NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2022
(UNAUDITED)
Note
1 – Summary of Significant Accounting Policies
Description
of Business
INVO Bioscience, Inc. (“INVO”
or the “Company”) is a commercial-stage fertility company dedicated to expanding the assisted reproductive technology
(“ART”) marketplace by making fertility care accessible and inclusive to people around the world. The Company’s
primary mission is to implement new medical technologies aimed at increasing the availability of affordable, high-quality, patient-centered
fertility care. The Company’s flagship product is INVOcell, a revolutionary medical device that allows fertilization and early
embryo development to take place in vivo within the woman’s body. This treatment solution is the world’s first intravaginal
culture technique for the incubation of oocytes and sperm during fertilization and early embryo development. This technique, designated
as “IVC,” provides patients a more connected and intimate experience in comparison to other ART treatments. We
believe the IVC procedure can deliver comparable results at a lower cost than traditional in vitro fertilization (“IVF”)
and is a significantly more effective treatment than intrauterine insemination (“IUI”). The Company’s commercialization
strategy involves the opening of dedicated “INVO Centers” focused on offering the INVOcell and IVC procedure (with three
centers in North America now operational), as well as continuing to distribute and sell its technology solution into existing
fertility clinics.
Basis
of Presentation
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 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 consolidated
financial statements and the reported amounts of revenues and expenses during the reporting periods.
The
Company considers events or transactions that have occurred after the consolidated balance sheet date of March 31, 2022, but prior to
the filing of the 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 – Variable Interest Entities” for additional information on the
Company’s VIEs.
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.
Use
of Estimates
In
preparing financial statements in conformity with generally accepted accounting principles, management is required 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 financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.
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 three months ended March 31, 2022, and 2021.
Fair
Value of Financial Instruments
ASC
825-10-50, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of certain financial
instruments. The carrying value of cash and cash equivalents, accounts payable and borrowings, as reflected in the balance sheets, approximate
fair value because of the short-term maturity of these instruments.
Effective
January 1, 2008, the Company adopted ASC 820-10, “Fair Value Measurements”, which provides a framework for measuring fair
value under GAAP. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820-10 requires that valuation techniques maximize the use of observable inputs and minimize the use of
unobservable inputs.
Income
Taxes
The
Company is subject to income taxes in the United States and its domestic tax liabilities are subject to the allocation of expenses in
multiple state jurisdictions. 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 recoverability of deferred tax assets is evaluated by assessing the adequacy of future expected taxable income from all
sources, including taxable income in prior carryback years, reversal of taxable temporary differences, forecasted operating earnings
and available tax planning strategies. To the extent the Company does not consider it more-likely-than-not that a deferred tax asset
will be recovered, a valuation allowance is established.
Concentration
of Credit Risk
Cash
includes amounts deposited in financial institutions in excess of insurable Federal Deposit Insurance Corporation (“FDIC”)
limits. As of March 31, 2022, the Company had cash balances in excess of FDIC limits.
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. |
Revenue
generated from the sale of INVOcell is 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.
Revenue
generated from clinical and lab services related at the Company’s affiliated INVO Centers is typically recognized at the time the
service is performed.
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 fertility treatment) in humans.
On
November 2, 2021, Ferring notified the Company of its intention to terminate the Ferring Agreement, which required 90-days prior
written notice. Accordingly, the Ferring Agreement officially terminated on January 31, 2022.
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
was being recognized as income over the 7-year term.
As
of March 31, 2022, the Company had no deferred revenue related to the Ferring Agreement as it was recognized in the fourth quarter of
fiscal year 2021 in relation to the contract termination. Per ASC 606-10-55-48 the likelihood of Ferring exercising its rights became
remote at the time notice of termination was received so INVO recognized the full remaining amount of the deferred revenue.
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 months ended March 31, 2022, and 2021, as the inclusion of any potential shares would have had an anti-dilutive effect
due to the Company generating a loss.
Schedule
of Earnings Per Share Basic and Diluted
| |
| | | |
| | |
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Net loss (numerator) | |
$ | (2,774,312 | ) | |
$ | (2,453,469 | ) |
Basic and diluted weighted-average number of common shares outstanding (denominator) | |
| 12,050,696 | | |
| 9,888,025 | |
Basic and diluted net loss per common share | |
| (0.23 | ) | |
| (0.25 | ) |
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 March 31, | |
| |
2022 | | |
2021 | |
Options | |
| 1,474,605 | | |
| 1,102,672 | |
Convertible notes and interest | |
| - | | |
| 160,504 | |
Unit purchase options and warrants | |
| 260,165 | | |
| 216,193 | |
Total | |
| 1,734,770 | | |
| 1,479,369 | |
Recently
Adopted Accounting Pronouncements
The
Company has reviewed all recently issued, but not yet effective, accounting pronouncements, and does not believe the future adoption
of any such pronouncements will have a material impact on its financial condition or the results of its operations.
