PROSPECTUS
SUPPLEMENT NO. 1
Filed
Pursuant to Rule 424(b)(3)
Registration
File No. 333-123008
PROSPECTUS
SUPPLEMENT NO. 1 DATED May 15, 2006
TO
THE
PROSPECTUS DATED APRIL 12, 2006
This
Prospectus Supplement No. 1 supplements our Prospectus dated April 12, 2006
with the following attached documents:
| A. |
Form
8-K Current Report dated May 10, 2006
|
| B. |
Form
10-QSB Quarterly Report dated May 12,
2006
|
The
attached information modifies and supersedes, in part, the information in
the
prospectus. Any information that is modified or superseded in the prospectus
shall not be deemed to constitute a part of the Prospectus except as modified
or
superseded by this Prospectus Supplement.
This
Prospectus Supplement No. 1 should be read in conjunction with the Prospectus,
which is required to be delivered with this Prospectus Supplement.
INVESTING
IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE
“RISK
FACTORS” BEGINNING ON PAGE 4 OF THE PROSPECTUS, AS
SUPPLEMENTED
BY THIS PROSPECTUS SUPPLEMENT.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES
OR DETERMINED IF THIS PROSPECTUS SUPPLEMENT IS
TRUTHFUL
OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL
OFFENSE.
The
date
of this prospectus supplement is May 15, 2006
INDEX
TO
FILINGS
| |
|
|
|
|
|
Annex
|
|
Form
8-K Current Report of the registrant filed with the Securities
and
Exchange Commission on May 10, 2006
|
|
A
|
|
Form
10-QSB Quarterly Report of the registrant filed with the Securities
and
Exchange Commission on May 12, 2006
|
|
B
|
ANNEX
A
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C., 20549
Form
8-K
Current
Report
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date
Of Report (Date Of Earliest Event
Reported): 5/09/2006
(Exact
Name of Registrant as Specified in its Charter)
Commission
File Number: 0-8092
|
DE
|
|
94-1620407
|
|
(State
or Other Jurisdiction of
|
|
(I.R.S.
Employer
|
|
Incorporation
or Organization)
|
|
Identification
No.)
|
323
Vintage Park Drive, Suite B, Foster City, California 94404(Address
of Principal Executive Offices, Including Zip Code)
(650)
212-2568
(Registrant’s
Telephone Number, Including Area Code)
(Former
name or former address, if changed since last report)
Check
the appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
[ ]
Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ]
Soliciting material pursuant to Rule 14a-12 under the Exchange
Act(17CFR240.14a-12)
[ ]
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act(17CFR240.14d-2(b))
[ ]
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act(17CFR240.13e-4(c))
Item
2.02. Results
of Operations and Financial Condition.
The
information in this report and the exhibit attached hereto are being furnished
pursuant to Item 2.02 of Form 8-K and are not deemed “filed” for purposes of
Section 18 of the Securities Exchange Act of 1934 or otherwise subject to
the
liability of that section, and are not incorporated by reference into any
filing
of OXIS International, Inc. under the Securities Exchange Act of 1933 or
the
Securities Act of 1934, whether made before or after the date hereof and
irrespective of any general incorporation language in the filing.
On
May 9,
2006, OXIS International, Inc. issued a press release announcing its financial
results for the quarter ended March 31, 2006. A copy of the press release
is
attached hereto as Exhibit 99.1.
Item
9.01. Financial
Statements and Exhibits.
(d)
Exhibits
99.1 Press
release dated May 9, 2006.
Signature(s)
Pursuant
to the Requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this Report to be signed on its behalf by the Undersigned hereunto
duly authorized.
| |
|
|
| |
OXIS
INTERNATIONAL, INC. |
|
|
|
| Date:
May 10, 2006 |
By: |
/s/ MICHAEL
D. CENTRON |
| |
Michael D. Centron |
| |
Title:
Chief Financial Officer |
Exhibit
99.1
OXIS
International Reports Financial Results for First Quarter
2006
Product
Revenues Increase 140% over 2005
New
Cardiac and Cancer Research Products and Value Pricing to Drive Sales Volume
Results
Include 51% Ownership in BioCheck, Inc. Beginning in December
2005
Foster
City, CA (May 9, 2006) - Oxis International, Inc. (OTCBB: OXIS.OB) (Nouveau
Marché: OXIS) (FWB: OXI) today reported results for the first quarter
2006.
OXIS
International is a biopharmaceutical company focused on commercializing research
assays, nutraceutical and therapeutic products related to oxidative stress
and,
through its majority interest in BioCheck, a leading provider of high quality
immunoassay clinical kits and contract services.
On
a GAAP
basis, OXIS reported a net loss of $0.7 million, or $0.02 per share, for
the first quarter of 2006 compared to a net loss of $0.2 million, or $0.01
per share, for the first quarter of 2005. In the fourth quarter of 2005, the
Company’s net loss was $2.2 million, or $0.05 per share. The consolidated
financial statements for the three months ended March 31, 2006 include
the results of operations and the assets and liabilities of BioCheck at
December 31, 2005 and March 31, 2006.
Revenues
for the first quarter of 2006 were $1.5 million, an increase of
$0.9 million, or 140%, over the same period last year, and
$0.7 million over the fourth quarter of 2005. Cost of product revenues on a
GAAP basis were $0.8 million for the first quarter of 2006, an increase of
$0.5 million, or 185%, from $0.3 million incurred in the first quarter
of 2005. Total operating expenses on a GAAP basis were $1.3 million for the
first quarter of 2006, an increase of $0.7 million, or 114%, from
$0.6 million incurred in the first quarter of 2005. Gross profit as a
percentage of revenues was 46% in first quarter of 2006.
OXIS
ended the quarter with approximately $0.7 million in cash and cash
equivalents of which $0.5 million was held by OXIS and $0.2 million
was held by its majority-owned subsidiary, BioCheck, Inc.
The
Company also reported the following highlights for the first quarter
2006:
| · |
OXIS
strengthened its management team with the appointment of Michael
D.
Centron as Chief Financial Officer in January 2006, and Randall Moeckli
as
Senior Director of Sales and Marketing in February
2006.
|
| · |
The
Company’s Board of Directors was further enhanced with the appointment of
Gary M. Post, Managing Director of Ambient Advisors, LLC, in March
2006.
|
| · |
The
Company improved its short-term financial position by securing $200,000
and $400,000 in promissory note agreements with President and Chief
Executive Officer Steve Guillen and Fagan Capital, respectively,
in March
2006.
|
| · |
On
April 3, 2006 OXIS and BioCheck jointly announced the upcoming launch
in
late spring and summer 2006 of new immunoassay (ELISA) test kits
and
reagent products for the oncology research market, including assays
based
on the HMGA2 and Id proteins shown to play a role in the control
of cell
growth, differentiation and tumorigenesis related to breast cancer
and
other tumor related angiogenesis functions.
|
| · |
In
early May, OXIS expanded its product portfolio for the cardiovascular
research markets with the addition of new assay products from BioCheck,
including assays for the measurement of biomarkers of inflammation
related
to cardiovascular disease, including Troponin I, Myoglobin, High
Sensitivity C-Reactive Protein, CK-MB, and Fatty Acid Binding Protein.
|
“With
the
successful consolidation of the key product manufacturing, sales and marketing
functions of OXIS and BioCheck, we are beginning to realize significant merger
synergies,” stated Steve Guillen, President and CEO of OXIS International. “We
are now able to offer our life sciences research and clinical customers a more
comprehensive menu of products that are known for their high quality, stability
and strong technical support.”
The
consolidation of the companies’ operations has resulted in improved margins in
the first quarter of 2006 and combined lower manufacturing costs than incurred
by each company prior to the relocation of OXIS’ operations to Foster City,
California and, as a result, has allowed OXIS to implement new value pricing
programs. These initiatives are expected to drive revenue and product profit
margin expansion for both companies.
About
OXIS and BioCheck:
OXIS
International, Inc. develops technologies and products to research, diagnose,
treat and prevent diseases of oxidative stress associated with damage from
free
radical and reactive oxygen species. The company holds the rights to three
therapeutic classes of compounds in the area of oxidative stress, and has
focused commercialization programs in clinical cardiovascular markers, including
MPO (myeloperoxidase) and GPx (glutathione peroxidase), as well as a highly
potent antioxidant, Ergothioneine, that may be sold over-the-counter (OTC)
as a
dietary supplement. OXIS has acquired a 51% interest in and has the option
to
purchase the remaining 49% of BioCheck.
BioCheck,
Inc. is a leading provider of high quality enzyme immunoassay research services
and products including immunoassay kits for cardiac and tumor markers,
infectious diseases, thyroid function, steroids, and fertility hormones. The
company operates a 15,000 square-foot, U.S. Food and Drug Administration (FDA)
certified cGMP, and ISO device-manufacturing facility in Foster City,
California. BioCheck has advanced developmental programs on two promising cancer
biomarkers, related to the Id-gene, and the HMGA2 gene. Id
proteins play a significant role in the process of tumor related angiogenesis
and other functions related to blood vessel formation. The HMGA2 gene has been
implicated in aggressive forms of breast cancer.
More
information about OXIS, BioCheck and its products, services as well as current
SEC filings may be obtained by visiting http://www.oxis.com,
http://www.oxisresearch.com
and
http://www.biocheckinc.com.
*
*
*
The
statements in this press release that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including,
without limitation, statements regarding our expectations, objectives,
anticipations, plans, hopes, beliefs, intentions or strategies regarding the
future. Factors
that could cause actual results to differ materially from the forward-looking
statements include risks and uncertainties such as the acquisition of the
remaining 49% of the BioCheck shares by OXIS not closing due to, among other
reasons, the inability of OXIS to close a financing transaction; the risks
inherent in integrating an acquired business; risks inherent in owning a
majority interest in a company; unforeseen difficulties in achieving synergies
following an acquisition; unforeseen difficulties related to the company’s
oxidative stress and other diagnostic products; the development by the company’s
competitors of new competing products; and other risks indicated in the
company’s filings with the Securities and Exchange Commission. It is important
to note that actual outcomes could differ materially from those in such
forward-looking statements. Readers should also refer to the documents filed
by
the company with the Securities and Exchange Commission, specifically the
company’s annual report on Form 10-KSB filed with the Securities and Exchange
Commission on March 31, 2006 and the current report on Form 8-K filed with
the
Securities and Exchange Commission on April 4, 2006.
Oxis
International, Inc.
Condensed
Consolidated Statement of Operations
Unaudited
(in
thousands, except per share amounts)
| |
|
Three
Months Ended March 31,
|
|
| |
|
2006
|
|
2005
|
|
|
Revenues
|
|
$
|
1,513
|
|
$
|
631
|
|
|
Cost
of product revenues
|
|
|
816
|
|
|
286
|
|
|
Gross
profit
|
|
|
697
|
|
|
345
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
213
|
|
|
62
|
|
|
Selling,
general and administrative
|
|
|
1,064
|
|
|
536
|
|
|
Total
operating expenses
|
|
|
1,277
|
|
|
598
|
|
|
Loss
from operations
|
|
|
(580
|
)
|
|
(253
|
)
|
|
Interest
income (expense), net
|
|
|
(7
|
)
|
|
4
|
|
|
Minority
interest in subsidiary
|
|
|
(50
|
)
|
|
—
|
|
|
Loss
before provision for income taxes
|
|
|
(637
|
)
|
|
(249
|
)
|
|
Provision
for income taxes
|
|
|
53
|
|
|
—
|
|
|
Net
loss
|
|
|
(690
|
)
|
|
(249
|
)
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
|
Weighted
average shares outstanding - basic and diluted
|
|
|
42,584
|
|
|
41,629
|
|
Oxis
International, Inc.
Condensed
Consolidated Balance Sheets
Unaudited
(In
thousands)
| |
|
March
31, 2006
|
|
December
31, 2005
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
719
|
|
$
|
614
|
|
|
Accounts
receivable
|
|
|
1,002
|
|
|
865
|
|
|
Inventories
|
|
|
640
|
|
|
650
|
|
|
Prepaid
expenses and other current assets
|
|
|
180
|
|
|
252
|
|
|
Restricted
cash
|
|
|
3,060
|
|
|
3,060
|
|
|
Total
current assets
|
|
|
5,601
|
|
|
5,441
|
|
|
Property,
plant and equipment, net
|
|
|
232
|
|
|
243
|
|
|
Intangible
and other assets, net
|
|
|
2,093
|
|
|
2,122
|
|
| |
|
$
|
7,926
|
|
$
|
7,806
|
|
|
Liabilities
And Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,078
|
|
$
|
973
|
|
|
Accounts
payable to related party
|
|
|
154
|
|
|
194
|
|
|
Notes
payable
|
|
|
3,660
|
|
|
3,060
|
|
|
Total
current liabilities
|
|
|
4,892
|
|
|
4,227
|
|
|
Long-term
deferred taxes
|
|
|
41
|
|
|
41
|
|
|
Total
liabilities
|
|
|
4,933
|
|
|
4,268
|
|
|
Minority
interest
|
|
|
654
|
|
|
604
|
|
|
Shareholders'
equity
|
|
|
2,339
|
|
|
2,934
|
|
| |
|
$
|
7,926
|
|
$
|
7,806
|
|
ANNEX
B
U.
S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-QSB
T Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the
quarterly period ended March 31, 2006
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the
transition period from
to
.
