Item1A. Risk Factors
You should carefully consider the following risk factors, in addition to the other information in this report on Form 10-K, including the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. If any of the events described in the following risk factors and the risks described elsewhere in this report on Form 10-K occurs, our business, operating results and financial condition could be seriously harmed. This report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.
The following is a summary of certain important factors that may make an investment in our company speculative or risky. You should carefully consider the full risk factor disclosure set forth in Item 1A of this Annual Report, in addition to the other information herein, including the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes.
● Our business is subject to significant competition.
● We are subject to risks associated with doing business globally.
● We do not expect to pay any dividends to shareholders.
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Risks Relating to OurBusiness
Our business has posted net operating losses, has a limited operating history, and needs additional capital to grow and finance its operations.
From the inception of our consolidated subsidiary BioXcell Inc. on January 5, 2007 through December 31, 2020, we had an accumulated net loss of $32,236,082. We have a limited operating history and is essentially an early-stage operation. We will continue to be dependent on having access to additional new capital or generating positive operating cash flow primarily through increased sales in order to finance the growth of our operations. Continued net operating losses together with limited working capital make investing in our common stock a high-risk proposal. Our limited operating history may make it difficult for management to provide effective insight into future activities, marketing costs, and customer acquisition and retention. This could lead to INVO missing targets for the achievement of profitability, which could negatively affect the value of your investment.
We may require additional capital to continue as a going concern and to continue executing our business plan, which if not obtained could result in a need to curtail operations.
As reflected in the accompanying financial statements for the year ended December 31, 2020, we continue to make progress toward commercialization of our INVOcell device, although revenues are not yet sufficient to cover our current operations. Longer term, based on our projected cash needs, we will be dependent on generating sufficient sales, entering into new distribution agreements, receiving a milestone payment under the Ferring Distribution Agreement or raising additional debt or equity capital to support our operations. No assurance can be given that we will meet the Distribution Agreement milestone or be successful in raising capital in the amounts or at the rates required to continue operations, or that such capital, if available, will be available on terms acceptable to us. If we are not able to meet the Distribution Agreement milestone or otherwise raise additional capital at the rate and in the amounts needed, our business may be significantly impacted, which could materially adversely affect the value of your investment.
Our business is subject to significant competition.
The infertility industry is highly competitive and characterized by well entrenched and long-standing practices as well as technological improvements and advancements. New Assisted Reproductive Technology (“ART”) services, devices and techniques may be developed that may render the INVOcell obsolete. Competition in the areas of infertility and ART services is largely based on pregnancy rates and other patient outcomes. Accordingly, the ability of our business to compete is largely dependent on our ability to achieve adequate pregnancy rates and patient satisfaction levels. Our business operates in highly competitive areas that are subject to change. New health care providers and medical technology companies entering the market may reduce our market share, patient volume and growth rates, and could force us to alter our planned pricing. Additionally, increased competitive pressures may require us to commit more resources to our marketing efforts, thereby increasing our cost structure and affecting our ability to achieve, or the timing of achieving, profitability. There can be no assurance that we will not be able to compete effectively nor can there be any assurance that additional competitors will not enter the market. Such competition may make it more difficult for us to enter into additional contracts with fertility clinics or open profitable INVOcell clinics.
Under the terms of 2018 Distribution Agreement, Ferring is currently handling all sales and marketing activities for the U.S. market. The Distribution Agreement, as amended on March 2, 2021, provides that we will be allowed to initially open and operate seven (7) dedicated INVO clinics. There can be no assurances that Ferring’s or our commercial activities will be successful. Additionally, pursuant to the Distribution Agreement, Ferring will have the ability to elect to distribute and commercialize competitive products. The development and commercialization of such competitive products could reduce our U.S. market share. Ferring may also terminate the Distribution Agreement at any time without cause, which termination may have a material adverse impact on our domestic commercial activities.
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We are subject to risks associated with doing business globally.
Our operations, both inside and outside the United States, are subject to risks inherent in conducting business globally and under the laws, regulations and customs of various jurisdictions and geographies. Our operations outside the United States are subject to special risks and restrictions, including, without limitation: fluctuations in currency values and foreign-currency exchange rates; exchange control regulations; changes in local political or economic conditions; governmental pricing directives; import and trade restrictions; import or export licensing requirements and trade policy; restrictions on the ability to repatriate funds; and other potentially detrimental domestic and foreign governmental practices or policies affecting U.S. companies doing business abroad, including the U.S. Foreign Corrupt Practices Act and the trade sanctions laws and regulations administered by the U.S. Department of the Treasury's Office of Foreign Assets Control. Acts of terror or war may impair our ability to operate in particular countries or regions, and may impede the flow of goods and services between countries. Customers in weakened economies may be unable to purchase our products, or it could become more expensive for them to purchase imported products in their local currency, or sell at competitive prices, and we may be unable to collect receivables from such customers. Further, changes in exchange rates may affect our net earnings, the book value of our assets outside the United States and our stockholders’ equity. Failure to comply with the laws and regulations that affect our global operations could have an adverse effect on our business, financial condition or results of operations.
Failure to comply with the United States Foreign Corrupt Practices Act or similar laws could subject us to penalties and other adverse consequences.
We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies, including their suppliers, distributors and other commercial partners, from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the countries in which we distribute products. We have adopted formal policies and procedures designed to facilitate compliance with these laws. If our employees or other agents, including our distributors or suppliers, are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
We need to manage growth in operations, and we may not be successful in implementing our growth strategy.
In order to maximize potential growth in our current and potential markets, we believe we must expand the scope of our services in the medical device/bioscience industry. We also intend to seek additional market strategies to increase the adoption of INVOcell, which includes helping to establish stand-alone INVO-only clinics and attempting to bring the technology into the existing OB/Gyn infrastructure. Such expansion will place a significant strain on our management, operational and sales systems. As a result, we plan to continue to improve our INVOcell technology, operating procedures and management information systems. We will also need to effectively train, motivate and manage our employees. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating revenues at the levels we expect.
Many factors including, but not limited to, increased competition from similar businesses, unexpected costs, costs associated with marketing efforts and maintaining a strong client base may interfere with our ability to expand successfully. Our inability to implement our internal strategy successfully may have a negative impact on our growth, future financial condition, results of operations and/or cash flows.
Our products incorporate intellectual property rightsdeveloped by us thatmay be difficult to protect ormay be found to infringe on the rights of others.
While we currently own U.S. and international patents, these patents may be challenged, invalidated or circumvented. In addition, the rights granted under these patents may not provide the competitive advantages we currently anticipate. Certain countries, including the United States or Europe, could place restrictions on the patentability of various medical devices which may materially affect our business and competitive position. Additionally, the laws of some foreign countries, in particular China and India, do not protect our proprietary rights to the same extent or in the same manner as U.S. laws, and we may encounter significant problems in protecting and defending its proprietary rights in these countries. In addition to relying on patent, copyright and trademark laws, we also utilize a combination of trade secrets, confidentiality policies, non-disclosure and other contractual arrangements to protect our intellectual property rights. However, these measures may not be adequate to prevent or deter infringement or other misappropriation. Further, our intellectual property rights may be found to infringe on intellectual property rights of third parties. Moreover, we may not be able to detect unauthorized use or take appropriate and timely steps to establish and enforce our proprietary rights. Existing laws of some countries in which we conduct business offer only limited protection of our intellectual property rights, if at all. As the number of market entrants as well as the complexity of the technology increases, the possibility of functional overlap and inadvertent infringement of intellectual property rights also increases.
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We may be forced to defend our intellectual property rights from infringement through expensive legal action.
Third parties may in the future assert claims against us alleging infringement on their intellectual property rights. Defending such claims may be expensive, time consuming and divert the efforts of our management and/or technical personnel. Because of litigation, we could be required to pay damages and other compensation, develop non-infringing products or enter into royalty and/or licensing agreements. However, we cannot be certain that any such licenses, will be made available to us on commercially reasonable terms.
We regard our trade secrets, patents and similar intellectual property as critical to our successful operations. To protect our propriety rights, we rely on intellectual property and trade secret laws, as well as confidentiality and license agreements with certain employees, customers and third-parties. No assurance can be given that our intellectual property will not be challenged, invalidated, infringed or circumvented. If necessary, we intend to defend our intellectual property rights from infringement through legal action, which could be very costly and could adversely affect our ability to achieve and maintain profitability. Our limited capital resources could put us at a disadvantage if we are required to take legal action to enforce our intellectual property rights.
We face potential liability as a provider of a medical device.These risks may be heightened in the area of artificial reproduction.
The provision of medical devices entails the substantial risk of potential tort injury claims. We do not engage in the practice of medicine or assume responsibility for compliance with regulatory requirements directly applicable to physicians. We currently utilize product liability insurance to provide coverage against potential tort injury claims. However, there can be no assurance such coverage will provide adequate protection against any potential claims. Furthermore, any claim asserted against us could generate costly legal fees, consume management’s time and resources, and adversely affect our reputation and business, regardless of the merit or eventual outcome of such claim.
There are inherent risks specific to the provision of infertility and ART services. For example, the long-term effects on women of the administration of fertility medication, integral to most infertility and ART services, are of concern to certain physicians and others who fear the medication may prove to be carcinogenic or cause other medical problems. Additionally, any ban or other limitation imposed by the FDA or other foreign regulatory department on fertility medication and services could have a material adverse effect on our business. Any such action would likely adversely affect the value of your investment.
If we fail to maintain adequate quality standards for our products, our reputation and business may be adversely affected and harmed.
Our customers are expecting that our products will perform as marketed and in accordance with industrial standards. We rely on third-party manufacturing companies and their packaging processes in connection with the production of our products. A failure to maintain product quality standards in accordance with our customer’s expectations could result in the loss of demand for our products. Additionally, delays or quality lapses in our production lines could result in substantial economic losses to us. Although we believe that our current quality control procedures adequately address these risks, there can be no assurance that we will not experience occasional or systemic quality lapses in our manufacturing and service operations. Currently, we have limited manufacturing capabilities as we rely on a single manufacturing provider regarding our production process. In the event our manufacturer is unable to produce an adequate supply of products at appropriate quality levels, our growth could be limited and our business may be harmed. If we experience significant or prolonged disturbance in our quality standards, our business and reputation may be harmed, which may result in the loss of customers, our inability to participate in future customer product opportunities and reduced revenue and earnings.
We heavily rely on third party package delivery services, and a significant disruption in these services or significant increases in prices may disrupt our ability to import or export materials, increase our costs and negatively affect our ability to achieve and maintain profitability.
We ship a significant portion of our products to our customers through independent package delivery companies. If any of our key third party package delivery providers experience a significant disruption such that any of our products, components or raw materials cannot be delivered in a timely fashion or such that we incur additional shipping costs that we are unable to recoup, our costs may increase and our relationships with certain customers may be adversely affected. In particular, if our third-party package delivery providers increase prices and we are not able to find comparable alternatives or adjust our delivery network, our profitability could be adversely affected.
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We may not be able to develop or continue our business if we fail to retain key personnel.
We substantially rely upon the efforts and abilities of our executive management and directors. The loss of any of our executive officers and/or directors services could potentially have a material adverse effect on our business, operations, revenues and/or prospects. If one or more of these persons were to become unable or unwilling to continue in their present positions, we may not be able to replace them readily or timely, if at all. We do not maintain key man life insurance on the lives of any of our executive management or directors.
We will need additional, qualified personnel in order to expand our business.Without additional personnel, we will not be able to expand our business.
Expanding our business requires increasing the number of persons engaged in activities for the sale, marketing, administration and delivery of our products as well as clinical training personnel for the proper training of the INVO Procedure. Our ability to attract and hire personnel to fulfill these efforts is dependent on our ability to attract and retain potential employees with the proper background and training matching the skills required for the positions. In addition, we may not be able to attract personnel who will be able to successfully implement our business operations and growth strategy in the manner that we currently anticipate.
Currency exchange rate fluctuations may affect the results of our operations.
