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: None.
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
| The
|
As of November 15, 2021, the registrant had shares of common stock outstanding.
INVO BIOSCIENCE, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021
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 30, 2021 (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)
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Capitalized patents, net | ||||||||
| Lease right of use | ||||||||
| Trademarks | ||||||||
| Notes receivable from joint ventures | - | |||||||
| Other assets | - | |||||||
| Investment in joint ventures | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities, including related parties | $ | $ | ||||||
| Accrued compensation – related party | ||||||||
| Deferred revenue, current portion | ||||||||
| Lease liability, current portion | ||||||||
| Notes payable – Payroll Protection Program | - | |||||||
| Convertible notes, net | ||||||||
| Income taxes payable | - | |||||||
| Total current liabilities | ||||||||
| Lease liability, net of current portion | ||||||||
| Deferred revenue, net of current portion | ||||||||
| Deferred tax liability | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity | ||||||||
| Common Stock, $ par value; shares authorized; and issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Noncontrolling interest | ( | ) | - | |||||
| 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 | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| 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 | ( | ) | - | ( | ) | - | ||||||||||
| Gain on extinguishment of debt | - | - | - | |||||||||||||
| Interest income | ( | ) | - | - | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign currency exchange loss | ( | ) | - | ( | ) | - | ||||||||||
| Total other expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to noncontrolling interest | ( | ) | - | ( | ) | - | ||||||||||
| Net loss attributable to INVO Bioscience, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 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 (DEFICIENCY)
(UNAUDITED)
| Common Stock | Additional Paid-in | Accumulated | Noncontrolling | |||||||||||||||||||||
Shares | Amount | Capital | Deficit | Interest | Total | |||||||||||||||||||
| Balances, December 31, 2019 | $ | $ | $ | ( | ) | - | $ | ( | ) | |||||||||||||||
| Common stock issued to directors and employees | - | - | ||||||||||||||||||||||
| Common stock issued to service providers | - | - | ||||||||||||||||||||||
| Stock options issued to employees | - | - | - | - | ||||||||||||||||||||
| Discount on convertible notes payables | - | - | - | - | ||||||||||||||||||||
| Rounding shares as a result of stock split | - | - | - | - | - | |||||||||||||||||||
| Stock issuance costs | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Balances, September 30, 2020 | $ | $ | $ | ( | ) | - | $ | ( | ) | |||||||||||||||
| Balances, December 31, 2020 | $ | $ | $ | ( | ) | - | $ | |||||||||||||||||
| Common stock issued to directors and employees | - | - | ||||||||||||||||||||||
| Common stock issued for services | - | - | ||||||||||||||||||||||
| 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 attributable to noncontrolling interest | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||
| Net loss attributable to INVO Bioscience, Inc. | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Balances, September 30, 2021 | $ | $ | $ | ( | ) | ( | ) | $ | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 6 |
INVO BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Nine Months | ||||||||
| Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| 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 | ||||||||
| Gain on extinguishment of debt | ( | ) | - | |||||
| 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 notes payable | - | |||||||
| Proceeds from notes payable | - | |||||||
| Proceeds from warrant exercise | - | |||||||
| Proceeds from unit purchase option exercise | - | |||||||
| Principal payment on notes payable – related parties | - | ( | ) | |||||
| Principal payment on notes payable | - | ( | ) | |||||
| Payment of stock issuance expenses | - | ( | ) | |||||
| 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 | $ | $ | ||||||
| Initial ROU asset and lease liability | $ | $ | ||||||
| Fair value of options issued for debt | $ | $ | ||||||
| Fair value of warrants issued with debt | $ | $ | ||||||
| Fair value of warrants issued related to debt placement | $ | $ | ||||||
| Beneficial conversion feature on convertible notes | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 7 |
INVO BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(UNAUDITED)
Note 1 – Description of Business
INVO Bioscience, Inc. (“INVO” or the “Company”) is a medical device company focused on the Assisted Reproductive Technology (“ART”) marketplace. The primary focus is the manufacture and sale of the INVOcell device and the INVO technology to provide an alternative infertility treatment option for couples. The Company’s patented device, the INVOcell, is the first intravaginal culture (“IVC”) system in the world used for the natural in vivo incubation of eggs and sperm during fertilization and early embryo development (the “INVO Procedure”). INVOcell was granted clearance in the United States by the U.S. Food & Drug Administration (“FDA”) in November 2015, received the CE mark in October 2019, and is now positioned to help provide millions of infertile couples across the globe access to a new infertility treatment option. The Company believes this novel device and procedure provides a more natural, safe, effective, efficient, and economical fertility treatment compared to current infertility treatments, including in vitro fertilization (“IVF”) and intrauterine insemination (“IUI”). Unlike conventional infertility treatments such as IVF where the eggs and sperm develop into embryos in a laboratory incubator, the INVOcell utilizes the women’s vaginal cavity as an incubator to support a more natural fertilization and embryo development environment. This novel device promotes in vivo conception and early embryo development.
In both current utilization of the INVOcell and in clinical studies, the INVO Procedure has proven to have equivalent pregnancy success and live birth rates as the traditional assisted reproductive technique, IVF. Additionally, the Company believes there are emotional benefits of the mother’s participation in the fertilization and early embryo development by vaginal incubation compared to that of conventional IVF treatment.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated balance sheets as of September 30, 2021, and December 31, 2020, the consolidated statements of operations for the three and nine months ended September 30, 2021, and 2020 and stockholders’ equity (deficiency) and consolidated statement of cash flows for the nine months ended September 30, 2021, and 2020 of the Company, and the related information contained in these notes have been prepared by management and are unaudited. In the opinion of management, all adjustments (which include normal recurring and nonrecurring items) necessary to present fairly the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles (“GAAP”) for the periods presented have been made. Interim operating results are not necessarily indicative of operating results for a full year.
The accompanying consolidated financial statements present on a consolidated basis the accounts of the Company and its wholly owned subsidiaries and controlled affiliates. The Company presents noncontrolling interest within the equity section of its consolidated balance sheets and the amount of consolidated net income (loss) that is attributable to the Company and to the noncontrolling interest in its consolidated statement of operations. All significant intercompany accounts and transactions have been eliminated in consolidation.
The Company uses the equity method of accounting when it owns an interest in an entity whereby it can exert significant influence over but cannot control the entity’s operations.
The preparation of the Company’s unaudited consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Certain information and note disclosures normally included in the Company’s annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 10-K.
The Company considers events or transactions that have occurred after the unaudited consolidated balance sheet date of September 30, 2021, but prior to the filing of the unaudited consolidated financial statements with the SEC in this Quarterly Report on Form 10-Q, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure, as applicable. Subsequent events have been evaluated through the date of the filing of this Quarterly Report on Form 10-Q.
| 8 |
Business Segments
The Company operates in one segment and therefore segment information is not presented.
