INVO Bioscience, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited. INVO develops and commercializes INVOcell, an intravaginal culture fertility device and procedure. U.S. commercialization is licensed exclusively to Ferring, subject to limited rights retained by INVO.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $336,071 | $303,571 | $840,714 | $1,151,641 |
| Gross margin | $308,673 (92%) | $258,645 (85%) | $762,152 (91%) | $1,040,455 (90%) |
| Operating expenses | $1,576,439 | $891,008 | $4,489,364 | $2,087,725 |
| Interest expense | $504,061 | $47,462 | $811,888 | $332,677 |
| Net loss | $1,771,827 | $710,334 | $4,539,100 | $1,410,456 |
- Nine-month operating cash use was $2,954,823, versus cash provided of $2,141,607 in 2019. Investing cash use was $90,682; financing provided $2,715,209. Cash declined to $908,289 from $1,238,585 at December 31, 2019.
- At September 30, current assets were $1,372,139 and current liabilities were $1,882,832, a working-capital deficit of $510,693. Total liabilities were $5,590,936; stockholders’ deficiency was $3,901,944.
- Convertible notes had approximately $3.495 million in principal and $120,939 accrued interest, but a net carrying value of $607,521 after discounts. The notes bear 10% interest and mature in 2021–2022. The company also recorded a $157,620 current PPP loan at 1% interest, potentially forgivable subject to program requirements.
Changes versus the prior comparable periods
- Q3 revenue increased 11%, primarily from higher product sales to Ferring. Nine-month revenue declined 27%, principally because COVID-19 disrupted fertility clinic operations and reduced product sales in the first half.
- Operating expenses rose substantially: SG&A increased 64% for Q3 and 107% for the nine-month period, reflecting personnel, stock compensation and corporate costs. R&D spending began in 2020 to support clinical-trial preparation and patent work.
- Net loss increased 149% for Q3 and 222% for the first nine months. Higher operating costs and interest, including amortization of debt discounts and issuance costs, were key factors. Management reported $2.14 million of non-cash expenses for the nine months.
Outlook, risks and unusual items
- Going concern: Management says substantial doubt exists about the company’s ability to continue as a going concern. It expects to depend on sales, new distribution arrangements and additional debt or equity financing to fund the next 12 months; funding availability is not assured.
- Management outlook: Management said clinic activity had resumed at a measured pace and expected Ferring minimums and the recovery to support a stronger Q4, but provided no quantified guidance.
- Ferring: The company recognized license revenue over the agreement term; deferred revenue was $3.75 million at September 30. A further $3 million payment is contingent on obtaining an FDA label enhancement and other agreement conditions.
- Financing after quarter-end: In November, the company agreed to sell 3.625 million shares at $3.20 per share, with an underwriters’ option for 543,750 additional shares. It expected approximately $10.1 million net proceeds, subject to closing customary conditions. The filing expected closing on November 17, 2020.
- Expansion: A Mexico joint venture was formed in September; operations were estimated to begin no earlier than Q2 2021, subject to setup and regulatory approval. The planned India joint venture had not completed final setup by quarter-end.
- COVID-19 and concentration: The filing warns that clinic restrictions and reduced fertility services could continue to affect sales. It states that 100% of revenue was derived from the Ferring agreement.
- Litigation: A dispute with related party James Bowdring concerns repayment and potential conversion of old notes. The company said it did not expect a material adverse effect; no material litigation developments were reported for the period.
- Share changes: A 1-for-20 reverse split took effect May 26, 2020. A further 5-for-8 reverse split and proportional reduction in authorized common shares took effect November 9, 2020.
Important facts for investors to verify
- Whether the November public offering closed as expected, its final net proceeds, and the resulting share dilution.
- Cash runway and financing needs in light of operating cash use, the working-capital deficit and the company’s going-concern disclosure.
- Ferring sales, minimum-revenue obligations, deferred-revenue recognition and the conditions for the potential $3 million milestone payment.
- Convertible-note terms, including conversion and anti-dilution provisions, discounts, security arrangements and potential dilution from associated options and warrants.
- Whether clinic activity and COVID-19 conditions support the anticipated sales recovery, and whether the Mexico and India ventures progress to operation.