INVO BioScience(INVO) - 2022 Q4 - Annual Report

Part I Business INVO Bioscience is a fertility company commercializing its INVOcell device through dedicated centers, acquisitions, and direct sales - The company's primary mission is to expand the ART market with its flagship product, INVOcell, a medical device for in vivo fertilization and embryo development, offering a more affordable and connected experience compared to traditional IVF[19] - Commercialization strategy is focused on three main pillars: opening dedicated INVO Centers, acquiring existing IVF clinics, and direct sales of the INVOcell device to established fertility clinics[19][63] Recent Developments The company raised capital, agreed to acquire Wisconsin Fertility Institute, and is addressing Nasdaq non-compliance notices - In January and March 2023, the company sold $410,000 in convertible notes and warrants for working capital[20] - In February 2023, INVO raised $500,000 through convertible debentures and entered a $10.0 million equity purchase agreement (ELOC) with an investor[27][35] - On March 16, 2023, INVO entered into a binding agreement to acquire Wisconsin Fertility Institute for a total purchase price of $10 million, payable in four installments of $2.5 million each[39][40] - In March 2023, the company closed a registered direct offering, raising gross proceeds of approximately $3 million, with proceeds intended for the Wisconsin Fertility acquisition down payment and working capital[42][44] - Received a Nasdaq non-compliance notice on November 23, 2022, for failing to maintain the minimum $2.5 million stockholders' equity requirement; an extension to regain compliance was granted until May 22, 2023[48][50] - Received a second Nasdaq non-compliance notice on January 11, 2023, for failing to maintain a minimum bid price of $1.00 per share, with a compliance period until July 10, 2023[51][52] Operations and Market The company operates with a lean, outsourced model to target the large, underserved global market for assisted reproductive technology - As of December 31, 2022, the company had fifteen full-time and one part-time employee, outsourcing manufacturing and sterilization to reduce fixed overhead[54][55] - The global ART market is vastly underserved, with less than 3% of infertile couples worldwide receiving treatment annually due to cost and geographical availability[56] - In the U.S., an estimated 10%-15% of couples of childbearing age are affected by infertility, representing about 6.7 million women with impaired fertility[57] Competitive Advantages and Strategy INVOcell's competitive edge lies in its lower cost and efficiency, supporting a strategy shift towards providing fertility services directly - The IVC procedure using INVOcell is more affordable than conventional IVF, with cycle costs ranging from $4,500 to $7,000 at INVO Centers, compared to $12,000 to $17,000 for IVF[59] - INVOcell can increase a clinic's fertility cycle volume by up to 30% without adding personnel, space, or equipment costs, addressing industry capacity constraints[61] - The company has transitioned from a medical device company to a fertility services provider, focusing on opening INVO Centers and acquiring IVF clinics[63] - The U.S. distribution agreement with Ferring was terminated effective January 31, 2022, after which INVO regained full commercialization rights in the U.S[65] Current Joint Venture Arrangements | Affiliate Name | Country | Ownership (%) | | :--- | :--- | :--- | | HRCFG INVO, LLC | United States | 50% | | Bloom Invo, LLC | United States | 40% | | Positib Fertility, S.A. de C.V. | Mexico | 33% | | Ginekalix INVO Bioscience LLC Skopje | Republic of North Macedonia | 50% | Competition, Regulation, and IP The company competes with traditional fertility treatments, navigates extensive healthcare regulations, and protects its intellectual property - The primary medical device competitor is AneVivo™ from Anecova, which differs by being placed inside the uterus; AneVivo™ has a CE Mark but is not FDA-approved[83] - INVOcell received FDA de novo classification in November 2015 and has a CE mark, permitting distribution in the European Economic Area[85][87] - The company is subject to healthcare fraud, waste, and abuse laws such as the Anti-Kickback Statute (AKS) and the Stark Law, as well as data privacy regulations like HIPAA[88][89][90] - The company holds registered trademarks for INVO®, INVO BIOSCIENCE®, and INVOCELL®; a new patent application for a redesigned INVOcell device is pending[93][96] Risk Factors The company faces significant going concern risk, challenges in acquisitions and growth, and regulatory and stock-related uncertainties - Financial Risks: The company's financial situation raises substantial doubt about its ability to continue as a going concern, with an accumulated net loss of $49.4 million through December 31, 2022, and requires additional funding[101][102] - Acquisition Risks: The pending acquisition of Wisconsin Fertility Institute is subject to closing conditions, including securing funds for the initial $2.5 million payment; failure to close or integrate would adversely affect the business[106][107] - Business & Operational Risks: The business faces significant competition, risks associated with global operations, and potential liabilities as a medical device provider, while relying on third-party manufacturers and key personnel[114][115][122] - Regulatory Risks: The company is subject to extensive FDA regulation and healthcare laws (e.g., Anti-Kickback Statute, Stark Law, HIPAA), where non-compliance could prevent product commercialization[135][137][158][164] - Stock-Related Risks: The company has received Nasdaq non-compliance notices and could be delisted; the stock is thinly traded, and future financing may cause significant dilution[174][193][199] Properties The company leases its 1,223 square foot principal executive office in Sarasota, Florida, and does not own any real property - The company leases its principal executive office in Sarasota, Florida, consisting of 1,223 square feet[205] Legal Proceedings As of the report date, the company is not subject to any material legal proceedings - The Company is not currently subject to any material legal proceedings[206] Mine Safety Disclosures This item is not applicable to the company - Not applicable[207] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "INVO", with no history of dividend payments or recent equity repurchases - The company's common stock is traded on the Nasdaq Capital Market under the symbol "INVO"[209] - As of April 17, 2023, there were 13,971,283 shares of common stock