22 May OXIS Reverse Stock Split: A Case Study
Oxis Biotech, a subsidiary of Oxis International (OTCQB: OXIS), recently filed a notification to shareholders and the SEC that the company would be entering into a reverse split of not less than 1-50 shares and not more than 1-250 shares. Currently trading at around 3 cents per share, the stock has traded between less than 1 cent and 7 cents per share in the past year. Oxis trades for a market cap of just over $17.4 million.
Investors can learn a lot about the due diligence process by inspecting the rationale for this reverse split, and whether it bodes well for current shareholders and the future of the company. Oxis is presenting itself as a drug discovery company that is using cannabinoids, so there has been some interest among the cannabis investing community.
Is the reverse split good news for shareholders, and is this a true cannabis company or is it just pivoting to an industry with a lot of investor interest for marketing reasons? We will attempt to dive in to these issues.
Business Model Boilerplate
Let’s start with what Oxis does. The company states that its business model is to “develop and commercialize innovative drugs of therapeutic molecules including cannabinoids, which are focused on several cancer indications. Oxis addresses the clinical shortcomings of existing commercial products in related fields.”
Compounds stated as “in development” include:
“OXIS’ lead drug candidate, OXS-2175, is being developed for the treatment of triple-negative breast cancer. In in vitro and in vivo models of TNBC, OXS-2175 demonstrated the ability to inhibit metastasis.
OXIS’ lead drug candidate, OXS-4235, is being developed for the treatment of multiple myeloma and associated osteolytic lesions. In in vitro and in vivo models of multiple myeloma and osteoporosis, OXS-4235 demonstrated the ability to kill multiple myeloma cells, and decrease osteolytic lesions in bone.”
Anthony J. Cataldo, CEO of Oxis, has also stated, “Our goal at Oxis Biotech is to build a leading cancer immunotherapy company focused on platform technologies including bispecific immune cell engagers, antibody-drug conjugates (ADCs), and novel small molecule therapeutics targeting B-cell malignancies and certain solid tumors such as triple negative breast cancer.”
While all of this may sound exciting, investors have no way of knowing what kind of actual progress there is on any of these compounds. They cannot read about these compounds on the company’s website, as the “Products & Technology” and “Clinical Development” sections of the website have no content on them.
There is no information on any clinical trials underway or even under consideration, which is odd considering some of their “lead candidates” are only under exclusive license for the next 17 months. (Note that a typical FDA approval process from start of Stage 1 trials is between 8-12 years.)
In the latest quarterly report filed with the SEC, for the period ending March 31, 2015, Oxis International reported the following:
- $1.425 million in assets, the bulk of which is in cash.
- $50.5 million in current liabilities, assumed to be payable within a year.
- Since year-end 2014, total assets have risen by $537,000 while current liabilities have risen by $20,681,000.
The ongoing business showed total revenues in the first three months of the year of $7,000. Total operating expenses were $1.81 million. Total revenue fell in 2014 by 92% over 2013’s figure of $368,000 in revenue.
In addition, the SEC filing states “Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the Company’s financial position or results of operations.” This would include the announcement of the reverse stock split.
Investors should also note that the current quarterly SEC filing also included the following:
“In order to finance existing operations and pay current liabilities over the next twelve months, we will need to raise $11,462,000 of capital.”
Cataldo has stated in his recent press releases that the goal of the reverse stock split is to “uplist” to the NASDAQ. He has also called out his prior experience as CEO of Genesis Biopharma several times in recent press releases. He stated:
“As the founder of Lion Biotechnologies, Inc. (LBIO $240 Million market capitalization) I found the same dynamics when creating the nucleus for markets in cell therapies, which brought significant market cap appreciation in exploding biotech sectors. They are now present in the Cannabinoid/Medical Marijuana sector for Oxis Biotech, Inc. to take advantage of. With Lion Biotechnologies it was obvious that there would be increased interest in the cell therapy (TIL’s tumor-infiltrating lymphoctes) markets, which no company had entered at the time I formed Lion Biotechnologies, Inc. The increase in biotech institutional interest in this sector has been evidenced by the continuing growing market cap companies such as Kite Pharma, Inc. (KITE) $3 Billion market cap, Juno (JUNO) $4 Billion market cap. History shows that companies similar to Lion make advancements in appreciation when they uplist to NASDAQ. This creates an arbitrage with these companies. The same holds true for Oxis Biotech, Inc. (OXIS) $13 Million market cap. Which could continue to advance in value as GW Pharmaceuticals, Plc (GWPH) $1.6 Billion market cap and INSYS Therapeutics, Inc. (INSY) $1.9 Billion market cap. Possibly presenting another arbitrage opportunity for Oxis Biotech (OXIS) investors within this investment community as well for the Cannabinoid Biotech Sector.”
