Filing identity and reporting period
The supplied filing is OXIS International, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2012, signed November 21, 2012. This differs from the request metadata, which names GT Biopharma, Inc.; verify the intended issuer.
Business context
OXIS focused on developing and selling products and intellectual property related to oxidative stress, with current commercial efforts centered on ergothioneine (EGT)-based nutraceuticals and skin-care products. It began online sales of Prograce and Reverge through its engage:BDR joint venture in July 2012.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | 2012: $120,000; 2011: $2,000 | 2012: $123,000; 2011: $23,000 |
| Gross profit (loss) | 2012: $88,000; 2011: $(6,000) | 2012: $90,000; 2011: $(25,000) |
| Operating expenses | 2012: $1.438 million; 2011: $535,000 | 2012: $2.865 million; 2011: $2.855 million |
| Net income (loss) | 2012: $(1.400) million; 2011: $23,000 | 2012: $(4.410) million; 2011: $(2.562) million |
| Operating cash flow | Nine months 2012: $(773,000); 2011: $(639,000) |
For the 2012 quarter, gross margin was approximately 73%; nine-month gross margin was approximately 73%, versus a gross loss in the comparable 2011 period. Revenue rose from a low base following the product launch. Quarterly SG&A increased $903,000 year over year, while nine-month SG&A rose $59,000 to $2.865 million; management attributed the nine-month increase principally to wages and noncash stock compensation.
At September 30, 2012, cash was $61,000, total assets $88,000, current assets $73,000, and current liabilities $6.326 million, yielding a $6.148 million working-capital deficit. Current liabilities included $1.225 million accrued interest, $1.966 million current convertible debentures, $625,000 noncurrent-listed convertible debentures, and a $514,000 warrant liability. Management characterized $5.812 million of current liabilities as cash obligations. Stockholders’ deficit was $6.238 million. Cash declined $31,000 from year-end. Financing activities provided $615,000, including $615,000 of note proceeds.
Material changes and unusual items
- Common shares outstanding increased from 269.3 million at December 31, 2011 to 457.2 million at September 30, 2012, largely through debt conversions and shares issued for services. The company reported 160.1 million shares issued for retirement of debt during the first nine months.
- In April 2012, anti-dilution adjustments reset conversion prices on most convertible instruments and exercise prices on certain warrants to $0.01. At quarter-end, 499.5 million warrants were outstanding, with a weighted-average exercise price of $0.01; options outstanding totaled 38.8 million.
- An August settlement with Bristol Investment Fund and Merit Capital called for $1.120 million of consideration: $417,476 in restricted shares and two notes totaling approximately $702,302, bearing 8% interest and maturing December 1, 2017. Conversion at $0.01 is permitted only during a continuing payment default.
- Warrant and derivative liability remeasurement affected reported results. The statements show a nine-month 2012 loss of $358,000 from the change in value of warrant and derivative liabilities, while the cash-flow reconciliation lists a $356,000 adjustment.
Outlook, risks, and controls
Management expected 2012 product revenue to increase significantly versus 2011, conditional on raising needed capital, but said the amount and timing of online sales were uncertain. It anticipated increased research and development spending in subsequent quarters. The filing provides no quantified revenue or earnings guidance.
The company disclosed substantial doubt about its ability to continue as a going concern, citing its accumulated deficit of $88.205 million, low cash balance, ongoing cash use, and dependence on additional financing and future product revenues. Management said it would seek debt or equity financing; it warned that financing might not be available on acceptable terms and could dilute shareholders. The Gemini inventory credit facility could be terminated by Gemini at its discretion. No assurance was given that product sales or the engage:BDR venture would fund operations.
Disclosure controls and internal control over financial reporting were deemed ineffective at September 30, 2012. Identified material weaknesses included inadequate segregation of duties, reliance on outside consultants, and risk of executive override. The filing reported no material changes in legal proceedings or risk factors from the prior annual report.
Important facts for investors to verify
- Confirm issuer identity: the filing names OXIS International, Inc., not GT Biopharma, Inc.
- Review the company’s near-term cash needs, financing commitments, debt terms, and ability to meet current obligations given $61,000 cash and the going-concern warning.
- Assess actual sales, margins, and cash generation from the newly launched products and engage:BDR joint venture; management’s revenue expectations were uncertain.
- Evaluate potential dilution from the large warrant and option overhang, low conversion/exercise prices, and continued debt conversions.
- Reconcile discrepancies in the filing: MD&A gives a different comparative 2011 nine-month net-loss figure ($633,000) than the financial statements ($2.562 million), and the derivative-liability cash-flow adjustment differs from the reported income-statement amount.
- Track remediation of the disclosed material weaknesses in financial reporting controls.