UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB/A
Amendment
No. 1
þ Annual
report under Section 13 or 15(d) of the Securities Exchange Act of 1934
for the
fiscal year ended December 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 0-8092
(Exact
name of small business issuer 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)
|
|
Securities
registered pursuant to Section 12(b) of the Act: NONE
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $.001 par value
Check
whether the issuer is not required to file reports pursuant to Section
13 or
15(d) of the Exchange Act. ¨
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
þ
NO
¨
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or
any
amendment to this Form 10-KSB. þ
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule
12b-2 of the Exchange Act).
YES
¨
NO
þ
The
issuer’s revenues for its fiscal year ended December 31, 2006 were
$5,776,000.
Aggregate
market value of the common equity held by non-affiliates of the issuer
as of
March 23, 2007 was $ 4,351,426.
Number
of
shares outstanding of the issuer’s common stock as of March 23, 2007:
44,527,476
shares.
TABLE
OF CONTENTS
|
PART
I
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Page
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|||
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Item
1.
|
Description
of Business
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2
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||
|
Item
2.
|
Description
of Property
|
18
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||
|
Item
3.
|
Legal
Proceedings
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19
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||
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Item
4.
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Submission
of Matters to a Vote of Security Holders
|
19
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PART
II
|
||||
|
Item
5.
|
Market
for Common Equity and Related Stockholder Matters
|
20
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||
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Item
6.
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Management’s
Discussion and Analysis or Plan of Operation
|
23
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Item
6.
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Risk
Factors
|
40
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||
|
Item
7.
|
Financial
Statements
|
57
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||
|
Item
8.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
57
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||
|
Item
8A.
|
Controls
and Procedures
|
58
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||
|
Item
8B.
|
Other
Information
|
58
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||
|
PART
III
|
||||
|
Item
9.
|
Directors,
Executive Officers, Promoters and Control Persons; Compliance with
Section
16(a) of the Securities Exchange Act
|
59
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||
|
Item
10.
|
Executive
Compensation
|
63
|
||
|
Item
11.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
71
|
||
|
Item
12.
|
Certain
Relationships and Related Transactions
|
75
|
||
|
Item
13.
|
Exhibits
|
78
|
||
|
Item
14.
|
Principal
Accountant Fees and Services
|
78
|
||
|
SIGNATURES
|
79
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|||
|
EXHIBIT
INDEX
|
80
|
|||
PART
I
CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This
annual report on Form 10-KSB and the documents incorporated by reference
include
“forward-looking statements.” To the extent that the information presented in
this report discusses financial projections, information or expectations
about
our business plans, results of operations, products or markets, or otherwise
makes statements about future events, such statements are forward-looking.
Such
forward-looking statements can be identified by the use of words such as
“may,”
“will,” “should,” “might,” “would,” “intends,” “anticipates,” “believes,”
“estimates,” “projects,” “forecasts,” “expects,” “plans,” and “proposes.”
Although we believe that the expectations reflected in these forward-looking
statements are based on reasonable assumptions, there are a number of risks
and
uncertainties that could cause actual results to differ materially from
such
forward-looking statements. These include, among others, the cautionary
statements in the “Risk Factors” and “Management’s Discussion and Analysis and
Plan of Operation” sections of this report. These cautionary statements identify
important factors that could cause actual results to differ materially
from
those described in the forward-looking statements. When considering
forward-looking statements in this report, you should keep in mind the
cautionary statements in the “Risk Factors” section above and “Management’s
Discussion and Analysis or Plan of Operation” section below, and other
sections of this report.
The
statements contained in this Registration Statement 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.
All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update
any
such forward-looking statements. It is important to note that our actual
results
could differ materially from those included in such forward-looking statements.
For a more detailed explanation of such risks, please see “Risk Factors” below.
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.
The
following discussion should be read in conjunction with the audited consolidated
financial statements and the notes included in this report on Form 10-KSB
and
the section entitled “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in this report on Form
10-KSB.
1
ITEM
1. DESCRIPTION
OF BUSINESS
Recent
Events
During
2006 and 2007 to date, we have been building our management team and enhancing
our board of directors to bring effective leadership to our company.
On
March
15, 2006, Gary M. Post, Managing Director of Ambient Advisors, LLC, joined
our
board of directors. On May 12, 2006, we entered into an engagement letter
with
Ambient Advisors LLC, or Ambient Advisors. Gary M. Post is the manager
of
Ambient Advisors. Ambient Advisors provided certain services pertaining
to
strategic planning, investor communications and financing strategies and
other
projects at the request of our chief executive officer for a one year period.
On
October 12, 2006, we mutually agreed with Gary M. Post to terminate the
engagement letter with Ambient Advisors LLC, effective October 15, 2006,
and
replace it with a new consulting agreement. On November 6, 2006, we entered
into
an advisory agreement with Ambient Advisors that commenced retroactively
at
October 15, 2006, or the Commencement Date. Ambient Advisors will provide
certain services pertaining to strategic planning, financial planning and
budgeting, investor relations, corporate finance and such additional roles
and
responsibilities as requested for a three year period from the Commencement
Date, after this period on a year-to-year basis.
On
September 15, 2006, Steven T. Guillen’s employment as President and Chief
Executive Officer was terminated. Mr. Guillen remained a member of our
board of
directors.
Also
on
September 15, 2006, Marvin S. Hausman, M.D. was appointed by the board
of
directors as President and Chief Executive Officer of the Company. Dr.
Hausman
remains Chairman of the board of directors. On November 6, 2006, we entered
into
an employment agreement with Dr. Hausman. The commencement date of our
agreement
with Dr. Hausman was set retroactively at October 15, 2006.
On
November 6, 2006, we entered into a consulting agreement with John E. Repine,
M.D., a member of our board of directors, which commenced retroactively
at
October 15, 2006. Dr. Repine will advise us concerning matters of antioxidant
and inflammation research and potential acquisitions (including products,
compounds, intellectual property, companies), product research and development,
and the development and establishment of reference labs for oxidative stress
and
inflammatory reactions for a three year period from the commencement date
of
October 15, 2006, and after this period on a year-to-year basis.
On
November 15, 2006, Michael D. Centron, Vice President and Chief Financial
Officer, resigned and Dr. Hausman was appointed acting Chief Financial
Officer.
On
June
23, 2006, OXIS entered into a mutual services agreement with BioCheck.
Both OXIS
and BioCheck provide certain services to the other corporation to be charged
monthly at an hourly rate with an overhead surcharge. The services that
BioCheck
provides under the agreement include assistance in manufacturing OXIS’ research
assay test kits, assisting in packaging and shipping such research assay
test
kits to OXIS customers, and undertaking research and development of certain
new
OXIS research assay test kits on a case-by-case basis to be agreed upon
between
the parties. OXIS provides services to BioCheck, including marketing and
sales,
website management and materials requirement and control systems.