We intend to distribute our INVOcell product internationally with all sales, domestic and international, in U.S. dollars. As a result, our operations could be impacted by fluctuations in currency exchange rates, although we attempt to mitigate such risk by invoicing only in U.S. dollars. In spite of this, our operations may still be negatively impacted by foreign currency exchange rates in the event the U.S. dollar strengthens and the local currency where the product is being sold weakens. In the event such international patients are unable to afford the associated increase costs, international doctors and clinics may not be able to offer the INVOcell product and procedure. As we expand our international footprint with joint ventures, these joint ventures will likely have a functional currency based on their location and as a result, if we are required to consolidate these financial results it may create currency fluctuations. Additionally, as an international business we may be susceptible to adverse foreign currency fluctuations unconnected to the U.S. dollar.
We are subject to risks in connection with changes in international, national and local economic and market conditions.
Our business is subject to risks in connection with changes in international, national and local economic and market conditions, including the effects of global financial crises, effects of terrorist acts, war and global pandemics. Such economic changes could negatively impact infertile couples’ ability to pay for fertility treatment around the world.
We anticipate that eventually international sales will account for a meaningful part of our revenue. We will experience additional risks associated with international sales, including:
● political and economic instability;
● export controls;
● changes in international legal and regulatory requirements;
● changes in tax laws, duties and tariffs.
Any of these factors could have a material adverse effect on our business, results of operations and financial condition. From 2011 through 2020, we sold products in certain international markets mainly through independent distributors, and we anticipate maintaining a similar sales strategy along with our recent joint venture activity for the foreseeable future. In the event a distributor fails to meet annual sales goals, we may be required to obtain a replacement distributor, which may be costly and difficult to locate. Additionally, a change in our distributors may increase costs, and create a substantial disruption in our operations resulting loss of revenue.
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We sell directly to Ferring in the U.S., and if we cease selling to Ferring it may be difficult and expensive to find a replacement.
We sell our products directly to Ferring in the United States market, which accounted for 98.3% of total 2020 revenues. If Ferring fails to meet its milestones, it may be difficult and costly to locate an acceptable substitute partner. The process of searching for an acceptable substitute may divert significant management attention away from executing our commercial growth strategy, which could have a material adverse impact on our business and results of operations.
The coronavirus pandemic could have a significant negative impact on our business, revenues, financial condition and results of operations.
The persistence of the coronavirus pandemic has severely depressed the level of economic activity around the world. Many businesses and governments have taken preventative or protective actions, including restrictions on travel and business operations, and advising or requiring individuals to limit or forego their time outside of their homes. Temporary closures of many businesses have been ordered and numerous other businesses have temporarily closed voluntarily. Further, individuals' ability to travel has been curtailed through mandated travel restrictions, voluntary or mandated closures of travel-related businesses, as well as quarantines, shelter-in-place/stay-at-home and social distancing orders.
In particular, our sales and marketing efforts with the INVOcell and INVOcell Procedure could be adversely affected by recently implemented protocols for screening and restricting outside visitors and vendors. The COVID-19 pandemic created substantial disruption within the infertility care marketplace as many clinics ceased performing new procedures for a period of time. We believe that disruption has impacted our key partners, and although it may be temporary in nature and many clinics have already returned to performing new procedures, there can be no assurance that the pandemic will not have long term adverse effects on the industry and our business. Additionally, officially imposed quarantines and self-quarantines could interfere with patients’ ability to see a health care provider and obtain our INVOcell and INVOcell Procedure.
The spread of coronavirus has also caused us to modify our business practices, and we may take further actions as may be required by government authorities or that we determine are necessary or advisable. Work-from-home and other measures introduce additional operational risks, including cybersecurity risks, and have affected the way we conduct our business, which could have an adverse effect on our operations. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and illness and workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions. In addition, work-from-home and related business practice modifications present significant challenges to maintaining our corporate culture, including employee engagement and productivity, both during the immediate pandemic crisis and as we make additional adjustments in the eventual transition from it. Implementing new business practices in order to protect employees, vendors and other parties with whom we interact may result in increased costs. Furthermore, even if we follow what we believe to be best practices, there can be no assurance that our measures will prevent the transmission of COVID-19 between employees. Any incidents of actual or perceived transmission may expose us to liability claims, adversely impact employee productivity and morale, and result in negative publicity and reputational harm.
The degree to which coronavirus impacts our results will continue to depend on future developments that are highly uncertain and cannot be predicted, including, without limitation, the timing, extent, trajectory and duration of the pandemic, the development, rollout and availability of effective treatments and vaccines, the imposition of protective public safety measures, and how quickly and to what extent normal economic and operating conditions can resume, if at all. These uncertainties may result in delays or modifications to our plans, initiatives and results.
Risks Related to Our Industry
We are subject to significant domestic and international governmental regulation.
Our business is heavily regulated domestically in the United States and internationally. In the United States the FDA, and other federal, state and local authorities implement various regulations that subject us to civil and criminal penalties, including cease of operations, in the event we fail to comply. Any such actions could severely curtail our sales and business reputation. In addition, additional restrictive laws, regulations or interpretations could be adopted, making compliance with such regulations more difficult or expensive. While we devote substantial resources to ensure our compliance with laws and regulations, we cannot completely eliminate the risk that we may be found non-compliant with applicable legal and regulatory requirements.
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We believe that the healthcare industry will continue to be subject to increased regulation as well as political and legal action, as future proposals to reform the health care system are considered by Congress and state legislatures. We do not know of, nor do we have any control over, future changes to health care laws and regulations which may have a significant impact on our business.
The FDA regulatory review process is expensive, time-consuming and uncertain, and the failure to obtain and maintain required regulatory clearances and approvals could prevent us from commercializing our products.
Unless an exemption applies, each medical device commercially distributed in the United States requires either FDA clearance of a 510(k) premarket notification, approval of a premarket approval (“PMA”), or issuance of a de novo classification order. The FDA clearance, de novo classification, and approval processes for medical devices are expensive, uncertain and time-consuming.
Future modifications to the INVOcell that was classified through de novo may require a 510(k) clearance. We may make changes to the INVOcell without seeking clearance for the modifications if we determine such clearances are not necessary and document the basis for that conclusion. However, the FDA may disagree with our determination or may require additional information, including clinical data, to be submitted before a determination is made, in which case we may be required to delay the introduction and marketing of our modified products, redesign our products, conduct clinical trials to support any modifications, or we may be subject to enforcement actions. In addition, the FDA may not clear the modified INVOcell for the indications that are necessary or desirable for successful commercialization.
There is no assurance that we will be able to obtain the necessary clearances on a timely basis or at all. Further, the FDA may change its policies, adopt additional regulations or revise existing regulations, or take other actions which may impact our ability to modify the INVOcell on a timely basis, and may prevent or delay clearance of future products. Delays in receipt of, or failure to obtain clearances for any product modifications or future products we may develop would result in delayed or no realization of revenue from such products and in substantial additional costs, which could decrease our profitability.
In addition, we are required to continue to comply with applicable FDA and other regulatory requirements following de novo classification or clearance. The failure to comply with existing or future regulatory requirements could have a material adverse effect on our business.
Improper marketing and promotion or off-label use of our product could lead to investigations and enforcement by governmental bodies, may harm our reputation and business, and could result in product liability suits.
If the FDA or any foreign regulatory entity determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions. These enforcement actions could include, for example, a warning letter or untitled letter, injunction, seizure, civil fine or criminal penalties. We cannot, however, prevent a physician from using the INVOcell off-label, when in the physician’s independent professional medical judgement, he or she deems it appropriate. There may be increased risk of injury to patients if physicians attempt to use the INVOcell off-label, or the INVOcell may not be as effective, which could harm our reputation.
If we fail to comply with the FDA’s Quality System Regulation (QSR) or comparable EU requirements, the FDA or EU competent authorities could take various enforcement actions, including halting our manufacturing operations, and our business would suffer.
In the United States, as a manufacturer of a medical device, we are required to demonstrate and maintain compliance with the FDA’s QSR. The QSR covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of medical devices. The FDA enforces the QSR through periodic inspections and unannounced “for cause” inspections. Outside the United States, our products and operations are also required to comply with national requirements and also standards set by industrial standards bodies, such as the International Organization for Standardization. Foreign regulatory bodies may evaluate our products or the testing that our products undergo against these standards. The specific standards, types of evaluation and scope of review differ among foreign regulatory bodies. Our failure to comply with FDA or foreign quality requirements, or failure to take satisfactory and prompt corrective action in response to an adverse inspection, could result in enforcement actions, including a warning letter, adverse publicity, a shutdown of or restrictions on our manufacturing operations, a recall or seizure of our products, fines, injunctions, civil or criminal penalties, or other sanctions, any of which could cause our business and operating results to suffer.
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We are subject to continuing regulation by the FDA, and failure to comply may materially harm our business.
We are subject to Medical Device Reporting (“MDR”) regulations, which require us to report to the FDA if we become aware of information that reasonably suggests our product may have caused or contributed to a death or serious injury or has malfunctioned and the device or a similar device we market would likely cause or contribute to a death or serious injury if the malfunction were to recur. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event. If we fail to comply with our medical device reporting obligations, the FDA could issue warning letters or untitled letters, take administrative actions, commence criminal prosecution, impose civil monetary penalties, request or require a product recall, seize our products, or delay the clearance of our future products. We must report corrections and removals to the FDA where the correction or removal was initiated to reduce a risk to health posed by the device or to remedy a violation of the Federal Food, Drug, and Cosmetic Act, or FDCA, caused by the device that may present a risk to health.
Our failure to comply with these or other applicable regulatory requirements could result in enforcement actions by the FDA which may include untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; customer notifications or repair, replacement or refunds; and criminal prosecution.
Our products are generally subject to regulatory requirements in foreign countries in which we sell those products. We will be required to expend significant resources to obtain regulatory approvals or clearances of our products, and there may be delays and uncertainty in obtaining those approvals or clearances.
In order to sell our products in foreign countries, generally we must obtain regulatory approvals and comply with the regulations of those countries. These regulations, including the requirements for approvals or clearances and the time required for regulatory review, vary from country-to-country.
The EU requires that manufacturers certify compliance of medical devices with Council Directive (93/42/EEC) (“MDD”), as amended, and affix the CE mark before selling such devices in member countries of the EU or European Economic Area (“EEA”). The CE mark is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. In order to obtain the authorization to affix the CE mark to products, a manufacturer must certify that its product complies with the applicable directive, which may include a requirement to obtain certification that its processes and products meet certain European quality standards.
In May 2017, the EU adopted Regulation (EU) 2017/745 (“MDR”), which will repeal and replace the MDD with effect from May 26, 2021. Under transitional provisions, medical devices with notified body certificates issued under the MDD prior to May 26, 2021 may continue to be placed on the market for the remaining validity of the certificate, until May 27, 2024 at the latest. After the expiry of any applicable transitional period, only devices that have been CE marked under the MDR may be placed on the market in the EU (or EEA). The MDR includes increasingly stringent requirements in multiple areas, such as pre-market clinical evidence (some of which are now in effect), review of high-risk devices, labeling and post-market surveillance. Under the MDR, pre-market clinical data will now be required to obtain CE Mark approval for high-risk, new and modified medical devices. We believe these new requirements have the potential to be expensive and time-consuming to implement and maintain.
Complying with and obtaining regulatory approval in foreign countries, including compliance with the MDR, have caused and will likely continue to cause us to experience more uncertainty, risk, expense and delay in commercializing products in certain foreign jurisdictions, which could have a material adverse impact on our net sales, market share and operating profits from our international operations.
Our planned additional clinical trial and 510(k) efforts may prove unsuccessful.
We intend to pursue our label expansion effort and corresponding 510(k) submission utilizing real-market usage (retrospective) data. We may also conduct an additional prospective clinical trial related to the expansion of INVOcell’s indications to include 5-day incubation. While we anticipate a positive outcome of this effort, an unsuccessful trial or insufficient retrospective data could adversely impact our ability to receive FDA clearance for the particular indication related to 5-day incubation, impact our ability to expand into potential markets, and delay or eliminate our ability to receive the $3 million milestone payment under the Ferring agreement.
Our revenues and operating results could fluctuate significantly from quarter to quarter, which may cause our stock price to decline.
Since our inception, we have not generated significant revenues. Our results from year-to-year and from quarter-to-quarter have, and are expected to continue to, vary significantly based on ordering cycles of distributors and partners. As a result, we expect period-to-period comparisons of our operating results may not be meaningful as an indication of our future performance for any future period.