Commission
File Number O-8092
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
94-1620407
(I.R.S.
employer
identification
number)
|
|
323
Vintage Park Drive, Suite B, Foster City, CA 94404
(Address
of principal executive offices and zip code)
(650)
212-2568
(Registrant’s
telephone number, including area
code)
|
Check
mark whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2)
has been subject to such filing requirements for the past 90 days. YES T NO
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES
NO
T
At
May
12, 2006, the issuer had outstanding the indicated number of shares of common
stock: 42,588,397.
Transitional
Small Business Disclosure Format YES
NO
T
OXIS
International, Inc.
Form
10-QSB
For
the Quarter Ended March 31, 2006
Table
of Contents
|
PART
I - FINANCIAL INFORMATION
|
Page
|
|
Item
1.
|
Financial
Statements
|
|
| |
Consolidated
Balance Sheets as of March 31, 2006 (Unaudited) and December 31,
2005
|
1
|
| |
Consolidated
Statements of Operations for the three months ended March 31, 2006
and
2005 (Unaudited)
|
2
|
| |
Consolidated
Statements of Cash Flows for the three months ended March 31, 2006
and
2005 (Unaudited)
|
3
|
| |
Condensed
Notes to Consolidated Financial Statements
|
4
|
|
Item
2.
|
Management’s
Discussion and Analysis or Plan of Operation
|
11
|
|
Item
3.
|
Controls
and Procedures
|
29
|
|
PART
II - OTHER INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
30
|
|
Item
2.
|
Unregistered
Sales of Securities and Use of Proceeds
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
|
Item
5.
|
Other
Information
|
|
|
Item
6.
|
Exhibits
|
|
|
SIGNATURE
|
31
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial
Statements.
OXIS
INTERNATIONAL, INC.
CONSOLIDATED
BALANCE SHEETS
| |
|
March
31, 2006
(Unaudited)
|
|
December
31, 2005
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
719,000
|
|
$
|
614,000
|
|
|
Accounts
receivable, net of allowances of $2,000
|
|
|
1,002,000
|
|
|
865,000
|
|
|
Inventories
|
|
|
640,000
|
|
|
650,000
|
|
|
Prepaid
expenses and other current assets
|
|
|
166,000
|
|
|
238,000
|
|
|
Deferred
tax assets
|
|
|
14,000
|
|
|
14,000
|
|
|
Restricted
cash
|
|
|
3,060,000
|
|
|
3,060,000
|
|
|
Total
current assets
|
|
|
5,601,000
|
|
|
5,441,000
|
|
|
Property,
plant and equipment, net
|
|
|
232,000
|
|
|
243,000
|
|
|
Patents,
net
|
|
|
802,000
|
|
|
831,000
|
|
|
Goodwill
and other assets
|
|
|
1,291,000
|
|
|
1,291,000
|
|
| |
|
$
|
7,926,000
|
|
$
|
7,806,000
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
704,000
|
|
$
|
505,000
|
|
|
Accrued
expenses
|
|
|
374,000
|
|
|
468,000
|
|
|
Accounts
payable to related party
|
|
|
154,000
|
|
|
194,000
|
|
|
Notes
payable to related party
|
|
|
200,000
|
|
|
—
|
|
|
Notes
payable
|
|
|
3,460,000
|
|
|
3,060,000
|
|
|
Total
current liabilities
|
|
|
4,892,000
|
|
|
4,227,000
|
|
|
Long-term
deferred taxes
|
|
|
41,000
|
|
|
41,000
|
|
|
Total
liabilities
|
|
|
4,933,000
|
|
|
4,268,000
|
|
|
Minority
interest in subsidiary
|
|
|
654,000
|
|
|
604,000
|
|
|
Shareholders
equity:
|
|
|
|
|
|
|
|
|
Convertible
preferred stock - $0.01 par value; 15,000,000 shares authorized;
Series C
- 96,230 shares issued and outstanding
|
|
|
1,000
|
|
|
1,000
|
|
|
Common
stock- $0.001 par value; 95,000,000 shares authorized; 42,538,397
shares
issued and outstanding
|
|
|
43,000
|
|
|
43,000
|
|
|
Additional
paid-in capital
|
|
|
68,781,000
|
|
|
68,686,000
|
|
|
Accumulated
deficit
|
|
|
(66,069,000
|
)
|
|
(65,379,000
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(417,000
|
)
|
|
(417,000
|
)
|
|
Total
shareholders’ equity
|
|
|
2,339,000
|
|
|
2,934,000
|
|
| |
|
$
|
7,926,000
|
|
$
|
7,806,000
|
|
See
accompanying condensed notes to consolidated financial statements.
OXIS
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
UNAUDITED
| |
|
Three
Months Ended March 31,
|
|
| |
|
2006
|
|
2005
|
|
|
Product
revenues
|
|
$
|
1,513,000
|
|
$
|
631,000
|
|
|
Cost
of product revenues
|
|
|
816,000
|
|
|
286,000
|
|
|
Gross
profit
|
|
|
697,000
|
|
|
345,000
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
213,000
|
|
|
62,000
|
|
|
Selling,
general and administrative
|
|
|
1,064,000
|
|
|
536,000
|
|
|
Total
operating expenses
|
|
|
1,277,000
|
|
|
598,000
|
|
|
Loss
from operations
|
|
|
(580,000
|
)
|
|
(253,000
|
)
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
20,000
|
|
|
8,000
|
|
|
Interest
expense
|
|
|
(27,000
|
)
|
|
(4,000
|
)
|
|
Total
other income and expenses
|
|
|
(7,000
|
)
|
|
4,000
|
|
|
Allocation
to minority interest in subsidiary
|
|
|
(50,000
|
)
|
|
—
|
|
|
Loss
before provision for income taxes
|
|
|
(637,000
|
)
|
|
(249,000
|
)
|
|
Provision
for income taxes
|
|
|
53,000
|
|
|
—
|
|
|
Net
loss
|
|
$
|
(690,000
|
)
|
$
|
(249,000
|
)
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
|
Weighted
average shares outstanding - basic and diluted
|
|
|
42,538,397
|
|
|
41,628,877
|
|
See
accompanying condensed notes to consolidated financial statements.
OXIS
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
UNAUDITED
| |
|
Three
Months Ended March 31,
|
|
| |
|
2006
|
|
2005
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(690,000
|
)
|
$
|
(249,000
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
of property, plant and equipment
|
|
|
18,000
|
|
|
7,000
|
|
|
Amortization
of intangible assets
|
|
|
32,000
|
|
|
11,000
|
|
|
Stock
compensation expense
|
|
|
95,000
|
|
|
8,000
|
|
|
Minority
interest in subsidiary
|
|
|
50,000
|
|
|
—
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(137,000
|
)
|
|
(113,000
|
)
|
|
Inventories
|
|
|
10,000
|
|
|
(53,000
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
72,000
|
|
|
26,000
|
|
|
Accounts
payable
|
|
|
199,000
|
|
|
(95,000
|
)
|
|
Accrued
expenses
|
|
|
(94,000
|
)
|
|
(427,000
|
)
|
|
Accounts
payable to related party
|
|
|
(40,000
|
)
|
|
—
|
|
|
Net
cash used in operating activities
|
|
|
(485,000
|
)
|
|
(885,000
|
)
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Investment
in restricted certificate of deposit
|
|
|
(3,060,000
|
)
|
|
—
|
|
|
Capital
expenditures
|
|
|
(7,000
|
)
|
|
(3,000
|
)
|
|
Increase
in patents
|
|
|
(3,000
|
)
|
|
(59,000
|
)
|
|
Proceeds
from restricted certificate of deposit
|
|
|
3,060,000
|
|
|
—
|
|
|
Net
cash used in investing activities
|
|
|
(10,000
|
)
|
|
(62,000
|
)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Collection
of private placement proceeds receivable
|
|
|
—
|
|
|
2,168,000
|
|
|
Proceeds
from issuance of common stock
|
|
|
—
|
|
|
239,000
|
|
|
Proceeds
from exercise of stock options
|
|
|
—
|
|
|
34,000
|
|
|
Proceeds
from short-term borrowing
|
|
|
3,660,000
|
|
|
—
|
|
|
Repayment
of short-term borrowings
|
|
|
(3,060,000
|
)
|
|
(1,200,000
|
)
|
|
Net
cash provided by financing activities
|
|
|
600,000
|
|
|
1,241,000
|
|
|
Net
increase in cash and cash equivalents
|
|
|
105,000
|
|
|
294,000
|
|
|
Cash
and cash equivalents - beginning of period
|
|
|
614,000
|
|
|
4,687,000
|
|
|
Cash
and cash equivalents - end of period
|
|
$
|
719,000
|
|
$
|
4,981,000
|
|
See
accompanying condensed notes to consolidated financial statements.
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2006
1. The
Company and Summary of Significant Accounting Policies
OXIS
International, Inc. and its subsidiaries (collectively, “OXIS” or the "Company")
is a clinical diagnostics company engaged in the development of clinical and
research assays, diagnostics, nutraceutical and therapeutic products, which
include new technologies applicable to conditions and diseases associated with
oxidative stress. OXIS derives its revenues primarily from sales of research
diagnostic assays to research laboratories. The Company’s diagnostic products
include five cardiac marker assays and 25 research assays to measure markers
of
oxidative and nitrosative stress.
In
1965,
the corporate predecessor of OXIS, Diagnostic Data, Inc., was incorporated
in
the State of California. Diagnostic Data changed its incorporation to the State
of Delaware in 1972; and changed its name to DDI Pharmaceuticals, Inc. in 1985.
In 1994, DDI Pharmaceuticals merged with International BioClinical, Inc. and
Bioxytech S.A. and changed its name to OXIS International, Inc. The Company’s
principal executive offices were relocated to Foster City, California from
Portland, Oregon on February 15, 2006.
On
September 19, 2005, the Company entered into a stock purchase agreement with
BioCheck, Inc. (“BioCheck”) and certain stockholders of BioCheck to purchase all
of the common stock of BioCheck for $6.0 million in cash. On
December 6, 2005, the Company purchased 51% of the common stock of BioCheck
from each of the shareholders of BioCheck on a pro rata basis, for $3,060,000
in
cash. The consolidated statements of operations for the three months ended
March
31, 2006 include the results of operations of BioCheck and the consolidated
balance sheets at December 31, 2005 and March 31, 2006 include the
assets and liabilities of BioCheck.
The
Company incurred net losses of $0.7 million in the first quarter of 2006
and $3.1 million in 2005. The Company is expensing stock options effective
January 1, 2006 in accordance with the Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payments” (“SFAS 123R”) and the
Company is seeking debt financing that may have related warrants. Non-cash
financing charges resulting from such financing and the additional non-cash
charges related to stock options may delay profitability. The Company’s plan is
to increase revenues to generate sufficient gross profit in excess of selling,
general and administrative, and research and development expenses in order
to
achieve profitability. However, the Company cannot provide assurances that
it
will accomplish this task and there are many factors that may prevent the
Company from reaching its goal of profitability.
On
a
consolidated basis, the Company had cash and cash equivalents of $719,000 at
March 31, 2006 of which $255,000 was held by BioCheck. Since BioCheck has been
and is expected to continue to be cash flow positive, management believes that
its cash will be sufficient to sustain its operating activities.
The
OXIS
parent company had cash and cash equivalents of $464,000 at March 31, 2006,
and
the Company has incurred negative operating cash flows of $0.5 million during
the first quarter of 2006 and $2.1 million during 2005. The current rate of
cash
usage raises substantial doubt about the OXIS parent Company’s ability to
continue as a going concern, absent any new sources of significant cash flows.
In an effort to mitigate this near-term concern, the Company is seeking loan
and
equity financings to obtain sufficient funds to sustain operations, implement
its marketing campaign and purchase the remaining 49% of BioCheck for
approximately $3.0 million. Given the availability of capital resources, the
Company plans to increase revenues by executing its marketing campaign and
introducing new products. However, the Company cannot provide assurances that
it
will successfully obtain debt or equity financing, if any, sufficient to finance
its goals or that the Company will increase product related revenues, as such
events are subject to factors beyond the Company’s control. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue
in
existence.
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH
31, 2006
Basis
of Presentation
The
consolidated financial statements have been prepared by the Company in
accordance with the rules and regulations of the Securities and Exchange
Commission regarding interim financial information. Accordingly, these financial
statements and notes thereto do not include certain disclosures normally
associated with financial statements prepared in accordance with accounting
principles generally accepted in the United States of America. This interim
financial information should be read in conjunction with the Company’s audited
consolidated financial statements and notes thereto for the year ended December
31, 2005 included in the Company’s Annual Report on Form 10-KSB.
The
consolidated financial statements include the accounts of OXIS International,
Inc. and its subsidiaries. All intercompany balances and transactions have
been
eliminated. On December 6, 2005, the Company purchased 51% of the common
stock of BioCheck. The consolidated statement of operations for the three months
ended March 31, 2006 includes the results of operations of BioCheck
and the consolidated balance sheets include the assets and liabilities of
BioCheck at December 31, 2005 and March 31, 2006. BioCheck’s
revenues and expenses are not included in the consolidated statement of
operations for the three months ended March 31, 2005 because those
results of operations were incurred before the December 6, 2005 date
of acquisition. In the opinion of the Company’s management, the consolidated
financial statements include all adjustments (consisting of only normal
recurring adjustments) and disclosures considered necessary for a fair
presentation of the results of the interim periods presented. This interim
financial information is not necessarily indicative of the results of any future
interim periods or for the Company’s full year ending December 31,
2006.
