INVO INVO BioScience Inc

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(UNAUDITED)

Note 1 – Description of Business

INVO Bioscience, Inc. (“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 September 30, 2021, and December 31, 2020, the consolidated statements of operations for the three and nine months ended September 30, 2021, and 2020 and stockholders’ equity (deficiency) and consolidated statement of cash flows for the nine months ended September 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 and controlled affiliates. The Company presents noncontrolling interest within the equity section of its consolidated balance sheets and the amount of consolidated net income (loss) that is attributable to the Company and to the noncontrolling interest in its consolidated statement of operations. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company uses the equity method of accounting when it owns an interest in an entity whereby it can exert significant influence over but cannot control the entity’s operations.

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 September 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 ASC 810, Consolidation (“ASC 810”). A VIE must be consolidated by its primary beneficiary when, along with its affiliates and agents, the primary beneficiary has both: (i) the power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) the obligation to absorb losses or the right to receive the benefits of the VIE that could potentially be significant to the VIE. The Company reconsiders whether an entity is still a VIE only upon certain triggering events and continually assesses its consolidated VIEs to determine if it continues to be the primary beneficiary. See “Note 3 – Joint Ventures” for additional information on the Company’s VIEs.

Noncontrolling Interests

The noncontrolling interest in an affiliate is presented within total equity in the Company’s consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income (loss) attributable to INVO in its consolidated statements of operations. The Company’s earnings per share is calculated based on net income (loss) attributable to INVO’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.

Equity Method Investments

Investments in unconsolidated affiliates in which the Company exerts significant influence but does not control or otherwise consolidate are accounted for using the equity method. Equity method investments are initially recorded at cost. These investments are included in investment in joint ventures in the accompanying consolidated balance sheets. The Company’s share of the profits and losses from these investments is reported in loss from equity method joint venture in the accompanying consolidated statements of operations. The Company monitors its investments for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the investees and records reductions in carrying values when necessary.

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 nine months ended September 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:

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 net loss attributable to the Company’s 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 nine months ended September 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.

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

Recently Adopted Accounting Pronouncements

None.

HRCFG INVO, LLC

On March 10, 2021, the Company’s 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 entity is HRCFG INVO, LLC (the “Alabama JV”). In connection with the formation of the Alabama JV, the Company provided an initial $30,000 in funding, in exchange for a note, which will be repaid from the operating profit of the Alabama JV. As of September 30, 2021, the Company has provided an additional $1,300,000 to the Alabama JV pursuant to the note. Interest on the note accrues at a rate of 1.5% per annum.

The Company determined the Alabama JV is a VIE and the Company is the primary beneficiary, as a result the Company consolidated the Alabama JV’s results with its own. For the three and nine months ended September 30, 2021, the Alabama JV recorded a net loss of $477,086. HRCFG’s noncontrolling interest in the Alabama JV was $238,543. As the Alabama JV only operated part of the period and is still in ramp up phase, pro forma financials have not been provided for this period.

Bloom Invo, LLC

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 “Georgia JV”). The Georgia JV will, subject to the equity and debt arrangements in the Bloom Agreement, assist Bloom in establishing an INVO Center that will offer INVO technologies. In connection with the formation of the Georgia JV, the Company provided an initial $200,000 in funding, in exchange for a note issued by the Georgia JV, which will be repaid from the operating profit of the Georgia JV.

The Company determined the Georgia JV is a VIE and is currently in the process of determining if the Company is the primary beneficiary. As the financial results of the Georgia JV are immaterial for the third quarter, the Company will use the equity method to account for its interest in the Georgia JV. As of September 30, 2021, the Company invested $165,170 in the Georgia JV. For the three and nine months ended September 30, 2021, the Georgia JV recorded a net loss of $283,731 of which the Company recognized a loss from equity investment of $113,492. As the Georgia JV only operated part of the period and is still in ramp up phase, pro forma financials have not been provided for this period.

Positib Fertility, S.A. de C.V.

On 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 Company determined the Mexico JV is a VIE, and that there is no primary beneficiary. As a result, the Company will use the equity method to account for its interest in the Mexico JV. As of September 30, 2021, the Mexico JV was not yet operational and therefore had no profit or loss to report. As of September 30, 2021, the Company had invested $43,721 in the Mexico JV.

Note 5 – Property and Equipment

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

During the three months ended September 30, 2021, and 2020, the Company recorded depreciation expense of $17,268 and $2,528, respectively.

During each of the nine months ended September 30, 2021, and 2020, the Company recorded depreciation expense of $22,323 and $7,583, respectively.

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(UNAUDITED)

Note 6 – 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

During the three months ended September 30, 2021, and 2020, the Company recorded amortization expenses related to patents of $453 and $452, respectively.

