IVF 10-Q
INVO Fertility, Inc. (IVF)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
EXCHANGE ACT OF 1934
For
the quarterly period ended
OR
EXCHANGE ACT OF 1934
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(Commission File No.) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |||
| Smaller
reporting company |
Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
| The
|
As of May 16, 2022, the registrant had shares of common stock outstanding.
INVO BIOSCIENCE, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED March 31, 2022
TABLE OF CONTENTS
| 2 |
Forward Looking Statements
The statements contained in this Quarterly Report on Form 10-Q which are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management, including, without limitation, our expectations regarding results of operations, the commercialization of our technology, regulatory approvals, our development of new technologies, the adequacy of our ability to develop current financing sources to fund our operations, our growth initiatives, and the strength of our intellectual property portfolio. These forward-looking statements may be identified by the use of words such as “plans”, “intends,” “may,” “could,” “expect,” “estimate,” “anticipate,” “continue” or similar terms, though not all forward-looking statements contain such words. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements due to a number of important factors. These factors that could cause actual results to differ from those anticipated or predicted include, without limitation, our ability to develop and commercialize our products, including obtaining regulatory approvals, the size and growth of the potential markets for our products and our ability to serve those markets, the rate and degree of market acceptance of any of our products, general economic conditions, costs and availability of raw materials and management information systems, our ability to obtain and maintain intellectual property protection for our products, competition, the loss of key management and technical personnel, our ability to obtain timely payment of our invoices from customers, litigation, the effect of governmental regulatory developments, the availability of financing sources, our ability to comply with our debt obligations, our ability to deleverage our balance sheet, and seasonality, as well as the uncertainties set forth in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022 (the “10-K”), including the risk factors contained in Item 1A, and from time to time in our other filings with the SEC We disclaim any intention or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Reverse Stock Splits
On May 26, 2020, the Company effected a 1-for-20 reverse stock split of its common stock. All shares, options and warrants throughout these consolidated financial statements have been retroactively restated to reflect the reverse split.
On November 9, 2020, the Company effected a 5-for-8 reverse stock split of its common stock. All shares, options and warrants throughout these consolidated financial statements have been retroactively restated to reflect the reverse split.
| 3 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INVO BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (audited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible Assets, net | ||||||||
| Lease right of use | ||||||||
| Investment in joint ventures | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Accrued compensation | ||||||||
| Deferred revenue, current portion | ||||||||
| Lease liability, current portion | ||||||||
| Total current liabilities | ||||||||
| Lease liability, net of current portion | ||||||||
| Deferred tax liability | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity | ||||||||
| Common Stock, $ par value; shares authorized; and issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
INVO BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue: | ||||||||
| Product revenue | $ | $ | ||||||
| Clinic revenue | ||||||||
| License revenue | ||||||||
| Total revenue | ||||||||
| Cost of goods sold: | ||||||||
| Production costs | ||||||||
| Depreciation | ||||||||
| Total cost of goods sold | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| Selling, general and administrative expenses | ||||||||
| Research and development expenses | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Loss from equity method joint ventures | ( | ) | ||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Foreign currency exchange loss | ( | ) | ( | ) | ||||
| Total other expenses | ( | ) | ( | ) | ||||
| Net loss | ( | ) | ( | ) | ||||
| Net loss per common share: | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of common shares outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
INVO BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
| Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balances, December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common stock issued to directors and employees | ||||||||||||||||||||
| Common stock issued to service providers | ||||||||||||||||||||
| Conversion of notes payable and accrued interest | ||||||||||||||||||||
| Proceeds from warrant exercise | ||||||||||||||||||||
| Proceeds from unit purchase option exercise | ||||||||||||||||||||
| Cashless warrant exercise | ( | ) | ||||||||||||||||||
| Cashless unit purchase option exercise | ( | ) | ||||||||||||||||||
Stock options issued to directors and employees as compensation | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balances, March 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balances, December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common stock issued to directors and employees | ||||||||||||||||||||
| Common stock issued for services providers | ||||||||||||||||||||
| Proceeds from the sale of common stock, net of fees and expenses | ||||||||||||||||||||
| Stock options issued to directors and employees | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balances, March 31, 2022 | ( | ) | ||||||||||||||||||
| 6 |
INVO BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Non-cash stock compensation issued for services | ||||||||
| Non-cash stock compensation issued to directors and employees | ||||||||
| Fair value of stock options issued to employees | ||||||||
| Amortization of discount on notes payable | ||||||||
| Amortization of leasehold right of use asset | ||||||||
| Loss from equity method investment | ||||||||
| Depreciation and amortization | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Interest receivable | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Accrued compensation | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Leasehold liability | ( | ) | ( | ) | ||||
| Accrued interest | ||||||||
| Income taxes payable | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash from investing activities: | ||||||||
| Payments to acquire property, plant, and equipment | ( | ) | ||||||
| Payments to acquire patents | ( | ) | ||||||
| Payments to acquire trademarks | ( | ) | ( | ) | ||||
| Investment in joint ventures | ( | ) | ||||||
| Payment for notes receivable | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash from financing activities: | ||||||||
| Proceeds from the sale of common stock, net of offering costs | ||||||||
| Proceeds from warrant exercise | ||||||||
| Proceeds from unit purchase option exercise | ||||||||
| Net cash provided by financing activities | ||||||||
| Increase (decrease) in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Taxes | $ | $ | ||||||
| Noncash activities: | ||||||||
| Common stock issued upon note payable and accrued interest conversion | $ | $ | ||||||
| Common stock issued for prepaid services | $ | $ | ||||||
| Cashless exercise of warrants | $ | $ | ||||||
| Cashless exercise of unit purchase options | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 7 |
INVO BIOSCIENCE, INC.
