INVO Bioscience, Inc. — Form 10-Q summary
Period: Quarter and six months ended June 30, 2016; financial statements are unaudited. The filing identifies the registrant as INVO Bioscience, Inc. (the request metadata names INVO Fertility, Inc.). The report was signed September 5, 2017.
Business context and results
The company was commercializing INVOcell, an FDA-cleared intravaginal culture system for fertility treatment. Following FDA clearance in November 2015, it began a U.S. soft launch, training physicians and making early sales; its Indian partner was also marketing the procedure. Management said South American procedures slowed amid the Zika virus.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $5,446 | $5,551 | $23,553 | $9,176 |
| Gross profit (reported) | $3,064 | $6,017 | $18,006 | $7,434 |
| Gross margin (reported) | 56% | 108% | 76% | 81% |
| SG&A | $1,455,147 | $113,457 | $1,650,753 | $246,717 |
| Net loss | $1,455,709 | $4,447,268 | $1,637,021 | $4,591,926 |
Quarterly revenue was essentially flat year over year; first-half revenue increased 157%, which management attributed to the FDA-cleared soft launch and initial sales to trained U.S. providers. Management attributed lower margins mainly to introductory pricing and higher manufacturing costs for an accessory. The 2015 gross margin exceeded 100% because reported cost of goods sold was negative $466. SG&A rose substantially, primarily due to $1.264 million of noncash stock compensation, plus higher training expenses; first-half expenses also included increased accrued salaries.
The smaller comparative net losses mainly reflect the $4.332 million debt-settlement loss recorded in 2015, not a return to profitability. No income tax provision was recorded.
Cash, liquidity, debt, and financial condition
- Cash was $323,614 at June 30, 2016, down from $492,004 at December 31, 2015. Six-month operating cash use was $168,390, versus $24,003 in the first half of 2015; there were no financing proceeds in the 2016 period.
- Current assets were $435,866 and current liabilities were $4,585,418, a working-capital deficiency of $4,149,552. Total liabilities were $4,585,418; stockholders’ deficiency was $4,130,414.
- Current liabilities included $210,888 of related-party notes and $10,000 of convertible notes, as well as $1,016,140 of accounts payable and accrued liabilities and $3,348,390 of accrued compensation. Certain older notes described in the filing are past due; the related-party notes shown on the balance sheet have repayment dates extended to October 31, 2018.
- Management estimated current operating needs at approximately $100,000 per quarter, before expansion. It said existing cash, operating cash flow, and short-term management borrowing would not fund fiscal 2017 operations.
The filing states that recurring losses, minimal revenue, the working-capital and stockholders’ deficiencies, and operating cash use raise substantial doubt about the company’s ability to continue as a going concern. Continued operations depend on raising capital and implementing the business plan.
Outlook, risks, contingencies, and unusual items
- Management was seeking additional funding and said the amount raised would determine the pace of marketing, physician training, sales-team development, international regulatory work, and other growth plans. It cautioned that funding was not assured; without it, the company might further curtail spending, downsize operations, or pursue exit strategies.
- Management anticipated significant quarterly sales fluctuations, dependent in part on physician training and adoption. It cited introductory pricing, accessory costs, limited resources, and the Zika-related slowdown in South America as operating factors.
- In May 2016, the company issued 3,000,000 shares valued at $1.080 million to officers and 511,000 shares valued at $183,608 to service providers. The filing reports no options or warrants outstanding at June 30, 2016.
- Long-running litigation concerning an alleged predecessor’s asset sale remained subject to an appeal described in the filing. The filing says the company and Bio X Cell intended to oppose it; management characterized the allegations as baseless. The filing does not quantify a potential financial exposure.
- Management concluded disclosure controls were ineffective and internal control over financial reporting was not effective, citing an unremediated material weakness and limited staffing/resources. It described steps including a new accounting system, outsourced accounts payable, and approval procedures.
Important facts for investors to verify
- Whether the company secured sufficient financing after the reporting date to fund operations, and the resulting dilution or debt terms.
- Current cash, operating cash burn, accrued compensation, and the status and maturity of outstanding notes and payables.
- Actual commercial adoption of INVOcell, subsequent revenue, customer collections, and gross margins after introductory pricing and accessory-cost changes.
- The status and potential exposure of the litigation appeal, and whether internal-control weaknesses were remediated.
- The filing contains date inconsistencies: its controls discussion refers to an evaluation as of March 31, 2016, although this is a quarter ended June 30 filing. Confirm the correct evaluation date and filing-period details against the filed document.