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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 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 ☒ 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 ☒ 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 Smaller reporting company 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 ☒

 

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

 

As of August 16, 2021, the registrant had 10,469,035 shares of common stock outstanding.

 

 

 

 
 

 

INVO BIOSCIENCE, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED June 30, 2021

 

TABLE OF CONTENTS

 

Item   Page Number
Part I
     
1. Financial Statements (Unaudited): 4
  Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020 4
  Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020 5
  Consolidated Statements of Stockholders’ Equity (Deficiency) for the six months ended June 30, 2021 and 2020 6
  Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 7
  Notes to the Condensed Consolidated Financial Statements 8
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
3. Quantitative and Qualitative Disclosures about Market Risks 28
4. Controls and Procedures 28
  Evaluation of Disclosure Controls and Procedures 28
  Changes in Internal Controls Over Financial Reporting 28
     
Part II
     
1. Legal Proceedings 29
1A. Risk Factors 29
2. Unregistered Issuance of Equity Securities and Use of Proceeds 29
3. Defaults Upon Senior Securities 29
4. Mine Safety Disclosure 29
5. Other Information 29
6. Exhibits 29
  Signatures 30

 

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 our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 2020 (the “10-K”), 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.

 

3
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

INVO BIOSCIENCE, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

    June 30, 2021     December 31, 2020  
    June 30,     December 31,  
    2021     2020  
ASSETS                
Current assets                
Cash   $ 6,643,080     $ 10,097,760  
Accounts receivable     47,869       21,699  
Inventory     250,784       265,372  
Prepaid expenses and other current assets     289,843       157,700  
Total current assets     7,231,576       10,542,531  
Property and equipment, net     127,151       132,206  
Capitalized patents, net     22,155       5,427  
Lease right of use     1,419,925       79,319  
Trademarks     107,287       89,536  
Notes receivable     881,827       -  
Other assets     -       240  
Investment in joint ventures     141,267       98,084  
Total assets   $ 9,931,188     $ 10,947,343  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities                
Accounts payable and accrued liabilities, including related parties   $ 306,252     $ 328,927  
Accrued compensation – related party     349,658       527,326  
Deferred revenue, current portion     714,286       714,286  
Lease liability, current portion     96,921       22,707  
Notes payable – Payroll Protection Program     -       157,620  
Convertible notes, net     249,936       536,063  
Income taxes payable     -       1,062  
Total current liabilities     1,717,053       2,287,991  
Lease liability, net of current portion     1,355,323       58,634  
Deferred revenue, net of current portion     2,500,000       2,857,143  
Deferred tax liability     469       469  
Total liabilities     5,572,845       5,204,237  
                 
Stockholders’ equity                
Common Stock, $.0001 par value; 125,000,000 shares authorized; 10,459,035 and 9,639,268 issued and outstanding as of June 30, 2021 and December 31, 2020, respectively     1,046       964  
Additional paid-in capital     40,864,011       37,978,224  
Accumulated deficit     (36,506,714 )     (32,236,082 )
Total stockholders’ equity     4,358,343       5,743,106  
                 
Total liabilities and stockholders’ equity   $ 9,931,188     $ 10,947,343  

 

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

 

4
 

 

INVO BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    2021     2020     2021     2020  
    For the Three Months     For the Six Months  
    Ended June 30,     Ended June 30,  
    2021     2020     2021     2020  
                         
Revenue:                                
Product revenue   $ 29,900     $ 67,500     $ 535,852       147,500  
License revenue     178,572       178,572       357,143       357,143  
Total revenue     208,472       246,072       892,995       504,643  
Cost of goods sold:                                
Production costs     12,163       18,739       72,477       46,301  
Depreciation     2,432       2,431       4,863       4,863  
Total cost of goods sold     14,595       21,170       77,340       51,164  
Gross profit     193,877       224,902       815,655       453,479  
Operating expenses                                
Selling, general and administrative expenses     2,049,422       1,252,939       4,164,725       2,847,985  
Research and development expenses     31,016       34,890       97,283       64,940  
Total operating expenses     2,080,438       1,287,829       4,262,008       2,912,925  
Loss from operations     (1,886,561 )     (1,062,927 )     (3,446,353 )     (2,459,446 )
Other income (expense):                                
Other income     159,126       -       159,126       -  
Interest income     2,425       -       4,438       -  
Interest expense     (91,125 )     (259,954 )     (986,351 )     (307,827 )
Foreign currency exchange loss     (1,028 )     -       (1,492 )     -  
Total other expenses     69,398       (259,954 )     (824,279 )     (307,827 )
Loss before income taxes     (1,817,163 )     (1,322,881 )     (4,270,632 )     (2,767,273 )
Provision for income taxes     -       -       -       -  
Net loss   $ (1,817,163 )   $ (1,322,881 )     (4,270,632 )     (2,767,273 )
                                 