Segment
Reporting
The
Company operates in one reportable segment.
Restricted
Cash
The
Company invested $3,060,000 of cash into a 30-day certificate of deposit at
KeyBank, N.A. (“KeyBank”) and entered into a $3,060,000 non-revolving one-year
loan agreement with KeyBank on December 2, 2005 for the purpose of
completing the initial closing of the BioCheck acquisition. The Company granted
a security interest in its $3,060,000 certificate of deposit to KeyBank under
the loan agreement. The $3,060,000 loan with KeyBank was repaid during February
2006 and a new one-year loan agreement for $3,060,000 was entered into at Bridge
Bank, N.A. (“Bridge Bank”). As part of the loan arrangement with Bridge Bank,
the Company granted a security interest in a $3,060,000 certificate of deposit
transferred from KeyBank to Bridge Bank. The certificate of deposit bears
interest at 1.0%. Consequently, these certificates of deposit were classified
as
restricted cash on the consolidated balance sheets at March 31, 2006 and
December 31, 2005 as the cash is restricted as to use.
Stock-Based
Compensation
The
Company has historically accounted for stock options granted to employees and
directors and other stock-based employee compensation plans using the intrinsic
value method of accounting in accordance with Accounting Principles Board
Opinion No. 25 (“APB 25”), "Accounting for Stock Issued to Employees" and
related interpretations. As such, the Company recognized compensation expense
for stock options only if the quoted market value of the Company’s common stock
exceeded the exercise price of the option on the grant date. Any compensation
expense realized using this intrinsic value method is being amortized over
the
vesting period of the option.
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH
31, 2006
In
December 2004, the Financial Accounting Standards Board issued a revision to
Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payments” (hereinafter “SFAS 123R”). This statement replaces FASB Statement No.
123, “Accounting for Stock-Based Compensation”, and supersedes APB 25. SFAS 123R
establishes standards for the accounting for share-based payment transactions
in
which an entity exchanges its equity instruments for goods or services. It
also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity’s equity
instruments or that may be settled by the issuance of those equity instruments.
This statement covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards,
share
appreciation rights and employee share purchase plans. SFAS 123R requires a
public entity to measure the cost of employee services received in exchange
for
an award of equity instruments based on the fair value of the award on the
grant
date (with limited exceptions). That cost will be recognized in the entity’s
financial statements over the period during which the employee is required
to
provide services in exchange for the award.
Management
has implemented SFAS 123R effective January 1, 2006, using the modified
prospective application method. Under the modified prospective application
method, SFAS 123R applies to new awards and to awards modified, repurchased
or
cancelled after January 1, 2006. Additionally, compensation cost for the portion
of awards for which the requisite service has not been rendered that are
outstanding as of January 1, 2006 are recognized as the requisite service is
rendered on or after January 1, 2006. The compensation cost for that portion
of
awards is based on the grant-date fair value of those awards as calculated
for
proforma disclosures under SFAS 123. The compensation cost for awards issued
prior to January 1, 2006 attributed to services performed in years after January
1, 2006 uses the attribution method applied prior to January 1, 2006 according
to SFAS 123, except that the method of recognizing forfeitures only as they
occur was not continued.
The
recognition of share-based employee compensation costs in the first quarter
of
2006 had no related tax effect since the Company provides a valuation allowance
equal to its net deferred tax assets. The adoption of SFAS 123R had no effect
on
cash flow from operations, cash flow from financing activities and basic and
diluted earnings per share. The effect of adoption of SFAS 123R on the results
of operations for the three months ended March 31, 2006 was:
| |
|
Loss
from Operations
|
|
Loss
Before Provision
for Income
Taxes
|
|
Net
Loss
|
|
|
Results
as reported
|
|
$
|
(580,000
|
)
|
$
|
(637,000
|
)
|
$
|
(690,000
|
)
|
|
Additional
compensation expense - effect of adoption of SFAS 123R
|
|
|
71,000
|
|
|
71,000
|
|
|
71,000
|
|
|
Proforma
results applying the original provisions of SFAS 123 using the intrinsic
value method of APB 25
|
|
$
|
(509,000
|
)
|
$
|
(566,000
|
)
|
$
|
(619,000
|
)
|
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH
31, 2006
The
following table presents the effect on net loss and net loss per share if the
Company had applied the fair value recognition provisions of SFAS 123 to
stock-based awards to employees prior to January 1, 2006:
| |
|
Three
Months Ended March 31,
|
|
| |
|
2006
|
|
2005
|
|
|
Net
loss as reported
|
|
$
|
(690,000
|
)
|
$
|
(249,000
|
)
|
|
Share-based
employee compensation expense included in reported net loss
|
|
|
71,000
|
|
|
—
|
|
|
Share-based
employee compensation expense that would have been included in net
income
if the fair
value
method had been applied to all awards
|
|
|
(71,000
|
)
|
|
(48,000
|
)
|
|
Pro
forma net loss
|
|
$
|
(690,000
|
)
|
$
|
(297,000
|
)
|
|
Net
loss per share:
Basic
and diluted - as reported
Basic
and diluted - pro forma
|
|
$
$
|
(0.02
(0.02
|
)
)
|
$
$
|
(0.01
(0.01
|
)
)
|
The
Company undertook a comprehensive study of options issued from 1994 through
2001
to determine historical patterns of options being exercised and forfeited.
The
results of this study were used as a source to estimate expected life and
forfeiture rates. The new estimated life of 4.45 years was applied only to
determine the fair value of awards issued after January 1, 2006. The estimated
forfeiture rate of 40% was applied to all awards that vested after January
1,
2006, including awards issued prior to that date, to determine awards expected
to be exercised.
The
Company issued 280,000 and 600,000 stock options to employees and directors
during the three months ended March 31, 2006 and 2005, respectively. The fair
values of employee stock options are estimated for the calculation of employee
compensation expense in 2006 and the pro forma adjustments in 2005 in the above
table at the date of grant using the Black-Scholes option-pricing model with
the
following weighted-average assumptions during 2006 and 2005: expected volatility
of 90% and 170%, respectively; average risk-free interest rate of 4.45% and
4.00%, respectively; initial expected life of 4.45 years and 6 years,
respectively; no expected dividend yield; and amortization over the vesting
period of typically one to four years.
Stock
options issued to non-employees as consideration for services provided to the
Company have been accounted for under the fair value method in accordance with
SFAS 123 and Emerging Issues Task Force No. 96-18, “Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services,” which requires that compensation
expense be recognized for all such options. The Company did not issue any
options to non-employees during the three months ended March 31, 2006 or
2005.
Net
Loss Per Share
Basic
net
loss per share is computed by dividing the net loss for the period by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share is computed by dividing the net loss for the period by the
weighted average number of common shares outstanding during the period, plus
the
potential dilutive effect of common shares issuable upon exercise or conversion
of outstanding stock options and warrants during the period. The weighted
average number of potentially dilutive common shares are 940,505 and 1,160,270
for the three months ended March 31, 2006 and 2005, respectively. These shares
were excluded from net diluted loss per share because of their anti-dilutive
effect.
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH
31, 2006
Recent
Accounting Pronouncements
In
March
2006, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 156, “Accounting for Servicing of Financial Assets—an
amendment of FASB Statement No. 140.” This statement requires an entity to
recognize a servicing asset or servicing liability each time it undertakes
an
obligation to service a financial asset by entering into a servicing contract
in
any of the following situations: a transfer of the servicer’s financial assets
that meets the requirements for sale accounting; a transfer of the servicer’s
financial assets to a qualifying special-purpose entity in a guaranteed mortgage
securitization in which the transferor retains all of the resulting securities
and classifies them as either available-for-sale securities or trading
securities; or an acquisition or assumption of an obligation to service a
financial asset that does not relate to financial assets of the servicer or
its
consolidated affiliates. The statement also requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair
value, if practicable and permits an entity to choose either the amortization
or
fair value method for subsequent measurement of each class of servicing assets
and liabilities. The statement further permits, at its initial adoption, a
one-time reclassification of available for sale securities to trading securities
by entities with recognized servicing rights, without calling into question
the
treatment of other available for sale securities under Statement 115, provided
that the available for sale securities are identified in some manner as
offsetting the entity’s exposure to changes in fair value of servicing assets or
servicing liabilities that a servicer elects to subsequently measure at fair
value and requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value in the statement of financial
position and additional disclosures for all separately recognized servicing
assets and servicing liabilities. This statement is effective for fiscal years
beginning after September 15, 2006, with early adoption permitted as of the
beginning of an entity’s fiscal year. Management believes the adoption of this
statement will have no impact on the Company’s financial condition or results of
operations.
In
February 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial
Instruments, an Amendment of FASB Standards No. 133 and 140” (hereinafter “SFAS
No. 155”). This statement established the accounting for certain derivatives
embedded in other instruments. It simplifies accounting for certain hybrid
financial instruments by permitting fair value remeasurement for any hybrid
instrument that contains an embedded derivative that otherwise would require
bifurcation under SFAS No. 133 as well as eliminating a restriction on the
passive derivative instruments that a qualifying special-purpose entity (“SPE”)
may hold under SFAS No. 140. This statement allows a public entity to
irrevocably elect to initially and subsequently measure a hybrid instrument
that
would be required to be separated into a host contract and derivative in its
entirety at fair value (with changes in fair value recognized in earnings)
so
long as that instrument is not designated as a hedging instrument pursuant
to
the statement. SFAS No. 140 previously prohibited
a qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. This
statement is effective for fiscal years beginning after September 15, 2006,
with
early adoption permitted as of the beginning of an entity’s fiscal year.
Management believes the adoption of this statement will have no impact on the
Company’s financial condition or results of operations.
2. Acquisition
of BioCheck
On
September 19, 2005, the Company entered into a Stock Purchase Agreement with
BioCheck and certain stockholders of BioCheck to purchase all of the common
stock of BioCheck for $6.0 million in cash. BioCheck is a privately held
California corporation engaged in the development of immunoassays, with a number
of clinical diagnostic tests that have been approved by the United States Food
and Drug Administration. On December 6, 2005, the Company purchased 51% of
the common stock of BioCheck from each of the shareholders of BioCheck on a
pro
rata basis, for $3,060,000 in cash. This acquisition was accounted for by the
purchase method of accounting according to Statement of Financial Accounting
Standards (“SFAS”) No. 141, “Business Combinations.”
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH
31, 2006
Pursuant
to the Stock Purchase Agreement, OXIS will use its reasonable best efforts
to
consummate a follow-on financing transaction to raise additional capital with
which to purchase the remaining outstanding shares of BioCheck in one or more
additional closings. The purchase price for any BioCheck shares purchased after
the initial closing will be increased by an additional 8% per annum from
December 6, 2005. If OXIS has not purchased all of the outstanding shares
of BioCheck within twelve months of December 6, 2005, the earnings before
interest, taxes, depreciation and amortization expenses, if any, of BioCheck,
will be used to repurchase the remaining outstanding BioCheck shares at one
or
more additional closings. The purchase of the remaining outstanding shares
of
BioCheck will be accounted for the same as the initial purchase of 51% of
BioCheck using the purchase method of accounting according to SFAS No. 141.
The
additional purchase price will be allocated over the purchased assets of
BioCheck and the consolidated statements of operations will continue to include
the results of operations of BioCheck reduced by the minority interest, if
any,
in BioCheck. The Company may obtain additional independent valuations of
BioCheck’s assets related to the acquisition of the remaining 49% of BioCheck
and additional acquisition costs may be incurred. Such information and costs
may
affect the disclosures as presented herein.
3. Notes
Payable
| |
|
March
31,
2006
|
|
December
31, 2005
|
|
|
Note
payable to KeyBank, N.A.
|
|
$
|
—
|
|
$
|
3,060,000
|
|
|
Note
payable to Bridge Bank, N.A.
|
|
|
3,060,000
|
|
|
—
|
|
|
Note
payable to the Company’s President & CEO
|
|
|
200,000
|
|
|
—
|
|
|
Note
payable to Fagan Capital, Inc.
|
|
|
400,000
|
|
|
—
|
|
|
Total
notes payable
|
|
$
|
3,660,000
|
|
$
|
3,060,000
|
|
On
December 2, 2005, the Company entered into non-revolving one-year loan
agreement with KeyBank in the amount of $3,060,000, for the purpose of
completing the initial closing of the BioCheck acquisition. The Company granted
a security interest in its $3,060,000 certificate of deposit at KeyBank under
the loan agreement. The loan bore interest at an annual rate that was 2.0%
greater than the interest rate on the certificate of deposit. The Company’s
$3,060,000 loan with KeyBank was repaid during February 2006 and a new one-year
loan agreement was entered into at Bridge Bank. The Company has granted a
security interest in its $3,060,000 certificate of deposit transferred from
KeyBank to Bridge Bank. The loan bears interest at 3.0% and the certificate
of
deposit bears interest at 1.0%.
On
March
10, 2006, the Company received $200,000 in exchange for an unsecured promissory
note with the Company’s President and Chief Executive Officer. The related party
note bears interest at 7.0%. Interest and principal are due on September 10,
2006 or, at the option of the holder, on the date the Company receives net
proceeds in the amount of $500,000 or more from a debt or equity financing.