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
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.
| 8 |
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
| 9 |
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
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. |
| 10 |
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 $
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.
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.
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.
Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net loss (numerator) | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted weighted-average number of common shares outstanding (denominator) | ||||||||
| Basic and diluted net loss per common share | ( | ) | ( | ) | ||||
| As of March 31, | ||||||||
| 2022 | 2021 | |||||||
| Options | ||||||||
| Convertible notes and interest | ||||||||
| Unit purchase options and warrants | ||||||||
| Total | ||||||||
| 11 |
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 $
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 $
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 $
| 12 |
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
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 $
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
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 $
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 $
| 13 |
The following table summarizes our investments in unconsolidated VIEs:
| Carrying Value as of | ||||||||||||||
| Location | Percentage Ownership | March 31, 2022 | December 31, 2021 | |||||||||||
| HRCFG INVO, LLC | Alabama, United States | % | $ | |||||||||||
| Positib Fertility, S.A. de C.V. | Mexico | % | ||||||||||||
| Total investment in unconsolidated VIEs | $ | |||||||||||||
Earnings from investments in unconsolidated VIEs were as follows:
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| HRCFG INVO, LLC | $ | ( | ) | |||||
| Positib Fertility, S.A. de C.V. | ( | ) | ||||||
| Total earnings from unconsolidated VIEs | $ | ( | ) | |||||
The following tables summarize the combined unaudited financial information of our investments in unconsolidated VIEs:
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Statements of operations: | ||||||||
| Operating revenue | $ | |||||||
| Operating expenses | ( | ) | ||||||
| Net loss | $ | ( | ) | |||||
| March 31, 2022 | December 31, 2021 | |||||||
| Balance sheets: | ||||||||
| Current assets | $ | |||||||
| Long-term assets | ||||||||
| Current liabilities | ( | ) | ( | ) | ||||
| Long-term liabilities | ( | ) | ( | ) | ||||
| Net assets | $ | |||||||
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:
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Bloom Invo, LLC | ||||||||
| INVOcell revenue | $ | |||||||
| Unconsolidated VIEs | ||||||||
| INVOcell revenue | $ | |||||||
The Company had balances with VIEs as follows:
| March 31, 2022 | December 31, 2021 | |||||||
| Bloom Invo, LLC | ||||||||
| Accounts receivable | $ | |||||||
| Notes payable | ||||||||
| Unconsolidated VIEs | ||||||||
| Accounts receivable | $ | |||||||
| 14 |
Note 5 – Inventory
Components of inventory are:
| March 31, 2022 | December 31, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Total inventory | $ | $ | ||||||
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:
| Estimated Useful Life | ||
| Manufacturing equipment | ||
| Medical equipment | ||
| Office equipment |
| March 31, 2022 | December 31, 2021 | |||||||
| Manufacturing equipment | $ | $ | ||||||
| Medical equipment | ||||||||
| Office equipment | ||||||||
| Leasehold improvements | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total equipment, net | $ | $ | ||||||
During
the three months ended March 31, 2022, and 2021, the Company recorded depreciation expense of $
Note 7 – Intangible Assets
Components of intangible assets are as follows:
| March 31, 2022 | December 31, 2021 | |||||||
| Trademarks | $ | $ | ||||||
| Patents | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Total patent costs, net | $ | $ | ||||||
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 $
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.
| 15 |
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:
| Lease component | Balance sheet classification | March 31, 2022 | ||||
| Assets | ||||||
| ROU assets – operating lease | Other assets | $ | ||||
| Total ROU assets | $ | |||||
| Liabilities | ||||||
| Current operating lease liability | Current liabilities | $ | ||||
| Long-term operating lease liability | Other liabilities | |||||
| Total lease liabilities | $ | |||||
Future minimum lease payments as of March 31, 2022 were as follows:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 and beyond | ||||
| Total future minimum lease payments | $ | |||
| Less: Interest | ( |
) | ||
| Total operating lease liabilities | $ |
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 $
Interest
on the 2020 Convertible Notes accrued at a rate of
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 $
As of March 31, 2022, all 2020 Convertible Notes had either converted or been repaid by the Company.
| 16 |
Interest
expense on the 2020 Convertible Notes was $
Amortization
of options discount on the 2020 Convertible Notes was $
Amortization
of warrant discount on the 2020 Convertible Notes was $
Amortization
of beneficial conversion feature on the 2020 Convertible Notes was $
Amortization
of issuance costs on the 2020 Convertible Notes was $
Paycheck Protection Program
On
July 1, 2020, the Company received a loan in the principal amount of $
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 $
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
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
The consolidated financial statements presented reflect the reverse splits.
| 17 |
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 shares of common stock, at a public offering price of $ per share. The initial closing
of the Offering for 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 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 $
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
shares of its common stock, in a registered direct offering (the “Direct Offering”) for aggregate gross proceeds
of $
Three Months Ended March 31, 2022
During
the first three months of 2022, the Company issued shares of common stock to employees and directors and shares of common
stock to consultants with a fair value of $
During
the first three months of 2022, the Company issued shares of its common stock to consultants
in consideration of services rendered with a fair value of $
In
January 2022, the Company issued shares of its common stock for proceeds of $
During the first three months of
2022, the Company granted
restricted stock units to employees that will vest
at six months from grant date and
at twelve months from grant date. The Company recognized stock based compensation expense of $
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 shares. In January 2022, the number of available shares increased by shares to a total of .