Net loss per common share:                                
Basic   $ (0.17 )   $ (0.27 )     (0.42 )     (0.56 )
Diluted   $ (0.17 )   $ (0.27 )     (0.42 )     (0.56 )
Weighted average number of common shares outstanding:                                
Basic     10,444,150       4,932,942       10,167,624       4,925,469  
Diluted     10,444,150       4,932,942       10,167,624       4,925,469  

 

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

 

5
 

 

INVO BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)

(UNAUDITED)

 

    Shares     Amount     Additional     Accumulated     Total  
    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     44,007       4       345,968       -       345,972  
Common stock issued to service providers     8,750       1       60,799       -       60,800  
Stock options issued to employees     -       -       596,390       -       596,390  
Discount on convertible notes payables     -       -       1,879,542       -       1,879,542  
Rounding shares as a result of stock split     23       -       -       -       -  
Net loss     -       -       -       (2,767,273 )     (2,767,273 )
Balances, June 30, 2020     4,937,659     $ 494     $ 23,057,381     $ (26,656,039 )   $ (3,598,164 )
                                         
Balances, December 31, 2020     9,639,268     $ 964     $ 37,978,224     $ (32,236,082 )   $ 5,743,106  
Common stock issued to directors and employees     39,806       4       186,781       -       186,785  
Common stock issued for services     96,500       10       324,840       -       324,850  
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     -       -       760,606       -       760,606  
Net loss     -       -       -       (4,270,632 )     (4,270,632 )
Balances, June 30, 2021     10,459,035     $ 1,046     $ 40,864,011     $ (36,506,714 )   $ 4,358,343  

 

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

 

6
 

 

INVO BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    2021     2020  
    For the Six Months  
    Ended June 30,  
    2021     2020  
Cash flows from operating activities:                
Net loss   $ (4,270,632 )   $ (2,767,273 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Non-cash stock compensation issued for services     240,422       60,800  
Non-cash stock compensation issued to employees     186,785       345,972  
Fair value of stock options issued to employees     760,606       596,390  
Amortization of discount on notes payable     937,135       262,945  
Amortization of leasehold right of use asset     34,350       11,098  
Extinguishment of debt     (157,620 )     -  
Depreciation and amortization     5,959       5,958  
Changes in assets and liabilities:                
Accounts receivable     (26,170 )     (63,641 )
Interest receivable     (1,827 )     -  
Inventory     14,588       (142,721 )
Prepaid expenses and other current assets     (90,658 )     (25,880 )
Accounts payable and accrued expenses     (22,675 )     (62,070 )
Accrued compensation     (177,668 )     182,157  
Deferred revenue     (357,143 )     (357,143 )
Leasehold liability     (4,053 )     (10,484 )
Accrued interest     20,526       (49,610 )
Income taxes payable     (1,062 )     (912 )
Net cash used in operating activities     (2,909,137 )     (2,014,414 )
Cash from investing activities:                
Payments to acquire property, plant and equipment     -       (20,528 )
Payments to acquire patents     (17,632 )     -  
Payments to acquire trademarks     (17,751 )     (9,202 )
Payment for notes receivable     (880,000 )     -  
Net cash used in investing activities     (915,383 )     (29,730 )
Cash from financing activities:                
Proceeds from the sale of notes payable     -       2,644,510  
Proceeds from warrant exercise     123,562       -  
Proceeds from unit purchase option exercise     246,278       -  
Principal payment on notes payable – related parties     -       (40,000 )
Principal payments on note payable     -       (295,000 )
Net cash provided by financing activities     369,840       2,309,510  
Increase (decrease) in cash and cash equivalents     (3,454,680 )     265,366  
Cash and cash equivalents at beginning of period     10,097,760       1,238,585  
Cash and cash equivalents at end of period   $ 6,643,080     $ 1,503,951  
                 
Supplemental disclosure of cash flow information:                
Cash paid during the period for:                
Interest   $ 27,184     $ 78,456  
Taxes   $ 912     $ 1,062  
Noncash 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     $ -  
Initial ROU asset and lease liability   $ 1,374,956     $ -  
Fair value of options issued for debt   $ -     $ 767,160  
Fair value of warrants issued with debt   $ -     $ 882,629  
Fair value of warrants issued related to debt placement   $ -     $ 47,293  
Beneficial conversion feature on convertible notes   $ -     $ 182,460  

 

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

 

7
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 option 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.

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated balance sheets as of June 30, 2021 and December 31, 2020, the consolidated statements of operations for the three and six months ended June 30, 2021 and 2020 and stockholders’ equity (deficiency) and consolidated statement of cash flows for the six months ended June 30, 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 10-K.

 

The Company considers events or transactions that have occurred after the unaudited consolidated balance sheet date of June 30, 2021, but prior to the filing of the unaudited consolidated financial statements with the SEC in 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.

