,382
     
404,078
 
Net cash used in operating activities
   
(348,634
)
   
(159,430
)
   
(1,531,304
)
                         
                         
Cash flows from investing activities:
                       
Purchase of equipment
   
                -
     
  -
     
(42,858
)
Purchase of intangible assets
   
-
     
(7,320
)
   
(77,742
)
Net cash used in investing activities
   
-
     
(7,320
)
   
(120,600
)
                         
Cash flows from financing activities:
                       
Proceeds from demand note payable
   
                -
     
779
     
50,000
 
Proceeds from loan payable- insurance
   
                -
             
70,587
 
Proceeds from loan payable- related party
   
88,000
     
2,916
     
190,889
 
Repayment of loan payable- related party
   
               -
     
  -
     
(6,428
)
Proceeds from issuance of common stock
   
               -
     
 163,055
     
1,101,938
 
Proceeds from subscription receivable
   
245,000
     
  -
     
245,000
 
Net cash provided by financing activities
   
333,000
     
166,750
     
1,651,986
 
                         
Net increase in cash and cash equivalents
 
 $
(15,634
 )
 
 $
-
   
 $
82
 
                         
Cash and cash equivalents at beginning of period
 
 $
15,716
   
 $
-
   
 $
-
 
                         
Cash and cash equivalents at end of period
 
 $
82
   
 $
-
   
 $
82
 
                         
Supplemental disclosure of non-cash financing activity:
                       
  Cash paid for interest
 
 $
10,431
   
 $
4,026
   
 $
25,945
 
  Cash paid for taxes
 
 $
456
   
 $
             -
   
 $
456
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
6
 
 
INVO BIOSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
 
NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION

(A)              Description of Business

INVO Bioscience, Inc. (“the Company”) intends to commercialize its proven and patented technology that will revolutionize the treatment of infertility.  The Company’s device, the INVOcell and the INVO procedure are designed to provide an alternative infertility treatment for the patient and the clinician; it is less expensive and simpler to perform than current infertility treatments.  The simplicity of the INVO procedure relates to the ability to potentially perform the infertility procedure in a physician’s practice rather than in a specialized facility at a much lower cost overall than current infertility treatments.  Therefore, the Company believes that the INVO procedure will be available in many more locations than conventional IVF especially outside the US.  INVO also allows conception and embryo development to take place inside the woman's body; an attractive feature for most couples.

We are a development stage company, as defined by Statement of Financial Accounting Standards (“SFAS”) No. 7.  The Company’s activities during the development stage include developing the business plan, seeking regulatory clearance in the European Union and the United States and raising capital.

Through June 30, 2009, we have generated minimal sales revenues, have incurred significant expenses and have sustained losses.  Consequently, our operations are subject to all the risks inherent in the establishment of a new business enterprise.

In May 2008, the Company received notice that the INVOcell product meets all the essential requirements of the relevant European Directive(s), and received CE Marking.  The CE marking (also known as CE mark) is a mandatory conformity mark on many products placed on the single market in the European Economic Area (EEA).  The CE marking (an acronym for the French “Conformité Européenne”) certifies that a product has met EU health, safety and environmental requirements, which ensure consumer safety.

With CE Marking, the Company now has the ability and necessary regulatory authority to distribute its product in the European Economic Area ( i.e., the European Union, Canada, Australia, New Zealand, and most parts of the Middle East).  The Company has sold approximately 900 INVOcell units to date since we commenced sales in the late fall 2008.
 
(B)              Basis of Presentation

On December 5, 2008, the Company completed a share exchange with Emy’s Salsa Aji Distribution Company, Inc. (“Emy’s”) a publicly registered shell corporation with no significant assets or operations.  Emy’s was incorporated on July 11, 2005, under the laws of the State of Nevada under the name Certiorari Corp.  In connection with the share exchange, INVO Bioscience became Emy’s wholly-owned subsidiary and the INVO Bioscience Shareholders acquired control of Emy’s.  

For accounting purposes, the Company accounted for the transaction as a recapitalization and the Company is the surviving entity.  In connection with the share exchange, 14,937,500 shares were retained by Emy’s shareholders.  Effective with the Agreement, all previously outstanding shares of common owned by the Company's shareholders were exchanged for an aggregate of 38,307,500 shares of Emy’s common stock.  Effective with the Agreement, Emy’s changed its name to INVO Bioscience Inc.

All references to Common Stock, share and per share amounts have been retroactively restated to reflect the exchange ratio of 357.0197 shares of INVO Bioscience common stock for one share of Emy’s common stock outstanding immediately prior to the merger as if the exchange had taken place as of the beginning of the earliest period presented.

The accompanying unaudited condensed consolidated financial statements present the historical financial condition, results of operations and cash flows of the Company prior to the merger with Emys.  The accompanying unaudited condensed consolidated financial statements present on a consolidated basis the accounts of the Company and its wholly owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
 
7
 
 
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
 
(C)               Significant Accounting Policies

The financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report filed on Form 10K for the year ended December 31, 2008.  The condensed consolidated balance sheet as of December 31, 2008 was derived from the audited financial statements for the year then ended.

In the opinion of the Company, all adjustments necessary to present fairly our financial position and the results of our operations and cash flows have been included in the accompanying unaudited condensed consolidated financial statements.  The results of operations for interim periods are not necessarily indicative of the expected results for the full year.

 Use of Estimates

In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period.  Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.  As of June 30, 2009, and December 31, 2008, the Company had $100 and $15,700 in cash equivalents, respectively.
 
(D)              Recent Accounting Pronouncements     
 
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting. SFAS 168 represents the last numbered standard to be issued by FASB under the old (pre-Codification) numbering system, and amends the GAAP hierarchy. On July 1, FASB will launch new FASB’s Codification (full name: the FASB Accounting Standards Codification TM.) The Codification will supersede existing GAAP for nongovernmental entities; governmental entities will continue to follow standards issued by FASB's sister organization, the Governmental Accounting Standards Board (GASB). This pronouncement has no effect on the Company’s financial statements.
 
In June 2009, the FASB issued SFAS No. 167, a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and will change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. Under SFAS No. 167, determining whether a company is required to consolidate an entity will be based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. SFAS 167 is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis.  The Company does not expect the adoption of SFAS No. 167 will have a material effect on its  financial position, results of operations or cash flows.
 
In June 2009, the FASB issued SFAS No. 166, a revision to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transferred of financial assets and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The Company does not expect the adoption of SFAS No. 140 will have a material effect on its  financial position, results of operations or cash flows.
 
