INVO Bioscience, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The filing identifies the registrant as INVO Bioscience, Inc.; the request metadata names INVO Fertility, Inc.
Business context and results
The company is commercializing INVOcell, an FDA-cleared device and procedure for fertility treatment. It reported that the procedure was offered at 70 trained physician offices or IVF-center satellite facilities in 19 U.S. states. Revenue in the period came only from domestic physicians.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $110,210 | $80,330 | $214,350 | $132,570 |
| Gross profit (margin) | $93,500 (85%) | $66,136 (82%) | $183,216 (85%) | $104,531 (79%) |
| SG&A | $1,883,946 | $198,549 | $2,113,945 | $403,645 |
| Operating loss | $1,790,446 | $132,413 | $1,930,729 | $299,114 |
| Net loss | $1,865,128 | $136,974 | $2,009,851 | $351,847 |
Six-month operating cash use was $249,503, compared with $134,329 in 2017. Financing provided $944,000, primarily from $895,000 of convertible notes and $77,000 of stock sales, offset by $28,000 in related-party loan principal payments. Cash at June 30 was $720,256, versus $25,759 at year-end 2017; investing cash flow was zero.
Financial position and material changes
- At June 30, total assets were $1.14 million, total liabilities $5.28 million, and stockholders’ deficiency $4.13 million. Current liabilities were $5.09 million, including $4.11 million of accrued compensation. The company disclosed a $3.98 million working-capital deficiency.
- Current-period revenue increased 37% for Q2 and 62% for the first half. Management attributed growth to repeat clinic orders, new practices, and higher shipment volumes; it reported shipping 300 INVOcells in Q2 and approximately 600 in the first half, including samples and demonstration/training units.
- Gross margin improved, which management attributed mainly to higher reorder pricing compared with 2017 introductory promotions. SG&A rose sharply, largely due to stock-based service compensation, including a $1.53 million fair-value award to director Dr. Kevin Doody for clinical support, as well as other public-company, insurance, market-research, and investor-awareness costs. The cash-flow statement reports $1.74 million of noncash stock compensation for the first half.
- The company issued $895,000 of 9% convertible notes in April and May. They are due in 2021, generally convertible at $0.20 per share, with an option to convert at 75% of the price in a subsequent equity financing. The filing records a $895,000 beneficial conversion discount and $56,446 of discount amortization as interest expense. Common shares outstanding were 147,454,700 at June 30 and August 10, versus 142,132,374 at December 31, 2017.
Outlook, risks, and unusual items
- Going concern: The filing says recurring losses, limited revenue, the working-capital and stockholders’ deficiencies, and operating cash use raise substantial doubt about the company’s ability to continue as a going concern. Continued operations depend on raising capital and executing its business plan.
- Management estimated reduced operations require approximately $200,000 per quarter and said current resources and operating cash flow would support reduced operations through fiscal 2018. It is seeking additional strategic funding; no assurance is given that funding will be available. Without it, the company may curtail spending, downsize, or pursue exit strategies. No formal revenue or earnings guidance was provided.
- Plans include expanding sales, training, marketing, insurance-company outreach in states with fertility coverage, and pursuing international regulatory approvals. Management cautioned that sales may fluctuate and depend on physician training and adoption.
- Disclosure controls and internal control over financial reporting were deemed ineffective as of June 30; a previously identified material weakness had not been remediated. Management cited limited staff and resources and described control-improvement measures underway.
- A long-running lawsuit relating to the sale of assets of an alleged predecessor remained on appeal. The company disputes the allegations and says it will oppose the appeal. The filing does not quantify a potential loss.
- Employment agreements had expired and were not renewed because of insufficient funds; the company continued accruing nominal compensation. The filing also describes related-party loans, below-market office rent from an entity owned by a director’s brother, and related-party stock financing.
Important facts for investors to verify
- Cash needs and financing availability, including the convertible notes’ conversion terms and potential dilution.
- Whether clinic adoption and repeat orders translate into sustained revenue and cash generation; reported device shipments include non-revenue samples and training units.
- The status of the going-concern conditions, accrued compensation, and other obligations as they fall due.
- Remediation of the disclosed material weakness and effectiveness of financial-reporting controls.
- Developments in the pending litigation and any material change in the company’s risk disclosures.