 

8
 

 

Business Segments

 

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

 

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 its Birmingham, Alabama and Monterrey, Mexico joint ventures (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 June 30, 2021, the JVs were not yet operational and therefore there was no financial information from the JVs to consolidate into the Company’s financial statements.

 

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 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.

 

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 six months ended June 30, 2021 and 2020.

 

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.

 

9
 

 

Revenues generated from the sale of INVOcell®, 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 “Ferring 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.

 

The Ferring license was deemed to be a functional license that provides a customer 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.

 

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 and six months ended June 30, 2021 and 2020, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.

 Schedule of Earning Per Share Basic and Diluted

    2021     2020     2021     2020  
    Three Months Ended June 30,     Six Months Ended June 30,  
    2021     2020     2021     2020  
Net loss attributable to common shareholders (numerator)   $ (1,817,163 )   $ (1,322,881 )   $ (4,270,632 )   $ (2,767,273 )
Basic and diluted weighted-average number of common shares outstanding (denominator)     10,444,150       4,932,942       10,167,624       4,925,469  
Basic and diluted net loss per common share     (0.17 )     (0.27 )     (0.42 )     (0.56 )

 

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

 Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share

    As of June 30,  
    2021     2020  
Options     1,118,911       425,821  
Convertible notes and interest     156,597       869,472  
Unit purchase options and warrants     216,193       860,032  
Total     1,491,701       2,155,325  

 

Recently Adopted Accounting Pronouncements

 

None.

 

10
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(UNAUDITED)

 

Note 3 – Inventory

 

Components of inventory are:

 Schedule of Inventory

   

June 30,

2021

   

December 31,

2020

 
Raw materials   $ 67,909     $ 72,022  
Work in process     -       29,645  
Finished goods     182,875       163,705  
Total inventory   $ 250,784     $ 265,372  

 

Note 4 – Property and Equipment

 

The estimated useful lives and accumulated depreciation for furniture, equipment and software are as follows as of June 30, 2021, and December 31, 2020:

 Schedule of Esimated Useful Lives of Property and Equipment

    Estimated Useful Life
Manufacturing equipment   6 to 10 years
Medical equipment   10 years
Office equipment   3 to 7 years

 

 

   

June 30,

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     (57,312 )     (52,257 )
Total equipment, net   $ 127,151     $ 132,206  

 

During the three months ended June 30, 2021 and 2020, the Company recorded depreciation expense of $2,528 and $2,527, respectively.

 

During each of the six months ended June 30, 2021 and 2020, the Company recorded depreciation expense of $5,055.

 

11
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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:

 Schedule of Finite-Lived Intangible Assets

 

   

June 30,

2021

   

December 31,

2020

 
Patents   $ 95,354     $ 77,722  
Accumulated amortization     (73,199 )     (72,295 )
Total patent costs, net   $ 22,155     $ 5,427  

 

During the three months ended June 30, 2021 and 2020, the Company recorded amortization expenses related to patents of $452 and $451, respectively.

 

During the six months ended June 30, 2021 and 2020, the Company recorded amortization expenses related to patents of $904 and $903, respectively.

 

The increase in the trademark assets of $17,751 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 Company’s joint venture in Birmingham, Alabama with HRCFG, LLC, accrues interest at 1.5% per annum and principal and interest shall be repaid from 30% of the joint venture’s operating profit. The balance as of June 30, 2021 consists of $880,000 principle and $1,827 of accrued interest.

 

The following table lists the Company’s notes receivable:

 

    June 30, 2021     December 31, 2020  
Notes receivable – HRCFG, LLC   $ 881,827     $        -  
Total notes receivable   $ 881,827     $ -  

 

Note 7 – Leases

 

The Company has various operating lease agreements in place for its office and joint ventures. 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 lease 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, as of the commencement of the lease. Lease renewal options included in any lease are considered in the lease term if it is reasonably certain the Company will exercise the option to renew. The Company’s operating lease agreements do not contain any material restrictive covenants.

 

As of June 30, 2021, the Company’s lease components included in the consolidated balance sheet were as follows:

 

Lease component   Balance sheet classification   June 30, 2021  
Assets            
ROU assets - operating lease   Other assets   $ 1,419,925  
Total ROU assets       $ 1,419,925  
             
Liabilities            
Current operating lease liability   Current liabilities   $ 96,921  
Long-term operating lease liability   Other liabilities     1,355,323  
Total lease liabilities       $ 1,452,244  

 

Future minimum lease payments as of June 30, 2021 were as follows:

 

      June 30, 2021  
2021   $ 58,524  
2022     137,388  
2023     140,668  
2024     125,762  
2025 and beyond     1,193,694  
Total future minimum lease payments   $ 1,656,036  
Less: Interest     (203,792 )
Total operating lease liabilities   $ 1,452,244  

 

12
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 gross proceeds received by the Company included $3,351,200 in cash and $143,640 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 agents 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 agents, 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 has 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 Ferring Agreement to the extent such proceeds are actually received by the Company from Ferring.

