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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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INVO BIOSCIENCE, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED September 30, 2022
TABLE OF CONTENTS
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:
| ● | our business strategies; |
| ● | the timing of regulatory submissions; |
| ● | our ability to obtain and maintain regulatory approval of our existing product candidates and any other product candidates we may develop, and the labeling under any approval we may obtain; |
| ● | risks relating to the timing and costs of clinical trials and the timing and costs of other expenses; |
| ● | risks related to market acceptance of products; |
| ● | the ultimate impact of the ongoing Coronavirus pandemic, or any other health epidemic, on our business, our clinical trials, our research programs, healthcare systems or the global economy as a whole; |
| ● | intellectual property risks; |
| ● | risks associated with our reliance on third-party organizations; |
| ● | our competitive position; |
| ● | our industry environment; |
| ● | our anticipated financial and operating results, including anticipated sources of revenues; |
| ● | assumptions regarding the size of the available market, benefits of our products, product pricing and timing of product launches; |
| ● | management’s expectation with respect to future acquisitions; |
| ● | statements regarding our goals, intentions, plans and expectations, including the introduction of new products and markets; and |
| ● | our cash needs and financing plans. |
All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q may include market data and certain industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies and publications are reliable, we have not independently verified market and industry data from third-party sources.
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, | |||||||
| 2022 | 2021 | |||||||
| (audited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Lease right of use | ||||||||
| Investment in joint ventures | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Accrued compensation | ||||||||
| Deferred revenue, current portion | ||||||||
| Lease liability, current portion | ||||||||
| Total current liabilities | ||||||||
| Lease liability, net of current portion | ||||||||
| Deferred tax liability | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity | ||||||||
| Common Stock, $ par value; shares authorized; and issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
INVO BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue: | ||||||||||||||||
| Product revenue | $ | |||||||||||||||
| Clinic revenue | ||||||||||||||||
| License revenue | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Cost of goods sold: | ||||||||||||||||
| Cost of revenue | ||||||||||||||||
| 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 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||||||
| Interest income | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign currency exchange loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes | $ | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
| Income taxes | ||||||||||||||||
| 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
(UNAUDITED)
| Common Stock | Additional Paid-in | Accumulated | Noncontrolling | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Interest | Total | |||||||||||||||||||
| 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 | $ | $ | $ | ( | ) | ( | ) | $ | ) | |||||||||||||||
| Balances, December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Common stock issued to directors and employees | ||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||
| Proceeds from the sale of common stock, net of fees and expenses | ||||||||||||||||||||||||
| Stock options issued to directors and employees as compensation | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balances, September 30, 2022 | ( | ) | ||||||||||||||||||||||
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, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Non-cash stock compensation issued for services | ||||||||
| Non-cash stock compensation issued to directors and employees | ||||||||
| Fair value of stock options issued to employees | ||||||||
| Non-cash compensation for services | ||||||||
| Amortization of discount on notes payable | ||||||||
| Amortization of leasehold right of use asset | ||||||||
| 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 intangibles | ( | ) | ( | ) | ||||
| Investment in joint ventures | ( | ) | ( | ) | ||||
| Payment for notes receivable | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash from financing activities: | ||||||||
| Proceeds from the sale of common stock, net of offering costs | ||||||||
| Proceeds from warrant exercise | ||||||||
| Proceeds from unit purchase option exercise | ||||||||
| Net cash provided by financing activities | ||||||||
| Increase (decrease) in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Taxes | $ | $ | ||||||
| Noncash activities: | ||||||||
| Common stock issued upon note payable and accrued interest conversion | $ | $ | ||||||
| Common stock issued for prepaid services | $ | $ | ||||||
| Cashless exercise of warrants | $ | $ | ||||||
| Cashless exercise of unit purchase options | $ | $ | ||||||
| Initial ROU asset and lease liability | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 7 |
INVO BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(UNAUDITED)
Note 1 – Summary of Significant Accounting Policies
Description of Business
INVO Bioscience, Inc. (“INVO” or the “Company”) is a commercial-stage fertility company dedicated to expanding the assisted reproductive technology (“ART”) marketplace by making fertility care accessible and inclusive to people around the world. The Company’s primary mission is to implement new medical technologies aimed at increasing the availability of affordable, high-quality, patient-centered fertility care. The Company’s flagship product is INVOcell, a revolutionary medical device that allows fertilization and early embryo development to take place in vivo within the woman’s body. This treatment solution is the world’s first intravaginal culture technique for the incubation of oocytes and sperm during fertilization and early embryo development. This technique, designated as “IVC,” provides patients a more connected and intimate experience in comparison to other ART treatments. We believe the IVC procedure can deliver comparable results at a lower cost than traditional in vitro fertilization (“IVF”) and is a significantly more effective treatment than intrauterine insemination (“IUI”). The Company’s commercialization strategy involves the opening of dedicated “INVO Centers” focused on offering the INVOcell and IVC procedure (with three centers in North America now operational), the acquisition of existing fertility clinics, as well as the distribution and sale of its technology solution into existing fertility clinics.
Basis of Presentation
The accompanying consolidated financial statements present on a consolidated basis the accounts of the Company and its wholly owned subsidiaries and controlled affiliates. The Company presents noncontrolling interest within the equity section of its consolidated balance sheets and the amount of consolidated net income (loss) that is attributable to the Company and to the noncontrolling interest in its consolidated statement of operations. All significant intercompany accounts and transactions have been eliminated in consolidation.
The Company uses the equity method of accounting when it owns an interest in an entity whereby it can exert significant influence over but cannot control the entity’s operations.
The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.
The Company considers events or transactions that have occurred after the consolidated balance sheet date of September 30, 2022, but prior to the filing of the consolidated financial statements with the SEC in this Quarterly Report on Form 10-Q, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure, as applicable. Subsequent events have been evaluated through the date of the filing of this Quarterly Report on Form 10-Q.
Business Segments
The
Company operates in
Variable Interest Entities
The Company’s consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and variable interest entities (“VIE”), where the Company is the primary beneficiary under the provisions of ASC 810, Consolidation (“ASC 810”). A VIE must be consolidated by its primary beneficiary when, along with its affiliates and agents, the primary beneficiary has both: (i) the power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) the obligation to absorb losses or the right to receive the benefits of the VIE that could potentially be significant to the VIE. The Company reconsiders whether an entity is still a VIE only upon certain triggering events and continually assesses its consolidated VIEs to determine if it continues to be the primary beneficiary. See “Note 3 – Variable Interest Entities” for additional information on the Company’s VIEs.
| 8 |
Equity Method Investments
Investments in unconsolidated affiliates in which the Company exerts significant influence but does not control or otherwise consolidate are accounted for using the equity method. Equity method investments are initially recorded at cost. These investments are included in investment in joint ventures in the accompanying consolidated balance sheets. The Company’s share of the profits and losses from these investments is reported in loss from equity method joint venture in the accompanying consolidated statements of operations. The Company monitors its investments for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the investees and records reductions in carrying values when necessary.
Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For financial statement presentation purposes, the Company considers time deposits, certificates of deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. At times, cash and cash equivalents balances exceed amounts insured by the Federal Deposit Insurance Corporation.
Inventory
Inventories consist of raw materials, work in process and finished goods and are stated at the lower of cost or net realizable value, using the first-in, first-out method as a cost flow method.
Property and Equipment
The
Company records property and equipment at cost. Property and equipment is depreciated using the straight-line method over the estimated
economic lives of the assets, which are from
| 9 |
Long- Lived Assets
Long-lived
assets and certain identifiable assets related to those assets are periodically reviewed for impairment whenever circumstances and situations
change such that there is an indication that the carrying amounts may not be recoverable. If the non-discounted future cash flows of
the asset are less than their carrying amount, their carrying amounts are reduced to the fair value and an impairment loss recognized.
There was
Fair Value of Financial Instruments
ASC 825-10-50, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments.