Variable Interest Entities
The Company’s consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and variable interest entities (“VIE”), where the Company is the primary beneficiary under the provisions of ASC 810, Consolidation (“ASC 810”). A VIE must be consolidated by its primary beneficiary when, along with its affiliates and agents, the primary beneficiary has both: (i) the power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) the obligation to absorb losses or the right to receive the benefits of the VIE that could potentially be significant to the VIE. The Company reconsiders whether an entity is still a VIE only upon certain triggering events and continually assesses its consolidated VIEs to determine if it continues to be the primary beneficiary. See “Note 3 – Joint Ventures” for additional information on the Company’s VIEs.
Noncontrolling Interests
The noncontrolling interest in an affiliate is presented within total equity in the Company’s consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income (loss) attributable to INVO in its consolidated statements of operations. The Company’s earnings per share is calculated based on net income (loss) attributable to INVO’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.
Equity Method Investments
Investments in unconsolidated affiliates in which the Company exerts significant influence but does not control or otherwise consolidate are accounted for using the equity method. Equity method investments are initially recorded at cost. These investments are included in investment in joint ventures in the accompanying consolidated balance sheets. The Company’s share of the profits and losses from these investments is reported in loss from equity method joint venture in the accompanying consolidated statements of operations. The Company monitors its investments for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the investees and records reductions in carrying values when necessary.
Cash and Cash Equivalents
For financial statement presentation purposes, the Company considers time deposits, certificates of deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. At times, cash and cash equivalents balances exceed amounts insured by the Federal Deposit Insurance Corporation.
Inventory
Inventories consist of raw materials, work in process and finished goods and are stated at the lower of cost or net realizable value, using the first-in, first-out method as a cost flow method.
Property and Equipment
The
Company records property and equipment at cost. Property and equipment is depreciated using the straight-line method over the estimated
economic lives of the assets, which are from
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
Revenue Recognition
The Company recognizes revenue on arrangements in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services ASC 606 requires companies to assess their contracts to determine the timing and amount of revenue to recognize under the new revenue standard. The model has a five-step approach:
| 1. | Identify the contract with the customer. |
| 2. | Identify the performance obligations in the contract. |
| 3. | Determine the total transaction price. |
| 4. | Allocate the total transaction price to each performance obligation in the contract. |
| 5. | Recognize as revenue when (or as) each performance obligation is satisfied. |
| 9 |
Revenues generated from the sale of INVOcell®, are typically recognized at the time the product is shipped, at which time the title passes to the customer, and there are no further performance obligations.
On November 12, 2018, the Company entered into a U.S. Distribution Agreement (the “Ferring Agreement”) with Ferring International Center S.A. (“Ferring”), pursuant to which it granted Ferring an exclusive license in the United States market only, with rights to sublicense under patents related to our proprietary intravaginal culture device (INVOcell™), together with the retention device and any other applicable accessories (collectively, the “Licensed Product”) to market, promote, distribute and sell the Licensed Product with respect to all therapeutic, prophylactic and diagnostic uses of medical devices or pharmaceutical products involving reproductive technology (including infertility treatment) in humans.
The
Ferring license was deemed to be a functional license that provides a customer with a “right to access” to the Company’s
intellectual property during the subscription period and accordingly, under ASC 606-10-55-60 revenue is recognized over a period of time,
which is generally the subscription period. The initial upfront payment of $
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 and nine months ended September 30, 2021, and 2020, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net loss attributable to INVO Bioscience common shareholders (numerator) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted weighted-average number of common shares outstanding (denominator) | ||||||||||||||||
| Basic and diluted net loss per common share | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| As of September 30, | ||||||||
| 2021 | 2020 | |||||||
| Options | ||||||||
| Convertible notes and interest | ||||||||
| Unit purchase options and warrants | ||||||||
| Total | ||||||||
Recently Adopted Accounting Pronouncements
None.
| 10 |
INVO BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(UNAUDITED)
Note 3 – Joint Ventures
| Affiliate Name | Country | Percent (%) Ownership | ||||
| % | ||||||
| % | ||||||
| % | ||||||
| % | ||||||
| % | ||||||
| % | ||||||
| * |
HRCFG INVO, LLC
On
March 10, 2021, the Company’s wholly owned subsidiary, INVO Centers, LLC (“INVO CTR”), entered into a limited liability
company agreement with HRCFG, LLC (“HRCFG”) to form a joint venture for the purpose of establishing an INVO Center in Birmingham,
Alabama. The name of the joint venture entity is HRCFG INVO, LLC (the “Alabama JV”). In connection with the formation of
the Alabama JV, the Company provided an initial $
The
Company determined the Alabama JV is a VIE and the Company is the primary beneficiary, as a result the Company consolidated the Alabama
JV’s results with its own. For the three and nine months ended September 30, 2021, the Alabama JV recorded a net loss of $
Bloom Invo, LLC
On
June 28, 2021, INVO CTR entered into a joint venture agreement (the “Bloom Agreement”) with Bloom Fertility, LLC (“Bloom”)
to organize and own in a joint venture entity formed as Bloom INVO, LLC (the “Georgia JV”). The Georgia JV will, subject
to the equity and debt arrangements in the Bloom Agreement, assist Bloom in establishing an INVO Center that will offer INVO technologies.
In connection with the formation of the Georgia JV, the Company provided an initial $
The
Company determined the Georgia JV is a VIE and is currently in the process of determining if the Company is the primary beneficiary.
As the financial results of the Georgia JV are immaterial for the third quarter, the Company will use the equity method to account for
its interest in the Georgia JV. As of September 30, 2021, the Company invested $
Positib Fertility, S.A. de C.V.
On September 24, 2020, INVO CTR entered into a Pre-Incorporation and Shareholders Agreement with Francisco Arredondo, MD PLLC (“Arredondo”) and Security Health LLC, a Texas limited liability company (“Ramirez”, and together with INVO CTR and Arredondo, the “Shareholders”) under which the Shareholders will commercialize the INVO Procedure and offer related medical treatments in Mexico. Each party owns one-third of the Mexican incorporated company, Positib Fertility, S.A. de C.V. (the “Mexico JV”).
The
Company determined the Mexico JV is a VIE, and that there is no primary beneficiary. As a result, the Company will use the equity
method to account for its interest in the Mexico JV. As of September 30, 2021, the Mexico JV was not yet operational and therefore
had no profit or loss to report. As of September 30, 2021, the Company had invested $
Note 4 – Inventory
Components of inventory are:
September 30, 2021 | December 31, 2020 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | - | |||||||
| Finished goods | ||||||||
| Total inventory | $ | $ | ||||||
Note 5 – Property and Equipment
The estimated useful lives and accumulated depreciation for equipment are as follows as of September 30, 2021, and December 31, 2020:
| Estimated Useful Life | ||
| Manufacturing equipment | ||
| Medical equipment | ||
| Office equipment |
September 30, 2021 | December 31, 2020 | |||||||
| Manufacturing equipment | $ | $ | ||||||
| Medical equipment | ||||||||
| Office equipment | ||||||||
| Leasehold improvements | - | |||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total equipment, net | $ | $ | ||||||
During
the three months ended September 30, 2021, and 2020, the Company recorded depreciation expense of $
During
each of the nine months ended September 30, 2021, and 2020, the Company recorded depreciation expense of $
| 11 |
INVO BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(UNAUDITED)
Note 6 – Patents and Trademarks
The Company capitalizes the initial expense related to establishing patents by country and then amortizes the expense over the life of the patent, typically 20 years. It then expenses annual filing fees to maintain the patents. The Company regularly reviews the value of its patents in the marketplace in proportion to the expense it must spend to maintain the patent.