 

Of the $3,494,840 in gross 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 June 30, 2021, there is $500,000 in principal value of such notes that remains outstanding.

 

13
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(UNAUDITED)

 

Principal balances of the 2020 Convertible Notes were as follows:

 

   

June 30,

2021

   

December 31,

2020

 
             
2020 Convertible Notes     500,000       1,700,000  
Accrued interest     1,111       24,373  
Less beneficial conversion feature discount     (94,773 )     (604,897 )
Less options discount     (59,018 )     (224,051 )
Less warrants discount     (62,460 )     (229,954 )
Less issuance cost     (34,924 )     (129,408 )
Total, net of discount   $ 249,936     $ 536,063  

 

Interest expense on the 2020 Convertible Notes was $12,640 and $31,781 for the three months ended June 30, 2021 and 2020, respectively.

 

Interest expense on the 2020 Convertible Notes was $47,710 and $31,781 for the six months ended June 30, 2021 and 2020, respectively.

 

Amortization of options discount on the 2020 Convertible Notes was $3,694 and $9,377 for the three months ended June 30, 2021 and 2020, respectively.

 

Amortization of options discount on the 2020 Convertible Notes was $165,033 and $9,377 for the six months ended June 30, 2021 and 2020, respectively.

 

Amortization of warrant discount on the 2020 Convertible Notes was $3,914 and $9,603 for the three months ended June 30, 2021 and 2020, respectively.

 

Amortization of warrant discount on the 2020 Convertible Notes was $167,494 and $9,603 for the six months ended June 30, 2021 and 2020, respectively.

 

Amortization of beneficial conversion feature on the 2020 Convertible Notes was $49,004 and $123,023 for the three months ended June 30, 2021 and 2020, respectively.

 

Amortization of beneficial conversion feature on the 2020 Convertible Notes was $510,124 and $123,023 for the six months ended June 30, 2021 and 2020, respectively.

 

Amortization of issuance costs on the 2020 Convertible Notes was $20,368 and $20,577 for the three months ended June 30, 2021 and 2020, respectively.

 

Amortization of issuance costs on the 2020 Convertible Notes was $94,484 and $20,577 for the six months ended June 30, 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 matured 18 months from the date of funding, was payable over 18 equal monthly installments, and had an interest of 1% per annum. Up to 100% of the principal balance of the loan was forgivable based upon satisfaction of certain criteria under the Paycheck Protection Program. On June 16, 2021, the principal of the loan as well as $1,506 of accrued interest was forgiven and the note was extinguished. The Company recognized a gain of $159,126 as other income.

 

14
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(UNAUDITED)

 

Note 9 – 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 the Company’s directors, is President of Paulson Investment Company. Mr. Davis did not receive any compensation related to the fees and commissions received by Paulson.

 

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.

 

Six months Ended June 30, 2021

 

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.

 

During the first half of 2021, the Company issued 39,806 shares of common stock to employees and directors and 96,500 shares of common stock to consultants with a fair value of $186,786 and $324,850, respectively. The shares were issued under the 2019 Stock Incentive Plan.

 

15
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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.

 

The following table sets forth the activity of the options to purchase common stock under the 2019 Plan.

 

    Number of
Shares
    Weighted Average Exercise Price     Aggregate
Intrinsic Value
 
Outstanding as of December 31, 2020     939,114     $ 5.73     $

17,250

 
Granted     179,797     $ 3.14       -  
Exercised     -       -       -  
Canceled     -     $ -       -  
Balance as of June 30, 2021     1,118,911     $ 5.32     $

1,162,805

 
Exercisable as of June 30, 2021     582,858     $ 2.63     $

150,231

 

 

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:

 

      Six months ended June 30,  
      2021       2020  
Risk-free interest rate range     0.22 to 0.73 %     0.48 to 1.65 %
Expected life of option-years     5.3 to 6.5       5.20 to 5.77  
Expected stock price volatility     107 to 125 %     110.8 to 128. %
Expected dividend yield     - %     - %

 

16
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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  
Six months ended June 30, 2021   $ -     $ 760,606  

 

For the six months ended June 30, 2021, the weighted average grant date fair value of options granted was $2.37 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 June 30, 2021, the weighted average remaining service period is 4.2 years.

 

The Company recognized $384,082 and $214,165 in stock-based compensation expense for stock options for the three months ended June 30, 2021 and 2020, respectively. The Company recognized $760,606 and $596,390 in stock-based compensation expense related to stock options for the six months ended June 30, 2021 and 2020, respectively. Unamortized stock option expense as of June 30, 2021 to be amortized over the weighted-average remaining service period totaled $2,313,898.