Effective January 1, 2008, the Company adopted ASC 820-10, “Fair Value Measurements”, which provides a framework for measuring fair value under GAAP. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
Income Taxes
The Company is subject to income taxes in the United States and its domestic tax liabilities are subject to the allocation of expenses in multiple state jurisdictions. The Company uses the asset and liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The recoverability of deferred tax assets is evaluated by assessing the adequacy of future expected taxable income from all sources, including taxable income in prior carryback years, reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent the Company does not consider it more-likely-than-not that a deferred tax asset will be recovered, a valuation allowance is established.
Concentration of Credit Risk
Cash includes amounts deposited in financial institutions in excess of insurable Federal Deposit Insurance Corporation (“FDIC”) limits. As of September 30, 2022, the Company did not have cash balances in excess of FDIC limits.
Revenue Recognition
The Company recognizes revenue on arrangements in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services ASC 606 requires companies to assess their contracts to determine the timing and amount of revenue to recognize under the new revenue standard. The model has a five-step approach:
| 1. | Identify the contract with the customer. |
| 2. | Identify the performance obligations in the contract. |
| 3. | Determine the total transaction price. |
| 4. | Allocate the total transaction price to each performance obligation in the contract. |
| 5. | Recognize as revenue when (or as) each performance obligation is satisfied. |
| 10 |
Revenue generated from the sale of INVOcell is typically recognized at the time the product is shipped, at which time the title passes to the customer, and there are no further performance obligations.
Revenue generated from clinical and lab services related at the Company’s affiliated INVO Centers is typically recognized at the time the service is performed.
On November 12, 2018, the Company entered into a U.S. Distribution Agreement (the “Ferring Agreement”) with Ferring International Center S.A. (“Ferring”), pursuant to which it granted Ferring an exclusive license in the United States market only, with rights to sublicense under patents related to our proprietary intravaginal culture device (INVOcell), together with the retention device and any other applicable accessories (collectively, the “Licensed Product”) to market, promote, distribute and sell the Licensed Product with respect to all therapeutic, prophylactic and diagnostic uses of medical devices or pharmaceutical products involving reproductive technology (including fertility treatment) in humans.
On November 2, 2021, Ferring notified the Company of its intention to terminate the Ferring Agreement, which required 90-days prior written notice. Accordingly, the Ferring Agreement officially terminated on January 31, 2022.
The
Ferring license was deemed to be a functional license that provides a customer with a “right to access” to the Company’s
intellectual property during the subscription period and accordingly, under ASC 606-10-55-60 revenue is recognized over a period of time,
which is generally the subscription period. The initial upfront payment of $
As of September 30, 2022, the Company had no deferred revenue related to the Ferring Agreement as it was recognized in the fourth quarter of fiscal year 2021 in relation to the contract termination. Per ASC 606-10-55-48 the likelihood of Ferring exercising its rights became remote at the time notice of termination was received so INVO recognized the full remaining amount of the deferred revenue.
The Company accounts for stock-based compensation under the provisions of Accounting Standards Codification (“ASC”) subtopic 718-10, Compensation (“ASC 718-10”). This statement requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period in which the employee is required to provide service or based on performance goals in exchange for the award, which is usually the vesting period.
Basic loss per share calculations are computed by dividing net loss attributable to the Company’s common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share are computed similar to basic earnings per share except that the denominator is increased to include potentially dilutive securities. The Company’s diluted loss per share is the same as the basic loss per share for the three and nine months ended September 30, 2022, and 2021, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net loss attributable to 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, | ||||||||
| 2022 | 2021 | |||||||
| Options | ||||||||
| Convertible notes and interest | ||||||||
| Unit purchase options and warrants | ||||||||
| Total | ||||||||
| 11 |
Recently Adopted Accounting Pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements, and does not believe the future adoption of any such pronouncements will have a material impact on its financial condition or the results of its operations.
Note 2 – Liquidity
Historically,
the Company has funded its cash and liquidity needs through operating cash flow, equity financings, and convertible notes. For the nine
months ended September 30, 2022, and 2021, the Company incurred a net loss of approximately $
The
Company has been dependent on raising capital from debt and equity financings to meet its needs for cash flow used in operating and investing
activities. During the first nine months of 2021, the Company converted approximately $
Although the Company’s audited financial statements for the year ended December 31, 2021 were prepared under the assumption that it would continue operations as a going concern, the report of the Company’s independent registered public accounting firm that accompanies the Company’s financial statements for the year ended December 31, 2021 contains a going concern qualification in which such firm expressed substantial doubt about the Company’s ability to continue as a going concern, based on the financial statements at that time. Specifically, as noted above, the Company has incurred significant operating losses and the Company expects to continue to incur significant expenses and operating losses as it continues to ramp up the commercialization of INVOcell and develop new INVO Centers. These prior losses and expected future losses have had, and will continue to have, an adverse effect on the Company’s financial condition. If the Company cannot continue as a going concern, its stockholders would likely lose most or all of their investment in the Company.
Note 3 – Variable Interest Entities
Consolidated VIEs
Bloom INVO, LLC
On June 28, 2021, INVO CTR entered into a limited liability company agreement (the “Bloom Agreement”) with Bloom Fertility, LLC (“Bloom”) to establish a joint venture entity, formed as “Bloom INVO LLC” (the “Georgia JV”), for the purposes of commercializing INVOcell, and the related IVC procedure, through the establishment of an INVO Center (the “Atlanta Clinic”) in the Atlanta, Georgia metropolitan area.
In
consideration for INVO’s commitment to contribute up to $
| 12 |
The responsibilities of Bloom include providing all medical services required for the operation of the Atlanta Clinic. The responsibilities of INVO CTR include providing certain funding to the Georgia JV, lab services quality management, and providing access to and being the exclusive provider of the INVOcell to the Georgia JV. INVO CTR also performs all required, industry specific compliance and accreditation functions, and product documentation for product registration.
The
Bloom Agreement provides Bloom with a “profits interest” in the Georgia JV and, in connection with such profits interest,
states that profits and losses be allocated to its members based on a hypothetical liquidation of the Georgia JV. In such a scenario,
liquidation proceeds would be distributed in the following order: (a) to INVO CTR until the difference between its capital contributions
and distributions equals $0; (b) to Bloom until its distributions equal
The Georgia JV opened to patients on September 7, 2021 and commenced initial treatment cycles in November 2021.
The
Company determined the Georgia JV is a VIE, and that the Company is its primary beneficiary because the Company has an obligation to
absorb losses that are potentially significant and the Company controls the majority of the activities that impact the Georgia JV’s
economic performance, specifically control of the INVOcell and lab services quality management. As a result, the Company consolidated
the Georgia JV’s results with its own. As of September 30, 2022, the Company invested $
Unconsolidated VIEs
HRCFG INVO, LLC
On
March 10, 2021, INVO CTR entered into a limited liability company agreement with HRCFG, LLC (“HRCFG”) to form a joint venture
for the purpose of establishing an INVO Center in Birmingham, Alabama. The name of the joint venture entity is HRCFG INVO, LLC (the “Alabama
JV”). The Company also provides certain funding to the Alabama JV. Each party owns
The Alabama JV opened to patients on August 9, 2021, and initial treatment cycles commenced in September 2021.
The
Company determined the Alabama JV is a VIE, and that there is no primary beneficiary. As a result, the Company will use the equity method
to account for its interest in the Alabama JV. As of September 30, 2022, the Company invested $
Positib Fertility, S.A. de C.V.
On September 24, 2020, INVO CTR entered into a Pre-Incorporation and Shareholders Agreement with Francisco Arredondo, MD PLLC (“Arredondo”) and Security Health LLC, a Texas limited liability company (“Ramirez”, and together with INVO CTR and Arredondo, the “Shareholders”) under which the Shareholders will commercialize the IVC procedure and offer related medical treatments in Mexico. Each party owns one-third of the Mexican incorporated company, Positib Fertility, S.A. de C.V. (the “Mexico JV”).
The Mexico JV opened to patients on November 1, 2021 and commenced initial treatment cycles beginning in January 2022.
