Business Context and Reporting Period
This is OXIS International, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The request identifies GT Biopharma, Inc., but the filing itself names OXIS International, Inc.; verify the entity and filing match. OXIS develops and sells products intended to counter oxidative stress and inflammation, with a stated focus on L-Ergothioneine (ERGO), nutraceuticals, cosmeceuticals, functional foods and beverages, and potential licensing of its intellectual property.
Financial Results and Condition
- Revenue: Third-quarter product revenue was $2,000; nine-month revenue was $23,000, all product revenue. No license revenue was reported. The comparable 2010 periods reported no revenue.
- Profit and margins: Third-quarter net income was $23,000, versus a $633,000 loss in 2010; the filing attributes much of the quarter’s result to a $681,000 favorable change in the fair value of warrant and derivative liabilities. Nine-month net loss was $2.562 million versus $2.333 million. Nine-month gross loss was $25,000 on $23,000 of revenue, reflecting $48,000 of product costs. No sustainable operating margin is demonstrated.
- Expenses: Nine-month operating expenses were $2.855 million, including $2.806 million of selling, general and administrative expense and $49,000 of research and development. SG&A increased about $995,000 from the comparable period, while third-quarter SG&A decreased $53,000 year over year. Management cites compensation, overhead, contractors and shareholder-relations costs as drivers of the nine-month increase.
- Cash flow: Operating cash use was $639,000 for the first nine months, compared with $1.158 million in 2010. Financing provided $585,000, including $621,000 of note proceeds, less $50,000 of repayments and offset by other financing activity. Cash declined from $54,000 at year-end 2010 to zero at September 30, 2011.
- Liquidity and debt: Current assets were $343,000 against current liabilities of $5.277 million; management reports a cash-basis working-capital deficit of $4.934 million. Current liabilities included $974,000 accounts payable, $1.614 million accrued interest, $557,000 accrued expenses, $290,000 noncash warrant liability, $198,000 demand notes and $1.644 million of convertible debentures. Total assets were $371,000 and stockholders’ deficit was $4.906 million.
- Share count and dilution: Common shares outstanding increased to 238.6 million at September 30, from 149.6 million at December 31, 2010. The filing reports 399.7 million potentially dilutive shares excluded from diluted loss per share at September 30; it also reports 238.6 million common shares outstanding on November 21, 2011.
Material Changes, Outlook and Risks
- Revenue arose from a direct-mail test market for ErgoFlex begun in December 2010. Management said it planned to market products and introduce at least one additional consumer product in 2011, with Engage:BDR expected to provide the principal online marketing channel. Revenue growth was conditional on raising sufficient capital; the filing provides no quantified revenue guidance.
- OXIS entered a June 2011 financing arrangement involving up to $500,000 of 12% convertible debentures due April 2012. A separate Gemini purchase-order credit facility of up to $750,000 was restricted to purchases of product and inventory; no advances were outstanding at September 30.
- The company disclosed substantial doubt about its ability to continue as a going concern. It had no cash, significant current obligations, an accumulated deficit of $82.657 million and continuing operating cash needs. Management planned to seek additional debt or equity financing but gave no assurance it could obtain funding. Failure to do so could require curtailing operations or abandoning its business plan.
- OXIS had not made required monthly redemptions on secured 2006 debentures, an event of default under their terms. The filing describes prior collateral enforcement and continuing creditor rights, including potential acceleration and remedies; verify the current outstanding amount, status and enforceability. The company also reported demand notes due on demand.
- Planned commitments included up to $1.5 million for the Engage:BDR joint venture, which had not begun operations and had received no contributions by quarter-end, and support for Ergo ARDS, a 60%-owned venture. Further clinical-development funding and milestone payments could be required. The filing says OXIS would use best efforts to raise $3 million for Ergo ARDS if the parties agreed to proceed to human trials.
- Common shares authorized were increased to 600 million in 2011 to accommodate outstanding options, warrants and convertible securities. Shares were issued for debt conversions, services and joint-venture consideration, creating substantial dilution. The CEO appointment in August included a potential three-year employment extension and additional compensation and options if at least $2 million of financing is obtained. Subsequent to quarter-end, the chairman and CFO resigned on October 25, 2011.
- The filing reports no material changes to previously disclosed risk factors or legal proceedings. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm that this OXIS International filing is the intended filing for the company identified in the request as GT Biopharma.
- Verify available cash, near-term funding, and the status and terms of the June 2011 financing and Gemini credit facility.
- Confirm current balances, defaults, creditor remedies and payment status for the 2006 secured debentures, other convertible debentures and demand notes.
- Review the full potential share dilution from convertible securities, warrants, options and any financing-related awards or adjustments.
- Assess whether product marketing, joint ventures and ERGO-related development have progressed, and whether they can generate revenue sufficient to fund operations and commitments.