CEO Fundamentals Course
Investors should seek out CEOs that talk about the actual numbers of the company they’re running today; those are the only shareholders you are beholden to as a CEO. If an executive seems to redirect inquiry into the business of today, and instead continuously points to the successes other companies have had, as well as their current market caps, take a second to assess if that info is relevant to any investment you are considering today.
In the case of Oxis and Genesis, it is not relevant. Moreover, it is highly unusual for CEOs to talk about the current market cap companies they used to run for a while, back in the day. If someone is pointing to a shiny car and saying “I built that over there, and I’m going to build another one for you here,” then one should by all means go check out that first car.
As it Relates to OXIS Today
Your mileage may vary, but prudent minds suggest avoiding investing with someone that seems to just jump from one buzz word industry to the next—VoIP, nutraceuticals, green energy, biotechnology—all the while leaving little behind except evaporated shareholder wealth.
The pending reverse split of shares in Oxis Biotech is a good case study for small-cap stocks in general. The key bullet point is that a reverse split doesn’t change the value of stock one bit; it only changes the price per share of equity ownership. So if you have 100 shares of a stock that does a 1-10 reverse split, you’d exchange your 100 shares for 10 shares, with each new share being worth exactly 10x what your previous ones were worth.
Nothing else theoretically changes. So why would any company bother doing it? The strategy is two-fold. First, it helps with the visceral sense of things. Companies don’t start out issuing shares for just a few pennies, so the fact that a stock trades that low usually implies a long-term downtrend—not the best way to attract broad stock ownership.
Secondly, the Big Boy stock indexes—the NASDAQ and NYSE—both have minimum share price requirements in order to remain listed. Stocks that break below $4 on the NASDAQ can be kicked down, or delisted, to OTC markets, which can be a death knell for a stock.
In addition to a minimum bid amount (price offered to buy a share) of 4 bucks, the NASDAQ requires at least $11 million of pre-tax earnings in the past three years, along with no years of a net loss. OXIS obviously has no chance of passing this bar. The prospective company also can’t have any years of negative cash flow in the past three; this would be another unhittable target.
Recent Company Press Releases/Commentary
We struggle to see any legitimate reason to drop the name of another company—Genesis Biopharma, which later merged to become Lion Biotechnologies (NASDAQ: LBIO) that Cataldo was at the helm of during the period between Feb 2011 and January 2013.
Yes, it is true that LBIO executed a 1-100 reverse split in September of 2013. On the first day of trading after the reverse split, shares went for $5.05. Today, LBIO shares trade for around $11; the only problem is that Lion Biotech’s success seems to be in spite of Cataldo, not because of it.
Anthony Cataldo took a leave of absence from his position as CEO in January of 2013, then resigned officially in May 2013 after the company essentially was turned over to its creditors. Shares of Genesis only traded for a few pennies at the time, and under Cataldo’s watch shares of Genesis lost approximately 99% of their total value, despite Cataldo being paid over $10.5 million in compensation during 2011 alone.
Cannabis Company or Not?
There is no public mention of the company’s intentions to work with cannabinoids anywhere in the 2014 Annual Report. There is also no mention of any specific compounds under development, no Phase I trials, and no mention of a timetable for any to begin.
Investors should look at situations like a reverse stock split like they would any potential stock investment; be objective and do your homework. A reverse split doesn’t have to be a deal-breaker when considering a buy, but when other red flags start popping up, don’t ignore them.