In
addition, if, at any time on or before the maturity date, the Company enters
into an agreement to incur debt, the holder has the right to rollover this
note
into such debt arrangement, on the same terms and conditions offered to such
future lenders. The purpose of this loan was to provide the Company with short
term financing as it seeks longer term financing.
On
March
31, 2006, the Company entered into a $400,000 unsecured promissory note with
Fagan Capital, Inc. Interest accrues at an annual rate of 8.0% and interest
and
principal are due on June 2, 2006. The obligation to pay all unpaid principal
and accrued interest will be accelerated upon an event of default, including
failure to pay debt when due in an amount exceeding $200,000, the bankruptcy
of
the Company or related events. The Company covenants that it will not incur
indebtedness, other than its current Bridge Bank loan and normal course trade
debt, in excess of $1 million. The Company also covenants that it will not
pledge, grant or convey any new liens on the Company’s assets. The purpose of
this loan was to provide the Company with short term financing as it seeks
longer term financing.
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH
31, 2006
4. Supplemental
Cash Flow Disclosures
The
Company recognized non-cash compensation expense of $24,000 and $8,000 related
to the issuance and vesting of stock options issued to consultants in the three
months ended March 31, 2006 and 2005, respectively. The Company recognized
non-cash compensation expense of $71,000 related to the issuance and vesting
of
stock options issued to employees in the three months ended March 31, 2006.
No
employee non-cash compensation expense was recognized in the three months ended
March 31, 2005 prior to the implementation of FASB 123R. Cash interest paid
was
$41,000 and $4,000 in the three months ended March 31, 2006 and 2005,
respectively.
5. Relocation
of Operations
On
December 6, 2005, the Company committed itself to a plan to cease
operations in Portland, Oregon and relocate operations to Foster City,
California (the “Relocation”). The Company decided to effect the Relocation
after reviewing and evaluating all aspects of the Company’s operations to
determine the profitability and viability of continuing in the Portland, Oregon
location. During the first quarter of 2006, operations were relocated to
California and on February 15, 2006 the Portland, Oregon facility was closed
with the termination of employment of all Portland based employees who did
not
relocate to California. The Company’s subsidiary, BioCheck, has commenced
shipping of the Company’s products and is manufacturing all of its research
assay kit products not manufactured by third party suppliers.
In
connection with the Relocation, the Company accrued $119,000 during 2005 for
an
employee severance package offered to all regular full-time employees who were
not relocated to Foster City, California. Of this amount, $41,000 was paid
during the first quarter of 2006, resulting in $78,000 of accrued expenses
at
March 31, 2006. The Company expects $70,000 of this amount to be paid during
the
remainder of 2006 and $8,000 is to be paid during 2007. The Company accrues
for
these benefits in the period when benefits are communicated to the terminated
employees. Typically, terminated employees are not required to provide continued
service to receive termination benefits. In general, the Company uses a formula
based on the number of years of service to calculate the termination benefits
to
be provided to affected employees.
Related
to the Relocation, the Company signed a lease agreement with Westcore Peninsula
Vintage LLC to occupy 4,136 square feet of space adjacent to space occupied
by
its BioCheck subsidiary in Foster City, California. The lease started on April
1, 2006 at an annual base rent of $62,000 per year that increases incrementally
to $66,000 by the end of the lease term on March 31, 2009. In addition to the
base rent, the Company will be responsible for its proportionate share of the
building's operating expenses and real estate taxes. The Company has a renewal
option to extend the lease for one three-year period at the prevailing market
rental value for rentable property in the same area.
Item
2. Management’s
Discussion and Analysis or Plan of Operation.
Statement
Regarding Forward-Looking Statements
The
statements contained in this Report on Form 10-QSB that are not purely
historical are forward-looking statements within the meaning of Section 27A
of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including, without limitation, statements regarding our expectations,
objectives, anticipations, plans, hopes, beliefs, intentions or strategies
regarding the future. Forward-looking statements include, without limitation,
statements regarding:
(1)
our plan to increase revenues to generate sufficient gross profit in excess
of
selling, general and administrative, and research and development expenses
in
order to achieve profitability; (2) our expectation that BioCheck will continue
to be cash flow positive, and that its cash will be sufficient to sustain our
operating activities; (3) our intention to seek additional loan and equity
financings to obtain sufficient funds to sustain operations, implement our
marketing campaign and purchase the remaining 49% of BioCheck for approximately
$3.0 million; (4) our plan to increase revenues by our marketing campaign and
the introduction of new products; (5) our expectation that $70,000 of employee
severance package expenses will be paid during the remainder of 2006 and $8,000
will be paid during 2007; (6) our plan to pursue the development of novel
cardiac markers intended to provide a more effective diagnostic predictor test
for patients at risk of cardiac events before they occur; (7) our plan to
develop the cardiac marker product through the combination of our MPO assay
with
other in-house assays; (8) our belief that our Ergothioneine compound may be
well suited for development as a nutraceutical supplement that can be sold
over
the counter and our testing of Ergothioneine; (9) our intent to pursue the
development of Ergothioneine for use in over-the-counter markets, given the
availability of sufficient capital resources; (10) our expectation that a new
myeloperoxidase research assay will be ready for commercial launch in the second
quarter of 2006; (11) our expectation that the ID protein assays and reagents
will be ready for commercial launch by mid to late 2006; (12) our plan to
continue to build our management team and enhance our Board of Directors during
2006; (13) our expectation that revenues and expenses will increase
substantially as described below from 2005 to 2006; (14) our projections for
2006, which are based upon our expectations that BioCheck will incur similar
revenues and costs in 2006 as it incurred in 2005; (15) our expectation that
in
the second quarter 2006, product revenues will be approximately the same as
the
first quarter; (16) our intention to develop new diagnostic test kits and
evaluate our product offerings, pricing and distribution network in order to
increase sales volume; (17) our expectation that second quarter 2006 product
costs will be approximately the same as the first quarter adjusted for any
changes in revenues; (18) our expectation that revenues and expenses will
increase substantially from 2005 to 2006 with the consolidation of all of
BioCheck’s results of operations during the first quarter of 2006; (19) our
expectation that second quarter 2006 research and development costs will be
approximately the same as the first quarter; (20) our expectation that the
actual amount of research and development expenses will fluctuate with the
availability of funding; (21) our expectation that second quarter 2006 selling,
general and administrative expenses will be lower than the first quarter because
of reduced accounting and legal fees associated with year-end reporting and
reduced costs related to relocation of operations; and (22) our expectation
that
interest expense will increase during the second quarter of 2006 with the
incurring of additional debt in March 2006;
and
(23) our anticipation that in 2006 the BioCheck manufacturing facility will
require expenditures.
It
is
important to note that our actual results could differ materially from those
included in such forward-looking statements due to a variety of factors
including (1) failure to complete our acquisition of BioCheck or to adequately
integrate the operations of the two companies; (2) failure to achieve any
benefits in connection with the recent changes in management or personnel;
(3)
disruption in operations due to the relocation plan and reduction in workforce;
(4) inability to hire employees or management; (5) failure to find alternative
suppliers; (6)
failure to develop or market products successfully; (7)
failure to obtain necessary financing; (8)
the
cost of complying with regulatory
requirements; (9)
uncertainties exist relating to issuance, validity and ability to enforce
and
protect patents, other intellectual property and certain proprietary
information; (10)
our
products may not meet product performance specifications; (11)
new
products may be unable to compete successfully in either existing or new
markets; (12)
availability and future costs of materials and other operating expenses;
and
(13)
weakness in the global economy and changing market conditions, together with
general economic conditions affecting our target industries, could cause
our
operating results to fluctuate. These and other factors could cause actual
results to differ materially from the forward looking statements. For a detailed
explanation of such risks, please see the section entitled “Factors that May
Affect Future Operating Results” beginning on page 20
of
this Report on Form 10-QSB. Such risks, as well as such other risks and
uncertainties as are detailed in our SEC reports and filings for a discussion
of
the factors that could cause actual results to differ materially from the
forward- looking statements. Given these uncertainties, readers are cautioned
not to place undue reliance on the forward-looking statements. All
forward-looking statements included in this Report
on Form 10-QSB
are
based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements.
The
following discussion of our financial condition and plan of operation should
be
read in conjunction with our consolidated financial statements and related
notes
included in this Report and our audited consolidated financial statements and
related notes for the year ended December 31, 2005 included in our Annual Report
on Form 10-KSB.
Overview
OXIS
International, Inc. develops technologies and products to research, diagnose,
treat and prevent diseases of oxidative stress associated with damage from
free
radical and reactive oxygen species. We derive our revenues primarily from
sales
of research diagnostic assays to research laboratories. Our diagnostic products
include approximately 30 research assays to measure markers of oxidative
stress. We
hold
the rights to three therapeutic classes of compounds in the area of oxidative
stress, and have focused our commercialization programs in clinical
cardiovascular markers, including MPO (myeloperoxidase) and GPx (glutathione
peroxidase), as well as a potent antioxidant, Ergothioneine, that may be
appropriate for sale over-the-counter as a dietary supplement. OXIS has acquired
a 51% interest in and has the option to purchase the remaining 49% of
BioCheck.
Our
majority held subsidiary BioCheck
is a
leading producer of clinical diagnostic assays, including high quality enzyme
immunoassay research services and immunoassay kits for cardiac and tumor
markers, infectious diseases, thyroid function, steroids, and fertility hormones
designed to improve the accuracy, efficiency, and cost-effectiveness of
in
vitro
(outside
the body) diagnostic testing in clinical laboratories. BioCheck
focuses primarily on the immunoassay segment of the clinical diagnostics market.
BioCheck
offers over 40 clinical diagnostic assays manufactured in its 15,000
square-foot, U.S. Food and Drug Administration, or FDA, certified Good
Manufacturing Practices device-manufacturing facility in Foster City,
California.
We
incurred net losses of $0.7 million in the first quarter of 2006 and
$3.1 million in 2005. We are expensing stock options effective January 1,
2006 in accordance with the Statement of Financial Accounting Standards No.
123
(revised 2004), “Share-Based Payments,” or SFAS 123R, and we are seeking debt
financing that may have related warrants. Non-cash financing charges resulting
from such financing and the additional non-cash charges related to stock options
may delay profitability. Our plan is to increase revenues to generate sufficient
gross profit in excess of selling, general and administrative, and research
and
development expenses in order to achieve profitability. However, we can not
assure you that we will accomplish this task and there are many factors that
may
prevent us from reaching our goal of profitability.
On
a
consolidated basis, we had cash and cash equivalents of $719,000 at March 31,
2006 of which $255,000 was held by BioCheck, Inc., or BioCheck. Since BioCheck
has been and is expected to continue to be cash flow positive, management
believes that its cash will be sufficient to sustain its operating
activities.
The
OXIS
parent company had cash and cash equivalents of $464,000 at March 31, 2006,
and
we have incurred negative operating cash flows of $0.5 million during the first
quarter of 2006 and $2.1 million during 2005. The current rate of cash usage
raises substantial doubt about the OXIS parent company’s ability to continue as
a going concern, absent any new sources of significant cash flows. In an effort
to mitigate this near-term concern, we are seeking loan and equity financings
to
obtain sufficient funds to sustain operations, implement our marketing campaign
and purchase the remaining 49% of BioCheck for approximately $3.0 million.
We
plan to increase revenues by our marketing campaign and the introduction of
new
products. However, we cannot assure you that we will successfully obtain debt
or
equity financing, if any, sufficient to finance our goals or that we will
increase product related revenues as such events are subject to factors beyond
our control. The financial statements do not include any adjustments relating
to
the recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event OXIS cannot
continue in existence.
Recent
Developments
Current
significant financial and operating events and strategies are summarized as
follows:
Product
Development
We
have
expanded our product portfolio of research assay kits for the cardiovascular
research markets with the addition of five new assay products from BioCheck
for
the measurement of biomarkers of inflammation related to cardiovascular
disease. Given the availability of sufficient capital resources, we plan
to pursue the development of novel cardiac markers intended to provide a more
effective diagnostic predictor test for patients at risk of cardiac events
before they occur. We are planning to develop this product through the
combination of our myeloperoxidase, or MPO, assay with other in-house
assays. We also believe that our Ergothioneine compound may be well suited
for development as a nutraceutical supplement that can be sold over the
counter. We are currently testing Ergothioneine produced in bulk to ensure
that its purity level is acceptable. Given the availability of sufficient
capital resources and the successful scale-up to a bulk manufacturing process
that ensures an acceptable level of purity, we intend to pursue the development
of Ergothioneine for use in the over the counter market, however, there can
be
no assurance as to when or if we will launch Ergotheioneine on a commercial
basis as a nutraceutical.
BioCheck
currently has several products under development for cancer,
cardiac/inflammatory and angiogenesis research applications. A research
assay and reagents for the detection of HMGA2, a marker for aggressive breast
cancer, are under development. Myeloperoxidase is an inflammatory
protein that has utility as a prognostic marker for cardiac events. A new
myeloperoxidase research assay has been developed that we expect will be ready
for commercial launch in the second quarter of 2006. Id proteins play a
central role in cell differentiation, and Id1 and Id3 play a central and
critical role in tumor related angiogenesis. BioCheck has developed
research assays and rabbit monoclonal antibodies for the detection of human
and
mouse Id proteins. We currently expect that the Id protein assays and reagents
will be ready for commercial launch by mid to late 2006.
