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INVO INVO Bioscience

Filed: 17 May 21, 4:06pm

 

 

 

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 March 31, 2021

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

INVO Bioscience, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada 001-39701 20-4036208

(State or other jurisdiction

of incorporation or organization)

 

(Commission

File No.)

 

(I.R.S. Employer

Identification No.)

 

5582 Broadcast Court Sarasota, Florida, 34240

(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. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes [X] No [  ]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]Accelerated filer [  ] 
Non-accelerated filer [X]Smaller reporting company [X]Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Title of each class Trading symbol(s) Name of each exchange on which registered
Common Stock, $0.0001 par value per share INVO The Nasdaq Stock Market LLC

 

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: 10,449,035 shares outstanding as of May 17, 2021.

 

 

 

 
 

 

INVO BIOSCIENCE, INC.

FORM 10-Q

FOR THE QUARTER ENDED March 31, 2021

 

TABLE OF CONTENTS

 

Item Page Number
Part I
   
1.Financial Statements (Unaudited):3
 Consolidated Balance Sheets as of March 31, 2021 and December 31, 20203
 Consolidated Statements of Operations for the three months ended March 31, 2021 and 20204
 Consolidated Statements of Stockholders’ Equity (Deficiency) for the three months ended March 31, 2021 and 20205
 Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 20206
 Notes to the Condensed Consolidated Financial Statements7
2.Management’s Discussion and Analysis of Financial Condition and Results of Operations27
3.Quantitative and Qualitative Disclosures about Market Risks32
4.Controls and Procedures32
 Evaluation of Disclosure Controls and Procedures32
 Changes in Internal Controls Over Financial Reporting32
   
Part II
   
1.Legal Proceedings33
1A.Risk Factors33
2.Unregistered Issuance of Equity Securities and Use of Proceeds33
3.Defaults Upon Senior Securities33
4.Mine Safety Disclosure33
5.Other Information33
6.Exhibits33
 Signatures34

 

2
 

 

Forward Looking Statements

 

The statements contained in this Quarterly Report on Form 10-Q which are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management, including, without limitation, our expectations regarding results of operations, the commercialization of our technology, regulatory approvals, our development of new technologies, the adequacy of our ability to develop current financing sources to fund our operations, our growth initiatives, and the strength of our intellectual property portfolio. These forward-looking statements may be identified by the use of words such as “plans”, “intends,” “may,” “could,” “expect,” “estimate,” “anticipate,” “continue” or similar terms, though not all forward-looking statements contain such words. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements due to a number of important factors. These factors that could cause actual results to differ from those anticipated or predicted include, without limitation, our ability to develop and commercialize our products, including obtaining regulatory approvals, the size and growth of the potential markets for our products and our ability to serve those markets, the rate and degree of market acceptance of any of our products, general economic conditions, costs and availability of raw materials and management information systems, our ability to obtain and maintain intellectual property protection for our products, competition, the loss of key management and technical personnel, our ability to obtain timely payment of our invoices from customers, litigation, the effect of governmental regulatory developments, the availability of financing sources, our ability to comply with our debt obligations, our ability to deleverage our balance sheet, and seasonality, as well as the uncertainties set forth in the our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 30, 2020, including the risk factors contained in Item 1A, and from time to time in our other filings with the SEC We disclaim any intention or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Reverse Stock Splits

 

On May 26, 2020, the Company effected a 1-for-20 reverse stock split of its common stock. All shares, options and warrants throughout these consolidated financial statements have been retroactively restated to reflect the reverse split.

 

On November 9, 2020, the Company effected a 5-for-8 reverse stock split of its common stock. All shares, options and warrants throughout these consolidated financial statements have been retroactively restated to reflect the reverse split.

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

INVO BIOSCIENCE, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

  March 31,  December 31, 
  2021  2020 
ASSETS       
Current assets        
Cash $8,423,236  $10,097,760 
Accounts receivable  527,651   21,699 
Inventory  268,349   265,372 
Prepaid expenses and other current assets  363,969   157,700 
Total current assets  9,583,205   10,542,531 
         
Property and equipment, net  129,679   132,206 
Capitalized patents, net  22,606   5,427 
Lease right of use  73,644   79,319 
Trademarks  100,885   89,536 
Notes receivable  280,160   - 
Other assets  -   240 
Investment in joint ventures  -   98,084 
Total other assets  477,295   272,606 
         
Total assets $10,190,179  $10,947,343 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities        
Accounts payable and accrued liabilities, including related parties $512,044  $328,927 
Accrued compensation – related party  267,390   527,326 
Deferred revenue, current portion  714,286   714,286 
Lease liability, current portion  23,061   22,707 
Notes payable – Payroll Protection Program  157,620   157,620 
Convertible notes, net  185,458   536,063 
Income taxes payable  -   1,062 
Total current liabilities  1,859,859   2,287,991 
         
Lease liability, net of current portion  52,789   58,634 
Deferred revenue, net of current portion  2,678,571   2,857,143 
Deferred tax liability  469   469 
         
Total liabilities  4,591,688   5,204,237 
         
Stockholders’ equity        
Common Stock, $.0001 par value; 125,000,000 shares authorized; 10,424,229 and 9,639,268 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively  1,042   964 
Additional paid-in capital  40,287,000   37,978,224 
Accumulated deficit  (34,689,551)  (32,236,082)
Total stockholders’ equity  5,598,491   5,743,106 
         
Total liabilities and stockholders’ equity $10,190,179  $10,947,343 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3
 

 

INVO BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

  For the Three Months
  Ended March 31, 
  2021 2020
     
Revenue:        
Product revenue $505,952  $80,000 
License revenue  178,571   178,571 
Total revenue  684,523   258,571 
         
Cost of goods sold:        
Production costs  60,314   27,563 
Depreciation  2,431   2,431 
Total cost of goods sold  62,745   29,994 
         
Gross profit  621,778   228,577 
         
Selling, general and administrative expenses  2,115,303   1,595,046 
Research and development expenses  66,267   30,050 
Total operating expenses  2,181,570   1,625,096 
         
Loss from operations  (1,559,792)  (1,396,519)
         
Other income (expense):        
Interest income  2,013   - 
Interest expense  (895,226)  (47,873)
Foreign currency exchange loss  (464)  - 
Total other expenses  (893,677)  (47,873)
         
Loss before income taxes  (2,453,469)  (1,444,392)
         
Provision for income taxes  -   - 
         
Net loss $(2,453,469) $(1,444,392)
         
Net loss per common share:        
Basic $(0.25) $(0.29)
Diluted $(0.25) $(0.29)
Weighted average number of common shares outstanding:        
Basic  9,888,025   4,917,997 
Diluted  9,888,025   4,917,997 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4
 

 

INVO BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)

(UNAUDITED)

 

  Common Stock Additional Paid-in Accumulated  
  Shares Amount Capital Deficit Total
           
Balances, December 31, 2019  4,884,879  $489  $20,174,682  $(23,888,766) $(3,713,595)
Common stock issued to directors and employees  40,569   4   303,459   -   303,463 
Common stock issued to service providers  5,000   -   38,000   -   38,000 
Stock options issued to employees  -   -   381,475   -   381,475 
Net loss  -   -   -   (1,444,392)  (1,444,392)
Balances, March 31, 2020  4,930,448  $493  $20,897,616  $(25,333,158) $(4,435,049)
                     
Balances, December 31, 2020  9,639,268  $964  $37,978,224  $(32,236,082) $5,743,106 
Common stock issued to directors and employees  30,000   3   97,450   -   97,453 
Common stock issued for services  71,500   7   221,243   -   221,250 
Conversion of notes payable and accrued interest  388,684   39   1,243,749   -   1,243,788 
Proceeds from warrant exercise  39,095   4   123,558   -   123,562 
Proceeds from unit purchase option exercise  77,444   8   246,270   -   246,278 
Cashless warrant exercise  91,709   9   (9)  -   - 
Cashless unit purchase option exercise  86,529   8   (8)  -   - 
Stock options issued to directors and employees as compensation  -   -   376,523   -   376,523 
Net loss  -   -   -   (2,453,469)  (2,453,469)
Balances, March 31, 2021  10,424,229  $1,042  $40,287,000  $(34,689,551) $5,598,491 

  

The accompanying notes are an integral part of these consolidated financial statements.