2
On
July
20, 2006, we entered into an amendment to the exclusive license and supply
agreement originally signed on September 28, 2004 with HaptoGuard, Inc.,
which
has since been merged into Alteon Inc. We granted Alteon three-month extensions
to fulfill its obligation to begin Phase II clinical trials with a licensed
product. Alteon may obtain three such extensions upon payment of $50,000
for
each extension. In addition, we agreed to change the timeline for initiation
of
Phase IIb clinical trials with a licensed product under the license agreement
and agreed to allow the same extension arrangement for that milestone.
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 at that time.
The
related party note bore interest at 7.0%. Interest and principal were due
on
September 10, 2006. Mr. Guillen’s employment was terminated on September 15,
2006. We were in default on this note at September 30, 2006. Subsequent
to
September 30, 2006, Mr. Guillen sued the Company for payment of interest
and
principal due under the note. On November 2, 2006, we repaid the principal
and
accrued interest due on the promissory note with Mr. Guillen in the amount
of
$209,000. The purpose of this loan was to provide us with short term financing
as we sought longer term financing.
On
March
31, 2006, we issued a $400,000 unsecured promissory note to Fagan Capital.
Interest accrued at an annual rate of 8.0% and interest and principal were
due
on June 2, 2006. On July 26, 2006, Fagan Capital extended the maturity
date of
the promissory note to June 1, 2007 and we issued to Fagan Capital a warrant
to
purchase 1,158,857 shares of common stock at an initial exercise price
of $0.35
per share. On October 25, 2006, we prepaid the principal, accrued interest
and
legal fees due in the amount of $426,000. The purpose of this loan was
to
provide us with short term financing as we sought longer term
financing.
On
January 11, 2007, Matthew Spolar, Vice President, Product Technology for
Atkins
Nutritionals, Inc., was appointed to our board of directors.
In
March 2007, we retained
Kevin Pickard, a certified public accountant, to provide management with
support
and assistance with regard to certain matters previously handled by Michael
Centron, our former Chief Financial Officer.
In
April
2007, we entered into an Amended and Restated Exclusive License Agreement
with
Alteon, Inc., under which we granted Alteon an exclusive, sole, worldwide
license to develop, manufacture and market BXT-51072 and related compounds
covered by certain patent rights, with the right to sublicense. This license
agreement amends and supersedes the Exclusive License and Supply Agreement
previously entered into between OXIS and HaptoGuard, Inc. (now part of
Alteon)
on September 28, 2004, as amended. For additional details regarding this
license
agreement, see the section entitled “License
Agreement with Alteon”
on
page
28 of this report.
On
April
12, 2007, Steven T. Guillen resigned from our board of
directors.
3
Recent
Convertible Debenture and Warrant Financing
On
October 25, 2006, we completed a $1,694,250 financing with four accredited
investors, in which we issued convertible notes and warrants. The debentures
are
subject to an original issue discount of 20.318% resulting in proceeds
to OXIS
of $1,350,000 from the transaction. The debentures are convertible at
a
conversion price of $0.35 per share, and the warrants are exercisable
at prices
ranging from $0.35 to $0.385 per share, as adjusted pursuant to a full
ratchet
anti-dilution provision. The debentures mature on October 25, 2008 and
are
secured with substantially all of our assets. Further, the debentures
are
redeemable in cash or in stock (subject to certain conditions) on a monthly
basis beginning on February 1, 2007. We filed a registration statement
to cover
the resale of the common stock underlying the debentures and warrants,
on
December 8, 2006, which was declared effective on February 12, 2007.
For further
details regarding the terms of this financing, refer to the section below
entitled “Recent Sales of Unregistered Securities” on page 21 of this
report.
BioCheck
Acquisition
On
September 19, 2005, we entered into a stock purchase agreement with BioCheck,
Inc., a privately held California corporation, or BioCheck, and its stockholders
to purchase all of its common stock for $6.0 million in cash. For
additional details regarding this transaction, refer to the description
of the
business of BioCheck on page 11 of this report.
4
BUSINESS
Overview
OXIS
International, Inc. focuses on the research and development of technologies
and
therapeutic products in the field of oxidative stress/inflammatory reaction.
The
company’s research agents, assays and therapeutic products have the potential to
predict early disease development as well as treat conditions associated
with
oxidative stress/inflammatory reaction. The company’s present revenues are
mostly derived from sales of diagnostic reagents and assays to medical
research
laboratories. Our diagnostic products include approximately 25 research
reagents
and assays to measure markers of oxidative stress and inflammation.
We also
hold the rights to four therapeutic classes of anti-oxidant/anti-inflammatory
compounds. Specifically, one example of a potent antioxidant, is
L-Ergothioneine, that may be appropriate for sale over-the-counter as a
dietary
supplement. We have acquired a 51% interest in and have the option to purchase
the remaining 49% of BioCheck, Inc.
Our
majority-held subsidiary, BioCheck, Inc. 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.
It
is the
intent of management of both companies to use mutual diagnostic and clinical
expertise and sales expertise of each company to maximize the value of
their
respective portfolios of reagents and diagnostic assays. Moreover, OXIS
and
BioCheck are collaborating in research and development relating to new
predictive biomarker assays applicable to diseases in both humans and animals,
and we expect this collaboration to continue.
We
are
presenting the business descriptions of the parent company OXIS International,
Inc., followed by that of our 51% owned subsidiary, BioCheck, Inc., in
separate
sections for greater clarity.
OXIS
INTERNATIONAL, INC.
OXIS
International, Inc. focuses on the research and development of technologies
and
therapeutic products in the field of oxidative stress/inflammatory reaction,
diseases that are associated with damage from free radicals and reactive
oxygen
species. Biological free radicals are the result of naturally occurring
processes such as oxygen metabolism and inflammatory reactions. Free radicals
react with key organic substances such as lipids, proteins and DNA. Oxidation
of
these biomolecules can damage them, disturbing normal functions and may
contribute to a variety of disease states. Organ systems that are predisposed
to
oxidative stress and damage are the pulmonary system, the brain, the eye,
circulatory system, and reproductive systems. A prime objective of OXIS
is to
use its broad portfolio of oxidative stress biomarkers to identify associations
between reactive biomarker signals and various disease etiologies and
conditions
We
presently derive our revenues primarily from sales of research diagnostic
reagents and assays to medical research laboratories. Our diagnostic products
include approximately 25 research reagents and assays to measure markers
of
oxidative stress.
We hold
the rights to four therapeutic classes of compounds in the area of oxidative
stress and inflammation. One such compound is L-Ergothioneine, a potent
antioxidant produced by OXIS, that may be appropriate for sale over-the-counter
as a dietary supplement. In September 2005 we acquired a 51% interest in
and
have the option to purchase the remaining 49% of BioCheck, Inc.