Relocation
of Operations
On
December 6, 2005, we initiated a relocation plan to cease our operations in
Portland, Oregon and relocate to Foster City, California. We decided to relocate
after reviewing and evaluating all aspects of our operations to determine the
profitability and viability of continuing in the Portland, Oregon location.
During February 2006, we signed a lease agreement for 4,136
square feet of space located immediately adjacent to those of BioCheck and
relocated our manufacturing operations to Foster City, California.
On
February 15, 2006, we ceased operations at the Portland, Oregon facility and
most of the Portland, Oregon employees were terminated. In connection with
the
relocation, we accrued $119,000 during 2005 for an employee severance package
offered to all regular full-time employees who were not relocated to Foster
City, California. Of this amount, $41,000 was paid during the first quarter
of
2006, resulting in $78,000 of accrued expenses at March 31, 2006. We expect
$70,000 of this amount to be paid during the remainder of 2006 and $8,000 is
to
be paid during 2007.
Management
Team and Board of Directors
During
2006, we continue to build our management team and enhance our Board of
Directors. Michael D. Centron was appointed as our Vice President and Chief
Financial Officer during January 2006, replacing Dr. Hausman as acting Chief
Financial Officer. During February 2006, Randall Moeckli was appointed as our
Senior Director of Sales and Marketing. On March 15, 2006, Gary M. Post,
Managing Director of Ambient Advisors, LLC, joined our Board of
Directors.
Loans
The
$3,060,000 loan with KeyBank, N.A., or KeyBank, was repaid during February
2006
and a new one-year loan agreement for $3,060,000 was entered into at Bridge
Bank, National Association, or Bridge Bank. As part of the loan arrangement
with
Bridge Bank, we granted a security interest in a $3,060,000 certificate of
deposit transferred from KeyBank to Bridge Bank. The loan bears interest at
3.0%
and the certificate of deposit bears interest at 1.0%.
On
March
10, 2006, we received $200,000 in exchange for an unsecured promissory note
with
Steven T. Guillen, our President and Chief Executive Officer. The related party
note bears interest at 7.0%. Interest and principal are due on September 10,
2006 or, at the option of Mr. Guillen, on the date we receive net proceeds
in
the amount of $500,000 or more from a debt or equity financing. On March 31,
2006, we entered into a $400,000 unsecured promissory note with Fagan Capital,
Inc. Interest accrues at an annual rate of 8.0% and interest and principal
are
due on June 2, 2006. The purpose of these loans was to provide us with short
term financing as we seek longer term financing.
Acquisition
of BioCheck
On
September 19, 2005, we entered into a stock purchase agreement with BioCheck
and
its stockholders to purchase all of its common stock for $6.0 million in
cash. BioCheck is a leading producer of enzyme immunoassay diagnostic kits
for
clinical laboratories. On December 6, 2005, we purchased 51% of the
shares of BioCheck’s common stock from each of its shareholders on a pro rata
basis for $3,060,000 in cash. This acquisition was accounted for by the purchase
method of accounting according to Statement of Financial Accounting Standards
No. 141, “Business Combinations.” The consolidated statement of operations for
the three months ended March 31, 2006 includes the results of
operations of BioCheck and the consolidated balance sheets include the assets
and liabilities of BioCheck at December 31, 2005 and
March 31, 2006. Pursuant to the stock purchase agreement, OXIS will
use its reasonable best efforts to consummate a follow-on financing transaction
to raise additional capital with which to purchase the remaining outstanding
shares of BioCheck in one or more additional closings.
Results
of Operations
We
expect
revenues and expenses to increase substantially as described below from 2005
to
2006 with the consolidation of all of BioCheck’s results of operations during
the first quarter of 2006. BioCheck’s revenues and expenses are not included in
the first quarter 2005 results of operations because they were incurred before
the December 6, 2005 date of acquisition. Our projections for 2006 are
based upon our expectations that BioCheck will incur similar revenues and costs
in 2006 as it incurred in 2005. We can give no assurances that we will be able
to successfully merge manufacturing operations without adversely affecting
revenues and costs, implement an effective marketing campaign that will increase
revenues, develop new products, finance our expansion plans and purchase the
remaining 49% of the BioCheck common stock we do not own.
Revenues
The
following table presents the changes in revenues from 2005 to 2006:
| |
|
Quarters
ended March 31,
|
|
Increase
from 2005
|
|
| |
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
|
Product
revenues
|
|
$
|
1,513,000
|
|
$
|
631,000
|
|
$
|
882,000
|
|
|
140%
|
|
The
increase in product revenues was primarily attributable to the consolidation
of
$1,062,000 of revenues from BioCheck that was partially offset by an $180,000
decrease in sales from the OXIS parent company. The decrease in OXIS parent
company sales is attributable to lower sales volume that was caused, in part,
by
the interruption arising from moving operations from Portland, Oregon to Foster
City, California and consolidating our product offerings. We expect second
quarter 2006 product revenues to be approximately the same as the first quarter.
However, we are developing new diagnostic test kits and evaluating our product
offerings, pricing and distribution network in order to increase sales volume.
Cost
of product revenues
The
following table presents the changes in cost of product revenues from 2005
to
2006:
| |
|
Quarters
ended March 31,
|
|
Increase
from 2005
|
|
| |
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
|
Cost
of product revenues
|
|
$
|
816,000
|
|
$
|
286,000
|
|
$
|
530,000
|
|
|
185%
|
|
The
increase in cost of product revenues is attributable to the consolidation of
$521,000 of costs from the operations of BioCheck and increased costs of
approximately $21,000 for raw materials. The increase was partially offset
by
decreased payroll and benefit costs of $19,000. We expect second quarter 2006
product costs to be approximately the same as the first quarter adjusted for
any
changes in revenues.
Gross
profit of $697,000 in 2006 was higher than the gross profit of $345,000 in
2005
because of the additional profits from increased product sales from BioCheck.
Gross profit as a percentage of revenues was 46% in first quarter of
2006.
Research
and development expenses
The
following table presents the changes in research and development expenses from
2005 to 2006:
| |
|
Quarters
ended March 31,
|
|
Increase
from 2005
|
|
| |
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
|
Research
and development expenses
|
|
$
|
213,000
|
|
$
|
62,000
|
|
$
|
151,000
|
|
|
244%
|
|
The
increase in research and development expenses is primarily attributable to
the
consolidation of $169,000 of costs from the operations of BioCheck and increased
patent amortization expense of $20,000. The increase was partially offset by
decreased salary and benefits costs of $23,000 and direct project expenses
of
$13,000. We expect second quarter 2006 research and development costs to be
approximately the same as the first quarter. However, the actual amount of
research and development expenses will fluctuate with the availability of
funding.
Selling,
general and administrative expenses
The
following table presents the changes in selling, general and administrative
expenses from 2005 to 2006:
| |
|
Quarters
ended March 31,
|
|
Increase
from 2005
|
|
| |
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
|
Selling,
general and administrative expenses
|
|
$
|
1,064,000
|
|
$
|
536,000
|
|
$
|
528,000
|
|
|
99%
|
|
The
increase in selling, general and administrative expenses is primarily attributed
to the consolidation of costs from the operations of BioCheck of $219,000,
and
increased costs for accounting and legal activities of $119,000; marketing
consultants of $43,000; payroll and benefits of $53,000; travel and moving
of
$46,000; shareholder communication and investor relations costs of $23,000;
and
non-cash compensation of $87,000 which, effective January 1, 2006, is required
for employees to be included in expenses by SFAS 123R. The increase was
partially offset by decreased costs for administrative consultants of $90,000.
We expect second quarter 2006 selling, general and administrative expenses
to be
lower than the first quarter because of reduced accounting and legal fees
associated with year-end reporting and reduced costs related to relocation
of
operations.
Interest
Income
The
decrease in interest income from $20,000 in 2005 to $8,000 in 2006 is primarily
due to reduced cash available for investment activities obtained in the
$6,500,000 equity financing received during December 2004 and January
2005.
Interest
Expense
Interest
expense of $27,000 in 2006 was primarily due to the loan with KeyBank that
was
transferred to Bridge Bank incurred in connection with the BioCheck acquisition.
We expect interest expense to increase during the second quarter of 2006 with
the addition of new debt of $600,000 in March 2006.
Liquidity
and Capital Resources
On
a
consolidated basis, we had cash and cash equivalents of $719,000 at March 31,
2006 of which $255,000 was held by BioCheck. Since BioCheck has been and is
expected to continue to be cash flow positive, management believes that its
cash
will be sufficient to sustain its operating activities.
The
cash
held by the OXIS parent company was $464,000 at March 31, 2006. We have incurred
negative operating cash flows of $485,000 during the first quarter of 2006.
Our
cash is not sufficient to sustain our operations through the second quarter
of
2006 without additional financings. We are seeking loan and equity financings
to
obtain sufficient funds to sustain operations, implement our marketing campaign
and purchase the remaining 49% of BioCheck for approximately $3.0 million.
We
plan to increase revenues by our marketing campaign and the introduction of
new
products. However, we cannot assure you that we will successfully obtain debt
or
equity financing, if any, sufficient to finance our goals or that we will
increase product related revenues as such events are subject to factors beyond
our control. If we are unable to raise additional capital in the second quarter
of 2006 we will have to curtail or cease operations.
Net
cash used in operating activities
The
following table presents quarterly cash flows from operating activities for
2006
and 2005:
| |
|
Quarters
ended March 31,
|
|
| |
|
2006
|
|
2005
|
|
|
Cash
paid to employees including benefits
|
|
$
|
(626,000
|
)
|
$
|
(209,000
|
)
|
|
Cash
paid to suppliers
|
|
|
(1,214,000
|
)
|
|
(1,198,000
|
)
|
|
Total
cash paid to employees and suppliers
|
|
|
(1,840,000
|
)
|
|
(1,407,000
|
)
|
|
Cash
received from customers
|
|
|
1,376,000
|
|
|
518,000
|
|
|
Interest
received
|
|
|
20,000
|
|
|
8,000
|
|
|
Interest
paid
|
|
|
(41,000
|
)
|
|
(4,000
|
)
|
|
Net
cash used in operating activities
|
|
$
|
(485,000
|
)
|
$
|
(885,000
|
)
|
The
increase in cash paid to employees is primarily attributed to $357,000 of cash
paid by BioCheck for payroll and benefits and $41,000 for severance benefits
and
accrued vacation to terminated employees. Cash paid to suppliers is increased
by
approximately $500,000 due to BioCheck that was offset by 2004 expenses recorded
as liabilities at December 31, 2004 that were paid in the first quarter of
2005.
Cash received from customers in the first quarter of 2006 is from revenues
of
$1,513,000 decreased by an increase in accounts receivable of $137,000. Cash
received from customers in the first quarter of 2005 is from revenues of
$631,000 decreased by an increase in accounts receivable of $113,000. Interest
paid increased in the first quarter 2006 primarily due to increased bank debt
of
$3,060,000 entered into during December 2005.
Cash
used in investing activities
During
the first quarter of 2006 we transferred our $3,060,000 restricted certificate
of deposit from KeyBank to Bridge Bank. Capital expenditures were not
significant in the first quarters of 2006 or 2005. We had no commitments for
capital expenditures at March 31, 2006. We anticipate that in 2006 the
BioCheck manufacturing facility in Foster City, California will require
expenditures to support our business objective. We capitalized $3,000 and
$59,000 of patents costs in the first quarter of 2006 and 2005,
respectively.
Net
cash provided by financing activities
On
December 2, 2005, we entered into non-revolving one-year loan agreement
with KeyBank in the amount of $3,060,000, for the purpose of completing the
initial closing of the BioCheck acquisition. This loan was repaid during
February 2006 and a new one-year loan agreement for $3,060,000 was entered
into
at Bridge Bank.
On
March
10, 2006, we received $200,000 in exchange for an unsecured promissory note
with
Steven T. Guillen, our President and Chief Executive Officer. The related party
note bears interest at 7.0%. Interest and principal are due on September 10,
2006 or, at the option of Mr. Guillen, on the date we receive net proceeds
in
the amount of $500,000 or more from a debt or equity financing. On March 31,
2006, we entered into a $400,000 unsecured promissory note with Fagan Capital,
Inc. Interest accrues at an annual rate of 8.0% and interest and principal
are
due on June 2, 2006. The purpose of these loans was to provide us with short
term financing as we seek longer term financing.
The
cash
held by the OXIS parent company of $464,000 at March 31, 2006 is not sufficient
to sustain our operations through the second quarter of 2006 without additional
financings. In an effort to mitigate this near-term concern, we are seeking
loan
and equity financings to obtain sufficient funds to sustain operations,
implement our marketing campaign and purchase the remaining 49% of BioCheck
for
approximately $3.0 million. However, we cannot assure you that we will
successfully obtain debt or equity financing.
Critical
Accounting Policies
We
consider the following accounting policies to be critical given they involve
estimates and judgments made by management and are important for our investors’
understanding of our operating results and financial condition.
