INVO Bioscience, Inc. — Q2 2019 Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2019; unaudited. The filing identifies the registrant as INVO Bioscience, Inc. (metadata refers to INVO Fertility, Inc.).
Business context and financial performance
The company develops and commercializes INVOcell, an intravaginal culture fertility device and procedure. Its January 2019 U.S. distribution and licensing agreement with Ferring is central to the period’s revenue, cash position, and business outlook.
| Metric | Three months ended June 30, 2019 | Six months ended June 30, 2019 |
|---|---|---|
| Revenue | $658,638, versus $110,210 in 2018 | $848,070, versus $214,350 in 2018 |
| Gross profit / margin | $603,356 / 92%, versus $93,500 / 85% | $781,810 / 92%, versus $183,216 / 85% |
| Operating expenses (SG&A) | $669,152, down 64% year over year | $1,196,717, down 43% year over year |
| Operating loss | $65,796 | $414,907 |
| Interest expense | $175,756 | $285,215 |
| Net loss | $241,552, versus $1,865,128 in 2018 | $700,122, versus $2,009,851 in 2018 |
Revenue growth reflected higher product sales as Ferring increased marketing activity and recognition of Ferring license revenue. The higher reported gross margin also reflects license revenue with no associated cost of sales. SG&A fell mainly because of lower advisory and FDA-clearance support costs; 2018 expenses included substantial noncash stock issued for services. Interest expense rose primarily from amortizing discounts on convertible notes.
Cash, liquidity, debt, and balance sheet
- Cash was $2.66 million at June 30, 2019, up from $212,243 at December 31, 2018. Current assets were $3.18 million and current liabilities $2.28 million; total liabilities were $6.55 million. Stockholders’ deficiency was $3.16 million.
- Operating cash flow was positive $2.71 million for the six months, versus cash used of $249,503 in 2018. This result was substantially driven by a $4.64 million increase in deferred revenue following Ferring’s upfront payment, partly offset by a $1.55 million decrease in accrued compensation; it should not be read as recurring operating cash generation.
- Investing cash use was $64,839, primarily for manufacturing molds and equipment. Financing cash use was $194,465, including repayment of notes.
- The company received Ferring’s $5 million upfront payment in January. It recognizes the fee over the seven-year license term; $357,143 was recognized in the first half. Deferred revenue totaled $4.66 million at June 30.
- At June 30, the balance sheet reported $232,960 of convertible notes, net of discount, and $20,072 of related-party convertible notes, net of discount, as long-term liabilities, plus $35,000 of related-party notes payable. The company had repaid its $131,722 vendor note and paid off the remaining $62,743 Karloff related-party loan during the first half. Notes were also converted into common shares.
- Common shares outstanding were 155,546,112 at June 30, up from 154,292,497 at year-end.
Outlook, risks, and notable developments
- Management said cash on hand should fund current debt obligations, estimated capital expenditures, and working capital needs for the next 12 months. It also acknowledged continuing expected negative operating cash flows during 2019 and gave no assurance of reaching positive operating cash flow.
- The agreement’s additional $3 million payment is conditional on obtaining an FDA five-day label enhancement at least three years before the license expires and Ferring not having terminated for convenience. The agreement’s initial term runs through December 31, 2025. Management said it may pursue international markets and up to five U.S. INVO-only reproductive centers.
- Management expects significant quarterly sales fluctuations and says near-term operating results depend heavily on Ferring’s U.S. market penetration and physician training. Commercialization, regulatory requirements, competition, financing, customer collections, and litigation are among the disclosed risks.
- The auditor’s prior going-concern discussion cited recurring losses, negative operating cash flows, and dependence on financing. Management now believes the Ferring funds provide at least 12 months of capital, but the filing does not eliminate the underlying execution and cash-flow risks.
- Disclosure controls and internal control over financial reporting were deemed ineffective at June 30 because a previously identified material weakness remained unremediated; management cited limited resources and staffing. The company described steps underway, including accounting-system and process improvements.
- A long-running Massachusetts dispute over the sale of assets of an alleged predecessor remained on appeal; a September 2019 hearing was set on the company’s motion to dismiss. Separately, in August 2019 a related party returned the company’s $65,197 payment on 2011 notes and sought conversion into shares, disputing the payoff calculation; the company said it would contest conversion.
- The company adopted lease accounting on January 1, 2019, recording right-of-use assets and lease liabilities. On August 14, 2019, Debra Hoopes was appointed Acting CFO and Robert Bowdring resigned from that role.
Most important facts for investors to verify
- Progress against Ferring’s commercial rollout, including sales volumes, revenue trends, and any dependence on a single distribution partner.
- Whether the FDA label-enhancement condition for the potential $3 million payment is achieved, and the timing and termination provisions of the Ferring agreement.
- Cash burn excluding the upfront license payment and deferred-revenue movements, and whether available cash continues to cover the company’s stated 12-month needs.
- Convertible and related-party note balances, accrued interest, conversion rights, and resolution of the August 2019 payment dispute.
- Remediation of the material weakness and improvement in disclosure and financial-reporting controls.
- Developments in the Massachusetts litigation and any resulting financial exposure.