Options granted under the 2019 Plan generally have a life of to 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 period.
| 18 |
| Number of Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding as of December 31, 2021 | $ | $ | ||||||||||
| Granted | - | |||||||||||
| Exercised | - | |||||||||||
| Canceled | - | |||||||||||
| Balance as of March 31, 2022 | $ | |||||||||||
| Exercisable as of March 31, 2022 | ||||||||||||
| Three Months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Risk-free interest rate range | % to | % | % to | % | ||||
| Expected life of option-years | to | to | ||||||
| Expected stock price volatility | to | % | % | |||||
| 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.
| Total Intrinsic Value of Options Exercised | Total Fair Value of Options Vested | |||||||
| Year ended December 31, 2021 | $ | $ | ||||||
| Three months ended March 31, 2022 | $ | $ | ||||||
For the three months ended March 31, 2021, the weighted average grant date fair value of options granted was $ 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 years.
Restricted Stock and Restricted Stock Units
In the three months ended March 31, 2022, the Company granted 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 from the date of grant.
Number of Unvested Shares | Weighted Average Grant Date | Aggregate Value of Shares | ||||||||||
| Balance as of December 31, 2021 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Vested | ( | ) | ( | ) | ||||||||
| Forfeitures | ||||||||||||
| Balance as of March 31, 2022 | $ | $ | ||||||||||
| 19 |
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
In
connection with the issuance of the 2020 Convertible Notes, the Company agreed to issue the placement agent and the selling agent -year
warrants to purchase
A Monte Carlo model was used because the investor unit purchase options and warrants contain fundamental transaction payouts and reset events that cannot be modeled with a Black Scholes model.
The fair value of the unit purchase options and warrants issued to the convertible debt holders is estimated as of the issue date using a Monte Carlo model with the following assumptions:
| Risk-free interest rate range | | % | ||
| Stock price | $ | - $ | ||
| Expected life of warrants and unit purchase options (years) | ||||
| Expected stock price volatility | % | |||
| 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 unit purchase options and warrants. Expected volatility is based upon the historical volatility of the Company’s common stock over the period commensurate with the expected term of the related instrument. The unit purchase options and warrants are valued assuming projected reset events adjusting the exercise price and a forced exercise upon a projected fundamental transaction by management. The unit purchase options and warrants early exercise are modeled assuming registration after 180 days. The Company does not currently pay dividends on its common stock, nor does it expect to in the foreseeable future.
The following table sets forth the activity of unit purchase options:
| Number of Unit Purchase Options | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding as of December 31, 2021 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Canceled | ||||||||||||
| Balance as of March 31, 2022 | $ | $ | ||||||||||
The following table sets forth the activity of warrants:
| Number of Warrants | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding as of December 31, 2021 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Canceled | ||||||||||||
| Balance as of March 31, 2022 | $ | $ | ||||||||||
| 20 |
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 $
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”).
| 21 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements made in this Quarterly Report on Form 10-Q, including without limitation this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than statements of historical information, are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may sometimes be identified by such words as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue” or similar words. We believe that it is important to communicate our future expectations to investors. However, these forward-looking statements involve many risks and uncertainties including those referred to herein and in our Annual Report on Form 10-K for the year ended December 31, 2021. Our actual results could differ materially from those indicated in such forward-looking statements as a result of certain factors. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
We are a 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. Our primary mission is to implement new medical technologies aimed at increasing the availability of affordable, high-quality, patient-centered fertility care. Our 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”). Our commercialization strategy is focused on the opening of dedicated “INVO Centers” offering the INVOcell and IVC procedure (with three centers in North America now operational), in addition to continuing to distribute and sell our technology solution into existing fertility clinics.
Unlike conventional infertility treatments such as IVF where the oocytes and sperm develop into embryos in an expensive laboratory incubator, the INVOcell allows fertilization and early embryo development to take place in the woman’s body. This allows for many benefits in the IVC procedure, including:
| ● | Eliminates expensive and time-consuming lab equipment and corresponding procedures, allowing clinics and doctors to increase patient capacity and reduce costs; | |
| ● | Provides a natural, stable incubation environment; | |
| ● | Offers a more personal, intimate experience for patients; and | |
| ● | Reduces the risk of errors and wrong embryo transfers. |
In both current utilization of the INVOcell, and in clinical studies, the IVC procedure has demonstrated equivalent pregnancy success and live birth rates to those of IVF.
| 22 |
Operations
We operate with a core internal team and outsource certain operational functions in order to help advance our efforts as well as reduce fixed internal overhead needs and costs, as well as in-house capital equipment requirements. Our most critical management and leadership functions are carried out by our core management team. We have contracted out the manufacturing, assembly, packaging, labeling, and sterilization of the device to a medical manufacturing company and a sterilization specialist to perform the gamma sterilization process.