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 is intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The Company does not expect the adoption of SFAS No. 165 will have a material effect on its  financial position, results of operations or cash flows.
 
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company's present or future consolidated financial statements.
    
 
8
 
 
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
 
NOTE 2  GOING CONCERN
 
As reflected in the accompanying unaudited condensed consolidated financial statements, the Company is in the development stage and has just commenced operations in December 2008, has a net loss for the quarter of $439,000 and a cumulative net loss of $3,177,000, a working capital deficiency of $1,474,000, a stockholder deficiency of $1,468,000 and cash used in operations of $349,000 for the six months ended June 30, 2009.  This raises substantial doubt about its ability to continue as a going concern.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.  The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement its business plan.
 
NOTE 3  INVENTORY

As of June 30, 2009 and December 31, 2008, the Company recorded the following inventory balances:

   
June 30,
2009
   
December 31,
2008
 
Raw Materials
 
$
-
   
$
-
 
Work in Process
   
49,507
     
55,465
 
Finished Goods
   
19,008
     
15,257
 
Total Inventory
 
$
68,515
   
$
70,722
 
 
NOTE 4  PROPERTY AND EQUIPMENT

The estimated useful lives and accumulated depreciation for furniture, equipment and software are as follows:

 
Estimated Useful Life
Molds
3 to 7 years
Computers and Software
3 to 5 years

   
June 30,
2009
   
December 31,
2008
 
Manufacturing Equipment- Molds
 
$
35,263
   
$
35,263
 
  Accumulated Depreciation
   
(3,918
) 
   
(980
) 
Network/IT Equipment
   
7,595
     
7,595
 
  Accumulated Depreciation
   
(1,899
) 
   
(633
) 
   
$
37,041
   
$
41,245
 
 
During the six months ended June 30, 2009 the Company recorded $4,204 and $0 in depreciation expense respectively.
 
 
9
 
 
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
NOTE 5.  PATENTS

As of June 30, 2009 and December 31, 2008, the Company recorded the following patent balances:

   
June 30,
2009
   
December 31,
2008
 
Total Patents
 
 $
77,743
   
 $
77,743
 
Accumulated Amortization
   
(12,167
)
   
(9,351
)
Patent costs, net
 
$
65,576
   
$
68,392
 

During the six months ended June 30, 2009 and 2008, the Company recorded $ 2,816 and $1,728, respectively in amortization expenses
 
NOTE 6  WORKING LINE OF CREDIT

At June 30, 2009, the Company had a $50,000 working capital line of credit with Century Bank with interest payable monthly at 0.24% above the bank’s prime lending rate.  On July 1, 2009 the rate was 3.74%, maturing May 31, 2010.  At June 30, 2009 and December 31, 2008, the balance outstanding on the line of credit was $50,000.
 
NOTE 7  NOTE PAYABLE AND OTHER RELATED PARTY TRANSACTIONS

On September 18, 2008, the Company entered into a related party transaction with Dr. Claude Ranoux.  Dr. Ranoux is the President, Director and Chief Scientific Officer of the Company.  Dr. Ranoux had loaned funds to the Company to sustain its operations since January 5, 2007 (inception).  Dr. Ranoux’s total cumulative investment at June 30, 2009 is $96,462 in INVO Bioscience.  On March 26, 2009, the Company and Dr Ranoux agreed to amend the agreement to a non-convertible note payable bearing interest at 5% per annum and extended the repayment date to March 31, 2010.  The Company and Dr. Ranoux can jointly decide to repay the loan earlier without prepayment penalties. 

On March 5, 2009, the Company entered into a related party transaction with Kathleen Karloff the CEO and a Director of the Company.  Ms. Karloff provided a short-term loan in the amount of $75,000 at a 5% interest rate to the Company to fund operations. In May, Ms. Karloff  loaned the Company an additional $13,000 making her total cumulative investment at June 30, 2009,  $88,000  in INVO Bioscience, the note is due on September 15, 2009. 

For the three months ended June 30, 2009 and 2008, the Company recorded $5,081 and $1,947 in interest expense respectively, 2008 was charged as an in-kind contribution.  Additionally for the six months ended June 30, 2009 and 2008, the Company recorded $10,431 and $4,026 in interest expense respectively, again with 2008 being charged as an in-kind contribution.
 
NOTE  8  STOCKHOLDERS’ EQUITY
 
For the period from January 5, 2007 (inception) through December 31, 2007, BioXcell (INVO Bioscience) issued 70,000 shares of common stock for $20,000, at $.2857/share.  This was retroactively restated to 24,991,379 shares due to the stock split on November 12, 2008 and the subsequent share exchange  on December 5, 2008.
 
On December 29, 2008, the Company filed an amended and restated articles of incorporation with the Secretary of State of Nevada.  The Company’s authorized capital stock was changed from 75,000,000 shares, all of which were shares of Common Stock, par value $.0001 per share , to authorized Common Stock of 200,000,000 shares, par value $.0001, and 100,000,000 newly created shares of undesignated preferred stock, par value $.0001.
 
On November 7, 2008, Our predecessor’s Board of Directors approved a 5-1 forward stock split (the “Forward Split”) of our Common Stock with a record date of November 10, 2008 for the Company’s issued and outstanding shares and not its authorized shares.  The Forward Split was payable on November 12, 2008.  Emy’s had 12,387,500 shares outstanding prior to the Forward Split and 61,937,500 shares outstanding thereafter.
 
 
10
 
 
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
 
The Company had 61,937,500 shares issued and outstanding immediately prior to the Share Exchange.  Pursuant to the Share Exchange Agreement, certain shareholders of Emy’s agreed to cancel 47,000,000 shares of Emy’s Common Stock and Emys agreed to issue 38,307,500 newly-issued shares of Common Stock to INVO Bioscience shareholders.  As of December 5, 2008 and immediately after Closing, an aggregate of 53,245,000 shares of Common Stock were outstanding, including shares issued pursuant to the Closing.

After the consummation of the transaction contemplated by the Share Exchange Agreement, on the day of the Closing, we entered into the Securities Purchase Agreement with investors pursuant to which, the investors contributed $375,000 in exchange for 375,000 shares of our Common Stock at a price of $1.00 per share.  The investors have piggyback registration rights that permit them to register their Common Stock on any registration statement filed by the Company, as well as anti-dilution protection.

During the period from January 1, 2008 through November 30, 2008, the Company issued an aggregate of 4,561,641 shares of Common Stock for cash totaling $706,938 for share prices ranging from $0.15 to $1.50.