Note
2 – Liquidity
Historically,
the Company has funded its cash and liquidity needs through operating cash flow, equity financings, and convertible notes. For the three
months ended March 31, 2022 and 2021, the Company incurred a net loss of approximately $2.8
million and $2.5
million, respectively, and has an accumulated
deficit of approximately $41.7
million as of March 31, 2022. Approximately
$0.9 million
of the net loss was related to non-cash expenses for the three months ended March 31, 2022, compared to $1.4
million for the three months ended March 31,
2021.
The
Company has been dependent on raising capital from debt and equity financings to meet its needs for cash flow used in operating and investing
activities. During the first three months of 2021, the Company received approximately $0.4
million of proceeds from unit purchase option
and warrant exercises. During the first three months of 2022, the Company received proceeds of approximately $0.3
million for the sale of common stock.
The Company’s current plan includes opening additional INVO Centers over the next 12 months. Until the Company can generate a sufficient
amount of cash from operations and to the extent additional funds are necessary to meet the Company’s longer-term liquidity needs
and to execute the Company’s business strategy, it may need to raise additional funding, as it has done in the past, by way of
debt and/or equity financings. Such additional funding may not be available on reasonable terms, if at all.
Although
the Company’s audited financial statements for the year ended December 31, 2021 were prepared under the assumption that it would
continue operations as a going concern, the report of the Company’s independent registered public accounting firm that accompanies
the Company’s financial statements for the year ended December 31, 2021 contains a going concern qualification in which such firm
expressed substantial doubt about the Company’s ability to continue as a going concern, based on the financial statements at that
time. Specifically, as noted above, the Company has incurred significant operating losses and the Company expects to continue to incur
significant expenses and operating losses as it continues to ramp up the commercialization of INVOcell and develop new INVO Centers.
These prior losses and expected future losses have had, and will continue to have, an adverse effect on the Company’s financial
condition. If the Company cannot continue as a going concern, its stockholders would likely lose most or all of their investment in the
Company.
Note
3 – Variable Interest Entities
Consolidated
VIEs
Bloom
INVO, LLC
On
June 28, 2021, INVO CTR entered into a limited liability company agreement (the “Bloom Agreement”) with Bloom Fertility,
LLC (“Bloom”) to establish a joint venture entity, formed as “Bloom INVO LLC” (the “Georgia JV”),
for the purposes of commercializing INVOcell, and the related IVC procedure, through the establishment of an INVO Center (the “Atlanta
Clinic”) in the Atlanta, Georgia metropolitan area.
In
consideration for INVO’s commitment to contribute up to $800,000
within the 24-month period following the
execution of the Bloom Agreement to support the start-up operations of the Georgia JV, the Georgia JV issued 800
of its units to INVO CTR and in consideration
for Bloom’s commitment to contribute physician services having an anticipated value of up to $1,200,000
over the course of a 24-month vesting period,
the Georgia JV issued 1,200
of its units to Bloom.
The
responsibilities of Bloom include providing all medical services required for the operation of the Atlanta Clinic. The responsibilities
of INVO CTR include providing certain funding to the Georgia JV, lab services quality management, and providing access to and being the
exclusive provider of the INVOcell to the Georgia JV. INVO CTR also performs all required, industry specific compliance and accreditation
functions, and product documentation for product registration.
The
Bloom Agreement provides Bloom with a “profits interest” in the Georgia JV and, in connection with such profits interest,
states that profits and losses be allocated to its members based on a hypothetical liquidation of the Georgia JV. In such a scenario,
liquidation proceeds would be distributed in the following order: (a) to INVO CTR until the difference between its capital contributions
and distributions equals $0; (b) to Bloom until its distributions equal 150% of the liquidation amounts
distributed to INVO CTR (a “catch-up” to rebalance the distributions between members); and (c) thereafter on a pro rata basis.
