INVO Bioscience, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The filing identifies the registrant as a development-stage company focused on manufacturing and selling the INVOcell fertility device and training clinicians in the INVO procedure. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Product revenue | $21,791 | $11,172 | $54,850 | $37,993 |
| Gross margin | $15,425 | $7,579 | $42,258 | $26,078 |
| Operating expenses | $220,020 | $317,598 | $420,975 | $764,226 |
| Operating loss | $(204,595) | $(310,019) | $(378,717) | $(738,148) |
| Net income (loss) | $(306,917) | $(391,061) | $(505,742) | $479,507 |
Q2 revenue rose about 95% year over year and six-month revenue rose about 44%, which management attributed to customer reorders and new users. Gross margin was approximately 71% in Q2 and 77% for the six-month period; the filing attributes lower cost of sales as a percentage of revenue to higher average selling prices. The six-month 2010 profit reflected a $1.565 million derivative fair-value gain; in 2011, the comparable six-month period recorded a $7,276 gain. Basic and diluted loss per share was $0.004 for Q2 2011 and $0.007 for the first half.
Cash flow and liquidity: Operating cash use was $105,733 for the first half, versus $290,361 in the prior-year period; investing cash flow was zero. Financing provided $102,912, including proceeds from stock issuance and convertible notes. Cash at June 30 was $9,704. Management estimated operating cash needs at approximately $125,000 per month and said existing resources were insufficient to fund 2011 operations without additional financing.
Balance sheet at June 30: Current assets were $85,818, compared with current liabilities of $3.057 million, resulting in a working-capital deficit of approximately $2.971 million. Total assets were $152,405; stockholders’ deficiency was $2.904 million. Current liabilities included $623,530 accounts payable, $365,470 accrued expenses, $1.302 million accrued salaries, $132,107 related-party notes, $372,492 convertible notes net of discount, and $261,699 derivative liabilities.
Material changes and financing
- SG&A fell 31% in Q2 and 45% for the first half, primarily from reduced professional, marketing and legal costs and lower accrued employee compensation. Management said employees deferred salaries; the filing reported accrued salaries of $1.302 million at quarter-end.
- The first-half net loss compared with prior-year net income primarily because the prior-year period included the large derivative revaluation gain. Lower operating expenses partly offset the difference.
- The company issued $37,500 of convertible notes in March and a $50,000 short-term convertible note in April; the latter, bearing 10% interest, was past due at June 30. Certain 2009 senior secured bridge notes were also past due. Related-party loans were scheduled for repayment by October 31, 2011.
- The company reported $261,699 of derivative liabilities, valued using Level 3 inputs. It also issued shares for financing, consulting, FDA consulting and legal expenses. Common shares outstanding were 77,935,533 at June 30.
- Patent amortization increased after management decided to accelerate amortization of an original patent that expires the following year and not to defend a block patent. Net capitalized patents declined to $46,364.
Outlook, risks and contingencies
Management said international sales were expected to remain the company’s only revenue source in the coming year and could fluctuate substantially with distributor agreements and physician training. The company had sales approvals in multiple countries and was pursuing registrations in additional markets. Its U.S. FDA 510(k) submission required human efficacy data and a clinical trial; management discussed possible clearance by the end of 2012, dependent on funding. Management also described approximately $1 million as needed to complete the filing process and said it might pursue alternative submission options.
The company was seeking capital through a Reserve Equity Financing Agreement of up to $10 million over two years and private placements. Management said it could not draw on the equity line until it updated its registration statement, and gave no assurance that financing would be available. Without additional capital, it may further reduce spending, downsize, curtail operations, or pursue exit strategies. The filing states that substantial doubt exists about the company’s ability to continue as a going concern.
A lawsuit related to the sale of Medelle Corporation assets continued against the company’s president, who faced remaining fraud and fiduciary-duty claims; claims against INVO, its subsidiary and its CEO had been dismissed, subject to possible appeal. The company had not accrued a loss for the litigation. Management identified limited resources as its largest risk. Disclosure controls and internal control over financial reporting were deemed ineffective, and a previously identified material weakness had not been remediated. A $30,000 convertible note was issued to Asher Enterprises in July 2011.
Important facts for investors to verify
- Near-term liquidity, the ability to meet payroll and other obligations, and the availability and terms of additional financing, including access to the AGS equity line.
- Amounts, maturity dates, conversion terms and status of past-due bridge and short-term notes, as well as related-party debt and accrued employee compensation.
- Progress and funding for the FDA clinical trial and 510(k) pathway; independently verifiable evidence behind reported international study efficacy rates and commercial demand.
- Potential exposure from the remaining litigation and whether the control weakness is remediated; also reconcile the filing’s going-concern note, which describes approximately $106,000 of operating cash use as for the quarter, with the cash-flow statement showing that amount for the six-month period.