Basis
of Consolidation
The
consolidated financial statements contained in this Report include the accounts
of OXIS International, Inc. and its subsidiaries. All intercompany balances
and
transactions have been eliminated. On December 6, 2005, we purchased 51% of
the common stock of BioCheck. This acquisition was accounted for by the purchase
method of accounting according to Statement of Financial Accounting Standards
No. 141, “Business Combinations.” The consolidated statement of operations for
the three months ended March 31, 2006 includes the results of
operations of BioCheck and the consolidated balance sheets include the assets
and liabilities of BioCheck at March 31, 2006 and
December 31, 2005.
Revenue
Recognition
We
manufacture, or have manufactured on a contract basis, research and diagnostic
assays and fine chemicals, which are our primary products sold to customers.
Revenue from the sale of our products, including shipping fees, is recognized
when title to the products is transferred to the customer which usually occurs
upon shipment or delivery, depending upon the terms of the sales order and
when
collectibility is reasonably assured. Revenue from sales to distributors of
our
products is recognized, net of allowances, upon delivery of product to the
distributors. According to the terms of individual distributor contracts, a
distributor may return product up to a maximum amount and under certain
conditions contained in its contract. Allowances are calculated based upon
historical data, current economic conditions and the underlying contractual
terms. Our mix of product sales are substantially at risk to market conditions
and demand, which may change at anytime.
We
recognize license fee revenue for licenses to our intellectual property when
earned under the terms of the agreements. Generally, revenue is recognized
upon
transfer of the license unless we have continuing obligations for which fair
value cannot be established, in which case the revenue is recognized over the
period of the obligation. We consider all arrangements with payment terms
extending beyond twelve months not to be fixed or determinable. In certain
licensing arrangements there is provision for a variable fee as well as a
non-refundable minimum amount. In such arrangements, the amount of the
non-refundable minimum guarantee is recognized upon transfer of the license
and
collectibility is reasonably assured or over the period of the obligation,
as
applicable, and the amount of the variable fee is recognized as revenue when
it
is fixed and determinable. We recognize royalty revenue based on reported sales
by third party licensees of products containing our materials, software and
intellectual property. Non-refundable royalties, for which there are no further
performance obligations, are recognized when due under the terms of the
agreements.
Inventories
Inventories
are stated at the lower of cost to purchase and/or manufacture the inventory
or
the current estimated market value of the inventory. We regularly review our
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and/or
our
ability to sell the products and production requirements. Demand for our
products can fluctuate significantly. Factors which could affect demand for
our
products include unanticipated changes in consumer preferences, general market
conditions or other factors, which may result in cancellations of advance orders
or a reduction in the rate of reorders placed by customers and/or continued
weakening of economic conditions. Additionally, our estimates of future product
demand may be inaccurate, which could result in an understated or overstated
provision required for excess and obsolete inventory. Our estimates are based
upon our understanding of historical relationships which can change at
anytime.
Long-Lived
Assets
Our
long-lived assets include property, plant and equipment, capitalized costs
of
filing patent applications and goodwill and other assets. We evaluate our
long-lived assets for impairment in accordance with SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be
recoverable. Estimates of future cash flows and timing of events for evaluating
long-lived assets for impairment are based upon management’s judgment. If any of
our intangible or long-lived assets are considered to be impaired, the amount
of
impairment to be recognized is the excess of the carrying amount of the assets
over its fair value.
Applicable
long-lived assets are amortized or depreciated over the shorter of their
estimated useful lives, the estimated period that the assets will generate
revenue, or the statutory or contractual term in the case of patents. Estimates
of useful lives and periods of expected revenue generation are reviewed
periodically for appropriateness and are based upon management’s judgment.
Goodwill and other assets are not amortized.
Stock-Based
Compensation
In
December 2004, the Financial Accounting Standards Board issued a revision to
Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payments” (hereinafter “SFAS 123R”). This statement replaces FASB Statement No.
123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No.
25, “Accounting for Stock Issued to Employees”. SFAS 123R establishes standards
for the accounting for share-based payment transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity’s equity instruments or
that may be settled by the issuance of those equity instruments. This statement
covers a wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share appreciation
rights and employee share purchase plans. SFAS 123R requires a public entity
to
measure the cost of employee services received in exchange for an award of
equity instruments based on the fair value of the award on the grant date (with
limited exceptions). That cost will be recognized in the entity’s financial
statements over the period during which the employee is required to provide
services in exchange for the award. Management has implemented SFAS 123R
effective January 1, 2006. Methodologies used for calculations such as the
Black-Scholes and lattice option-pricing models and variables such as volatility
and expected life are based upon management’s judgment. Such methodologies and
variables are reviewed and updated periodically for appropriateness and affect
the amount of recorded charges. See Note 1 to the unaudited consolidated
financial statements included in this Report for more information on the
amounts, methodologies and variables related to non-cash stock-based
compensation charges.
FACTORS
THAT MAY AFFECT FUTURE OPERATING RESULTS
We
operate in a rapidly changing environment that involves a number of risks,
some
of which are beyond our control. The following discussion highlights some of
these risks and others are discussed elsewhere in this report or in our Annual
Report on Form 10-KSB for the period ended December 31, 2005 and our
Post-Effective Amendment No. 1 to Form SB-2 Registration Statement (SEC
File No. 333-123008).
Risks
Related to Our Business
We
will need to raise additional capital to fund our general and administrative
expenses, and if we are unable to raise such capital, we will have to curtail
or
cease operations.
The
cash
held by the OXIS parent company of $464,000 at March 31, 2006 is not sufficient
to continue operations through the second quarter of 2006 without additional
financings. We are seeking loan and equity financings to obtain sufficient
funds
to sustain operations, including our development and commercialization programs,
to implement our marketing campaign and purchase the remaining 49% of BioCheck
common stock we do not own. We have incurred significant obligations in relation
to our relocation to Foster City, California and our integration of operations
with BioCheck, including severance benefits for terminated employees, the hiring
of new personnel, our contractual obligations to consultants and moving
expenses. We will need to repay debt in the amount of $200,000 to our Chief
Executive Officer on or before September 10, 2006 and $400,000 to Fagan Capital
on or before June 2, 2006. If we are unable to raise additional capital in
the
second quarter of 2006 we will have to curtail or cease operations. If we raise
short term capital by incurring additional debt, we will have to obtain equity
financing sufficient to repay such debt and accrued interest. Further, incurring
additional debt may make it more difficult for us to successfully consummate
future equity financings.
We
will need to raise additional capital in order to complete our acquisition
of
the outstanding shares of BioCheck, Inc.
On
September 19, 2005 we entered into a Stock Purchase Agreement with BioCheck
and
the stockholders of BioCheck pursuant to which OXIS undertook to purchase up
to
all of the outstanding shares of common stock of BioCheck for an aggregate
purchase price of $6.0 million in cash. On December 6, 2005, pursuant to
the terms of the Stock Purchase Agreement with BioCheck, at the initial closing,
we purchased an aggregate of fifty-one percent (51%) of the outstanding shares
of common stock of BioCheck from each of the shareholders of BioCheck on a
pro
rata basis, for an aggregate of $3,060,000 in cash. Pursuant to the Stock
Purchase Agreement, OXIS will use its reasonable best efforts to consummate
a
follow-on financing transaction to raise additional capital with which to
purchase the remaining outstanding shares of BioCheck in one or more additional
closings. The purchase price for any BioCheck shares purchased after the initial
closing will be increased by an additional 8% per annum from the date of the
initial closing through the date of such purchase. If OXIS has not purchased
all
of the outstanding shares of BioCheck within twelve months of the initial
closing, the earnings before interest, taxes, depreciation and amortization
expenses, or EBITDA, if any, of BioCheck will be used to repurchase the
remaining outstanding BioCheck shares at one or more additional closings. There
can be no assurance that there will be any EBITDA of BioCheck in the next
several years which could be utilized to purchase additional shares of BioCheck
pursuant to the Stock Purchase Agreement. Even if there is some amount of
BioCheck EBITDA available to purchase additional shares of BioCheck, there
can
be no assurance that such EBITDA would be sufficient to complete our acquisition
of the remaining 49% of BioCheck outstanding shares.
To
avoid
an increase in the purchase price of the remaining shares of BioCheck at the
rate of 8% per annum, we will need to consummate a financing transaction to
complete the acquisition of the remaining 49% of the outstanding shares of
BioCheck. The successful completion of our acquisition of BioCheck is dependent
upon obtaining financing on acceptable terms. No assurances can be given that
we
will be able to complete such a financing sufficient to undertake our
acquisition of the outstanding shares of BioCheck on terms favorable to us,
or
at all. Any financing that we do undertake to finance the acquisition of
BioCheck will likely involve dilution of our common stock if it is an equity
financing or will involve the assumption of significant debt by
OXIS.
We
will need additional financing in order to complete our development and
commercialization programs.
As
of
March 31, 2006, we had an accumulated deficit of approximately $66,069,000.
We
currently do not have sufficient capital resources to complete the development
and commercialization of our antioxidant therapeutic technologies and oxidative
stress assays, and no assurances can be given that we will be able to raise
such
capital in the future on terms favorable to us, or at all. The unavailability
of
additional capital could cause us to cease or curtail our operations and/or
delay or prevent the development and marketing of our potential products. In
addition, we may choose to abandon certain issued United States and
international patents that we deem to be of lesser importance to our strategic
direction, in an effort to preserve our financial resources.
Our
future capital requirements will depend on many factors including the following:
-
continued
scientific progress in our research and development programs and the
commercialization of additional products;
-
the
cost of our research and development and commercialization activities and
arrangements, including sales and marketing;
-
the
costs associated with the scale-up of manufacturing;
-
the
success of pre-clinical and clinical trials;
-
the
establishment of and changes in collaborative relationships;
-
the
time and costs involved in filing, prosecuting, enforcing and defending
patent
claims;
-
the
time and costs required for regulatory approvals;
-
the
acquisition of additional technologies or businesses;
-
technological
competition and market developments; and
-
the
cost of complying with the requirements of the Autorité des Marchés
Financiers, or AMF, the French regulatory agency overseeing the Nouveau
Marché
in France.
We
will
need to raise additional capital to fund our development and commercialization
programs. Our current capital resources are not sufficient to sustain operations
and our development programs with respect to our cardiovascular predictor
product and Ergothioneine as a nutraceutical supplement. We have granted a
licensee exclusive worldwide rights, in certain defined areas of cardiovascular
indications, to develop, manufacture and market BXT-51072 and related compounds
from our library of such antioxidant compounds. The licensee is responsible
for
worldwide product development programs with respect to the licensed compounds.
Due to the lack of financial resources, we ceased further testing of BXT-51072
but continue to review the possibility of further developing applications for
BXT-51072 and related compounds outside of the areas defined in the license.
However, further development and commercialization of antioxidant therapeutic
technologies, oxidative stress assays or currently unidentified opportunities,
or the acquisition of additional technologies or businesses, may require
additional capital. The fact that further development and commercialization
of a
product or technology would require us to raise additional capital, would be
an
important factor in our decision to engage in such further development or
commercialization. No assurances can be given that we will be able to raise
such
funds in the future on terms favorable to us, or at all.
If
we
complete our acquisition of BioCheck, our business could be materially and
adversely affected if we fail to adequately integrate the operations of the
two
companies.
If
we
complete the acquisition of BioCheck, or the Acquisition, as planned, and we
do
not successfully integrate the operations of the two companies, or if the
benefits of the transaction do not meet the expectations of financial or
industry analysts, the market price of our common stock may decline. The
Acquisition could result in the use of significant amounts of cash, dilutive
issuances of equity securities, or the incurrence of debt or expenses related
to
goodwill and other intangible assets, any of which could materially adversely
affect our business, operating results and financial condition.
We
may
not be able to successfully integrate the BioCheck business into our existing
business in a timely and non-disruptive manner, or at all. In addition, the
Acquisition may result
in, among other things, substantial
charges
associated with acquired in-process research and development, future write-offs
of goodwill that is deemed to be impaired, restructuring charges related to
consolidation of operations, charges associated with unknown or unforeseen
liabilities of acquired businesses and increased general and administrative
expenses. Furthermore, the Acquisition may not produce revenues, earnings or
business synergies that we anticipate. In
addition, we depend on
BioCheck for the
shipping
and much of our manufacturing of research assay test kits without the
benefit of a formal agreement with BioCheck. There can be no assurance that
BioCheck will continue to manufacture our research assay test kits.
In
addition, acquisitions in general involve numerous risks, including:
-
difficulties
in assimilating the operations, technologies, products and personnel of
an
acquired company;
-
risks
of entering markets in which we have either no or limited prior
experiences;
-
the
diversion of management’s attention from other business concerns; and
-
the
potential loss of key employees of an acquired company.
The
time,
capital management and other resources spent on the Acquisition, if it fails
to
meet our expectations, could cause our business and financial condition to
be
materially and adversely affected.
Our
relocation plan could adversely affect our operations.
As
part
of our decision to acquire BioCheck, we have implemented a relocation and
integration plan, including a strategy to reduce our cost structure. In doing
so, we have significantly reduced our employee workforce from 15 full time
employees to four, outsourced certain company functions and have taken other
steps intended to reduce costs and improve efficiencies. Our
business may continue to be disrupted and adversely affected by this reduction
in work force until we employ new personnel to replace certain open positions.
Our business may also be disrupted due to our move to new
facilities.
The
payment of severance benefits resulting from employee terminations will cause
us
to utilize cash. There can be no assurances that we will be able to improve
efficiencies and function properly following such reductions.
We
may experience disruption or may fail to achieve any benefits in connection
with
the recent changes in executive management and in Board membership.