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Changes in the healthcare industry may require us to decrease the selling price for our products or could result in a reduction in the available market size.
Governmental and private sector initiatives in the U.S. and abroad involving trends toward managed healthcare and cost containment could place an emphasis on our ability to deliver more cost-effective medical therapies. The development of other cost-effective devices could eventuality adversely affect the prices and/or sales of our products. Companies in the healthcare industry are subject to various existing and proposed laws and regulations, in both domestic and international markets, regulating healthcare pricing and profitability. Additionally, there have been third-party payer initiatives to challenge the prices associated with medical products, which if successful, could affect our ability to sell products on a competitive basis in the future.
In the United States, there has been a trend of consolidation among healthcare facilities and purchasers of medical devices, allowing such purchasers to limit the number of suppliers from whom they purchase medical products. As result, it is unknown whether such purchasers will decide to stop purchasing our products or demand discounts on our prices. Any pressure to reduce our product prices in response to these industry trends and the decrease in market size could adversely affect our anticipated revenues and profitability of our sales, creating a material adverse effect on our business.
If third-party payers do not provide adequate coverage and reimbursement for INVOcell and the INVO Procedure, we may be unable to generate significant revenues.
Our success in marketing and commercializing INVOcell and the INVO Proceduremay depend in part on whether private health insurers and other payer organizations provide adequate coverage and reimbursement. If physicians or insurers do not find our clinical data compelling or wish to wait for additional studies, they may choose not to use or provide coverage and reimbursement for INVOcell and the INVO Procedure. We cannot provide assurance that data we or others may generate in the future will be consistent with that observed in our existing clinical studies, or that our current or future published clinical evidence will be sufficient to obtain adequate coverage and reimbursement for our products. Moreover, if we cannot obtain adequate coverage for and reimbursement of the cost of our products, we cannot provide assurance that patients will be willing to incur the full cost of INVOcell and the INVO Procedure.
Third-party payers, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for INVOcell and the INVO Procedure exists among third-party payers. Therefore, coverage and reimbursement for INVOcell and the INVO Procedure may differ significantly from payer to payer. In addition, payers continually review new technologies for possible coverage and can, without notice, deny coverage for these new products and procedures. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of INVOcell and the INVO Procedure to each payer separately, with no assurance that coverage and adequate reimbursement will be obtained or maintained if obtained.
Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. In many international markets, a product must be approved for reimbursement before it can be approved for sale in that country. Further, many international markets have government-managed healthcare systems that control reimbursement for new devices and procedures. In most markets, there are private insurance systems as well as government-managed systems. If sufficient and timely coverage and reimbursement is not available for our current or future products, in either the United States or internationally, the demand for our products and our revenues may be adversely affected.
Recenteconomictrendscouldadverselyaffect ourfinancialperformance.
Economic downturns and declines in consumption in the healthcare market may affect the levels of both our sales and profitability. If a downturn in economic conditions occurs, or if there is deterioration in financial markets and major economies, our financial performance could be adversely affected. The tightening of credit in financial markets may adversely affect the ability of our customers and suppliers to obtain financing, which could result in a decrease in, or deferrals or cancellations of, the sale of our products and services. In addition, weakening economic conditions may result in a decline in spending for ART and fertility assistance that could adversely affect our business operations and liquidity. We are unable to predict the likely duration and severity of any disruption in the domestic and global financial markets.
Social media platforms present risks and challenges.
The unauthorized use of certain social media vehicles could result in the improper collection and/or dissemination of personally identifiable information causing brand damage and various legal implications. In addition, negative or inaccurate social media posts or comments about us on any social networking site could damage our brand, reputation, and goodwill.
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Risks Related toOur Common Stock
The significant number of common shares issuable upon conversion of outstanding notes could adversely affect the trading price of our common shares.
The sale of substantial amounts of our common stock at any particular time could cause the trading price of our common stock to decline significantly. In July 2020, we registered 1,220,722 shares of common stock issuable under convertible notes, units and warrants and on September 16, 2019, we registered 1,278,328 shares of common stock for resale. As of December 31, 2020, we had $1,700,000 of Notes outstanding, which are convertible into 536,302 shares of our common stock and at March 19, 2021, we had $500,000 of Notes outstanding, which are convertible into 160,504 shares of our common stock. In the event the Notes are converted into shares of common stock, the issuance of shares of our common stock upon such conversion will result in dilution of ownership to existing stockholders. If our existing stockholders sell substantial amounts of our common stock under either registration statement, including the shares issued upon the conversion of the notes, in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.
Our common stock is subject to risks arising from restrictions on reliance on Rule 144 by shell companies or former shell companies.
Under a Securities and Exchange Commission (“SEC”) rule known as “Rule 144”, a person who has beneficially owned restricted securities of an issuer and who is not an affiliate of that issuer may sell them without registration under the Securities Act provided that certain conditions have been met. However, Rule 144 is unavailable for the resale of securities issued by an issuer that is a shell company or that has been at any time previously a shell company. The SEC defines a shell company as a company that has no or nominal operations and either (i) no or nominal assets, (ii) assets consisting solely of cash and cash equivalents, or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets. We are a former shell company.
The SEC has provided an exception to this unavailability if and for as long as the following conditions are met: (a) the issuer of the securities that was formerly a shell company has ceased to be a shell company; (b) the issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; (c) the issuer of the securities has filed all Exchange Act reports and materials required to be filed, as applicable during the preceding 12 months, other than certain Current Reports on Form 8-K; and (d) at least one (1) year has elapsed form the time the issuer filed current comprehensive disclosure with the SEC reflecting its status as an entity that it is not a shell company.
Because of our prior history as a shell company, stockholders who receive our restricted securities will only be able to sell them pursuant to Rule 144 without registration for only as long as we continue to meet the requirements set forth above. No assurance can be given that we will meet these requirements going forward. Furthermore, any non-registered securities we sell in the future or issue will have limited or no liquidity until and unless such securities are registered with the SEC and/or until we comply with the foregoing requirements.
As a result, it may be harder for us to raise funding through the sale of debt or equity securities unless we agree to register such securities with the SEC, which could require us to deploy additional resources. In addition, if we are unable to attract additional capital, it could have an adverse impact on our ability to implement our business plan and/or sustain our operations. Our status as a former “shell company” could prevent us from raising additional funds to develop additional technological advancements, which could cause the value of our securities to decline in value.
A portion of the ownership of our common stock is concentrated in a small number of investors, some of whom are affiliated with our Board of Directors and management.
Our management and board of directors own approximately 5.2% of our issued and outstanding shares of common stock. By virtue of such holdings, they have the ability to exercise influence over our business and affairs, including matters requiring approval by our stockholders including but not limited to the following actions:
● the election of the Board of Directors;
● amending our Articles of Incorporation or bylaws; and
● approving a merger, sale of assets, or other corporate transaction.
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Our directors have the right to authorize the issuance of shares of our preferred stock and additional shares of our common stock.
Our directors, within the limitations and restrictions contained in our Articles of Incorporation and without further action by our shareholders, have the authority to issue shares of preferred stock from time to time in one or more series and to fix the number of shares and the relative conversion and voting rights, and terms of redemption, liquidation preferences and any other preferences, special rights and qualifications of any such series. While we have no intention of issuing shares of preferred stock at the present time, we may seek to raise capital through the sale of our securities and may issue shares of preferred stock in connection with a particular investment. Any issuance of shares of preferred stock could adversely affect the rights of holders of our common stock.
Should we issue additional shares of our common stock, each investor’s ownership interest in our stock would be proportionally reduced.
The indemnification rights provided to our directors, officers and employees may result in substantial expenditures by us and may discourage lawsuits against its directors, officers and employees.
Our Articles of Incorporation and applicable Nevada law provide for the indemnification of our directors, officers, employees. The foregoing indemnification obligations could result in us incurring substantial expenditures to cover the costs of settlement or damage awards against directors, officers and employees, which we may be unable to recoup. These provisions and resultant costs may also discourage us from brining a lawsuit against out directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directs or officer even though such actions, if successful, might otherwise benefit us and our stockholders.
Our shares of common stock are thinly traded, and the price may not reflect our value; there can be no assurance that there will be an active market for our shares now or in the future.
We have a trading symbol for our common stock (“INVO”) and our common stock is currently quoted on the Nasdaq Capital Market.
Our shares of common stock are thinly traded, and as such the price, if traded, may not reflect our value. There can be no assurance that there will be an active market for our shares of common stock either now or in the future. The market liquidity will be dependent on, among other things, the perception of our operating business and any steps that our management might take to bring us to the awareness of investors. There can be no assurance given that there will be any awareness generated or, if given, that it will be positive.
Consequently, investors may not be able to liquidate their investment or may be able to liquidate it only at a price that does not reflect the value of the business. If a more active market should develop, the price may be highly volatile. Due to the possibility of our common stock being priced lower than its actual value, many brokerage firms may not be willing to effect transactions in the securities. Even if an investor finds a broker willing to effect a transaction in the shares of our common stock, the combination of brokerage commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price.
Our failure to meet the continued listing requirements of the Nasdaq Stock Market could result in a delisting of our common stock.
We are required to satisfy the continued Nasdaq listing requirements. If we fail to satisfy the continued listing requirements of the Nasdaq Stock Market, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to delist our common stock. Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we would take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.
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We have convertible notes outstanding.
The Notes contain customary triggering events including but not limited to (i) failure to make payments when due and (ii) our bankruptcy or insolvency. If a triggering event occurs, each holder may require us to redeem all or any portion of the Notes (including all accrued and unpaid interest thereon), in cash. Further, the Notes are secured by the proceeds from the $3 million milestone payment that we are eligible to receive in connection with the Distribution Agreement with Ferring. The occurrence of a triggering event under the Notes could cause a material adverse effect on our business and results of operations, which could materially reduce the value of your investment.
We are currently involved in a dispute with an existing noteholder over the appropriate value of the notes he holds.
On August 7, 2019, we sent James Bowdring, a related party, a check in the amount of $65,197 as full and final payment under those certain promissory notes dated April 8, 2011 and November 9, 2011. On August 8, 2019, Mr. Bowdring’s legal counsel returned the check. A basis for returning the check was a claim that the interest due under the Notes called for compounded interest and not per annum interest. In addition, the letter rejecting the tender of the payment in full check alleged Mr. Bowdring was considering a future intention to convert his Promissory Notes into shares of our common stock. Mr. Bowdring, through his counsel, indicated that such future intention to convert the Notes to common stock were contingent upon Mr. Bowdring addressing certain personal issues which were not disclosed by his counsel in the correspondence returning the checks. We do not believe that Mr. Bowdring has the right to seek conversion of the Notes once payment for the Notes has been tendered. In order to resolve the issue of our tender of payment in full versus Mr. Bowdring’s assertion that he can reject tender and seek conversion, we filed an action in the Suffolk Superior Court in Boston seeking Declaratory Judgment and Judgment for Breach of Contract.
Our common stock may be subject to the “penny stock” rules of the SEC, which will make the shares of our common stock more difficult to sell.
Our shares of common stock are subject to the “penny stock” rules of the Exchange Act. The Exchange Act defines “penny stock” as any equity security that has a market price of less than $5.00 per share, subject to certain restrictions. We anticipate our common stock may continue to be considered a penny stock in the future.
The penny stock rules require broker-dealers to deliver to potential investors a standardized risk disclosure document prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also provide the potential investor current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson, and monthly account statements showing the market value of each penny stock held in the investor’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information must be given to the potential investor orally or in writing prior to completing the transaction and must be given to the potential investor in writing before or with the investor’s confirmation.
In addition, the penny stock rules require that prior to a transaction the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. The penny stock rules are burdensome and may reduce purchases of any offerings and reduce the trading activity for shares of our common stock. As long as our shares of common stock are subject to the penny stock rules, the holders of such shares of common stock may find it more difficult to sell their securities.
The market for penny stocks has experienced numerous frauds and abuses, which could adversely affect investors in our stock.