 

5
 

 

INVO BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

  For the Three Months
  Ended March 31,
  2021 2020
Cash flows from operating activities:        
Net loss $(2,453,469) $(1,444,392)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:        
Non-cash stock compensation issued for services  94,611   38,000 
Non-cash stock compensation issued to employees  97,453   303,463 
Fair value of stock options issued to employees  376,523   381,475 
Amortization of discount on notes payable  860,155   39,918 
Amortization of leasehold right of use asset  5,675   5,529 
Depreciation and amortization  2,979   2,980 
Changes in assets and liabilities:        
Accounts receivable  (505,952)  3,859 
Interest receivable  (160)  - 
Inventory  (2,977)  (60,896)
Prepaid expenses and other current assets  18,694  22,675 
Accounts payable and accrued expenses  183,117   (76,791)
Accrued compensation  (259,936)  94,144 
Deferred revenue  (178,572)  (178,572)
Leasehold liability  (5,491)  (5,163)
Accrued interest  33,028   10,321 
Income taxes payable  (1,062)  - 
Net cash used in operating activities  (1,735,384)  (863,450)
         
Cash from investing activities:        
Payments to acquire property, plant and equipment  -   (20,528)
Payments to acquire patents  (17,631)  - 
Payments to acquire trademarks  (11,349)  (4,607)
Payment for notes receivable  (280,000)  - 
Net cash used in investing activities  (308,980)  (25,135)
         
Cash from financing activities:        
Proceeds from warrant exercise  123,562   - 
Proceeds from unit purchase option exercise  246,278   - 
Net cash provided by financing activities  369,840   - 
         
Decrease in cash and cash equivalents  (1,674,524)  (888,585)
         
Cash and cash equivalents at beginning of period  10,097,760   1,238,585 
         
Cash and cash equivalents at end of period $8,423,236  $350,000 
         
Supplemental disclosure of cash flow information:        
         
Cash paid during the period for:        
         
Interest $2,043  $- 
         
Taxes $912  $- 
         
Non cash activities:        
         
Common stock issued upon note payable and accrued interest conversion $1,243,788  $- 
         
Common stock issued for prepaid services $168,850  $- 
         
Cashless exercise of warrants $9  $- 
         
Cashless exercise of unit purchase options $8  $- 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

Note 1 – Description of Business

 

INVO Bioscience (“INVO” or the “Company”) is a medical device company focused on the Assisted Reproductive Technology (“ART”) marketplace. The primary focus is the manufacture and sale of the INVOcell device and the INVO technology to provide an alternative infertility treatment for couples. The Company’s patented device, the INVOcell, is the first Intravaginal Culture (“IVC”) system in the world used for the natural in vivo incubation of eggs and sperm during fertilization and early embryo development (the “INVO Procedure”). INVOcell was granted clearance in the United States by the U.S. Food & Drug Administration (“FDA”) in November 2015, received the CE mark in October 2019, and is now positioned to help provide millions of infertile couples across the globe access to a new infertility treatment option. The Company believes this novel device and procedure provides a more natural, safe, effective, efficient and economical fertility treatment compared to current infertility treatments, including in-vitro fertilization (“IVF”) and intrauterine insemination (“IUI”). Unlike conventional infertility treatments such as IVF where the eggs and sperm develop into embryos in a laboratory incubator, the INVOcell utilizes the women’s vaginal cavity as an incubator to support a more natural fertilization and embryo development environment. This novel device promotes in vivo conception and early embryo development.

 

In both current utilization of the INVOcell and in clinical studies, the INVO Procedure has proven to have equivalent pregnancy success and live birth rates as the traditional assisted reproductive technique, IVF. Additionally, the Company believes there are emotional benefits of the mother’s participation in the fertilization and early embryo development by vaginal incubation compared to that of conventional IVF treatment. INVOcell also offers to patients a more personalized way to achieve pregnancy.

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated balance sheets as of March 31, 2021 and December 31, 2020, the consolidated statements of operations and stockholders’ equity (deficiency) for the three months ended March 31, 2021 and 2020, and consolidated statement of cash flows for the three months ended March 31, 2021 and 2020 of the Company, and the related information contained in these notes have been prepared by management and are unaudited. In the opinion of management, all adjustments (which include normal recurring and nonrecurring items) necessary to present fairly the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles (“GAAP”) for the periods presented have been made. Interim operating results are not necessarily indicative of operating results for a full year.

 

The accompanying consolidated financial statements present on a consolidated basis the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The preparation of the Company’s unaudited consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Certain information and note disclosures normally included in the Company’s annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 previously filed by the Company with the Securities and Exchange Commission (“SEC”) on March 30, 2021.

 

The Company considers events or transactions that have occurred after the unaudited consolidated balance sheet date of March 31, 2021, but prior to the filing of the unaudited consolidated financial statements with the SEC on this Quarterly Report on Form 10-Q, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure, as applicable. Subsequent events have been evaluated through the date of the filing of this Quarterly Report on Form 10-Q with the SEC.

 

7
 

  

Cash and Cash Equivalents

 

For financial statement presentation purposes, the Company considers time deposits, certificates of deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. At times, cash and cash equivalents balances exceed amounts insured by the Federal Deposit Insurance Corporation.

 

Inventory

 

Inventories consist of raw materials, work in process and finished goods and are stated at the lower of cost or net realizable value, using the first-in, first-out (FIFO) method as a cost flow method.

 

Property and Equipment

 

The Company records property and equipment at cost. Property and equipment is depreciated using the straight-line method over the estimated economic lives of the assets, which are from 3 to 10 years. The Company capitalizes the expenditures for major renewals and improvements that extend the useful lives of property and equipment. Expenditures for maintenance and repairs are charged to expense as incurred. The Company reviews the carrying value of long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.

 

Stock Based Compensation

 

The Company accounts for stock-based compensation under the provisions of Accounting Standards Codification (“ASC”) subtopic 718-10, Compensation (“ASC 718-10”). This statement requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period in which the employee is required to provide service or based on performance goals in exchange for the award, which is usually the vesting period.

 

Loss Per Share

 

Basic loss per share calculations are computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share are computed similar to basic earnings per share except that the denominator is increased to include potentially dilutive securities. The Company’s diluted loss per share is the same as the basic loss per share for the three months ended March 31, 2021 and 2020, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.

 

  Three Months Ended March 31, 
  2021  2020 
Loss to common shareholders (Numerator) $(2,453,469) $(1,444,392)
Basic and diluted weighted-average number of common shares outstanding (Denominator)  9,888,025   4,917,997 

 

The Company has excluded the following dilutive securities from the calculation of fully diluted shares outstanding because the result would have been anti-dilutive:

 

  Three Months Ended March 31, 
  2021  2020 
Effect of dilutive common stock equivalents:        
Options  1,102,672   - 
Convertible notes and interest  160,504   - 
Unit purchase options and warrants  216,193   - 
Total  1,479,369   - 

 

8
 

 

Business Segments

 

The Company operates in one segment and therefore segment information is not presented.

 

Revenue Recognition

 

The Company recognizes revenue on arrangements in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services ASC 606 requires companies to assess their contracts to determine the timing and amount of revenue to recognize under the new revenue standard. The model has a five-step approach:

 

1.Identify the contract with the customer.
  
2.Identify the performance obligations in the contract.
  
3.Determine the total transaction price.
  
4.Allocate the total transaction price to each performance obligation in the contract.
  
5.Recognize as revenue when (or as) each performance obligation is satisfied.

 

Revenues for products, including: INVOcell®, INVO TM Retention System, and INVO Microscope Holding Block are typically recognized at the time the product is shipped, at which time the title passes to the customer, and there are no further performance obligations.

 

On November 12, 2018, the Company entered into a U.S. Distribution Agreement (the “Distribution Agreement”) with Ferring International Center S.A. (“Ferring”), pursuant to which it granted Ferring an exclusive license in the United States market only, with rights to sublicense under patents related to our proprietary intravaginal culture device (INVOcell™), together with the retention device and any other applicable accessories (collectively, the “Licensed Product”) to market, promote, distribute and sell the Licensed Product with respect to all therapeutic, prophylactic and diagnostic uses of medical devices or pharmaceutical products involving reproductive technology (including infertility treatment) in humans.

 

9
 

 

The Ferring license was deemed to be a functional license that provide customers with a “right to access” to the Company’s intellectual property during the subscription period and accordingly, under ASC 606-10-55-60 revenue is recognized over a period of time, which is generally the subscription period. The initial upfront payment of $5,000,000 which was received upon the signing of the agreement is being recognized as income over the 7-year term.

 

Long- Lived Assets

 

Long-lived assets and certain identifiable assets related to those assets are periodically reviewed for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the non-discounted future cash flows of the asset are less than their carrying amount, their carrying amounts are reduced to the fair value and an impairment loss recognized. There was no impairment recorded during the three months ended March 31, 2021 and 2020.

 

Investment in Joint Ventures

 

The following table sets forth a list of the Company’s current joint venture arrangements:

 

Subsidiary Name Country Percent (%) Ownership 
      
HRCFG INVO, LLC United States  50% 
Positib Fertility, S.A. de C.V. Mexico  33% 
SNS MURNI INVO Bioscience Malaysia Sendirian Berhad Malaysia  50% 
Ginekalix INVO Bioscience LLC Skopje North Macedonia  50% 
Medesole INVO Bioscience India India  50% 

 

Alabama JV Agreement

 

On March 10, 2021, the Company’s wholly owned subsidiary, INVO Centers, LLC (“INVO Centers”), entered into a limited liability company agreement (the “JV LLC Agreement”) with HRCFG, LLC (“HRCFG”) to form a joint venture for the purpose of commercializing INVOcell and the INVO Procedure at a dedicated fertility clinic in Birmingham, Alabama. The name of the joint venture LLC is HRCFG INVO, LLC (the “Alabama JV”). The responsibilities of HRCFG’s principals include providing clinical practice expertise, performing recruitment functions, providing all necessary training, and providing day-to-day management of the clinic. The responsibilities of INVO Centers will be to provide access to and be the exclusive provider to the Alabama JV of the INVOcell and the INVO Procedure. INVO Centers will also perform all required in vitro fertilization, industry specific compliance and accreditation functions, and product documentation for product registration. The Company will also provide certain funding to the Alabama JV. In connection with the formation of the Alabama JV, the Company provided an initial $30,000 in funding, in exchange for a note issued by HRCFG, which will be repaid from the operating profit of the Alabama JV. On March 19, 2021, the Company provided an additional $250,000 to HRCFG pursuant the note. Interest on the note accrues at a rate of 1.5% per annum. In addition, the Company has agreed to issue 25,000 shares of its common stock to HRCFG (i) upon opening the Birmingham clinic for business, and (ii) upon each additional INVOcell clinic opened for business by the Alabama JV. As of March 31, 2021, the Company had expended $64,932 in startup costs related to this joint venture.