During
the second quarter of 2004, our former Chief Executive Officer retired, and
during the third quarter of 2004 our Chief Operating and Financial Officer
left
the employment of our company. As a result, others who had limited experience
with OXIS were appointed to serve as acting Chief Executive Officer, acting
Chief Operating Officer and acting Chief Financial Officer.
On February 28, 2005, the Board appointed Mr. Steven T. Guillen to the
positions of President and Chief Executive Officer of OXIS, and as a member
of
our board. On January 6, 2006, we hired Michael D. Centron as our Vice President
and Chief Financial Officer. In addition, during 2004 and early 2005, following
the acquisition of a then-majority interest in OXIS by Axonyx, eight directors
resigned from the board resulting in a four person board. During 2005 we added
independent director John E. Repine, M.D., and on March 15, 2006 Gary M. Post
joined our Board of Directors, resulting in a six person board. Five out of
the
six directors currently serving on the board commenced their service on the
board during the period of 2004 through the date hereof.
One
impact of such changes has been to delay our sales promotions in the research
assay market and in the development of Ergothioneine market opportunities.
Further, we narrowed our strategic focus to concentrate resources, including
discontinuing our Animal Health Profiling program. In addition, the decreased
OXIS parent company sales during the first quarter of 2006 are attributable
to
lower sales volume that was caused, in part, by the interruption arising from
moving operations from Portland, Oregon to Foster City, California and
consolidating our product offerings. There can be no assurances that these
changes will not cause further disruptions in, or otherwise adversely affect,
our business and results of operations.
If
we
fail to attract and retain key personnel, our business could suffer.
Our
future depends, in part, on our ability to attract and retain key personnel.
We
may not be able to hire and retain such personnel at compensation levels
consistent with our existing compensation and salary structure. We deferred
the
hiring of senior management personnel in order to allow our newly-engaged full
time Chief Executive Officer to select such key personnel. While we succeeded
in
engaging Mr. Steven T. Guillen as our President and Chief Executive Officer
and
Michael D. Centron as our Chief Financial Officer, we cannot predict whether
we
will be successful in finding suitable new candidates for key management
positions within OXIS. While we have entered into letter agreements of
employment with Mr. Guillen and Mr. Centron, they are free to terminate their
employment “at will.” Further, we cannot predict whether Mr.
Guillen or Mr. Centron will
be
successful in their roles as our President and Chief Executive Officer, and
Chief Financial Officer, or whether senior management personnel hires will
be
effective. The loss of services of executive officers or key personnel, any
transitional difficulties with our new Chief Financial Officer or the inability
to attract qualified personnel could have a material adverse effect on our
financial condition and business. We
do not
have any key employee life insurance policies with respect to any of our
executive officers.
The
success of our business depends upon our ability to successfully develop and
commercialize products.
We
cannot
assure you that our efforts to develop and commercialize a cardiac predictor
product, an Ergothioneine
nutraceutical product or any other products will be successful. The cost of
such
development and commercialization efforts can be significant and the likelihood
of success of any such programs is difficult to predict. The failure to develop
or commercialize such new products could be materially harmful to us and our
financial condition.
Our
future profitability is uncertain.
We
cannot
predict our ability to reduce our costs or achieve profitability. Our research
and development expenses are expected to increase as we attempt to develop
potential products. As evidenced by the substantial net losses during 2004
and
2005, losses and expenses may increase and fluctuate from quarter to quarter.
There can be no assurance that we will ever achieve profitable operations.
We
have no biopharmaceutical or clinical diagnostic products available for sale
and
we may never be successful in developing products suitable for
commercialization.
All
of
our biopharmaceutical and clinical diagnostic candidates are at an early stage
of development and all of such therapeutic and clinical diagnostic candidates
will require expensive and lengthy testing and regulatory clearances. None
of
our therapeutic or clinical diagnostic candidates have been approved by
regulatory authorities. We have no therapeutic or clinical diagnostic products
available for sale and we may not have any products commercially available
for
several years, if at all. There are many reasons we may fail in our efforts
to
develop our therapeutic and clinical diagnostic candidates,
including:
-
our
therapeutic and clinical diagnostic candidates may be ineffective, toxic
or
may not receive regulatory clearances,
-
our
therapeutic and clinical diagnostic candidates may be too expensive to
manufacture or market or may not achieve broad market acceptance,
-
third
parties may hold proprietary rights that may preclude us from developing
or
marketing our therapeutic and clinical diagnostic candidates, or
-
third
parties may market equivalent or superior products.
Clinical
development is inherently uncertain and expense levels may fluctuate
unexpectedly because we cannot accurately predict the timing and level of such
expenses.
Our
future success may depend in part upon the results of clinical trials undertaken
by us or our licensees designed to assess the safety and efficacy of our
potential products. We do not have substantial experience in developing and
running clinical trials. The completion of clinical trials often depends
significantly upon the rate of patient enrollment, and our expense levels will
vary depending upon the rate of enrollment. In addition, the length of time
necessary to complete clinical trials and submit an application for marketing
and manufacturing approvals varies significantly and is difficult to predict.
The expenses associated with each phase of development depend upon the design
of
the trial. The design of each phase of trials depends in part upon results
of
prior phases, and additional trials may be needed at each phase. As a result,
the expense associated with future phases cannot be predicted in advance.
Further, if we undertake clinical trials, we may decide to terminate or suspend
ongoing trials. Failure to comply with extensive FDA regulations may result
in
unanticipated delay, suspension or cancellation of a trial or the FDA's refusal
to accept test results. The FDA may also suspend our clinical trials at any
time
if it concludes that the participants are being exposed to unacceptable risks.
As a result of these factors, we cannot predict the actual expenses that we
will
incur with respect to clinical trials for any of our potential products, and
we
expect that our expense levels will fluctuate unexpectedly in the future.
Competition
in most of our primary current and potential market areas is intense and
expected to increase.
The
diagnostic, pharmaceutical and nutraceutical industries are highly competitive.
The main commercial competition at present in our research assay business is
represented by, but not limited to, the following companies: Cayman Chemical
Company, Assay Designs and Randox Laboratories Ltd. In addition, our competitors
and potential competitors include large pharmaceutical/nutraceutical companies,
universities and research institutions. Relative to OXIS, these competitors
may
have substantially greater capital resources, research and development staffs,
facilities, as well as greater expertise manufacturing and making products.
In
addition, these companies, as well as others, may have or may develop new
technologies or use existing technologies that are, or may in the future be,
the
basis for competitive products. There can be no assurance that we can compete
successfully.
In
addition, current and potential competitors may make strategic acquisitions
or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their products to address the needs of our
current and prospective customers. Accordingly, it is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Such competition could materially
adversely affect our ability to commercialize existing technologies or new
technologies on terms favorable to us. Further, competitive pressures could
require us to reduce the price of our products and technologies, which could
materially adversely affect our business, operating results and financial
condition. We may not be able to compete successfully against current and future
competitors and any failure to do so would have a material adverse effect upon
our business, operating results and financial condition.
Axonyx
holds the voting power to influence matters affecting us.
Axonyx
currently owns approximately 33% of our issued and outstanding stock. In
addition, Dr. Marvin Hausman is a member of the board of directors of Axonyx
and
is the chairman of our board of directors, and Mr. S. Colin Neill, the Chief
Financial Officer of Axonyx, is a member of our board of directors and the
Secretary of OXIS. Given these circumstances, Axonyx may influence our business
direction and policies, and, thus, may have the ability to control certain
material decisions affecting us. In addition, such concentration of voting
power
could have the effect of delaying, deterring or preventing a change of control
or other business combination that might otherwise be beneficial to our
shareholders. Section 203 of the Delaware General Corporation Law prohibits
a
Delaware corporation from engaging in any business combination with any
interested shareholder for a period of three years unless the transaction meets
certain conditions. Section 203 also limits the extent to which an
interested shareholder can receive benefits from our assets. These provisions
could complicate or prohibit certain transactions (including a financing
transaction between OXIS and Axonyx), or limit the price that other investors
might be willing to pay in the future for shares of our common
stock.
If
we
are unable to develop and maintain alliances with collaborative partners, we
may
have difficulty developing and selling our products and services.
Our
ability to realize significant revenues from new products and technologies
is
dependent upon, among other things, our success in developing business alliances
and licensing arrangements with nutraceutical/biopharmaceutical and/or health
related companies to develop and market these products. To date, we have had
limited success in establishing foundations for such business alliances and
licensing arrangements and there can be no assurance that our efforts to develop
such business relationships will progress to mature relationships or that any
such relationships will be successful. Further, relying on these or other
alliances is risky to our future success because:
-
our
partners may develop products or technologies competitive with our products
and technologies;
-
our
partners may not devote sufficient resources to the development and sale
of
our products and technologies;
-
our
collaborations may be unsuccessful; or
-
we
may
not be able to negotiate future alliances on acceptable terms.
Our
revenues and quarterly results have fluctuated historically and may continue
to
fluctuate, which could cause our stock price to decrease.
Our
revenues and operating results may fluctuate due in part to factors that are
beyond our control and which we cannot predict. Material shortfalls in revenues
will materially adversely affect our results and may cause us to experience
losses. In particular, our revenue growth and profitability depend on sales
of
our research assays and fine chemicals. Factors that could cause sales for
these
products and other products to fluctuate include:
-
an
inability to produce products in sufficient quantities and with appropriate
quality;
-
an
inability to obtain sufficient raw materials;
-
the
loss of or reduction in orders from key customers;
-
variable
or decreased demand from our customers;
-
the
receipt of relatively large orders with short lead times;
-
our
customers' expectations as to how long it takes us to fill future orders;
-
customers'
budgetary constraints and internal acceptance review procedures;
-
there
may be only a limited number of customers that are willing to purchase
our
research assays and fine chemicals;
-
a
long
sales cycle that involves substantial human and capital resources;
and
-
potential
downturns in general or in industry specific economic
conditions.
Each
of
these factors has impacted, and may in the future impact, the demand for and
availability of our products and our quarterly operating results. For example,
due to the unavailability of beef liver as a source for bSOD we were unable
to
sell any bSOD during 2005 and 2004, as compared to sales of $562,000 in 2003.
We
do not
anticipate this source becoming available again within the foreseeable future
and do not anticipate any revenues from sales of this product in the foreseeable
future. In addition, a decrease in the demand for our Ergothioneine product
resulted in a reduction of sales of Ergothioneine to $18,000 in 2005 and $87,000
in 2004, compared to $333,000 in 2003. We cannot predict with any certainty
our
future sales of Ergothioneine.
If
the
sales or development cycles for research assays and fine chemicals lengthen
unexpectedly, our revenues may decline or not grow as anticipated and our
results from operations may be harmed.
Changes
in accounting standards regarding stock option plans could increase our reported
losses, cause our stock price to decline and limit the desirability of granting
stock options.
In
December 2004, the Financial Accounting Standards Board issued a revision to
Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payments” (hereinafter “SFAS 123R”). This statement replaces FASB Statement No.
123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No.
25, “Accounting for Stock Issued to Employees.” SFAS 123R establishes standards
for the accounting for share-based payment transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity’s equity instruments or
that may be settled by the issuance of those equity instruments. This statement
covers a wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share appreciation
rights and employee share purchase plans. SFAS 123R requires a public entity
to
measure the cost of employee services received in exchange for an award of
equity instruments based on the fair value of the award on the grant date (with
limited exceptions). That cost will be recognized in the entity’s financial
statements over the period during which the employee is required to provide
services in exchange for the award. Management has implemented SFAS 123R
effective January 1, 2006. Expensing such stock options will add to our losses
or reduce our profits, if any. In addition, stock options are an important
employee recruitment and retention tool, and we may not be able to attract
and
retain key personnel if we reduce the scope of our employee stock option
program.
Our
income may suffer if we receive relatively large orders with short lead times,
or our manufacturing capacity does not otherwise match our demand.
Because
we cannot immediately adapt our production capacity and related cost structures
to rapidly changing market conditions, when demand does not meet our
expectations, our manufacturing capacity will likely exceed our production
requirements. Fixed costs associated with excess manufacturing capacity could
adversely affect our income. Similarly, if we receive relatively large orders
with short lead times, we may not be able to increase our manufacturing capacity
to meet product demand, and, accordingly, we will not be able to fulfill orders
in a timely manner. During a market upturn, we may not be able to purchase
sufficient supplies to meet increasing product demand. In addition, suppliers
may extend lead times, limit supplies or increase prices due to capacity
constraints or other factors. These factors could materially and adversely
affect our results.
Our
success will require that we establish a strong intellectual property position
and that we can defend ourselves against intellectual property claims from
others.
Maintaining
a strong patent position is important to our competitive advantage. We currently
have 82 patents either granted or applied for in 15 countries with expiration
dates ranging from 2006 to 2024. Litigation on patent-related matters has been
prevalent in our industry and we expect that this will continue. Patent law
relating to the scope of claims in the technology fields in which we operate
is
still evolving and the extent of future protection is highly uncertain, so
there
can be no assurance that the patent rights we have or may obtain will be
valuable. Others may have filed, or may in the future file, patent applications
that are similar or identical to ours. To determine the priority of inventions,
we may have to participate in interference proceedings declared by the United
States Patent and Trademark Office that could result in substantial costs in
legal fees and could substantially affect the scope of our patent protection.