To date, we have completed a series of important steps in the successful development and manufacturing of the INVOcell:
| ● | Manufacturing: We are ISO 13485:2016 certified and manage all aspects of production and manufacturing with qualified suppliers. Our key suppliers have been steadfast partners since our company first began and can provide us with virtually an unlimited capability to support our growth objectives, with all manufacturing performed in the New England region of the U.S.. |
| ● | Raw Materials: All raw materials utilized for the INVOcell are medical grade and commonly used in medical devices (e.g., medical grade silicone, medical grade plastic). Our principal molded component suppliers are well-established companies in the molding industry and are either ISO 13485 or ISO 9001 certified. The molded components are supplied to our contract manufacturer for assembly and packaging of the INVOcell system. The contract manufacturer is ISO 13485 certified, and U.S. Food & Drug Administration (“FDA”) registered. |
| ● | CE Mark: INVO received the CE Mark in October 2019. The CE Mark permits the sale of devices in Europe, Australia and other countries that recognize the CE Mark, subject to local registration requirements. |
| ● | US Marketing Clearance: the safety and efficacy of the INVOcell was demonstrated and cleared for marketing and use by the FDA in November 2015. |
| ● | Clinical: We are actively seeking to expand the labeling on our device, the indication for use, to cover a day 5 incubation period, in addition to the currently approved use of day 3 incubation. This may be accomplished with a prospective clinical study, which we previously designed and had the Institutional Review Board (“IRB”) approve to evaluate the modified INVOcell system for effectiveness of achieving fertilization, implantation, embryo development, clinical pregnancy, and live birth after day 5 continuous vaginal incubation (clinicaltrials.gov identifier: NCT04246268). The objective of this study would be to assess the efficacy, safety, comfort and retention of the INVOcell with the retention device and demonstrate superior efficacy following day 5 vaginal incubation as compared to the current day 3 vaginal incubation indication. As a result of the COVID-19 pandemic, we elected to place the trial on hold, but expect to move it forward with some improved design parameters. In the meantime, and as a result of available retrospective, real-market usage (day 5) data, we initiated an effort to pursue a 510(k) filing utilizing retrospective data as a separate effort to achieve our label enhancement. This retrospective effort remains ongoing and active in 2022. |
| 23 |
Market Opportunity
The global ART marketplace is a large, multi-billion industry growing at a strong pace in most parts of the world as increased infertility rates, increased patient awareness, acceptance of treatment options, and improving financial incentives such as insurance and government assistance continue to drive demand. According to the European Society for Human Reproduction 2020 ART Fact Sheet, one in six couples worldwide experience infertility problems. Additionally, the worldwide market remains vastly underserved as a high percentage of patients in need of care continue to go untreated each year for many reasons, but key among them are capacity constraints and cost barriers. While there have been large increases in the use of IVF, there are still only approximately 2.6 million ART cycles, including IVF, IUI and other fertility treatments, performed globally each year, producing around 500,000 babies. This amounts to less than 3% of the infertile couples worldwide being treated and only 1% having a child through IVF. The industry remains capacity constrained which creates challenges in providing access to care to the volume of patients in need. A survey by “Resolve: The National Infertility Association,” indicates the two main reasons couples do not use IVF is cost and geographical availability (and/or capacity).
In the United States, infertility, according to the American Society of Reproductive Medicine (2017), affects an estimated 10%-15% of the couples of childbearing-age. According to the Centers for Disease Control (“CDC”), there are approximately 6.7 million women with impaired fertility. Based on preliminary 2020 data from CDC’s National ART Surveillance System, approximately 326,000 IVF cycles were performed at 449 IVF centers, leaving the U.S. with a large, underserved patient population, which is similar to most markets around the world.
Competitive Advantages
We believe that the INVOcell, and the IVC procedure it enables, have the following key advantages:
Lower cost than IVF with equivalent efficacy. The IVC procedure can be offered for less than IVF due to lower cost of supplies, labor, capital equipment and general overhead. The laboratory equipment needed to perform an IVF cycle is expensive and requires ongoing costs as compared to what is required for an IVC cycle. As a result, we also believe INVOcell and the IVC procedure enable a clinic and its laboratory to be more efficient as compared to conventional IVF, and, ultimately, to allow the treatment of more patients with fewer resources.
The IVC procedure is currently being offered at practicing clinics at a range of $5,000 - $11,000 per cycle and from $4,500 to $7,000 at the existing INVO Centers, thereby making it more affordable than conventional IVF (which tends to average $12,000 to $17,000 per cycle or higher).
Improved efficiency providing for greater capacity and improved access to care and geographic availability. In many parts of the world, including the U.S., IVF clinics tend to be concentrated in higher population centers and are often capacity constrained in terms of how many patients a center can treat, since volume is limited by the number of capital-intensive incubators available in IVF clinic labs. With the significant number of untreated patients along with the growing interest and demand for services, the industry remains challenged to provide sufficient access to care and to do so at an economical price. We believe INVOcell and the IVC procedure it enables can play a significant role in helping to address these challenges. According to the 2020 CDC Report, there are approximately 449 IVF centers in the U.S. We estimate that by adopting the INVOcell, IVF clinics can increase fertility cycle volume by up to 30% without adding to personnel, space and/or equipment costs. Our own INVO Centers also address capacity constraints by adding to the overall ART cycle capacity and doing so with comparable efficacy to IVF outcomes as well as at a lower per cycle price. Moreover, we believe that we are uniquely positioned to drive more significant growth in fertility treatment capacity in the future by partnering with existing OB/GYN practices. In the U.S., there are an estimated 5,000 OB/GYN offices, many of which offer fertility services (usually limited to consultation and IUI, but not IVF). Since the IVC procedure requires a much smaller lab facility, less equipment and fewer lab personnel (in comparison to conventional IVF), it could potentially be offered as an extended service in an OB/GYN office. With proper training and a lighter lab infrastructure, the INVOcell could expand the business for these physicians and allow them to treat patients that are unable to afford IVF and provide patients with a more readily accessible, convenient, and cost-effective solution. With our multi-pronged strategy (IVF clinics, INVO Centers and OB/GYN practices), in addition to lowering costs, we believe INVOcell and the IVC procedure can address our industry’s key challenges, capacity and cost, by their ability to expand and decentralize treatment and increase the number of points of care for patients in need. This powerful combination of lower cost and added capacity has the potential to open up access to care for underserved patients around the world.