In March 2008, the Company issued an aggregate of 8,488,857 shares of Common Stock (net of forfeitures) for services rendered totaling $11,259.  In November 2008, the Company issued an aggregate of 265,623 shares of Common Stock for services rendered totaling $40,056.

In March 2009, the Company issued an aggregate of 83,333 shares of Common Stock for services rendered totaling $37,500.

In April, 2009, the Company received $45,000 against the outstanding stock subscription receivable.  As of June 30, 2009, $205,000 remains outstanding.

In May 2009, the Company issued an aggregate of 125,000 shares of Common Stock for services rendered totaling $15,500.
 
Since January 1, 2008, the Company has signed agreements in place for certain of its officers, executives and service providers of the Company.  As of December 31, 2008, a total of 303,500 shares of Common Stock and options to purchase an additional 637,000 (including 461,000 of employee incentive stock options) of the Company’s Common Stock were agreed to be issued.  As of June 30, 2009, the Company has not issued the committed shares but has recorded an accrued liability of $313,500.  As of June 30, 2009, the Company has not deemed the 637,000 options as granted until the plan is approved. 
 
Non-Statutory Options

The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s Common Stock issued.  These options were agreed to be issued in lieu of cash compensation for services performed.

     
Options Outstanding
 
Options Exercisable
 
Exercise Prices
   
Number
Outstanding
   
Weighted Average
Remaining Contractual
Life (Years)
 
Number
Exercisable
 
Weighted
Average
Exercise Price
 
$
1.00
     
70,000
     
2.9
   
 $
-
   
$
-
 
 
 
11
 
 
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
 
Transactions involving warrants are summarized as follows:
   
Number of
Shares
   
Weighted
Average Price
Per Share
 
Outstanding at January 5, 2007
   
-
   
$
-
 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Canceled or expired
   
-
     
-
 
Outstanding at December 31, 2007
   
-
   
$
-
 
Granted
   
140,000
     
1.00
 
Exercised
   
-
     
-
 
Canceled or expired
   
-
     
-
 
Outstanding at December 31, 2008
   
140,000
   
$
1.00
 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Canceled or expired
   
70,000
     
1.00
 
Outstanding at June 30, 2009
   
70,000
   
$
1.00
 
  
Aggregate intrinsic value of options outstanding and exercisable at June 30, 2009 was $0.  Aggregate intrinsic value represents the difference between the Company's closing stock price on the last trading day of the fiscal period, which was $0.11 as of June 30, 2009, and the exercise price multiplied by the number of options outstanding.  As of June 30, 2009, total unrecognized stock-based compensation expense related to stock options was $105,000.  During the quarters ended June 30, 2009 and 2008, the Company did not charge to operations the related expense to recognized stock-based compensation for the above stock options.
 
NOTE  9  INCOME TAXES
The Company has adopted Financial Accounting Standard number 109, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant.
 
For income tax reporting purposes, the Company's aggregate unused net operating losses approximate $3,200,000, expire at various times through 2029, subject to limitations of Section 382 of the Internal Revenue Code, as amended.  The deferred tax asset related to the carry forward is approximately $540,000.  The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earning history of the Company, it is more likely than not that the benefits will not be realized.
 
NOTE 10  COMMITMENTS

 
A)
Operating Leases

On January 1, 2007, the Company entered into an operating lease (the “lease”) with Cummings Properties, LLC, to lease 3,294 square feet of general office space.  The lease commenced on January 1, 2007 and was automatically extended in October 2008 until December 31, 2010.  The Company agreed to pay a security deposit of $3,000 on January 1, 2007, which was repaid to the Company in equal $500 installments over the first six months of the lease.  The Company received no rent incentives or improvement allowances under this agreement.  The lease requires the Company to pay minimum lease payments of $2,000 per month for the duration of the lease.  The lease is subject to a cost of living increase equal to the Boston, MA Consumer Price Index at the beginning of each calendar year.  As of January 1, 2009, the Company’s lease payments under this agreement increased 3.53% to $2,070.60.
 
 
B)
Consulting agreements

On December 5, 2008 in conjunction with the closing of the share exchange, the Company signed a letter agreement with Lionshare Ventures LLC (“LSV”).  The terms of the letter agreement were such that LSV agreed to invest the balance of its original commitment to the Company dated May 19, 2008 for $450,000.  Thereafter, 2,000,000 shares of Common Stock were escrowed until the money was funded to the Company.  As of today, LSV has delivered $245,000 and the Company released 1,225,000 of the 2,000,000 common shares it held in escrow. On June 10, 2009 the Company and LSV agreed to extend the time period until December 5, 2009 in which LSV has to deliver the outstanding balance of $205,000.

 
12
 
 
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
 
On March 10, 2009, the Company entered into an agreement with Wakabayashi Fund, LLC of Tokyo, Japan for investor relation services focused on the Asian financial markets.

On April 17, 2009 the Company entered into an agreement with Red Chip Securities, Inc. of Alpharetta, Georgia to act as the Company’s investment banker and placement agent in assisting the Company in securing a private placement equity financing.  In May Red Chip changed its name to Moody Capital, Inc.
 
On June 5, 2009, the Company engaged Hallmark Investments, Inc. to act as its placement agent on an exclusive basis in connection a private placement bridge offering of convertible promissory notes for an aggregate principal amount of up to $500,000.  On July 15, 2009, the Company consummated the initial closing in the total principal amount of $100,000 to one accredited investor.  The Company expects to consummate additional closings for the bridge offering over the next 60 to 90 days, although no assurances can be made that the remaining amount of the bridge offering will be consummated.
 
 
C)
Anti-Dilution and Piggyback Registration Rights

On December 5, 2008, we entered into the Securities Purchase Agreement with the certain investors who have piggyback registration rights that permit them to register their Common Stock on certain registration statements filed by the Company.  In addition, pursuant to certain anti-dilution rights granted under the Securities Purchase Agreement to the investors, the Company may be obligated to issue additional shares of its Common Stock to the investors in the event it issues Common Stock to future investors at a per share purchase price less than $1.00.  The number of additional shares to be issued in such event is equal to that number of shares that the investors would have acquired at such price had that price been offered at the time of their original investment, minus the number of shares acquired in their original investment.  Further, pursuant to the letter agreement, Lionshare Ventures (LSV) and its managing member, Christopher Esposito, have agreed to forfeit to us, one share of our Common Stock for every two shares we would be required to issue up to the maximum of 562,500 shares, which number of shares are being held in escrow by us until December 5, 2010.

