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.
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.
|
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.
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
|
Schedule of Property and Equipment
|
|
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.
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:
Schedule of 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:
Schedule of Lease Components
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:
Schedule of Future Minimum Lease Payaments
|
|
|
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
|
|
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.
INVO
BIOSCIENCE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2021
(UNAUDITED)
Principal
balances of the 2020 Convertible Notes were as follows:
Schedule of Convertible Notes
|
|
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.
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.
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.
Schedule of Stock Options Activity
|
|
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:
Schedule of Share-based Payment Award, Stock Options, Valuation 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
|
|
|
-
|
%
|
|
|
-
|
%
|
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.
Schedule of Share Based Payments Arrangements Options Exercised and Options Vested
|
|
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:
Schedule of Aggregate Restricted Stock Awards and Restricted Stock Unit Activity
|
|
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
|
|
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:
Schedule of Fair Value Measurement Inputs and Valuation Techniques
|
|
|
|
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:
Schedule of Unit Purchase Stock Options Activity
|
|
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:
Schedule of Warrants Activity
|
|
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
|
|
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.