 

Mexico JV Agreement

 

Effective September 24, 2020, INVO Centers, LLC entered into a Pre-Incorporation and Shareholders Agreement with Francisco Arredondo, MD PLLC (“Arredondo”) and Security Health LLC, a Texas limited liability company (“Ramirez”, and together with INVO and Arredondo, the “Shareholders”) under which the Shareholders will commercialize the INVO Procedure and offer related medical treatments in Mexico. Each party owns one-third of the Mexican incorporated company, Positib Fertility, S.A. de C.V. (the “Mexico JV”). The Mexico JV will acquire the INVOcell product at cost plus any incurred shipping, customs and related fees.

 

The Mexico JV will operate in Monterrey Nuevo Leon, Mexico and any other cities and places in Mexico as approved by the Mexico JV’s board of directors and Shareholders. In addition, the Shareholders agreed that the Mexico JV will be the Company’s exclusive distributor in Mexico. The Shareholders also agreed not to compete directly or indirectly with the Mexico JV in Mexico. As of March 31, 2021, the Company had expended $51,670 in startup costs related to this joint venture.

 

Malaysia JV Agreement

 

On November 23, 2020, the Company entered into a joint venture agreement with SNS Murni SDN BHD (“SNS Murni”), a company incorporated in Malaysia, to establish an exclusive joint venture in Malaysia to (i) introduce, promote and market its technologies related to the INVOcell and INVO Procedure in dedicated government-owned fertility clinics in Malaysia, and (ii) establish INVO Clinics in Malaysia. The joint venture is co-managed and owned 50% by each of INVO Bioscience and SNS Murni. As of March 31, 2021, the Company has expended $7,885 in startup costs related to this joint venture.

  

North Macedonia JV Agreement

 

On November 23, 2020, the Company entered into a joint venture agreement with Ginekaliks Dooel (“Ginekaliks”), a limited liability company incorporated in the Republic of North Macedonia, to establish an exclusive joint venture to (i) commercialize, introduce, promote and market technologies related to the INVOcell and INVO Procedure in North Macedonia, (ii) establish a private healthcare institution to offer the INVO Procedure. The joint venture will be co-managed and owned 50% by each of INVO Bioscience and Ginekaliks. As of March 31, 2021, the Company had expended $2,597 in startup costs related to this joint venture.

 

India JV Agreement

 

On January 13, 2020, the Company entered into a joint venture agreement (the “Agreement”) with Medesole Healthcare and Trading Private Limited, India (“Medesole”), an Indian corporation that promotes and distributes healthcare technologies, medical equipment and allied services to hospitals, clinics and primary health care centers in India and the Middle East.

 

Pursuant to the Agreement, the Company and Medesole have formed a joint venture entity incorporated and registered in India, which will operate under the name Medesole INVO Bioscience India Private Limited (the “India JV”). After formation, the Company will grant to the India JV all required licenses for promoting, marketing and selling the Company’s INVOcell® technology in India. The Company and Medesole intend that the India JV will open and operate dedicated INVOcell® clinics only in India.

 

The India JV will be co-managed and owned 50% by each of INVO and Medesole, who will share equally in the expenditures, revenues and profits of the India JV. The Agreement has a term of three years and may be terminated by either party on 180 days’ prior written notice.

 

10
 

 

Variable Interest Entities

 

The Company’s consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and variable interest entities (“VIE’), where the Company is the primary beneficiary under the provisions of the ASC 810, Consolidation (“ASC 810”).

 

Management makes judgments regarding the Company’s level of influence or control over an entity and whether or not the Company is the primary beneficiary of a VIE. Various factors are considered in this analysis, including but not limited to the Company’s ability to direct the activities that most significantly impact the entity’s governing body, the size and seniority of the Company’s investment, the Company’s ability and the rights of other investors to participate in policy making decisions, the Company’s ability to replace the manager and/or liquidate the entity, and the Company’s obligation to absorb losses and right to receive benefits that are significant. Management’s ability to correctly assess its influence or control over an entity when determining the primary beneficiary of a VIE affects the presentation of these entities in the Company’s consolidated financial statements. If it is determined that the Company is the primary beneficiary of a VIE, the Company’s financial statements would consolidate the VIE. The Company performs a qualitative assessment of its joint ventures on an ongoing basis to determine if it continues to be a primary beneficiary.

 

The Company concluded it has a variable interest in the Alabama JV and the Mexico JV (the “JVs”) on the basis of its capital contributions to the JVs and the terms and conditions contained in the agreements that control the JVs. First, the Company determined that the JVs are VIEs, since the JVs’ equity at risk, as defined by GAAP, is considered to be insufficient to finance JV activities without additional support. Second, the Company determined that it has a controlling financial interest in, and thus is a primary beneficiary of the JVs. Such control stems from the Company’s power to direct activities that most significantly impact the JVs operations, and the Company’s obligation to absorb losses and its right to receive benefits from the JVs that would be significant to the JVs. Such power stems from the Company’s ability, among other things, to control the sale or transfer of the JVs capital units and/or common stock. As a result of its analysis, the Company concluded that it is a primary beneficiary of the JVs and therefore consolidates the balance sheets, results of operations and cash flows of the JVs into its own.

 

As of March 31, 2021, there was no financial activity in the JV’s and therefore no impact on the Company’s financial statements.

 

Recently Adopted Accounting Pronouncements

 

None.

 

11
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

Note 3 – Inventory

 

Components of inventory are:

 

  

March 31,

2021

  

December 31,

2020

 
Raw materials $67,936  $72,022 
Work in process  5,005   29,645 
Finished goods  195,408   163,705 
Total inventory $268,349  $265,372 

 

Note 4 – Property and Equipment

 

The estimated useful lives and accumulated depreciation for furniture, equipment and software are as follows as of March 31, 2021 and December 31, 2020:

 

 Estimated Useful Life
Manufacturing equipment6 to 10 years
Medical equipment10 years
Office equipment3 to 7 years

 

  

March 31,

2021

  

December 31,

2020

 
Manufacturing equipment $132,513  $132,513 
Medical equipment  49,261   49,261 
Office equipment  2,689   2,689 
Less: accumulated depreciation  (54,784)  (52,257)
Total equipment, net $129,679  $132,206 

 

During the three months ended March 31, 2021 and 2020, the Company recorded depreciation expense of $2,527 and $2,528, respectively.

 

12
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

Note 5 – Patents and Trademarks

 

The Company capitalizes the initial expense related to establishing patents by country and then amortizes the expense over the life of the patent, typically 20 years. It then expenses annual filing fees to maintain the patents. The Company regularly reviews the value of its patents in the marketplace in proportion to the expense it must spend to maintain the patent.

 

The Company has recorded the following patent costs:

 

  

March 31,

2021

  

December 31,

2020

 
Patents $95,353  $77,722 
Accumulated amortization  (72,747)  (72,295)
Total patent costs, net $22,606  $5,427 

 

During the three months ended March 31, 2021 and 2020, the Company recorded $452 and $452, respectively, of amortization expenses related to patents.

 

The increase in the trademark assets of $11,349 was the result of additional legal fees.

 

The trademarks have an indefinite life and therefore are not amortized. Trademarks are periodically reviewed for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. The trademark assets were created in 2019, and no material adverse changes have occurred since their creation.

 

Note 6 – Notes Receivable

 

On March 10, 2021, the Company entered into a promissory note with HRCFG, LLC, an unrelated party. The note was entered into in conjunction with the Alabama JV with HRCFG, LLC, accrues interest at 1.5% per annum and repayment of principal and interest shall be paid from 30% of HRCFG INVO LLC’s operating profit. The balance as of March 31, 2021 consists of $280,000 principle and $160 of accrued interest.

 

The following table lists the Company’s notes receivable:

 

  March 31, 2021  December 31, 2020 
Notes receivable – HRCFG, LLC $280,160  $- 
Total notes receivable $280,160  $- 

 

Note 7 – Leases

 

The Company has an operating lease for its office, which has a remaining term of 5 years with an option to renew for three additional years. The lease does not have an early termination clause. The Company’s operating lease agreement does not contain any material restrictive covenants. Per FASB’s ASU 2016-02, Leases Topic 842 (“ASU 2016-02”), effective January 1, 2019, the Company is required to report a right-of-use asset and corresponding liability to report the present value of the total least payments, with appropriate interest calculation. Per the terms of ASU 201-02, the Company can use its implicit interest rate, if known, or applicable federal rate otherwise. Since the Company’s implicit interest rate was not readily determinable, the Company utilized the applicable federal rate, which was 3.0% as of April 2019.

