INVO Bioscience, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. The filing identifies the registrant as INVO Bioscience, Inc., a development-stage company focused on the INVOcell device and INVO infertility procedure. Financial statements are unaudited.
Financial performance and condition
Amounts below are in U.S. dollars; the filing does not present these financial statement figures in thousands.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $12,878 | $0 | $67,728 | $37,992 |
| Gross margin | $9,619 | $(1,705) | $51,876 | $24,373 |
| Operating expenses | $182,106 | $363,271 | $602,625 | $1,127,497 |
| Operating loss | $(172,487) | $(364,976) | $(550,749) | $(1,103,124) |
| Net income (loss) | $(99,196) | $(235,190) | $(604,939) | $244,317 |
| Operating cash flow | Not separately provided | Not separately provided | $(164,039) | $(431,024) |
- For the nine months, revenue rose about 78% year over year; management attributed growth to repeat orders, new customers, and improved ability to meet demand. Product costs were 23% of revenue versus 36% in 2010. Q3 revenue was from repeat orders during a period when comparable 2010 sales were affected by product shortages.
- Q3 net loss narrowed by about $136,000, primarily as selling, general and administrative (SG&A) costs fell. Nine-month results shifted from income to loss largely because the prior-year period included a much larger noncash gain from revaluing derivative liabilities; 2011 also had lower SG&A.
- At September 30, cash was $2,240, total assets $134,588, current liabilities $3,064,597, and stockholders’ deficiency $2,930,009. Management reported a working-capital deficiency of approximately $2.993 million. Cash declined from $12,525 at December 31, 2010.
- Liabilities included $611,948 of accounts payable, $413,627 of accrued expenses, $1,424,390 of accrued salaries, $130,480 of related-party notes, $352,301 of convertible notes net of discount, and $131,851 of derivative liabilities. Certain convertible notes were past due.
- Financing activities provided $153,754 in the first nine months, including stock issuance and convertible borrowing. No investing cash flow was reported. Operating cash use improved year over year, partly because employees deferred salaries.
Material changes, outlook, and risks
- SG&A fell 50% in Q3 and 46% for the nine-month period, reflecting reduced investor-relations, professional, marketing and legal spending, lower facility costs, and reduced employee time and accrued compensation. Research and development expense was zero in both comparative periods.
- The company states it needs approximately $125,000 per month to fund operations. It plans to seek capital through securities sales, including an equity financing agreement providing for up to $10 million over two years. It said it could not draw on that facility until required registration-statement updates were completed; it cautioned that funding was not assured. Failure to raise capital could require further spending cuts, downsizing, or exit strategies.
- The filing and financial statements raise substantial doubt about the company’s ability to continue as a going concern. The company had a cumulative net loss of $7.507 million and says continued operations depend on additional capital and execution of its business plan.
- Management expects international sales to remain its only revenue source in the coming year and anticipates significant quarterly sales fluctuations tied to distributor agreements and physician training. No specific revenue or earnings guidance is provided.
- INVOcell had CE marking and the company listed sales authorizations in multiple countries. U.S. FDA clearance remained uncertain: the FDA requested human efficacy data, necessitating a clinical trial. Management said it was exploring alternatives, with possible acceleration in early 2012 or, subject to funding and trial completion, clearance by year-end 2012.
- Management reported clinical marketing-study efficacy results ranging from 30% to 44% per cycle in studies in Colombia, Peru, Brazil, and Bolivia; these were described as non-regulatory studies. A Pakistan study was ongoing and delayed.
- The company accelerated amortization of its original patent, which it said expires the following year, and decided not to defend a block patent. This reduced the carrying value of capitalized patents to $44,956 from $57,126.
- A lawsuit against the company and others had most claims against INVO dismissed, but remaining fraud and fiduciary-duty claims against a company officer continued. The company had not accrued a loss and said it would defend the case; dismissal rulings remained subject to appeal.
- Disclosure controls and internal control over financial reporting were reported ineffective as of September 30, 2011 due to an unremediated material weakness and limited staffing. Management described remedial steps, including a new accounting system and outsourced accounts-payable support.
Important facts for investors to verify
- Whether the company obtained enough financing to fund operations, and whether it became eligible to draw on the equity financing facility.
- The status, maturity, and conversion terms of past-due convertible notes and the potential dilution from subsequent conversions and other share issuances.
- Progress and funding for the FDA clinical-trial or alternative submission path, and whether any U.S. clearance was achieved.
- Current status and potential exposure from the remaining litigation claims and any appeal.
- The filing’s nine-month 2010 diluted loss-per-share line appears inconsistent with reported net income and basic EPS; the clear value is not provided by the filing text and should be checked against the filed statements.