In July 2009, the Company executed a $100,000 convertible note in connection with the bridge offering discussed above which has a conversion price of $0.10,  in doing so the transition triggered the anti-dilution clause outlined above. The Company will be issuing 1,125,000 restricted shares of common stock to the investors that are parties to the Securities Purchase Agreement.  In addition the Company will take possession of  the 562,500 shares pledged by LSV to meet this obligation.

 
D)
Employee Agreements

Since January 1, 2008, the Company has signed nine employee agreements for officers, executives and employees of the Company.  Three of these agreements were with the founders of the Company.  The remaining six of the agreements were executed with executives and staff of the Company.  The Company agreed to issue options and shares of common stock of the Company.  Under the terms of these agreements, the shares and options are only issued the completion of the share exchange and the implementation of the Company’s employee stock plan.  The share exchange closed on December 5, 2008, however, the Company has yet to implement an employee stock plan.  The Company intends to implement an employee stock plan in the third quarter of 2009.  As of June 30, 2009, a total of 336,560 shares of Common Stock and options to purchase an additional 637,000 shares of the Company’s Common Stock have been promised but not issued.  
 
NOTE 11  SUBSEQUENT EVENT

The Company commenced a private placement offering of convertible promissory notes for an aggregate principal amount of up to $500,000 (the “Bridge Offering”).  On July 15, 2009, the Company consummated the initial closing of the Bridge Offering in the total principal amount of $100,000 to one accredited investor. The Company expects to consummate additional closings for the Bridge Offering over the next 60 to 90 days, although no assurances can be made that the remaining amount of the Bridge Offering will be consummated.
 
Each Note bears interest, payable in shares of common stock, at a rate equal to 9-12% per annum from the date of issuance of each note until paid in full on the Maturity Date. The Initial Investor’s Note has a 12% interest rate. All outstanding principal and accrued interest under each note is payable on the first to occur of (i) one year following the original issue date or (ii) the follow-on financing of at least $2,500,000 (the “Maturity Date”). The Company can pre-pay the Note at any time without penalty or premium. The Notes are secured and carry detachable Common Stock purchase warrants.  The notes rank junior to the Company’s SBA $50,000 Century Bank Line of Credit Loan and shall rank senior in all respects to all other existing and future indebtedness of the Company.
 
The Notes are convertible into common stock  at a conversion price of $0.10 per common stock share. The Investor has the option to convert all or any portion of the principal amount of the note outstanding at any time, together with any accrued and unpaid interest hereunder into shares of common stock at the conversion price. Additionally under the Purchase Agreement (the “Purchase Agreement”), effective as of July 15, 2009, by and among the Company and the Initial Investor, as additional consideration for the investment in the Notes, The Company issued a warrant to  purchase the number of shares of Common Stock equal to 100% of the quotient of the principal amount of the note issued to such Investor divided by the Conversion Price, Price initially shall equal $0.10 per share and the exercise price of the Warrants shall equal $0.20 per share.  The Purchase Agreement also includes certain negative covenants of the Company, including, without limitation, limitations on:  incurring additional indebtedness and liens, transactions with affiliates and payment of dividends.
 
 
13
 
 
ITEM 2.   Management s Discussion and Analysis of Financial Condition and Results of Operations
 
Statements made in this Quarterly Report on Form 10-Q, including without limitation this Management's Discussion and Analysis of Financial Condition and Results of Operations, other than statements of historical information, are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements may sometimes be identified by such words as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue" or similar words.  We believe that it is important to communicate our future expectations to investors.  However, these forward-looking statements involve many risks and uncertainties including those referred to herein and in our Annual Report on Form 10-K for the year ended December 31, 2008.  Our actual results could differ materially from those indicated in such forward-looking statements as a result of certain factors.  We are under no duty to update any of the forward-looking statements after the date of this Report on Quarterly Form 10-Q to conform these statements to actual results.
 
Overview

Our primary focus is the manufacture and sale of the INVO technology to assist infertile couples in having a baby.  In-vitro fertilization (IVF) is an effective treatment option for most infertile couples.  Our patented and proven INVOcell technology is an effective low cost alternative to current treatments.  It may be provided in a physician’s office and, therefore, may be offered by physicians around the world who do not have access to IVF facilities.  INVO uses a device, the INVOcell, which we currently price between $75-$225 to distributors in the developing countries around the world and $125-$300 in Europe and the U.S.  We can manufacture, assemble, package, sterilize and ship an INVOcell for less than $50.

Currently, we are establishing agreements with distributors and beginning to train physicians around the world in places such as Latin America, Europe, Africa and the Middle East.  While we penetrate the infertility markets in Europe and Canada along with certain developing countries, additionally we anticipate pursuing the completion of the FDA's “510(k)” process.  We have completed the first step for medical device companies who manufacture Class 2 devices and the filing of a Premarket Notification with the FDA ( i.e., an FDA 510(k) submission).  Technically, the FDA does not “approve” Class 1 and 2 medical devices for sale in the U.S. they give “clearance” for them to be sold.  We are hoping to receive clearance to market in the U.S. by 2010 upon completion of our clinical trial.  However, there can be no assurance that we will receive such clearance by that date or ever.

We anticipate that we will experience significant quarterly fluctuations in our sales and revenues as a result of the Company’s efforts to expand the sales of the INVO technology to new markets.  Operating results will depend upon and upon the timing of signing of new distributor contracts and the training of the physicians and their staffs in the INVO procedure.  International sales will continue to be our only source of revenue for the coming year.  We are aware of many significant international opportunities and we expect international revenues to continue to grow.  International sales are, however, difficult to forecast.  We are committed in our ongoing sales, marketing and development activities to sustain and grow our sales and revenues from our products and services.  We expect our sales and marketing, research and development and general and administrative expenses to increase in 2009 as compared to 2008.
 
During the three months ended June 30, 2009 the company continued to market its products in strategic markets utilizing its limited resources in the most economical fashion possible. We focused our efforts on South America and Europe as we see these as our best opportunities to quickly introduce the INVO procedure to many willing physicians requesting the product be brought into their area. During the period travel was reduced and planned in advance taking advantage of discounts reducing travel expenses considerably.  The Company actively participated in the 25 th annual meeting of The European Society of Human Reproduction and Embryology (ESHRE) in June, setting the stage for introducing the INVOcell across Europe.  This annual meeting is the largest infertility conference of physicians in Europe and was felt to be a key component in gaining name recognition and viewed a success. During the period two employees left the organization and the Company is holding off hiring replacements until additional financial capital is raised. As a result revenues were slightly less than anticipated as we could not be in as many places as originally planned. The Company is continuing to actively take and plan sales and training trips it believes necessary to achieve its goals with the resources it has.

