INVO BIOSCIENCE, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

Certain statements made in this Quarterly Report on Form 10-Q, including without
limitation this Management’s Discussion and Analysis of Financial Condition and
Results of Operations, other than statements of historical information, are
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements may sometimes be identified by such
words as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and
“continue” or similar words. We believe that it is important to communicate our
future expectations to investors. However, these forward-looking statements
involve many risks and uncertainties including those referred to herein and in
our Annual Report on Form 10-K for the year ended December 31, 2021. Our actual
results could differ materially from those indicated in such forward-looking
statements as a result of certain factors. Except as required by law, we
undertake no obligation to update any forward-looking statements to reflect
events or circumstances after the date of such statements.

Overview

We are a commercial-stage fertility company dedicated to expanding the assisted
reproductive technology (“ART”) marketplace by making fertility care accessible
and inclusive to people around the world. Our primary mission is to implement
new medical technologies aimed at increasing the availability of affordable,
high-quality, patient-centered fertility care. Our flagship product is INVOcell,
a revolutionary medical device that allows fertilization and early embryo
development to take place in vivo within the woman’s body. This treatment
solution is the world’s first intravaginal culture technique for the incubation
of oocytes and sperm during fertilization and early embryo development. This
technique, designated as “IVC”, provides patients a more connected and intimate
experience in comparison to other ART treatments. We believe the IVC procedure
can deliver comparable results at a lower cost than traditional in vitro
fertilization (“IVF”) and is a significantly more effective treatment than
intrauterine insemination (“IUI”). Our commercialization strategy is focused on
the opening of dedicated “INVO Centers” offering the INVOcell and IVC procedure
(with three centers in North America now operational), in addition to continuing
to distribute and sell our technology solution into existing fertility clinics.

Unlike conventional infertility treatments such as IVF where the oocytes and
sperm develop into embryos in an expensive laboratory incubator, the INVOcell
allows fertilization and early embryo development to take place in the woman’s
body. This allows for many benefits in the IVC procedure, including:

? Eliminates expensive and time-consuming lab equipment and corresponding
procedures, allowing clinics and doctors to increase patient capacity and
reduce costs;
? Provides a natural, stable incubation environment;
? Offers a more personal, intimate experience for patients; and
? Reduces the risk of errors and wrong embryo transfers.

In both current utilization of the INVOcell, and in clinical studies, the IVC
procedure has demonstrated equivalent pregnancy success and live birth rates to
those of IVF.

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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.

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Greater patient involvement. With the IVC procedure, the patient uses their own
body for fertilization, incubation, and early embryo development which creates a
greater sense of involvement, comfort, and participation. In some cases, this
may also free people from barriers related to due to ethical or religious
concerns, or fears of laboratory mix-ups.

Sales and Marketing

Our product commercialization efforts are focused on identifying distributors
and partners within targeted geographic regions that we believe can best
promote, market and sell the INVOcell and support our efforts to expand access
to advanced fertility treatment for the large number of underserved infertile
people hoping to have a baby. We believe that the IVC procedure is an effective
and affordable treatment option that greatly reduces the need for more expensive
IVF lab facilities and allows providers to pass on related savings to patients
without compromising efficacy. We have been cleared to sell the INVOcell in the
United States since November 2015 after receiving de novo class II clearance
from the FDA. Our primary focus has been on establishing INVO Centers to promote
the INVOcell and the IVC procedure, selling the INVOcell directly to U.S.
fertility clinics, and developing key international market partnerships around
the world.

In late 2021, we made substantial progress with our INVO Center strategy by
opening three locations – Birmingham, Alabama, Atlanta, Georgia, and Monterrey,
Mexico – and remain focused on opening additional locations in the US and abroad
to expand access to INVOcell and the IVC procedure.

We anticipate that we will experience quarterly fluctuations in our revenue as
we expand the sales of the INVOcell to new markets in the U.S. and globally. We
continue to seek partners that will contractually commit to meeting agreeable
performance objectives that are consistent with our goals and objectives.