The Company has recorded the following patent costs:
September 30, 2021 | December 31, 2020 | |||||||
| Patents | $ | $ | ||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Total patent costs, net | $ | $ | ||||||
During
the three months ended September 30, 2021, and 2020, the Company recorded amortization expenses related to patents of $
During
the nine months ended September 30, 2021, and 2020, the Company recorded amortization expenses related to patents of $
The
increase in the trademark assets 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.
Note 7 – Notes Receivable
On
August 5, 2021, the Company entered into a promissory note with Bloom Invo, LLC. The note was entered into in conjunction with the Georgia
JV, accrues interest at
The following table lists the Company’s notes receivable:
| September 30, 2021 | December 31, 2020 | |||||||
| Notes receivable – Bloom Invo, LLC | $ | $ | - | |||||
| Total notes receivable | $ | $ | ||||||
Note 8 – Leases
The Company has various operating lease agreements in place for its office and joint ventures. Per FASB’s ASU 2016-02, Leases Topic 842 (“ASU 2016-02”), effective January 1, 2019, the Company is required to report a right-of-use asset and corresponding liability to report the present value of the total lease payments, with appropriate interest calculation. Per the terms of ASU 201-02, the Company can use its implicit interest rate, if known, or applicable federal rate otherwise. Since the Company’s implicit interest rate was not readily determinable, the Company utilized the applicable federal rate, as of the commencement of the lease. Lease renewal options included in any lease are considered in the lease term if it is reasonably certain the Company will exercise the option to renew. The Company’s operating lease agreements do not contain any material restrictive covenants.
As of September 30, 2021, the Company’s lease components included in the consolidated balance sheet were as follows:
| Lease component | Balance sheet classification | September 30, 2021 | ||||
| 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 September 30, 2021 were as follows:
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 and beyond | ||||
| Total future minimum lease payments | $ | |||
| Less: Interest | ( | ) | ||
| Total operating lease liabilities | $ |
| 12 |
INVO BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(UNAUDITED)
Note 9 – Convertible Notes and Notes Payable
2020 Convertible Notes Payable
From
May 15, 2020 through July 1, 2020, the Company entered into definitive securities purchase agreements (“Purchase Agreements”)
with accredited investors for their purchase of (i) secured convertible notes issued by us in the aggregate original principal amount
of $
Pursuant
to those certain Secured Convertible Notes issued in connection with the Purchase Agreements, interest on
such Notes accrues at a rate of ten percent (
All amounts of principal and interest due under the Notes are convertible at any time after the issuance date, in whole or in part (subject to rounding for fractional shares), at the option of the holders, into the Company’s common stock at a fixed conversion price of $3.20, which is subject to adjustment as described above.
Upon any issuance by the Company of any of its equity securities, including common stock, for cash consideration, indebtedness or a combination thereof after the date hereof (a “Subsequent Equity Financing”), each holder of a Note will has option to convert the outstanding principal and accrued but unpaid interest of its Note into the number of fully paid and non-assessable shares of common stock issued in the Subsequent Equity Financing (“Conversion Securities”) equal to the product of unpaid principal, together with the balance of unpaid and accrued interest and other amounts payable hereunder multiplied by 1.1, divided by the price per share paid by the investors for the Conversion Securities.
The Notes contain customary events of default including but not limited to: (i) failure to make payments when due; and (ii) bankruptcy or insolvency of the Company. If an event of default occurs, each holder may require the Company to redeem all or any portion of the Notes (including all accrued and unpaid interest thereon), in cash.
Pursuant
to the terms of a Security Agreement entered into between the Company and the noteholders under the Purchase Agreements, the Notes are
secured by the proceeds from the $
Of
the $
In
November 2020, noteholders holding notes with a principal value of $
| 13 |
INVO BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(UNAUDITED)
Principal balances of the 2020 Convertible Notes were as follows:
September 30, 2021 | December 31, 2020 | |||||||
| 2020 Convertible Notes | ||||||||
| Accrued interest | ||||||||
| Less beneficial conversion feature discount | ( | ) | ( | ) | ||||
| Less options discount | ( | ) | ( | ) | ||||
| Less warrants discount | ( | ) | ( | ) | ||||
| Less issuance cost | ( | ) | ( | ) | ||||
| Total, net of discount | $ | $ | ||||||
Interest
expense on the 2020 Convertible Notes was $
Interest
expense on the 2020 Convertible Notes was $
Amortization
of options discount 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 warrant discount on the 2020 Convertible Notes was $
Amortization
of beneficial conversion feature 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 $
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 $
| 14 |
INVO BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(UNAUDITED)
Note 10 – Related Party Transactions
In
November 2020, Paulson Investment Company served as a co-managing underwriter for the Company’s underwritten public offering and
received fees and commissions for such role in the amount of $
See “Note 16-Subsequent Events” for information relating to the Company’s October 2021 Offering.
Note 11 – Stockholders’ Equity
Reverse Stock Splits
On
December 16, 2019, the Company’s stockholders approved a reverse stock split at a ratio of between
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.
Public offering
On
November 12, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Roth Capital Partners,
LLC, as representative of the several underwriters (the “Underwriters”), in connection with the Company’s public offering
(the “Offering”) of 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 $
During
the year ended December 31, 2020, the Company incurred approximately $
Nine months Ended September 30, 2021
In
March 2021, the Company issued shares of common stock with fair value of $
In
March 2021, the Company issued shares of common stock for proceeds of $
In
March 2021, the Company issued shares of common stock for proceeds of $
In March 2021, the Company issued shares of common stock as a result of a cashless exercise of warrants.
In March 2021, the Company issued shares of common stock as a result of a cashless exercise of unit purchase options.
As
of September 30, 2021, the Company had issued shares of common stock to employees and directors
and shares of common stock to consultants with
a fair value of $and $
As of September
30, 2021, the Company issued shares of its common stock to consultants in consideration of services rendered with a fair value
of $
| 15 |
INVO BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(UNAUDITED)
Equity Incentive Plans
In October 2019, the Company adopted its 2019 Stock Incentive Plan (the “2019 Plan”). Under the 2019 Plan, the Company’s Board of Directors is authorized to grant both incentive and non-statutory stock options to purchase common stock and restricted stock awards to its employees, directors, and consultants. The 2019 Plan initially provided for the issuance of shares. In January 2021, the number of available shares issuable increased by an additional shares to a total of shares.