 
As of June 30, 2009, we require approximately $175,000 per month to fund our operations.  This amount may increase as we expand our sales and marketing efforts and develop new products and services; however, if we do not raise additional capital in the near future we will have to curtail our spending and downsize our operations.  Our cash needs are primarily attributable to funding sales and marketing efforts, strengthening our training capabilities, satisfying existing obligations and building an administrative infrastructure, including costs and professional fees associated with being a public company. 
 
We are currently seeking up to $5 million in capital through a private placement of our common stock.  The exact amount of funds raised, if any, will determine how aggressively we can grow and what additional projects we will be able to undertake.  No assurance can be given that we will be able to raise additional capital, when needed or at all, or that such capital, if available, will be on terms acceptable to us.  If we are unable to raise additional capital in the current private offering, we could be required to substantially reduce operations, terminate certain products or services or pursue exit strategies.

To support ongoing operations while seeking the above mentioned $5 million dollar capital raise the Company has also initiated a $500,000 convertible bridge loan agreement as identified in our Current Report on Form 8-K filed with the SEC on July 15, 2009.  The Company engaged Hallmark Investments, Inc. (“Hallmark”) to act as its placement agent on an exclusive basis in connection with this private placement. The Company expects this financing will meet its short term cash requirements while securing its larger private placement.
 
Our registered independent certified public accountants have stated in their report dated April 15, 2009, filed with the Company’s Annual report on form 10-K that the Company has a generated negative cash outflows from operating activities, experienced recurring net operating losses, and is dependent on securing additional equity and debt financing to support its business efforts.  These factors among others may raise substantial doubt about our ability to continue as a going concern.
 
 
14
 
 
Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations are based upon the condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles as recognized in the United States of America.  The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities.  Our estimates include those related to revenue recognition, the valuation of inventory, and valuation of deferred tax assets and liabilities, useful lives of intangible assets, warranty obligations and accruals.  We base our estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.  For a complete description of accounting policies, see Note 1 to our financial statements included in our Form 10K for the year ended December 31, 2008.  There were no significant changes in critical accounting estimates.

Results of Operations

Three months ended June 30, 2009, compared to the three months ended June 30, 2008

Net Sales and Revenues

Net sales and revenue for the second quarter of 2009 increased 100% to $16,600 compared to no revenue for the same period in 2008.  The increase was due to starting international shipments of small orders to our newly signed distributors as well as direct shipments to physicians who want to use the INVOcell. The Company has received positive feedback and acceptance of the INVO procedure and INVOCell device almost instantaneously following the completion of an initial procedure.  The Company expects this trend to continue as we introduce the technology into our newly targeted countries over the next few months ( i.e., Spain, Italy and Peru).  The Company expects revenues to grow slowly as we move into these new countries adding to our current customer base in Turkey, the Mid-East and Colombia.

Cost of Sales and Revenues

Cost of sales as a percentage of revenues for three months ended June 30, 2009 was 37%, there were no sales or corresponding cost of sales for the same period in 2008.  This is higher than we expect in the future as we are producing small lot quantities and have higher shipping costs per unit as a result of the small volume shipments.  Additionally, as we open new markets we are finding the need to provide samples of the INVOcell for demonstration and training, as markets mature this practice will not be necessary.    As the Company’s products become an accepted method of assisting couples with infertility, we expect to be manufacturing larger quantities of our devices that is expected to reduce our costs of sales.  .

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended June 30, 2009 were $444,000 as compared to $257,000 for the three months ended June 30, 2008.  Our higher general and administrative expenses in 2009 were due to starting to market our products and technology outside of the United States.  During the three months of 2008 the Company had three employees, just starting to take a salary in the third month of the quarter.  In 2009, the Company had grown to six employees all earning a salary as well as all the associated expenses that relates to them, including benefits and travel.  Salaries and benefits for the period were $211,000 compared to $39,000 for the same three months ending June 30 last year.  The Company incurred considerable travel costs as its employees continued to go across the globe to introduce the INVOcell and the INVO process to physicians and distributors in Europe and South America, travel related expenses for the three months ending June 30, 2009 were $48,000 compared to no expense in the same period during 2008.  The Company continued to protect its patent rights around the world with legal and filing fees totaling $11,600 for the three months ended June 30, 2009 compared to the $7,400 for the three months ended June 30, 2008.  Some of  the new expenses incurred by the Company during  the three months ended June 30, 2009 relate to being a public entity, including investor relations, insurance, accounting and legal costs,  which together were $55,000. For the three months ended June 30, 2008, $156,000 was spent on accounting services in preparing the Company’s books and records for its first external independent audit.  In the second quarter for the three months ended June 30, 2009 the Company started to invest some monies in marketing related activities in the amount of $27,000 for items such as making changes to its corporate website while developing a new design with an outside firm along with creating and printing brochures.
 
Research and Development Expenses

Research and development expenses were decreased to $0 for the three months ended June 30, 2009, as compared to $17,500 spent in the three months ended June 30, 2008.  The decrease in research and development expense was due to the Company’s belief that the product was fully ready for market as it is, and its limited resources were devoted to sales, marketing and training new distributors and customers

 
15
 
 
Interest Income and Expense, Net

The Company had net interest expense of $5,100 for the three months ended June 30, 2009, as compared to $1,900 for the three months ended June 30, 2008 as a result of having higher loans in 2009 versus 2008.
 