 

Restricted Stock and Restricted Stock Units

 

In the six months ended June 30, 2021, the Company issued 39,806 shares of restricted stock to certain employees and directors under the Company’s 2019 Plan. 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 under the Company’s 2019 Plan during the six months ended June 30, 2021:

 

   

Number of Unvested

Shares

   

Weighted

Average

Grant Date Fair Value

   

Aggregate

Value

of Unvested Shares

 
                   
Balance as of December 31, 2020     16,698     $ 4.67     $ 77,927  
Granted     81,563     $ 3.38     $ 259,444  
Vested     (49,986 )   $ 3.58     $ (178,806 )
Forfeitures     -     $ -     $ -  
Balance as of June 30, 2021     48,275     $ 3.28     $ 158,562  

 

17
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(UNAUDITED)

 

The Company recognized $89,333 and $55,008 in stock-based compensation expense related to restricted stock and restricted stock units for the three months ended June 30, 2021 and 2020, respectively. The Company recognized $178,806 and $320,971 in stock-based compensation expense for restricted stock and restricted stock units for the six months ended June 30, 2021 and 2020, respectively.

 

Note 12 – Unit Purchase Options and Warrants

 

In connection with the issuance of the 2020 Convertible Notes, the Company also issued unit purchase 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 vested immediately, are exercisable for a period of five years from the date of issuance and are subject to downward adjustment 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 unit purchase options and warrants issued in this period were determined to require equity treatment.

 

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 unit purchase options and warrants contain fundamental transaction payouts and reset events that cannot be modeled with a Black Scholes model.

 

The fair value of the unit purchase 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 unit purchase options (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 unit purchase 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 unit purchase 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 unit purchase 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.

 

The following table sets forth the activity of unit purchase options:

 

    Number of
Unit Purchase Options
    Weighted Average Exercise Price     Aggregate
Intrinsic Value
 
Outstanding as of December 31, 2020     303,623     $ 3.20     $ -  
Granted     -     $ -       -  
Exercised     210,730       3.20       427,839  
Canceled     -     $ -       -  
Balance as of June 30, 2021     92,893     $ 3.20     $ 62,985  

 

The following table sets forth the activity of warrants:

 

    Number of
Warrants
    Weighted Average Exercise Price     Aggregate
Intrinsic Value
 
Outstanding as of December 31, 2020     310,373     $ 3.48     $ -  
Granted     -     $ -       -  
Exercised     180,323       3.20       457,839  
Canceled     -     $ -       -  
Balance as of June 30, 2021     130,050     $ 3.74     $ 107,075  

 

18
 

 

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 for each of the three and six months ended June 30, 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 six months ended June 30, 2021 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.

 

Note 15 – Subsequent Events

 

During July and August 2021, the Company issued 10,000 shares of common stock to employees under its 2019 Stock Incentive Plan.

 

19
 

 

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.

 

20
 

 

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 INVOcell procedure is an effective and affordable 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”). Since our January 2019 exclusive sales, marketing and distribution agreement with Ferring International Center S.A. (“Ferring”) for the U.S., our primary focus has been on supporting Ferring and establishing fertility clinics focused primarily on the INVOcell device and procedure (“INVO Centers”), 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.

 

Ferring

 

On November 12, 2018, we entered into a U.S. Distribution Agreement (the “Ferring Agreement”) with Ferring, which closed on January 14, 2019. Pursuant to the Ferring Agreement, among other things, we granted Ferring an exclusive license in the United States 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 five INVO Centers in the United States. 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 helped provide us with the necessary sales and marketing resources and overall market credibility to 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 and six months ended June 30, 2021, we recognized $178,572 and $357,143 of revenue related to the Ferring license agreement, respectively.

 

As of June 30, 2021, we had deferred revenue of $3,214,286 relating to the Ferring Agreement.

 

On March 2, 2021, we entered into Amendment No. 1 to the Ferring Agreement (the “Amendment”) to provide for added flexibility by increasing the number of INVO Centers allowable under the agreement to seven and removing certain geographical requirements. Pursuant to the Amendment, Ferring agreed to purchase a 2,004 count of product for $501,000 in March 2021, and the minimum annual target for 2020 was deemed to have been satisfied in full as a result of such purchase.

 

International Distribution Agreements

 

We have 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. We are 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.

 

21
 

 

The following table sets forth a list of our current international distribution agreements:

 

                INVOcell Registration
Market   Distribution Partner   Date   Initial Term   Status in Country
                 
Canada   Invaron Pharmaceuticals Inc.   July 2020   1-Year   Completed
Mexico   Positib Fertility, S.A. de C.V.   Sept 2020   TBD**   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 2020   1-year   In process
Uganda   Quality Medicines, Cosmetics & Medical Equipment Import   Sept 2020   1-year   In process
Nigeria   G-Systems Limited   Sept 2020   1-year   Completed
Togolese Republic   INVOSOLUX TOGO   Nov 2019   1-year   In process
Iran   Tasnim Behboud   Dec 2020   1-year   In process
                 
    ** Our Mexico JV. Please note that the registration is temporarily in the name of Proveedora de Equipos y Productos, S.A. de C.V. and will be transferred to Positib Fertility as soon as practicable.