Options 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 .
| Number of Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding as of December 31, 2020 | $ | $ | ||||||||||
| Granted | - | |||||||||||
| Exercised | - | |||||||||||
| Canceled | - | |||||||||||
| Balance as of September, 2021 | $ | $ | ||||||||||
| Exercisable as of September, 2021 | $ | $ | ||||||||||
| Nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Risk-free interest rate range | to | % | to | % | ||||
| Expected life of option-years | to | to | ||||||
| Expected stock price volatility | to | % | to . | % | ||||
| Expected dividend yield | % | % | ||||||
| 16 |
INVO BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(UNAUDITED)
The risk-free interest rate is based on U.S. Treasury interest rates, the terms of which are consistent with the expected life of the stock options. Expected volatility is based upon the average historical volatility of the Company’s common stock over the period commensurate with the expected term of the related instrument. The expected life and estimated post-employment termination behavior is based upon historical experience of homogeneous groups, executives and non-executives, within the Company. The Company does not currently pay dividends on its common stock, nor does it expect to do so in the foreseeable future.
| Total Intrinsic Value of Options Exercised | Total Fair Value of Options Vested | |||||||
| Year ended December 31, 2020 | $ | $ | ||||||
| Nine months ended September 30, 2021 | $ | $ | ||||||
For the nine months ended September 30, 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 September 30, 2021, the weighted average remaining service period is years.
The Company recognized $and $in stock-based compensation expense for stock options for the three months ended September 30, 2021, and 2020, respectively. The Company recognized $and $in stock-based compensation expense related to stock options for the nine months ended September 30, 2021, and 2020, respectively. Unamortized stock option expense as of September 30, 2021, to be amortized over the weighted-average remaining service period totaled $.
Restricted Stock and Restricted Stock Units
In the nine months ended September 30, 2021, the Company issued shares of restricted stock to certain employees and directors under the Company’s 2019 Plan. Restricted stock and restricted stock units issued to employees and directors generally vest either at grant or vest over a period of .
Number of Shares | Weighted Average Grant Date | Aggregate Value of Shares | ||||||||||
| Balance as of December 31, 2020 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Vested | ( | ) | ( | ) | ||||||||
| Forfeitures | ||||||||||||
| Balance as of September 30, 2021 | $ | $ | ||||||||||
| 17 |
INVO BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(UNAUDITED)
The Company recognized $and $in stock-based compensation expense related to restricted stock and restricted stock units for the three months ended September 30, 2021, and 2020, respectively. The Company recognized $and $in stock-based compensation expense for restricted stock and restricted stock units for the nine months ended September 30, 2021, and 2020, respectively.
Note 13 – Unit Purchase Options and Warrants
In
connection with the issuance of the 2020 Convertible Notes, the Company also issued unit purchase options to purchase
In
connection with the issuance of the 2020 Convertible Notes, the Company agreed to issue the placement agent and the selling agent five-year
warrants to purchase
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, 2020 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Canceled | ||||||||||||
| Balance as of September 30, 2021 | $ | $ | ||||||||||
The following table sets forth the activity of warrants:
| Number of Warrants | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding as of December 31, 2020 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Canceled | ||||||||||||
| Balance as of September 30, 2021 | $ | $ | ||||||||||
| 18 |
INVO BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(UNAUDITED)
Note 14 – Income Taxes
The Company uses the asset and liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If a carryforward exists, the Company decides as to whether the carryforward will be utilized in the future. Currently, a valuation allowance is established for all deferred tax assets and carryforwards as their recoverability is deemed to be uncertain. If the Company’s expectations for future operating results at the federal or at the state jurisdiction level vary from actual results due to changes in healthcare regulations, general economic conditions, or other factors, it may need to adjust the valuation allowance, for all or a portion of the Company’s deferred tax assets. The Company’s income tax expense in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in the Company’s valuation allowance in the period when the change in circumstances occurs. These changes could have a significant impact on the Company’s future earnings.
Income
tax expense was $ for
each of the three and nine months ended September 30, 2021, and 2020. The annual forecasted effective income tax rate for 2021
is
Note 15 – Commitments and Contingencies
INVO Bioscience, Inc. v. James Bowdring
On
August 7, 2019, the Company sent James Bowdring, the brother of the Company’s then Chief Financial Officer, a check in the amount
of $
The
The Company does not currently expect the above matter to have a material adverse effect upon either the Company’s results of operations, financial position, or cash flows.
Note 16 – Subsequent Events
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 (the “Securities Purchase Agreement”) pursuant
to which the Company agreed to issue and sell to the Investors shares (the “Shares”) of its common
stock, par value $
On
October 1, 2021, the Company entered into a Stock Purchase Agreement (the “Paradigm Purchase Agreement’) with
Paradigm Opportunities Fund, LP an accredited institutional investor, pursuant to which the Company will issue to such investor
shares (the “Paradigm Shares”)
of the Company’s common stock, for a purchase price of $per share for an aggregate purchase price of
$
On November 2, 2021, Ferring notified the Company of its intention to terminate the Ferring Agreement. Ferring gave notice of termination for convenience under Section 14.2(b) of the Ferring Agreement which requires 90-days prior written notice. Accordingly, the Ferring Agreement will officially terminate on January 31, 2022. Pursuant to the terms of the Ferring Agreement, for ninety (90) days after the expiration or termination, Ferring shall use commercially reasonable efforts to transition any customers to the Company and otherwise facilitate the orderly transition of the distribution from Ferring to the Company. In addition, Ferring shall provide the Company with a list of all then-existing customers. By its terms, the Company’s Supply Agreement with Ferring terminates upon termination of the Ferring Agreement on January 31, 2022.
In October 2021, the Company issued shares of common stock to consultants under the 2019 Stock Incentive Plan.
In October 2021, the Company issued shares of its common stock to consultants and employees in consideration of services rendered. There shares were issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended. The Company did not receive any proceeds from this issuance.
| 19 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements made in this Quarterly Report on Form 10-Q, including without limitation this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than statements of historical information, are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may sometimes be identified by such words as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue” or similar words. We believe that it is important to communicate our future expectations to investors. However, these forward-looking statements involve many risks and uncertainties including those referred to herein and in our Annual Report on Form 10-K for the year ended December 31, 2020. Our actual results could differ materially from those indicated in such forward-looking statements as a result of certain factors. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
We are a medical device company focused in the Assisted Reproductive Technology (“ART”) marketplace. Our mission is to increase access to care and expand fertility treatment and patient care across the globe. Our patented device, the INVOcell, is the first intravaginal culture (“IVC”) system in the world used for the natural in vivo incubation of eggs and sperm during fertilization and early embryo development. INVOcell was granted clearance in the United States by the U.S. Food & Drug Administration (“FDA”) in November 2015, received the CE mark in October 2019, and is now positioned to help provide millions of infertile couples across the globe access to a new infertility treatment option. We believe this novel device and procedure provides a more natural, safe, effective, efficient and economical fertility treatment compared to current infertility treatments, including in vitro fertilization (“IVF”) and intrauterine insemination (“IUI”). Unlike conventional infertility treatments such as IVF where the eggs and sperm develop into embryos in a laboratory incubator, the INVOcell utilizes the women’s vaginal cavity as an incubator to support a more natural fertilization and embryo development environment. As such, this novel device promotes in vivo conception and early embryo development.