| 24 |
Greater patient involvement. With the IVC procedure, the patient uses their own body for fertilization, incubation, and early embryo development which creates a greater sense of involvement, comfort, and participation. In some cases, this may also free people from barriers related to due to ethical or religious concerns, or fears of laboratory mix-ups.
Sales and Marketing
Our product commercialization efforts are focused on identifying distributors and partners within targeted geographic regions that we believe can best promote, market and sell the INVOcell and support our efforts to expand access to advanced fertility treatment for the large number of underserved infertile people hoping to have a baby. We believe that the IVC procedure is an effective and affordable treatment option that greatly reduces the need for more expensive IVF lab facilities and allows providers to pass on related savings to patients without compromising efficacy. We have been cleared to sell the INVOcell in the United States since November 2015 after receiving de novo class II clearance from the FDA. Our primary focus has been on establishing INVO Centers to promote the INVOcell and the IVC procedure, selling the INVOcell directly to U.S. fertility clinics, and developing key international market partnerships around the world.
In late 2021, we made substantial progress with our INVO Center strategy by opening three locations – Birmingham, Alabama, Atlanta, Georgia, and Monterrey, Mexico – and remain focused on opening additional locations in the US and abroad to expand access to INVOcell and the IVC procedure.
We anticipate that we will experience quarterly fluctuations in our revenue as we expand the sales of the INVOcell to new markets in the U.S. and globally. We continue to seek partners that will contractually commit to meeting agreeable performance objectives that are consistent with our goals and objectives.
Ferring
On November 12, 2018, we entered into a U.S. Distribution Agreement (the “Ferring Agreement”) with Ferring International Center S.A. (“Ferring”), which closed on January 14, 2019. Pursuant to the Ferring Agreement, among other things, we granted Ferring an exclusive license in the United States to market, promote, distribute, and sell the INVOcell. Ferring was responsible, at its own cost, for all commercialization activities in the United States. We retained a limited exception to the exclusive license granted to Ferring allowing us, subject to certain restrictions, to establish up to five INVO Centers in the United States, which as of March 2, 2021, was amended to seven centers. We retained all commercialization rights for the INVOcell outside of the United States.
On November 2, 2021, Ferring notified us 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. Pursuant to the terms of the Ferring Agreement, upon notice of termination, Ferring was required to use commercially reasonable efforts to transition any customers to us and otherwise facilitate the orderly transition of the distribution from Ferring to us. By its terms, our Supply Agreement with Ferring also terminated on January 31, 2022.
The Ferring license was deemed to be a functional license that provides the counterparty with a “right to access” to our intellectual property during the subscription period and accordingly, revenue is recognized over a period of time, which is generally the subscription period. During the years ended December 31, 2021, and 2020, we recognized $3.6 million and $0.7 million of revenue related to the Ferring license agreement, respectively.
As of December 31, 2021, we 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. The likelihood of Ferring exercising its rights became remote at the time notice of termination was received therefore INVO recognized the full remaining amount of the deferred revenue.
International Distribution Agreements
We have entered into exclusive distribution agreements for a number of international markets. These agreements usually have an initial term with renewal options and require the distributors to meet minimum annual purchases, which vary depending on the market. We are also required to register the product in each market before the distributor can begin importing, a process and timeline that can vary widely depending on the market.
| 25 |
The following table sets forth a list of our current international distribution agreements:
| INVOcell Registration | ||||||||||
| Market | Distribution Partner | Date | Initial Term | Status in Country | ||||||
| Canada | Invaron Pharmaceuticals Inc. | July 2020 | 1-Year | Completed | ||||||
| Mexico (a) | Positib Fertility, S.A. de C.V. | Sept 2020 | TBD** | Completed | ||||||
| Malaysia | iDS Medical Systems | Nov 2020 | 3-year | Completed | ||||||
| Jordan | Biovate | Sept 2019 | 1-year | Completed | ||||||
| Pakistan | Galaxy Pharma | Dec 2020 | 1-year | In process | ||||||
| Thailand | IVF Envimed Co., Ltd. | April 2021 | 1-year | Complete | ||||||
| Sudan | Quality Medicines, Cosmetics & Medical Equipment Import | Sept 2020 | 1-year | In process | ||||||
| Ethiopia | Quality Medicines, Cosmetics & Medical Equipment Import | Sept 2020 | 1-year | In process | ||||||
| Uganda | Quality Medicines, Cosmetics & Medical Equipment Import | Sept 2020 | 1-year | Not required | ||||||
| Nigeria | G-Systems Limited | Sept 2020 | 5-year | Completed | ||||||
| Togolese Republic | INVOSOLUX TOGO | Nov 2019 | 1-year | In process | ||||||
| Iran | Tasnim Behboud | Dec 2020 | 1-year | Complete | ||||||
| Sri Lanka | Alsonic Limited | July 2021 | 1-year | In process |
| (a) | Our Mexico JV. Please note that the registration is temporarily in the name of Proveedora de Equipos y Productos, S.A. de C.V. and will be transferred to Positib Fertility as soon as practicable. |
Investment in Joint Ventures and Partnerships
As part of our commercialization strategy, we entered into a number of joint ventures and partnerships designed to establish new INVO Centers.