The
Company determined the Mexico JV is a VIE, and that there is no primary beneficiary. As a result, the Company will use the equity method
to account for its interest in the Mexico JV. As of September 30,2022, the Company invested $
| 13 |
The following table summarizes our investments in unconsolidated VIEs:
| Carrying Value as of | ||||||||||||||
| Location | Percentage Ownership | September 30, 2022 | December 31, 2021 | |||||||||||
| HRCFG INVO, LLC | Alabama, United States | | % | $ | ||||||||||
| Positib Fertility, S.A. de C.V. | Mexico | % | ||||||||||||
| Total investment in unconsolidated VIEs | $ | |||||||||||||
Earnings from investments in unconsolidated VIEs were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| HRCFG INVO, LLC | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Positib Fertility, S.A. de C.V. | ( | ) | ( | ) | ||||||||||||
| Total earnings from unconsolidated VIEs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
The following tables summarize the combined unaudited financial information of our unconsolidated VIEs:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Statements of operations: | ||||||||||||||||
| Operating revenue | $ | $ | $ | $ | ||||||||||||
| Operating expenses | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
September 30, 2022 | December 31, 2021 | |||||||
| Balance sheets: | ||||||||
| Current assets | $ | |||||||
| Long-term assets | ||||||||
| Current liabilities | ( | ) | ( | ) | ||||
| Long-term liabilities | ( | ) | ( | ) | ||||
| Net assets | $ | |||||||
Note 4 – Agreements and Transactions with VIE’s
The Company sells the INVOcell to its consolidated and unconsolidated VIEs and anticipates continuing to do so in the ordinary course of business. All intercompany transactions with consolidated entities are eliminated in the Company’s consolidated financial statements. Per ASC 323-10-35-8 the Company eliminates any sales to an unconsolidated VIE for INVOcell inventory that the VIE still has remaining on the books at period end.
The following table summarizes the Company’s transactions with VIEs:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Bloom Invo, LLC | ||||||||||||||||
| INVOcell revenue | $ | $ | $ | $ | ||||||||||||
| Unconsolidated VIEs | ||||||||||||||||
| INVOcell revenue | $ | $ | $ | $ | ||||||||||||
The Company had balances with VIEs as follows:
September 30, 2022 | December 31, 2021 | |||||||
| Bloom Invo, LLC | ||||||||
| Accounts receivable | $ | |||||||
| Notes payable | ||||||||
| Unconsolidated VIEs | ||||||||
| Accounts receivable | $ | |||||||
| 14 |
Note 5 – Inventory
Components of inventory are:
September 30, 2022 | December 31, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Total inventory | $ | $ | ||||||
Note 6 – Property and Equipment
The estimated useful lives and accumulated depreciation for equipment are as follows as of September 30, 2022, and December 31, 2021:
| Estimated Useful Life | ||
| Manufacturing equipment | ||
| Medical equipment | ||
| Office equipment |
September 30, 2022 | December 31, 2021 | |||||||
| Manufacturing equipment | $ | $ | ||||||
| Medical equipment | ||||||||
| Office equipment | ||||||||
| Leasehold improvements | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total equipment, net | $ | $ | ||||||
During
the three months ended September 30, 2022, and 2021, the Company recorded depreciation expense of $
During
the nine months ended September 30, 2022, and 2021, the Company recorded depreciation expense of $
Note 7 – Intangible Assets
Components of intangible assets are as follows:
September 30, 2022 | December 31, 2021 | |||||||
| Trademarks | $ | $ | ||||||
| Patents | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Total patent costs, net | $ | $ | ||||||
The Company capitalizes the initial expense related to establishing patents by country and then amortizes the expense over the life of the patent, typically 20 years. It then expenses annual filing fees to maintain the patents. The Company regularly reviews the value of its patents in the marketplace in proportion to the expense it must spend to maintain the patent.
During
the three months ended September 30, 2022, and 2021, the Company recorded amortization expenses related to patents of $
During
the nine months ended September 30, 2022, and 2021, the Company recorded amortization expenses related to patents of $
The trademarks have an indefinite life and therefore are not amortized. Trademarks are periodically reviewed for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. The trademark assets were created in 2019, and no material adverse changes have occurred since their creation.
| 15 |
Note 8 – Leases
The Company has various operating lease agreements in place for its office and joint ventures. Per FASB’s ASU 2016-02, Leases Topic 842 (“ASU 2016-02”), effective January 1, 2019, the Company is required to report a right-of-use asset and corresponding liability to report the present value of the total lease payments, with appropriate interest calculation. Per the terms of ASU 2016-02, the Company can use its implicit interest rate, if known, or applicable federal rate otherwise. Since the Company’s implicit interest rate was not readily determinable, the Company utilized the applicable federal rate, as of the commencement of the lease. Lease renewal options included in any lease are considered in the lease term if it is reasonably certain the Company will exercise the option to renew. The Company’s operating lease agreements do not contain any material restrictive covenants.
As of September 30, 2022, the Company’s lease components included in the consolidated balance sheet were as follows:
| Lease component | Balance sheet classification | September 30, 2022 | ||||
| Assets | ||||||
| ROU assets – operating lease | Other assets | $ | ||||
| Total ROU assets | $ | |||||
| Liabilities | ||||||
| Current operating lease liability | Current liabilities | $ | ||||
| Long-term operating lease liability | Other liabilities | |||||
| Total lease liabilities | $ | |||||
Future minimum lease payments as of September 30, 2022 were as follows:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 and beyond | ||||
| Total future minimum lease payments | $ | |||
| Less: Interest | ( | ) | ||
| Total operating lease liabilities | $ |
Note 9 – Notes Payable
2020 Convertible Notes Payable
From
May 15, 2020, through July 1, 2020, the Company entered into agreements with accredited investors for their purchase of secured convertible
notes issued by the Company in the aggregate original principal amount of $
Interest
on the 2020 Convertible Notes accrued at a rate of
All
amounts of principal and interest due under the 2020 Convertible Notes were convertible at any time after the issuance date, in whole
or in part (subject to rounding for fractional shares), at the option of the holders, into the Company’s common stock at a fixed
conversion price of $
As of September 30, 2022, all 2020 Convertible Notes had either converted or been repaid by the Company.
| 16 |
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 $
Note 10 – Related Party Transactions
In
October 2021, Paulson Investment Company (“Paulson”) served as a placement agent for the Company’s registered
direct offering and received fees and commissions for such role in the amount of $
Note 11 – Stockholders’ Equity
Reverse Stock Splits
On
December 16, 2019, the Company’s stockholders approved a reverse stock split at a ratio of between
On
October 22, 2020, the Company’s board of directors approved a reverse stock split of the Company’s common stock at a ratio
of
The consolidated financial statements presented reflect the reverse splits.
| 17 |
Public offerings
On
November 12, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Roth Capital Partners,
LLC, as representative of the several underwriters (the “Underwriters”), in connection with the Company’s public offering
(the “Offering”) of shares of common stock, at a public offering price of $ per share. The initial closing
of the Offering for shares of common stock took place on November 17, 2020. On November 18, 2020, the Underwriters exercised
their option pursuant to the Underwriting Agreement to purchase an additional shares of common stock (the “Option Shares”).
The closing for the Option Shares took place on November 20, 2020, for which the Company received approximately $
On
October 1, 2021, the Company and certain institutional and accredited investors and members of the Company’s management team (the
“Investors”) entered into a securities purchase agreement pursuant to which the Company agreed to issue and sell to the Investors
shares of its common stock, in a registered direct offering (the “Direct Offering”) for aggregate gross proceeds
of $
Nine Months Ended September 30, 2022
During
the nine months ended September 30, 2022, the Company issued shares of common stock to employees and directors and shares of common
stock to consultants with a fair value of $
During the nine months ended September 30, 2022, the Company granted restricted stock units to employees that vest % at six months from grant date and % at twelve months from grant date. The shares were granted under the 2019 Plan. As of September 30, 2022 the Company had issued vested shares and recognized stock based compensation expense of $ during the nine months ended September 30, 2022 associated with the equity grants.
