INVO Bioscience, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The filing identifies the registrant as INVO Bioscience, Inc. Financial statements are unaudited; amounts below are U.S. dollars.
Business context
The company markets the INVOcell device and intravaginal culture procedure for fertility treatment. Management said it was expanding U.S. physician training and sales; it reported 45 trained U.S. physician offices or IVF-center satellite facilities. Its Canadian partner had opened an initial center in Calgary, while South American procedures had slowed amid Zika concerns. Management described the company as an early-stage business with minimal revenue.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Product revenue | $52,240 | $18,107 |
| Cost of goods sold | $13,845 | $3,165 |
| Gross profit / margin | $38,395 / 73% | $14,942 / 83% |
| Operating expenses | $205,096 | $195,606 |
| Operating loss | $(166,701) | $(180,664) |
| Debt-settlement loss | $40,869 | — |
| Interest expense | $7,303 | $648 |
| Net loss | $(214,873) | $(181,312) |
| Net cash used in operations | $(112,755) | $(68,677) |
Revenue grew 189% year over year, which management attributed to FDA clearance and the company’s market launch and training activity. Gross margin declined 10 percentage points, which management attributed mainly to introductory pricing and higher manufacturing cost for an accessory. SG&A rose about 5%, including higher legal and training expenses, partly offset by lower accrued salaries. The net loss widened largely because of the debt-settlement charge.
Cash was $39,649 at quarter-end, down from $152,404 at December 31, 2016. The company reported no cash used in investing or financing activities during the quarter. Current assets were $159,660 versus current liabilities of $4,778,113, a working capital deficit of approximately $4.62 million. Total liabilities were $4,909,835, and stockholders’ deficiency was $4,715,337. Current liabilities included $3,673,590 of accrued compensation and $893,635 of accounts payable and accrued liabilities. A $131,722 vendor balance had been converted to a three-year, 5% note; related-party notes totaled $210,888.
Material developments, outlook and risks
- In March, the company converted its final $10,000 past-due Bridge Note and accrued interest into 341,000 restricted shares, recording a $40,869 loss. It also issued 196,000 restricted shares valued at $59,242 for services. Common shares outstanding were 141,133,646 at March 31 and 141,185,396 as of May 12.
- Management said it needed approximately $125,000 per quarter to fund current operations and that available resources would not support operations through fiscal 2017. It was seeking additional financing but gave no assurance funding would be available. Without it, the company said it might further cut spending, downsize operations, or pursue exit strategies. No formal revenue or earnings guidance was provided.
- The financial statements disclose substantial doubt about the company’s ability to continue as a going concern. Management cited recurring losses, limited cash, a working capital deficit, and dependence on raising capital and executing its business plan.
- A long-running investor lawsuit remained subject to appeal; the company said it intended to oppose the appeal. The filing did not quantify a potential financial exposure.
- Management concluded disclosure controls and internal control over financial reporting were ineffective as of March 31, 2017, citing an unremediated material weakness and limited staffing and resources. The company described remediation efforts, including a new accounting system and outsourced accounts payable.
- The cover page checked “No” for having filed all required Exchange Act reports during the preceding 12 months and “No” for submitting and posting all required Interactive Data Files. The filing does not explain those responses.
Important facts for investors to verify
- Whether the company secured sufficient financing after the quarter, on what terms, and whether its going-concern position changed.
- Whether training and partner activity converted into repeat orders, procedures, and sustainable revenue, and whether introductory pricing or manufacturing costs continued to pressure margins.
- The status and potential financial consequences of the litigation appeal, and progress in remediating the disclosed control weakness.
- The reasons for the cover-page “No” responses regarding filing compliance and Interactive Data Files.