INVO BioScience(INVO) - 2021 Q2 - Quarterly Report

Preliminary Information This section covers forward-looking statements and details the company's reverse stock splits Forward Looking Statements This section outlines forward-looking statements, their inherent risks, and the company's disclaimer regarding updates - Statements in the report are forward-looking, based on current expectations, estimates, forecasts, and projections, and are subject to risks and uncertainties[8] - Key factors that could cause actual results to differ include ability to commercialize products, regulatory approvals, market size and acceptance, economic conditions, intellectual property protection, competition, and financing availability[8] - The company disclaims any intention or obligation to update forward-looking statements[8] Reverse Stock Splits This section details the two reverse stock splits effected in 2020 and their retroactive financial statement restatement - A 1-for-20 reverse stock split was effected on May 26, 2020[9] - A 5-for-8 reverse stock split was effected on November 9, 2020[9] - All shares, options, and warrants in the consolidated financial statements have been retroactively restated to reflect these reverse splits[9] Part I. Financial Information This part presents the company's unaudited consolidated financial statements and management's discussion and analysis Item 1. Financial Statements This section presents INVO Bioscience's unaudited consolidated financial statements and comprehensive explanatory notes Consolidated Balance Sheets This section presents the company's unaudited consolidated balance sheets, detailing assets, liabilities, and equity Consolidated Balance Sheet Highlights (Unaudited) | Metric | June 30, 2021 | December 31, 2020 | | :--------------------------------- | :-------------- | :------------------ | | Cash | $6,643,080 | $10,097,760 | | Total current assets | $7,231,576 | $10,542,531 | | Total assets | $9,931,188 | $10,947,343 | | Total current liabilities | $1,717,053 | $2,287,991 | | Total liabilities | $5,572,845 | $5,204,237 | | Total stockholders' equity | $4,358,343 | $5,743,106 | - Cash decreased by approximately $3.45 million from December 31, 2020, to June 30, 2021[13] - Total assets decreased by approximately $1.02 million, while total liabilities increased by approximately $0.37 million[13] Consolidated Statements of Operations This section presents the unaudited consolidated statements of operations, outlining revenue, expenses, and net loss Consolidated Statements of Operations Highlights (Unaudited) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $208,472 | $246,072 | $892,995 | $504,643 | | Gross profit | $193,877 | $224,902 | $815,655 | $453,479 | | Selling, general and administrative expenses | $2,049,422 | $1,252,939 | $4,164,725 | $2,847,985 | | Research and development expenses | $31,016 | $34,890 | $97,283 | $64,940 | | Loss from operations | $(1,886,561) | $(1,062,927) | $(3,446,353) | $(2,459,446) | | Net loss | $(1,817,163) | $(1,322,881) | $(4,270,632) | $(2,767,273) | | Basic net loss per common share | $(0.17) | $(0.27) | $(0.42) | $(0.56) | - Total revenue decreased by 15% for the three months ended June 30, 2021, but increased by 77% for the six months ended June 30, 2021, compared to the respective prior periods[15] - Net loss increased significantly for both the three-month (37.3%) and six-month (54.3%) periods ended June 30, 2021, primarily due to higher operating expenses[15] Consolidated Statements of Stockholders' Equity (Deficiency) This section presents the unaudited consolidated statements of stockholders' equity, detailing changes in capital and deficit Consolidated Statements of Stockholders' Equity Highlights (Unaudited) | Metric | June 30, 2021 | December 31, 2020 | | :--------------------------------- | :-------------- | :------------------ | | Common Stock (Shares) | 10,459,035 | 9,639,268 | | Common Stock (Amount) | $1,046 | $964 | | Additional Paid-in Capital | $40,864,011 | $37,978,224 | | Accumulated Deficit | $(36,506,714) | $(32,236,082) | | Total Stockholders' Equity | $4,358,343 | $5,743,106 | - Total stockholders' equity decreased by approximately $1.38 million from December 31, 2020, to June 30, 2021, mainly due to the net loss[16] - Common stock shares outstanding increased from 9,639,268 to 10,459,035, driven by conversions of notes payable, warrant exercises, and