Six months ended June 30, 2009, compared to the six months ended June 30, 2008

Net Sales and Revenues

Net sales and revenue for the six months ending June 30, 2009 was $53,400 compared to no revenue for the same period in 2008. The increase was due to starting international shipments of small orders to our newly signed distributors as well as direct shipments to physicians who want to use the INVOcell.  The Company expects this trend to continue as we introduce the INVO technology into our targeted countries over the next few months including , Spain, Italy and Peru while continuing to nurture our current customer base in  the Mid-East and South America

Cost of Sales and Revenues

Cost of sales as a percentage of revenues for the six months ended June 30, 2009 was 50%.  This is significantly higher than we expect in the future as we are producing small lot quantities and have higher shipping costs per unit as a result of the small volume shipments.  There were no sales or costs for the comparative period of 2008 with which to compare our results.  As the Company’s products become an accepted method of assisting couples with infertility, we expect to  be manufacturing larger quantities of our devices that we expect will reduce our cost of sales.  Further, shipping larger quantities to distributors via common carriers will reduce our shipping costs.  Collectively, the Company anticipates that these volume discounts would reduce our cost of sales by approximately 50% down to 25%  compared to the 50% shown for the six months ended June 30, 2009.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the six months ended June 30, 2009 and 2008 were $1,101,000 and $296,000 respectively.  Our higher general and administrative expenses in 2009 were due to starting to market our products and technology outside of the United States.  During the six months of 2008, the Company had three employees, during which most of the period they did not take a salary.  In 2009 the Company had grown to six employees all earning a salary as well as all the associated expenses that relate to them, including benefits and travel.  Salaries and benefits for the period were $484,000 compared to $49,000 for the same period ending June 30 last year.  The Company incurred considerable travel costs as its employees continued to go across the globe to introduce the INVOcell and the INVO process to physicians and distributors in Europe and South America, travel related expenses for the six months ending June 30, 2009 $119,000 compared to nothing in the same period in 2008.  The Company continued to protect its patent rights around the world with legal and filing fees totaling $30,000 for the six months ended June 30, 2009 compared to the $18,000 for the six months ended June 30, 2008. . Some of  the new expenses incurred by the Company during  the six months ended June 30, 2009 relate to being a public entity, including investor relations, insurance, accounting and legal costs,  which together were $181,000. For the six months ended June 30, 2008, $156,000 was spent on accounting services in preparing the Company’s books and records for its first external independent audit. 
 
Research and Development Expenses

Research and development expenses were decreased to $5,000 for the six months ended June 30, 2009, as compared to $17,500 spent in the six months ended June 30, 2008.  The decrease in research and development expense was due to the Company’s belief that the product was fully ready for market as it is, and its limited resources were devoted to sales, marketing and training new distributors and customers.

Interest Income and Expense, Net

The Company had net interest expense of $10,400 for the six months ended June 30, 2009, as compared to $4,000 for the six months ended June 30, 2008 as a result of having higher loans in 2009 versus 2008.
 
Income Taxes

The Company's aggregate unused net operating losses approximate $3,200,000, which expire at various times through 2029, subject to limitations of Section 382 of the Internal Revenue Code of 1986, as amended.  The deferred tax asset related to the carry forward is approximately $540,000.  The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earning history of the Company, it is more likely than not that the benefits will not be realized.

 
16
 
 
Liquidity and Capital Resources

As of June 30, 2009, we had $100 in cash and no cash equivalents.  

Net cash used by operating activities was $349,000 for the six months ended June 30, 2009, compared to net cash used by operating activities of $159,000 for the six months ended June 30, 2008.  The increase in net cash used was due to the significant costs of staffing, compliance, introducing our products into new markets and the establishment of an Advisory Board and consulting in preparation of our FDA 510k submission.  In addition, all of the current employees have assisted INVO Bioscience in its funding requirements by deferring their salaries for the last four months ending June 30, 2009.

No cash was used during the first six months of 2009 in investing activities, compared to $7,300 cash used by investing activities for the same six months ended June 30, 2008.  The cash used during 2008 was for the purchase of patents to protect our proprietary products. During 2009 the Company is maintaining its current patents across the globe and currently does not believe it is necessary to expand any of them at this time.

Net cash provided by financing activities was $333,000 for the six months ended June 30, 2009, of that amount $88,000 was provided by a four month 5% loan by Kathleen Karloff, the Company’s CEO.  The remaining $245,000 was from Lionshare Ventures LLC per their subscription receivable agreement dated December 5, 2008 and revised on June 10, 2009 for the previous sale of Common Stock.  As of August 11, 2009, $205,000 is still due to the Company from Lionshare.

The Company maintains a $50,000 working capital line of credit with Century Bank.  Interest is payable monthly at the rate of 0.24% above the bank’s prime lending rate.  As of June 30, 2009, the rate was 3.74%.  This line of credit matures May 31, 2010.  At June 30, 2009 and December 31, 2008 the balance outstanding on the line of credit was $50,000.

Our registered independent certified public accountants have stated in their report dated April 15, 2009, filed with the Company’s Annual report on form 10K that the Company has a generated negative cash outflows from operating activities, experienced recurring net operating losses, and is dependent on securing additional equity and debt financing to support its business efforts.  These factors among others may raise substantial doubt about our ability to continue as a going concern.
 
 The Company’s existing cash resources, cash flow from operations and short-term borrowings on the existing credit line or from management will not provide adequate resources for supporting operations during fiscal 2009.  The Company is actively seeking the funding it needs to continue to execute its business plan.  It is doing so in two steps, first with a $500,000 10% convertible note bridge offering while it lines up a $5 million dollar Private Investment in a Public Entity (PIPE) Common Stock offering.   On July 15, 2009, the Company consummated the initial closing of the bridge offering in the total principal amount of $100,000 to one accredited investor. Although there can be no assurance that we will find additional sources of funding, management believes that it will be able to find sources of funds on commercially acceptable terms.  However, if we do not raise additional capital in the near future we will have to further curtail our spending and downsize our operations.

Recent Accounting Pronouncements
 
For information regarding recent accounting pronouncements and their effect on the Company, see “Recent Accounting Pronouncements” in Note 1 of the Unaudited Notes to Condensed Consolidated Financial Statements contained herein.
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risks
 
Not Applicable

Item 4.  Controls and Procedures
 
4a.   Evaluation of Disclosure Controls and Procedures

The Company’s management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial (and principal accounting) Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2009, the end of the fiscal period covered by this Form 10Q.  We maintain disclosure controls and procedures that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.   Based upon that evaluation and the identification of the material weakness in the Company’s internal control over financial reporting as of December 31, 2008 (described below) which has not been remediated as of of the end of the period covered by this Quarterly Report, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this Quarterly Report.
 
 
17
 
 
Because of the Company’s limited resources and limited number of employees, management concluded that, as of December 31, 2008, our internal control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
 
To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals. The Company is taking steps to create effective procedures and controls throughout the organization.  The Company is in the process of establishing procedures and segregating duties where it can.  Over the past six months, it has implemented a new accounting system and has outsourced its accounts payable function.  It has implemented an approval processes, created a number of policies, reporting processes, a standard customer contract and has introduced an employee manual.  We will continue to monitor our disclosure controls and procedures and will address areas of potential concern.  As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.
 
