INVO Bioscience, Inc. — FY2019 Form 10-K
Reporting period: Year ended December 31, 2019; comparative figures are for FY2018. The filing was signed March 30, 2020. INVO develops and commercializes INVOcell, an FDA-cleared intravaginal culture fertility device. This is an annual report, not a standalone fourth-quarter report.
Financial performance and position
| Metric | FY2019 / Dec. 31, 2019 | FY2018 / Dec. 31, 2018 |
|---|---|---|
| Revenue | $1.480 million | $494,375 |
| Gross profit (margin) | $1.341 million (about 90.6%) | $404,008 (about 81.7%) |
| Operating expenses | $3.129 million | $3.038 million |
| Operating loss | $1.788 million | $2.634 million |
| Interest expense | $379,019 | $442,031 |
| Net loss | $2.168 million; $0.01 per share | $3.076 million; $0.02 per share |
| Cash and cash equivalents | $1.239 million | $212,243 |
| Operating cash flow | Provided: $1.371 million | Used: $652,971 |
| Working capital | $42,330 | Deficit: $2.770 million |
| Total liabilities | $5.509 million | $3.502 million |
| Stockholders’ deficiency | $3.714 million | $2.724 million |
- FY2019 revenue included $765,927 of product revenue and $714,286 of amortized Ferring license revenue. The $5 million upfront Ferring payment is recognized over the seven-year license term; the balance sheet reports $4.286 million of deferred revenue at year-end.
- Revenue increased about 199% year over year. Product sales to Ferring and the license amortization drove the increase. The reported gross margin benefited from license revenue with no associated cost of sales, and should not be read as a product-only margin.
- Operating cash flow was positive largely because deferred revenue increased by $4.267 million following the upfront license payment. The filing says cash was used in operations in each of the last three quarters of 2019, underscoring that the annual cash-flow figure does not establish sustainable operating cash generation.
- Investing cash outflow was $114,706; financing cash outflow was $229,465, mainly reflecting note repayments. Cash at year-end rose by $1.026 million.
- Convertible notes had approximately $460,000 aggregate principal outstanding, with conversion and adjustment provisions; their reported carrying value is reduced by discounts. The filing also reports 2.73 million shares issuable on conversion at year-end.
Business developments and changes
- INVOcell uses the patient’s vaginal cavity for fertilization and early embryo incubation. The company positions it as a lower-cost alternative to IVF that may expand access by reducing reliance on specialized laboratory facilities.
- Ferring received exclusive U.S. commercialization rights in a distribution and supply agreement that closed in January 2019. Ferring handles U.S. commercialization; INVO retained international rights and a limited right to establish up to five U.S. clinics. Ferring accounted for 99.7% of FY2019 revenue, creating substantial customer and partner concentration.
- INVOcell received CE marking in October 2019, enabling commercial distribution in eligible markets subject to local registration. The company reported more than a doubling in the number of clinics offering the procedure during 2019, and approximately 140 trained U.S. clinics or satellite facilities.
- SG&A rose $90,567 to $3.129 million, reflecting higher wages, professional and legal fees, a legal settlement and other corporate costs, partly offset by lower FDA support costs. Interest expense declined $63,012.
- The company entered distribution agreements covering Sudan, Uganda, Ethiopia, Nigeria, Jordan and Turkey. In January 2020, it announced a 50/50 India joint venture intended to establish INVO-only clinics.
Outlook, risks and unusual items
- No quantified company-wide revenue or earnings guidance is provided. Management expects continued losses in 2020 and says additional financing will be needed to execute its plans. Funding may come from sales, new distribution agreements, debt or equity; availability and terms are uncertain.
- The auditor’s report expresses substantial doubt about the company’s ability to continue as a going concern. Management cites capital raising and business execution plans, but the financial statements contain no adjustments for a failure to continue as a going concern.
- A further $3 million Ferring payment is conditional on obtaining an FDA five-day incubation label enhancement, meeting timing conditions and Ferring not having terminated the agreement for convenience. Receipt is not assured. A three-site, single-arm clinical trial was planned to assess the five-day protocol; the filing says recruitment had begun.
- The filing identifies COVID-19 as a risk to sales and marketing, clinical development, patient access and future financing. Other key risks include dependence on Ferring, limited capital, competition, regulatory requirements, reliance on a single contract manufacturer, patent protection and potential dilution.
- In November 2019, the company settled the Paasch-related litigation for $90,000 cash and 300,000 shares valued at $93,750; the parties dismissed the case with prejudice. A separate dispute with related party James Bowdring concerns repayment versus conversion of old notes and includes counterclaims; the company says it does not expect a material financial effect.
- The filing contains apparent disclosure inconsistencies to reconcile: the balance sheet shows total deferred revenue of $4.286 million, while a revenue note states $4.477 million; the statements of operations show a $433 tax provision, while the tax note reports $2,257; and Item 9A says disclosure controls were effective but also describes internal control over financial reporting as ineffective due to limited resources and staffing.
Most important facts for investors to verify
- Whether INVO can fund operations beyond the near term, given the going-concern warning, $1.239 million year-end cash and minimal working capital.
- Whether Ferring sustains purchases and commercialization, and whether the conditional $3 million FDA milestone can be achieved.
- How much future revenue is product-based versus deferred license-fee amortization, and whether clinic adoption translates into recurring device sales and patient volumes.
- The correct deferred-revenue and income-tax figures, and the company’s actual internal-control status, in light of conflicting disclosures.
- Potential dilution from convertible notes, stock options and equity financing, together with the status and possible outcome of the Bowdring note litigation.
- Clinical-trial progress, FDA action on the five-day label, and international registration and commercialization progress following CE marking.