 

13
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

As of March 31, 2021, the Company’s lease components included in the consolidated balance sheet were as follows:

 

Lease component Balance sheet classification March 31, 2021 
Assets      
ROU assets - operating lease Other assets $73,644 
       
Total ROU assets   $73,644 
       
Liabilities      
Current operating lease liability Current liabilities $23,061 
       
Long-term operating lease liability Other liabilities  52,789 
       
Total lease liabilities   $75,850 

 

Future minimum lease payments under non-cancellable leases were as follows:

 

  March 31, 2021 
2021 $18,751 
2022  25,585 
2023  26,352 
2024  8,870 
2025 and beyond  - 
Total future minimum lease payments $79,558 
Less: Interest  (3,708)
Total operating lease liabilities $75,850 
     
Current operating lease liability $23,061 
Long-term operating lease liability  52,789 
Total operating lease liabilities $75,850 

 

14
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

Note 8 – Convertible Notes and Notes Payable

 

2020 Convertible Notes Payable

 

From May 15, 2020 through July 1, 2020, the Company entered into definitive securities purchase agreements (“Purchase Agreements”) with accredited investors for their purchase of (i) secured convertible notes issued by us in the aggregate original principal amount of $3,494,840 (the “Notes”), and (ii) Unit Purchase Options (“Purchase Options”) to purchase 303,623 units (each, a “Unit”), at an exercise price of $3.20 per Unit (subject to adjustments), with each Unit exercisable for (A) one share of the Company’s common stock and (B) a 5-year warrant (the “Warrants”) to purchase one share of our common stock at an exercise price of $3.20 (subject to adjustments) (the “Private Placement”). Each purchaser of a Note was issued a 5-year Purchase Option to purchase 0.086875 Units (as adjusted for subsequent reverse splits for each dollar of Notes purchased. The Company received gross proceeds of approximately $3.5 million (of which $3,351,200 was received in cash and $143,640 resulted from cancellation of indebtedness). Tribal Capital Markets, LLC acted as placement agent (the “Placement Agent”) in the Private Placement. The Company paid the Placement Agent and certain selling agents a cash fee of 8% on a portion of the proceeds for an aggregate amount of $236,000. The Company also agreed to issue the Placement Agent and the selling agent 5-year warrants to purchase 6,750 shares of our common stock at an exercise price of $3.20 per share. These warrants have the same terms and conditions as the Warrants issued in the Private Placement, except for the different exercise price. The Company received approximately $2,998,905 in net proceeds from the Private Placement, after deducting fees payable to the Placement Agent, selling agent, and investor counsel. The Company used approximately $413,456, in proceeds to repay outstanding 9% promissory notes and the Company intends to use the remaining proceeds for working capital and general corporate purposes.

 

Pursuant to that certain Form of Secured Convertible Note entered into in connection with the Purchase Agreement, interest on such Notes accrues at a rate of ten percent (10%) per annum and is payable either in cash or in shares of the Company’s common stock at a conversion price of $3.20 (following and subject to adjustment for stock splits, combinations or similar events and anti-dilution provisions, among other adjustments) on each of the six- and twelve-month anniversary of the issuance date and on the maturity dates of November 15, 2021, December 22, 2021 and December 30, 2021.

 

All amounts of principal and interest due under the Notes are convertible at any time after the issuance date, in whole or in part (subject to rounding for fractional shares), at the option of the holders, into the Company’s common stock at a fixed conversion price of $3.20, which is subject to adjustment as described above.

 

Upon any issuance by the Company of any of its equity securities, including common stock, for cash consideration, indebtedness or a combination thereof after the date hereof (a “Subsequent Equity Financing”), each holder of a Note will have the option to convert the outstanding principal and accrued but unpaid interest of its Note into the number of fully paid and non-assessable shares of common stock issued in the Subsequent Equity Financing (“Conversion Securities”) equal to the product of unpaid principal, together with the balance of unpaid and accrued interest and other amounts payable hereunder multiplied by 1.1, divided by the price per share paid by the investors for the Conversion Securities.

 

A Note may not be converted, and shares of common stock may not be issued under the Notes if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of 9.99% of the Company’s outstanding ordinary shares.

 

The Company may prepay the Notes at any time in whole or in part by paying an amount equal to 100% of the principal amount to be redeemed, together with accrued and unpaid interest plus a prepayment fee equal to one percent (1%) of the principal amount to be repaid.

 

The Notes contain customary events of default including but not limited to: (i) failure to make payments when due; and (ii) bankruptcy or insolvency of the Company. If an event of default occurs, each holder may require the Company to redeem all or any portion of the Notes (including all accrued and unpaid interest thereon), in cash.

 

Pursuant to the terms of a Security Agreement entered into between the Company and the noteholders under the Purchase Agreements, the Notes are secured by the proceeds from the $3,000,000 milestone payment pursuant to Section 7.2(b) of the Distribution Agreement dated November 12, 2018 between the Company and Ferring to the extent such proceeds are actually received by the Company from Ferring.

 

Of the $3,494,840 in net proceeds received in the offering, $1,048,904 million was allocated to the unit purchase options issued to investors based on their relative fair value and $2,062,586 of beneficial conversion feature based on their relative fair value. This amount represented a discount on the debt and additional paid-in-capital at the date of issuance.

 

In November 2020, noteholders holding notes with a principal value of $1,319,840 elected to convert in connection with the public underwritten offering. In November and December 2020, the Company redeemed an additional $475,000 in principal note value. In March 2021, an additional $1,200,000 converted into equity. As of March 31, 2021, there is $500,000 in principal note value that remains outstanding.

 

15
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

Principal balances of the 2020 Convertible Notes were as follows:

 

  

March 31,

2021

  

December 31,

2020

 
       
2020 Convertible Notes  500,000   1,700,000 
Accrued interest  13,613   24,373 
Less beneficial conversion feature discount  (143,777)  (604,897)
Less options discount  (62,712)  (224,051)
Less warrants discount  (66,374)  (229,954)
Less issuance cost  (55,292)  (129,408)
Total, net of discount $185,458  $536,063 

 

Interest expense on the 2020 Convertible Notes was $35,070 and $0 for the three months ended March 31, 2021 and 2020, respectively.

 

Amortization of options discount on the 2020 Convertible Notes was $161,339 and $0 for the three months ended March 31, 2021 and 2020, respectively.

 

Amortization of warrant discount on the 2020 Convertible Notes was $163,580 and $0 for the three months ended March 31, 2021 and 2020, respectively.

 

Amortization of beneficial conversion feature on the 2020 Convertible Notes was $461,120 and $0 for the three months ended March 31, 2021 and 2020, respectively.

 

Amortization of issuance costs on the 2020 Convertible Notes was $74,116 and $0 for the three months ended March 31, 2021 and 2020, respectively.

 

Paycheck Protection Program

 

On July 1, 2020, the Company received a loan in the principal amount of $157,620 pursuant to the U.S. Small Business Administration’s Paycheck Protection Program. The loan will mature 18 months from the date of funding is payable over 18 equal monthly installments, and bears interest at a rate of 1% per annum. Up to 100% of the principal balance of the loan is forgivable based upon satisfaction of certain criteria under the Paycheck Protection Program. The Company has applied for full forgiveness of the loan.

 

16
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

Note 9 –Other Related Party Transactions

 

In November 2020, Paulson Investment Company served as a co-managing underwriter for the Company’s underwritten public offering and received fee and commissions for such role in the amount of $271,440. Trent Davis, one of our directors is President of Paulson Investment Company. Mr. Davis did not receive any compensation related to the fees and commissions received by Paulson.

 

17
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

Note 10 – Stockholders’ Equity

 

Reverse Stock Splits

 

On December 16, 2019, the Company’s stockholders approved a reverse stock split at a ratio of between 1-for 5 and 1-for-25, with discretion for the exact ratio to be approved by the Company’s board of directors. On February 19, 2020, the Company’s board of directors approved a reverse stock split of the Company’s common stock at a ratio of 1-for-20. On May 21, 2020, the Company filed a certificate of change (with an effective date of May 26, 2020) with the Nevada Secretary of State pursuant to Nevada Revised Statutes 78.209 to effectuate a 1-for-20 reverse stock split of its outstanding common stock. The reverse split took effect at the open of business on May 26, 2020.

 

On October 22, 2020, the Company’s board of directors approved a reverse stock split of the Company’s common stock at a ratio of 5-for-8 and also approved a proportionate decrease in the Company’s authorized common stock to 125,000,000 shares from 200,000,000. On November 5, 2020, the Company filed a certificate of change (with an effective date of November 9, 2020) with the Nevada Secretary of State pursuant to Nevada Revised Statutes 78.209 to effectuate a 5-for-8 reverse stock split of its outstanding common stock. As a result of the reverse stock split, 133 shares were issued in lieu of fractional shares. On November 6, 2020, the Company received notice from FINRA/OTC Corporate Actions that the reverse split would take effect at the open of business on November 9, 2020 and the reverse stock split took effect on that date. The consolidated financial statements presented reflect the reverse splits.

 

Public offering

 

On November 12, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC, as representative of the several underwriters (the “Underwriters”), in connection with the Company’s public offering (the “Offering”) of 3,625,000 shares of common stock, at a public offering price of $3.20 per share. The initial closing of the Offering for 3,625,000 shares of common stock took place on November 17, 2020. On November 18, 2020, the Underwriters exercised their option pursuant to the Underwriting Agreement to purchase an additional 528,750 shares of common stock (the “Option Shares”). The closing for the Option Shares took place on November 20, 2020 for which the Company received approximately $1.5 million in net proceeds after deducting underwriting discounts and commissions. With the exercise of the option to purchase the Option Shares, the total amount of shares of common stock sold in the Offering was 4,153,750 shares with aggregate net proceeds received by the Company of approximately $11.8 million after deducting underwriting discounts and commissions and offering expenses.

 

During the year ended December 31, 2020 the Company incurred approximately $1.8 million of offering costs related to issuance of common stock.

 

Three months Ended March 31, 2021

 

In January 2021, the Company issued 30,000 shares of common stock to employees under its 2019 Stock Incentive Plan with a fair value of $97,453.