The Georgia JV had no assets or liabilities at the time the units were issued, and, as of March 31, 2022, INVO CTR had made capital contributions
greater than the net loss of the Georgia JV. As such, the entire net loss was allocated to INVO CTR, and no loss was allocated to the
noncontrolling interest of Bloom.
The
Georgia JV opened to patients on September 7, 2021, and commenced initial treatment cycles in November 2021.
The
Company determined the Georgia JV is a VIE, and that the Company is its primary beneficiary because the Company has an obligation to
absorb losses that are potentially significant and the Company controls the majority of the activities that impact the Georgia JV’s
economic performance, specifically control of the INVOcell and lab services quality management. As a result, the Company consolidated
the Georgia JV’s results with its own. As of March 31, 2022, the Company invested $0.7 million in the Georgia JV in the form of
capital contributions as well as $0.5 million in the form of a note. For the three months ended March 31, 2022, the Georgia JV recorded
a net loss of $0.2 million. Noncontrolling interest in the Georgia JV was $0.
Unconsolidated
VIEs
HRCFG
INVO, LLC
On
March 10, 2021, 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”). The Company also provides certain funding to the Alabama JV. Each party owns 50% of the Alabama JV.
The
Alabama JV opened to patients on August 9, 2021, and initial treatment cycles commenced in September 2021.
The
Company determined the Alabama 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 Alabama JV. As of March 31, 2022, the Company invested $1.7 million in the Alabama JV in the form
of a note. For the three months ended March 31, 2022, the Alabama JV recorded a net loss of $0.1 million of which the Company recognized
a loss from equity method investment of $0.05 million.
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 IVC 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 opened to patients on November 1, 2021, and commenced initial treatment cycles beginning in January 2022.
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 March 31,2022, the Company invested $0.2 million in the Mexico JV. For the three
months ended March 31, 2022, the Mexico JV recorded a net loss of $0.05 million of which the Company recognized a loss from equity method investment
of $0.02 million.
The
following table summarizes our investments in unconsolidated VIEs:
Schedule
of Investments in Unconsolidated Variable Interest Entities
| |
| |
| | |
Carrying Value as of | |
| |
Location | |
Percentage Ownership | | |
March 31, 2022 | | |
December 31, 2021 | |
HRCFG INVO, LLC | |
Alabama, United States | |
| 50 | % | |
$ | 1,332,574 | | |
| 1,387,495 | |
Positib Fertility, S.A. de C.V. | |
Mexico | |
| 33 | % | |
| 161,569 | | |
| 102,439 | |
Total investment in unconsolidated VIEs | |
| | | |
$ | 1,494,143 | | |
| 1,489,934 | |
Earnings
from investments in unconsolidated VIEs were as follows:
Schedule
of Earnings from Investments in Unconsolidated Variable Interest Entities
| |
| | | |
| | |
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
HRCFG INVO, LLC | |
$ | (54,920 | ) | |
| - | |
Positib Fertility, S.A. de C.V. | |
| (16,197 | ) | |
| - | |
Total earnings from unconsolidated VIEs | |
$ | (71,117 | ) | |
| - | |
The
following tables summarize the combined unaudited financial information of our investments in unconsolidated VIEs:
Schedule
of Financial Information of Investments in Unconsolidated Variable Interest Entities
| |
| | | |
| | |
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Statements of operations: | |
| | |
| |
Operating revenue | |
$ | 169,835 | | |
| - | |
Operating expenses | |
| (328,756 | ) | |
| - | |
Net loss | |
$ | (158,921 | ) | |
| - | |
| |
March 31, 2022 | | |
December 31, 2021 | |
Balance sheets: | |
| | | |
| | |
Current assets | |
$ | 474,379 | | |
| 456,967 | |
Long-term assets | |
| 1,133,071 | | |
| 1,302,067 | |
Current liabilities | |
| (407,425 | ) | |
| (404,155 | ) |
Long-term liabilities | |
| (146,515 | ) | |
| (142,321 | ) |
Net assets | |
$ | 1,053,510 | | |
| 1,212,558 | |
Note
4 – Agreements and Transactions with VIE’s
The
Company sells the INVOcell to its consolidated and unconsolidated VIEs and anticipates continuing to do so in the ordinary course of
business. All intercompany transactions with consolidated entities are eliminated in the Company’s consolidated financial statements.
Per ASC 323-10-35-8 the Company eliminates any sales to an unconsolidated VIE for INVOcell inventory that the VIE still has remaining
on the books at period end.