We believe that the market for penny stocks has suffered from patterns of fraud and abuse. We believe that many of these abuses have occurred with respect to the promotion of low-price stock companies that lacked experienced management, adequate financial resources, an adequate business plan and/or marketable and successful business or product. Because our shares are penny stocks, the share price for our common stock may be adversely affected such frauds and abuses involving other penny stocks.
We do not expect to pay any dividends to shareholders.
To date, we have never declared or paid any dividends to our stockholders. Our board of directors does not intend to distribute dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial conditions, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid to stockholders. In the event dividends are paid to stockholders, there is no assurance with respect to the amount of any such dividend.
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We may have difficulty raising necessary capital to fund operations because of the thin market and market price volatility for our shares of common stock.
Throughout 2020, there has been a thin market for our shares, and the market price for our shares has been volatile. In recent years, the securities markets in the U.S. and around the world have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performances, underlying asset values or prospects of such companies. For these reasons, we expect our shares of common stock may also be subject to volatility resulting from market forces over which we will have no control. The success of our products and services may be dependent upon our ability to obtain additional financing through debt and equity or other means. The thin market for our shares, and the volatility in the market price for our shares, may adversely affect our ability to raise needed additional capital.
General Risk Factors
Shareholders may be diluted significantly through our efforts to obtain financing and from issuance of additional shares of our common stock, including such issuances of shares for services.
To satisfy certain financial obligations, we have issued and may continue to issue shares of our common stock and we have incurred and may continue to incur debt, which may be convertible into shares of our common stock. We may attempt to raise capital by selling shares of our common stock, possibly with warrants, which may be issued or exercised at a discount to the market price for our common stock. These actions would result in dilution of the ownership interests of existing shareholders, and may further dilute the common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to control us as the shares may be issued to our officers, directors, new employees, or other related parties.
We are subject to the reporting requirements of U.S. federal securities laws, which can be expensive.
We are a public reporting company and accordingly subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and other federal securities laws, including compliance with the Sarbanes-Oxley Act of 2002. We are required to prepare and file annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports. Compliance with such reporting requirements is both time-consuming and costly for us. We may need to hire additional financial reporting, internal control, and other finance personnel in order to develop and implement appropriate internal controls and reporting procedures.
In addition, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules implemented by the SEC and the securities exchanges, require certain corporate governance practices for public companies. Our management and other personnel have devoted and expect to continue to devote a substantial amount of time to public reporting requirements and corporate governance. These rules and regulations have significantly increased our legal and financial compliance costs and made some activities more time-consuming and costly. If these costs are not offset by increased revenues and improved financial performance, our financial condition and results of operations may be materially adversely affected. These rules and regulations also make it more difficult and more expensive for us to obtain director and officer liability insurance in the future. Additionally, we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified personnel to serve on our board of directors or as executive officers.
Failure to comply with internal control attestation requirements could lead to loss of public confidence in our financial statements and negatively impact our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to conduct an annual management assessment of the effectiveness of our internal controls over finical reporting. If we fail to timely develop our internal controls, and management is unable to make this assessment, or, once required, if the independent registered public accounting firm cannot timely attest to this assessment, we could be subject to regulatory sanctions. As a result, a loss of public confidence in our financial controls and the reliability of our financial statements may develop ultimately negatively impacting our stock price and our ability to raise additional capital when and as needed.
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Item 1B. Unresolved Staff Comments.
None.
Item2. Properties
We currently do not own any real property and operate from leased facilities. Our principal executive office is located at 5582 Broadcast Court Sarasota, Florida 34240. The lease is for one 5-year term, with option to extend for one 3-year term. We lease approximately 1,223 square feet in the Sarasota facility, pursuant to a May 2019 lease with a 3% annual rent increase. We believe that our facilities are adequate to meet our needs.
Item3. Legal Proceedings
See Note 13 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Item4. Mine Safety Disclosures.
Not Applicable
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Part II
Item5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Trading of our shares of our common stock is on the Nasdaq Capital Market under the symbol “INVO.” Prior to November 12, 2020, our common stock was traded on the OTC QB Venture Market tier of the over-the-counter (“OTC”) market.
As of December 31, 2020, and 2019, there were 9,639,268 and 4,884,879 shares of registrant’s common stock outstanding, respectively.
Information required with respect to Equity Compensation Plans in this Item 5 is included in Item 11 on page 43 of this report on Form 10-K.
Stockholders
As of December 31, 2020, and 2019, there were approximately 172 and 168 stockholders of record of our common stock, respectively. However, we estimate that we have a significantly greater number of beneficial holders of our common stock because a number of shares are held of record by broker-dealers for their customers in street name.
Dividend Policy
We have never declared or paid a dividend on our common stock. We intend to retain future earnings (if any) to fund development and growth of our business, rather than to pay them as dividends, for the foreseeable future.
Recent Sales of Unregistered Securities
In March 2021, we issued 11,098 shares of our common stock upon conversion of $35,513.60 of accrued interest under certain of our convertible notes. We did not receive any proceeds upon conversion. We relied on the exemption from registration provided by Section 3(a)(9) and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
In March 2021, we issued 85,568 shares of our common stock upon exercise of outstanding unit purchase options. The unit purchase options were issued to purchase 131,114 shares and were exercised in full on a cashless basis and accordingly 45,546 shares were withheld by us at the market price of $9.20 per share less the exercise price of $3.20 per share to fund the exercise price. We relied on the exemption from registration provided by Section 3(a)(9) and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
In March 2021, we issued 131,114 warrants upon the exercise in full of 131,114 unit purchase options. We did not receive any proceeds upon exercise. We relied on the exemption from registration provided by Section 3(a)(9) and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
In March 2021, we issued 90,748 shares of our common stock upon exercise of outstanding warrants. The warrants were issued to purchase 139,056 shares and were exercised in full on a cashless basis and accordingly 48,308 shares were withheld by us at the market price of $9.20 per share less the exercise price of $3.20 per share to fund the exercise price. We relied on the exemption from registration provided by Section 3(a)(9) and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
In November 2020, pursuant to Section 4(a)(2) of the Securities Act, we issued 109 shares of common stock in consideration of consulting services rendered. We did not receive any proceeds from the issuance.
In November 2020, pursuant to Section 3(a)(9) of the Securities Act, we issued 453,699 shares of common stock with fair value of $1,366,249 are the result of the conversion of notes payables and accrued interest.
In November 2020, pursuant to Section 4(a)(2) of the Securities Act, we issued 22,250 shares of common stock with a fair value of $70,562 in consideration of consulting services rendered. We did not receive any proceeds from the issuance.
Purchase of Equity Securities
No repurchase of equity securities were made during the fiscal year.
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Item 6. Selected Financial Data
No longer required.
Item 7.Management s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This discussion includes certain forward-looking statements about our business and our expectations, including statements relating to revenues, international revenues, revenue growth rates, gross margin, operating expenses, amortization expense, earnings per share, available cash and operating cash flow. Any such statements are subject to risk that could cause the actual results to vary materially from expectations. For a further discussion of the various risks that may affect our business and expectations, see the section titled “Risk Factors” contained in Item 1A of Part I of this Annual Report on Form 10-K. The risks and uncertainties discussed therein do not reflect the potential future impact of any mergers, acquisitions or dispositions. In addition, any forward-looking statements represent our estimates only as of the day this Annual Report was filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.
Background
We were formed on January 5, 2007 under the laws of the Commonwealth of Massachusetts under the name Bio X Cell, Inc. to acquire the assets of Medelle Corporation (“Medelle”). Dr. Claude Ranoux purchased all of the assets of Medelle, and then he contributed those assets, including four patents relating to the INVOcell technology, to Bio X Cell, Inc. upon its formation in January 2007.
On December 5, 2008, Bio X Cell, Inc., doing business as INVO Bioscience, and each of the shareholders of INVO Bioscience entered into a share exchange agreement and consummated a share exchange with Emy’s Salsa AJI Distribution Company, Inc., a Nevada corporation (“Emy’s”). Upon the closing of the share exchange on December 5, 2008, the INVO Bioscience shareholders transferred all of their shares of common stock in INVO Bioscience to Emy’s. In connection with the share exchange, Emy’s changed its name to INVO Bioscience, Inc. and Bio X Cell, Inc. became a wholly owned subsidiary of Emy’s (re-named INVO Bioscience, Inc.).
The share exchange described immediately above was accounted for as a “reverse merger” because the former Bio X Cell shareholders owned a majority of the outstanding shares of common stock of Emy’s immediately following the share exchange. Bio X Cell was deemed the acquirer in the reverse merger. The financial results included in this Annual Report on Form 10-K are based on our audited balance sheet as of December 31, 2020 and 2019 and related audited statements of operations and stockholders’ deficiency and statements of cash flows for the periods ended December 31, 2020 and 2019, respectively.
Overview
We are a medical device company focused in the Assisted Reproductive Technology (“ART”) marketplace. Our mission is to increase access to care and expand fertility treatment and patient care across the globe. Our patented device, the INVOcell, is the first Intravaginal Culture (“IVC”) system in the world used for the natural in vivo incubation of eggs and sperm during fertilization and early embryo development. INVOcell was granted clearance in the United States by the U.S. Food & Drug Administration (“FDA”) in November 2015, received the CE mark in October 2019, and is now positioned to help provide millions of infertile couples across the globe access to a new infertility treatment option. We believe this novel device and procedure provides a more natural, safe, effective, efficient and economical fertility treatment compared to current infertility treatments, including in-vitro fertilization (“IVF”) and intrauterine insemination (“IUI”). Unlike conventional infertility treatments such as IVF where the eggs and sperm develop into embryos in a laboratory incubator, the INVOcell utilizes the women’s vaginal cavity as an incubator to support a more natural fertilization and embryo development environment. As such, this novel device promotes in vivo conception and early embryo development.
In both commercial utilization of the INVOcell and in clinical studies, the INVO Procedure has proven to have equivalent pregnancy success and live birth rates as IVF. Additionally, we believe there are emotional benefits with the mother’s participation in fertilization and early embryo development by vaginal incubation compared to that of conventional IVF treatment by offering patients a more connected and personalized method to achieve pregnancy.
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For many couples struggling with infertility, access to treatment is often not available. Financial challenges (cost of treatment) and limited availability (or capacity) of fertility medical care are two of the main challenges in the ART marketplace that contribute to the large percentage of untreated patients. Religious, social and cultural roadblocks can also prevent hopeful couples from realizing their dream to have a baby with conventional IVF. We believe INVOcell can address many of the key challenges in the ART market, particularly patient cost and infrastructure capacity constraints. The many benefits to the INVO solution include:
● Promotes greater involvement by couples in the treatment and conception.
In the second quarter of 2016, the first U.S. baby from the INVOcell and INVO Procedure following FDA clearance was born in Texas.
Sales and Marketing
Our product commercialization efforts are focused on identifying distributors and partners within targeted geographic regions that we believe can best promote, market and sale the INVOcell device and process to assist infertile couples in having a baby. We believe that our proven INVOcell procedure is an effective low-cost treatment option which can also be offered without the need for a more expensive IVF lab facility. We have been authorized to sell the INVOcell device in the United States since November 2015 after receiving de novo class II clearance from the US Food & Drug Administration (“FDA”). As a result of our January 2019 exclusive sales, marketing and distribution agreement with Ferring for the U.S., our primary focus will be on supporting Ferring and establishing INVO-clinics within the U.S. as well as developing key international markets around the world.
We anticipate that we will experience quarterly fluctuations in our revenues as a result of our efforts to expand the sales of the INVO technology to new markets. We expect international sales will increase moving forward as we continue to expand our efforts to expand INVOcell globally. We will continue to seek out partners that will contractually commit to meeting agreeable performance objectives that are consistent with our goals and objectives.