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
4b.  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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
18
 
 
PART II.  OTHER INFORMATION
 
ITEM 1.       Legal Proceedings
 
 From time to time we may be a party to various legal proceedings arising in the ordinary course of our business.  We are not currently subject to any material legal proceedings.
 
ITEM 1A.     Risk Factors
 
You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under “Item 1A.  Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.  There have been no material changes from the factors disclosed in our 2008 Annual Report on Form 10-K, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the Securities and Exchange Commission.
 
ITEM 2.        Unregistered Issuance of Equity Securities and Use of Proceeds
 
During the period covered by this Report, the Company issued 83,333 shares of restricted Common Stock for investor relations services in Asia to Wakabayashi Fund, LLC, 75,000 shares of restricted Common Stock to Moody Capital (formerly Red Chip Securities) for acting as a non-exclusive agent for the Company in securing future capital for INVO Bioscience and 50,000 shares of restricted Common Stock were issued to Investor Awareness, Inc. for investor relations services in the United States.  We claimed the exemption from registration set forth in Section 4(2) of the Securities Act and the rules there under, as private transactions not involving a public distribution.  The facts we relied upon to claim the exemption include: (i) Wakabayashi Fund, LLC, Moody Capital and Investor Awareness all represented that they acquired the shares from the Company for investment and not with a view to distribution to the public; (ii) each certificate issued for unregistered securities contains a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities; (iii) Wakabayashi Fund, LLC , Moody Capital and Investor Awareness all represented that they are accredited investors and familiar with our business activities; and (iv) Wakabayashi Fund, LLC, Moody Capital and Investor Awareness were all given full and complete access to any corporate information they requested.
 
ITEM 3.       Defaults Upon Senior Securities
 
None.
 
ITEM 4.       Submission of Matters to a Vote of Security Holders
 
None.
 
ITEM 5.       Other Information
 
None.
 
ITEM 6.       Exhibits
 
10.1
Form of Senior Secured Convertible Promissory Note (1)
10.2
Form of Purchase Agreement (1)
10.3
Form of Warrant Purchase Agreement (1)
10.4
Hallmark Investments, Inc.  Agreement (1)
   
10.5
10.6
   
31.1
31.2
32.0

(1) Incorporated by reference to our Current Report Form 8-K filed with the SEC on July 15, 2009
 
 
19
 
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 14, 2009.
 
 
INVO Bioscience, Inc.
 
       
Date:  August 1 4, 2009
By:
/s/Kathleen Karloff                            
 
   
Kathleen Karloff
 
   
Chief Executive Officer
(Principal Executive Officer)
 
 
 
Date: August 14, 2009
By:
/s/ Robert J. Bowdring                              
 
   
Robert J. Bowdring
 
   
Chief Financial Officer
(Principal Financial and Accounting Officer)
 

 
 
EXHIBIT INDEX
 
10.1
Form of Senior Secured Convertible Promissory Note (1)
10.2
Form of Purchase Agreement (1)
10.3
Form of Warrant Purchase Agreement (1)
10.4
Hallmark Investments, Inc.  Agreement (1)
   
10.5
10.6
   
31.1
31.2
32.0

(1) Incorporated by reference to our Current Report Form 8-K filed with the SEC on July 15, 2009

 
 
20
 
 
EXHIBIT 10.5
 
 
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER SUCH ACT AND LAWS OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
 
INVO BIOSCIENCE, INC.
 
SHORT TERM NOTE
 
$88,000.00   
Beverly, Massachusetts
   
   May 19, 2009
    
FOR VALUE RECEIVED, the undersigned, INVO Bioscience, Inc. (“Maker”) a Nevada corporation with its principal place of business in Beverly, Massachusetts promises to pay to Kathleen Karloff (“Holder”), of 109 Beacon Street, Boston, MA 02116 or at such other place as Holder shall have designated to Maker in writing, a principal amount equal to Eighty-Eight Thousand Dollars ($88,000.00) (the “Principal Amount”) together with interest thereon as set forth below.
 
1.  
Repayment .  Maker promises to pay the entire Principal Amount plus accrued and unpaid interest thereon, and all other sums and charges due Holder hereunder on September 15, 2009 (the “Maturity Date”).  The Maturity Date is subject to acceleration as set forth below.
 
This is an extension and increase of the Holder’s original note dated March 5, 2009.  In consideration for the extension the Maker agrees to pay any fees, charges or penalties that the Holder may incur as a result of not being able to repay her 401k account (source of funds) in a timely manner.
 
2.  
Interest .  This Note shall bear interest at the rate of five percent (5%) per annum from the date hereof.  All interest shall accrue and be paid with the Principal Amount on the Maturity Date.
 
3.  
Application of Payments .  All payments shall be made in legal tender of the United States of America and shall be applied first to the payment of any sums or charges other than principal or interest due Holder; second, to the payment of accrued and unpaid interest on the unpaid Principal Amount; and third, the balance on account of the Principal Amount.
 
4.  
Payment of Charges and Expenses .  Maker agrees to pay the debt evidenced hereby, and, after default, to pay all reasonable costs, expenses and attorneys’ fees incurred by the Holder in connection with any proceeding for collection of the debt evidenced hereby, or in any litigation or controversy arising from or connected with this Note.  The Maker’s obligation to pay such costs, expenses and attorneys’ fees of Holder after default in connection with the protecting, enforcing or realizing of the rights and remedies above described or otherwise set forth herein, shall exist whether or not proceedings are instituted or legal appearances made in any court of competent jurisdiction on behalf of the Holder.
 
5.  
Event of Default .  Upon the occurrence of any one or more of the following events Maker shall be in default hereunder and the entire indebtedness with accrued interest due thereon under this Note shall, at the option of Holder, accelerate and become immediately due and payable without demand or notice of any kind:
 
(a)  
Failure by Maker to pay (i) the outstanding Principal Amount of this Note, together with interest accrued thereon, at final maturity of this Note; or (ii) any other sums required to be paid by Maker hereunder; or
 
(b)  
If (i) a petition is filed against Maker under any bankruptcy, reorganization, arrangement, composition, readjustment, liquidation, dissolution, or insolvency law, and is not dismissed within ninety (90) days after such filing; or (ii) Maker (x) files a petition in voluntary bankruptcy or seeks relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any petition against it under any such law, or (y) makes any general assignment for the benefit of creditors or admits in writing its inability to pay, or fails to pay, its debts generally as they become due, or consents to or otherwise suffers the appointment of a receiver, custodian, liquidator or trustee for itself, or of all or any part of its property.
 
