INVO Bioscience, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. The filing identifies the registrant as INVO Bioscience, Inc. (ticker IVOB), which develops and commercializes the INVOcell fertility device and procedure.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $303,571 | $125,035 | $1,151,641 | $339,385 |
| Gross profit | $258,645 | $109,666 | $1,040,455 | $292,882 |
| Gross margin | 85% | 88% | 90% | 86% |
| SG&A | $891,008 | $299,548 | $2,087,725 | $2,413,493 |
| Interest expense | $47,462 | $104,978 | $332,677 | $184,100 |
| Net loss | $710,334 | $294,860 | $1,410,456 | $2,304,711 |
Revenue growth reflected increased product sales, including sales to Ferring, and recognition of the Ferring license fee over the agreement term. Nine-month gross margin improved because license revenue had no associated cost of sales; Q3 margin declined amid lower product pricing to Ferring.
At September 30, cash was $2.01 million, versus $212,243 at December 31, 2018. Current assets were $2.30 million and current liabilities $2.18 million. Total liabilities were $6.33 million, including $4.48 million of deferred revenue and approximately $303,820 of net convertible-note liabilities; stockholders’ deficiency was $3.76 million.
Operating cash flow was positive $2.14 million for the nine months, compared with negative $366,648 in 2018. The result was principally driven by a $4.46 million increase in deferred revenue from Ferring’s upfront payment, partly offset by reduced accrued compensation. Investing cash use was $114,706 and financing cash use was $229,465. The positive operating cash flow should not be read as evidence of positive operating earnings or recurring cash generation.
Material developments and outlook
- Ferring paid $5 million in January 2019 for exclusive U.S. licensing and distribution rights. INVO recognizes the payment over seven years; $535,714 was recognized as license revenue in the first nine months. A further $3 million is conditional on, among other things, an FDA label enhancement and Ferring not having terminated the agreement.
- Management said the Ferring proceeds support its plan for at least the next 12 months, but also stated that future plans depend on sufficient sales, additional distribution agreements, or debt or equity financing. The company expects substantial quarterly sales fluctuations and said near-term results depend heavily on Ferring’s U.S. rollout and physician training.
- Nine-month SG&A declined 14% year over year, partly because 2018 included a one-time $1.53 million stock issuance for board-member services. In Q3 2019, SG&A rose 197%, which management attributed to higher wages, professional and legal fees, a legal settlement, and other commercialization-related costs. Nine-month interest expense increased 81%, primarily due to amortization of convertible-note discounts.
- Management disclosed recurring operating losses and negative operating cash flows in prior periods; its auditor’s 2018 report had cited substantial doubt about the company’s ability to continue as a going concern. Management believes the Ferring funding provides at least 12 months of capital, but gives no assurance of achieving positive operating cash flow.
- Disclosure controls and internal control over financial reporting were deemed ineffective at September 30, 2019 because a previously identified material weakness remained unremediated. Management cited limited staffing and described planned or ongoing control improvements.
- Subsequent events included appointment of Steven Shum as CEO, effective October 10, with a $260,000 annual salary and equity awards; agreements under which former CEO Kathleen Karloff and director Robert Bowdring waived accrued compensation in exchange for performance-based options; and a November 11 settlement of the Paasch litigation for $90,000 cash and 300,000 shares valued at $93,750.
- A separate dispute with related party James Bowdring concerns payment and potential conversion of 2011 notes. He rejected the company’s $65,197 payment tender, counterclaimed for alleged breach, fraud and other claims, and seeks shares based on an adjusted conversion price. The company disputes his asserted conversion right.
Key facts investors should verify
- Whether Ferring’s U.S. commercialization produces product sales and whether the conditions for the additional $3 million payment are achieved.
- Cash runway and recurring cash burn after separating Ferring’s upfront payment and deferred-revenue movements from ongoing operating cash generation.
- Recognition and timing of the $4.48 million deferred-revenue balance, and any obligations or termination provisions under the Ferring agreement.
- Resolution and financial or dilution effects of the Bowdring note dispute, and completion of the Paasch settlement and dismissal.
- Progress in remediating the material weakness and improving disclosure and financial-reporting controls.
- Potential dilution from equity awards, note conversions, and shares issued for services or settlements.