Business context and reporting period
The filing is for OXIS International, Inc. (the issuer named in the filing), for the quarter and six months ended June 30, 2013. The request identifies GT Biopharma, Inc.; this filing itself does not identify that company as the issuer. OXIS described a business focused on nutraceutical and related products, particularly those using ergothioneine (ERGO), and potential licensing of proprietary compounds.
The report was signed December 12, 2014, well after the reported period, and includes subsequent-event disclosures through 2014. Its financial statements are unaudited.
Financial results and condition
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 | Prior-year comparison |
|---|---|---|---|
| Revenue | $56,000 | $143,000 reported in the statement of operations; MD&A says $144,000 | $1,000 and $2,000, respectively |
| Gross profit | $44,000 | $63,000 | $1,000 for each comparable period |
| Operating expenses | $118,000 | $484,000 | $1.031 million and $1.427 million |
| Net income (loss) | $(306,000) | $162,000 | $(2.395 million) and $(3.010 million) |
| Cash from operations | $(118,000) for six months | $(495,000) |
Six-month gross margin was approximately 44% using the statement’s $143,000 revenue figure; second-quarter gross margin was approximately 79%. No research and development expense was reported for either 2013 period. Six-month net income included a $1.375 million gain from changes in fair value of warrant and derivative liabilities; it did not reflect positive operating performance.
At June 30, 2013, cash was $11,000, current assets were $131,000, and current liabilities were $5.758 million. The company reported a $5.627 million cash-basis working-capital deficit in MD&A. Total assets were $154,000 and stockholders’ deficit was $5.604 million. The balance sheet reports accumulated deficit of $88.804 million, while MD&A reports $88.974 million.
Current liabilities included $1.430 million accrued interest, $1.254 million accrued expenses, $904,000 accounts payable, a $695,000 settlement note, and current convertible debentures net of discount. The company also reported $547,000 of convertible debentures outside the current portion. Operating cash use exceeded financing cash provided ($1,000); cash fell by $112,000, from $123,000 to $11,000. No interest or income taxes were paid in cash during the six months.
Material changes versus prior comparable periods
- Revenue rose from minimal levels, but management said it did not actively market products until July 2012, considered the comparisons unrepresentative of future operations, and was evaluating product marketability as of 2014.
- SG&A fell by $913,000 for the quarter and $943,000 for the six months, primarily because of lower non-cash fees. Interest expense also declined, mainly from lower non-cash amortization of debt issuance costs.
- The six-month result shifted from a $3.010 million loss to $162,000 of income, principally alongside the $1.375 million non-cash fair-value gain on warrant and derivative liabilities.
- Common shares outstanding increased from 500.6 million at December 31, 2012 to 573.1 million at June 30, 2013. The company issued shares to retire debt; substantial options and warrants remained outstanding.
Outlook, risks and unusual items
Management stated that the company needed additional equity or debt financing until revenue could cover cash needs or operations became profitable. It explicitly said substantial doubt existed about its ability to continue as a going concern absent significant cash flows and gave no assurance that financing or future product revenue would be sufficient. No quantified revenue or earnings guidance was provided.
- Long-standing convertible debt defaults were disclosed, including unpaid required redemptions on 2006 debentures, penalty interest, and creditor rights to accelerate repayment and enforce security. The filing also describes short-term secured borrowing and settlement notes.
- Potential dilution is significant: 539.4 million warrants and 29.3 million options were outstanding at June 30, 2013; the filing also lists 471.7 million potentially dilutive shares excluded from EPS calculations.
- Management concluded disclosure controls were ineffective and internal control over financial reporting had material weaknesses, citing inadequate segregation of duties, reliance on outside consultants, and risk of executive override.
- Subsequent-event disclosures describe additional convertible financing in 2013 and 2014, including 10% debentures and warrants, and leadership changes. A 2014 legal settlement provided for cash and a perpetual royalty on future product sales. These events occurred after the reporting period.
Most important facts to verify
- Confirm the issuer’s identity: the supplied filing is for OXIS International, Inc., not an issuer named GT Biopharma, Inc.
- Reconcile the six-month revenue discrepancy ($143,000 in the statement versus $144,000 in MD&A) and the accumulated-deficit discrepancy ($88.804 million versus $88.974 million).
- Review the going-concern disclosure, cash runway, financing availability, debt defaults, security interests, and settlement-note payment status.
- Assess the quality of reported six-month income, particularly the non-cash derivative fair-value gain, and the company’s limited revenue and lack of R&D spending.
- Evaluate dilution from outstanding warrants, options, conversions, and post-period financings, and the implications of the identified material weaknesses in controls.