stock issued to employees/consultants[16] Consolidated Statements of Cash Flows This section presents the unaudited consolidated statements of cash flows, categorizing activities into operating, investing, and financing Consolidated Statements of Cash Flows Highlights (Unaudited) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(2,909,137) | $(2,014,414) | | Net cash used in investing activities | $(915,383) | $(29,730) | | Net cash provided by financing activities | $369,840 | $2,309,510 | | Cash and cash equivalents at end of period | $6,643,080 | $1,503,951 | - Net cash used in operating activities increased by approximately $0.89 million for the six months ended June 30, 2021, compared to the same period in 2020[19] - Cash used in investing activities significantly increased to $915,383 in 2021, primarily due to notes receivable for joint ventures and acquisition of patents/trademarks[19] - Cash provided by financing activities decreased substantially from $2.31 million in 2020 (due to convertible notes) to $0.37 million in 2021 (from warrant/option exercises)[19] Notes to the Condensed Consolidated Financial Statements This section provides detailed notes explaining the company's business, accounting policies, and specific financial line items Note 1 – Description of Business This note describes INVO Bioscience as an ART medical device company, focusing on its INVOcell device for intravaginal culture - INVO Bioscience is a medical device company specializing in Assisted Reproductive Technology (ART)[22] - The company's primary product is INVOcell, the first Intravaginal Culture (IVC) system for natural in vivo incubation of eggs and sperm[22] - INVOcell received FDA clearance in November 2015 and CE mark in October 2019, offering a more natural, safe, effective, efficient, and economical fertility treatment compared to IVF and IUI[22] Note 2 – Summary of Significant Accounting Policies This note details significant accounting policies, including financial statement presentation, consolidation, revenue recognition, and loss per share - The financial statements are unaudited and prepared in conformity with GAAP, consolidating accounts of the Company and its wholly-owned subsidiaries, including Variable Interest Entities (VIEs) where the Company is the primary beneficiary[24][25][29] - Revenue is recognized in accordance with ASC 606, following a five-step model, with product revenue recognized upon shipment and license revenue (e.g., Ferring agreement) recognized over the subscription period[38][39][40][42] - Basic and diluted loss per share are the same due to the anti-dilutive effect of potential shares given the company's net loss[44] Note 3 – Inventory This note details inventory valuation using FIFO and presents a slight decrease in total inventory for the period Inventory Components | Component | June 30, 2021 | December 31, 2020 | | :---------------- | :-------------- | :------------------ | | Raw materials | $67,909 | $72,022 | | Work in process | $- | $29,645 | | Finished goods | $182,875 | $163,705 | | Total inventory | $250,784 | $265,372 | - Total inventory decreased by $14,588 from December 31, 2020, to June 30, 2021[48] Note 4 – Property and Equipment This note describes property and equipment accounting, including depreciation methods and changes in net value Property and Equipment, Net | Category | June 30, 2021 | December 31, 2020 | | :-------------------- | :-------------- | :------------------ | | Manufacturing equipment | $132,513 | $132,513 | | Medical equipment | $49,261 | $49,261 | | Office equipment | $2,689 | $2,689 | | Less: accumulated depreciation | $(57,312) | $(52,257) | | Total equipment, net | $127,151 | $132,206 | - Depreciation expense for the six months ended June 30, 2021, and 2020, was $5,055 for both periods[51] Note 5 – Patents and Trademarks This note details accounting for patents and trademarks, including capitalization, amortization, and impairment review Patent Costs, Net | Category | June 30, 2021 | December 31, 2020 | | :-------------------- | :-------------- | :------------------ | | Patents | $95,354 | $77,722 | | Accumulated amortization | $(73,199) | $(72,295) | | Total patent costs, net | $22,155 | $5,427 | - Amortization expenses related to patents were $904 for the six months ended June 30, 2021, and $903 for the same period in 2020[56] - Trademark assets increased by $17,751 due to additional