6.  
Waiver of Rights .  Maker hereby waives presentment, demand, notice, protest, and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note, and assents to extensions of the time of payment of forbearance or other indulgence without notice.
 
7.  
Holder’s Rights .  Holder’s rights hereunder shall be cumulative and not exclusive and may be exercised at the sole discretion of Holder until this Note and all accrued and unpaid interest and other sums and charges due hereunder shall have been paid in full.  Further, no failure on the part of Holder to exercise any right or remedy hereunder, whether before or after the occurrence of any event of default hereunder, shall constitute a waiver hereof, and no waiver of any past default shall constitute waiver of any future default or of any other default.  No failure to accelerate the indebtedness evidenced hereby by reason of default hereunder, or waiver granted from time to time shall be construed to be a waiver of the right to insist upon prompt payment thereafter or a waiver of any right of acceleration or any other right, or be construed so as to preclude the exercise of any right which Holder may have, whether by the laws of the Commonwealth of Massachusetts, by agreement or otherwise; and Maker hereby expressly waives the benefit of any statute or rule of law or equity which would produce a result contrary to or in conflict with the foregoing.
 
 
 
 
 
8.  
Prepayment .  Maker shall have the right to prepay this Note.
 
9.  
Binding Effect .  This Note shall bind the successors and assigns of Maker and shall inure to the benefit of Holder, his heirs, administrators, representatives, trustees, successors and assigns.
 
10.  
Captions and Section Headings .  The captions and section headings used in this Note are for convenience only and shall not be used to interpret, modify or affect in any way the covenants and agreements herein contained.
 
 
11.  
Severability .  In the event that any one or more of the provisions of this Note shall for any reason be held to be invalid, illegal or unenforceable, in whole or in part, or in any respect, or in the event that any one or more of the provisions of this Note shall operate or would prospectively operate, to invalidate this Note, then the remaining provisions of this Note shall remain operative and in full force and effect, shall be valid, legal and enforceable and shall in no way be affected, prejudiced or disturbed thereby.
 
12.  
Governing Law .  This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts without reference to its conflict of law’s provisions.
 
 
MAKER: HOLDER:
INVO BIOSCIENCE, INC. 
 
KATHLEEN T. KARLOFF
By: s/Dr. Claude Ranoux                                                
 
By: s/ Kathleen Karloff     
Dr. Claude Ranoux, President                                      
 
Kathleen Karloff  
 
 
                                                                           
 
 
                                            
 
 
 
 
 
 
 
 
 
 
EXHIBIT 10.6
 
 
June 10, 2009

 
 
Lionshare Ventures, LLC
 
100 Cummings Center Suite 324C
 
Beverly, Massachusetts 01915

 
 
Re:  LSV Pledge

 
 
Dear Christopher,
 
 
For good and valuable consideration, the parties agree to the following modifications to the Term Sheet, dated May 19, 2008 and reaffirmed on December 5, 2008 by and between LionShare Ventures (LSV) and then BioXcell Inc., the undersigned do hereby covenant and agree as follows:
 
1)  
LSV and Christopher Esposito (“ Esposito” ), jointly and severally, hereby promise to pay to INVO Bioscience (INVO) by December 5, 2009 the amount of $205,000 in cash, which amount LSV agreed to contribute to  pursuant to the Term Sheet in connection with the transactions contemplated by the Exchange Agreement on December 5, 2008. The parties agree that such amount represents the balance due for the prior issuance of INVO Bioscience common stock and that no further shares of INVO Bioscience common stock shall be issued to Esposito upon contribution of the $205,000.
 
2)  
In order to secure the prompt and complete payment of the amount set forth in the prior paragraph, LSV and Esposito hereby pledge and grant to INVO a continuing first priority security interest in 775,000 shares of Common Stock of INVO Bioscience.  The parties acknowledge that all of such shares will be held in escrow until December 5th, 2009. The parties acknowledge that with each investment of $51,000, 25% or 193,000 shares will be issued to Lion Share Ventures, if Esposito contributes the $205,000 to INVO Bioscience prior to December 5, 2009, the stock certificates and stock powers shall be returned to Esposito.
 
This letter agreement constitutes the entire agreement between LSV and INVO Bioscience pertaining to the subject matter contained herein.  This letter agreement may not be altered, amended, or modified, except by means of a writing executed by LSV and INVO.  This letter agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Massachusetts, other than the choice of law provisions thereof.
 
 
[SIGNATURE PAGE FOLLOWS]
 

 

 
 

 
 
 
 
 
Please execute this letter in the space provided below in order to acknowledge your acceptance of and agreement with the terms set forth herein.

 
 
Sincerely,
 
 

 
 
Lionshare Ventures, LLC
 
 

 
 
By:  / s/Gerald Esposito       
 
 
Name: Gerald Esposito
 
 
Title: President
 
 

 
 
Christopher Esposito
 
 
s/Christopher Esposito
 
 
 

 
 
Acknowledged and Agreed :
 
 
INVO Bio Science, Inc.
 
 
By:       s/Kathleen T. Karloff
 
 
Name:  Kathleen T. Karloff                                               
 
Title:     CEO                                                                         
 
 
 
 
 
EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Kathleen Karloff, certify that:
 
1.
I have reviewed this annual report on Form 10-Q of INVO Bioscience Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
 
INVO BIOSCIENCE
 
       
Date: August 14, 2009
By:
/s/ Kathleen Karloff                                
 
   
Kathleen Karloff
 
   
Chief Executive Officer
 
       
 
 
 
 
 
 
 
 
 
 
EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Robert J. Bowdring, certify that:
 
1.
I have reviewed this annual report on Form 10-Q of INVO Bioscience Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 

 
INVO BIOSCIENCE
 
       
Date: August 14, 2009
By:
/s/ Robert J. Bowdring                     
 
   
Robert J. Bowdring
 
   
Chief Financial Officer
 
       
 

 
 
 
 
 
 
 
EXHIBIT 32.0

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of INVO Bioscience, Inc. (the “Company”) for the  period ended June 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Kathleen Karloff, Chief and Principal Executive Officer of the Company, and Robert J Bowdring, Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 

 
 
INVO BIOSCIENCE
 
       
Date: August 14, 2009
By:
/s/ Kathleen Karloff                        
 
   
Kathleen Karloff
 
   
Chief Executive Officer
 
       
 
 
 
 
 
INVO BIOSCIENCE
 
       
Date: August 14, 2009
By:
/s/ Robert J. Bowdring                     
 
   
Robert J. Bowdring
 
   
Chief Financial Officer