 

Investment in Joint Ventures and Partnerships

 

As part of our commercialization strategy, we entered into a number of joint ventures and partnerships designed to establish new INVO Centers.

 

The following table sets forth a list of our current joint venture arrangements:

 

Subsidiary Name   Country   Percent (%)
Ownership
 
           
HRCFG INVO, LLC   United States     50 %
Bloom Invo, LLC   United States     40 %
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 %

 

The following table sets forth a list of our current partnership arrangements:

 

Partner   Country   Partnership Split  
Lyfe Medical   United States     40 %

 

Alabama JV Agreement

 

On March 10, 2021, our wholly owned subsidiary, INVO Centers, LLC (“INVO CTR”), entered into a limited liability company agreement with HRCFG, LLC (“HRCFG”) to form a joint venture for the purpose of establishing an INVO Center 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 CTR will be to provide access to and be the exclusive provider to the Alabama JV of the INVOcell and the INVO Procedure. INVO CTR 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 Alabama JV. 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. As of June 30, 2021 we have provided an additional $850,000 to HRCFG pursuant to 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 the Birmingham INVO Center for business, and (ii) upon each additional INVO Center opened for business by the Alabama JV. As of June 30, 2021, we expended $27,966 in startup costs related to this joint venture.

 

Atlanta JV Agreement

 

On June 28, 2021, INVO CTR entered into a joint venture agreement (the “Bloom Agreement”) with Bloom Fertility, LLC (“Bloom”) to organize and own in a joint venture entity formed as “Bloom INVO LLC” (the “Atlanta JV”). The Atlanta JV will, subject to the equity and debt arrangements in the Bloom Agreement, assist Bloom in establishing an INVO Center (the “Atlanta Clinic”) that will offer INVO technologies, along with related procedures and such other technologies or procedures that may be agreed to by the parties to the Bloom Agreement from time to time. We will make available to the Atlanta JV the INVO technologies, and, subject to INVO’s existing third-party distribution arrangements, be the exclusive provider to the Atlanta JV of the INVOcell and other medical devices and supplies for use at the Atlanta Clinic. The Atlanta JV will provide comprehensive management services to the Atlanta Clinic, including full administrative, billing and collection, business, consulting, financial, marketing, staffing, and other support services necessary for its operations, including but not limited to clinical laboratory services, pursuant to an exclusive, long-term management services agreement. Bloom will provide all professional services required for the operation of the Atlanta Clinic. As of June 30, 2021, we expended $145,455 in startup costs related to this joint venture. Additionally, we invested $97,545 of equity as of June 30, 2021, which is recorded on our balance sheet.

 

22
 

 

Mexico JV Agreement

 

Effective September 24, 2020, INVO CTR 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 CTR 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 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 our exclusive distributor in Mexico. The Shareholders also agreed not to compete directly or indirectly with the Mexico JV in Mexico. As of June 30, 2021, we expended $51,884 in startup costs related to this joint venture. Additionally, we invested $43,721 of equity as of June 30, 2021, which is recorded on our balance sheet.

 

Malaysia JV Agreement

 

On November 23, 2020, we 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 technologies related to the INVOcell and INVO Procedure in dedicated government-owned fertility clinics in Malaysia, and (ii) establish INVO Centers in Malaysia. The joint venture is co-managed and owned 50% by each of INVO Bioscience and SNS Murni. As of June 30, 2021, we expended $7,885 in startup costs related to this joint venture.

 

North Macedonia JV Agreement

 

On November 23, 2020, we 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 the Republic of North Macedonia, and (ii) establish an INVO Center. The joint venture will be co-managed and owned 50% by each of INVO and Ginekaliks. As of June 30, 2021, we expended $2,597 in startup costs related to this joint venture.

 

India JV Agreement

 

On January 13, 2020, we entered into a joint venture agreement (the “Medesole 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 Medesole Agreement, INVO and Medesole 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, we will grant to the India JV all required licenses for promoting, marketing and selling our INVOcell® technology in India. INVO and Medesole intend that the India JV will open and operate INVO Centers 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.