During
the nine months ended September 30, 2022, the Company issued shares of its common stock to consultants in consideration of services rendered
with a fair value of $
In
January 2022, the Company issued
shares of its common stock for net proceeds of $
Equity Incentive Plans
In October 2019, the Company adopted the 2019 Plan. Under the 2019 Plan, the Company’s board of directors is authorized to grant stock options to purchase common stock, restricted stock units, and restricted shares of common stock to its employees, directors, and consultants. The 2019 Plan initially provided for the issuance of shares. In January 2022, the number of available shares increased by shares and on October 12, 2022 shareholders approved an amendment to the plan to add an additional shares bringing the total shares available under the 2019 Plan to .
Options granted under the 2019 Plan generally have a life of to years and exercise prices equal to or greater than the fair market value of the common stock as determined by the Company’s board of directors. Vesting for employees typically occurs over a -year period.
| 18 |
Number of Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding as of December 31, 2021 | $ | $ | ||||||||||
| Granted | - | |||||||||||
| Exercised | - | |||||||||||
| Canceled | - | |||||||||||
| Balance as of September 30, 2022 | ||||||||||||
| Exercisable as of September 30, 2022 | ||||||||||||
Nine months ended September 30, |
||||||||
| 2022 | 2021 | |||||||
| Risk-free interest rate range | to | % | to | % | ||||
| Expected life of option-years | to | to | ||||||
| Expected stock price volatility | to | % | to | % | ||||
| Expected dividend yield | % | % | ||||||
The risk-free interest rate is based on U.S. Treasury interest rates, the terms of which are consistent with the expected life of the stock options. Expected volatility is based upon the average historical volatility of the Company’s common stock over the period commensurate with the expected term of the related instrument. The expected life and estimated post-employment termination behavior is based upon historical experience of homogeneous groups, executives and non-executives, within the Company. The Company does not currently pay dividends on its common stock, nor does it expect to do so in the foreseeable future.
Total Intrinsic Value of Options Exercised | Total Fair Value of Options Vested | |||||||
| Year ended December 31, 2021 | $ | $ | ||||||
| Nine months ended September 30, 2022 | $ | $ | ||||||
For the nine months ended September 30, 2022, 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, 2022, the weighted average remaining service period is years.
Restricted Stock and Restricted Stock Units
In the nine months ended September 30, 2022, the Company granted in restricted stock units and shares of restricted stock to certain employees, directors, and consultants under the 2019 Plan. Restricted stock issued to employees, directors, and consultants generally vest either at grant or vest over a period of from the date of grant.
Number of Unvested Shares | Weighted Average Grant Date Fair Value | Aggregate Value of Shares | ||||||||||
| Balance as of December 31, 2021 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Vested | ( | ) | ( | ) | ||||||||
| Forfeitures | ||||||||||||
| Balance as of September 30, 2022 | $ | $ | ||||||||||
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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
warrants to purchase
A Monte Carlo model was used because the investor unit purchase options and warrants contain fundamental transaction payouts and reset events that cannot be modeled with a Black Scholes model.
The fair value of the unit purchase options and warrants issued to the convertible debt holders is estimated as of the issue date using a Monte Carlo model with the following assumptions:
| Risk-free interest rate range | % | |||
| Stock price | $ | - $ | ||
| Expected life of warrants and unit purchase options (years) | ||||
| Expected stock price volatility | % | |||
| Expected dividend yield | % |
The risk-free interest rate is based on U.S. Treasury interest rates, the terms of which are consistent with the expected life of the unit purchase options and warrants. Expected volatility is based upon the historical volatility of the Company’s common stock over the period commensurate with the expected term of the related instrument. The unit purchase options and warrants are valued assuming projected reset events adjusting the exercise price and a forced exercise upon a projected fundamental transaction by management. The unit purchase options and warrants early exercise are modeled assuming registration after 180 days. The Company does not currently pay dividends on its common stock, nor does it expect to in the foreseeable future.
The following table sets forth the activity of unit purchase options:
Number of Unit Purchase Options | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding as of December 31, 2021 | $ | $ | $ | |||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Canceled | ||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | |||||||||
The following table sets forth the activity of warrants:
Number of Warrants | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding as of December 31, 2021 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Canceled | ||||||||||||
| Balance as of September 30, 2022 | $ | $ | ||||||||||
| 20 |
Note 14 – Income Taxes
The Company uses the asset and liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If a carryforward exists, the Company decides as to whether the carryforward will be utilized in the future. Currently, a valuation allowance is established for all deferred tax assets and carryforwards as their recoverability is deemed to be uncertain. If the Company’s expectations for future operating results at the federal or at the state jurisdiction level vary from actual results due to changes in healthcare regulations, general economic conditions, or other factors, it may need to adjust the valuation allowance, for all or a portion of the Company’s deferred tax assets. The Company’s income tax expense in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in the Company’s valuation allowance in the period when the change in circumstances occurs. These changes could have a significant impact on the Company’s future earnings.
Income
tax expense was $ and $
Note 15 – Commitments and Contingencies
Insurance
The Company’s insurance coverage is carried with third-party insurers and includes: (i) general liability insurance covering third-party exposures; (ii) statutory workers’ compensation insurance; (iv) excess liability insurance above the established primary limits for general liability and automobile liability insurance; (v) property insurance, which covers the replacement value of real and personal property and includes business interruption; and (vi) insurance covering our directors and officers for acts related to our business activities. All coverage is subject to certain limits and deductibles, the terms and conditions of which are common for companies with similar types of operations.
Legal Matters
The Company is not currently subject to any material legal proceedings; however, it could be subject to legal proceedings and claims from time to time in the ordinary course of its business, or legal proceedings it considered immaterial may in the future become material. Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and can divert management resources.
Note 16 – Subsequent Events
In
October and November 2022, the Company received $
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as may be amended, supplemented or superseded from time to time by other reports we file with the SEC. All amounts in this report are in U.S. dollars, unless otherwise noted.
Throughout this Quarterly Report on Form 10-Q, references to “we,” “our,” “us,” the “Company,” “INVO,” or “INVO Bioscience, Inc.” refer to INVO Bioscience, Inc.
Overview
We are a commercial-stage fertility company dedicated to expanding the assisted reproductive technology (“ART”) marketplace by making fertility care accessible and inclusive to people around the world. Our primary mission is to implement new medical technologies aimed at increasing the availability of affordable, high-quality, patient-centered fertility care. Our flagship product is INVOcell, a revolutionary medical device that allows fertilization and early embryo development to take place in vivo within the woman’s body. This treatment solution is the world’s first intravaginal culture technique for the incubation of oocytes and sperm during fertilization and early embryo development. This technique, designated as “IVC”, provides patients a more connected and intimate experience in comparison to other ART treatments. We believe the IVC procedure can deliver comparable results at a lower cost than traditional in vitro fertilization (“IVF”) and is a significantly more effective treatment than intrauterine insemination (“IUI”). Our commercialization strategy is focused on the opening of dedicated “INVO Centers” offering the INVOcell and IVC procedure (with three centers in North America now operational), the acquisition of existing fertility clinics, as well as the distribution and sale of our technology solution into existing fertility clinics.
Unlike conventional infertility treatments such as IVF where the oocytes and sperm develop into embryos in an expensive laboratory incubator, the INVOcell allows fertilization and early embryo development to take place in the woman’s body. This allows for many benefits in the IVC procedure, including:
| ● | Eliminates expensive and time-consuming lab equipment and corresponding procedures, allowing clinics and doctors to increase patient capacity and reduce costs; | |
| ● | Provides a natural, stable incubation environment; | |
| ● | Offers a more personal, intimate experience for patients; and | |
| ● | Reduces the risk of errors and wrong embryo transfers. |
In both current utilization of the INVOcell, and in clinical studies, the IVC procedure has demonstrated equivalent pregnancy success and live birth rates to those of IVF.