The
following table summarizes the Company’s transactions with VIEs:
Summary
of Transaction with Variable Interest Entities
| |
| | | |
| | |
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Bloom Invo, LLC | |
| | | |
| | |
INVOcell revenue | |
$ | - | | |
| - | |
Unconsolidated VIEs | |
| | | |
| | |
INVOcell revenue | |
$ | 7,500 | | |
| - | |
The
Company had balances with VIEs as follows:
Summary
of Balances with Variable Interest Entities
| |
March 31, 2022 | | |
December 31, 2021 | |
Bloom Invo, LLC | |
| | | |
| | |
Accounts receivable | |
$ | 21,600 | | |
| 21,600 | |
Notes payable | |
| 457,012 | | |
| 453,406 | |
Unconsolidated VIEs | |
| | | |
| | |
Accounts receivable | |
$ | 23,810 | | |
| 16,310 | |
Note
5 – Inventory
Components
of inventory are:
Schedule
of Inventory
| |
March 31, 2022 | | |
December 31, 2021 | |
Raw materials | |
$ | 77,909 | | |
$ | 67,605 | |
Finished goods | |
| 216,722 | | |
| 220,168 | |
Total inventory | |
$ | 294,631 | | |
$ | 287,773 | |
Note
6 – Property and Equipment
The
estimated useful lives and accumulated depreciation for equipment are as follows as of March 31, 2022, and December 31, 2021:
Schedule
of Estimated Useful Lives of Property and Equipment
| |
Estimated Useful Life |
Manufacturing equipment | |
6 to 10 years |
Medical equipment | |
7 to 10 years |
Office equipment | |
3 to 7 years |
Schedule
of Property and Equipment
| |
March 31, 2022 | | |
December 31, 2021 | |
Manufacturing equipment | |
$ | 132,513 | | |
$ | 132,513 | |
Medical equipment | |
| 282,811 | | |
| 275,423 | |
Office equipment | |
| 75,589 | | |
| 74,891 | |
Leasehold improvements | |
| 96,817 | | |
| 96,817 | |
Less: accumulated depreciation | |
| (95,735 | ) | |
| (78,208 | ) |
Total equipment, net | |
$ | 491,995 | | |
$ | 501,436 | |
During
the three months ended March 31, 2022, and 2021, the Company recorded depreciation expense of $15,095 and $2,527, respectively.
Note
7 – Intangible Assets
Components
of intangible assets are as follows:
Schedule
of Finite-Lived Intangible Assets
| |
March 31, 2022 | | |
December 31, 2021 | |
Trademarks | |
$ | 111,752 | | |
$ | 110,842 | |
Patents | |
| 95,355 | | |
| 95,355 | |
Accumulated amortization | |
| (74,556 | ) | |
| (74,104 | ) |
Total patent costs, net | |
$ | 132,551 | | |
$ | 132,093 | |
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.
During
the three months ended March 31, 2022, and 2021, the Company recorded amortization expenses related to patents of $452 and $452, respectively.
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
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 2016-02,
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 March 31, 2022, the Company’s lease components included in the consolidated balance sheet were as follows:
Schedule
of Lease Components
Lease component | |
Balance sheet classification | |
March 31, 2022 | |
Assets | |
| |
| | |
ROU assets – operating lease | |
Other assets | |
$ | 1,980,153 | |
Total ROU assets | |
| |
$ | 1,980,153 | |
| |
| |
| | |
Liabilities | |
| |
| | |
Current operating lease liability | |
Current liabilities | |
$ | 224,361 | |
Long-term operating lease liability | |
Other liabilities | |
| 1,844,784 | |
Total lease liabilities | |
| |
$ | 2,069,145 | |
Future
minimum lease payments as of March 31, 2022 were as follows:
Schedule of Future Minimum Lease Payments
|
|
|
|
|
2022 |
|
$ |
194,542 |
|
2023 |
|
|
264,108 |
|
2024 |
|
|
251,671 |
|
2025 |
|
|
247,960 |
|
2026
and beyond |
|
|
1,316,245 |
|
Total
future minimum lease payments |
|
$ |
2,274,526 |
|
Less:
Interest |
|
|
(205,381 |
) |
Total
operating lease liabilities |
|
$ |
2,069,145 |
|
Note
9 – Notes Payable
2020
Convertible Notes Payable
From
May 15, 2020, through July 1, 2020, the Company entered into agreements with accredited investors for their purchase of secured convertible
notes issued by the Company in the aggregate original principal amount of $3,494,840 (the “2020 Convertible Notes”). See
Note 14 – Unit Purchase Options and Warrants for additional information on related securities.
