INVO Bioscience, Inc. — FY2015 Form 10-K Summary
Reporting period: Fiscal years ended December 31, 2011–2015. This is a comprehensive, late-filed annual report, not a standalone 2015 fourth-quarter report. The filing was signed March 17, 2017 and states that the company remained delinquent in other SEC filings. The registrant is identified in the filing as INVO Bioscience, Inc.
Business context
The company develops and sells INVOcell, a single-use device for intravaginal fertilization and early embryo development, as a lower-cost alternative to conventional fertility treatments. The FDA granted De Novo Class II clearance in November 2015, enabling U.S. marketing. The company reported 42 trained U.S. physician offices or IVF-center satellite facilities at the time described in the filing. It uses third parties for manufacturing, packaging and sterilization and has a very small operating team.
Financial performance and position
| Metric | FY2015 / Dec. 31, 2015 | FY2014 / Dec. 31, 2014 |
|---|---|---|
| Revenue | $11,689 | $16,588 |
| Cost of goods sold | $7,810 | $7,682 |
| Gross profit / gross margin | $3,879 / about 33% | $8,906 / about 54% |
| Operating expenses (SG&A) | $598,953 | $1,689,482 |
| Loss from operations | $(595,074) | $(1,680,576) |
| Net loss | $(4,959,247) | $(1,732,472) |
| Cash used in operating activities | $(151,622) | $(19,401) |
| Cash at year-end | $492,004 | $18,626 |
- The 2015 net loss included a large, non-cash debt-settlement charge tied to conversion of past-due convertible notes. The statements report a $4.332 million loss on settlement, while the debt footnote describes a $6.632 million loss; the filing text does not provide a clear reconciliation.
- At year-end 2015, total current liabilities were $4.337 million, including $1.026 million of accounts payable and accrued liabilities, $3.090 million of accrued compensation, $210,888 of related-party notes and $10,000 of convertible notes. Working capital deficit was $3.778 million and stockholders’ deficit was $3.757 million.
- The company reported accumulated losses of approximately $15.8 million in its balance sheet and an accumulated deficit of approximately $18 million in the auditor’s going-concern discussion. The filing does not reconcile these figures clearly.
- FY2015 financing activities provided $625,000 net, primarily from equity investments and warrant exercises, offset by a $20,000 related-party loan repayment. No cash was used in investing activities during 2011–2015.
Changes versus prior periods
- Revenue declined about 30% in 2015 from 2014, and gross margin fell as low sales left fixed costs spread across fewer units.
- SG&A fell by about $1.09 million in 2015. The prior-year expense included approximately $1.05 million of non-cash stock compensation for 7 million shares granted to directors and officers for past service.
- Net loss rose by about $3.23 million in 2015, primarily because of the debt-settlement charge. The company converted $300,000 of past-due notes and accrued interest into 12.47 million restricted shares in May 2015.
- Cash rose from $18,626 to $492,004, chiefly due to equity financing—not operating cash generation. Shares outstanding increased from 119.7 million at year-end 2014 to 137.1 million at year-end 2015.
- Revenue had also declined in earlier years: $71,503 in 2011, $56,377 in 2012, $27,063 in 2013 and $16,588 in 2014.
Outlook, risks and unusual items
- Management planned to prioritize U.S. sales and training after FDA clearance, while continuing selected international distribution and registrations. It expected losses to continue through 2017 and said growth plans depended on raising additional capital; no quantified revenue or earnings guidance was provided.
- The company and its auditor warned that substantial doubt existed about its ability to continue as a going concern. Management said it might need to further curtail spending, downsize or cease operations if it could not obtain financing. The auditor’s report states that the financial statements contain no adjustments for a possible failure to continue as a going concern.
- The company did not exercise a previously described $10 million reserve equity financing facility, citing market conditions and potential shareholder dilution. Its planned sales expansion, hiring and international growth were subject to uncertain financing.
- The CE Mark had expired and was being renewed. Other risks include limited sales support, highly competitive fertility markets, dependence on third-party manufacturing, regulatory compliance, product liability, patent protection, and a thinly traded OTC Pink stock with potential dilution from future financing.
- Management assessed disclosure controls and internal control over financial reporting as ineffective for each year covered, citing limited resources and the absence of a full-time CFO/principal accounting officer from March 2013 until March 2017. The auditor did not attest to internal controls.
- A long-running dispute concerning the predecessor’s asset sale remained subject to an appeal filed in November 2016. The company said it intended to oppose the appeal. Related-party balances, deferred officer compensation and related-party office arrangements are also disclosed.
- The filing says officers and directors had not filed required Section 16 ownership reports for the covered years and anticipated filing missing forms after the report.
Key facts for investors to verify
- Reconcile the debt-settlement loss: $4.332 million in the income and cash-flow statements versus $6.632 million in the note disclosure, and clarify the related accumulated-deficit figures.
- Confirm subsequent cash, financing, operating burn, accrued obligations and the company’s ability to fund operations; year-end cash alone does not establish a viable runway.
- Check whether later SEC reports were filed and whether the company became current, and review any subsequent auditor or control disclosures.
- Verify commercial traction after FDA clearance, including device sales, repeat purchasing, active trained sites and realized pricing; reported clinical efficacy and market-size claims are not company financial results.
- Assess the status of CE Mark renewal, country registrations, the outstanding litigation appeal, related-party debt and any further share issuance or dilution.