On November 12, 2018, we entered into a U.S. Distribution Agreement (the “Distribution Agreement”) with Ferring International Center S.A. (“Ferring”), which closed on January 14, 2019. Pursuant to the Distribution Agreement, among other things, we granted Ferring an exclusive license in the United States (the “Territory”) with rights to sublicense under patents related to our proprietary INVOcellTM intravaginal culture device together with the retention device and any other applicable accessories (collectively, the “Licensed Product”) to market, promote, distribute and sell the Licensed Product with respect to all therapeutic, prophylactic and diagnostic uses of medical devices or pharmaceutical products involving reproductive technology (including infertility treatment) in humans (the “Field”). Ferring is responsible, at its own cost, for all commercialization activities for the Licensed Product in the United States. We retained a limited exception to the exclusive license granted to Ferring allowing us, subject to certain restrictions, to establish up to establish up to five clinics that will commercialize INVO cycles in the U.S. This agreement was amended on March 2, 2021 to provide for added flexibility by increasing the number of INVO company-owned clinics initially allowable under the agreement and removing certain geographical requirements. We retained all commercialization rights for the Licensed Product outside of the United States. We believe the strategic partnership with a strong reproductive organization such as Ferring has provided us with the necessary sales and marketing resources and overall market credibility to help execute our goal to expand the INVOcell device around the world.
The Ferring license was deemed to be a functional license that provides the counterparty with a “right to access” to our intellectual property during the subscription period and accordingly, revenue is recognized over a period of time, which is generally the subscription period. During the twelve months ended December 31, 2020, we recognized $714,286, related to the Ferring license agreement.
As of December 31, 2020, we had deferred revenues of $3,571,429 relating to the Distribution Agreement with Ferring.
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On March 2, 2021, we entered into Amendment No. 1 to the Distribution Agreement (the “Amendment”) with Ferring. Pursuant to the Amendment, Ferring agreed to purchase a 2,004 count of product for $501,000 pursuant to the Distribution Agreement in March 2021, at which point the minimum annual target for 2020 set forth in Section 2.4 of the Distribution Agreement will be deemed to be satisfied in full as a result of such purchase. The Amendment provides for added flexibility by increasing the number of INVO company-owned clinics initially allowable under the agreement and removing certain geographical requirements.
Operations
We operate with a core internal team and outsource certain operational functions in order to help accelerate our efforts as well as reduce fixed internal overhead needs and in-house capital equipment requirements. Our most critical management and leadership functions are carried out by our core management team. We have contracted out the manufacturing, assembly, packaging, labeling and sterilization of the device to a medical manufacturing company and to a sterilization specialist to perform the gamma sterilization process.
Historically, our most significant challenge in growing our business has been our limited resources. Beginning in 2019, as a result of the Ferring agreement and upfront payment, we expanded our sales and marketing efforts and regulatory and clinical development activities. Our cash needs are primarily attributable to funding our sales and marketing efforts, strengthening our training capabilities, satisfying existing obligations, funding our planned clinical trial for additional indications for use, building an administrative infrastructure, and costs and professional fees associated with being a public company. We currently expect our existing distribution and partnership agreements, such as that with Ferring and the other more recent agreements with non-U.S. companies to provide increased revenue in the future, which we expect will help offset the higher level of spending.
Selling, general and administrative expenses were $6,062,874 and $3,123,875 for the years ended December 31, 2020 and 2019, respectively. The $2,938,999 increase in selling, general and administrative expenses in 2020 was primarily the result of an increase in wages as we expanded our internal team, professional fees, legal fees, and increased our spending on expanded label efforts. However, $1,756,991 of this increase is related to non-cash stock compensation and stock option expense.
Throughout the period 2019 to 2020 we incurred annual net losses as we continued to market our product and proprietary process as we endeavored to increase our revenue base. We expect to continue incurring losses during 2021 as we continue to invest in INVO clinics in the U.S. and the global expansion of our business and INVOcell technology.
We cannot accurately predict the level of success our key partners will enjoy over the next 12-24 months. However, we anticipate that we will continue to launch the INVOcell device and INVO Procedure within the U.S. through our agreement with Ferring, and in other parts of the world with new distributor partnerships and joint venture agreements.
Critical Accounting Policies and Estimates
The discussion and analysis of INVO Bioscience’s financial condition presented in this section are based upon the audited consolidated financial statements of INVO Bioscience, which have been prepared in accordance with the generally accepted accounting principles in the United States. During the preparation of the financial statements, INVO Bioscience is required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, INVO Bioscience evaluates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A summary of significant accounting policies is included below. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.
Stock Based Compensation
The Company accounts for stock-based compensation under the provisions of ASC 718-10 Share-Based Payment (formerly SFAS 123R). This statement requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period in which the employee is required to provide service or performance goals in exchange for the award, which is usually immediate but sometimes over a vesting period. Warrants granted to non-employees are recorded as an expense over the requisite service period based on the grant date estimated fair value of the grant, determined using the Black-Scholes option pricing model.
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Revenue Recognition
The Company recognizes revenue on arrangements in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services ASC 606 requires companies to assess their contracts to determine the timing and amount of revenue to recognize under the new revenue standard. The model has a five-step approach:
1. Identify the contract with the customer.
2. Identify the performance obligations in the contract.
3. Determine the total transaction price.
5. Recognize as revenue when (or as) each performance obligation is satisfied.
Recent Accounting Pronouncements
In July 2017, FASB issued ASU 2017-11 (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). The new standard simplifies the accounting for certain financial instruments with down round features. Part I of ASU 2017-11 changes the classification analysis of certain equity-linked financial instruments, such as warrants and embedded conversion features, such that a down round feature is disregarded when assessing whether the instrument is indexed to an entity’s own stock under Subtopic 815-40, Contracts in Entity’s Own Equity. As a result, a down round feature, by itself, no longer requires an instrument to be re-measured at fair value through earnings each period, although all other aspects of the indexation guidance under Subtopic 815-40 continue to apply. Part II of ASU 2017-11 re-characterizes the indefinite deferral of certain provisions of Topic 480, Distinguishing Liabilities from Equity, (currently presented as pending content in the Codification) as a scope exception. No change in practice is expected as a result of these amendments. The new standard is effective for fiscal years beginning after December 15, 2018, early adoption is permitted. The amendments in Part II have no accounting impact and therefore do not have an associated effective date. The Company decided to early adopt this ASU 2017-11 and applied it to the convertible notes it issued during the year which are reflected in this Form 10K.Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. In May 2017, the FASB issued ASU No. 2017-09 which was issued to clarify and reduce both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, “Compensation – Stock Compensation” to changes in the terms and conditions of a share-based payment award. This update is effective for the Company in the fiscal year beginning October 1, 2018. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
Leases (Topic 842). In February 2016, FASB issued ASU 2016-02, Leases (“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
The Company adopted the standard effective January 1, 2019. The standard allows a number of optional practical expedients to use for transition. The Company choose the certain practical expedients allowed under the transition guidance which permitted us to not to reassess any existing or expired contracts to determine if they contain embedded leases, to not to reassess our lease classification on existing leases, to account for lease and non-lease components as a single lease component for equipment leases, and whether initial direct costs previously capitalized would qualify for capitalization under FASB ASC 842. The new standard also provides practical expedients and recognition exemptions for an entity's ongoing accounting policy elections. The Company has elected the short-term lease recognition for all leases that qualify, which means that we do not recognize a ROU asset and lease liability for any lease with a term of twelve months or less.
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The most significant impact of adopting the standard was the recognition of ROU assets and lease liabilities for operating leases on the Company's consolidated balance sheet but it did not have an impact on the Company's consolidated statements of operations or consolidated statements of cash flows. The Company did not have a cumulative effect on adoption prior to January 1, 2019.
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued ASU 2017-04 which simplifies the test for goodwill impairment by eliminating Step 2 from the Goodwill impairment test. This new guidance is effective for the Company beginning in fiscal year 2021. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.
Management does not believe that any other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the accompanying condensed consolidated financial statements.
Results of Operations
Fiscal year 2020 was impacted by the COVID-19 global pandemic, which affected the overall fertility industry as well as impacted some of our key partners and their efforts. However, we also believe important progress was made during the year that will help drive overall awareness and future expansion of INVOcell within key markets. This includes: 1) the availability of additional, real world (retrospective) data demonstrating quality patient outcomes with INVOcell, which further builds confidence and credibility around the technology, 2) the signing of additional distribution and joint venture agreements, 3) the addition of key personnel, and 4) the completion of a major public financing which provides the necessary working capital to execute on our growth and global market expansion efforts. While the ongoing pandemic may continue to impact 2021 and impede certain progress in some markets, the fertility industry has and continues to work toward a return to normal levels and we believe our expanded number of partners and active markets affords us a strong forward looking outlook.
The Assisted Reproductive Technology (“ART”) market also continues to benefit from a number of industry tailwinds, including 1) the large under-served potential patient population, 2) increasing infertility rates around the world 3) growing awareness and education of fertility treatment options, 4) a growing acceptance toward fertility treatment, 5) improvements in procedure techniques and hence improvements in pregnancy success rates and 6) generally improving insurance (private and public) reimbursement trends; all of which should help contribute to strong industry growth and patient demand for treatment. As a result of these dynamics, we feel INVO Bioscience and its novel technology solution are well positioned.
Comparison of the years ended December 31, 2020 and 2019
Revenues
Revenue for year ended December 31, 2020 was $1,037,286, compared to $1,480,213 for the ended December 31, 2019. The decrease was the result of a decline in product sales to Ferring.
However, pursuant to an amendment we entered into subsequent to the year end, Ferring placed a $501,000 order in March 2021, which we agreed would satisfy Ferring’s minimum purchase requirements for 2020.
Gross Profit
Gross profit for the year ended December 31, 2020 was $948,526 compared to $1,340,543 for the year ended December 31, 2019. Gross margins were 91% and 91% for the years ended December 31, 2020 and 2019, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31, 2020 were $6,065,066, compared to $3,128,635 for the year ended December 31, 2019. The increase of $2,936,431 or 94% was primarily the result of an increase in personnel, stock-based compensation, marketing and other corporate expenses. Approximately $1,756,991 of this increase is related to non-cash stock compensation and stock option expense.
Research and Development Expenses
We began to fund additional research and development (“R&D”) efforts in 2020 as part of our 5-day label expansion efforts, and also submitted additional trademark and patent filings. Excluding the investment in inventory in anticipation of clinical trials and patents, R&D expenses were $398,426 for the year ended December 31, 2020. During 2019 we did not fund any R&D.
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Interest Expense, Financing Fees
Interest expense and financing fees were $2,836,504 for the year ended December 31, 2020, compared to $387,646 for the year ended December 31, 2019. The increase of $2,448,858, or approximately 632%, was primarily due to an increase in amortization of discount, debt issuance cost and interest on the 2020 Convertible Notes and was a non-cash related expense.
Income Taxes
As of December 31, 2020, we had unused federal net operating loss carryforwards (“NOLs”) of $21,819,421. These losses expire in various amounts at varying times beginning in 2027 with a portion carrying on indefinitely. Unless expiration occurs, these NOLs may be used to offset future taxable income and thereby reduce our income taxes otherwise payable.
We recorded a valuation allowance against our deferred tax assets at December 31, 2020 and 2019 totaling $6,408,401 and $4,401,714, respectively. The valuation allowance has been established for certain deferred tax assets for which we believe it is more likely than not that the tax benefits will not be realized, which are primarily federal and state net operating loss carryforwards. If our expectations for future operating results on a consolidated basis or at the state jurisdiction level vary from actual results due to changes in healthcare regulations, general economic conditions, or other factors, we may need to adjust the valuation allowance, for all or a portion of our deferred tax assets. Our income tax expense in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in our valuation allowance in the period when the change in circumstances occurs. These changes could have a significant impact on our future earnings.
Liquidity and Capital Resources
For the years ended December 31, 2020 and 2019, we had net losses of $8,347,316 and $2,167,544, respectively. The increase in net loss was due to increased operating expenses and interest expense. Approximately $2,626,220 of this increase was related to non-cash equity and debt amortization expenses as well as $1,756,991 of equity compensation. As of December 31, 2020, we had working capital of $8,254,540, compared to $42,330 as of December 31, 2019. As of December 31, 2020, our stockholders’ equity was $5,743,106, compared to a stockholders’ deficit of $3,713,595 as of December 31, 2019. Cash used in operations was $4,775,148 for the year ended December 31, 2020, compared to cash provided by operations of $1,370,513 for the year ended December 31, 2019.
During 2020, we raised $13.8 million in debt and equity financings. Based on our current plan, we believe we have sufficient liquidity for at least the next 12 months. To the extent additional funds are necessary to meet our longer-term liquidity needs to execute our business strategy, we may need to raise additional funding by way of debt or equity financings or a combination of these potential sources of funds, although we can provide no assurance that these sources of funding will be available on reasonable terms.