In both commercial utilization of the INVOcell and in clinical studies, the INVO Procedure has proven to have equivalent pregnancy success and live birth rates as IVF. Additionally, we believe there are emotional benefits with the mother’s participation in fertilization and early embryo development by vaginal incubation compared to that of conventional IVF treatment by offering patients a more connected and personalized method to achieve pregnancy.
For many couples struggling with infertility, access to treatment is often not available. Financial challenges (cost of treatment) and limited availability (or capacity) of fertility medical care are two of the main challenges in the ART marketplace that contribute to the large percentage of untreated patients. Religious, social and cultural roadblocks can also prevent hopeful couples from realizing their dream to have a baby with conventional IVF. We believe INVOcell can address many of the key challenges in the ART market, particularly patient cost and infrastructure capacity constraints. The many benefits to the INVO solution include:
| ● | Cost: Many current clinics offering INVOcell are doing so at approximately half the cost of IVF treatment, due to reduced drugs often being prescribed for INVOcell, fewer office visits needed, and less laboratory time needed as incubation is occurring inside the body rather than in the lab incubator. |
| ● | Enhances patient capacity: The INVOcell device eliminates the need for a lab incubator as well as helps reduce the overall need for lab-support resources during the incubation period. We believe this generally supports the ability to lower costs and enables a clinic to handle a higher volume of patients on average. |
| ● | Reduces the risk of errors of wrong embryo transfers since the embryos are never separated from the woman. |
| ● | Promotes greater involvement by couples in the treatment and conception. |
| ● | Creates a more natural and environmentally stable incubation than conventional IVF incubation in a laboratory. |
In the second quarter of 2016, the first U.S. baby from the INVOcell and INVO Procedure following FDA clearance was born in Texas.
| 20 |
Sales and Marketing
Our product commercialization efforts are focused on identifying distributors and partners within targeted geographic regions that we believe can best promote, market and sale the INVOcell device and process to assist infertile couples in having a baby. We believe that our INVOcell procedure is an effective and affordable treatment option which can also be offered without the need for a more expensive IVF lab facility. We have been cleared to sell the INVOcell device in the United States since November 2015 after receiving de novo class II clearance from the FDA. Since our January 2019 exclusive sales, marketing and distribution agreement with Ferring International Center S.A. (“Ferring”) for the U.S., our primary focus has been on supporting Ferring and establishing fertility clinics focused primarily on the INVOcell device and procedure (“INVO Centers”), as well as developing key international markets around the world.
We anticipate that we will experience quarterly fluctuations in our revenue as a result of our efforts to expand the sales of the INVO technology to new markets. We expect international sales will increase moving forward as we continue to expand our efforts to expand INVOcell globally. We will continue to seek out partners that will contractually commit to meeting agreeable performance objectives that are consistent with our goals and objectives.
Ferring
On November 12, 2018, we entered into a U.S. Distribution Agreement (the “Ferring Agreement”) with Ferring, which closed on January 14, 2019. Pursuant to the Ferring Agreement, among other things, we granted Ferring an exclusive license in the United States with rights to sublicense under patents related to our proprietary INVOcell™ intravaginal culture device together with the retention device and any other applicable accessories (collectively, the “Licensed Product”) to market, promote, distribute and sell the Licensed Product with respect to all therapeutic, prophylactic and diagnostic uses of medical devices or pharmaceutical products involving reproductive technology (including infertility treatment) in humans (the “Field”). Ferring is responsible, at its own cost, for all commercialization activities for the Licensed Product in the United States. We retained a limited exception to the exclusive license granted to Ferring allowing us, subject to certain restrictions, to establish up to five INVO Centers in the United States. We retained all commercialization rights for the Licensed Product outside of the United States. We believe the strategic partnership with a strong reproductive organization such as Ferring has helped provide us with the necessary sales and marketing resources and overall market credibility to execute our goal to expand adoption of the INVOcell device around the world.
The Ferring license was deemed to be a functional license that provides the counterparty with a “right to access” to our intellectual property during the subscription period and accordingly, revenue is recognized over a period of time, which is generally the subscription period. During the three and nine months ended September 30, 2021, we recognized $178,571 and $ 535,714 of revenue related to the Ferring license agreement, respectively.
As of September 30, 2021, we had deferred revenue of $3,035,715 relating to the Ferring Agreement.
On March 2, 2021, we entered into Amendment No. 1 to the Ferring Agreement (the “Amendment”) to provide for added flexibility by increasing the number of INVO Centers allowable under the agreement to seven and removing certain geographical requirements. Pursuant to the Amendment, Ferring agreed to purchase a 2,004 count of product for $501,000 in March 2021, and the minimum annual target for 2020 was deemed to have been satisfied in full as a result of such purchase.
On November 2, 2021, Ferring notified us of its intention to terminate the Ferring Agreement, which requires 90-days prior written notice. Accordingly, the Ferring Agreement will officially terminate on January 31, 2022. Pursuant to the terms of the Ferring Agreement, Ferring shall 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, the Company’s Supply Agreement with Ferring terminates upon termination of the Ferring Agreement on January 31, 2022.
International Distribution Agreements
We have entered into exclusive distribution agreements for a number of international markets. These agreements usually have an initial term with renewal options and require the distributors to meet minimum annual purchases, which vary depending on the market. We are also required to register the product in each market before the distributor can begin importing, a process and timeline that can vary widely depending on the market.
| 21 |
The following table sets forth a list of our current international distribution agreements:
| INVOcell
Registration | ||||||||
| Market | Distribution Partner | Date | Initial Term | Status in Country | ||||
| Canada | Invaron Pharmaceuticals Inc. | July 2020 | 1-Year | Completed | ||||
| Mexico | Positib Fertility, S.A. de C.V. | Sept 2020 | TBD** | Completed | ||||
| Malaysia | iDS Medical Systems | Nov 2020 | 3-year | Completed | ||||
| Jordan | Biovate | Sept 2019 | 1-year | Completed | ||||
| Pakistan | Galaxy Pharma | Dec 2020 | 1-year | In process | ||||
| Thailand | IVF Envimed Co., Ltd. | April 2021 | 1-year | In process | ||||
| Sudan | Quality Medicines, Cosmetics & Medical Equipment Import | Sept 2020 | 1-year | In process | ||||
| Ethiopia | Quality Medicines, Cosmetics & Medical Equipment Import | Sept 2020 | 1-year | In process | ||||
| Uganda | Quality Medicines, Cosmetics & Medical Equipment Import | Sept 2020 | 1-year | In process | ||||
| Nigeria | G-Systems Limited | Sept 2020 | 5-year | Completed | ||||
| Togolese Republic | INVOSOLUX TOGO | Nov 2019 | 1-year | In process | ||||
| Iran | Tasnim Behboud | Dec 2020 | 1-year | In process | ||||
| Sri Lanka | Alsonic Limited | July 2021 | 1-year | In process | ||||
| ** Our Mexico JV. Please note that the registration is temporarily in the name of Proveedora de Equipos y Productos, S.A. de C.V. and will be transferred to Positib Fertility as soon as practicable. | ||||||||
Investment in Joint Ventures and Partnerships
As part of our commercialization strategy, we entered into a number of joint ventures and partnerships designed to establish new INVO Centers.