5
Oxidative
stress and/or inflammation are associated with an excess of free
radicals/reactive
oxygen species and a decrease in antioxidant levels resulting in the development
of tissue or organ damage OXIS has invested significant resources to build
a
substantial patent position on our portfolio of antioxidant therapeutic
technologies and selected oxidative stress/inflammatory reaction
assays.
Marketed
Products
We
have
developed, commercialized and marketed an extensive product line that provides
several types of tools for researchers to identify and measure the balance
between oxidative, nitrosative, antioxidant and inflammatory biomarkers
in
biological samples. We offer more than 60 research products for sale, including
25 research diagnostic assay test kits for markers of oxidative and nitrosative
stress. We also market antibodies, enzymes and controls for use primarily
in
research laboratories. The antibodies provide detection of oxidative,
nitrosative, antioxidant and inflammatory markers in some cases different
from
those measured by our assay test kits. The enzymes have been shown in early
in
vitro
studies
and preclinical animal studies to allow manipulation and control of oxidative
biomarkers of protein and DNA, nitric oxide, antioxidant enzymes and
inflammatory neutrophils. Our assays are useful, as shown in controlled
in
vitro
studies
and in
vivo
preclinical studies, in monitoring oxidative biomarkers of lipids, proteins
and
DNA, and nitrosative and antioxidant biomarkers. In addition, we have marketed
the antioxidant Ergothioneine to selected customers, including prominent
industry leaders in the cosmetics industry.
OXIS
Research Diagnostic Assays
Our
primary research diagnostic assay product line is comprised of approximately
25
assay test kits which measure key markers in free radical biochemistry
for
oxidative and nitrosative stress. Specifically, these assays measure levels
of
general and specific antioxidant activity, oxidative alterations to lipid,
protein and DNA substrates, and pro-oxidant activation of specific white
blood
cells. Fifteen of our research assays were manufactured at our facility
in
Portland, Oregon and with the closing of the Portland facility, the
manufacturing of our research assays was transferred to BioCheck’s Foster City
facility during the first quarter of 2006. As of the date of this Report,
we
along with BioCheck are manufacturing research assays under a mutual services
agreement between BioCheck and us. If BioCheck ceased participating in
the
manufacture of our research assays before we engaged an alternative
manufacturer, our business would be adversely affected. Ten other research
assays are manufactured by third party suppliers pursuant to private label
arrangements or in-house development and manufacture.
Our
research diagnostic assay test kits utilize either chemical (colorimetric)
or
immunoenzymatic (EIA) reactions that can be read using laboratory
spectrophotometers and/or microplate readers, respectively. We believe
our
assays offer advantages over other laboratory methods, including ease of
use,
speed, specificity, accuracy and proprietary technology. Our research diagnostic
assays for markers of oxidative stress are generally protected by trade
secrets,
and to some extent, patents. Five U.S. patents and eight international
patents
have been issued with respect to these assays. The oxidative stress assays
are
sold under the registered trademark “Bioxytech.” We continue to offer a few
proprietary antioxidants and specialty chemicals but our product development
focus and support are directed at assays, antibodies and enzymes in the
area of
oxidative and nitrosative stress.
6
Ergothioneine
L-Ergothioneine
(ERGO) is a naturally occurring, water soluble, antioxidant amino acid
molecule
found in most animals and plants. It is considered one of the most potent
biological antioxidants known. ERGO neutralizes hydroxyl free radicals
and
hypochlorous
acid, which are common products of immune and inflammatory responses in
vivo.
This
nutrient increases respiration and oxidation of fat, protects the mitochondria
from damage due to environmental ultraviolet radiation and aids in the
detoxification of the liver. We have developed the
only
published and patented
method
for producing commercial quantities
of
enantiomerically pure ERGO, which is analytically indistinguishable from
the
biological material. We
hold
the patents and patent applications for the protective effect of ERGO on
mitochondria, the commercial preparation process and the neuroprotective
effects
of
ERGO.
OXIS
has
sold ERGO to selected customers as a
potentially anti-aging
component
in skin
care products sold by
the
cosmetics industry. Sales of ERGO were temporarily halted pending development
of
a large scale-up manufacturing process as well as new chiral analytic
procedures. Sales of ERGO were $1,000 in 2006 and $18,000 in 2005. Sales
during
2006 were
made
to three customers in research quantities. Sales during
2005
were to one customer in the cosmetics industry in connection with such
customer’s marketing campaign of a formulation of cosmetics which included,
among other components,
ERGO.
We have not received any indication that additional orders are expected.
We can
give no assurances that sales of ERGO to this customer or other cosmetics
industry customers will resume.
Marketing
We
market
products and technologies related to oxidative stress. Oxidative stress
occurs
as a result of an imbalance between damaging free-radicals and related
molecules
and their inactivation by antioxidants. Oxidative stress can cause tissue
injury
by triggering cell death or inciting a tissue-damaging inflammatory
response.
During
2006, we continued to market our research diagnostic assay products to
professional scientists in academia, industry and government through our
OXIS
Research
catalog. Our marketing program is centered on targeting medical, environmental
and various industry audiences interested in oxidative and nitrosative
stress.
Nitrosative stress occurs when the generation of reactive nitrogen species
in a
system exceeds the system’s ability to neutralize and eliminate them. Primary
vehicles for this marketing program include printed literature, the OXIS
Research
website and attendance at conferences targeting neuroscience, cancer, cardiac
and nutritional researchers.
Our
assays for markers of oxidative stress are currently being sold both directly
by
us and through a network of distributors to researchers primarily in the
United
States, Europe and the Pacific Rim. We estimate that there are more than
10,000
scientists and clinicians who are working directly in research on free
radical
biochemistry, and who are potential customers for these research diagnostic
assays. We continue to seek to strengthen our international distribution
network
by adding new distributors around the world. These distributors are primarily
focused on sales of research products in the life science market. In 2006,
43
distributors accounted for approximately 44% of our total revenues. Although
we
have not recruited distributors for Ergothioneine, we intend to establish
and
implement a plan to do so in the future.
During
2006, approximately 9% of our total revenues were from Funakoshi, a distributor
customer located in Japan. We expect revenues from sales to Funakoshi for
fiscal
year 2007 to be similar to those in 2006.
7
Foreign
Operations and Export Sales
Revenues
attributed to countries outside the United States based on the location
of
customers were:
|
|
2006
|
2005
|
|||||
| Japan | $ | 151,000 | $ | 163,000 | |||
|
Korea
|
55,000
|
76,000
|
|||||
|
Poland
|
53,000
|
54,000
|
|||||
|
France
|
45,000
|
94,000
|
|||||
|
Canada
|
35,000
|
47,000
|
|||||
|
Other
foreign countries
|
296,000
|
275,000
|
|||||
Revenues
to other foreign countries included sales in more than 40 countries.
