INVO Fertility, Inc. (INVO Bioscience, Inc.) - 10-K Summary
Business Context and Reporting Period
This Annual Report on Form 10-K covers the fiscal year ended December 31, 2009. INVO Bioscience, Inc. is a development-stage company focused on commercializing the INVOcell, a medical device designed to treat infertility at a lower cost and with greater accessibility than In-Vitro Fertilization (IVF). The device allows fertilization and embryo development to occur inside the patient's body rather than in a laboratory incubator.
The company operates internationally, having received CE Marking in May 2008, which permits sales in the European Economic Area and other regions recognizing the mark. The company is currently seeking FDA 510(k) clearance for the U.S. market, with clinical trials anticipated to complete in 2011, subject to funding.
Key Financial Metrics (Year Ended Dec 31, 2009)
| Metric | 2009 | 2008 |
|---|---|---|
| Net Revenue | $63,204 | $37,995 |
| Cost of Goods Sold | $41,391 | $10,088 |
| Gross Margin | $21,813 (34.5%) | $27,907 (73.4%) |
| Operating Expenses | $1,864,554 | $1,889,367 |
| Net Loss | $(4,661,469) | $(1,873,405) |
| Cash Used in Operating Activities | $(926,664) | $(1,066,629) |
| Cash and Cash Equivalents (Ending) | $79,052 | $15,716 |
| Working Capital Deficiency | $(3,332,732) | $(727,742) |
| Stockholders' Deficiency | $(3,237,137) | $(676,567) |
Note: The significant increase in Net Loss for 2009 includes approximately $2.9 million in non-cash expenses related to the fair value adjustment of derivative liabilities and financing fees associated with convertible notes issued during the year.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 66% to $63,204, driven by initial international shipments to distributors and physicians. However, gross margin percentage declined significantly from 73.4% to 34.5% due to reduced selling prices for market entry and higher per-unit shipping costs for small volume orders.
- Financing Activity: The company raised $990,000 in net cash from financing activities in 2009, primarily through a $545,000 convertible note bridge offering and a $100,000 equity sale. This contrasts with 2008, which saw $1.15 million in financing proceeds.
- Derivative Liabilities: A material new liability of $1.9 million was recorded in 2009 related to the fair value of warrants and conversion features on convertible notes, which did not exist in 2008.
- Inventory: Inventory levels decreased slightly to $63,134 from $70,722, despite the company having 300 devices ready for sale and 9,000 molded parts ready for assembly.
Guidance, Outlook, and Risks
Outlook and Capital Needs: Management states the company requires approximately $175,000 per month to fund planned operations. The company has entered into a Reserve Equity Financing (REF) Agreement with AGS Capital Group, LLC, allowing for the purchase of up to $10 million in stock over two years. However, the company cannot draw on this facility until it updates its Form S-1 registration statement. Management anticipates continuing net losses through 2010.
Regulatory Status: The company expects to complete its final FDA clinical study in 2011, subject to funding, with a goal of receiving 510(k) clearance by the end of 2011. U.S. sales are not expected before the third quarter of 2011.
Going Concern: The independent auditors have issued a report raising substantial doubt about the company's ability to continue as a going concern due to recurring losses, negative cash flows, and a working capital deficiency. Continued operations are dependent on raising additional capital.
Risks:
- Litigation: A complaint was filed in March 2010 by former employees and a creditor of the predecessor company (Medelle Corporation) alleging wrongful asset transfer. Management intends to challenge these allegations as baseless.
- Dilution: Significant dilution is expected due to the REF agreement, convertible notes, and potential future equity issuances.
- Internal Controls: Management concluded that disclosure controls and procedures were ineffective as of December 31, 2009, due to limited resources and a small number of employees.
Investor Verification Checklist
- Capital Runway: Verify the status of the Form S-1 update required to access the $10 million AGS Capital Group REF facility.
- Derivative Liability: Review the valuation assumptions (Black-Scholes) used for the $1.9 million derivative liability and the impact of stock price volatility on future earnings.
- Legal Proceedings: Monitor the status of the lawsuit filed by former Medelle Corporation employees regarding the 2006 asset transfer.
- FDA Timeline: Confirm the funding status required to complete the 2011 clinical trial and the realistic timeline for U.S. market entry.
- Revenue Quality: Assess the sustainability of international revenue given the low gross margins and the reliance on distributor relationships in developing markets.