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Operations
We operate with a core internal team and outsource certain operational functions in order to help advance our efforts as well as reduce fixed internal overhead needs and costs, as well as in-house capital equipment requirements. Our most critical management and leadership functions are carried out by our core management team. We have contracted out the manufacturing, assembly, packaging, labeling, and sterilization of the device to a medical manufacturing company and a sterilization specialist to perform the gamma sterilization process.
To date, we have completed a series of important steps in the successful development and manufacturing of the INVOcell:
| ● | Manufacturing: We are ISO 13485:2016 certified and manage all aspects of production and manufacturing with qualified suppliers. Our key suppliers have been steadfast partners since our company first began and can provide us with virtually an unlimited capability to support our growth objectives, with all manufacturing performed in the New England region of the U.S.. |
| ● | Raw Materials: All raw materials utilized for the INVOcell are medical grade and commonly used in medical devices (e.g., medical grade silicone, medical grade plastic). Our principal molded component suppliers are well-established companies in the molding industry and are either ISO 13485 or ISO 9001 certified. The molded components are supplied to our contract manufacturer for assembly and packaging of the INVOcell system. The contract manufacturer is ISO 13485 certified, and U.S. Food & Drug Administration (“FDA”) registered. |
| ● | CE Mark: INVO received the CE Mark in October 2019. The CE Mark permits the sale of devices in Europe, Australia and other countries that recognize the CE Mark, subject to local registration requirements. |
| ● | US Marketing Clearance: the safety and efficacy of the INVOcell was demonstrated and cleared for marketing and use by the FDA in November 2015. |
| ● | Clinical: We are actively seeking to expand the labeling on our device, the indication for use, to cover a day 5 incubation period, in addition to the currently approved use of day 3 incubation. This may be accomplished with a prospective clinical study, which we previously designed and had the Institutional Review Board (“IRB”) approve to evaluate the modified INVOcell system for effectiveness of achieving fertilization, implantation, embryo development, clinical pregnancy, and live birth after day 5 continuous vaginal incubation (clinicaltrials.gov identifier: NCT04246268). The objective of this study would be to assess the efficacy, safety, comfort and retention of the INVOcell with the retention device and demonstrate superior efficacy following day 5 vaginal incubation as compared to the current day 3 vaginal incubation indication. As a result of the COVID-19 pandemic, we elected to place the trial on hold, but expect to move it forward with some improved design parameters. In the meantime, and as a result of available retrospective, real-market usage (day 5) data, we initiated an effort to pursue a 510(k) filing utilizing retrospective data as a separate effort to achieve our label enhancement. This retrospective effort remains ongoing and active in 2022. |
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Market Opportunity
The global ART marketplace is a large, multi-billion industry growing at a strong pace in most parts of the world as increased infertility rates, increased patient awareness, acceptance of treatment options, and improving financial incentives such as insurance and government assistance continue to drive demand. According to the European Society for Human Reproduction 2020 ART Fact Sheet, one in six couples worldwide experience infertility problems. Additionally, the worldwide market remains vastly underserved as a high percentage of patients in need of care continue to go untreated each year for many reasons, but key among them are capacity constraints and cost barriers. While there have been large increases in the use of IVF, there are still only approximately 2.6 million ART cycles, including IVF, IUI and other fertility treatments, performed globally each year, producing around 500,000 babies. This amounts to less than 3% of the infertile couples worldwide being treated and only 1% having a child through IVF. The industry remains capacity constrained which creates challenges in providing access to care to the volume of patients in need. A survey by “Resolve: The National Infertility Association,” indicates the two main reasons couples do not use IVF is cost and geographical availability (and/or capacity).
In the United States, infertility, according to the American Society of Reproductive Medicine (2017), affects an estimated 10%-15% of the couples of childbearing-age. According to the Centers for Disease Control (“CDC”), there are approximately 6.7 million women with impaired fertility. Based on preliminary 2020 data from CDC’s National ART Surveillance System, approximately 326,000 IVF cycles were performed at 449 IVF centers, leaving the U.S. with a large, underserved patient population, which is similar to most markets around the world.
Competitive Advantages
We believe that the INVOcell, and the IVC procedure it enables, have the following key advantages:
Lower cost than IVF with equivalent efficacy. The IVC procedure can be offered for less than IVF due to lower cost of supplies, labor, capital equipment and general overhead. The laboratory equipment needed to perform an IVF cycle is expensive and requires ongoing costs as compared to what is required for an IVC cycle. As a result, we also believe INVOcell and the IVC procedure enable a clinic and its laboratory to be more efficient as compared to conventional IVF, and, ultimately, to allow the treatment of more patients with fewer resources.
The IVC procedure is currently being offered at practicing clinics at a range of $5,000 - $11,000 per cycle and from $4,500 to $7,000 at the existing INVO Centers, thereby making it more affordable than conventional IVF (which tends to average $12,000 to $17,000 per cycle or higher).
Improved efficiency providing for greater capacity and improved access to care and geographic availability. In many parts of the world, including the U.S., IVF clinics tend to be concentrated in higher population centers and are often capacity constrained in terms of how many patients a center can treat, since volume is limited by the number of capital-intensive incubators available in IVF clinic labs. With the significant number of untreated patients along with the growing interest and demand for services, the industry remains challenged to provide sufficient access to care and to do so at an economical price. We believe INVOcell and the IVC procedure it enables can play a significant role in helping to address these challenges. According to the 2020 CDC Report, there are approximately 449 IVF centers in the U.S. We estimate that by adopting the INVOcell, IVF clinics can increase fertility cycle volume by up to 30% without adding to personnel, space and/or equipment costs. Our own INVO Centers also address capacity constraints by adding to the overall ART cycle capacity and doing so with comparable efficacy to IVF outcomes as well as at a lower per cycle price. Moreover, we believe that we are uniquely positioned to drive more significant growth in fertility treatment capacity in the future by partnering with existing OB/GYN practices. In the U.S., there are an estimated 5,000 OB/GYN offices, many of which offer fertility services (usually limited to consultation and IUI, but not IVF). Since the IVC procedure requires a much smaller lab facility, less equipment and fewer lab personnel (in comparison to conventional IVF), it could potentially be offered as an extended service in an OB/GYN office. With proper training and a lighter lab infrastructure, the INVOcell could expand the business for these physicians and allow them to treat patients that are unable to afford IVF and provide patients with a more readily accessible, convenient, and cost-effective solution. With our multi-pronged strategy (IVF clinics, INVO Centers and OB/GYN practices), in addition to lowering costs, we believe INVOcell and the IVC procedure can address our industry’s key challenges, capacity and cost, by their ability to expand and decentralize treatment and increase the number of points of care for patients in need. This powerful combination of lower cost and added capacity has the potential to open up access to care for underserved patients around the world.
| 24 |
Greater patient involvement. With the IVC procedure, the patient uses their own body for fertilization, incubation, and early embryo development which creates a greater sense of involvement, comfort, and participation. In some cases, this may also free people from barriers related to due to ethical or religious concerns, or fears of laboratory mix-ups.
Sales and Marketing
Our product commercialization efforts are focused on identifying distributors and partners within targeted geographic regions that we believe can best promote, market and sell the INVOcell and support our efforts to expand access to advanced fertility treatment for the large number of underserved infertile people hoping to have a baby. We believe that the IVC procedure is an effective and affordable treatment option that greatly reduces the need for more expensive IVF lab facilities and allows providers to pass on related savings to patients without compromising efficacy. We have been cleared to sell the INVOcell in the United States since November 2015 after receiving de novo class II clearance from the FDA. Our primary focus has been on establishing INVO Centers to promote the INVOcell and the IVC procedure, selling the INVOcell directly to U.S. fertility clinics, and developing key international market partnerships around the world. More recently, we announced our intention to pursue acquisitions of established fertility clinics in the U.S.
In late 2021, we made substantial progress with our INVO Center strategy by opening three locations – Birmingham, Alabama, Atlanta, Georgia, and Monterrey, Mexico – and remain focused on opening and acquiring additional clinics in the US to expand access to INVOcell and the IVC procedure. We announced new INVO Centers in the San Francisco Bay Area, Tampa, Florida and Kansas City, Kansas, as well as the execution of a non-binding letter of intent to acquire an existing fertility clinic.