 

During the first three month of 2021, the Company issued 71,500 shares of common stock to consultants under its 2019 Stock Incentive Plan with a fair value of $221,250.

 

In March 2021, the Company issued 388,684 shares of common stock with fair value of $1,243,788 as a result of the conversion of notes payables and accrued interest. No gain or loss was recorded on conversion, as the issuance of common stock was pursuant to the terms of a prior agreement.

 

In March 2021, the Company issued 77,444 shares of common stock for proceeds of $246,278 as a result of the exercise of unit purchase options.

 

In March 2021, the Company issued 39,095 shares of common stock for proceeds of $123,562 as a result of the exercise of warrants.

 

In March 2021, the Company issued 91,709 shares of common stock as a result of a cashless exercise of warrants.

 

In March 2021, the Company issued 86,529 shares of common stock as a result of a cashless exercise of unit purchase options.

 

18
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

Note 11 – Equity-Based Compensation

 

Equity Incentive Plans

 

In October 2019, the Company adopted its 2019 Stock Incentive Plan (the “2019 Plan”). Under the 2019 Plan, the Company’s Board of Directors is authorized to grant both incentive and non-statutory stock options to purchase common stock and restricted stock awards to its employees, directors, and consultants. The 2019 Plan initially provided for the issuance of 500,000 shares. A provision in the 2019 Plan provides for an automatic annual increase equal to 6% of the total number of shares of Company common stock outstanding on December 31 of the preceding calendar year. In January 2020, the number of available shares was increased to 793,093. In January 2021, the number of available shares issuable increased by an additional 578,356 shares to a total of 1,371,449 shares.

 

Options generally have a life of 3 to 10 years and exercise prices equal to or greater than the fair market value of the common stock as determined by the Company’s Board of Directors.

 

Vesting for employees typically occurs over a three-year period or based on performance objectives.

 

The following table sets forth the activity of the options to purchase common stock under the 2019 Plan. The prices represent the closing price of our common stock on the Nasdaq Capital Market on the respective dates.

 

  Options Outstanding  Options Exercisable 
  

Number of

Shares

  Price per Share Range  

Weighted

Average

Exercise

Price

  

Aggregate

Intrinsic

Value (1)

  

Number of

Shares

  

Weighted

Average

Exercise

Price

  

Aggregate

Intrinsic

Value (1)

 
Balance at December 31, 2020  594,114  $3.19-9.25  $7.28  $-   265,386  $5.64  $- 
Forfeited  -  $-  $-   -   -   -   - 
Vested  -   -   -   -   97,615   3.86   - 
Exercised  -  $-  $-   -   -   -   - 
Granted  508,558  $2.28-2.55  $2.33   -   -   -   - 
Balance at March 31, 2021  1,102,672  $ 2.28-9.25  $4.33  $-   374,256  $3.57  $- 

 

(1)The intrinsic value of an option represents the amount by which the market value of the stock exceeds the exercise price of the option of in-the-money options only.

 

The fair value of each option granted is estimated as of the grant date using the Black-Scholes option pricing model with the following assumptions:

 

  Three months ended March 31, 
  2021  2020 
Risk-free interest rate range  0.22 to 0.31%  0.48 to 1.65%
Expected life of option-years  5.5 to 6.5    5.20 to 5.77  
Expected stock price volatility  107.4%  110.8 to 128.%
Expected dividend yield  -%  -%

 

19
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

The risk-free interest rate is based on U.S. Treasury interest rates, the terms of which are consistent with the expected life of the stock options. Expected volatility is based upon the average historical volatility of the Company’s common stock over the period commensurate with the expected term of the related instrument. The expected life and estimated post-employment termination behavior is based upon historical experience of homogeneous groups, executives and non-executives, within the Company. The Company does not currently pay dividends on its common stock nor does it expect to do so in the foreseeable future.

 

  

Total Intrinsic Value of

Options Exercised

  

Total Fair Value of

Options Vested

 
Year ended December 31, 2020 $        -  $1,495,744 
Three months ended March 31, 2021 $-  $376,523 

 

For the three months ended March 31, 2021, the weighted average grant date fair value of options granted was $2.33 per share. The Company estimates the fair value of options at the grant date using the Black-Scholes model. For all stock options granted through March 31, 2021, the weighted average remaining service period is 4.5 years.

 

The Company recognized $376,524 and $381,475 in stock-based compensation expense for stock options, which is recorded in selling, general and administrative expenses on the consolidated statement of operations for the three months ended March 31, 2021 and 2020, respectively. Unamortized stock option expense at March 31, 2021, that will be amortized over the weighted-average remaining service period totaled $2,642,796.

 

Restricted Stock and Restricted Stock Units

 

In the three months ended March 31, 2021, the Company issued 30,000 shares of restricted stock, to certain employees. Restricted stock and restricted stock units issued to employees and directors generally vest either at grant or vest over a period of one year from grant.

 

The following table summarizes the Company’s aggregate restricted stock awards and restricted stock unit activity during the three months ended March 31, 2021:

 

  

Number of Unvested

Shares

  

Weighted

Average

Grant Date Fair Value

  

Aggregate

Value

of Unvested Shares

 
          
Balance at December 31, 2020  16,698  $4.67  $77,927 
Granted  71,757  $3.04  $218,228 
Vested  (24,445) $3.66  $(89,473)
Forfeitures  - $-  $-
Balance at March 31, 2021  64,010  $3.23  $206,682 

 

20
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

The Company recognized $89,473 and $265,963 in stock-based compensation expense for restricted stock and restricted stock units for the three months ended March 31, 2021 and March 31, 2020 respectively. Stock-based compensation expense is recorded in selling, general and administrative expenses on the consolidated statement of operations

 

Note 12 – Stock Options and Warrants

 

In connection with the issuance of the 2020 Convertible Notes, the Company also issued options to purchase 303,623 units at an exercise price of $3.20 per unit, with each unit consisting of one share of common stock, and a warrant to purchase one share of common stock at an exercise price of $3.20 per share. The units and warrants are exercisable for a period of five years from the date of issuance and are subject to a downward provision if the Company issues securities at a lower price. Warrant holders have a right to require the Company to pay cash in the event of a fundamental transaction. In accordance with ASC 815, the warrants and options issued in this period were determined to require equity treatment and $247,821 related to the options and $125,104 related to warrants was recorded in stockholders’ equity in the three months ended March 31, 2021.

 

In connection with the issuance of the 2020 Convertible Notes, the Company agreed to issue the placement agent and the selling agent five-year warrants to purchase 6,750 shares of the Company’s common stock at an exercise price of $3.20.

 

A Monte Carlo model was used because the investor warrants and options contain fundamental transaction payouts and reset events that cannot be modeled with a Black Scholes model.

 

The fair value of the options and warrants issued to the convertible debt holders is estimated as of the issue date using a Monte Carlo model with the following assumptions:

    
Risk-free interest rate range  0.33% - 0.39%
Stock Price $3.00 - $3.95 
Expected life of warrants and option (years)  5.00 
Expected stock price volatility  108.2% - 112.5%
Expected dividend yield  0%

 

The risk-free interest rate is based on U.S. Treasury interest rates, the terms of which are consistent with the expected life of the stock options and warrants. Expected volatility is based upon the historical volatility of the Company’s common stock over the period commensurate with the expected term of the related instrument. The options and warrants are valued assuming projected reset events adjusting the exercise price and a forced exercise upon a projected fundamental transaction by management. The options and warrants early exercise are modeled assuming registration after 180 days. The Company does not currently pay dividends on its common stock nor does it expect to in the foreseeable future.

 

21
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

Note 13 – Income Taxes

 

The Company uses the asset and liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If a carryforward exists, the Company decides as to whether the carryforward will be utilized in the future. Currently, a valuation allowance is established for all deferred tax assets and carryforwards as their recoverability is deemed to be uncertain. If the Company’s expectations for future operating results at the federal or at the state jurisdiction level vary from actual results due to changes in healthcare regulations, general economic conditions, or other factors, it may need to adjust the valuation allowance, for all or a portion of the Company’s deferred tax assets. The Company’s income tax expense in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in the Company’s valuation allowance in the period when the change in circumstances occurs. These changes could have a significant impact on the Company’s future earnings.

 

Income tax expense was $0 and $0 for the three months ended March 31, 2021 and 2020. The annual forecasted effective income tax rate for 2021 is 0% with a year-to-date effective income tax rate for the three months ended March 31, 2021 respectively of 0%.

 

Note 14 – Commitments and Contingencies

 

INVO Bioscience, Inc. v. James Bowdring

 

On August 7, 2019, the Company sent James Bowdring, the brother of the Company’s then Chief Financial Officer, a check in the amount of $65,197 as full and final payment under those certain promissory notes dated April 8, 2011 and November 9, 2011. On August 8, 2019, Mr. Bowdring’s legal counsel returned the check. The basis for returning the check was a claim that the interest due under the Notes called for compounded interest and not per annum interest, this amount is recorded in Accounts Payable and Accrued Liabilities on the Consolidated Balance Sheet. In addition, the letter rejecting the tender of the payment in full check alleged Mr. Bowdring was considering a future intention to convert his Promissory Notes into shares of the Company’s common stock. Mr. Bowdring, through his counsel, indicated that such future intention to convert the Notes to common stock were contingent upon Mr. Bowdring addressing certain personal issues which were not disclosed by his counsel in the correspondence returning the checks. The Company does not believe that Mr. Bowdring has the right to seek conversion of the Notes once payment for the Notes has been tendered. In order to resolve the issue of the Company’s tender of payment in full versus Mr. Bowdring’s assertion that he can reject tender and seek conversion, the Company has filed an action in the Suffolk Superior Court in Boston on September 3, 2019 seeking Declaratory Judgment and Judgment for Breach of Contract. On September 30, 2019, Mr. Bowdring filed an answer and counterclaim under which he alleged breach of contract, fraud, promissory estoppel, unfair and deceptive practices and constructive trust. Mr. Bowdring is seeking receipt of all shares due under the adjusted conversion price.