The following table sets forth a list of our current joint venture arrangements:
| Affiliate Name | Country | Percent (%) Ownership | ||||
| HRCFG INVO, LLC | United States | 50 | % | |||
| Bloom Invo, LLC | United States | 40 | % | |||
| Positib Fertility, S.A. de C.V. | Mexico | 33 | % | |||
| SNS MURNI INVO Bioscience Malaysia Sendirian Berhad | Malaysia | 50 | % | |||
| Ginekalix INVO Bioscience LLC Skopje | Republic of North Macedonia | 50 | % | |||
The following table sets forth a list of our current partnership arrangements:
| Partner | Country | Partnership Split | ||||
| Lyfe Medical | United States | 40 | % | |||
Alabama JV Agreement
On March 10, 2021, our wholly owned subsidiary, INVO Centers, LLC (“INVO CTR”), entered into a limited liability company agreement with HRCFG, LLC (“HRCFG”) to form a joint venture for the purpose of establishing an INVO Center in Birmingham, Alabama. The name of the joint venture LLC is HRCFG INVO, LLC (the “Alabama JV”). The responsibilities of HRCFG’s principals include providing clinical practice expertise, performing recruitment functions, providing all necessary training, and providing day-to-day management of the clinic. The responsibilities of INVO CTR include providing certain funding to the Alabama JV and providing access to and being the exclusive provider of the INVOcell to the Alabama JV. INVO CTR will also perform all required, industry specific compliance and accreditation functions, and product documentation for product registration.
The Alabama JV opened to patients on August 9, 2021, and initial treatment cycles commenced in September 2021.
The Alabama JV is accounted for using the equity method in our financial statements. As of March 31, 2022 we 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 we recognized a loss from equity method investment of $0.05 million.
| 26 |
Georgia JV Agreement
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 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 will also perform all required, industry specific compliance and accreditation functions, and product documentation for product registration.
The Georgia JV opened to patients on September 7, 2021, and commenced initial treatment cycles in November 2021.
The results of the Georgia JV are consolidated in our financial statements. As of March 31, 2022, INVO 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 months ended March 31, 2022, the Georgia JV recorded a net loss of $0.2 million. Noncontrolling interest in the Georgia JV was $0. See Note 3 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information on the Georgia JV.
| 27 |
Mexico JV Agreement
Effective September 24, 2020, INVO CTR entered into a Pre-Incorporation and Shareholders Agreement with Francisco Arredondo, MD PLLC (“Arredondo”) and Security Health LLC, a Texas limited liability company (“Ramirez”, and together with INVO CTR and Arredondo, the “Shareholders”) under which the Shareholders will commercialize the 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 will operate in Monterrey, Nuevo Leon, Mexico and any other cities and places in Mexico as approved by the Mexico JV’s board of directors and Shareholders. In addition, the Shareholders agreed that the Mexico JV will be our exclusive distributor in Mexico. The Shareholders also agreed not to compete directly or indirectly with the Mexico JV in Mexico.
The Mexico JV opened to patients on November 1, 2021, and commenced initial treatment cycles beginning in January 2022.
The Mexico JV is accounted for using the equity method in our financial statements. As of March 31, 2022, INVO 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 we recognized a loss from equity method investment of $0.02 million.
Malaysia JV Agreement
On November 23, 2020, we entered into a joint venture agreement with SNS Murni SDN BHD (“SNS Murni”), a company incorporated in Malaysia, to establish an exclusive joint venture in Malaysia to (i) introduce, promote and market technologies related to the INVOcell and IVC Procedure in dedicated government-owned fertility clinics in Malaysia, and (ii) establish INVO Centers in Malaysia. The joint venture is co-managed and owned 50% by each of INVO Bioscience and SNS Murni. As of March 31, 2022, no joint venture entity had been formed.
North Macedonia JV Agreement
On November 23, 2020, we entered into a joint venture agreement with Ginekaliks Dooel (“Ginekaliks”), a limited liability company incorporated in the Republic of North Macedonia, to establish an exclusive joint venture to (i) commercialize, introduce, promote and market technologies related to the INVOcell and IVC procedure in the Republic of North Macedonia, and (ii) establish an INVO Center. The joint venture will be co-managed and owned 50% by each of INVO and Ginekaliks. As of March 31, 2022, no joint venture entity had been formed.