We continue to seek partners that will contractually commit to meeting agreeable performance objectives that are consistent with our goals and objectives.
Ferring
On November 12, 2018, we entered into a U.S. Distribution Agreement (the “Ferring Agreement”) with Ferring International Center S.A. (“Ferring”), which closed on January 14, 2019. Pursuant to the Ferring Agreement, among other things, we granted Ferring an exclusive license in the United States to market, promote, distribute, and sell the INVOcell. Ferring was responsible, at its own cost, for all commercialization activities in the United States. We retained a limited exception to the exclusive license granted to Ferring allowing us, subject to certain restrictions, to establish up to five INVO Centers in the United States, which as of March 2, 2021, was amended to seven centers. We retained all commercialization rights for the INVOcell outside of the United States.
On November 2, 2021, Ferring notified us of its intention to terminate the Ferring Agreement, which required 90-days prior written notice. Accordingly, the Ferring Agreement officially terminated on January 31, 2022. Pursuant to the terms of the Ferring Agreement, upon notice of termination, Ferring was required to use commercially reasonable efforts to transition any customers to us and otherwise facilitate the orderly transition of the distribution from Ferring to us. By its terms, our Supply Agreement with Ferring also terminated on January 31, 2022.
The Ferring license was deemed to be a functional license that provides the counterparty with a “right to access” to our intellectual property during the subscription period and accordingly, revenue was recognized over a period of time, which is generally the subscription period. During the years ended December 31, 2021, and 2020, we recognized $3.6 million and $0.7 million of revenue related to the Ferring license agreement, respectively.
As of December 31, 2021, we had no deferred revenue related to the Ferring Agreement as it was recognized in the fourth quarter of fiscal year 2021 in relation to the contract termination.
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.
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The following table sets forth a list of our current international distribution agreements:
INVOcell Registration | ||||||||
| Market | Distribution Partner | Date | Initial Term | Status in Country | ||||
| Canada | Invaron Pharmaceuticals Inc. | July 2020 | 1-Year | Completed | ||||
| Mexico (a) | Positib Fertility, S.A. de C.V. | Sept 2020 | n/a | Completed | ||||
| Malaysia | SNS Murni SDN BHD | Sept 2022 | 3-year | Completed | ||||
| Pakistan | Galaxy Pharma | Dec 2020 | 1-year | In process | ||||
| Thailand | IVF Envimed Co., Ltd. | April 2021 | 1-year | Completed | ||||
| Sudan | Quality Medicines, Cosmetics & Medical Equipment Import | Sept 2020 | 1-year | In process | ||||
| Ethiopia | Quality Medicines, Cosmetics & Medical Equipment Import | Sept 2020 | 1-year | In process | ||||
| Uganda | Quality Medicines, Cosmetics & Medical Equipment Import | Sept 2020 | 1-year | Not required | ||||
| Nigeria | G-Systems Limited | Sept 2020 | 5-year | Completed | ||||
| Iran | Tasnim Behboud | Dec 2020 | 1-year | Completed | ||||
| Sri Lanka | Alsonic Limited | July 2021 | 1-year | In process | ||||
| China | Onesky Holdings Limited | May 2022 | 5-year | In process |
| (a) | Our Mexico JV. Please note that the registration is temporarily in the name of Proveedora de Equipos y Productos, S.A. de C.V. and will be transferred to Positib Fertility as soon as practicable. |
Investment in Joint Ventures and Partnerships
As part of our commercialization strategy, we entered into a number of joint ventures and partnerships designed to establish new INVO Centers.
The following table sets forth a list of our current joint venture arrangements:
| Affiliate Name | Country | Percent (%) Ownership | ||||
| HRCFG INVO, LLC | United States | 50 | % | |||
| Bloom Invo, LLC | United States | 40 | % | |||
| Positib Fertility, S.A. de C.V. | Mexico | 33 | % | |||
| Ginekalix INVO Bioscience LLC Skopje | Republic of North Macedonia | 50 | % | |||
The following table sets forth a list of our current partnership arrangements:
| Partner | Country | Partnership Split | ||||
| Lyfe Medical | United States | 40 | % | |||
Alabama JV Agreement
On March 10, 2021, our wholly owned subsidiary, INVO Centers, LLC (“INVO CTR”), entered into a limited liability company agreement with HRCFG, LLC (“HRCFG”) to form a joint venture for the purpose of establishing an INVO Center in Birmingham, Alabama. The name of the joint venture LLC is HRCFG INVO, LLC (the “Alabama JV”). The responsibilities of HRCFG’s principals include providing clinical practice expertise, performing recruitment functions, providing all necessary training, and providing day-to-day management of the clinic. The responsibilities of INVO CTR include providing certain funding to the Alabama JV and providing access to and being the exclusive provider of the INVOcell to the Alabama JV. INVO CTR will also perform all required, industry specific compliance and accreditation functions, and product documentation for product registration.
The Alabama JV opened to patients on August 9, 2021, and initial treatment cycles commenced in September 2021.
The Alabama JV is accounted for using the equity method in our financial statements. As of September 30, 2022 we invested $1.6 million in the Alabama JV in the form of a note. For the nine months ended September 30, 2022, the Alabama JV recorded a net loss of $0.3 million of which we recognized a loss from equity method investment of $0.2 million.
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Georgia JV Agreement
On June 28, 2021, INVO CTR entered into a limited liability company agreement (the “Bloom Agreement”) with Bloom Fertility, LLC (“Bloom”) to establish a joint venture entity, formed as “Bloom INVO LLC” (the “Georgia JV”), for the purposes of commercializing INVOcell, and the related IVC procedure, through the establishment of an INVO Center, (the “Atlanta Clinic”) in the Atlanta, Georgia metropolitan area.
In consideration for INVO’s commitment to contribute up to $800,000 within the 24-month period following execution of the Bloom Agreement to support the start-up operations of the Georgia JV, the Georgia JV issued 800 of its units to INVO CTR and in consideration for Bloom’s commitment to contribute physician services having an anticipated value of up to $1,200,000 over the course of a 24-month vesting period, the Georgia JV issued 1,200 of its units to Bloom.
The responsibilities of Bloom include providing all medical services required for the operation of the Atlanta Clinic. The responsibilities of INVO CTR include providing certain funding to the Georgia JV, lab services quality management, and providing access to and being the exclusive provider of the INVOcell to the Georgia JV. INVO CTR will also perform all required, industry specific compliance and accreditation functions, and product documentation for product registration.
The Georgia JV opened to patients on September 7, 2021, and commenced initial treatment cycles in November 2021.
The results of the Georgia JV are consolidated in our financial statements. As of September 30, 2022, INVO invested $0.9 million in the Georgia JV in the form of capital contributions as well as $0.5 million in the form of a note. For the nine months ended September 30, 2022, the Georgia JV recorded a net loss of $0.5 million. Noncontrolling interest in the Georgia JV was $0. See Note 3 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information on the Georgia JV.
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Mexico JV Agreement
Effective September 24, 2020, INVO CTR entered into a Pre-Incorporation and Shareholders Agreement with Francisco Arredondo, MD PLLC (“Arredondo”) and Security Health LLC, a Texas limited liability company (“Ramirez”, and together with INVO CTR and Arredondo, the “Shareholders”) under which the Shareholders will commercialize the IVC procedure and offer related medical treatments in Mexico. Each party owns one-third of the Mexican incorporated company, Positib Fertility, S.A. de C.V. (the “Mexico JV”).
The Mexico JV will operate in Monterrey, Nuevo Leon, Mexico and any other cities and places in Mexico as approved by the Mexico JV’s board of directors and Shareholders. In addition, the Shareholders agreed that the Mexico JV will be our exclusive distributor in Mexico. The Shareholders also agreed not to compete directly or indirectly with the Mexico JV in Mexico.
The Mexico JV opened to patients on November 1, 2021, and commenced initial treatment cycles beginning in January 2022.