Ferring

On November 12, 2018, we entered into a U.S. Distribution Agreement (the
“Ferring Agreement”) with Ferring International Center S.A. (“Ferring”), which
closed on January 14, 2019. Pursuant to the Ferring Agreement, among other
things, we granted Ferring an exclusive license in the United States to market,
promote, distribute, and sell the INVOcell. Ferring was responsible, at its own
cost, for all commercialization activities in the United States. We retained a
limited exception to the exclusive license granted to Ferring allowing us,
subject to certain restrictions, to establish up to five INVO Centers in the
United States, which as of March 2, 2021, was amended to seven centers. We
retained all commercialization rights for the INVOcell outside of the United
States.

On November 2, 2021, Ferring notified us of its intention to terminate the
Ferring Agreement, which required 90-days prior written notice. Accordingly, the
Ferring Agreement officially terminated on January 31, 2022. Pursuant to the
terms of the Ferring Agreement, upon notice of termination, Ferring was required
to use commercially reasonable efforts to transition any customers to us and
otherwise facilitate the orderly transition of the distribution from Ferring to
us. By its terms, our Supply Agreement with Ferring also terminated on January
31, 2022.

The Ferring license was deemed to be a functional license that provides the
counterparty with a “right to access” to our intellectual property during the
subscription period and accordingly, revenue is recognized over a period of
time, which is generally the subscription period. During the years ended
December 31, 2021, and 2020, we recognized $3.6 million and $0.7 million of
revenue related to the Ferring license agreement, respectively.

As of December 31, 2021, we had no deferred revenue related to the Ferring
Agreement as it was recognized in the fourth quarter of fiscal year 2021 in
relation to the contract termination. The likelihood of Ferring exercising its
rights became remote at the time notice of termination was received therefore
INVO recognized the full remaining amount of the deferred revenue.

International Distribution Agreements

We have entered into exclusive distribution agreements for a number of
international markets. These agreements usually have an initial term with
renewal options and require the distributors to meet minimum annual purchases,
which vary depending on the market. We are also required to register the product
in each market before the distributor can begin importing, a process and
timeline that can vary widely depending on the market.

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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

Invaron
Canada Pharmaceuticals Inc. July 2020 1-Year Completed
Positib Fertility,
Mexico (a) S.A. de C.V. Sept 2020 TBD** Completed
Malaysia iDS Medical Systems Nov 2020 3-year Completed
Jordan Biovate Sept 2019 1-year Completed
Pakistan Galaxy Pharma Dec 2020 1-year In process
Thailand IVF Envimed Co., Ltd. April 2021 1-year Complete
Quality Medicines,
Cosmetics & Medical
Sudan Equipment Import Sept 2020 1-year In process
Quality Medicines,
Cosmetics & Medical
Ethiopia Equipment Import Sept 2020 1-year In process
Quality Medicines,
Cosmetics & Medical
Uganda Equipment Import Sept 2020 1-year Not required
Nigeria G-Systems Limited Sept 2020 5-year Completed
Togolese Republic INVOSOLUX TOGO Nov 2019 1-year In process
Iran Tasnim Behboud Dec 2020 1-year Complete
Sri Lanka Alsonic Limited July 2021 1-year In process

(a) Our Mexico JV. Please note that the registration is temporarily in the name
of Proveedora de Equipos y Productos, S.A. de C.V. and will be transferred
to Positib Fertility as soon as practicable.

Investment in Joint Ventures and Partnerships

As part of our commercialization strategy, we entered into a number of joint
ventures and partnerships designed to establish new INVO Centers.