Lyfe Medical Center I, LLC Partnership Agreement
On April 9, 2021, we entered into a partnership agreement (the “Lyfe Agreement”) with Lyfe Medical Center I, LLC (“Lyfe”) in connection with Lyfe’s intention to establish an INVO Center in the Bay Area of California (the “Bay Area Clinic”). Pursuant to the Lyfe Agreement, we will provide embryology laboratory services in connection with the IVC procedure and other fertility-related treatments (the “Lab Services”) to be provided by Lyfe to its patients at the Bay Area Clinic. Under the terms of the Lyfe Agreement, we will receive 40% of the net income received by the Bay Area Clinic for the performance of the Lab Services. As of March 31, 2022, the Bay Area Clinic was not yet operational.
| 28 |
Results of Operations
During the first quarter of 2022, our fully operational INVO Centers in Birmingham, Alabama, Atlanta, Georgia, and Monterrey, Mexico continued to make progress toward building local market awareness and treating patients. We also continued to expand on our similar marketing efforts to build awareness for the INVOcell and IVC procedure and to support the efforts of both the INVO Centers and our distribution partners around the world. During the quarter, we also announced plans to open INVO Centers in the Tampa, Florida and Kansas City, Missouri areas, and are working towards opening additional INVO Centers in key domestic and international markets. We believe we have initially identified more than 20 markets in the U.S. alone as excellent potential locations for an INVO Center.
With respect to our distribution efforts, we re-assumed control of the U.S. market upon the termination of the Ferring Agreement in the first quarter. We are now selling directly ourselves (rather than through a distributor) to the existing, established fertility clinics in the U.S. market. During the quarter, we received several orders from existing IVF clinics that had previously trained on implementing the IVC procedure within their practices. To support these efforts, we added sales resources during the first quarter and believe we will experience growing revenue from these activities going forward. This revenue is also anticipated to be more consistent from quarter to quarter, as opposed to the sporadic orders placed by Ferring over the past several years.
From a market strategy perspective, our commercialization efforts will continue to focus on the substantial, underserved patient population and on expanding access to advanced fertility treatments. We believe our solutions can help address the key challenges of affordability and capacity to provide care to the vast number of patients that go untreated every year. This represents the major opportunity for INVOcell and the IVC procedure it enables. Despite the COVID pandemic, the fertility industry continues to expand, and we believe our growing volume of partners (both distributors and JV INVO Centers) affords us a strong forward-looking outlook. We believe our INVO Center approach adds much needed capacity and affordability and aligns with our key mission to open access to care to the underserved.
The ART market also continues to benefit from a number of industry tailwinds, including 1) the large under-served potential patient population, 2) increasing infertility rates around the world 3) growing awareness and education of fertility treatment options, 4) a growing acceptance of fertility treatment, 5) improvements in procedure techniques and hence improvements in pregnancy success rates and 6) generally improving insurance (private and public) reimbursement trends.
Three months ended March 31, 2022, compared to the three months ended March 31, 2021
Revenue
Revenue for the three months ended March 31, 2022, was approximately $0.2 million compared to approximately $0.7 million for the three months ended March 31, 2021. Of the $0.2 million in revenue for the first quarter of 2022, $0.1 was related to clinic revenue from the consolidated Atlanta JV. The decrease of approximately $0.5 million, or approximately 76%, was related to a decrease in product sales versus a one-time bulk order from Ferring in the previous year that was made to meet calendar year 2020 minimum purchase commitments in the Ferring Agreement.
Gross Profit
Gross profit for the three months ended March 31, 2022, was approximately $0.1 million compared to approximately $0.6 million for the three months ended March 31, 2021. Gross margins were approximately 60% and 91% for the three months ended March 31, 2022, and 2021, respectively. The decrease in gross margin reflects the lack of Ferring license revenue in the first quarter of 2022 compared to the same period in 2021, as well as the inclusion of consolidated INVO Center cost of goods sold expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March 31, 2022, were approximately $2.6 million compared to approximately $2.1 million for the three months ended March 31, 2021. The increase of approximately $0.5 million, or approximately 27%, was primarily the result of approximately $0.2 million in increased expenses related to the operations of the consolidated Atlanta JV, approximately $0.2 million in increased personnel expenses, and $0.1 million in marketing activities. We also incurred approximately $0.7 million of non-cash, stock-based compensation expense in the period, compared to $0.6 million for the same period in the prior year.
Research and Development Expenses
We began to fund additional research and development (“R&D”) efforts in 2020 as part of our 5-day label expansion efforts. R&D expenses were approximately $0.1 million and $0.07 million for the three months ended March 31, 2022, and March 31, 2021, respectively.
| 29 |
Loss from equity investment
Loss from equity investments for the three months ended March 31, 2022, was approximately $0.07 million compared to $0 for the three months ended March 31, 2021. The increase in loss is due to the investment in Alabama and Mexico JVs becoming operational in the second half of 2021.
Interest Expense and Financing Fees
Interest expense and financing fees were approximately $0.1 thousand for the three months ended March 31, 2022, compared to approximately $0.9 million for the three months ended March 31, 2021.
Liquidity and Capital Resources
For the three months ended March 31, 2022, and 2021, we had net losses of approximately $2.8 million and $2.5 million, respectively, and 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. We had net working capital of approximately $3.3 million as of March 31, 2022, compared to approximately $5.1 million as of December 31, 2021. As of March 31, 2022, our stockholder’s equity was approximately $5.6 million compared to approximately $7.3 million as of December 31, 2021.