The following table sets forth a list of our current joint venture arrangements:
| 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 | % | |||
| Medesole INVO Bioscience India | India | 50 | % | |||
The following table sets forth a list of our current partnership arrangements:
| Partner | Country | Partnership Split | ||||
| Lyfe Medical | United States | 40 | % | |||
Alabama JV Agreement
On March 10, 2021, our wholly owned subsidiary, INVO Centers, LLC (“INVO CTR”), entered into a limited liability company agreement with HRCFG, LLC (“HRCFG”) to form a joint venture for the purpose of establishing an INVO Center in Birmingham, Alabama. The name of the joint venture LLC is HRCFG INVO, LLC (the “Alabama JV”). The responsibilities of HRCFG’s principals include providing clinical practice expertise, performing recruitment functions, providing all necessary training, and providing day-to-day management of the clinic. The responsibilities of INVO CTR will be to provide access to and be the exclusive provider to the Alabama JV of the INVOcell and the INVO Procedure. INVO CTR will also perform all required in vitro fertilization, industry specific compliance and accreditation functions, and product documentation for product registration. We will also provide certain funding to the Alabama JV. In connection with the formation of the Alabama JV, we provided an initial $30,000 in funding, in exchange for a note issued by HRCFG, which will be repaid from the operating profit of the Alabama JV. As of September 30, 2021, we have provided an additional $1,300,000 to HRCFG pursuant to the note. Interest on the note accrues at a rate of 1.5% per annum. In addition, we agreed to issue 25,000 shares of our common stock to HRCFG (i) upon opening the Birmingham INVO Center for business, and (ii) upon each additional INVO Center opened for business by the Alabama JV.
The Alabama JV opened to patients on August 9, 2021, and initial treatment cycles commenced in September 2021.
The results of the Alabama JV are consolidated in our financial statements. For the three and nine months ended September 30, 2021, the Alabama JV recorded a net loss of $477,086. HRCFG’s noncontrolling interest in the Alabama JV was $238,543.
Georgia JV Agreement
On June 28, 2021, INVO CTR entered into a joint venture agreement (the “Bloom Agreement”) with Bloom Fertility, LLC (“Bloom”) to organize and own in a joint venture entity formed as “Bloom INVO LLC” (the “Georgia JV”). The Georgia JV will, subject to the equity and debt arrangements in the Bloom Agreement, assist Bloom in establishing an INVO Center (the “Atlanta Clinic”) that will offer INVO technologies, along with related procedures and such other technologies or procedures that may be agreed to by the parties to the Bloom Agreement from time to time. We will make available to the Georgia JV the INVO technologies, and, subject to INVO’s existing third-party distribution arrangements, be the exclusive provider to the Georgia JV of the INVOcell and other medical devices and supplies for use at the Atlanta Clinic. The Georgia JV will provide comprehensive management services to the Atlanta Clinic, including full administrative, billing and collection, business, consulting, financial, marketing, staffing, and other support services necessary for its operations, including but not limited to clinical laboratory services, pursuant to an exclusive, long-term management services agreement. Bloom will provide all professional services required for the operation of the Atlanta Clinic. In connection with the formation of the Georgia JV, we provided an initial $200,000 in funding, in exchange for a note issued by the Georgia JV, which will be repaid from the operating profit of the JV.
The Georgia JV opened to patients on September 7, 2021, and commenced initial treatment cycles in November 2021.
The Georgia JV is accounted for using the equity method on our balance sheet. As of September 30, 2021, INVO invested $165,170 in the Georgia JV. For the three and nine months ended September 30, 2021, the Georgia JV recorded a net loss of $283,731 of which we recognized a loss from equity investment of $113,492.
| 22 |
Mexico JV Agreement
Effective September 24, 2020, INVO CTR entered into a Pre-Incorporation and Shareholders Agreement with Francisco Arredondo, MD PLLC (“Arredondo”) and Security Health LLC, a Texas limited liability company (“Ramirez”, and together with INVO CTR and Arredondo, the “Shareholders”) under which the Shareholders will commercialize the INVO Procedure and offer related medical treatments in Mexico. Each party owns one-third of the Mexican incorporated company, Positib Fertility, S.A. de C.V. (the “Mexico JV”).
The Mexico JV will operate in Monterrey, Nuevo Leon, Mexico and any other cities and places in Mexico as approved by the Mexico JV’s board of directors and Shareholders. In addition, the Shareholders agreed that the Mexico JV will be our exclusive distributor in Mexico. The Shareholders also agreed not to compete directly or indirectly with the Mexico JV in Mexico.
The Mexico JV opened to patients on November 1, 2021, and expects to commence initial treatment cycles before the end of the year.
The Mexico JV is accounted for using the equity method on our balance sheet. As of September 30, 2021, the Mexico JV was not yet operational and therefore has no profit or loss to report. As of September 30, 2021, INVO invested $43,721 in the Mexico JV.
Malaysia JV Agreement
On November 23, 2020, we entered into a joint venture agreement with SNS Murni SDN BHD (“SNS Murni”), a company incorporated in Malaysia, to establish an exclusive joint venture in Malaysia to (i) introduce, promote and market technologies related to the INVOcell and INVO Procedure in dedicated government-owned fertility clinics in Malaysia, and (ii) establish INVO Centers in Malaysia. The joint venture is co-managed and owned 50% by each of INVO Bioscience and SNS Murni. As of September 30, 2021, 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 INVO Procedure in the Republic of North Macedonia, and (ii) establish an INVO Center. The joint venture will be co-managed and owned 50% by each of INVO and Ginekaliks. As of September 30, 2021, no joint venture entity had been formed.
India JV Agreement
On January 13, 2020, we entered into a joint venture agreement (the “Medesole Agreement”) with Medesole Healthcare and Trading Private Limited, India (“Medesole”), an Indian corporation that promotes and distributes healthcare technologies, medical equipment and allied services to hospitals, clinics and primary health care centers in India and the Middle East.