International revenue accounted for 42% of our 2006 revenues.
Other
OXIS Therapeutic Compounds
Our
therapeutic and nutraceutical product portfolio includes four classes of
antioxidant molecules: glutathione peroxidase mimics including BXT-51072,
Ergothioneine analogs, lipid soluble antioxidants and superoxide dismutase
(Palosein/Orgotein).
BXT
(Organoselenium) Compounds
Our
lead
therapeutic antioxidant drug candidate, BXT-51072, completed a Phase IIA
clinical trial in inflammatory bowel disease in 1999, but due to the lack
of
financial resources, we ceased further testing of BXT-51072. In September
2004,
we entered into an Exclusive Licensing Agreement relating to BXT-51072
and
related compounds with HaptoGuard, Inc., which has since been merged into
Alteon
Inc. Under the agreement, we granted HaptoGuard 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.
On
April 2,
2007, we entered into an Amended and Restated Exclusive License Agreement
with
Alteon, Inc. (“Alteon”), under which we have granted Alteon worldwide exclusive
rights to a family of orally bioavailable organoselenium compounds that
have
demonstrated potent anti-oxidant and anti-inflammatory properties in clinical
and preclinical studies. The amended and restated exclusive license agreement
supercedes and replaces our prior agreement with HaptoGuard. The new agreement
expands the scope of the original agreement to also include non-cardiovascular
indications.
Under
the new
agreement, Alteon agreed to invest a minimum of $7.5 million over a three
year
period following the effective date of the agreement, in its development
program
for the development, discovery and manufacture of licensed products based
on the
processes and compounds covered under the license. Alteon agreed to pay
us a
non-refundable sum of $500,000, payable in six monthly installments of
$50,000,
with the remaining $200,000 payable upon the closing of a financing of
Alteon approved by Alteon’s shareholders. The agreement also provides for
milestone payments to us upon certain significant milestone events in the
development of a potential drug product. The agreement also entitles us
to
various levels of sublicensing fees and royalties based on a percentage
of net
sales of the licensed product. For additional details regarding this license
agreement, see the section entitled “License
Agreement with Alteon”
on
page
28 of this report.
8
Ergothioneine
as a Veterinary Product
On
March
21, 2007, we signed a supply agreement for ERGO with Golden Gourmet Mushrooms
(GGM) of San Marcos, CA, a leading marketer to the equine industry of natural
organic dietary supplements. OXIS will allow GGM to market the product
under our
owned trademark, ERGOLDTM.
GGM
currently markets Mushroom Matrix (M2™) to the United States equine market and
small animal pet market as a natural organic dietary supplement. GGM’s marketing
plan is to add ERGO (ERGOLDTM)
to the
M2™ product to confer viral shield capacity and sell the product through
veterinary practices. The research data underscoring this nutritional approach
was shown in a recently published paper entitled “Activity of the Dietary
Antioxidant Ergothioneine in a Virus Gene-Based Assay for Inhibitors of
HIV
Transcription.” Potential future markets include making this product available
to domestic animals such as dogs and cats.
Ergothioneine
as a Nutraceutical Supplement
We
believe that our Ergothioneine compound may be well suited for development
as a
nutraceutical supplement that can be sold over the counter in the human
and
veterinary markets and we intend to pursue the development of Ergothioneine
for
use in such markets. We have outsourced the manufacturing of the raw material
and we are working to expand this manufacturing capacity. We are currently
testing Ergothioneine produced in bulk to ensure that its purity level
is
acceptable.
Lipid
Soluble Antioxidants Patented Compound Group
Our
LSA
molecules are designed to mimic the activity of the body’s natural cell
membrane-protecting antioxidant, vitamin E. Molecules from this series
are 20 to
40 fold more potent than vitamin E and move into cell membranes much more
quickly, making them more appropriate as drugs than the natural vitamin.
The
primary disease targets for this series of molecules will include
neurodegenerative diseases such as Alzheimer’s and Parkinson’s disease as well
as cardiovascular diseases.
Superoxide
Dismutase (SOD)
SOD
is a
naturally occurring genzyme found in essentially all living organisms.
SOD
catalyzes the destruction of the “Superoxide” molecule. OXIS SOD has been
marketed in Europe by Tedec-Meiji under the brand name Orgotein. This product
has been used in Spain for many years in the treatment of Chronic Inflammatory
Joint Diseases and in the prevention of Radiation Fibrosis and scarring
in
patients with Colerectal Carcinoma undergoing radiation treatment. Palosein
(superoxide dismutase) is our proprietary free radical scavenger, which
has
demonstrated clinical efficacy as a potent anti-inflammatory drug for tendon
and
ligament injuries, arthritis and disc disease in dogs and horses. The product
had been marketed under the brand name Palosein for veterinary use in the
United
States. The FDA has notified us that an updated release formulation protocol
must be submitted to the agency for approval prior to any further marketing
in
the U.S. of this product. We are currently evaluating various paths to
facilitate reintroduction of Palosein/Orgotein to the marketplace.
We
intend
to focus on and intensify our efforts to form diagnostic, pharmaceutical
and
nutraceutical relationships and strategic partnerships with larger companies
for
the purpose of further developing and exploiting our antioxidant molecules.
No
assurance can be given that our efforts will generate the results anticipated
by
our management or will in the future be favorable to us.
9
Myeloperoxidase
Assay/Cardiovascular Predictor Product
Given
sufficient capital resources, we intend to pursue further development of
our
myeloperoxidase assay, or MPO, a research assay, which could be utilized
either
alone or in combination with other assays in the clinical predictive/ diagnostic
market. Currently, biomarkers used for prediction of heart attacks (myocardial
infarction) present significant limitations in predictive quality due to
variability of patient population, the range for abnormal test results
and other
factors including assay sensitivity and ease of use. In contrast, blood
plasma
MPO levels, as measured by our MPO kit using our proprietary monoclonal
antibody, appear to be a better predictor of patients at risk for cardiac
events
before they occur, according to a report in the October 23, 2003 New England
Journal of Medicine. Our MPO assay kit was used in that study to evaluate
myeloperoxidase levels in 604 hospital emergency room patients with chest
pain.
A single measurement of plasma myeloperoxidase using our MPO assay kit
was able
to identify patients at risk for a future heart attack, even when no tissue
damage to the heart was evident. Furthermore, the test was better than
some
established biomarkers at predicting the risk of a major cardiac event
following
the initial visit to the emergency room.
We
have
undertaken collaborative research with selected research scientists on
the
development of a cardiovascular predictor product using our MPO assay combined
with other assays currently in-house or under development.
We are
reassessing this development program in the context of our new research
and
development association with BioCheck.