 

The 10% Senior Secured Convertible Promissory Notes were issued on April 8, 2011 and November 9, 2011, with maturity dates thirty days subsequent to the dates of issuance. Interest was calculated at 10% per annum, compounded based on a 360-day year. Investors had the option to convert any unpaid principal and accrued interest into shares of Company’s common stock original conversion prices of $0.96 and $0.32, respectively, subject to adjustments upon the Company’s issuances of stock at prices less than the original conversion prices during the 24-months after issuance of each note (i.e., currently $0.2100).

 

The Company does not currently expect the above matter to have a material adverse effect upon either the Company’s results of operations, financial position, or cash flows.

 

22
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

Note 15 – Contracts with Customers

 

The Company adopted ASC 606, Revenue from Contracts with Customers (ASC 606) effective January 1, 2018 using the modified retrospective method applied to those contracts which were not substantially completed as of January 1, 2018. These standards provide guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenues for 2020 are reported under ASC 606.

 

The Company routinely enters into agreements with customers that include general commercial terms and conditions, notification requirements for price increases, shipping terms and in most cases prices for the products that it offers. However, these agreements do not obligate the Company to provide goods to the customer and there is no consideration promised to us at the onset of these arrangements. For customers without separate agreements, the Company has a standard list price established by geography and by currency for all products and our invoices contain standard terms and conditions that are applicable to those customers where a separate agreement is not controlling. The Company���s performance obligations are established when a customer submits a purchase order or notification (in writing, electronically or verbally) for goods, and it accept the order. The Company identifies performance obligations as the delivery of the requested product(s) in appropriate quantities and to the location specified in the customer’s e-mail/or purchase order. The Company generally recognizes revenue upon the satisfaction of these criteria when control of the product has been transferred to the customer at which time it has an unconditional right to receive payment. The Company’s prices are fixed and are not affected by contingent events that could impact the transaction price. The Company does not offer price concessions and does not accept payment that is less than the price stated when it accepted the purchase order, except in rare credit related circumstances. The Company does not have any material performance obligations where it is acting as an agent for another entity.

 

Revenues for products, including: INVOcell®, INVO TM Retention System, and INVO Microscope Holding Block are typically recognized at the time the product is shipped, at which time the title passes to the customer and there are no further performance obligations. Revenues from consignment are recognized when the medical device is shipped from the consignor to the customer.

 

In January 2019, the Company announced a U.S. license and distribution agreement with Ferring. The agreement calls for the issuance of an initial upfront payment of $5,000,000 which the Company received upon the signing of the agreement, ongoing product revenue, and then subsequent licensing fee payment of $3,000,000 that will provide the Company with a source of non-dilutive financing to execute its plan. Under the terms of the agreement the Company can pursue developing international markets and as well as partnering and opening INVO-only reproductive centers within the U.S. market. The initial upfront payment of $5,000,000 which the Company received upon the signing of the agreement is being recognized as income over the 7-year term.

 

Under the terms of the Distribution Agreement, Ferring completed its obligation to make an initial payment to the Company of $5,000,000 upon completion of the required closing conditions, including executed agreements from all current manufacturers of the Licensed Product that upon a material supply default by the Company, Ferring can assume a direct purchase relationship with such manufacturers. Ferring is obligated to make a second payment to the Company of $3,000,000 provided that the Company is successful in obtaining a five (5) day label enhancement from the FDA for the current incubation period for the Licensed Product at least three (3) years prior to the expiration of the term of the license for the Licensed Product and provided further that Ferring has not previously exercised its right to terminate the Distribution Agreement for convenience. In addition, the Company entered into a separate Distribution Agreement. The Distribution Agreement has an initial term expiring on December 31, 2025 and at the end of the initial term it may be terminated by the Company if Ferring fails to generate specified minimum revenues to the Company from the sale of the Licensed Product during the final two years of the initial term.

 

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INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

On March 2, 2021, the Company entered into Amendment No. 1 to the Distribution Agreement (the “Amendment”) with Ferring. Pursuant to the Amendment, Ferring agreed to purchase a 2,004 count of product for $501,000 in March 2021, at which point the minimum annual target for 2020 set forth in Section 2.4 of the Distribution Agreement was deemed to be satisfied in full as a result of such purchase. The Amendment provides for added flexibility by increasing the number of INVO company-owned clinics initially allowable under the agreement and removing certain geographical requirements.

 

The Ferring license was deemed to be a functional license that provide customers with a “right to access” to the Company’s intellectual property during the subscription period and, accordingly, revenue is recognized over a period of time, which is generally the subscription period. During the three months ended March 31, 2021, the Company recognized $178,571 related to the Ferring license agreement.

 

As of March 31, 2021, and March 31, 2020, the Company had deferred revenues of $3,392,857and $4,107,143, respectively.

 

International Distribution Agreements

 

The Company has entered into exclusive distribution agreements for a number of international markets. These agreements usually have an initial term with renewal options and require the distributors to meet minimum annual purchases, which vary depending on the market. The Company is also required to register the product in each market before the distributor can begin importing, a process and timeline that can vary widely depending on the market.

 

        INVOcell Registration
Market Distribution Partner Date Initial Term Status in Country
         
Canada Invaron Pharmaceuticals Inc. July 2020 1-Year Completed
Mexico Proveedora de Equipos y Productos S.A.** Sept 2020 5-year Completed
Malaysia iDS Medical Systems Nov 2020 3-year Completed
Turkey Orcan Medical Oct 2019 1-year Completed
Jordan Biovate Sept 2019 1-year Completed
Pakistan Galaxy Pharma Dec 2020 1-year In process
Thailand IVF Envimed Co., Ltd. April 2021 1-year In process
Sudan Quality Medicines, Cosmetics & Medical Equipment Import Sept 2020 1-year In process
Ethiopia Quality Medicines, Cosmetics & Medical Equipment Import Sept 2021 1-year In process
Uganda Quality Medicines, Cosmetics & Medical Equipment Import Sept 2022 1-year In process
Nigeria G-Sytems Limited Sept 2023 1-year In process
Togolese Republic INVOSOLUX TOGO Nov 2019 1-year In process
Iran Tasnim Behboud Dec 2020 1-year In process
         
      ** Also the JV Partner for Mexico

 

24
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

Contract Balances

 

The Company incurs agreement obligations on general customer purchase orders and e-mails that have been accepted but unfulfilled. Due to the short duration of time between order acceptance and delivery of the related product, the Company has determined that the balance related to these obligations is generally immaterial at any point in time. The Company monitors the value of orders accepted but unfulfilled at the close of each reporting period to determine if disclosure is appropriate.

 

Warranty

 

The Company’s general product warranties do not extend beyond an assurance that the product delivered will be consistent with stated specifications and do not include separate performance obligations.

 

Significant Judgments in the Application of the Guidance in ASC 606

 

There are no significant judgments associated with the satisfaction of our performance obligations. The Company generally satisfies performance obligations upon delivery of the product to the customer. This is consistent with the time in which the customer obtains control of the products. Therefore, the value of unsatisfied performance obligations at the end of any reporting period is generally immaterial. The Company considers variable consideration in establishing the transaction price. Forms of variable consideration applicable to our arrangements include sales returns, rebates, volume-based bonuses, and prompt pay discounts. The Company uses historical information along with an analysis of the expected value to properly calculate and to consider the need to constrain estimates of variable consideration. Such amounts are included as a reduction to revenue from the sale of products in the periods in which the related revenue is recognized and adjusted in future periods as necessary.

 

Commissions and Contract Costs

 

The Company does not use or offer sales commissions of any type at this time. The Company generally does not incur incremental charges associated with securing agreements with customers which would require capitalization and recovery over the life of the agreement.

 

Shipping and Handling Charges

 

Fees charged to customers for shipping and handling of products are included as an offset to the costs for shipping and handling of products included as a component of cost of products.

 

25
 

  

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(UNAUDITED)

 

Note 16 – Subsequent Events

 

On April 9, 2021, the Company entered into a partnership agreement (“Partnership Agreement”) with Lyfe Medical Center I, LLC (“Medical Center”) under which Medical Center will establish a clinic in Santa Cruz, California (the “Cruz Clinic”) to offer the INVO Procedure to its patients and where we will provide embryology laboratory services in connection with the INVO Procedure and other fertility treatments (the “Lab Services”) to patients at the Cruz Clinic. Under the terms of the Partnership Agreement, the Company will receive 40% of the net income received by the Cruz Clinic for the performance of the Lab Services under the Partnership Agreement.

 

On April 21, 2021, the Board appointed Rebecca Messina as a director to fill the vacancy created by the expansion of the Board to seven members in November 2020. Ms. Messina will serve as a director until her successor is duly elected and qualified. After Ms. Messina’s appointment, the Board currently has seven members.