Pursuant to the Medesole Agreement, INVO and Medesole formed a joint venture entity incorporated and registered in India, which will operate under the name Medesole INVO Bioscience India Private Limited (the “India JV”). After formation, we will grant to the India JV all required licenses for promoting, marketing and selling our INVOcell® technology in India. INVO and Medesole intend that the India JV will open and operate INVO Centers only in India.
The India JV will be co-managed and owned 50% by each of INVO and Medesole, who will share equally in the expenditures, revenues and profits of the India JV. The Agreement has a term of three years and may be terminated by either party on 180 days’ prior written notice. As of September 30, 2021, 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 INVO Procedure and other fertility treatments (the “Lab Services”) to be provided by Lyfe to its patients at the Bay Area Clinic. Under the terms of the Lyfe Agreement, we will receive 40% of the net income received by the Bay Area Clinic for the performance of the Lab Services. As of September 30, 2021, the Bay Area Clinic was not yet operational.
Operations
We operate with a core internal team and outsource certain operational functions in order to help accelerate our efforts as well as reduce fixed internal overhead needs and in-house capital equipment requirements. Our most critical management and leadership functions are carried out by our core management team. We have contracted out the manufacturing, assembly, packaging, labeling and sterilization of the device to a medical manufacturing company and to a sterilization specialist to perform the gamma sterilization process.
Our cash needs are primarily attributable to funding our sales and marketing efforts, strengthening our training capabilities, satisfying existing obligations, funding our clinical activities for additional indications for use, building an administrative infrastructure, and costs and professional fees associated with being a public company. We currently expect our existing distribution and partnership agreements, together with our INVO Centers, to provide increased revenue in the future, which we expect will help offset the higher level of spending.
We expect to continue incurring losses in the near term as we continue to invest in INVO Centers in the United States and abroad, and in the global expansion of our business and the INVOcell technology.
We cannot accurately predict the level of success our key partners will experience in the near future. However, we anticipate that we will continue to expand the market for the INVOcell device and INVO Procedure across the world with distributor partnerships and INVO Center joint ventures.
| 23 |
Results of Operations
During the third quarter of 2021, we made further progress with our commercialization goals with the opening and initial patient visits at the INVO Centers in Birmingham, Alabama and Atlanta, Georgia as well as the further addition of key personnel to our operating team. Our recently added marketing resources are working to enhance our branding and messaging in preparation to support both the new INVO Centers as well as our distribution partners around the world. Our dedicated team is looking to aggressively drive awareness for the INVOcell through the balance of this year and the next and to help accelerate adoption and expand fertility care through the utilization of our technology.
Our commercialization efforts continue to focus on the substantial, underserved patient population and on expanding access to advanced fertility treatments. We believe our technology can help address the key challenges of affordability and capacity to provide care to the vast number of patients that go untreated every year. This represents the major opportunity for INVOcell. While the ongoing pandemic may have delayed our progress in some markets, the fertility industry has and continues to expand, and we believe our growing volume of partners (both distributors and JVs) affords us a strong forward-looking outlook. Subsequent to the period end, we were notified by Ferring of their intent to terminate the Ferring Agreement. We believe we have adequate infrastructure and resources to take over and manage U.S. distribution for the INVOcell and it is our intention to do so once the Ferring Agreement officially terminates on January 31, 2022. In the future, we may or may not seek to identify alternative distribution partners for the U.S. market.
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 September 30, 2021, compared to the three months ended September 30, 2020
Revenue
Revenue for the three months ended September 30, 2021, was approximately $0.2 million compared to approximately $0.3 million for the three months ended September 30, 2020. Of the $0.2 million in revenue for 2021, $37,513 was related to clinic revenue from the consolidated Alabama JV with the clinic only being open for part of the period. The decrease of approximately $0.1 million, or approximately 35%, was related to a decrease in product sales to Ferring. Ferring’s minimum purchase requirements were based on a calendar year and hence contributed to quarterly fluctuations in revenue.
Gross Profit
Gross profit for the three months ended September 30, 2021, was approximately $0.2 million compared to approximately $0.3 million for the three months ended September 30, 2020. Gross margins were approximately 91% and 92% for the three months ended September 30, 2021, and 2020, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended September 30, 2021, were approximately $2.4 million compared to approximately $1.5 million for the three months ended September 30, 2020. The increase of approximately $0.9 million, or approximately 65%, was primarily the result of approximately $0.5 million in increased expenses related to the operations of the consolidated Alabama JV, approximately $0.3 million in increased personnel and board expenses, and $0.1 million in investor relations and regulatory activities. We also incurred approximately $0.5 million of non-cash, stock-based compensation expense in the period, compared to $0.3 million for the same period in the prior year.
Research and Development Expenses
We began to fund additional research and development (“R&D”) efforts in 2020 as part of our 5-day label expansion efforts. R&D expenses were $0.06 and $0.1 million for the three months ended September 30, 2021, and September 30, 2020, respectively.
| 24 |
Loss from equity investment
Loss from equity investments for the three months ended September 30, 2021, was approximately $0.1 million compared to $0 for the three months ended September 30, 2020. The increase in loss is due to the investment in Atlanta JV becoming operational in the third quarter of 2021. The clinic was only open for part of the period and was still in the early ramp up phase.
Interest Expense and Financing Fees
Interest expense and financing fees were approximately $0.09 million for the three months ended September 30, 2021, compared to approximately $0.5 million for the three months ended September 30, 2020.
Net Loss Attributable to Noncontrolling Interest
Net loss attributable to non-controlling interests for the three months ended September 30, 2021, was approximately $0.2 million compared to $0 for the three months ended September 30, 2021. The entire $0.2 million is attributable to HRCFG’s interest in the Alabama JV.
Nine months ended September 30, 2021, compared to the nine months ended September 30, 2020
Revenue
Revenue for the nine months ended September 30, 2021, was approximately $1.1 million, compared to approximately $0.8 million for the nine months ended September 30, 2020. The increase of approximately $0.3 million, or approximately 32%, was related to of an increase in product sales to Ferring as well as clinic revenue from the consolidated Alabama JV. The sales to Ferring in the first quarter of 2021 were related to satisfying the minimum purchase requirements for 2020 as described above under Ferring.
Gross Profit
Gross profit for the nine months ended September 30, 2021, was approximately $1.0 million compared to approximately $0.8 million for the nine months ended September 30, 2020. Gross margins were approximately 91% and approximately 91% for the nine months ended September 30, 2021, and 2020, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September 30, 2021, were approximately $6.6 million compared to approximately $4.3 million for the nine months ended September 30, 2020. The increase of approximately $2.3 million, or approximately 53%, was primarily the result of approximately $0.9 million in increased personnel, board and business development consulting expenses, $0.6 in miscellaneous administrative costs, $0.5 million in increased expenses related to the operations of the consolidated Alabama JV, as well as approximately $0.3 million in startup costs related to INVO Center joint ventures and. We incurred approximately $1.4 million of non-cash, stock-based compensation expense in the period compared to $1.2 million for the same period last year.