Out-Licensed
Technology
Our
lead
therapeutic drug candidate, BXT-51072 (BXT), is a low molecular weight
oral drug
that mimics the antioxidant enzyme known as glutathione peroxidase. BXT directly
neutralizes hydrogen peroxide and appears to protect cells from peroxide
mediated damage. It also inhibits nucleic transcription and prevents the
activation of cytokines, adhesion molecules and inflammatory enzymes, which
are
all mediators of inflammation. We completed a Phase IIA clinical trial
in
inflammatory bowel disease with BXT-51072 in 1999. This Phase IIA trial
was a
multi-center, nonrandomized, open-label, two-arm study which assessed the
safety, pharmacokinetics, and efficacy of BXT-51072; clinical results showed
potential promise as a therapeutic agent in GI disease. Due to the lack
of
financial resources, we ceased further testing of BXT-51072 at that time
until
further funding could be obtained.
In
September 2004, we entered into an Exclusive License and Supply Agreement
relating to BXT-51072 and related compounds with HaptoGuard, Inc., a New
York
based biopharmaceutical company which has since been merged into Alteon
Inc.
Under the agreement, we granted Alteon 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.
Under the license agreement, Alteon (as successor of Haptoguard) is responsible
for worldwide product development programs with respect to the licensed
compounds. We received an upfront license fee of $450,000, and Alteon is
obligated to pay royalties on net sales of certain licensed products, and
additional fees in excess of US $21 million for the achievement of development
milestones as well as regulatory approvals. There can be no assurances
that
royalty payments will result or that milestone payments will be
realized.
On
July
20, 2006, we entered into an amendment to the exclusive license and supply
agreement originally dated September 28, 2004 with HaptoGuard (now merged
with
Alteon). Under the agreement, as subsequently amended on March 22, 2005,
July
20, 2006 and April 6, 2006, we granted Alteon three-month extensions to
fulfill
its obligation to begin Phase II clinical trials with a licensed product,
upon
payment of $50,000 for each extension. In addition, under those amendments
we
agreed to change the timeline for initiation of Phase IIb clinical trials
with a
licensed product under the license agreement and agreed to allow the same
extension arrangement for that milestone. We received a $50,000 payment
from
Alteon on July 24, 2006 for the first extension ending on September 30,
2006.
10
On
April
2, 2007 we entered into an Amended and Restated Exclusive License Agreement
with
Alteon, Inc. pursuant to which we granted Alteon an exclusive, sole, worldwide
license to develop, manufacture and market BXT-51072 and related compounds
covered by certain patent rights, with the right to sublicense. This license
agreement amends and supersedes the Exclusive License and Supply Agreement
previously entered into between OXIS and HaptoGuard, Inc. (now part of
Alteon)
on September 28, 2004, as amended. Alteon’s lead compound under the previous
license, ALT-2074 (formerly BXT 51072) is currently in a Phase 2 clinical
study
for cardiovascular indications and is one of a family of licensed compounds
that
are orally bioavailable organoselenium compounds that have demonstrated
potent
anti-oxidant and anti-inflammatory properties in clinical and preclinical
studies. Unlike the previous license agreement with HaptoGuard, in this
Amended
and Restated Exclusive License Agreement, the license is not limited in
relation
to particular clinical indications. Under the license agreement, Alteon
is
responsible for funding product development programs with respect to the
licensed compounds. OXIS shall receive a non-refundable up-front license
fee of
$500,000 and Alteon is obligated to pay royalties on net sales of licensed
products, with certain adjustments under certain conditions, as well as
additional fees for the achievement of certain development and regulatory
approval milestones. There can be no assurances that royalty payments will
result or that milestone payments will be realized. In addition, within
14 days
of the effective date of the license agreement, Alteon will purchase shares
of
common stock at a premium to the market price in the aggregate amount of
$500,000. Alteon shall control, prosecute and maintain all licensed patents
and
shall be responsible for all costs and expenses in connection with the
filing,
prosecution and maintenance of the licensed patents.
We
have
the right to terminate the license agreement if Alteon fails to pay us
any
required payments under the license agreement and such failure is not cured
after written notice. Alteon may terminate the agreement by providing us
with
180 days’ written notice. Either party may terminate the agreement upon 30 days’
written notice upon certain events relating to the other party’s bankruptcy,
insolvency, dissolution, winding up or assignment for the benefit of creditors,
or upon the other party’s uncured breach of any material provision of the
agreement. Otherwise, the license agreement terminates upon the expiration
of
the underlying patents relating to the licensed compounds, on a country
by
country basis.
BIOCHECK,
INC.
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 manufactures over 40 clinical diagnostic assays 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.
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 stockholders on a pro rata basis for
$3,060,000 in cash. Pursuant to the stock purchase agreement, we will use
our
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.
John
Chen, Ph.D., co-founded BioCheck in January 1997 and has since served as
Chief
Executive Officer and Chairman of the Board. He is a biochemist and clinical
chemist with 30 years of research and development and assay development
expertise. Dr. Chen has developed over 50 enzyme immunoassay and rapid
tests, a
number of which have been approved for marketing by the FDA. His technical
expertise in immunology and biochemistry is complemented by his ability
to
facilitate technology transfer from research and development to
manufacturing.
11
Dr.
Chen
co-founded Rapid Diagnostics, Inc. in 1998, specializing in the development
of
rapid diagnostic test kits for the drugs of abuse. The company was acquired
by
ICN Pharmaceuticals, Inc. in 2002.
Prior
to
co-founding BioCheck, Dr. Chen co-founded Medix Biotech, Inc. in 1983,
specializing in monoclonal/polyclonal antibodies, enzyme immunoassay test
kits,
and rapid test kits. Following Medix Biotech’s acquisition by Genzyme
Corporation in 1992, Dr. Chen remained as Vice President of Research and
Development until 1995. Between 1981 and 1983, he co-founded Pacific Biotech
Inc. that was subsequently acquired by Eli Lilly and Company in 1990. At
Pacific
Biotech, Dr. Chen was instrumental in the development of the first rapid
pregnancy test. He also previously served research scientist roles at Sigma
Chemical, Mallinckrodt, and Beckman Instruments. Dr. Chen holds a B.S.
in
Chemistry from Tunghai University in Taiwan and a Ph.D. in Biochemistry
from the
University of Alberta, Edmonton, Canada.
Effective
December 6, 2005 and in connection with our acquisition of a 51% majority
stake
in BioCheck, Dr. Chen entered into an executive employment agreement, under
which Dr. Chen became employed as President of BioCheck. Dr. Chen has agreed
to
devote not less than 90% of his business time and efforts to the primary
business of BioCheck. In the event that BioCheck terminates the employment
of
Dr. Chen at any time other than for cause, Dr. Chen will receive an amount
equal
to 12 months of his then-current base salary.