Historically, our primary sources of liquidity have been from equity or debt offerings and up-front distribution licensing fees. Until we can generate a sufficient amount of cash from operations, we may need to finance future cash needs through public or private equity or debt offerings. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly scale back our operations or delay, scale back or discontinue the continuing development of our products. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing stockholders and increased fixed payment obligations, and these securities may have rights senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.
Cash Flows
The following table shows a summary of our cash flows for the years ended December 31, 2020 and 2019, (in thousands):
Cash (used in) provided by:
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As of December 31, 2020, we had $10,097,760 in cash compared to $1,238,585 on December 31, 2019. Net cash used in operating activities in 2020 was $4,775,148, as compared to net cash provided by operating activities of $1,370,513 for 2019. The increase in net cash used in operations was primarily due to the increase in net loss and a decrease in deferred revenue as a result of the initial exclusive license and distribution agreement fee we received in January 2019.
In 2020, cash used in investing activities of $187,254 related to new molds, additional trademarks and investment to establish joint ventures. In 2019, cash used in investing activities of $114,706 related to new molds and trademarks.
During 2020, cash provided by financing activities of $13,821,577 primarily related to the public offerings of equity and convertible notes. In 2019, cash used by financing activities of $229,465 primarily related to principal payments on notes payable.
Off Balance Sheet Arrangements
Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:
- Any obligation under certain guarantee contracts;
We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.
Inflation
We believe that inflation has not had a material effect on our operations to date.
Item 7A. Quantitative and Qualitative Disclosure about Market Risks
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
We will be exposed to risk from changes in foreign currency exchange rates related to our foreign joint ventures. Our principal exchange rate exposure relates to the Malaysian Ringgit, the North Macedonian Denar, the Mexican Peso and the Indian Rupee.
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Item 8.Financial Statements and Supplementary Data
Page
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2020 and 2019 F-2
Notes to Consolidated Financial Statements F-6
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of INVO Bioscience, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of INVO Bioscience, Inc. (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of operations, stockholders’ equity (deficiency), and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Lack of Going Concern Paragraph
As discussed in Note 2 to the financial statements, due to the net loss and negative cash flows from operations for the year, the Company evaluated the need for a going concern.
Auditing management’s evaluation of a going concern can be a significant judgment given the fact that the Company uses management estimates on future revenues and expenses which are not able to be easily substantiated.
To evaluate the appropriateness of the lack of going concern paragraph in our audit opinion, we examined and evaluated the financial information that was the initial cause for this consideration along with management’s plans to mitigate the going concern and management’s disclosure on going concern.
/s/ M&K CPAS, PLLC
We have served as the Company’s auditor since 2019.
Houston, TX
March 30, 2021
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INVO Bioscience, Inc.
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets
Other assets 240 -
Investment in joint ventures 98,084 -
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Note payable – Payroll Protection Program 157,620 -
Convertible notes, net 536,063 -
Lease liability, net of current portion 58,634 81,494
Convertible notes, net - 325,784
Convertible notes – related party, net - 28,824
Stockholders’ equity (deficiency)
Total liabilities and stockholders' equity (deficiency) $ 10,947,343 $ 1,795,479
The accompanying notes are an integral part of these consolidated financial statements.
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INVO Bioscience, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31,
Revenue:
Cost of goods sold:
Operating expenses:
Research and development expenses 398,426 -
Other income (expense):
Provision for income taxes (36 ) (433 )
Net loss per common share:
Weighted average number of common shares outstanding:
The accompanying notes are an integral part of these consolidated financial statements.
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INVO Bioscience, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
Common Stock Additional Accumulated
Shares Amount Paid-in Capital Deficit Total
Stock options issued to employees - - 69,787 - 69,787
Stock options issued to directors and employees - - 1,140,989 - 1,140,989
Rounding shares as a result of reverse stock split 133 - - - -
The accompanying notes are an integral part of these consolidated financial statements.
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INVO Bioscience, Inc.
CONSOLIDATED STATEMENTSOF CASH FLOWS
For the Year Ended December 31,
Cash flows from operating activities:
Non-cash stock compensation issued for services 150,862 46,000
Non-cash stock compensation issued to directors and employees 465,140 17,750
Fair value of stock options issued to employees 1,140,989 69,787
Fair value of stock to be issued for legal settlement - 93,750
Debt conversion expense 131,984 -
Amortization of leasehold right of use asset 22,564 14,558
Changes in assets and liabilities:
Prepaid expenses and other current assets 38,210 53,544
Accounts payable and accrued expenses (42,603 ) (200,298 )
Deferred tax liabilities 36 433
Net cash (used in) provided by operating activities (4,775,148 ) 1,370,513
Cash flows from investing activities:
Payments to acquire property, plant and equipment (49,261 ) (64,839 )
Other assets (240 ) -
Investment in joint ventures (98,084 ) -
Net cash (used in) investing activities (187,254 ) (114,706 )
Cash flows from financing activities:
Proceeds from the sale of common stock, net of offering costs 11,475,052 -
Proceeds from notes payable 157,620 -
Principal payment on notes payable – related parties (40,000 ) (97,743 )
Net cash provided by (used in) financing activities 13,821,577 (229,465 )
Cash and cash equivalents at beginning of period 1,238,585 212,243
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Non cash activities:
Beneficial conversion feature on convertible notes $ 2,062,586 $ -
Settlement of accrued compensation $ - $ 712,162
Fair value of options issued for debt $ 524,452 $ -
Fair value of warrants issued with debt $ 524,452 $ -
Fair value of warrants issued to service providers $ 8,660 $ -
The accompanying notes are an integral part of these consolidated financial statements.
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INVO BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) General
INVO Bioscience (“INVO” or the “Company”) is a medical device company focused on the Assisted Reproductive Technology (“ART”) marketplace. The primary focus is the manufacture and sale of the INVOcell device and the INVO technology to provide an alternative infertility treatment for couples. The Company’s patented device, the INVOcell, is the first Intravaginal Culture (“IVC”) system in the world used for the natural in vivo incubation of eggs and sperm during fertilization and early embryo development (the “INVO Procedure”). INVOcell was granted clearance in the United States by the U.S. Food & Drug Administration (“FDA”) in November 2015, received the CE mark in October 2019, and is now positioned to help provide millions of infertile couples across the globe access to a new infertility treatment option. The Company believes this novel device and procedure provides a more natural, safe, effective, efficient and economical fertility treatment compared to current infertility treatments, including in-vitro fertilization (“IVF”) and intrauterine insemination (“IUI”). Unlike conventional infertility treatments such as IVF where the eggs and sperm develop into embryos in a laboratory incubator, the INVOcell utilizes the women’s vaginal cavity as an incubator to support a more natural fertilization and embryo development environment. This novel device promotes in vivo conception and early embryo development.
In both current utilization of the INVOcell and in clinical studies, the INVO Procedure has proven to have equivalent pregnancy success and live birth rates as the traditional assisted reproductive technique, IVF. Additionally, we believe there are emotional benefits of the mother’s participation in the fertilization and early embryo development by vaginal incubation compared to that of conventional IVF treatment. INVOcell also offers to patients a more personalized way to achieve pregnancy.
(B) Basis of Presentation(Share Exchange and Corporate Structure)
The accompanying consolidated financial statements present on a consolidated basis the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Medesole JV Agreement
On January 16, 2020, the Company announced a joint venture agreement for the Indian market. Under terms of the agreement, INVO and our partner, Medesole Healthcare and Trading Pvt Ltd (“Medesole”), will each own 50% of the joint venture. The Company will provide the device, training and general technology support to the joint venture, while Medesole will be responsible for the operations of INVO clinics in India. Both partners will equally invest in start-up and capital expenditures and share in the revenue and profits of the joint venture. The business model allows INVO to benefit not only from the sale of the device, but from the delivery of the entire solution. The current joint venture arrangements are in the developmental stage and therefore only the initial startup costs are included in the financial statement for the year ended December 31, 2020.
Mexico JV Agreement
Effective September 24, 2020, INVO Centers, LLC, entered into a Pre-Incorporation and Shareholders Agreement with Francisco Arredondo, MD PLLC (“Arredondo”) and Security Health LLC, a Texas limited liability company (“Ramirez”, and together with INVO and Arredondo, the “Shareholders”) under which the Shareholders will commercialize the INVO Procedure and offer related medical treatments in Mexico. Each party will own one-third of the Mexican incorporated company, Positib Fertility, S.A. de C.V. (the “Mexico Company”). The Mexico Company will acquire the INVOcell product at cost plus any incurred shipping, customs and related fees.
The Mexico Company will operate in Monterrey Nuevo Leon, Mexico and any other cities and places in Mexico as approved by the Mexico Company’s board of directors and Shareholders. In addition, the Shareholders agreed that the Mexico Company will be the Company’s exclusive distributor in Mexico. The Shareholders also agreed not to compete directly or indirectly with the Mexico Company in Mexico. For the year ended December 31, 2020 the Company has invested $51,670 in this joint venture. This joint venture arrangements are in the developmental stage and therefore only the initial startup costs are included in the financial statement for the year ended December 31, 2020.
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North Macedonia JV Agreement
On November 23, 2020, the Company entered into a joint venture agreement with Ginekaliks Dooel (“Ginekaliks”), a limited liability company incorporated in the Republic of North Macedonia, to establish an exclusive joint venture to (i) commercialize, introduce, promote and market technologies related to the INVOcell and INVO Procedure in North Macedonia, (ii) establish a private healthcare institution to offer the INVO Procedure. The joint venture will be co-managed and owned 50% by each of INVO and Ginekaliks. For the year ended December 31, 2020 the Company has invested $2,597 in this joint venture. This joint venture arrangements are in the developmental stage and therefore only the initial startup costs are included in the financial statement for the year ended December 31, 2020.
Malaysia JV Agreement
On November 23, 2020, the Company entered into a separate joint venture agreement with SNS Murni SDN BHD (“SNS Murni”), a company incorporated in Malaysia, to establish an exclusive joint venture in Malaysia to (i) introduce, promote and market our technologies related to the INVOcell and INVO Procedure in dedicated government-owned fertility clinics in Malaysia, and (ii) establish INVO Clinics in Malaysia. The joint venture will be co-managed and owned 50% by each of INVO Bioscience and SNS Murni. For the year ended December 31, 2020 the Company has invested $7,348 in this joint venture. This joint venture arrangements are in the developmental stage and therefore only the initial startup costs are included in the financial statement for the year ended December 31, 2020.
(C) Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.
(D) Cash and Cash Equivalents
For financial statement presentation purposes, the Company considers time deposits, certificates of deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. At times, cash and cash equivalents balances exceed amounts insured by the Federal Deposit Insurance Corporation.
(E) Inventory
Inventories consist of raw materials, work in process and finished products and are stated at the lower of cost or market; using the first-in, first-out (FIFO) method as a cost flow convention.
(F) Property and Equipment
The Company records property and equipment at cost. Property and equipment is depreciated using the straight-line method over the estimated economic lives of the assets, which are from 3 to 10 years. The Company capitalizes the expenditures for major renewals and improvements that extend the useful lives of property and equipment. Expenditures for maintenance and repairs are charged to expense as incurred. The Company reviews the carrying value of long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.
(G) Stock Based Compensation
The Company accounts for stock-based compensation under the provisions of Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”). This statement requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period in which the employee is required to provide service or based on performance goals in exchange for the award, which is usually the vesting period.
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(H) Loss Per Share
Basic loss per share calculations are computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share are computed similar to basic earnings per share except that the denominator is increased to include securities or other contracts to issue common stock that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the years ended December 31, 2020 and 2019, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.
Years Ended December 31,
The Company has excluded the following dilutive securities from the calculation of fully diluted shares outstanding because the result would have been anti-dilutive:
Years Ended December 31,
Effect of dilutive common stock equivalents:
(I) Fair Value of Financial Instruments
ASC 825-10-50, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments.