 

Lyfe Medical Center I, LLC Partnership agreement

 

On April 9, 2021, we entered into a partnership agreement (the “Lyfe Agreement”) with Lyfe Medical Center I, LLC (“Lyfe”) in connection with Lyfe’s intention to establish an INVO Center in the Bay Area of California (the “Bay Area Clinic”). Pursuant to the Lyfe Agreement, we will provide embryology laboratory services in connection with the INVO Procedure and other fertility treatments (the “Lab Services”) to be provided by Lyfe to its patients at the Bay Area Clinic. Under the terms of the Lyfe Agreement, we will receive 40% of the net income received by the Bay Area Clinic for the performance of the Lab Services. As of June 30, 2021, we expended $27,611 in startup costs related to this partnership.

 

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.

 

We expect to continue incurring losses during 2021 as we continue to invest in INVO Centers in the United States and abroad, and in the global expansion of our business and the INVOcell technology.

 

We cannot accurately predict the level of success our key partners will experience in the near future. However, we anticipate that we will continue to expand the market for the INVOcell device and INVO Procedure (i) within the United States through our agreement with Ferring and our INVO Center joint ventures, and (ii) in other parts of the world with new distributor partnerships.

 

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Results of Operations

 

During the second quarter of 2021, we made further progress with our commercialization goals, the addition of key personnel to our operating team and board, and the signing of our latest joint venture to establish the Atlanta Clinic. We are also rapidly moving closer to first patient visits at our announced INVO Centers, events which we expect to occur in the second half of 2021. Our recently added marketing resources are working to enhance our branding and messaging in preparation to support both the new INVO Centers as well as our distribution partners around the world. Our dedicated team is looking to aggressively drive awareness for the INVOcell through the balance of this year and the next and to help accelerate adoption and expand fertility care through the utilization of our technology.

 

Our commercialization efforts continue to focus on the substantial, underserved patient population and on expanding access to advanced fertility treatments. We believe our technology can help address the key challenges of affordability and capacity to provide care to the vast number of patients that go untreated every year. This represents the major opportunity for INVOcell. While the ongoing pandemic may have delayed our progress in some markets, the fertility industry has and continues to expand, and we believe our growing volume of partners (both distributors and JVs) 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.

 

Three months ended June 30, 2021 compared to the three months ended June 30, 2020

 

Revenue

 

Revenue for the three months ended June 30, 2021, was approximately $0.21 million compared to approximately $0.25 million for the three months ended June 30, 2020. The decrease of approximately $0.04 million, or approximately 15%, was the result of a decrease in product sales to Ferring. Ferring’s minimum purchase requirements are based on a calendar year and hence contribute to quarterly fluctuations in revenue.

 

Gross Profit

 

Gross profit for the three months ended June 30, 2021 was approximately $0.19 million compared to approximately $0.22 million for the three months ended June 30, 2020. Gross margins were approximately 93% and 91% for the three months ended June 30, 2021 and 2020, respectively.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the three months ended June 30, 2021 were approximately $2.0 million compared to approximately $1.3 million for the three months ended June 30, 2020. The increase of approximately $0.7 million, or approximately 64%, was primarily the result of approximately $0.5 million in increased personnel, board and business development consulting expenses, approximately $0.1 million in start-up costs related to INVO Center joint ventures and $0.1 in investor relations activities. We also incurred approximately $0.6 million of non-cash, stock-based compensation expense in the period, compared to $0.3 million for the same period in the prior year.

 

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. R&D expenses were $31,016 and $34,890 for the three months ended June 30, 2021 and June 30, 2020, respectively.

 

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Other Income

 

Other income for the three months ended June 30, 2021 was approximately $0.16 million compared to $0 for the three months ended June 30, 2021. The increase was the result of the extinguishment of our Paycheck Protection Program note and related interest being forgiven.

 

Interest Income

 

Interest income for the three months ended June 30, 2021 was $2,425 compared to $0 for the three months ended June 30, 2021. The increase was the result of interest received on funds held in a money market account.

 

Interest Expense and Financing Fees

 

Interest expense and financing fees were approximately $0.09 million for the three months ended June 30, 2021, compared to approximately $0.26 million for the three months ended June 30, 2020. 

 

Foreign Currency Exchange

 

Foreign currency exchange loss for the three months ended June 30, 2021 was $1,028 compared to $0 for the three months ended June 30, 2021. The increase was the result of increased transactions with international vendors and consultants.

 

Six months ended June 30, 2021 compared to the six months ended June 30, 2020

 

Revenue

 

Revenue for the six months ended June 30, 2021, was approximately $0.9 million, compared to approximately $0.5 million for the six months ended June 30, 2020. The increase of approximately $0.4 million, or approximately 77%, 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 under Ferring.

 

Gross Profit

 

Gross profit for the six months ended June 30, 2021 was approximately $0.8 million compared to approximately $0.5 million for the six months ended June 30, 2020. Gross margins were approximately 91% and approximately 90% for the six months ended June 30, 2021 and 2020, respectively.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the six months ended June 30, 2021 were approximately $4.2 million compared to approximately $2.9 million for the six months ended June 30, 2020. The increase of approximately $1.3 million, or approximately 46%, was primarily the result of approximately $0.6 million in increased personnel, board and business development consulting expenses, as well as approximately $0.3 million in startup costs related to INVO Center joint ventures and $0.3 in miscellaneous administrative costs. We incurred approximately $1.2 million of non-cash, stock-based compensation expense in the period compared to $1.0 million for the same period last year.