BioCheck
Products and Services
BioCheck
offers its clinical laboratory and in
vitro
diagnostics customers 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. Of the 40 total clinical diagnostic assays offered by BioCheck,
17
clinical diagnostic assays have been cleared by the FDA for marketing and
sales
and a number of its products have FDA certificates to foreign governments
and
certificates of exportability. BioCheck’s clinical diagnostic kits have been
registered in Brazil, China, India, Italy, Taiwan, Turkey, and the United
Kingdom, and BioCheck’s distributors deliver its products to countries in
Central and South America, Europe, the Middle East, and Asia.
BioCheck
Clinical Diagnostics
The
clinical diagnostics market consists of companies that develop and manufacture
a
wide array of instruments, immunoassays reagents and data analysis tools.
Diagnostic instruments are the key hardware components, such as automated
immunoassay analyzers, used in the automatic processing of the diagnostic
tests.
Reagents are the bioactive test ingredients which, when combined with the
biologically derived samples, provide the diagnostic test results. The
analysis
tools, such as software programs and applications, assist the researchers
and
clinicians in the interpretation of data collected from high-volume analyzers
and reagents.
BioCheck
focuses primarily on the immunoassay segment of the clinical diagnostics
market.
The simplified, basic components of any immunoassay system are: an antigen,
an
antibody specific to this antigen, and a system to measure the amount of
the
antigen in a given sample. The commonly used immunoassays share four common
components required to produce a high quality immunoassay product: a supply
of
high-purity antigens, a supply of high quality, specific monoclonal or
polyclonal antibodies, a stable detection system, and a precise method
for
separating the bound detection system at the end of the reaction. The ability
to
develop, isolate and maintain the antibodies is a critical component of
immunoassay technology.
12
BioCheck’s
primary product line consists of enzyme linked immunoassay, or ELISA, kits
that
are widely used in medical laboratory settings. An ELISA test consists
of
linking an antibody or antigen to an enzyme in order to detect a match
between
the antibody and antigen. An ELISA test is used to detect specific antigens
in a
biological sample and the presence of antibodies attached to specific antigenic
sites on proteins or other molecules in a biological sample.
The
primary antibody development platform of BioCheck utilizes hybridoma technology.
This process creates monoclonal antibodies to precisely measure very low
concentrations of proteins in blood and plasma. The ability to express,
isolate
and maintain high-quality antibodies is a critical component of immunoassay
test
kit technology. BioCheck uses standard chromatography technology and its
proprietary antibody conjugation methods for its antibody purification
services
and antibody conjugates. We believe that BioCheck’s products and services exceed
industry average standards for stability and purity.
Test
kits
manufactured by BioCheck identify the existence, and in some cases the
amount,
of a specific molecule, or marker, that is an indicator of a condition
or
disease state. These test kits are applicable to cardiac markers; tumor
markers
for liver, ovarian, breast, prostate and gastrointestinal conditions; infectious
diseases including pregnancy-related panel screens for toxoplasmosis, rubella,
cytomegalovirus, and the herpes virus; thyroid function; steroids including
Estradiol, Progesterone, Testosterone, and Estriol; and fertility hormones.
BioCheck’s
revenues from product shipments were $3.7
million
in 2006, $3.5 million in 2005 and $3.9 million in 2004.
BioCheck
Research Reagents and Assay Kits
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
have been marketed since July 2006. Myeloperoxidase is an inflammatory
protein
that has utility as a prognostic marker for cardiac events. A new
myeloperoxidase research assay has been developed that resulted in commercial
sales in November 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. These Id protein assays and reagents were available
for
commercial launch in the fourth quarter of 2006.
BioCheck
Cardiovascular Markers
Coronary
heart disease, or CHD, is the most common form of heart disease caused
by a
narrowing of the coronary arteries that feed the heart. It is the number
one
cause of mortality for both men and women in the U.S. Approximately seven
million Americans suffer from CHD and more than 500,000 Americans die of
heart
attacks caused by CHD every year.
The
National Heart, Lung, and Blood Institute sponsored a multi-center epidemiologic
study in 2003. Increased levels of lipoprotein-associated phospholipase,
or
Lp-PLA2, in patients followed in this study have been linked to increased
risk
of CHD. In collaboration with diaDexus, BioCheck has developed and manufactures
an FDA cleared clinical diagnostic test for Lp-PLA2 called the PLAC test.
While
the PLAC test is not a stand-alone test for predicting CHD, it provides
supportive evidence when used with clinical evaluation and other tools
for
patient risk assessment. An elevated PLAC level with an LDL-cholesterol
level of
less than 130 mg/dL suggests that patients have two to three times the
risk of
having coronary heart disease when compared with patients having lower
PLAC test
results. BioCheck manufactures the PLAC test and diaDexus promotes and
sells it
to the medical community.
BioCheck’s revenues from PLAC test manufacturing and services were approximately
$520,000 in
2006,
$340,000 in 2005 and $580,000 in 2004, however, OXIS management does not
expect
that BioCheck’s sales to diaDexus will be a significant source of revenue in
2007.
13
BioCheck
Research Services
In
addition to clinical and research assay products, BioCheck provides various
research services to pharmaceutical and diagnostic companies worldwide.
Research
services consist primarily of highly specialized laboratory testing that
enhances the speed, and lowers the clinical risk, of the pharmaceutical
development process. The services include custom immunoassay development,
antibody purification and conjugation, and immunoassay assembly.
| · |
Custom
Immunoassay Development. With
over 30 years of experience and the development over 40 immunoassay
products, BioCheck’s in-house research and development team provides
antibodies and antigens, and assists biotechnology and pharmaceutical
customers with the development of their immunoassay test
kits.
|
| · |
Antibody
Purification and Conjugation. Using
chromatography technology and proprietary antibody conjugation
methods,
BioCheck offers antibody purification services and antibody conjugates.
Stability testing has indicated that BioCheck’s conjugates remain active
for five years.
|
| · |
Immunoassay
Assembly Services.
Having developed over 40 immunoassay products, BioCheck has exceptional
test kit packaging experience and can provide custom immunoassay
assembly
services for our customers.
|
Further
Information Regarding OXIS and BioCheck
Research
and Development
BioCheck
invested $518,000, $432,000 and $726,000 in research and development in
the
years 2006, 2005 and 2004, respectively. As of December 31, 2006, BioCheck
employed five employees in research and development. During 2006, BioCheck’s
research staff was primarily used to produce compounds for diagnostic use
and
optimize methods for binding these compounds to biological reagents such
as
antibodies. BioCheck employs a proprietary process for antibody conjugation
resulting in highly stable products. BioCheck also developed proprietary
clinical diagnostics tests that include promising new angiogenesis tumor
markers
and an aggressive breast cancer marker, which were launched in the fourth
quarter of 2006.