The following table sets forth a list of our current joint venture arrangements:

Percent (%)
Affiliate Name Country Ownership

United
HRCFG INVO, LLC States 50 %
United
Bloom Invo, LLC States 40 %
Positib Fertility, S.A. de C.V. Mexico 33 %
SNS MURNI INVO Bioscience Malaysia Sendirian Berhad Malaysia 50 %
Republic of
North
Ginekalix INVO Bioscience LLC Skopje Macedonia 50 %

The following table sets forth a list of our current partnership arrangements:

Partner Country Partnership Split
Lyfe Medical United States 40 %

Alabama JV Agreement

On March 10, 2021, our wholly owned subsidiary, INVO Centers, LLC (“INVO CTR”),
entered into a limited liability company agreement with HRCFG, LLC (“HRCFG”) to
form a joint venture for the purpose of establishing an INVO Center in
Birmingham, Alabama. The name of the joint venture LLC is HRCFG INVO, LLC (the
“Alabama JV”). The responsibilities of HRCFG’s principals include providing
clinical practice expertise, performing recruitment functions, providing all
necessary training, and providing day-to-day management of the clinic. The
responsibilities of INVO CTR include providing certain funding to the Alabama JV
and providing access to and being the exclusive provider of the INVOcell to the
Alabama JV. INVO CTR will also perform all required, industry specific
compliance and accreditation functions, and product documentation for product
registration.

The Alabama JV opened to patients on August 9, 2021, and initial treatment
cycles commenced in September 2021.

The Alabama JV is accounted for using the equity method in our financial
statements. As of March 31, 2022 we invested $1.7 million in the Alabama JV in
the form of a note. For the three months ended March 31, 2022, the Alabama JV
recorded a net loss of $0.1 million of which we recognized a loss from equity
method investment of $0.05 million.

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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 March 31, 2022, INVO invested $0.7 million in the Georgia JV in the form of
capital contributions as well as $0.5 million in the form of a note. For the
months ended March 31, 2022, the Georgia JV recorded a net loss of $0.2 million.
Noncontrolling interest in the Georgia JV was $0. See Note 3 of the Notes to
Consolidated Financial Statements included in Item 8 of this Annual Report on
Form 10-K for additional information on the Georgia JV.

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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 March 31, 2022, INVO invested $0.2 million in the Mexico JV.
For the three months ended March 31, 2022, the Mexico JV recorded a net loss of
$0.05 million of which we recognized a loss from equity method investment of
$0.02 million.

Malaysia JV Agreement

On November 23, 2020, we entered into a joint venture agreement with SNS Murni
SDN BHD (“SNS Murni”), a company incorporated in Malaysia, to establish an
exclusive joint venture in Malaysia to (i) introduce, promote and market
technologies related to the INVOcell and IVC Procedure in dedicated
government-owned fertility clinics in Malaysia, and (ii) establish INVO Centers
in Malaysia. The joint venture is co-managed and owned 50% by each of INVO
Bioscience and SNS Murni. As of March 31, 2022, no joint venture entity had been
formed.

North Macedonia JV Agreement

On November 23, 2020, we entered into a joint venture agreement with Ginekaliks
Dooel (“Ginekaliks”), a limited liability company incorporated in the Republic
of North Macedonia, to establish an exclusive joint venture to (i)
commercialize, introduce, promote and market technologies related to the
INVOcell and IVC procedure in the Republic of North Macedonia, and (ii)
establish an INVO Center. The joint venture will be co-managed and owned 50% by
each of INVO and Ginekaliks. As of March 31, 2022, no joint venture entity had
been formed.

Lyfe Medical Center I, LLC Partnership Agreement

On April 9, 2021, we entered into a partnership agreement (the “Lyfe Agreement”)
with Lyfe Medical Center I, LLC (“Lyfe”) in connection with Lyfe’s intention to
establish an INVO Center in the Bay Area of California (the “Bay Area Clinic”).
Pursuant to the Lyfe Agreement, we will provide embryology laboratory services
in connection with the IVC procedure and other fertility-related treatments (the
“Lab Services”) to be provided by Lyfe to its patients at the Bay Area Clinic.
Under the terms of the Lyfe Agreement, we will receive 40% of the net income
received by the Bay Area Clinic for the performance of the Lab Services. As of
March 31, 2022, the Bay Area Clinic was not yet operational.