 

Research and Development Expenses

 

R&D expenses were $97,283 for the six months ended June 30, 2021, compared to $64,940 for the six months ended June 30, 2020 and reflect the R&D efforts related to our 5-day label expansion described above.

 

Other Income

 

Other income for the six months ended June 30, 2021 was approximately $0.16 million compared to $0 for the six months ended June 30, 2021. The increase of approximately $0.16 million was the result of the extinguishment of our Paycheck Protection Program note and related interest being forgiven.

 

Interest Income

 

Interest income for the six months ended June 30, 2021 was $4,438 compared to $0 for the six months ended June 30, 2021. The increase of $4,438 was the result of interest received on funds held in a money market account.

 

Interest Expense and Financing Fees

 

Interest expense and financing fees were approximately $1.0 million for the six months ended June 30, 2021, compared to approximately $0.3 million for the six months ended June 30, 2020. The increase of approximately $0.7 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.

 

Foreign Currency Exchange

 

Foreign currency exchange loss for the three months ended June 30, 2021 was $1,492 compared to $0 for the three months ended June 30, 2021. The increase of $1,492 was the result of increased transactions with international vendors and consultants.

 

Liquidity and Capital Resources

 

For the six months ended June 30, 2021 and 2020, we had net losses of approximately $4.3 million and approximately $2.8 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 $2.0 million of the net loss was related to non-cash expenses for the six months ended June 30, 2021 compared to $1.3 million for the six months ended June 30, 2020. The Company had working capital of approximately $5.5 million as of June 30, 2021, compared to approximately $8.3 million as of December 31, 2020. As of June 30, 2021, the Company’s stockholder’s equity was approximately $4.4 million compared to approximately $5.7 million as of December 31, 2020. Cash used in operation for the first six months of 2021 was approximately $2.9 million, compared to approximately $2.0 million for the first six months of 2020.

 

During 2020, we raised approximately $13.8 million in debt and equity financings. During the first half of 2021, we converted approximately $1.2 million of outstanding debt to equity and received approximately $370,000 of proceeds from unit purchase option and warrant exercises. Based on our current plan, we believe we have sufficient liquidity for at least the next 12 months. Until we can generate a sufficient amount of cash from operations and to the extent additional funds are necessary to meet our longer-term liquidity needs and to execute our business strategy, we may need to raise additional funding, as we have done in the past, by way of debt and/or equity financings, up-front distribution licensing fees or a combination of these potential sources of funds. Such additional funding 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 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 six months ended June 30:

 

    2021     2020  
Cash (used in) provided by:                
Operating activities     (2,909,137 )     (2,014,414 )
Investing activities     (915,383 )     (29,730 )
Financing activities     369,840       2,309,510  

 

As of June 30, 2021, we had approximately $6.6 million in cash compared to approximately $10.0 million as of December 31, 2020. Net cash used in operating activities for the first six months of 2021, was approximately $2.9 million, compared to approximately $2.0 million for the same period in 2020. The increase in net cash used in operations was primarily due to the increase in net loss, which was partially offset by a decrease in accrued compensation and an increase in inventory.

 

During the six months ended June 30, 2021, cash used in investing activities of approximately $0.9 million was primarily related to notes receivable involved with our investments in our joint ventures, as well as additional trademarks and patents. During the six months ended June 30, 2020, cash used in investing activities of approximately $0.03 million was related to new molds and trademarks.

 

During the six months ended June 30, 2021, cash provided by financing activities of approximately $0.4 million was primarily related to the exercise of unit purchase options and warrants. During the six months ended June 30, 2020, cash provided by financing activities of approximately $2.3 million related to the proceeds from the 2020 Convertible Notes.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition presented in this section is based upon our audited consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. During the preparation of the financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, our results, which allows us to form a basis for making judgments on the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates based on variance with our assumptions and 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.

 

26
 

 

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 and the estimated fair value of the grant, which is 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 its 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 Securities and Exchange Commission (“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 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 June 30, 2021, the end of the fiscal period covered by this Form 10Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 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 June 30, 2021.

2. See our Current Report on Form 8-K filed on June 15, 2021.

 

Item 6. Exhibits

 

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 August 16, 2021.

 

  INVO Bioscience, Inc.
     
Date: August 16, 2021 By: /s/ Steven Shum
    Steven Shum, Chief Executive Officer
    (Principal Executive Officer)
     
Date: August 16, 2021 By: /s/ Andrea Goren
    Andrea Goren, Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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