We have been dependent on raising capital from debt and equity financings to meet our needs for cash to fund our operating expenses and investing activities. During the first three months of 2021, we received approximately $0.4 million of proceeds from unit purchase option and warrant exercises. During the first three months of 2022, we received proceeds of approximately $0.3 million for the sale of our common stock. Our current plan includes opening additional INVO Centers over the next 12 months. Until we can generate a sufficient amount of cash from operations and to the extent additional funds are necessary to meet our longer-term liquidity needs and to execute our business strategy, we will need to raise additional funding, as 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 our audited financial statements for the year ended December 31, 2021, were prepared under the assumption that we would continue operations as a going concern, the report of our independent registered public accounting firm that accompanies our financial statements for the year ended December 31, 2021, contains a going concern qualification in which such firm expressed substantial doubt about our ability to continue as a going concern, based on the financial statements at that time. Specifically, as noted above, we have incurred significant operating losses and we expect to continue to incur significant expenses and operating losses as we continue 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 our financial condition. If we cannot continue as a going concern, our stockholders would likely lose most or all of their investment in us.
| 30 |
Cash Flows
The following table shows a summary of our cash flows for the three months ended March 31:
| 2022 | 2021 | |||||||
| Cash (used in) provided by: | ||||||||
| Operating activities | (2,078,119 | ) | (1,735,384 | ) | ||||
| Investing activities | (81,890 | ) | (308,980 | ) | ||||
| Financing activities | 315,000 | 369,840 | ||||||
As of March 31, 2022, we had approximately $3.8 million in cash compared to approximately $8.4 million as of March 31, 2021. Net cash used in operating activities for the first three months of 2022, was approximately $2.1 million, compared to approximately $1.7 million for the same period in 2021. The increase in net cash used in operations was primarily due to the increase in net loss.
During the three months ended March 31, 2022, cash used in investing activities of $0.1 million was primarily related to a loss on equity method for the JVs, payments to acquire property, plants, and equipment, as well as additional trademarks. During the three months ended March 31, 2021, cash used in investing activities of approximately $0.3 million was related to notes receivable as well as new molds and trademarks.
During the three months ended March 31, 2022, cash provided by financing activities of approximately $0.3 million was primarily related to the sale of common stock, net of offering costs. During the three months ended March 31, 2021, cash provided by financing activities of approximately $0.4 million related to the exercising of warrants and unit purchase stock options.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition presented in this section is based upon our audited consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. During the preparation of the financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, our results, which allows us to form a basis for making judgments on the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates based on variance with our assumptions and conditions. A summary of significant accounting policies is included below. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.
| 31 |
See Note 1 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for a summary of significant accounting policies and the effect on our financial statements.
Stock Based Compensation
We account for stock-based compensation under the provisions of ASC 718-10 Share-Based Payment (formerly SFAS 123R). This statement requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period in which the employee is required to provide service or performance goals in exchange for the award, which is usually immediate but sometimes over a vesting period. Warrants granted to non-employees are recorded as an expense over the requisite service period based on the grant date and the estimated fair value of the grant, which is determined using the Black-Scholes option pricing model.
Revenue Recognition
We recognize revenue on arrangements in accordance with ASC 606, Revenue from Contracts with Customers. The core principle of ASC 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services ASC 606 requires companies to assess their contracts to determine the timing and amount of revenue to recognize under the new revenue standard. The model has a five-step approach:
| 1. | Identify the contract with the customer. |
| 2. | Identify the performance obligations in the contract. |
| 3. | Determine the total transaction price. |
| 4. | Allocate the total transaction price to each performance obligation in the contract. |
| 5. | Recognize as revenue when (or as) each performance obligation is satisfied. |
Variable Interest Entities
The Company’s consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and variable interest entities (“VIE”), where the Company is the primary beneficiary under the provisions of 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.
Equity Method Investments
Investments in unconsolidated affiliates in which we exert significant influence but do 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. Our share of the profits and losses from these investments is reported in loss from equity method investment in the accompanying consolidated statements of operations. Management 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.
| 32 |
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Not applicable.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”), and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2022, the end of the fiscal period covered by this Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2022.
(b) Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 33 |
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please see Note 14 to the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021, for a description of pending litigation.
Item 1A. Risk Factors
You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed on March 31, 2022. Except as set forth below, there have been no material changes from the factors disclosed in our 2020 Annual Report on Form 10-K, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| 1. | During the first three months of 2022, we issued 3,500 shares of our 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. We did not receive any cash proceeds from this issuance. | |
| 2. | See out Current Report dated January 31, 2022 and filed with the Securities and Exchange Commission on February 2, 2022. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
On May 13, 2022, we entered into an Exclusive Distribution Agreement (the “Onesky Agreement”) with Onesky Holdings Limited (“Onesky”), pursuant to which, among other things, we 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 effective 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. We granted Onesky an exclusive, revocable and royalty free license to use our trademarks in the Territory in connection with the promotion, distribution, and sale of the INVOcell.
The foregoing summary of the terms of the Distribution Agreement does not purport to be complete and is qualified in its entirety by reference to the Distribution Agreement, filed as an exhibit to this Quarterly Report on Form 10-Q.
Item 6. Exhibits
10.1*# |
Exclusive Distribution Agreement |
| 31.1* | Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2* | Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32** | Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS* | Inline XBRL Instance Document |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (the cover page of the Registrant’s Quartley Report on Form 10-Q for the quarter ended March 31, 2022 is embedded within the Inline XBRL document) |
| * Filed herewith. | |
| ** Furnished herewith. | |
# Certain confidential portions of this exhibit have been redacted from the publicly filed document because such portions are (i) not material and (ii) would be competitively harmful if publicly disclosed. |
| 34 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 16, 2022.
| INVO Bioscience, Inc. | ||
| Date: May 16, 2022 | By: | /s/ Steven Shum |
| Steven Shum, Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: May 16, 2022 | By: | /s/ Andrea Goren |
| Andrea Goren, Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| 35 |