Effective January 1, 2008, the Company adopted ASC 820-10, “Fair Value Measurements”, which provides a framework for measuring fair value under GAAP. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
(J) Income Taxes
The Company is subject to income taxes in the United States and its domestic tax liabilities are subject to the allocation of expenses in multiple state jurisdictions. The Company uses the asset and liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The recoverability of deferred tax assets is evaluated by assessing the adequacy of future expected taxable income from all sources, including taxable income in prior carryback years, reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent the Company does not consider it more-likely-than-not that a deferred tax asset will be recovered, a valuation allowance is established.
(K) Business Segments
The Company operates in one segment and therefore segment information is not presented.
(L) Concentration of Credit Risk
Cash includes amounts deposited in financial institutions in excess of insurable Federal Deposit Insurance Corporation (“FDIC”) limits. As of December 31, 2020, the Company had cash balances in excess of FDIC limits.
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(M) Revenue Recognition
The Company recognizes revenue on arrangements in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services ASC 606 requires companies to assess their contracts to determine the timing and amount of revenue to recognize under the new revenue standard. The model has a five-step approach:
1. Identify the contract with the customer.
2. Identify the performance obligations in the contract.
3. Determine the total transaction price.
5. Recognize as revenue when (or as) each performance obligation is satisfied.
Revenues for products, including: INVOcell®, INVO TM Retention System, and INVO Microscope Holding Block are typically recognized at the time the product is shipped, at which time the title passes to the customer, and there are no further performance obligations.
On November 12, 2018, we entered into a U.S. Distribution Agreement (the “Distribution Agreement”) with Ferring International Center S.A. (“Ferring”), which closed on January 14, 2019. At the closing, we received a $5,000,000 license payment upfront from Ferring. Pursuant to the Distribution Agreement, among other things, we granted Ferring an exclusive license in the United States market only, with rights to sublicense under patents related to our proprietary intravaginal culture device (INVOcellTM), together with the retention device and any other applicable accessories (collectively, the “Licensed Product”) to market, promote, distribute and sell the Licensed Product with respect to all therapeutic, prophylactic and diagnostic uses of medical devices or pharmaceutical products involving reproductive technology (including infertility treatment) in humans (the “Field”). Ferring is responsible, at its own cost, for all commercialization activities for the Licensed Product in the U.S. market. We retained a limited exception to the exclusive license granted to Ferring allowing us, subject to certain restrictions, to establish up to five clinics that will commercialize INVO cycles in the U.S. This agreement was amended on March 2, 2021 to provide for added flexibility by increasing the number of INVO company-owned clinics initially allowable under the agreement and removing certain geographical requirements. Ferring is obligated to make a second payment to us of $3,000,000 upon procurement of a five (5) day label enhancement from the FDA for the current incubation period for the Licensed Product at least three (3) years prior to the expiration of the term of the license for the Licensed Product and provided further that Ferring has not previously exercised its right to terminate the Distribution Agreement for convenience. In addition, under the terms of a separate Supply Agreement, Ferring is obligated to pay us a specified supply price for each Licensed Product purchased by Ferring for distribution. The Distribution Agreement has an initial term expiring on December 31, 2025 and at the end of the initial term it may be terminated by us if Ferring fails to generate specified minimum revenues to us from the sale of the Licensed Product during the final two years of the initial term. Provided that no such termination occurs at the end of the initial term, thereafter the term of the Distribution Agreement shall automatically be renewed for successive three (3) years terms unless terminated by mutual consent. We retain all commercialization rights for the Licensed Product outside of the United States.
The Ferring license was deemed to be a functional license that provide customers with a “right to access” to our intellectual property during the subscription period and accordingly, under ASC 606-10-55-60 revenue is recognized over a period of time, which is generally the subscription period. The initial upfront payment of $5,000,000 which was received upon the signing of the agreement is being recognized to income over the 7 year term.
(N) Long- Lived Assets
Long-lived assets and certain identifiable assets related to those assets are periodically reviewed for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the non-discounted future cash flows of the enterprise are less than their carrying amount, their carrying amounts are reduced to the fair value and an impairment loss recognized. There was no impairment recorded during the years ended December 31, 2020 and 2019.
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(O) Recent Accounting Pronouncements
In February 2016, FASB issued ASU 2016-02, Leases (“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
The Company adopted the standard effective January 1, 2019. The standard allows a number of optional practical expedients to use for transition. The Company chose the certain practical expedients allowed under the transition guidance which permitted the Company to not to reassess any existing or expired contracts to determine if they contain embedded leases, to not to reassess our lease classification on existing leases, to account for lease and non-lease components as a single lease component for equipment leases, and whether initial direct costs previously capitalized would qualify for capitalization under FASB ASC 842. The new standard also provides practical expedients and recognition exemptions for an entity's ongoing accounting policy elections. The Company has elected the short-term lease recognition for all leases that qualify, which means that we do not recognize a ROU asset and lease liability for any lease with a term of twelve months or less.
The most significant impact of adopting the standard was the recognition of ROU assets and lease liabilities for operating leases on the Company's consolidated balance sheet but it did not have an impact on the Company's consolidated statements of operations or consolidated statements of cash flows. The Company did not have a cumulative effect on adoption prior to January 1, 2019.
The Company adopted Accounting Standards Update No. 2016-02: Leases, or ASU 2016-02, effective January 1, 2019. ASC 842 superseded previously existing guidance on accounting for leases and generally requires all leases to be recognized in the statement of financial position.
The adoption of ASC 842 had no impact on the Company’s consolidated statement of operations and consolidated statement of cash flows.
The Company adopted ASC 842 on a modified retrospective approach at the effective date and, therefore, did not revise comparative period information or disclosure. In addition, the Company elected the package of practical expedients permitted under ASC 842.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard is intended to simplify the accounting and disclosure requirements for income taxes by eliminating various exceptions in accounting for income taxes as well as clarifying and amending existing guidance to improve consistency in application of ASC 740. The provisions of ASU 2019-12 are effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact that ASU 2019-12 will have on its consolidated financial statements.
In July 2017, FASB issued ASU 2017-11 (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). The new standard simplifies the accounting for certain financial instruments with down round features. Part I of ASU 2017-11 changes the classification analysis of certain equity-linked financial instruments, such as warrants and embedded conversion features, such that a down round feature is disregarded when assessing whether the instrument is indexed to an entity’s own stock under Subtopic 815-40, Contracts in Entity’s Own Equity. As a result, a down round feature, by itself, no longer requires an instrument to be re-measured at fair value through earnings each period, although all other aspects of the indexation guidance under Subtopic 815-40 continue to apply. Part II of ASU 2017-11 re-characterizes the indefinite deferral of certain provisions of Topic 480, Distinguishing Liabilities from Equity, (currently presented as pending content in the Codification) as a scope exception. No change in practice is expected as a result of these amendments. The new standard is effective for fiscal years beginning after December 15, 2018, early adoption is permitted. The amendments in Part II have no accounting impact and therefore do not have an associated effective date. The Company decided to early adopt this ASU 2017-11 and applied it to the convertible notes it issued during the quarter which are reflected in this Form 10-K.
Management was not aware of any accounting issued, but not yet effective accounting standards, if currently adopted would have material effect on the consolidated financial statements.
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(P) Reverse Stock Splits
On May 26, 2020, the Company effected a 1-for-20 reverse stock split of its common stock. All shares, options and warrants throughout these consolidated financial statements have been retroactively restated to reflect the reverse split.
On November 9, 2020, the Company effected a 5-for-8 reverse stock split of its common stock. All shares, options and warrants throughout these consolidated financial statements have been retroactively restated to reflect the reverse split.
NOTE 2 LIQUIDITY
On January 14, 2019, INVO Bioscience entered into a distribution agreement (the “Distribution Agreement”) with Ferring International Center S.A. (“Ferring”) which granted Ferring an exclusive licensing rights to sublicense the Company’s INVOcell together with the retention device for the U.S. market. Under the terms of the Distribution Agreement, Ferring was obligated to make an initial payment to the Company of $5,000,000 upon satisfaction of certain closing conditions. The Company received the initial $5 million cash payment upon the execution of the Ferring distribution agreement in January 2019.
On November 12, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC, as representative of the several underwriters (the “Underwriters”), in connection with the Company’s public offering (the “Offering”) of 3,625,000 shares of the common stock, at a public offering price of $3.20 per share. The initial closing of the Offering for 3,625,000 shares of common stock took place on November 17, 2020. On November 18, 2020, the Underwriters exercised their option pursuant to the Underwriting Agreement to purchase an additional 528,750 shares of common stock (the “Option Shares”). The closing for the Option Shares took place on November 20, 2020 for which the Company received $1,522,800 in net proceeds after deducting underwriting discounts and commissions. With the exercise of the option to purchase the Option Shares, the total amount of shares of common Stock sold in the Offering was 4,153,750 shares with aggregate net proceeds received by the Company of $11,837,800 after deducting underwriting discounts and commissions and offering expenses.
For the years ended December 31, 2020 and 2019, the Company had net losses of $8,347,316 and $2,167,544, respectively. The Company had working capital of $8,254,540 as of December 31, 2020, compared to $42,330 as of December 31, 2019. As of December 31, 2020, the Company’s stockholder’s equity was $5,743,106 compared to a deficiency of $3,713,595 as of December 31, 2019. Cash used in operation for 2020 was $4,775,148, compared to cash provided by operations of $1,370,513 for 2019.
In connection with the preparation of its financial statements for the years ended December 31, 2020 and 2019, the Company’s management evaluated the Company’s ability to continue as a going concern in accordance with the ASU 2014-15, Presentation of Financial Statements–Going Concern (Subtopic 205-40), which requires an assessment of relevant conditions or events, considered in the aggregate, that are known or reasonably knowable by management on the issuance dates of the financial statements which indicated the probable likelihood that the Company will be unable to meet its obligations as they become due within one year after the issuance date of the financial statements.
As part of its evaluation, management assessed known events, trends, commitments, and uncertainties, which included the profitability of the Company and the cash flow generated by its operations, and the amount of capital recently and/or in the process of being raised.
Working capital at December 31, 2020 improved by $8,212,210 from the previous year.
As a result of the public offering on November 12, 2020, of 3,625,000 shares of common stock and an over-allotment of 528,750 shares of common stock on November 17, 2020 that resulted in net proceeds received of approximately $11.8 million, combined with the projected cash needs, management believes that it has completely mitigated the circumstance that led to a doubt with respect to the Company’s ability to continue as a going concern which existed at the time of the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and (ii) it has sufficient liquidity for at least the next 12 months.
NOTE 3 INVENTORY
The components of inventory are:
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NOTE 4 PROPERTY AND EQUIPMENT
The estimated useful lives and accumulated depreciation for furniture, equipment and software are as follows:
Estimated Useful Life
Manufacturing equipment 6 to 10 years
Medical equipment 10 years
Office equipment 3 to 7 years
Medical equipment 49,261 -
The Company recorded depreciation expense of $10,110 and $6,230 in 2020 and 2019, respectively.
NOTE 5 PATENTS AND TRADEMARKS
The Company capitalizes the initial expense related to establishing the patent by country and then amortizes the expense over the life of the patent, typically 20 years. It then expenses annual filing fees to maintain the patents. The Company regularly reviews the value of the patent in the marketplace in proportion to the expense it must spend to maintain the patent.
The Company has recorded the following patent costs:
The Company recorded amortization expense of $1,807 and $4,558 in 2020 and 2019, respectively.
Estimated amortization expense as of December 31, 2020 is as follows:
Years ended December 31,
2025 and thereafter -
As of December 31, 2020, and December 31, 2019, the Company recorded the following trademarks balances:
Accumulated amortization - -
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The trademarks have an indefinite life, so no amortization expense is calculated. Trademarks are periodically reviewed for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. The Trademark assets were created in 2019 and no material adverse changes have occurred since their creation.
NOTE 6 LEASES
The Company has an operating lease for our office, which have an initial term of 5 years with an option to renew for 3 additional years. There is no early termination clause included. The operating lease agreements does not contain any material restrictive covenants. Per FASB’s ASU 2016-02, Leases (Topic 842), effective January 1, 2019, the Company is required to report a right-of-use asset and corresponding liability to report the present value of the total least payments, with appropriate interest calculation. Per the terms of ASU 201-02, the Company can use its implicit interest rate, if known, or applicable federal rate otherwise. Since the Company’s implicit interest rate was not readily determinable, the Company utilized the applicable federal rate, which was 3.0% as of April 2019.
