Business context and reporting period
INVO Bioscience, Inc.’s Form 10-K covers the fiscal year ended December 31, 2016, with 2015 comparatives; it is an annual report, not a standalone fourth-quarter filing. The company was commercializing INVOcell, an FDA-cleared fertility device and procedure intended as a lower-cost alternative to IVF. The company reported minimal revenue and remained an early-stage business. Its U.S. launch followed FDA De Novo Class II clearance in November 2015. The filing says more than 40 U.S. facilities were offering or referring patients for the procedure.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $50,901 | $11,689 |
| Gross profit | $35,807 | $3,879 |
| Gross margin | Approximately 70% | Approximately 33% |
| Selling, general and administrative expense | $2,146,221 | $598,953 |
| Operating loss | $(2,110,414) | $(595,074) |
| Net loss | $(2,124,252) | $(4,959,247) |
| Cash used in operations | $(323,900) | $(151,622) |
| Cash at year-end | $152,404 | $492,004 |
At December 31, 2016, total assets were $286,226 and total liabilities were $4,903,872. Current liabilities were $4,772,150, including $3,576,390 of accrued compensation and $974,872 of accounts payable and accrued liabilities. Working capital deficiency was $4,520,762; stockholders’ deficiency was $4,617,646. Debt included $210,888 of related-party notes, $10,000 of past-due convertible notes, and a $131,722 vendor note classified as long-term. No cash was provided by financing activities in 2016.
Material changes versus 2015
- Revenue increased from $11,689 to $50,901 following the U.S. launch, but remained very small relative to operating expenses.
- SG&A rose by approximately $1.55 million. The company attributed $1,263,608 of 2016 expense to stock issued for services, including 3,511,000 shares issued to officers and service providers.
- Net loss narrowed by approximately $2.84 million, principally because 2015 included a $4,332,155 loss on settlement of debt; 2016 had no comparable charge. Operating loss worsened as SG&A increased.
- Operating cash use increased, while cash declined by $339,600. The company invested $15,700 in equipment and converted $131,722 of vendor payables into a three-year, 5% note.
Outlook, risks and unusual items
- Management expected continued losses through 2017 and said existing cash and other resources would not adequately support fiscal 2017 operations. Additional capital was needed; without it, the company said it might curtail spending, downsize or cease operations. The auditor also highlighted substantial doubt about the company’s ability to continue as a going concern.
- Management’s near-term focus was U.S. physician recruitment, training and sales. International growth was expected to be slow, constrained by limited resources and market-registration requirements. No quantified revenue or earnings guidance was provided.
- INVOcell’s European CE Mark recertification was still in process. The company cited commercialization, competition, regulatory, manufacturing-supplier, product-liability, financing and dilution risks.
- Disclosure controls and internal control over financial reporting were reported ineffective at year-end 2015 and 2016, citing limited resources and the absence of a full-time CFO for much of the period. The company also acknowledged delinquent SEC filings; this 10-K alone did not make it current.
- A long-running dispute over the acquisition of predecessor Medelle’s assets remained subject to an appeal filed in November 2016. The company said it intended to oppose the appeal.
Important facts for investors to verify
- Whether the company obtained sufficient financing after year-end to fund operations, and the terms and dilution associated with any financing.
- Whether subsequent sales, cash collections and physician adoption materially exceeded the very low 2016 revenue base.
- The status of the CE Mark recertification, international registrations, and U.S. facility adoption and training.
- Progress in reducing accrued compensation and other current liabilities, and whether cash burn remained supportable.
- Whether the company cured its SEC filing delinquency and remediated the reported material weakness in financial reporting controls.
- The outcome of the pending litigation appeal and any potential financial exposure.