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Results of Operations

During the first quarter of 2022, our fully operational INVO Centers in
Birmingham, Alabama, Atlanta, Georgia, and Monterrey, Mexico continued to make
progress toward building local market awareness and treating patients. We also
continued to expand on our similar marketing efforts to build awareness for the
INVOcell and IVC procedure and to support the efforts of both the INVO Centers
and our distribution partners around the world. During the quarter, we also
announced plans to open INVO Centers in the Tampa, Florida and Kansas City,
Missouri areas, and are working towards opening additional INVO Centers in key
domestic and international markets. We believe we have initially identified more
than 20 markets in the U.S. alone as excellent potential locations for an INVO
Center.

With respect to our distribution efforts, we re-assumed control of the U.S.
market upon the termination of the Ferring Agreement in the first quarter. We
are now selling directly ourselves (rather than through a distributor) to the
existing, established fertility clinics in the U.S. market. During the quarter,
we received several orders from existing IVF clinics that had previously trained
on implementing the IVC procedure within their practices. To support these
efforts, we added sales resources during the first quarter and believe we will
experience growing revenue from these activities going forward. This revenue is
also anticipated to be more consistent from quarter to quarter, as opposed to
the sporadic orders placed by Ferring over the past several years.

From a market strategy perspective, our commercialization efforts will continue
to focus on the substantial, underserved patient population and on expanding
access to advanced fertility treatments. We believe our solutions can help
address the key challenges of affordability and capacity to provide care to the
vast number of patients that go untreated every year. This represents the major
opportunity for INVOcell and the IVC procedure it enables. Despite the COVID
pandemic, the fertility industry continues to expand, and we believe our growing
volume of partners (both distributors and JV INVO Centers) affords us a strong
forward-looking outlook. We believe our INVO Center approach adds much needed
capacity and affordability and aligns with our key mission to open access to
care to the underserved.

The ART market also continues to benefit from a number of industry tailwinds,
including 1) the large under-served potential patient population, 2) increasing
infertility rates around the world 3) growing awareness and education of
fertility treatment options, 4) a growing acceptance of fertility treatment, 5)
improvements in procedure techniques and hence improvements in pregnancy success
rates and 6) generally improving insurance (private and public) reimbursement
trends.

Three months ended March 31, 2022, compared to the three months ended March 31,
2021

Revenue

Revenue for the three months ended March 31, 2022, was approximately $0.2
million compared to approximately $0.7 million for the three months ended March
31, 2021. Of the $0.2 million in revenue for the first quarter of 2022, $0.1 was
related to clinic revenue from the consolidated Atlanta JV. The decrease of
approximately $0.5 million, or approximately 76%, was related to a decrease in
product sales versus a one-time bulk order from Ferring in the previous year
that was made to meet calendar year 2020 minimum purchase commitments in the
Ferring Agreement.

Gross Profit

Gross profit for the three months ended March 31, 2022, was approximately $0.1
million compared to approximately $0.6 million for the three months ended March
31, 2021. Gross margins were approximately 60% and 91% for the three months
ended March 31, 2022, and 2021, respectively. The decrease in gross margin
reflects the lack of Ferring license revenue in the first quarter of 2022
compared to the same period in 2021, as well as the inclusion of consolidated
INVO Center cost of goods sold expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March
31, 2022, were approximately $2.6 million compared to approximately $2.1 million
for the three months ended March 31, 2021. The increase of approximately $0.5
million, or approximately 27%, was primarily the result of approximately $0.2
million in increased expenses related to the operations of the consolidated
Atlanta JV, approximately $0.2 million in increased personnel expenses, and $0.1
million in marketing activities. We also incurred approximately $0.7 million of
non-cash, stock-based compensation expense in the period, compared to $0.6
million for the same period in the prior year.

Research and Development Expenses

We began to fund additional research and development (“R&D”) efforts in 2020 as
part of our 5-day label expansion efforts. R&D expenses were approximately $0.1
million and $0.07 million for the three months ended March 31, 2022, and March
31, 2021, respectively.