legal fees; trademarks have an indefinite life and are not amortized[57] Note 6 – Notes Receivable This note details the new notes receivable balance, primarily from a joint venture partner, including interest and repayment terms Notes Receivable | Category | June 30, 2021 | December 31, 2020 | | :-------------------------- | :-------------- | :------------------ | | Notes receivable – HRCFG, LLC | $881,827 | $- | | Total notes receivable | $881,827 | $- | - The note with HRCFG, LLC, includes $880,000 principal and $1,827 accrued interest as of June 30, 2021[58] Note 7 – Leases This note outlines operating lease accounting under Topic 842, detailing ROU assets, lease liabilities, and future payments Lease Components on Consolidated Balance Sheet | Lease Component | June 30, 2021 | | :-------------------------- | :-------------- | | ROU assets - operating lease | $1,419,925 | | Current operating lease liability | $96,921 | | Long-term operating lease liability | $1,355,323 | | Total lease liabilities | $1,452,244 | Future Minimum Lease Payments as of June 30, 2021 | Year | Amount | | :------------------------ | :-------------- | | 2021 | $58,524 | | 2022 | $137,388 | | 2023 | $140,668 | | 2024 | $125,762 | | 2025 and beyond | $1,193,694 | | Total future minimum lease payments | $1,656,036 | Note 8 – Convertible Notes and Notes Payable This note details convertible notes, their terms, and the forgiveness of the Paycheck Protection Program loan - The 2020 Convertible Notes, with an original principal of $3,494,840, accrue interest at 10% per annum and are convertible into common stock at $3.20 per share[65][66][67] 2020 Convertible Notes Principal Balances | Category | June 30, 2021 | December 31, 2020 | | :-------------------------- | :-------------- | :------------------ | | 2020 Convertible Notes | $500,000 | $1,700,000 | | Accrued interest | $1,111 | $24,373 | | Less beneficial conversion feature discount | $(94,773) | $(604,897) | | Less options discount | $(59,018) | $(224,051) | | Less warrants discount | $(62,460) | $(229,954) | | Less issuance cost | $(34,924) | $(129,408) | | Total, net of discount | $249,936 | $536,063 | - A Paycheck Protection Program loan of $157,620, plus $1,506 of accrued interest, was forgiven on June 16, 2021, resulting in a gain of $159,126 recognized as other income[80] Note 9 – Related Party Transactions This note discloses a related party transaction involving a director's company acting as co-managing underwriter for a public offering - Paulson Investment Company, where director Trent Davis is President, received $271,440 in fees and commissions for co-managing the company's public offering in November 2020[82] Note 10 – Stockholders' Equity This note details changes in stockholders' equity, including reverse stock splits, a public offering, and equity issuances - The company completed a public offering in November 2020, selling 4,153,750 shares of common stock at $3.20 per share, generating approximately $11.8 million in net proceeds[86] - In March 2021, 388,684 shares of common stock were issued with a fair value of $1,243,788 from the conversion of notes payable and accrued interest[88] - During the first half of 2021, the company issued 39,806 shares to employees/directors and 96,500 shares to consultants under the 2019 Stock Incentive Plan, with fair values of $186,786 and $324,850, respectively[92] Note 11 – Equity-Based Compensation This note outlines the 2019 Stock Incentive Plan, detailing stock option activity, valuation, and compensation expense Stock Option Activity (2019 Plan) | Metric | Number of Shares | Weighted Average Exercise Price ($) | | :-------------------------------- | :--------------- | :------------------------------ | | Outstanding as of December 31, 2020 | 939,114 | $5.73 | | Granted | 179,797 | $3.14 | | Balance as of June 30, 2021 | 1,118,911 | $5.32 | | Exercisable as of June 30, 2021 | 582,858 | $2.63 | - Stock-based compensation expense for stock options was $760,606 for the six months ended June 30, 2021, up from $596,390 in the prior year[100] - Stock-based compensation expense for restricted stock and restricted stock units was $178,806 for the six months ended June 30, 2021, compared to $320,971 in the prior year[104] Note 12 – Unit Purchase Options and Warrants This note details unit purchase options and warrants, their activity, and fair value estimation using a Monte