INVO Bioscience, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. The filing describes a medical-device business centered on INVOcell, an intravaginal culture system for fertility treatment. U.S. commercialization is primarily through an exclusive Ferring distribution and license agreement, with international distribution and clinic partnerships also under development.
Key financial results
| Metric | Q1 2020 | Q1 2019 or comparison |
|---|---|---|
| Revenue | $258,571 | $189,432; up about 36% |
| Product revenue | $80,000 | $10,860 |
| License revenue | $178,571 | $178,572 |
| Gross margin | $228,577; 88% | $178,454; 94% |
| Operating expenses | $1,625,096 | $527,565 |
| Operating loss | $(1,396,519) | $(349,111) |
| Net loss | $(1,444,392); $0.01 per share | $(458,570); reported loss per share rounded to $0.00 |
| Operating cash flow | $(863,450) | $3,088,088 provided |
SG&A increased by $1,067,481, primarily from compensation and professional fees as the company expanded its activities; about $685,000 of the increase was noncash equity-based compensation. R&D expense was $30,050, versus none reported in Q1 2019. Interest expense fell to $47,873 from $109,459, primarily due to lower amortization of note discounts. No income tax expense was recorded.
Financial position and liquidity
- Cash fell to $350,000 from $1,238,585 at December 31, 2019. Total current assets were $689,217 versus current liabilities of $1,923,649, a working-capital deficiency of $1,234,432; the prior year-end comparison was a $42,330 working-capital surplus.
- Total liabilities were $5,392,931, and stockholders’ deficiency was $4,435,049. Deferred revenue totaled $4,107,143, including $714,286 current and $3,392,857 noncurrent.
- Convertible notes, net of discount, were reported as current liabilities at March 31, 2020: $371,695 plus $33,152 related-party notes. No cash was provided by financing activities during the quarter.
- Investing activities used $25,135, mainly for medical equipment and trademarks. Cash declined by $888,585 during the quarter.
- Management and the filing identify recurring losses, operating cash use, working-capital deficiency, and dependence on financing as raising substantial doubt about the company’s ability to continue as a going concern. The company said it would need adequate sales, new distribution agreements, or additional debt or equity capital over the next 12 months.
Changes, outlook, and material matters
- Revenue growth reflected higher product sales to Ferring. Management said COVID-19 disrupted fertility clinic services and could also affect Q2, but expected the effect to be temporary as clinics reopened. Management also reported that the number of clinics offering INVOcell had nearly tripled since the Ferring agreement, while noting newly trained clinics may take time to place product orders.
- Management expected continued losses during 2020 and said costs and expenses were likely to exceed internally generated cash flow. It provided no specific revenue or earnings guidance. Planned efforts include expanding distribution, training, clinical development, and potentially establishing up to five U.S. INVO-only clinics. The 50/50 India joint venture’s final setup was incomplete at quarter-end; the company then anticipated completion in Q2 2020.
- The Ferring agreement provides a possible additional $3 million payment, conditional on obtaining a specified FDA label enhancement and other agreement terms. It had not been received as of March 31, 2020.
- Subsequent financing: On May 15, 2020, the company closed a private placement of $2.105 million in secured convertible notes and purchase options; approximately $1.75 million was reported as net proceeds. The notes bear 10% interest, mature November 15, 2021, and initially convert at $0.18 per share, with full-ratchet anti-dilution provisions and other conversion terms. The options and related warrants could create further dilution. The notes are secured by proceeds from the conditional Ferring milestone payment after receipt.
- Contingency: The company is litigating with James Bowdring over repayment and alleged conversion rights relating to 2011 promissory notes. Bowdring asserted claims and seeks shares; the company disputes his conversion right and said it did not expect a material adverse effect.
- The company reported disclosure controls were effective as of March 31, 2020 and said a previously identified material weakness had been remediated by year-end 2019. It also described continued reliance on management oversight and outside professionals due to limited resources. No material risk-factor changes were reported.
Important facts for investors to verify
- Whether the May 2020 financing provides sufficient liquidity, and the potential conversion and dilution under its note, option, and warrant terms.
- Whether the company can grow product sales and collect meaningful revenue from its expanding clinic and international distributor network, particularly amid COVID-related disruptions.
- Whether Ferring satisfies the conditions for the additional $3 million milestone payment and whether the required FDA label enhancement is obtained.
- Progress and funding requirements for the India joint venture, clinical development, and any planned U.S. clinics.
- Developments in the Bowdring litigation and the company’s continuing ability to operate given its going-concern warning and working-capital shortfall.
- The cash-flow comparison contains an inconsistency: the financial statements report $3,088,088 of operating cash provided in Q1 2019, while one MD&A passage states $3,077,088.