Interest
on the 2020 Convertible Notes accrued at a rate of 10% per annum and was payable on the maturity dates of November 15, 2021, December
22, 2021, and December 30, 2021.
All
amounts of principal and interest due under the 2020 Convertible Notes were 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, subject to adjustments.
As
of March 31, 2022, all 2020 Convertible Notes had either converted or been repaid by the Company.
Interest
expense on the 2020 Convertible Notes was $0 and $35,070 for the three months ended March 31, 2022, and 2021, respectively.
Amortization
of options discount on the 2020 Convertible Notes was $0 and $161,339 for the three months March 31, 2022, and 2021, respectively.
Amortization
of warrant discount on the 2020 Convertible Notes was $0 and $163,580 for the three months ended March 31, 2022, and 2021, respectively.
Amortization
of beneficial conversion feature on the 2020 Convertible Notes was $0 and $461,120 for the three months ended March 31, 2022, and 2021,
respectively.
Amortization
of issuance costs on the 2020 Convertible Notes was $0 and $74,116 for the three months ended March 31, 2022, and 2021, 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 on extinguishment of debt during the year ended December 31,
2021.
Note
10 – Related Party Transactions
In
October 2021, Paulson Investment Company served as a placement agent for the Company’s registered direct offering and received
fees and commissions for such role in the amount of $323,584. 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. Steve Shum and
Andrea Goren, the CEO and CFO of the Company, respectively, each purchased 30,674 shares in the registered direct offering for gross
proceeds of $199,994.
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
offerings
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.
On
October 1, 2021, the Company and certain institutional and accredited investors and members of the Company’s management team (the
“Investors”) entered into a securities purchase agreement pursuant to which the Company agreed to issue and sell to the Investors
1,240,737 shares of its common stock, in a registered direct offering (the “Direct Offering”) for aggregate gross proceeds
of $4,044,803. The purchase price for each share in the Direct Offering was $3.26. The net proceeds to the Company from the Direct Offering,
after deducting placement agent fees and the Company’s estimated offering expenses, were approximately $3.65 million. Paulson Investment
Company served as a placement agent for the Direct Offering and received a fee for its role in the amount of $323,584, as well as warrants
to purchase 37,222 shares of the Company’s common stock at an exercise price of $3.912 per share.
Three
Months Ended March 31, 2022
During
the first three months of 2022, the Company issued 51,528 shares of common stock to employees and directors and 18,500 shares of common
stock to consultants with a fair value of $186,000 and $57,370, respectively. The shares were issued under the Company’s 2019 Stock
Incentive Plan (the “2019 Plan”).
During
the first three months of 2022, the Company issued 3,000
shares of its common stock to consultants
in consideration of services rendered with a fair value of $9,480.
These 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 cash proceeds from this issuance.
In
January 2022, the Company issued 94,623 shares of its common stock for proceeds of $315,000.
During the first three months of
2022, the Company granted 86,333
restricted stock units to employees that will vest 50%
at six months from grant date and 50%
at twelve months from grant date. The Company recognized stock based compensation expense of $40,474
for during the three months ended March 31, 2022 associated with the equity
grant.
Note
12 – Equity-Based Compensation
Equity
Incentive Plans
In
October 2019, the Company adopted the 2019 Plan. Under the 2019 Plan, the Company’s board of directors is authorized to grant
stock options to purchase common stock, restricted stock units, and restricted shares of common stock 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 2022, the number of available shares
increased by 715,749 shares
to a total of 2,087,198.
Options
granted under the 2019 Plan 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, 2021 | |
| 1,055,894 | | |
$ | 5.09 | | |
$ | 133,022 | |
Granted | |
| 418,711 | | |
| 3.78 | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | |
Canceled | |
| - | | |
| - | | |
| - | |
Balance as of March 31, 2022 | |
| 1,474,605 | | |
$ | 4.90 | | |
| - | |
Exercisable as of March 31, 2022 | |
| 740,495 | | |
| 5.78 | | |
| - | |
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
| |
Three Months ended March 31, | |
| |
2022 | | |
2021 | |
Risk-free interest rate range | |
1.6% to 1.9 | % | |
0.22%
to 0.31 | % |
Expected life of option-years | |
5.25 to 5.75 | | |
5.3
to 6.5 | |
Expected stock price volatility | |
| 110.4 to 113.2 | % | |
| 107.4 | % |
Expected dividend yield | |
| - | % | |
| - | % |
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, 2021 | |
$ | - | | |
$ | 1,543,912 | |
Three months ended March 31, 2022 | |
$ | - | | |
$ | 428,488 | |
For
the three months ended March 31, 2021, the weighted average grant date fair value of options granted was $3.08 per share. The Company
estimates the fair value of options at the grant date using the Black-Scholes model. For all stock options granted through March 31,
2022, the weighted average remaining service period is 1.3 years.