Carlo model Unit Purchase Options Activity | Metric | Number of Unit Purchase Options | Weighted Average Exercise Price ($) | | :-------------------------------- | :------------------------------ | :------------------------------ | | Outstanding as of December 31, 2020 | 303,623 | $3.20 | | Exercised | 210,730 | $3.20 | | Balance as of June 30, 2021 | 92,893 | $3.20 | Warrants Activity | Metric | Number of Warrants | Weighted Average Exercise Price ($) | | :-------------------------------- | :----------------- | :------------------------------ | | Outstanding as of December 31, 2020 | 310,373 | $3.48 | | Exercised | 180,323 | $3.20 | | Balance as of June 30, 2021 | 130,050 | $3.74 | - A Monte Carlo model was used to estimate the fair value of unit purchase options and warrants due to features like fundamental transaction payouts and reset events[106] Note 13 – Income Taxes This note details income tax accounting, including deferred tax assets, valuation allowance, and a 0% effective tax rate - The company uses the asset and liability method for income taxes and has a valuation allowance for all deferred tax assets due to uncertain recoverability[111] - Income tax expense was $0 for both the three and six months ended June 30, 2021 and 2020[112] - The annual forecasted effective income tax rate for 2021 is 0%[112] Note 14 – Commitments and Contingencies This note discloses a legal proceeding regarding promissory notes and conversion rights, with no expected material adverse effect - The company is involved in a legal dispute with James Bowdring concerning promissory notes and his alleged right to convert them into common stock, which the company disputes[113] - The company does not currently expect the lawsuit to have a material adverse effect on its results of operations, financial position, or cash flows[115] Note 15 – Subsequent Events This note reports subsequent events, specifically the issuance of common stock to employees in July and August 2021 - In July and August 2021, the company issued 10,000 shares of common stock to employees under its 2019 Stock Incentive Plan[116] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's discussion and analysis of financial condition, operations, liquidity, and critical accounting policies Overview This section provides an overview of INVO Bioscience's business, focusing on its ART technology and INVOcell device benefits - INVO Bioscience is a medical device company focused on Assisted Reproductive Technology (ART), aiming to increase access to care and expand fertility treatment globally with its INVOcell device[118] - The INVOcell device offers a more natural, safe, effective, efficient, and economical fertility treatment compared to conventional IVF, utilizing the woman's vaginal cavity for embryo development[118] - Benefits of the INVO solution include approximately half the cost of IVF, enhanced patient capacity by eliminating the need for a lab incubator, reduced risk of embryo transfer errors, greater couple involvement, and a more natural incubation environment[122] Sales and Marketing This section outlines the company's commercialization strategy, focusing on distributors, partners, and INVO Centers globally - Commercialization efforts focus on identifying distributors and partners in targeted geographic regions to promote and sell the INVOcell device[123] - The company's primary focus in the U.S. is supporting the exclusive distribution agreement with Ferring International Center S.A. and establishing INVO Centers[123] Current International Distribution Agreements | Market | Distribution Partner | Initial Term | INVOcell Registration Status | | :------------- | :--------------------------------------- | :----------- | :--------------------------- | | Canada | Invaron Pharmaceuticals Inc. | 1-Year | Completed | | Mexico | Positib Fertility, S.A. de C.V. | TBD | Completed | | Malaysia | iDS Medical Systems | 3-year | Completed | | Turkey | Orcan Medical | 1-year | Completed | | Jordan | Biovate | 1-year | Completed | | Pakistan | Galaxy Pharma | 1-year | In process | | Thailand | IVF Envimed Co., Ltd. | 1-year | In process | | Sudan | Quality Medicines, Cosmetics & Medical Equipment Import | 1-year | In process | | Ethiopia | Quality Medicines, Cosmetics & Medical Equipment Import | 1-year | In process | | Uganda | Quality Medicines, Cosmetics & Medical Equipment Import | 1-year | In process | | Nigeria | G-Systems Limited | 1-year | Completed | | Togolese Republic | INVOSOLUX TOGO | 1-year | In process | | Iran | Tasnim Behboud | 1-year | In process | Investment in Joint Ventures and Partnerships This section details the company's strategy of forming joint ventures and partnerships to establish new INVO Centers globally - The company's commercialization strategy includes forming joint ventures and partnerships to establish new INVO Centers globally[132] Current Joint Venture Arrangements | Subsidiary Name | Country | Percent (%) Ownership | | :------------------------------------------ | :-------------- | :-------------------- | | HRCFG INVO, LLC | United States | 50% | | Bloom Invo, LLC | United States | 40% | | Positib Fertility, S.A. de C.V. | Mexico | 33% | | SNS MURNI INVO Bioscience Malaysia Sendirian Berhad | Malaysia | 50% | | Ginekalix INVO Bioscience LLC Skopje | North Macedonia | 50% | | Medesole INVO Bioscience India | India | 50% | - Key partnerships include the Alabama JV (HRCFG INVO, LLC), Atlanta JV (Bloom INVO LLC), Mexico JV (Positib Fertility, S.A. de C.V.), Malaysia JV, North Macedonia JV, India JV, and a partnership with Lyfe Medical Center I, LLC in California[134][135][137][139][140][142][144] Operations This section describes the company's operational model, outsourcing manufacturing, and expected continued losses due to expansion - The company operates with a core internal team and outsources manufacturing, assembly, packaging, labeling, and sterilization to reduce fixed overhead and capital equipment needs[145] - Cash needs are primarily for funding sales and marketing, training, existing obligations, clinical activities for label expansion, administrative infrastructure, and public company professional fees[146] - The company expects to continue incurring losses in 2021 due to investments in INVO Centers and global expansion, anticipating increased revenue from distribution and partnership agreements to offset spending[147][148] Results of Operations This section analyzes the company's financial performance, highlighting revenue, expenses, and net loss for the period - The company made progress in commercialization, adding key personnel, and signing a new joint venture for the Atlanta Clinic, with first patient visits expected in H2 2021[150] - The ART market benefits from tailwinds including a large underserved patient population, increasing infertility rates, growing awareness and acceptance of treatments, improved techniques, and better insurance reimbursement[152] Key Financial Performance (YoY Comparison) | Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | Change (YoY) | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | Change (YoY) | | :----------------------------------- | :--------------------------- | :--------------------------- | :----------- | :--------------------------- | :--------------------------- | :----------- | | Revenue | $0.21 million | $0.25 million | -15% | $0.9 million | $0.5 million | +77% | | Gross Profit | $0.19 million | $0.22 million | -13.6% | $0.8 million | $0.5 million | +60% | | Gross Margin | 93% | 91% | +2 pp | 91% | 90% | +1 pp | | Selling, General & Administrative Expenses | $2.0 million | $1.3 million | +64% | $4.2 million | $2.9 million | +46% | | Research & Development Expenses | $31,016 | $34,890 | -11.2% | $97,283 | $64,940 | +50% | | Other Income | $0.16 million | $0 | N/A | $0.16 million | $0 | N/A | | Interest Income | $2,425 | $0 | N/A | $4,438 | $0 | N/A | | Interest Expense & Financing Fees | $0.09 million | $0.26 million | -65.4% | $1.0 million | $0.3 million | +233.3% | | Foreign Currency Exchange Loss | $1,028 | $0 | N/A | $1,492 | $0 | N/A | Liquidity and Capital Resources This section discusses the company's liquidity, working capital, and future funding needs to support its business strategy - Net losses for the six months ended June 30, 2021, were approximately $4.3 million, an increase from $2.8 million in the prior year, with $2.0 million attributed to non-cash expenses[171] - Working capital decreased from approximately $8.3 million as of December 31, 2020, to $5.5 million as of June 30, 2021[171] - The company believes it has sufficient liquidity for at least the next 12 months, but may need additional funding through debt, equity, or licensing fees to meet longer-term needs and execute its business strategy[172][173] Cash Flows This section