Business Context and Reporting Period
Company: Emy's Salsa Aji Distribution Company, Inc. (effectively INVO Bioscience, Inc. following a reverse merger).
Reporting Period: Current Report on Form 8-K filed December 11, 2008, covering events occurring on December 5, 2008.
Event Summary: The Company consummated a Share Exchange Agreement with INVO Bioscience (formerly Bio X Cell, Inc.), a Massachusetts corporation. INVO Bioscience became a wholly-owned subsidiary of Emy's. The transaction is accounted for as a "reverse merger," with INVO Bioscience deemed the accounting acquirer. Consequently, Emy's ceased its salsa distribution business to focus solely on the INVOcell fertility device. The Company expects to change its name to "INVO Bioscience, Inc."
Key Financial Metrics
Revenue:
- Historical (INVO Bioscience): No revenue from inception (Jan 2007) through September 30, 2008.
- Recent Activity: In October 2008, the Company invoiced its first sales of 95 INVOcell units and 11 INVO Blocks for total revenue of $19,860.
- Q4 2008 YTD: Approximately $45,000 in revenue from the sale of 195 units and accessories.
Profitability:
- Net Loss (9 months ended Sept 30, 2008): $652,508.
- Operating Expenses (9 months ended Sept 30, 2008): $252,639.
- Operating Expenses (Year ended Dec 31, 2007): $210,520.
Liquidity and Capital Resources:
- Cash on Hand (Sept 30, 2008): $26,452.
- Working Capital Deficiency (Sept 30, 2008): $58,713.
- Stockholder Deficiency (Sept 30, 2008): $309,173.
- Cash Used in Operations (9 months ended Sept 30, 2008): $395,218.
Debt and Financing:
- Related Party Loan: Dr. Claude Ranoux loaned funds totaling $96,462 (principal + interest) as of Sept 30, 2008. Due March 31, 2009, with an option to convert to equity.
- Line of Credit: $50,000 working capital line with Century Bank (fully utilized as of Sept 30, 2008). Matures May 31, 2010.
- Private Placement: Immediately following the merger, the Company raised $375,000 from Barry Honig and Whalehaven Capital Fund Limited in exchange for 375,000 shares at $1.00/share.
- Committed Capital: Lionshare Ventures LLC (LSV) had a commitment to invest $1.5 million. As of Nov 30, 2008, $585,000 had been invested. LSV remains obligated to contribute an additional $450,000 by Feb 28, 2009.
Material Changes vs. Prior Period
- Change of Control: INVO Bioscience shareholders now own 71.9% of the outstanding common stock. Kathleen Karloff and Dr. Claude Ranoux (INVO Bioscience founders) now control 58.49% of the Company.
- Management Change: All former Emy's officers and directors resigned. Kathleen Karloff was appointed CEO, Secretary, and Director; Dr. Claude Ranoux was appointed President, Treasurer, and Director.
- Business Pivot: The Company transitioned from a salsa distribution business to a biotechnology firm focused on the INVOcell fertility device.
- Shell Status: The Company is no longer considered a "shell company" following the acquisition of INVO Bioscience's assets and operations.
- Accounting Change: The independent auditor, Berman & Company, P.A., was dismissed and replaced by Webb & Company, P.A. on December 4, 2008.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Guidance:
- Regulatory Status: The INVOcell has received CE Marking (May 2008), allowing sales in Europe, Canada, and other EEA countries. The Company is pursuing FDA 510(k) clearance for the U.S. market, anticipating completion of clinical trials by end of 2009 and clearance by 2010.
- Market Strategy: Focus on international markets (Europe, Middle East, Asia, Latin America) where IVF is cost-prohibitive. The Company has signed distribution agreements in Turkey, Canada, Thailand, Pakistan, and India.
- Orders: The Company has taken orders for 5,875 INVOcell devices but currently has 1,600 units ready for sale.
- Financial Needs: Management explicitly states the need for additional capital to fund operations, expand the sales force, and complete clinical trials. Continued net losses are expected for the next few quarters.
Risks and Contingencies:
- Going Concern: The filing states there is "substantial doubt" about the Company's ability to continue as a going concern due to the working capital deficiency and reliance on future financing.
- Regulatory Risk: No assurance that FDA clearance will be obtained by 2010 or ever. Failure to obtain clearance would prevent U.S. sales.
- Competition: The infertility market is competitive (IVF, IUI). The Company faces potential competition from Anecova and other ART technologies.
- Concentration of Ownership: Two individuals (Karloff and Ranoux) control nearly 59% of the stock, potentially influencing corporate actions to the detriment of minority shareholders.
- Stock Liquidity: The stock trades on the OTCBB and is subject to "penny stock" rules, which may limit liquidity and trading activity.
Investor Verification Checklist
- Capital Sufficiency: Verify if the Company has secured the remaining $450,000 commitment from Lionshare Ventures and any additional funding required to bridge the gap until profitability.
- Order Fulfillment: Confirm the status of the 5,875 units ordered versus the 1,600 units currently in inventory and the timeline for manufacturing the remainder.
- Regulatory Milestones: Monitor the progress of the FDA 510(k) clinical trials and the specific timeline for the anticipated 2010 clearance.
- Revenue Recognition: Review the actual cash collection on the $45,000 in Q4 2008 revenue to assess liquidity impact.
- Related Party Transactions: Review the terms of the Dr. Ranoux loan conversion and the potential dilution from the anti-dilution provisions granted to the $375,000 private placement investors.