Research and Development Expenses
R&D expenses were $0.2 for the nine months ended September 30, 2021, compared to $0.2 for the nine months ended September 30, 2020, and reflect the R&D efforts related to our 5-day label expansion described above.
| 25 |
Loss from equity investment
Loss from equity investments for the nine months ended September 30, 2021, was approximately $0.1 million compared to $0 for the nine months ended September 30, 2020. The increase in loss is due to the investment in Atlanta JV becoming operational in the third quarter of 2021. The clinic was only open for part of the period and was still in the early ramp up phase.
Other Income
Other income for the nine months ended September 30, 2021, was $0.2 million compared to $0 for the nine months ended September 30, 2020. The increase of $0.2 million was the result of the extinguishment of our Paycheck Protection Program note and related interest being forgiven.
Interest Expense and Financing Fees
Interest expense and financing fees were approximately $1.1 million for the nine months ended September 30, 2021, compared to approximately $0.8 million for the nine months ended September 30, 2020. The increase of approximately $0.3 million was primarily non-cash and due to an increase in amortization of debt discount, debt issuance cost and interest on the 2020 Convertible Notes.
Net Loss Attributable to Noncontrolling Interest
Net loss attributable to noncontrolling interests for the nine months ended September 30, 2021, was approximately $0.2 million compared to $0 for the nine months ended September 30, 2021. The entire $0.2 million is attributable to HRCFG’s interest in the Alabama JV.
Liquidity and Capital Resources
For the nine months ended September 30, 2021, and 2020, we had net losses of approximately $6.5 million and approximately $4.5 million, respectively. The increase in net loss was due to increased operating expenses and interest expense, partially offset by an increase in product revenue. Approximately $2.7 million of the net loss was related to non-cash expenses for the nine months ended September 30, 2021, compared to $2.0 million for the nine months ended September 30, 2020. The Company had working capital of approximately $3.2 million as of September 30, 2021, compared to approximately $8.3 million as of December 31, 2020. As of September 30, 2021, the Company’s stockholder’s equity was approximately $2.3 million compared to approximately $5.7 million as of December 31, 2020. Cash used in operation for the first nine months of 2021 was approximately $4.5 million, compared to approximately $3.0 million for the first nine months of 2020.
During 2020, we raised approximately $13.8 million in debt and equity financings. During the first three quarters of 2021, we converted approximately $1.2 million of outstanding debt to equity and received approximately $370,000 of proceeds from unit purchase option and warrant exercises. Based on our current plan, we believe that the cash on our balance sheet as of September 30, 2021, and the additional $3.7 million raised in October 2021 and described in the Subsequent Event note above is sufficient liquidity for at least the next 12 months. Until we can generate a sufficient amount of cash from operations and to the extent additional funds are necessary to meet our longer-term liquidity needs and to execute our business strategy, we may need to raise additional funding, as we have done in the past, by way of debt and/or equity financings, up-front distribution licensing fees or a combination of these potential sources of funds. Such additional funding may not be available on reasonable terms, if at all.
If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly scale back our operations or delay, scale back or discontinue development of our products. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing stockholders and increased fixed payment obligations, and these securities may have rights senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.
| 26 |
Cash Flows
The following table shows a summary of our cash flows for the nine months ended September 30:
| 2021 | 2020 | |||||||
| Cash (used in) provided by: | ||||||||
| Operating activities | (4,518,808 | ) | (2,954,823 | ) | ||||
| Investing activities | (1,235,673 | ) | (90,682 | ) | ||||
| Financing activities | 369,840 | 2,715,209 | ||||||
As of September 30, 2021, we had approximately $4.7 million in cash compared to approximately $10.1 million as of December 31, 2020. Net cash used in operating activities for the first nine months of 2021, was approximately $4.5 million, compared to approximately $3.0 million for the same period in 2020. The increase in net cash used in operations was primarily due to the increase in net loss.
During the nine months ended September 30, 2021, cash used in investing activities of approximately $1.2 million was primarily related to payments to acquire equipment for the Alabama JV, notes receivable involved with our investments in our joint ventures, as well as additional trademarks and patents. During the nine months ended September 30, 2020, cash used in investing activities of approximately $0.09 million was related to new molds and trademarks.
During the nine months ended September 30, 2021, cash provided by financing activities of approximately $0.4 million was primarily related to the exercise of unit purchase options and warrants. During the nine months ended September 30, 2020, cash provided by financing activities of approximately $2.7 million related to the proceeds from the 2020 Convertible Notes.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition presented in this section is based upon our audited consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. During the preparation of the financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, our results, which allows us to form a basis for making judgments on the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates based on variance with our assumptions and conditions. A summary of significant accounting policies is included below. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.
| 27 |
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.
| 28 |
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 September 30, 2021, 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 September 30, 2021.
(b) Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 29 |
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please see Note 13 to the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020, for a description of pending litigation.
Item 1A. Risk Factors
You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed on March 30, 2021. 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.
Ferring gave us notice of its termination for convenience of our Distribution Agreement with them.
On November 2, 2021, Ferring International Center S.A. (“Ferring”) notified us of their intent to terminate the U.S. Distribution Agreement (the “Ferring Agreement”), pursuant to which we granted Ferring certain rights to sell our products in the United States market. Ferring gave notice of termination for convenience under Section 14.2(b) of the Ferring Agreement which requires 90-days prior written notice. Accordingly, the Ferring Agreement will officially terminate on January 31, 2022. By its terms, our Supply Agreement with Ferring will terminate upon termination of the Ferring Agreement. Under the terms of these agreements, Ferring was required to make certain minimum purchases during 2021 to maintain exclusivity under such agreements. Such purchases are no longer expected now that Ferring has given notice of termination. Ferring’s termination of these agreements could have a material adverse effect on our business, financial condition and results of operations.
Item 2. Unregistered Issuance of Equity Securities and Use of Proceeds
From January to October 2021, we issued 15,000 shares of its common stock to consultants and employees in consideration of services rendered. There 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 proceeds from this issuance.
See our Current Report on Form 8-K dated October 1, 2021, and filed with the Securities and Exchange Commission on October 5, 2021.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
1. See our Current Report on Form 8-K filed with the SEC on September 7, 2021.
2. See our Current Report on Form 8-K filed with the SEC on October 4, 2021.
3. See our Current Report on Form 8-K filed with the SEC on October 5, 2021.
Item 6. Exhibits
| 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 (embedded within the Inline XBRL document) |
| * Filed herewith. | ||
| ** Furnished herewith. | ||
| 30 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 16, 2021.
| INVO Bioscience, Inc. | ||
| Date: November 15, 2021 | By: | /s/ Steven Shum |
| Steven Shum, Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 15, 2021 | By: | /s/ Andrea Goren |
| Andrea Goren, Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| 31 |