During the nine months ended September 30, 2021, and 2020, the Company recorded amortization expenses related to patents of $1,357 and $1,355, respectively.

The increase in the trademark assets of $20,909 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 7 – Notes Receivable

On August 5, 2021, the Company entered into a promissory note with Bloom Invo, LLC. The note was entered into in conjunction with the Georgia JV, accrues interest at 3.25% per annum and principal and interest shall be repaid from 50% of the Georgia JV’s operating profit, net of reserves, no later than August 5, 2026. The balance as of September 30, 2021, consists of $200,000 principal and $579 of accrued interest.

The following table lists the Company’s notes receivable:

Note 8 – 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 September 30, 2021, the Company’s lease components included in the consolidated balance sheet were as follows:

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

 Schedule of Future Minimum Lease Payaments

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(UNAUDITED)

Note 9 – 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 those certain Secured Convertible Notes issued in connection with the Purchase Agreements, 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 September 30, 2021, there is $500,000 in principal value of such notes that remains outstanding.

Interest expense on the 2020 Convertible Notes was $12,779 and $89,158 for the three months ended September 30, 2021, and 2020, respectively.

Interest expense on the 2020 Convertible Notes was $60,628 and $120,939 for the nine months ended September 30, 2021, and 2020, respectively.

Amortization of options discount on the 2020 Convertible Notes was $3,734 and $26,428 for the three months ended September 30, 2021, and 2020, respectively.

Amortization of options discount on the 2020 Convertible Notes was $168,767 and $35,805 for the nine months ended September 30, 2021, and 2020, respectively.

Amortization of warrant discount on the 2020 Convertible Notes was $3,955 and $27,053 for the three months ended September 30, 2021, and 2020, respectively.

Amortization of warrant discount on the 2020 Convertible Notes was $171,449 and $36,656 for the nine months ended September 30, 2021, and 2020, respectively.

Amortization of beneficial conversion feature on the 2020 Convertible Notes was $49,541 and $345,208 for the three months ended September 30, 2021, and 2020, respectively.

Amortization of beneficial conversion feature on the 2020 Convertible Notes was $559,665 and $468,231 for the nine months ended September 30, 2021, and 2020, respectively.

Amortization of issuance costs on the 2020 Convertible Notes was $20,594 and $61,187 for the three months ended September 30, 2021, and 2020, respectively.

Amortization of issuance costs on the 2020 Convertible Notes was $115,078 and $81,764 for the nine months ended September 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

September 30, 2021

(UNAUDITED)

Note 10 – Related Party Transactions

In November 2020, Paulson Investment Company served as a co-managing underwriter for the Company’s underwritten public offering and received fees 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.

See “Note 16-Subsequent Events” for information relating to the Company’s October 2021 Offering.

Note 11 – 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.

Nine months Ended September 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.

As of September 30, 2021, the Company had issued 44,806 shares of common stock to employees and directors and 91,500 shares of common stock to consultants with a fair value of $274,698 and $293,650, respectively. The shares were issued under the 2019 Stock Incentive Plan.

As of September 30, 2021, the Company issued 5,000 shares of its common stock to consultants in consideration of services rendered with a fair value of $31,200. There shares were issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended. The Company did not receive any proceeds from this issuance.

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(UNAUDITED)

Note 12 – 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.

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:

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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

For the nine months ended September 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 September 30, 2021, the weighted average remaining service period is 4.0 years.

The Company recognized $391,194 and $259,547 in stock-based compensation expense for stock options for the three months ended September 30, 2021, and 2020, respectively. The Company recognized $1,151,800 and $852,187 in stock-based compensation expense related to stock options for the nine months ended September 30, 2021, and 2020, respectively. Unamortized stock option expense as of September 30, 2021, to be amortized over the weighted-average remaining service period totaled $1,937,560.

Restricted Stock and Restricted Stock Units

In the nine months ended September 30, 2021, the Company issued 44,806 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 nine months ended September 30, 2021:

 Schedule of Aggregate Restricted Stock Awards and Restricted Stock Unit Activity

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(UNAUDITED)

The Company recognized $87,912 and $67,202 in stock-based compensation expense related to restricted stock and restricted stock units for the three months ended September 30, 2021, and 2020, respectively. The Company recognized $266,718 and $388,173 in stock-based compensation expense for restricted stock and restricted stock units for the nine months ended September 30, 2021, and 2020, respectively.

Note 13 – 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:

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

The following table sets forth the activity of warrants:

INVO BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(UNAUDITED)

Note 14 – 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 nine months ended September 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 nine months ended September 30, 2021, of 0%.

Note 15 – 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.

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.