Business Context and Reporting Period
Company: OXIS International, Inc. (formerly GT Biopharma, Inc. in request metadata, but filing identifies as OXIS International, Inc.)
Filing Type: Form 10-K
Period Ended: December 31, 2009
Business Overview: The Company is engaged in the research, development, and sale of products to counteract oxidative stress, primarily focusing on the compound L-Ergothioneine ("ERGO"). In 2008, the Company exited its diagnostic assay business (selling assets to Percipio Biosciences) and lost its majority-owned subsidiary, BioCheck, Inc., to foreclosure by Bristol Investment Fund, Ltd. As of December 31, 2009, the Company had no employees and was managed by consultants while transitioning to a new business model focused on nutraceuticals and cosmeceuticals.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Revenue | $48,000 | $1,143,000 |
| Cost of Product Revenue | $50,000 | $909,000 |
| Gross Profit | $(2,000) | $234,000 |
| Net Loss | $(2,246,000) | $(5,006,000) |
| Accumulated Deficit | $(77,100,000) | $(74,854,000) |
| Cash and Cash Equivalents | $1,293,000 | $22,000 |
| Working Capital Deficit | $(5,566,000) | $(3,995,000) |
| Total Current Liabilities | $6,859,000 | $4,270,000 |
| Convertible Debentures (Current) | $1,945,000 | $2,123,000 |
| Warrant Liability | $2,405,000 | $174,000 |
Note: The 2009 revenue was derived solely from the sale of a nutraceutical product ("Ergo-Plex"). The 2008 revenue included discontinued operations from the diagnostic assay business.
Material Changes vs. Prior Period
- Revenue Decline: Product revenues decreased by 95.8% (from $1.143 million to $48,000) due to the divestiture of the Research Assay business in December 2008.
- Loss Reduction: Net loss decreased from $5.0 million in 2008 to $2.2 million in 2009. The 2008 loss included a $2.978 million loss on the disposition of the BioCheck subsidiary.
- Interest Expense: Interest expense decreased from $1.657 million to $1.136 million, primarily due to changes in convertible debenture amortization and penalty interest.
- Derivative Liabilities: The warrant liability increased significantly to $2.405 million in 2009 from $174,000 in 2008, reflecting the fair value adjustment of warrants issued in connection with debt financing.
- Cash Position: Cash increased to $1.293 million (of which $1.26 million was held in escrow) compared to $22,000 in 2008, driven by a $2.0 million private placement in October 2009.
Guidance, Outlook, Risks, and Unusual Items
- Going Concern: The Company's auditors have raised substantial doubt about its ability to continue as a going concern. The Company has an accumulated deficit of $77.1 million and a working capital deficit of $5.6 million. Continued operations depend on raising additional capital.
- Capital Needs: Management believes current cash (including escrow) is sufficient for administrative expenses through the end of 2010, but additional financing is required to fund product commercialization and marketing. There are no commitments for future funding.
- Product Outlook: The Company plans to commercially release new ERGO-based products in the summer of 2010. A limited release of "Ergo-Plex" in 2009 showed a favorable response rate.
- Legal Proceedings: A lawsuit was filed in December 2009 by Hines Vaf No Cal Properties, L.P., seeking approximately $60,000 in unpaid rent. The Company is negotiating a resolution.
- Internal Controls: Management concluded that internal controls over financial reporting were not effective as of December 31, 2009, citing a lack of segregation of duties and risks of executive override due to a small staff.
- Dilution Risk: Significant dilution is possible. As of March 30, 2010, outstanding options, warrants, and convertible notes could result in the issuance of over 459 million additional shares. Current shareholders would own approximately 14% of the outstanding shares if all were issued.
Investor Verification Checklist
- Escrow Restrictions: Verify the terms of the escrow agreement holding $1.26 million of the October 2009 financing proceeds, which requires joint instructions from the Company and Theorem Capital for disbursement.
- Debt Conversion Terms: Review the conversion prices of the October 2006 and 2009 debentures and the associated warrants, which contain full ratchet anti-dilution provisions and variable conversion prices based on market lows.
- Related Party Transactions: Confirm the extent of control held by Theorem Group, LLC (beneficial owner of ~52% of voting stock) and its affiliate Theorem Capital, LLC, which controls the release of escrowed funds and rents office space to the Company.
- Product Commercialization: Assess the feasibility of the planned summer 2010 product launch given the Company's lack of employees and reliance on outsourced manufacturing and marketing.
- Legal Exposure: Monitor the status of the $60,000 lease dispute and the potential for further claims from creditors given the Company's history of default on convertible debentures.