We
cannot assure investors that any such patent applications will not have priority
over our patent applications. Further, we may choose to abandon certain issued
United States and international patents that we deem to be of lesser importance
to our strategic direction, in an effort to preserve our financial resources.
Abandonment of patents could substantially affect the scope of our patent
protection. In addition, we may in future periods incur substantial costs in
litigation to defend against patent suits brought by third parties or if we
initiate such suits.
In
addition to patent protection, we also rely upon trade secret protection for
our
confidential and proprietary information. There can be no assurance, however,
that such measures will provide adequate protection for our trade secrets or
other proprietary information. In addition, there can be no assurance that
trade
secrets and other proprietary information will not be disclosed, that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to or disclose our trade secrets and
other proprietary information. If we cannot obtain, maintain or enforce
intellectual property rights, competitors can design and commercialize competing
technologies.
We
may
face challenges from third parties regarding the validity of our patents and
proprietary rights, or from third parties asserting that we are infringing
their
patents or proprietary rights, which could result in litigation that would
be
costly to defend and could deprive us of valuable rights.
Extensive
litigation regarding patents and other intellectual property rights has been
common in the biotechnology and pharmaceutical industries. The defense and
prosecution of intellectual property suits, United States Patent and Trademark
Office interference proceedings, and related legal and administrative
proceedings in the United States and internationally involve complex legal
and
factual questions. As a result, such proceedings are costly and time-consuming
to pursue and their outcome is uncertain. Litigation may be necessary to:
-
enforce
patents that we own or license;
-
protect
trade secrets or know-how that we own or license; or
-
determine
the enforceability, scope and validity of the proprietary rights of others.
Our
involvement in any litigation, interference or other administrative proceedings
could cause us to incur substantial expense and could significantly divert
the
efforts of our technical and management personnel. An adverse determination
may
subject us to loss of our proprietary position or to significant liabilities,
or
require us to seek licenses that may not be available from third parties. An
adverse determination in a judicial or administrative proceeding, or a failure
to obtain necessary licenses, may restrict or prevent us from manufacturing
and
selling our products. Costs associated with these arrangements may be
substantial and may include ongoing royalties. Furthermore, we may not be able
to obtain the necessary licenses on satisfactory terms, if at all. These
outcomes could materially harm our business, financial condition and results
of
operations.
We
may be exposed to liability due to product defects.
The
risk
of product liability claims is inherent in the testing, manufacturing, marketing
and sale of our products. We may seek to acquire additional insurance for
liability risks. We may not be able to obtain such insurance or general product
liability insurance on acceptable terms or in sufficient amounts. A product
liability claim or recall could have a serious adverse effect on our business,
financial condition and results of operations.
Disclosure
controls are no assurance that the objectives of the control system are
met.
Although
we have an extensive operating history, resources are limited for the
development and maintenance of our control environment. We have a very limited
number of personnel and therefore segregation of duties can be somewhat limited
as to their scope and effectiveness. We believe, however, that we are in
reasonable compliance with the best practices given the environment in which
we
operate. Although existing controls in place are deemed appropriate for the
prevention, detection and minimization of fraud, theft and errors, they may
result in only limited assurances, at best, that the total objectives of the
control system are met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, can be detected and/or prevented
and as such this is a risk area for investors to consider.
Risks
Related to Our Common Stock
Our
common stock is traded on the OTCBB, our stock price is highly volatile, and
you
may not be able to sell your shares of our common stock at a price greater
than
or equal to the price you paid for such shares.
Our
shares of common stock are currently traded on the Over the Counter Bulletin
Board, or OTCBB. Stocks traded on the OTCBB generally have limited trading
volume and exhibit a wide spread between the bid/ask quotation. The market
price
of our common stock is extremely volatile. To demonstrate the volatility of
our
stock price, during the three-month period ending on March 31, 2006, the volume
of our common stock traded on any given day ranged from 0 to 330,800 shares.
Moreover, during that period, our common stock traded as low as
$0.27 per
share
and as high as $0.38 per share, a 41% difference. This may impact an investor’s
decision to buy or sell our common stock. As of March 31, 2006 there were
approximately 5,500 holders of our common stock. Factors affecting our stock
price include:
-
our
financial results;
-
fluctuations
in our operating results;
-
announcements
of technological innovations or new commercial health care products or
therapeutic products by us or our competitors;
-
government
regulation;
-
developments
in patents or other intellectual property rights;
-
developments
in our relationships with customers and potential customers; and
-
general
market conditions.
Furthermore,
volatility in the stock price of other companies has often led to securities
class action litigation against those companies. Any such securities litigation
against us could result in substantial costs and divert management's attention
and resources, which could seriously harm our business and financial
condition.
Our
common stock may be subject to “penny stock” rules which may be detrimental to
investors.
Our
common stock may be, or may become, subject to the regulations promulgated
by
the SEC for “penny stock”. SEC regulation relating to penny stock is presently
evolving, and the OTCBB may react to such evolving regulation in a way that
adversely affects the market liquidity of our common stock. Penny stock
currently includes any non-NASDAQ equity security that has a market price of
less than $5.00 per share, subject to certain exceptions. The regulations
require that prior to any non-exempt buy/sell transaction in a penny stock,
a
disclosure schedule set forth by the SEC relating to the penny stock market
must
be delivered to the purchaser of such penny stock. This disclosure must include
the amount of commissions payable to both the broker-dealer and the registered
representative and current price quotations for the common stock. The
regulations also require that monthly statements be sent to holders of penny
stock that disclose recent price information for the penny stock and information
of the limited market for penny stocks. These requirements may adversely affect
the market liquidity of our common stock.
Sales
of our common stock may require broker-dealers to make special suitability
determinations regarding prospective purchasers.
Our
common stock may be, or may become, subject to Rule 15g-1 through 15g-9 under
the Securities Exchange Act of 1934, as amended, or the Exchange Act, which
imposes certain sales practice requirements on broker-dealers which sell our
common stock to persons other than established customers and “accredited
investors” (generally, individuals with a net worth in excess of $1,000,000 or
an annual income exceeding $200,000 (or $300,000 together with their spouses)).
For transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser’s
written consent to the transaction prior to the sale. Applicability of this
rule
would adversely affect the ability of broker-dealers to sell our common stock
and purchasers of our common stock to sell their shares of such common stock.
Accordingly, the market for our common stock may be limited and the value
negatively impacted.
We
will incur expenses in connection with registration of our shares which may
be
significant.
We
are
required to pay fees and expenses incident to the registration with the SEC
of
the shares issued in the private placement of equity which closed on January
6,
2005 and maintain adequate disclosure in connection with such registration,
including updating prospectuses and under certain circumstances, filing amended
registration statements. These expenses were $302,000 in 2005, and we may incur
significant additional expenses in the future related to maintaining effective
registration statements for prior financings and any additional registrations
related to future financings. We have also agreed to indemnify such selling
shareholders against losses, claims, damages and liabilities arising out of
relating to any misstatements or omissions in our registration statement and
related prospectuses, including liabilities under the Securities Act. In the
event such a claim is made in the future, such losses, claims, damages and
liabilities arising therefrom could be significant in relation to our
revenues.
Item
3. Controls
and Procedures.
Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we have evaluated
the effectiveness of the design and operation of our disclosure controls
and
procedures as of March 31, 2006, and, based on their evaluation, our principal
executive officer and principal financial officer have concluded that these
controls and procedures are effective. On
January 6, 2006, we hired Michael D. Centron as our Vice President and Chief
Financial Officer. We
relocated our headquarters on February 15, 2006 from Portland, Oregon to
Foster
City, California, and on that date we terminated the employment of our financial
controller. Temporary accounting facilities were established during this
transition period. Our accounting procedures and disclosure controls and
procedures have changed during this period, and management believes that
disclosure controls and procedures have been adequately maintained during
this
period and that reporting controls and procedures have been improved. There
has
been no change in our internal control over financial reporting that occurred
during our most recent fiscal quarter that has materially affected or is
reasonably likely to materially affect our internal control over financial
reporting.
Disclosure
controls and procedures are our controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports that
we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by
us in
the reports that we file under the Exchange Act is accumulated and communicated
to our management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosures.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings.
None.
Item
2. Unregistered Sales of Securities and Use of Proceeds.
None.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. Submission of Matters to a Vote of Security Holders.
None.
Item
5. Other Information.
None.
Item
6. Exhibits
See
Index
to Exhibits on page 32.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
| |
|
|
| |
OXIS
INTERNATIONAL, INC. |
|
|
|
| Date:
May
12, 2006 |
By: |
/s/
MICHAEL
D. CENTRON |
| |
Michael
D. Centron |
| |
Title:
Chief
Financial Officer |
Exhibit
Index
|
Exhibit
Number
|
Exhibit
Title or Description
|
| |
|
|
31.1
|
Certification
of the Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
of the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
Certification
of the Principal Executive Officer pursuant to 18 U.S.C. Section
1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
of the Principal Financial Officer pursuant to 18 U.S.C. Section
1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32
Exhibit
31.1
CERTIFICATION
I,
Steven
T. Guillen, certify that:
|
1.
|
I
have reviewed this quarterly report on Form 10-QSB of OXIS International,
Inc.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
small
business issuer as of, and for, the periods presented in this report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
|
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the small business issuer,
including
its consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
|
|
b)
|
Evaluated
the effectiveness of the small business issuer’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of
the period covered by this report based on such evaluation; and
|
|
|
c)
|
Disclosed
in this report any change in the small business issuer’s internal control
over financial reporting that occurred during the small business
issuer’s
most recent fiscal quarter (the small business issuer’s fourth fiscal
quarter in the case of an annual report) that has materially affected,
or
is reasonably likely to materially affect, the small business issuer’s
internal control over financial reporting; and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the small business issuer’s auditors and the audit committee of the small
business issuer’s board of directors (or persons performing the equivalent
functions):
|
|
|
a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer’s ability
to record, process, summarize and report financial information; and
|
|
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer’s
internal control over financial reporting.
|
| |
|
|
| |
OXIS
INTERNATIONAL, INC. |
|
|
|
| Date:
May
12, 2006 |
By: |
/s/
STEVEN
T. GUILLEN |
| |
Steven T. Guillen |
| |
Title:
Chief
Executive Officer |
Exhibit
31.2
CERTIFICATION
I,
Michael D. Centron, certify that:
|
1.
|
I
have reviewed this quarterly report on Form 10-QSB of OXIS International,
Inc.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such
statements
were made, not misleading with respect to the period covered by
this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial
information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
small
business issuer as of, and for, the periods presented in this report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
small
business issuer and have:
|
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the small business issuer,
including
its consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
|
|
b)
|
Evaluated
the effectiveness of the small business issuer’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of
the end of
the period covered by this report based on such evaluation; and
|
|
|
c)
|
Disclosed
in this report any change in the small business issuer’s internal control
over financial reporting that occurred during the small business
issuer’s
most recent fiscal quarter (the small business issuer’s fourth fiscal
quarter in the case of an annual report) that has materially affected,
or
is reasonably likely to materially affect, the small business issuer’s
internal control over financial reporting; and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the small business issuer’s auditors and the audit committee of the small
business issuer’s board of directors (or persons performing the equivalent
functions):
|
|
|
a)
|
All
significant deficiencies and material weaknesses in the design
or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer’s ability
to record, process, summarize and report financial information;
and
|
|
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer’s
internal control over financial reporting.
|
| |
|
|
| |
OXIS
INTERNATIONAL, INC. |
|
|
|
| Date:
May
12, 2006 |
By: |
/s/
MICHAEL
D. CENTRON |
| |
Michael D. Centron |
| |
Title:
Chief
Financial Officer |
Exhibit
32.1
CERTIFICATION PURSUANT TO
18
U.S.C. SECTION 1350
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection
with the Quarterly Report of OXIS International, Inc. (the “Company”) on Form
10-QSB for the period ending March 31, 2006 as filed with the Securities and
Exchange Commission on the date therein specified (the “Report”), I, Steven T.
Guillen, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C.
Section 1350, that, to the best of my knowledge:
(1)
The
Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2)
The
information contained in the Report fairly presents, in all material respects,
the financial condition and result of operations of the Company at the dates
and
for the periods indicated.
This
Certification has not been, and shall not be deemed, “filed” with the Securities
and Exchange Commission.
| |
|
|
| |
OXIS
INTERNATIONAL, INC. |
|
|
|
| Date:
May
12, 2006 |
By: |
/s/
STEVEN
T. GUILLEN |
| |
Steven T. Guillen |
| |
Title: Chief
Executive Officer |
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection
with the Quarterly Report of OXIS International, Inc. (the “Company”) on Form
10-QSB for the period ending March 31, 2006 as filed with the Securities and
Exchange Commission on the date therein specified (the “Report”), I, Michael D.
Centron, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C.
Section 1350, that, to the best of my knowledge:
(1)
The
Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2)
The
information contained in the Report fairly presents, in all material respects,
the financial condition and result of operations of the Company at the dates
and
for the periods indicated.
This
Certification has not been, and shall not be deemed, “filed” with the Securities
and Exchange Commission.
| |
|
|
| |
OXIS
INTERNATIONAL, INC. |
|
|
|
| Date:
May
12, 2006 |
By: |
/s/
MICHAEL
D. CENTRON |
| |
Michael D. Centron |
| |
Title:
Chief
Financial Officer |
