INVO Bioscience, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2018; unaudited results. The filing identifies the registrant as INVO Bioscience, Inc. The filing cover also checks “No” for having filed all required reports during the preceding 12 months and for submitting all required Interactive Data Files.
Business context
The company is commercializing INVOcell, an intravaginal culture device and fertility procedure. It reported 75 trained U.S. physician offices or IVF-center satellite facilities, with the procedure offered in 19 states. Revenue for the first nine months came only from domestic physicians.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $125,035 | $68,220 | $339,385 | $200,790 |
| Gross profit / margin | $109,666 / 88% | $55,393 / 81% | $292,882 / 86% | $159,924 / 80% |
| Operating expenses | $299,548 | $199,691 | $2,413,493 | $603,336 |
| Operating loss | $(189,882) | $(144,298) | $(2,120,611) | $(443,412) |
| Interest expense | $104,978 | $4,550 | $184,100 | $16,414 |
| Net loss | $(294,860) | $(148,848) | $(2,304,711) | $(500,695) |
- Q3 revenue grew 83%; nine-month revenue grew 69%. Management attributed growth to repeat orders and new practices. Gross margin improved primarily due to higher reorder prices versus 2017 introductory pricing.
- Nine-month operating expenses rose sharply, largely reflecting a one-time $1.53 million stock award for services from a director. Higher investor-relations, marketing, legal and other expenses also contributed. The Q3 increase included insurance, market research, OTCQB listing and investor-awareness costs.
- Cash was $547,966 at September 30, versus $25,759 at December 31, 2017. Operating activities used $366,648 in the first nine months; financing provided $888,855, principally from $895,000 of convertible notes and $77,000 of stock sales, offset by related-party loan repayments.
- Current assets were $891,626 and current liabilities $5,348,350; management reported a $4,456,724 working-capital deficiency. Total liabilities were $5,348,350 and stockholders’ deficiency was $4,428,359. Accrued compensation was $4,156,790.
- The company issued $895,000 of 2018 convertible notes, bearing 9% interest paid in stock and generally maturing in 2021. A $895,000 beneficial conversion discount was recorded; $136,217 was amortized to interest expense in the first nine months. The balance sheet reports $136,217 of convertible notes, net of discounts, as current liabilities. A separate $131,722 vendor note is also current.
Material changes, outlook and risks
- The filing states substantial doubt exists about the company’s ability to continue as a going concern, citing recurring losses, minimal commercialization revenue, a working-capital deficiency and reliance on additional capital. Management estimated operating needs at about $350,000 per quarter and said cash and operating cash flow would support reduced operations through 2018.
- After quarter-end, in November 2018, the company entered a U.S. exclusive license and distribution agreement with Ferring. The agreement provides for a $5 million initial payment subject to closing conditions, including manufacturer supply arrangements, and a further $3 million payment contingent on obtaining an FDA label enhancement and other conditions. Closing was not expected before January 14, 2019 without mutual consent. Ferring is responsible for U.S. commercialization; the company retains international rights and a limited ability to establish up to five U.S. clinics. The agreement may be terminated in specified circumstances, including by Ferring for convenience.
- Management said a completed Ferring transaction could fund at least 18 months, with the MD&A also describing a 12-to-24-month funding horizon. If it does not close, further spending cuts or downsizing may be required. These statements are estimates, not assurances.
- Subsequent to quarter-end, the company issued shares for services, accrued compensation, director compensation and conversion of notes. Management said it planned additional liability reduction after the Ferring closing, including paying 60% of accrued compensation; the filing also describes an employee share exchange reducing accrued compensation by 33%.
- Disclosure controls and internal control over financial reporting were reported ineffective as of September 30, 2018; a previously identified material weakness had not been remediated. Management cited limited staff and resources and described ongoing remediation steps.
- Litigation over the 2009 sale of assets of Medelle remained on appeal. The company said it intended to oppose the appeal and believed the claims were baseless. Related-party transactions include loans, office rent and purchases from entities connected to directors or officers.
- Management cited risks including financing availability, product adoption and commercialization, regulatory developments, competition, intellectual-property protection, collections, debt obligations and litigation. No quantitative market-risk disclosure was provided.
Important facts for investors to verify
- Whether the Ferring agreement closed, whether the closing conditions were satisfied, and whether the $5 million and any contingent $3 million payment were received.
- How the company funded operations after September 30, including cash burn, debt obligations and its ability to address the working-capital and accrued-compensation deficits.
- The extent and timing of share issuances for compensation, services and note conversions, and resulting dilution; 153,449,336 common shares were outstanding as of November 10, 2018.
- Whether disclosure and financial-reporting controls were remediated, and the significance of the cover-page “No” responses regarding filing and Interactive Data File compliance.
- Current status and potential financial exposure from the Medelle litigation appeal and related-party arrangements.