The Mexico JV is accounted for using the equity method in our financial statements. As of September 30, 2022, INVO invested $0.2 million in the Mexico JV. For the nine months ended September 30, 2022, the Mexico JV recorded a net loss of $0.1 million of which we recognized a loss from equity method investment of $0.05 million.
Malaysia JV Agreement
On November 23, 2020, we entered into a joint venture agreement with SNS Murni SDN BHD (“SNS Murni”), a company incorporated in Malaysia, to establish an exclusive joint venture in Malaysia to (i) introduce, promote and market technologies related to the INVOcell and IVC Procedure in dedicated government-owned fertility clinics in Malaysia, and (ii) establish INVO Centers in Malaysia. The joint venture is co-managed and owned 50% by each of INVO Bioscience and SNS Murni. As of September 30, 2022, no joint venture entity had been formed.
North Macedonia JV Agreement
On November 23, 2020, we entered into a joint venture agreement with Ginekaliks Dooel (“Ginekaliks”), a limited liability company incorporated in the Republic of North Macedonia, to establish an exclusive joint venture to (i) commercialize, introduce, promote and market technologies related to the INVOcell and IVC procedure in the Republic of North Macedonia, and (ii) establish an INVO Center. The joint venture will be co-managed and owned 50% by each of INVO and Ginekaliks. As of September 30, 2022, no joint venture entity had been formed.
Lyfe Medical Center I, LLC Partnership Agreement
On April 9, 2021, we entered into a partnership agreement (the “Lyfe Agreement”) with Lyfe Medical Center I, LLC (“Lyfe”) in connection with Lyfe’s intention to establish an INVO Center in the Bay Area of California (the “Bay Area Clinic”). Pursuant to the Lyfe Agreement, we will provide embryology laboratory services in connection with the IVC procedure and other fertility-related treatments (the “Lab Services”) to be provided by Lyfe to its patients at the Bay Area Clinic. Under the terms of the Lyfe Agreement, we will receive 40% of the net income received by the Bay Area Clinic for the performance of the Lab Services. As of September 30, 2022, the Bay Area Clinic was not yet operational.
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Results of Operations
During the first nine months of 2022, our fully operational INVO Centers in Birmingham, Alabama, Atlanta, Georgia, and Monterrey, Mexico continued to make progress toward building local market awareness and treating patients. We also continued to expand on our similar marketing efforts to build awareness for the INVOcell and IVC procedure and to support the efforts of the INVO Centers, our distribution partners around the world and fertility clinic customers offering IVC. During the quarter, we also announced plans to open INVO Centers in the Tampa, Florida and Kansas City, Kansas areas, and are working towards opening additional INVO Centers in key domestic and international markets. We have identified more than 20 markets in the U.S. alone as excellent potential locations for an INVO Center. As part of our efforts to expand our clinic activities, we have more recently identified opportunities to acquire existing profitable fertility practices. Although these established practices provide conventional IVF, we believe they represent an opportunity to integrate the INVOcell technology and thereby enhance the available treatment options for patients and further expand the overall business level. As such, we intend to selectively pursue potential acquisitions as part of our strategy, which we believe compliments our efforts to build new practices and allows us to scale up our overall operations more quickly. To this end, we signed a non-binding letter of intent to acquire one such clinic.
With respect to our distribution efforts, we re-assumed control of the U.S. market upon the termination of the Ferring Agreement in the first quarter of 2022. We have since sold INVOcell directly to the existing, established fertility clinics in the U.S. market, rather than naming a new distributor. During the quarter ended September 30, 2022, we received several orders from existing IVF clinics that had previously trained on implementing the IVC procedure within their practices. To support these efforts, we added sales resources during the first quarter of 2022 and believe we will experience growing revenue from these activities going forward. This revenue is also anticipated to be more consistent from quarter to quarter, as opposed to the sporadic orders placed by Ferring over the past several years.
From a market strategy perspective, our commercialization efforts will continue to focus on the substantial, underserved patient population and on expanding access to advanced fertility treatments. We believe our solutions can help address the key challenges of affordability and capacity to provide care to the vast number of patients that go untreated every year. This represents the major opportunity for INVOcell and the IVC procedure it enables. Despite the COVID pandemic, the fertility industry continues to expand, and we believe our growing volume of partners (both distributors and JV INVO Centers) affords us strong forward-looking opportunities. We believe our INVO Center approach adds much needed capacity and affordability and aligns with our key mission to open access to care to the underserved, and that our acquisition strategy will allow us to accelerate our growth plans and help expand the use of INVOcell.
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.
Comparison of the Three Months Ended September 30, 2022, and 2021
Revenue
Revenue for the three months ended September 30, 2022, was approximately $235 thousand compared to approximately $219 thousand for the three months ended September 30, 2021. Of the $235 thousand in revenue for the first three months of 2022, approximately $176 thousand was related to clinic revenue from the consolidated Georgia JV. The increase of approximately $16 thousand, or approximately 8%, was primarily related to increased revenue from the Georgia JV and increased product sales to U.S. IVF clinics which was partially offset by the change in license revenue.
Gross Profit
Gross profit for the three months ended September 30, 2022, was approximately $126 thousand compared to approximately $198 thousand for the three months ended September 30, 2021. Gross margins were approximately 54% and 91% for the three months ended September 30, 2022, and 2021, respectively. The decrease in gross margin reflects both the lack of Ferring license revenue in the second quarter of 2022 compared to the same period in 2021, as well as consolidated INVO Center cost of goods sold expenses due to increased cycle volume.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended September 30, 2022, were approximately $2.5 million compared to approximately $2.4 million for the three months ended September 30, 2021. The increase of approximately $0.1 million, or approximately 2%, was primarily the result of increased personnel expenses. Non-cash, stock-based compensation expense in the period was $0.5 million, compared to $0.5 million for the same period in the prior year.
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Research and Development Expenses
We began to fund additional research and development (“R&D”) efforts in 2020 as part of our 5-day label expansion efforts. R&D expenses were approximately $0.2 million and $0.06 million for the three months ended September 30, 2022, and September 30, 2021, respectively.
Loss from equity investment
Loss from equity investments for the three months ended September 30, 2022, was approximately $0.02 million compared to $0.1 for the three months ended September 30, 2021. The decrease in loss is due to an increase in revenue in the equity method JV’s and a decrease in expenses associated with onetime startup costs.
Other income
Other income was $0 for the three months ended September 30, 2022, compared to approximately $0 for the three months ended September 30, 2021.
Interest Expense and Financing Fees
Interest expense and financing fees were approximately $2 thousand for the three months ended September 30, 2022, compared to approximately $93 thousand for the three months ended September 30, 2021. The expense in 2021 was primarily non-cash and due to the debt discount, debt issuance cost and interest from convertible notes which have now been fully amortized.
Comparison of the Nine Months Ended September 30, 2022, and 2021
Revenue
Revenue for the nine months ended September 30, 2022, was approximately $0.5 million compared to approximately $1.1 million for the nine months ended September 30, 2021. Of the $0.5 million in revenue for the nine months ended September 30, 2022, $0.4 million was related to clinic revenue from the consolidated Georgia JV. The decrease of approximately $0.6 million, or approximately 51%, was related to a decrease in product sales versus a one-time bulk order from Ferring in the previous year that was made to meet calendar year 2020 minimum purchase commitments in the Ferring Agreement and the loss of Ferring licensing revenue compared to the same period in 2021.
Gross Profit
Gross profit for the nine months ended September 30, 2022, was approximately $0.3 million compared to approximately $1 million for the nine months ended September 30, 2021. Gross margins were approximately 54% and 91% for the nine months ended September 30, 2022, and 2021, respectively. The decrease in gross margin reflects the lack of Ferring license revenue and one-time bulk order from Ferring in the first quarter of 2021 compared to the same period in 2022, as well as the inclusion of consolidated INVO Center cost of goods sold expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September 30, 2022, were approximately $7.7 million compared to approximately $6.6 million for the nine months ended September 30, 2021. The increase of approximately $1.1 million, or approximately 17%, was primarily the result of increased personnel expenses and non-cash, stock-based compensation expense, which increased from $1.3 million last year to $1.8 million for the current quarter.