outstanding and approximately 183 stockholders of record[210][211] - The company has never declared or paid a dividend and intends to retain future earnings for business development[212] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal year 2022 saw an 80% revenue decrease and a wider net loss, leading to a going concern qualification from auditors Results of Operations Revenue fell 80% in 2022 due to a one-time 2021 license recognition, while operating expenses and net loss increased Comparison of Operations (2022 vs 2021) | Metric | 2022 | 2021 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $0.8M | $4.2M | ($3.4M) | (80%) | | - Product Revenue | $0.2M | $0.5M | ($0.3M) | (55%) | | - Clinic Revenue | $0.6M | $0.04M | $0.56M | 1400% | | - License Revenue | $0 | $3.6M | ($3.6M) | (100%) | | Gross Profit | $0.5M | $4.0M | ($3.5M) | (88%) | | Gross Margin | 60% | 97% | (37 pts) | - | | SG&A Expenses | $10.6M | $9.0M | $1.6M | 17% | | R&D Expenses | $0.5M | $0.2M | $0.3M | 150% | | Net Loss | ($10.9M) | ($6.7M) | ($4.2M) | 63% | - The significant decrease in 2022 revenue was primarily due to the full recognition of $3.6 million in deferred revenue from the terminated Ferring agreement in 2021[290] Liquidity and Capital Resources The company faces a critical liquidity shortage with minimal cash, negative working capital, and a going concern qualification - The company's independent auditor's report contains a going concern qualification, expressing substantial doubt about the ability to continue operations due to significant operating losses and financial condition[300][373] Financial Position as of Dec 31, 2022 vs 2021 | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash | $0.09M | $5.7M | | Working Capital | ($2.8M) | $5.1M | | Stockholder's Equity | ($1.0M) | $7.3M | Summary of Cash Flows (Year Ended Dec 31) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Cash used in Operating Activities | ($6.6M) | ($6.0M) | | Cash used in Investing Activities | ($0.1M) | ($2.2M) | | Cash provided by Financing Activities | $1.1M | $3.8M | - The company is dependent on raising capital through debt and equity financings to fund operations; in 2022, it received $0.8 million from demand notes and $0.3 million from stock sales[299] Critical Accounting Policies and Estimates Key accounting policies require significant management judgment, particularly for stock compensation, revenue recognition, and VIEs - Stock-Based Compensation is accounted for under ASC 718, using the Black-Scholes model to estimate the fair value of equity awards[310] - Revenue is recognized under ASC 606, with product revenue at shipment, clinic revenue when services are performed, and license revenue over the access period[311][363] - The company consolidates Variable Interest Entities (VIEs) where it is the primary beneficiary, determined by power to direct activities and absorb significant economic impact[312] - Investments in unconsolidated affiliates where the company exerts significant influence are accounted for using the equity method[313] Financial Statements and Supplementary Data Consolidated financials show a sharp decline in assets and equity, a wider net loss, and a going concern warning from the auditor - The independent auditor's report includes a "Going Concern" paragraph, citing net losses and a net capital deficiency, which raises substantial doubt about the company's ability to continue as a going concern[322] - The auditor identified "Investments/Variable Interest Entities" as a critical audit matter due to the significant judgment required by management to assess consolidation[327][328] Consolidated Balance Sheet Data (as of Dec 31) | | 2022 | 2021 | | :--- | :--- | :--- | | Total Assets | $4,103,715 | $10,466,380 | | Total Current Assets | $621,087 | $6,305,865 | | Total Liabilities | $5,081,327 | $3,155,700 | | Total Current Liabilities | $3,409,424 | $1,253,004 | | Total Stockholders' Equity (Deficit) | ($977,612) | $7,310,680 | Consolidated Statement of Operations Data (Year Ended Dec 31) | | 2022 | 2021 | | :--- | :--- | :--- | | Total Revenue | $822,196 | $4,160,116 | | Gross Profit | $490,673 | $4,015,064 | | Loss from Operations | ($10,626,481) | ($5,216,524) | | Net Loss | ($10,892,511) | ($6,654,940) | | Net Loss Per Share (Basic & Diluted) | ($0.90) | ($0.63) | Controls and Procedures Management concluded that both disclosure controls and internal controls over financial reporting were effective as of year-end 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[460] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022[461] - The annual report does not include an attestation report from the registered public accounting firm regarding internal control over financial reporting, as permitted for smaller reporting companies[462] Part III Directors, Executive Officers and Corporate Governance Required information is incorporated by reference from the company's definitive Proxy Statement for the 2023 Annual Meeting - Information is incorporated by reference to the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[469] Executive and Director Compensation Required information is incorporated by reference from the company's definitive Proxy Statement for the 2023 Annual Meeting - Information is incorporated by reference to the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[470] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Required information is incorporated by reference from the company's definitive Proxy Statement for the 2023 Annual Meeting - Information is incorporated by reference to the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[471] Certain Relationships and Related Transactions, and Director Independence Required information is incorporated by reference from the company's definitive Proxy Statement for the 2023 Annual Meeting - Information is incorporated by reference to the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[472] Principal Accountant Fees and Services Required information is incorporated by reference from the company's definitive Proxy Statement for the 2023 Annual Meeting - Information is incorporated by reference to the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[473] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including key corporate agreements - The financial statements and the report of the independent registered public accounting firm are filed as part of this report[476] - The exhibit index lists all filed documents, including articles of incorporation, various financing and securities purchase agreements, joint venture agreements, and required certifications[478][479]