summarizes cash flow activities from operations, investing, and financing for the reported periods Summary of Cash Flows (Six Months Ended June 30) | Cash Flow Activity | 2021 | 2020 | | :--------------------------------- | :------------- | :------------- | | Operating activities | $(2,909,137) | $(2,014,414) | | Investing activities | $(915,383) | $(29,730) | | Financing activities | $369,840 | $2,309,510 | | Cash and cash equivalents at end of period | $6,643,080 | $1,503,951 | - Net cash used in operating activities increased by approximately $0.9 million, primarily due to increased net loss, partially offset by changes in accrued compensation and inventory[175] - Cash used in investing activities significantly increased due to notes receivable for joint ventures and acquisition of trademarks and patents[176] - Cash provided by financing activities decreased substantially as 2020 included proceeds from convertible notes, while 2021 primarily saw proceeds from warrant and unit purchase option exercises[177] Critical Accounting Policies and Estimates This section outlines critical accounting policies, including stock-based compensation, revenue recognition, and variable interest entities - Critical accounting policies include stock-based compensation (measured at grant-date fair value over vesting period), revenue recognition (following ASC 606's five-step model), and variable interest entities (assessing control and primary beneficiary status for consolidation)[180][181][182][183][184] Item 3. Quantitative and Qualitative Disclosures about Market Risks This section states that there are no applicable quantitative and qualitative disclosures about market risks for the period - This item is not applicable[185] Item 4. Controls and Procedures This section details the company's disclosure controls and procedures, confirming their effectiveness and no material changes Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of June 30, 2021 - Management, under the supervision of the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[187] Changes in Internal Controls Over Financial Reporting This section states that there were no material changes in internal controls over financial reporting during the period - There were no changes to the company's internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the period[188] Part II. Other Information This part provides additional information, including legal proceedings, risk factors, and other required disclosures Item 1. Legal Proceedings This section refers readers to the Annual Report on Form 10-K for a description of pending litigation - For a description of pending litigation, refer to Note 13 to the financial statements in the Annual Report on Form 10-K for the year ended December 31, 2020[190] Item 1A. Risk Factors This section directs readers to the Annual Report on Form 10-K for risk factors, noting no material changes - Readers should review the risk factors in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020[191] - There have been no material changes from the risk factors disclosed in the 2020 Annual Report on Form 10-K[191] Item 2. Unregistered Issuance of Equity Securities and Use of Proceeds This section states that there were no unregistered issuances of equity securities or use of proceeds to report - None[192] Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period - None[193] Item 4. Mine Safety Disclosure This section states that mine safety disclosure is not applicable to the company - Not applicable[194] Item 5. Other Information This section refers to Current Reports on Form 8-K filed on June 30, 2021, and June 15, 2021, for additional information - Refer to Current Reports on Form 8-K filed on June 30, 2021, and June 15, 2021[194] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including Sarbanes-Oxley Act certifications - Exhibits include Certifications of Principal Executive Officer and Principal Financial Officer under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[196] Signatures This section contains the official signatures of the company's Chief Executive Officer and Chief Financial Officer Signatures This section confirms the report's official signing by the Chief Executive Officer and Chief Financial Officer on August 16, 2021 - The report was signed by Steven Shum, Chief Executive Officer, and Andrea Goren, Chief Financial Officer, on August 16, 2021[199]