Research and Development Expenses
R&D expenses were approximately $0.5 million and $0.2 million for the nine months ended September 30, 2022, and September 30, 2021, respectively.
Loss from equity investment
Loss from equity investments for the nine months ended September 30, 2022, was approximately $0.2 million compared to $0.1 for the nine months ended September 30, 2021. The increase in loss was due to the Alabama and Mexico joint venture clinics being operational only for part of 2021.
Other income
Other income was $0 for the nine months ended September 30, 2022, compared to approximately $159 thousand for the nine months ended September 30, 2021. The decrease was the result of the extinguishment of our Paycheck Protection Program note and related interest being forgiven in 2021.
Interest Expense and Financing Fees
Interest expense and financing fees were approximately $3 thousand for the nine months ended September 30, 2022, compared to approximately $1.0 million for the nine months ended September 30, 2021. The expense in 2021 was primarily non-cash and due to the debt discount, debt issuance cost and interest from convertible notes which have now been fully amortized.
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Liquidity and Capital Resources
For the nine months ended September 30, 2022, and 2021, we had net losses of approximately $8.1 million and $6.5 million, respectively, and an accumulated deficit of approximately $47 million as of September 30, 2022. Approximately $2.3 million of the net loss was related to non-cash expenses for the nine months ended September 30, 2022, compared to $2.8 million for the nine months ended September 30, 2021. We had negative working capital of approximately $0.7 million as of September 30, 2022, compared to positive working capital of approximately $5.1 million as of December 31, 2021. As of September 30, 2022, our stockholder’s equity was approximately $1.3 million compared to approximately $7.3 million as of December 31, 2021.
We have been dependent on raising capital from debt and equity financings to meet our needs for cash required to fund our operating expenses and investing activities. During the first nine months of 2021, we converted approximately $1.2 million of outstanding debt to equity and received approximately $0.4 million of proceeds from unit purchase option and warrant exercises. During the first nine months of 2022, we received proceeds of approximately $0.3 million for the sale of our common stock. Our current plan includes opening additional INVO Centers over the next 12 months. Until we can generate a sufficient amount of cash from operations and to the extent additional funds are necessary to meet our longer-term liquidity needs and to execute our business strategy, we will need to raise additional funding, as in the past, by way of debt and/or equity financings. Such additional funding may not be available on reasonable terms, if at all.
Although our audited financial statements for the year ended December 31, 2021 were prepared under the assumption that we would continue operations as a going concern, the report of our independent registered public accounting firm that accompanies our financial statements for the year ended December 31, 2021 contains a going concern qualification in which such firm expressed substantial doubt about our ability to continue as a going concern, based on the financial statements at that time. Specifically, as noted above, we have incurred significant operating losses and we expect to continue to incur significant expenses and operating losses as we continue to ramp up the commercialization of INVOcell and develop new INVO Centers. These prior losses and expected future losses have had, and will continue to have, an adverse effect on our financial condition. If we cannot continue as a going concern, our stockholders would likely lose most or all of their investment in us.
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Cash Flows
The following table shows a summary of our cash flows for the nine months ended September 30, 2022 and 2021:
| 2022 | 2021 | |||||||
| Cash (used in) provided by: | ||||||||
| Operating activities | (5,599,174 | ) | (4,518,808 | ) | ||||
| Investing activities | (89,800 | ) | (1,235,673 | ) | ||||
| Financing activities | 289,800 | 369,840 | ||||||
Cash Flows from Operating Activities
As of September 30, 2022, we had approximately $0.3 million in cash compared to approximately $4.7 million as of September 30, 2021. Net cash used in operating activities for the first nine months of 2022, was approximately $5.6 million, compared to approximately $4.5 million for the same period in 2021. The increase in net cash used in operations was primarily due to the increase in net loss.
Cash Flows from Investing Activities
During the nine months ended September 30, 2022, cash used in investing activities of $0.1 million was primarily related to a loss on equity method for the JVs, payments to acquire property, plants, and equipment, as well as additional trademarks. During the nine months ended September 30, 2021, cash used in investing activities of approximately $1.2 million was related to notes receivable and payments to acquire property, plant, and equipment.
Cash Flows from Financing Activities
During the nine months ended September 30, 2022, cash provided by financing activities of approximately $0.3 million was primarily related to the sale of common stock. During the nine months ended September 30, 2021, cash provided by financing activities of approximately $0.4 million related to the exercise of unit purchase options and warrants.
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.
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See Note 1 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for a summary of significant accounting policies and the effect on our financial statements.
Stock Based Compensation
We account for stock-based compensation under the provisions of ASC 718-10 Share-Based Payment (formerly SFAS 123R). This statement requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period in which the employee is required to provide service or performance goals in exchange for the award, which is usually immediate but sometimes over a vesting period. Warrants granted to non-employees are recorded as an expense over the requisite service period based on the grant date and the estimated fair value of the grant, which is determined using the Black-Scholes option pricing model.
Revenue Recognition
We recognize revenue on arrangements in accordance with ASC 606, Revenue from Contracts with Customers. The core principle of ASC 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services ASC 606 requires companies to assess their contracts to determine the timing and amount of revenue to recognize under the new revenue standard. The model has a five-step approach:
| 1. | Identify the contract with the customer. |
| 2. | Identify the performance obligations in the contract. |
| 3. | Determine the total transaction price. |
| 4. | Allocate the total transaction price to each performance obligation in the contract. |
| 5. | Recognize as revenue when (or as) each performance obligation is satisfied. |
Variable Interest Entities
The Company’s consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and variable interest entities (“VIE”), where the Company is the primary beneficiary under the provisions of ASC 810, Consolidation (“ASC 810”). A VIE must be consolidated by its primary beneficiary when, along with its affiliates and agents, the primary beneficiary has both: (i) the power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) the obligation to absorb losses or the right to receive the benefits of the VIE that could potentially be significant to the VIE. The Company reconsiders whether an entity is still a VIE only upon certain triggering events and continually assesses its consolidated VIEs to determine if it continues to be the primary beneficiary.
Equity Method Investments
Investments in unconsolidated affiliates in which we exert significant influence but do not control or otherwise consolidate are accounted for using the equity method. Equity method investments are initially recorded at cost. These investments are included in investment in joint ventures in the accompanying consolidated balance sheets. Our share of the profits and losses from these investments is reported in loss from equity method investment in the accompanying consolidated statements of operations. Management monitors its investments for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the investees and records reductions in carrying values when necessary.
Recently Issued Accounting Standards Not Yet Effective or Adopted
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on the accompanying condensed consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosures about Market Risks
The Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.
Item 4. Controls and Procedures
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, 2022, the end of the fiscal period covered by this Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2022.
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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2021 (“Annual Report”) as filed with the SEC on March 31, 2022, as amended. There have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
In October and November 2022, we received $0.35 million through the issuance of demand notes from a related party, JAG Multi Investments LLC (“JAG”). Our CFO is a beneficiary of JAG but does not have any control over JAG’s investment decisions with respect to the Company. If paid prior to December 31, 2022, the demand notes are interest free until December 31, 2022. For any amount that remains outstanding past December 31, 2022, 10% annual interest would accrue from the date of issuance. At maturity, we agreed to pay outstanding principal, a 10% financing fee and accrued interest, if any. The demand notes are callable with 10 days prior written notice, which may be delivered to us starting 30 days from issuance.
Item 6. Exhibits
| Exhibit No. |
Description | |
| 4.1* | Form of Demand Note | |
| 31.1* | Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1** | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104* | Cover Page Interactive Data File - the cover page from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 is formatted in Inline XBRL |
| * Filed herewith. | ||
| ** Furnished herewith. |
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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 November 14, 2022.
| INVO Bioscience, Inc. | ||
| Date: November 14, 2022 | By: | /s/ Steven Shum |
| Steven Shum, Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 14, 2022 | By: | /s/ Andrea Goren |
| Andrea Goren, Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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