 

In May 2021, the Company issued 24,806 shares of common stock to employees and consultants under its 2019 Stock Incentive Plan.

 

26
 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Certain 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, 2020. Our actual results could differ materially from those indicated in such forward-looking statements as a result of certain factors. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

Overview

 

We are a medical device company focused in the Assisted Reproductive Technology (“ART”) marketplace. Our mission is to increase access to care and expand fertility treatment and patient care across the globe. Our patented device, the INVOcell, is the first Intravaginal Culture (“IVC”) system in the world used for the natural in vivo incubation of eggs and sperm during fertilization and early embryo development. INVOcell was granted clearance in the United States by the U.S. Food & Drug Administration (“FDA”) in November 2015, received the CE mark in October 2019, and is now positioned to help provide millions of infertile couples across the globe access to a new infertility treatment option. We believe this novel device and procedure provides a more natural, safe, effective, efficient and economical fertility treatment compared to current infertility treatments, including in-vitro fertilization (“IVF”) and intrauterine insemination (“IUI”). Unlike conventional infertility treatments such as IVF where the eggs and sperm develop into embryos in a laboratory incubator, the INVOcell utilizes the women’s vaginal cavity as an incubator to support a more natural fertilization and embryo development environment. As such, this novel device promotes in vivo conception and early embryo development.

 

In both commercial utilization of the INVOcell and in clinical studies, the INVO Procedure has proven to have equivalent pregnancy success and live birth rates as IVF. Additionally, we believe there are emotional benefits with the mother’s participation in fertilization and early embryo development by vaginal incubation compared to that of conventional IVF treatment by offering patients a more connected and personalized method to achieve pregnancy.

 

For many couples struggling with infertility, access to treatment is often not available. Financial challenges (cost of treatment) and limited availability (or capacity) of fertility medical care are two of the main challenges in the ART marketplace that contribute to the large percentage of untreated patients. Religious, social and cultural roadblocks can also prevent hopeful couples from realizing their dream to have a baby with conventional IVF. We believe INVOcell can address many of the key challenges in the ART market, particularly patient cost and infrastructure capacity constraints. The many benefits to the INVO solution include:

 

Cost: Many current clinics offering INVOcell are doing so at approximately half the cost of IVF treatment, due to reduced drugs often being prescribed for INVOcell, fewer office visits needed, and less laboratory time needed as incubation is occurring inside the body rather than in the lab incubator.
Enhances patient capacity: The INVOcell device eliminates the need for a lab incubator as well as helps reduce the overall need for lab-support resources during the incubation period. We believe this generally supports the ability to lower costs and enables a clinic to handle a higher volume of patients on average.
Reduces the risk of errors of wrong embryo transfers since the embryos are never separated from the woman.
Promotes greater involvement by couples in the treatment and conception.
Creates a more natural and environmentally stable incubation than conventional IVF incubation in a laboratory.

 

In the second quarter of 2016, the first U.S. baby from the INVOcell and INVO Procedure following FDA clearance was born in Texas.

 

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Sales and Marketing

 

Our product commercialization efforts are focused on identifying distributors and partners within targeted geographic regions that we believe can best promote, market and sale the INVOcell device and process to assist infertile couples in having a baby. We believe that our proven INVOcell procedure is an effective low-cost treatment option which can also be offered without the need for a more expensive IVF lab facility. We have been authorized to sell the INVOcell device in the United States since November 2015 after receiving de novo class II clearance from the US Food & Drug Administration (“FDA”). As a result of our January 2019 exclusive sales, marketing and distribution agreement with Ferring for the U.S., our primary focus will be on supporting Ferring and establishing INVO-clinics within the U.S. as well as developing key international markets around the world.

 

We anticipate that we will experience quarterly fluctuations in our revenues as a result of our efforts to expand the sales of the INVO technology to new markets. We expect international sales will increase moving forward as we continue to expand our efforts to expand INVOcell globally. We will continue to seek out partners that will contractually commit to meeting agreeable performance objectives that are consistent with our goals and objectives.

 

On November 12, 2018, we entered into a U.S. Distribution Agreement (the “Distribution Agreement”) with Ferring International Center S.A. (“Ferring”), which closed on January 14, 2019. Pursuant to the Distribution Agreement, among other things, we granted Ferring an exclusive license in the United States (the “Territory”) with rights to sublicense under patents related to our proprietary INVOcell™ intravaginal culture device together with the retention device and any other applicable accessories (collectively, the “Licensed Product”) to market, promote, distribute and sell the Licensed Product with respect to all therapeutic, prophylactic and diagnostic uses of medical devices or pharmaceutical products involving reproductive technology (including infertility treatment) in humans (the “Field”). Ferring is responsible, at its own cost, for all commercialization activities for the Licensed Product in the United States. We retained a limited exception to the exclusive license granted to Ferring allowing us, subject to certain restrictions, to establish up to establish up to five clinics that will commercialize INVO cycles in the U.S. This agreement was amended on March 2, 2021 to provide for added flexibility by increasing the number of INVO company-owned clinics initially allowable under the agreement and removing certain geographical requirements. We retained all commercialization rights for the Licensed Product outside of the United States. We believe the strategic partnership with a strong reproductive organization such as Ferring has provided us with the necessary sales and marketing resources and overall market credibility to help execute our goal to expand the INVOcell device around the world.

 

The Ferring license was deemed to be a functional license that provides the counterparty with a “right to access” to our intellectual property during the subscription period and accordingly, revenue is recognized over a period of time, which is generally the subscription period. During the three months ended March 31, 2021, we recognized $178,571 of revenue related to the Ferring license agreement.

 

As of March 31, 2021, we had deferred revenues of $3,392,857 relating to the Distribution Agreement with Ferring.

 

On March 2, 2021, we entered into Amendment No. 1 to the Distribution Agreement (the “Amendment”) with Ferring. Pursuant to the Amendment, Ferring agreed to purchase a 2,004 count of product for $501,000 pursuant to the Distribution Agreement in March 2021, at which point the minimum annual target for 2020 set forth in Section 2.4 of the Distribution Agreement will be deemed to be satisfied in full as a result of such purchase. The Amendment provides for added flexibility by increasing the number of INVO company-owned clinics initially allowable under the agreement and removing certain geographical requirements.

 

Operations

 

We operate with a core internal team and outsource certain operational functions in order to help accelerate our efforts as well as reduce fixed internal overhead needs and in-house capital equipment requirements. Our most critical management and leadership functions are carried out by our core management team. We have contracted out the manufacturing, assembly, packaging, labeling and sterilization of the device to a medical manufacturing company and to a sterilization specialist to perform the gamma sterilization process.

 

Our cash needs are primarily attributable to funding our sales and marketing efforts, strengthening our training capabilities, satisfying existing obligations, funding our clinical activities for additional indications for use, building an administrative infrastructure, and costs and professional fees associated with being a public company. We currently expect our existing distribution and partnership agreements, such as that with Ferring and the other more recent agreements with non-U.S. companies to provide increased revenue in the future, which we expect will help offset the higher level of spending.

 

Throughout 2020, we incurred annual net losses as we continued to market our product and proprietary process and endeavored to increase our revenue base. We expect to continue incurring losses during 2021 as we continue to invest in INVO clinics in the U.S. and the global expansion of our business and the INVOcell technology.

 

We cannot accurately predict the level of success our key partners will experience over the next 12-24 months. However, we anticipate that we will continue to launch the INVOcell device and INVO Procedure within the U.S. through our agreement with Ferring and our clinic joint ventures, and in other parts of the world with new distributor partnerships and joint venture agreements.

 

28
 

 

Recent Developments

 

Alabama JV Agreement

 

On March 10, 2021, our wholly owned subsidiary, INVO Centers, LLC (“INVO Centers”), entered into a limited liability company agreement (the “JV LLC Agreement”) with HRCFG, LLC (“HRCFG”) to form a joint venture for the purpose of commercializing INVOcell and the INVO Procedure at a dedicated fertility clinic in Birmingham, Alabama. The name of the joint venture LLC is HRCFG INVO, LLC (the “Alabama JV”). The responsibilities of HRCFG’s principals include providing clinical practice expertise, performing recruitment functions, providing all necessary training, and providing day-to-day management of the clinic. The responsibilities of INVO Centers will provide access to and will be the exclusive provider to the Alabama JV of the INVOcell and the INVO Procedure. INVO Centers will also perform all required in vitro fertilization, industry specific compliance and accreditation functions, and product documentation for product registration. We will also provide certain funding to the JV Company. In connection with the formation of the Alabama JV, we provided an initial $30,000 in funding, in exchange for a note issued by HRCFG, which will be repaid from the operating profit of the Alabama JV. On March 19, 2021 we provided an additional $250,000 for the note. Interest on the note accrues at a rate of 1.5% per annum. In addition, we agreed to issue 25,000 shares of our common stock to HRCFG (i) upon opening of the Birmingham clinic for business, and (ii) upon each additional INVOcell clinic opened for business by the Alabama JV.

 

Ferring Amendment

 

On March 2, 2021, the Company entered into Amendment No. 1 to the Distribution Agreement (the “Amendment”) with Ferring. Pursuant to the Amendment, Ferring agreed to purchase a 2,004 count of product for $501,000 in March 2021, at which point the minimum annual target for 2020 set forth in Section 2.4 of the Distribution Agreement will be deemed to be satisfied in full as a result of such purchase. The Amendment provides for added flexibility by increasing the number of INVO company-owned clinics initially allowable under the agreement and removing certain geographical requirements.