ROU assets represent the Company’s right to use the underlying assets for the lease term and lease liabilities represent the net present value of the Company’s obligation to make payments arising from these leases. The lease liabilities are based on the present value of fixed lease payments over the lease term using the implicit lease interest rate or, when unknown, the Company's incremental borrowing rate on the lease commencement date. If the lease includes one or more options to extend the term of the lease, the renewal option is considered in the lease term if it is reasonably certain the Company will exercise the option(s). Operating lease expense is recognized on a straight-line basis over the term of the lease. As permitted by ASC 842, leases with an initial term of twelve months or less, or short-term leases, are not recorded on the accompanying consolidated balance sheet.
The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component under the practical expedient provisions of the standard. The Company has lease agreements with terms less than one year. For the qualifying short-term leases, the Company elected the short-term lease recognition exemption in which the Company will not recognize ROU assets or lease liabilities, including the ROU assets or lease liabilities for existing short-term leases of those assets in upon adoption.
Variable lease payments and short-term lease expenses were immaterial to the Company’s financial statements for the years ended December 31, 2020 and 2019. The Company’s lease agreements do not contain material restrictive covenants.
The components of the lease assets and liabilities are as follows:
Lease Component Balance Sheet Classification December 31, 2020
Assets
ROU assets - operating lease Other assets $ 79,319
Liabilities
Current operating lease liability Current liabilities $ 22,707
Long-term operating lease liability Other liabilities 58,634
Total lease liabilities $ 81,341
Rent expense is recognized on a straight-line basis over the life of the lease. Rent expense consists of the following:
Year ended
Operating lease costs $ 24,982
Total rent expense $ 24,982
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Future minimum lease payments under non-cancellable leases were as follows:
Total future minimum lease payments $ 85,646
Total operating lease liabilities $ 81,341
Current operating lease liability $ 22,707
Long-term operating lease liability 58,634
Total operating lease liabilities $ 81,341
NOTE 7 CONVERTIBLE NOTES AND NOTES PAYABLE
Notes Payable
2018 Convertible Notes Payable
In April and May 2018, the Company issued convertible notes (the “2018 Convertible Notes”) payable to investors in the aggregate principal amount of $895,000. The 2018 Convertible Notes accrued interest at the rate of 9% per annum which was payable in stock. The 2018 Convertible Notes in an aggregate principal amount of $550,000, were due on January 30, 2020, and 2018 Convertible Notes with an aggregate principal amount of $345,000 were due on March 31, 2021. The notes were convertible into shares of common stock at a price of $6.40 per share, provided, that if the Company completes a subsequent equity financing, the holders of the 2018 Convertible Notes could elect to convert the notes in shares of the Company’s common stock at a price equal to 75% of the price paid per share in such subsequent equity financing. During the fourth quarter of 2018, three noteholders converted their notes with a value of $200,000 into 32,982 shares of common stock. During the twelve months ended December 31, 2019, two noteholders converted principal and accrued interest of $235,000 and $3,723, respectively, into a total of 37,301 shares of common stock.
At inception of issuance, the Company calculated a beneficial conversion feature of the 2018 Convertible Notes in the form of a discount of $895,000; In May 2020, the remaining balance of $396,044, which included the principal balance of $420,000, accrued interest of $94,419, and the conversion discount of $118,375. As part of the extinguishment of the 2018 Convertible Notes, the Company issued 2020 Convertible Notes (as described below) to two remaining holders in the amount of $143,640. The remaining balance related to these notes was $116,693, which was comprised of a principal balance of $125,000, accrued interest of $23,318, net of the remaining discount of $31,625. In accordance with ASC 470, the extinguishment for these two holders was accounted for as a modification and no gain or loss was recorded. In May 2020, the remaining balance of $35,483, which included the principal balance of $40,000, accrued interest of $7,355, and a conversion discount of $11,872, was repaid. As of December 31, 2020, the balance of the 2018 Convertible Notes is $0.
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2020 Convertible Notes Payable
From May 15, 2020 through July 1, 2020, the Company entered into definitive securities purchase agreements (“Purchase Agreements”) with accredited investors for their purchase of (i) secured convertible notes issued by us in the aggregate original principal amount of $3,494,840 (the “Notes”), and (ii) Unit Purchase Options (“Purchase Options”) to purchase 303,623 units (each, a “Unit”), at an exercise price of $3.20 per Unit (subject to adjustments), with each Unit exercisable for (A) one share of the Company’s common stock and (B) a 5-year warrant (the “Warrants”) to purchase one share of our common stock at an exercise price of $3.20 (subject to adjustments) (the “Private Placement”). Each purchaser of a Note was issued a 5-year Purchase Option to purchase 0.086875 Units (as adjusted for the Reverse Splits (as defined below) for each dollar of Notes purchased. The Company received gross proceeds of approximately $3.5 million (of which $3,351,200 was received in cash and $143,640 resulted from cancellation of indebtedness). Tribal Capital Markets, LLC acted as placement agent (the “Placement Agent”) in the Private Placement. The Company paid the Placement Agent and certain selling agents a cash fee of 8% on a portion of the proceeds for an aggregate amount of $236,000. The Company also agreed to issue the Placement Agent and the selling agent 5-year warrants to purchase 6,750 shares of our common stock at an exercise price of $3.20. These warrants have the same terms and conditions as the Warrants issued in the Private Placement, except for the different exercise price. The Company received approximately $2,998,905 in net proceeds from the Private Placement, after deducting Placement Agent fees and selling agent fees payable to the Placement Agent and selling agent, respectively, and investor counsel in connection with the transaction. The Company used approximately $413,456, in proceeds to repay outstanding 9% promissory notes and the Company intends to use the remaining proceeds for working capital and general corporate purposes.
Pursuant to that certain Form of Secured Convertible Note entered into in connection with the Purchase Agreement (the “Form of Note”), interest on such Notes accrues at a rates of ten percent (10%) per annum and is payable either in cash or in shares of the Company’s common stock at conversion price of $3.20 (following and subject to adjustment for stock splits, combinations or similar events and anti-dilution provisions, among other adjustments) on each of the six and twelve month anniversary of the issuance date and on the maturity dates of November 15, 2021, December 22, 2021 and December 30, 2021.
All amounts of principal and interest due under the Notes are convertible at any time after the issuance date, in whole or in part (subject to rounding for fractional shares), at the option of the holders, into the Company’s common stock at a fixed conversion price of $3.20, which is subject to adjustment as described above.
Upon any issuance by the Company of any of its equity securities, including common stock, for cash consideration, indebtedness or a combination thereof after the date hereof (a “Subsequent Equity Financing”), each holder of a Note will have the option to convert the outstanding principal and accrued but unpaid interest of its Note into the number of fully paid and non-assessable shares of common stock issued in the Subsequent Equity Financing (“Conversion Securities”) equal to the product of unpaid principal, together with the balance of unpaid and accrued interest and other amounts payable hereunder multiplied by 1.1, divided by the price per share paid by the investors for the Conversion Securities.
A Note may not be converted, and shares of common stock may not be issued under the Notes if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of 9.99% of our outstanding ordinary shares.
The Company may prepay the Notes at any time in whole or in part by paying an amount equal to 100% of the principal amount to be redeemed, together with accrued and unpaid interest plus a prepayment fee equal to one percent (1%) of the principal amount to be repaid.
The Notes contain customary events of default including but not limited to: (i) failure to make payments when due; and (ii) bankruptcy or insolvency of the Company. If an event of default occurs, each holder may require the Company to redeem all or any portion of the Notes (including all accrued and unpaid interest thereon), in cash.
The Notes are secured by the proceeds from the $3,000,000 milestone payment pursuant to Section 7.2(b) of the Distribution Agreement dated November 12, 2018 between the Obligor and Ferring International Center S.A., after such proceeds are actually received by the Company from Ferring, all pursuant to the terms of a Security Agreement entered into between the Company and the noteholders under the Purchase Agreements.
Of the $3,494,840 in net proceeds received in the offering, $1,048,904 million was allocated to the unit purchase options issued to investors based on their relative fair value and $ 2,062,586 of beneficial conversion feature based on their relative fair value. This amount represented a discount on the debt and additional paid-in-capital at the date of issuance.
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In November 2020, $1,319,840 of principal elected to convert as part of the public underwritten offering.
The remaining principal balances of the 2020 Convertible Notes were as follows:
Less beneficial conversion feature discount (604,897 ) -
Less options discount (224,051 ) -
Less warrants discount (229,954 ) -
Less issuance cost (129,408 ) -
Total, net of discount $ 536,063 $ -
Interest expense on the 2020 Convertible Note was $194,631 and $0 for the years ended December 31, 2020 and 2019, respectively.
Amortization of options discount on the 2020 Convertible note was $300,365 and $0 for the years ended December 31, 2020 and 2019, respectively.
Amortization of warrant discount on the 2020 Convertible Note was $301,228 and $0 for the years ended December 31, 2020 and 2019, respectively.
Amortization of beneficial conversion feature on the 2020 Convertible Note was $1,670,135 and $0 for the years ended December 31, 2020 and 2019, respectively.
Amortization of issuance costs on the 2020 Convertible Note was $222,508 and $0 for the years December 31, 2020 and 2019, respectively.
On July 1, 2020, the Company received a loan in the principal amount of $157,620 relating to the U.S. Small Business Administration’s Paycheck Protection Program. The loan will mature 18 months from the date of funding is payable over 18 equal monthly installments, and bears interest at a rate of 1% per annum. The loan is forgivable up to 100% of the principal balance based upon satisfaction of certain criteria under the Paycheck Protection Program. The Company has applied for full forgiveness.
NOTE 8 OTHER RELATED PARTY TRANSACTIONS
On March 5, 2009, the Company entered into a related party transaction with Kathleen Karloff, the former Chief Executive Officer and a former Director of the Company. During the twelve months ended December 31, 2019, the Company paid the remaining balance due Ms. Karloff in the amount of $62,743 along with $55,000 of accrued interest.
In April 2011, the Company issued a new short-term convertible note (“Q211 Note”) payable to James Bowdring in the amount of $50,000. The Note carries a 10% interest rate. The Company paid $25,000 of the Note in 2011 in cash. The Q211 Note is convertible into common stock of the Company at a conversion price of $0.96 per share, subject to adjustments. During the years ended December 31, 2020 and December 31, 2019, the Company accrued interest in the amount of $0 and $1,493 on the Q211 Note, respectively.
In November 2011, the Company issued a new convertible note (“Q411 Note”) payable to James Bowdring in the amount of $10,000. The Q411 Note carries a 10% interest rate. The Q411 Note was converted into common stock of the Company at a conversion price of $0.32 per share, subject to adjustments. In addition, $0 and $597 of interest was accrued in the years ended December 31, 2020 and 2019, respectively.
On August 7, 2019, the Company sent James Bowdring, a related party, a check in the amount of $65,197 as full payment of the foregoing promissory notes. On August 8, 2019, Mr. Bowdring’s legal counsel returned this check with a letter stating that the check did not properly account for the compound interest identified in such notes. In addition, the letter stated Mr. Bowdring’s desire to convert these promissory notes into shares of the Company’s common stock in lieu of any cash payment. The Company does not believe that Mr. Bowdring has the right to convert such notes upon receiving payment of such notes and intends to vigorously contest any conversion of these notes.
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In May 2018, James Bowdring and his children participated in the “2018 Convertible Notes” offerings in the aggregate principal amount of $40,000. The 2018 Convertible Notes accrue interest at the rate of 9% per annum which is paid in stock. These Notes are due on March 31, 2021. The notes are convertible into shares of common stock at a price of $6.40 per share, provided, that if the Company completes a subsequent equity financing, the holders of the 2018 Convertible Notes can elect to convert the notes in shares of our common stock at a price equal to 75% of the price paid per share in such subsequent equity financing. In addition, $1,380 and $3,599 of interest was accrued in the twelve months ended December 31, 2020 and 2019, respectively.
Accounts payable and accrued liabilities balances include accrued directors fees, expenses reports for management and employees for expenses they paid for personally related to travel or normal business expenses.
December 31,
Accounts payable and accrued liabilities $ 65,197 $ 41,842