Angiogenesis
Tumor Markers
In
April
2004, BioCheck entered into a development and marketing agreement with
AngioGenex for the diagnostic/prognostic applications of Id proteins in
angiogenesis, which is the formation of blood vessels. The therapeutic
and
diagnostic applications of this process were patented by Memorial
Sloan-Kettering Cancer Center and Albert Einstein Medical College and licensed
to AngioGenex. The diagnostic application was subsequently licensed to
BioCheck.
Id
genes
are expressed at high levels to produce Id proteins in many tissues during
human
embryonic development, but are generally not expressed, or expressed at
very low
levels, in adults except in some tumor cell types and tumor blood vessels.
Id1,
Id2 and Id3 proteins have been closely implicated in tumor-associated
angiogenesis. Interfering with the action of the Id proteins may prove
to be
very effective in preventing the growth and metastases of both early and
established tumors. The effectiveness of this approach has been demonstrated
in
commercially available therapeutic drugs, such as Avastin™, which targets the
vascular endothelial growth factor. Such therapeutics have been modestly
effective, suggesting the need for research and development to identify
more
powerful and specific agents for cancer therapy.
14
BioCheck’s
goal is to clinically validate an Id-based diagnostic/prognostic product
in
collaboration with AngioGenex. During 2006, BioCheck’s research staff continued
to work on the clinical validation of potential diagnostic products based
on Id
proteins related to tumor angiogenesis. Monoclonal antibodies to the Id
proteins
are required in order to develop highly sensitive ELISA diagnostic and
prognostic tests. BioCheck has developed rabbit monoclonal anti-Id1, Id2
and Id3
antibodies that can be used in cell and tissue extracts through commonly
utilized detection methods including Western Blot analysis, immunohistochemistry
staining and ELISA tests. Western Blot analysis is a method of separating
proteins by mass through a gel based process. Immunohistochemistry staining
is a
process of localizing proteins in cells by tagging their respective antibodies
with color producing tags. ELISA tests are used for measuring the amount
of Id1,
Id2 and Id3 proteins in cell culture supernatants, and cell and tissue
extracts.
Aggressive
Breast Cancer Marker
In
2005,
BioCheck entered into a development and marketing agreement with HMGene,
Inc.,
or HMGene, based in Piscataway, New Jersey for the development and manufacturing
of an ELISA test for the HMGA2 gene. The HMGA2 gene has been implicated
in
aggressive forms of breast cancer. The detection technology for tissue
staining
and peripheral blood samples related to the HMGA2 gene has been patented
by
HMGene and licensed to BioCheck for the development of rabbit polyclonal
and
monoclonal anti-HMGA2 antibodies. These antibodies can be used for Western
Blot
analyses, immunohistochemistry staining and ELISA assays.
While
we
believe that these are potentially promising diagnostic products, no assurances
can be given that the company will have sufficient funding and resources
to
continue research, development and commercialization of these
technologies.
Patents
and Trademarks
OXIS
Patent Portfolio
We
are
substantially dependent on our ability to obtain and maintain patents and
proprietary rights for our marketed products and to avoid infringing the
proprietary rights of others. We have an extensive portfolio of patents
for
diagnostic assays and several series of small molecular weight molecules
to
detect, treat and monitor diseases associated with damage from free radicals
and
reactive oxygen species. This portfolio provides opportunities to apply
our
technologies to a wide range of diseases and conditions of oxidative
stress.
We
currently hold a total of 90 patents, 29 of which have been granted by
the U.S.
Patent and Trademark Office, and 61 of which have been granted by foreign
regulatory agencies. We also have 26 patent applications pending, including
8
filed in the U.S. and 18 file internationally.
Patent
coverage includes aspects of all four of our classes of small molecular
weight
antioxidant molecules. We hold the patents and patent applications for
the
protective effect of Ergothioneine on mitochondria, the commercial preparation
process and the neuroprotectant methods and compositions of Ergothioneine.
We have
sublicensed to HaptoGuard, Inc. three patents and one patent application
related
to BXT-51072. Our assays for markers of oxidative stress are generally
protected
by trade secrets, and to some extent, patents. Five U.S. patents and eight
international patents have been issued with respect to these assays. The
oxidative stress assays are sold under the registered trademark
BioxytechÒ.
Associated foreign patents have been issued in most cases and foreign patent
applications have been filed associated with the listed patents and patent
applications.
Below
we
have listed selected patents and patent applications relating to our core
business including marketed products and sublicenses.
15
OXIS
Research Assay Patents
|
·
|
U.S.
Patent 5,726,063 issued March 10, 1998 for “Method of Colorimetric
Analysis of Malonic Dialdehyde and 4-Hydroxy-2-Enaldehydes as
Indexes of
Lipid Peroxidation, Kits for Carrying Out Said Method, Substituted
Indoles
for Use in Said Method and their Preparation” will expire on May 6,
2014.
|
|
·
|
U.S.
Patent 5,543,298 issued August 6, 1996 for “Method for Assaying the SOD
Activity by Using a Self-Oxidizable Compound Necessary for its
Implementation, Self-Oxidizable Compounds and Preparation Thereof” will
expire on August 6, 2013.
|
|
·
|
U.S.
Patent 6,235,495 issued May 1, 2001 for “Methods for the Quantiation of In
Vivo Levels of Oxidized Glutathione” will expire on November 12,
2019.
|
|
·
|
U.S.
Patent 5,861,262 issued January 19, 1999 for “Method of the Specific
Immunoassay of Human Plasma Glutathione Peroxidase, Kit for its
Implementation, Oligopeptides and Antibodies Specific for the
Method” will
expire on January 19, 2016.
|
|
·
|
U.S.
Patent 5,817, 520 issued October 6, 1998 for “Spectrophotometric Methods
for Assaying Total Mercaptans, Reduced Glutathione (GSH) and
Mercaptans
other than GSH in an Aqueous Medium, Reagents and Kits for Implementing
Same” will expire on December 15,
2012.
|
OXIS
Ergothioneine Patents
|
·
|
U.S.
Patent 5,438,151 issued August 1, 1995 entitled “Process for the
Preparation of Ergothioneine” will expire on February 8,
2014.
|
|
·
|
U.S.
Patent 6,103,746 issued August 8, 2000 entitled “Methods and Compositions
for the Protection of Mitochondria” will expire on February 19,
2018.
|
|
·
|
Patent
Application Serial No. 60/367,845 filed March 26, 2002 entitled
“Neuroprotectant Methods, Compositions and Screening Methods
Thereof”.
|
Selected
Licensed BXT-51072 Patents
|
·
|
U.S.
Patent 5,968,920 issued October 19, 1999 entitled “Novel Compounds having
a Benzoisoelen-Azoline and -Azine Structure, Method for Preparing
Same and
Therapeutic Uses Thereof” will expire on April 7, 2015.
|
|
·
|
U.S.