Restricted
Stock and Restricted Stock Units
In
the three months ended March 31, 2022, the Company granted 156,361
in restricted stock units and
shares of restricted stock to certain employees, directors, and consultants under the 2019 Plan. Restricted stock issued to employees,
directors, and consultants generally vest either at grant or vest over a period of one
year from the date of grant.
The
following table summarizes the Company’s restricted stock awards activity under the 2019 Plan during the three months ended March
31, 2022:
Schedule of Aggregate Restricted Stock Awards and Restricted Stock Unit Activity
| |
Number of Unvested Shares | | |
Weighted Average Grant Date Fair Value | | |
Aggregate Value of Shares | |
| |
| | |
| | |
| |
Balance as of December 31, 2021 | |
| 9,730 | | |
$ | 3.72 | | |
$ | 36,148 | |
Granted | |
| 159,361 | | |
| 3.40 | | |
| 532,167 | |
Vested | |
| (76,841 | ) | |
| 3.52 | | |
| (265,847 | ) |
Forfeitures | |
| - | | |
| - | | |
| - | |
Balance as of March 31, 2022 | |
| 92,250 | | |
$ | 3.39 | | |
$ | 302,468 | |
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:
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, 2021 | |
| 92,893 | | |
$ | 3.20 | | |
$ | 5,647 | |
Granted | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | |
Canceled | |
| - | | |
| - | | |
| - | |
Balance as of March 31, 2022 | |
| 92,893 | | |
$ | 3.20 | | |
$ | - | |
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, 2021 | |
| 167,272 | | |
$ | 3.62 | | |
$ | 16,029 | |
Granted | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | |
Canceled | |
| - | | |
| - | | |
| - | |
Balance as of March 31, 2022 | |
| 167,272 | | |
$ | 3.62 | | |
$ | - | |
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 months ended March 31, 2022, and 2021. The annual forecasted effective income tax rate for 2022
is 0%, with a year-to-date effective income tax rate for the three months ended March 31, 2022, of 0%.
Note
15 – Commitments and Contingencies
Insurance
The
Company’s insurance coverage is carried with third-party insurers and includes: (i) general liability insurance covering third-party
exposures; (ii) statutory workers’ compensation insurance; (iv) excess liability insurance above the established primary limits
for general liability and automobile liability insurance; (v) property insurance, which covers the replacement value of real and personal
property and includes business interruption; and (vi) insurance covering our directors and officers for acts related to our business
activities. All coverage is subject to certain limits and deductibles, the terms and conditions of which are common for companies with
similar types of operations.
Legal
Matters
The
Company is not currently subject to any material legal proceedings; however, it could be subject to legal proceedings and claims from
time to time in the ordinary course of its business, or legal proceedings it considered immaterial may in the future become material.
Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and can divert management
resources.
Note
16 – Subsequent Events
On
May 13, 2022, the Company entered into an Exclusive Distribution Agreement (the “Onesky Agreement”) with Onesky Holdings
Limited (“Onesky”), pursuant to which, among other things, the Company granted to Onesky an exclusive right to distribute
INVOcell in the People’s Republic of China, excluding Hong Kong, Macau and Taiwan (the “Territory”).
The
Onesky Agreement became effective on May 13, 2022, and will remain in effect for a period of five years after the date of National Medical
Products Administration approval and automatically renews for successive two year period unless written notice is given by either party
90 days’ prior to the expiry of any term. If either party defaults in the performance of any of its obligations under the Onesky
Agreement, including Onesky’s minimum purchase obligations, the other party may give written notice of default and the other party
has 30 days to cure. If such default is not cured, then the Onesky Agreement may be terminated immediately thereafter. The Onesky Agreement
contains other customary termination provisions. The Company granted Onesky an exclusive, revocable and royalty free license to use INVO
trademarks in the Territory in connection with the promotion, distribution, and sale of INVOcell.