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Loss from equity investment

Loss from equity investments for the three months ended March 31, 2022, was
approximately $0.07 million compared to $0 for the three months ended March 31,
2021. The increase in loss is due to the investment in Alabama and Mexico JVs
becoming operational in the second half of 2021.

Interest Expense and Financing Fees

Interest expense and financing fees were approximately $0.1 thousand for the
three months ended March 31, 2022, compared to approximately $0.9 million for
the three months ended March 31, 2021.

Liquidity and Capital Resources

For the three months ended March 31, 2022, and 2021, we had net losses of
approximately $2.8 million and $2.5 million, respectively, and an accumulated
deficit of approximately $41.7 million as of March 31, 2022. Approximately $0.9
million of the net loss was related to non-cash expenses for the three months
ended March 31, 2022, compared to $1.4 million for the three months ended March
31, 2021. We had net working capital of approximately $3.3 million as of March
31, 2022, compared to approximately $5.1 million as of December 31, 2021. As of
March 31, 2022, our stockholder’s equity was approximately $5.6 million compared
to approximately $7.3 million as of December 31, 2021.

We have been dependent on raising capital from debt and equity financings to
meet our needs for cash to fund our operating expenses and investing activities.
During the first three months of 2021, we received approximately $0.4 million of
proceeds from unit purchase option and warrant exercises. During the first three
months of 2022, we received proceeds of approximately $0.3 million for the sale
of our common stock. Our current plan includes opening additional INVO Centers
over the next 12 months. Until we can generate a sufficient amount of cash from
operations and to the extent additional funds are necessary to meet our
longer-term liquidity needs and to execute our business strategy, we will need
to raise additional funding, as in the past, by way of debt and/or equity
financings. Such additional funding may not be available on reasonable terms, if
at all.

Although our audited financial statements for the year ended December 31, 2021,
were prepared under the assumption that we would continue operations as a going
concern, the report of our independent registered public accounting firm that
accompanies our financial statements for the year ended December 31, 2021,
contains a going concern qualification in which such firm expressed substantial
doubt about our ability to continue as a going concern, based on the financial
statements at that time. Specifically, as noted above, we have incurred
significant operating losses and we expect to continue to incur significant
expenses and operating losses as we continue to ramp up the commercialization of
INVOcell and develop new INVO Centers. These prior losses and expected future
losses have had, and will continue to have, an adverse effect on our financial
condition. If we cannot continue as a going concern, our stockholders would
likely lose most or all of their investment in us.

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Cash Flows

The following table shows a summary of our cash flows for the three months ended
March 31:

2022 2021
Cash (used in) provided by:
Operating activities (2,078,119 ) (1,735,384 )
Investing activities (81,890 ) (308,980 )
Financing activities 315,000 369,840

As of March 31, 2022, we had approximately $3.8 million in cash compared to
approximately $8.4 million as of March 31, 2021. Net cash used in operating
activities for the first three months of 2022, was approximately $2.1 million,
compared to approximately $1.7 million for the same period in 2021. The increase
in net cash used in operations was primarily due to the increase in net loss.

During the three months ended March 31, 2022, cash used in investing activities
of $0.1 million was primarily related to a loss on equity method for the JVs,
payments to acquire property, plants, and equipment, as well as additional
trademarks. During the three months ended March 31, 2021, cash used in investing
activities of approximately $0.3 million was related to notes receivable as well
as new molds and trademarks.

During the three months ended March 31, 2022, cash provided by financing
activities of approximately $0.3 million was primarily related to the sale of
common stock, net of offering costs. During the three months ended March 31,
2021, cash provided by financing activities of approximately $0.4 million
related to the exercising of warrants and unit purchase stock options.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition presented in this section
is based upon our audited consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States. During the preparation of the financial statements, we are
required to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate, based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, our results, which allows us to form a basis for making
judgments on the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
based on variance with our assumptions and conditions. A summary of significant
accounting policies is included below. Management believes that the application
of these policies on a consistent basis enables us to provide useful and
reliable financial information about our operating results and financial
condition.

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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.

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