Business context and reporting period
This unaudited Form 10-Q covers the three and six months ended June 30, 2016. The filing identifies the registrant as OXIS International, Inc. and subsidiaries; it does not identify GT Biopharma by that name. OXIS describes itself as an immuno-oncology drug developer. Its programs include OXS-1550, a cancer-targeting therapy in clinical testing, and preclinical candidates OXS-2175 and OXS-4235.
OXIS began enrolling patients in a Phase 1/Phase 2 OXS-1550 trial during Q2; the filing reports 32 cumulative participants. The filing gives no commercial product revenue for the periods reported.
Financial performance and position
| Metric | Q2 2016 | Six months 2016 | Comparable 2015 period |
|---|---|---|---|
| Revenue | $0 | $0 | $20,000 and $27,000, respectively, all license revenue |
| Operating expenses | $2.121 million | $6.022 million | $1.451 million and $3.269 million |
| Operating loss | $2.121 million | $6.022 million | $1.431 million and $3.242 million |
| Net income | $1.543 million | $27.492 million | $26.860 million and $6.344 million |
| Gain from change in warrant and derivative fair values | $5.263 million | $36.759 million | $29.140 million and $17.874 million |
| Interest expense | $1.599 million | $3.245 million | $849,000 and $8.288 million |
Reported net income was driven by noncash fair-value gains, not operating revenue: the company had no revenue and incurred operating losses. Q2 SG&A rose 29% to $1.871 million; six-month SG&A rose to $5.547 million from $3.019 million. Management attributed the increase principally to professional and license fees, investor relations and stock compensation. Six-month R&D increased to $475,000 from $250,000.
For the six months, operating cash use was $1.232 million, versus $3.080 million in 2015; financing provided $1.540 million, versus $2.350 million. Cash was $355,000 at June 30, 2016, compared with $47,000 at December 31, 2015. The filing reports current liabilities of $15.666 million, total liabilities of $16.194 million, and stockholders’ deficit of $15.832 million. It states a cash-basis working-capital deficit of $14.819 million. Accumulated deficit was $118.190 million.
Current and long-term convertible debt carrying values totaled approximately $9.516 million; accrued interest was $2.853 million. The $492,000 warrant liability was far below its $44.531 million year-end 2015 balance. The filing’s current-liability total also includes accounts payable, accrued expenses, notes and other obligations.
Material changes versus prior periods
- Revenue fell to zero from license revenue of $20,000 in Q2 2015 and $27,000 in the first half of 2015.
- Six-month net income rose to $27.492 million from $6.344 million, principally reflecting a larger noncash gain on warrant and derivative liabilities; operating losses widened.
- Six-month interest expense declined to $3.245 million from $8.288 million, which management primarily attributed to lower noncash debt-cost amortization and related items.
- Common shares were issued for cashless warrant exercises, consulting services, executive contractual rights and note conversions. The filing reports 12.58 million shares issued for warrant cancellations and 4.28 million shares for note and accrued-interest conversions in the first half.
Outlook, risks and unusual items
- Going concern: Management says the current cash-use rate raises substantial doubt about the company’s ability to continue as a going concern absent significant cash flows. It intends to seek equity or debt financing, but cannot assure that financing or future product revenue will be obtained.
- Financing and restructuring: The company issued $150,000 of convertible debentures in January and $1.390 million in May 2016. A planned conversion of approximately $15.056 million of debt, conditioned on completing a $6 million financing, was terminated after that financing did not occur by March 15, 2016. Subsequent to quarter-end, the company reported additional convertible debenture financings in July and August.
- Dilution and financing terms: The May debentures carried a 10% rate and were convertible at $0.40, with warrants exercisable at $0.45. Significant share issuance and outstanding warrants create dilution risk. The filing reports 26,915,959 common shares outstanding at August 7, 2016.
- Clinical and development risk: OXS-1550 was in early-stage clinical testing; TriKE was being advanced toward clinical trials. No timing, cost or probability-of-success guidance is provided. License agreements also entail royalties, milestone payments and development-cost commitments.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at June 30, 2016, citing material weaknesses including inadequate segregation of duties and risk of executive override.
- Legal matters: The company disclosed it was in default on two remaining cash payments under a $150,000 settlement with Aaion Partners. A separate consulting-services suit sought $73,898; the company had engaged counsel.
- No formal financial guidance is provided in the supplied filing text.
Important facts for investors to verify
- Confirm the registrant’s identity and relationship, if any, to GT Biopharma; the supplied filing is under OXIS International, Inc.
- Reconcile the large reported net income with operating losses and noncash derivative/warrant fair-value gains; assess the valuation inputs and whether similar gains are likely to recur.
- Assess near-term liquidity, debt maturities and defaults, financing availability, and the company’s stated going-concern uncertainty.
- Verify the extent of potential dilution from conversions, warrants, share-based payments and any remaining preferred-stock exchange terms.
- Track OXS-1550 trial progress and financing-dependent development obligations, including license milestones and royalties.
- Check source-table details: the cash-flow statement labels a $308,000 increase as a “net decrease”; the MD&A appears to refer once to cash at June 30, 2015 although the surrounding discussion concerns June 30, 2016; and the balance-sheet common-share count is malformed in the supplied text.