  

Results of Operations

 

Although the COVID-19 global pandemic continued to impact the global economy, we believe we made progress toward our commercialization goals during the first quarter of 2021. We added new distribution partners in several markets, established new joint venture partnership agreements to develop dedicated INVO-clinics and we are now rapidly moving closer to the actual opening of those initial INVO-clinics, which we believe will commence in the second half of 2021. We have recently added marketing resources to our team to support both the INVO-clinics as well as our new distribution partners around the world and we will look to aggressively drive awareness this year of the INVOcell technology to help accelerate adoption and expand fertility care through the utilization of our technology.

 

The underserved patient market is significant, and we believe our technology can help address the key challenges of affordability and capacity to provide care to the many patients that go untreated. This represents a major opportunity for INVOcell. While the ongoing pandemic may continue to impact 2021 and impede certain progress in some markets, the fertility industry has and continues to work toward a return to normal levels and we believe our expanded number of partners and active markets affords us a strong forward-looking outlook.

 

The Assisted Reproductive Technology market also continues to benefit from a number of industry tailwinds, including 1) the large under-served potential patient population, 2) increasing infertility rates around the world 3) growing awareness and education of fertility treatment options, 4) a growing acceptance of fertility treatment, 5) improvements in procedure techniques and hence improvements in pregnancy success rates and 6) generally improving insurance (private and public) reimbursement trends; all of which should help contribute to strong industry growth and patient demand for treatment.

 

Three months ended March 31, 2021 compared to the three months ended March 31, 2020

 

Revenues

 

Revenue for the three months ended March 31, 2021, was approximately $0.7 million compared to approximately $0.3 million for the three months ended March 31, 2020. The increase of approximately $0.4 million or approximately 165% was the result of an increase in product sales to Ferring. The sales to Ferring in the first quarter of 2021 were related to satisfying the minimum purchase requirements for 2020 as described above in Recent Developments.

 

Gross Profit

 

Gross profit for the three months ended March 31, 2021 was approximately $0.6 million compared to approximately $0.2 million for the three months ended March 31, 2020. Gross margins were approximately 91% and approximately 88% for the three months ended March 31, 2021 and 2020, respectively.

 

29
 

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the three months ended March 31, 2021 were approximately $2.1 million compared to approximately $1.6 million for the three months ended March 31, 2020. The increase of approximately $0.5 million or approximately 33% was primarily the result of approximately $0.2 million in startup costs related to clinic joint ventures as well as approximately $0.2 million in increased personnel and consulting expenses. We incurred approximately $0.6 million of stock-based compensation expense in the period.

 

Research and Development Expenses

 

We began to fund additional research and development (“R&D”) efforts in 2020 as part of our 5-day label expansion efforts, and also submitted additional trademark and patent filings. R&D expenses were $66,267 for the three months ended March 31, 2021, compared to $30,050 for the three months ended March 31, 2020.

 

Interest Expense and Financing Fees

 

Interest expense and financing fees were approximately $0.9 million for the three months ended March 31, 2021, compared to approximately $0.05 million for the three months ended March 31, 2020. The increase of approximately $0.85 million was primarily non-cash and due to an increase in amortization of debt discount, debt issuance cost and interest on the 2020 Convertible Notes.

 

Liquidity and Capital Resources

 

For the three months ended March 31, 2021 and 2020, we had net losses of approximately $2.5 million and approximately $1.4 million, respectively. The increase in net loss was due to increased operating expenses and interest expense, partially offset by an increase in product revenue. Approximately $1.5 million of the net loss was related to non-cash expenses. The Company had working capital of approximately $7.7 million as of March 31, 2021, compared to approximately $8.3 million as of December 31, 2020. As of March 31, 2021, the Company’s stockholder’s equity was approximately $5.6 million compared to approximately $5.7 million as of December 31, 2020. Cash used in operation for the first three months of 2021, was approximately $1.7 million, compared to approximately $0.9 million for the first three months of 2020.

 

During 2020, we raised approximately $13.8 million in debt and equity financings. During the first quarter 2021, we converted approximately $1.2 million of outstanding debt to equity and received approximately $370,000 of proceeds from option and warrant exercises. Based on our current plan, we believe we have sufficient liquidity for at least the next 12 months. To the extent additional funds are necessary to meet our longer-term liquidity needs to execute our business strategy, we may need to raise additional funding by way of debt or equity financings or a combination of these potential sources of funds, although we can provide no assurance that these sources of funding will be available on reasonable terms.

 

Historically, our primary sources of liquidity have been from equity or debt offerings and up-front distribution licensing fees. Until we can generate a sufficient amount of cash from operations, we may need to finance future cash needs through public or private equity or debt offerings. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly scale back our operations or delay, scale back or discontinue the continuing development of our products. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing stockholders and increased fixed payment obligations, and these securities may have rights senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.

 

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Cash Flows

 

The following table shows a summary of our cash flows for the three months ended March 31:

 

  2021  2020 
Cash (used in) provided by:      
Operating activities  (1,735,384)  (863,450)
Investing activities  (308,980)  (25,135)
Financing activities  369,840   - 

 

As of March 31, 2021, we had approximately $8.4 million in cash compared to approximately $10.0 million on December 31, 2020. Net cash used in operating activities for the first three months of 2021, was approximately $1.7 million, compared to approximately $0.9 million for the same period in 2020. The increase in net cash used in operations was primarily due to the increase in net loss, accounts receivable and a decrease in accrued compensation.

 

During the three months ended March 31, 2021, cash used in investing activities of approximately $0.3 million related to notes receivable as well as additional trademarks and patents. During the three months ended March 31, 2020, cash used in investing activities of approximately $0.03 million related to new molds and trademarks.

 

During the three months ended March 31, 2021, cash provided by financing activities of approximately $0.4 million primarily related to the exercising of warrants and stock options. No cash was used or provided by financing activities during the three months ended March 31, 2020.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of INVO Bioscience’s financial condition presented in this section are based upon the audited consolidated financial statements of INVO Bioscience, which have been prepared in accordance with the generally accepted accounting principles in the United States. During the preparation of the financial statements, INVO Bioscience is required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, INVO Bioscience evaluates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A summary of significant accounting policies is included below. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.

 

Stock Based Compensation

 

We account for stock-based compensation under the provisions of ASC 718-10 Share-Based Payment (formerly SFAS 123R). This statement requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period in which the employee is required to provide service or performance goals in exchange for the award, which is usually immediate but sometimes over a vesting period. Warrants granted to non-employees are recorded as an expense over the requisite service period based on the grant date estimated fair value of the grant, determined using the Black-Scholes option pricing model.

 

Revenue Recognition

 

We recognize revenue on arrangements in accordance with ASC 606, Revenue from Contracts with Customers. The core principle of ASC 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services ASC 606 requires companies to assess their contracts to determine the timing and amount of revenue to recognize under the new revenue standard. The model has a five-step approach:

 

1.Identify the contract with the customer.

 

2.Identify the performance obligations in the contract.

 

3.Determine the total transaction price.

 

4.Allocate the total transaction price to each performance obligation in the contract.

 

5.Recognize as revenue when (or as) each performance obligation is satisfied.

 

Variable Interest Entities

 

The Company’s consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and variable interest entities (“VIE’), where the Company is the primary beneficiary under the provisions of the ASC 810, “Consolidation”.

 

Management makes judgments regarding the Company’s level of influence or control over an entity and whether or not the Company is the primary beneficiary of a VIE. Various factors are considered in this analysis, including but not limited to the Company’s ability to direct the activities that most significantly impact the entity’s governing body, the size and seniority of the Company’s investment, the Company’s ability and the rights of other investors to participate in policy making decisions, the Company’s ability to replace the manager and/or liquidate the entity, and the Company’s obligation to absorb losses and right to receive benefits that are significant. Management’s ability to correctly assess its influence or control over an entity when determining the primary beneficiary of a VIE affects the presentation of these entities in the Company’s consolidated financial statements. If it is determined that the Company is the primary beneficiary of a VIE, the Company’s financial statements would consolidate the VIE. The Company performs a qualitative assessment of its joint ventures on an ongoing basis to determine if it continues to be a primary beneficiary.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risks

 

Not applicable

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

 

Our management, under the supervision and with the participation of our Chief Executive Officer and Acting Chief Financial 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 March 31, 2021, 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, our Chief Executive Officer and Acting Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2021.

 

(b) 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.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Please see Note 13 to the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020 for a description of pending litigation.

 

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, 2020 filed on March 30, 2020. There have been no material changes from the factors disclosed in our 2020 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 SEC.

 

Item 2. Unregistered Issuance of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable

 

Item 5. Other Information

 

1.       See our Current Report on Form 8-K filed on April 26, 2021.

2.       See our Current Report on Form 8-K filed on April 13, 2021.

 

Item 6. Exhibits

 

10.1*Lease agreement dated March 17, 2021 between INVO Bioscience, Inc, Trustmark National Bank and HRCFG, LLC.
31.1*Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32**Certifications of Principal Executive Officer and Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
101 

 

  * Filed herewith.
  
  ** Furnished herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 17, 2021.

 

 INVO Bioscience, Inc.
   
Date: May 17, 2021By:/s/ Steven Shum
  Steven Shum, Chief Executive Officer
  (Principal Executive Officer)

 

Date: May 17, 2021By:/s/ Debra Hoopes
  Debra Hoopes, Acting Chief Financial Officer
  (Acting Principal Financial and Accounting Officer)

 

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