Patent 6,093,532 issued July 25, 2000 entitled “Method for Storing a
Biological Organ Transplant Graft Using a Benzisoelen-Azoline
or -Azine
Compound” will expire on April 7, 2015.
|
|
·
|
U.S.
Patent 5,973,009 issued October 26, 1999 entitled “Aromatic Diselenides
and Selenosulfides, their Preparation and their Uses, more Particularly
their Therapeutic Use” will expire on December 23,
2017.
|
|
·
|
U.S.
Patent 6,525,040 issued February 25, 2003 entitled “Cyclic Organoselenium
Compounds, their Preparation and their Uses” will expire on December 23,
2017.
|
These
patents can expire earlier if they are abandoned or are not adequately
maintained. We cannot assure you that corresponding patents will be issued
or
that the scope of the coverage claimed in our patent applications will
not be
significantly reduced prior to any patent being issued.
16
BioCheck
Patent Applications and Other Rights
As
of
December 31, 2006, BioCheck had filed two patent applications covering
research
and diagnostic assays to detect Id1 and Id2 related to tumor angiogenesis.
Angiogenesis is the formation of blood vessels in tumors.
In
April
2004, AngioGenex, Inc. (“AngioGenex”), based in New York City, and BioCheck
entered into an agreement to develop cancer diagnostic and prognostic products
based on the Id-gene platform technology licensed exclusively to AngioGenex
by
the Albert Einstein College of Medicine and the Memorial Sloan Kettering
Cancer
Center. The agreement assigns to BioCheck exclusive rights to develop and
market
diagnostics based on AngioGenex’s Id technology in return for
royalties.
A
critical component of the clinical validation of an Id protein-based
diagnostic/prognostic product is the development of monoclonal antibodies,
or
mAbs, to the Id proteins. Id proteins play a significant role in the process
of
tumor related angiogenesis and other functions related to blood vessel
formation. BioCheck has developed rabbit monoclonal anti-Id1, Id2 and Id3
antibodies for Western Blot analyses and immunohistochemistry staining,
and
ELISA tests for measuring Id1, Id2 and Id3 in cell culture supernatants,
and
cell and tissue extracts.
AngioGenex
and BioCheck have filed joint patent applications for the mAbs to the Id
proteins. Under the joint patent application, BioCheck has the exclusive
rights
to the diagnostic applications of the Id proteins while AngioGenex owns
the
rights for the therapeutic drug applications. U.S. Provisional Application
Serial No. 60/691,060 was filed on June 16, 2005 related to the Id1 protein,
titled “Novel Rabbit Monoclonal Antibodies to Id1”. The patent application
related to the Id3 protein, titled “Rabbit Monoclonal Antibody Against Human Id3
Protein” was filed on January 27, 2006.
BioCheck
has filed a patent application for a clinical diagnostic related to the
troponin
protein
complex. Certain types of troponin including cardiac troponin I and T are
highly
sensitive and specific indicators of damage to the heart muscle. Myocardial
infarction, or a heart attack, can be differentiated from unstable angina,
or
pain, by measuring troponin in the blood in patients with chest pain. Patent
application serial number 11/116,290 was filed April 28, 2005 titled
“Immunoassay for Cardiac Troponin-I in Non-Human Mammalian Species.” John Chen
is a co-inventor of the immunoassay that is the subject of this patent
application.
Competition
According
to Boston Biomedical Consultants and Morgan Stanley Research estimates,
the
worldwide clinical diagnostics market including instruments, immunoassays,
rapid
diagnostic tests and data analysis tools was approximately $22 billion
in
sales
revenue in 2004 and increased approximately 9% from the previous year
Competition in the clinical diagnostics market is intense and highly fragmented,
with the largest competitor, Roche Diagnostics, holding a 16% market
share.
BioCheck’s
direct competitors are developers and manufacturers of research and clinical
diagnostic products and include, but are not limited to, Adaltis Inc.,
BioSource
International, Inc., Diagnostic Products Corporation, Monobind, Inc. and
BioClone Australia Pty Ltd.
17
In
order to
continue to successfully market BioCheck’s products and services, the company
will be required to demonstrate that its immunoassay products meet or exceed
the
industry standards for quality as measured by high levels of purity, stability,
precision of measurement and cost effectiveness. The company’s competitors may
succeed in developing or marketing products that are more effective or
commercially attractive. The launch of these competitive products may adversely
impact the market pricing for BioCheck’s products as some of these competitors
have substantially greater financial, technical, research and development
resources and more established marketing, sales, distribution and service
organizations.
Government
Regulation
In
the
United States, our current products and manufacturing practices are not
subject
to regulation by the United States Food and Drug Administration, or FDA,
pursuant to the Federal Food, Drug and Cosmetic Act as it relates to research
products. Development, manufacture and marketing of clinical diagnostic
products
which we are currently pursuing and therapeutic compounds are regulated
by the
FDA. We believe that we currently are in compliance with all such regulations
and intend that in the future all of our diagnostic and therapeutic developments
will be in compliance with these regulations, as needed.
Employees
As
of
December 31, 2006, we had six full time employees, including one scientist
in
manufacturing/research and development, one employee in marketing and two
employees in administrative and operational support. On
December 6, 2005, we initiated a relocation plan to cease our operations
in
Portland, Oregon and relocate to Foster City, California at premises adjacent
to
those of BioCheck. 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. As part of the relocation
that was
effective February 15, 2006, we offered all regular full-time employees
who were
not relocated to Foster City, California severance benefits under an employee
incentive package estimated to cost approximately $119,000.
None of
our employees are subject to a collective bargaining agreement. We believe
our
relationship with our employees is good, and we have never experienced
an
employee-related work stoppage.
As
of
December 31, 2006, BioCheck employed 24 full-time employees. Included among
BioCheck’s full-time are 14 technicians in manufacturing, five scientists and
research associates in research and development, two specialists in quality
control functions, and professionals in administrative and operational
support.
Facilities
We
maintain a facility adjacent to BioCheck at 323 Vintage Park Drive, Suite
B,
Foster City, CA 94404, which also serves as our corporate headquarters.
BioCheck
occupies a 15,000 square foot facility adjacent to us, at Vintage Park,
323
Vintage Park Drive, Foster City, CA 94404. For further details regarding
our
facilities, please refer to Item 2 -- “Description of Property” below, which is
incorporated by reference.
ITEM
2. DESCRIPTION
OF PROPERTY
In
December 6, 2005 we purchased 51% of BioCheck and initiated a transition
plan to
consolidate all operations at BioCheck’s manufacturing facility. Consequently,
during 2006, we entered into a three-year lease agreement commencing
on April 1, 2006 for
4,136
square feet of space immediately adjacent to BioCheck at 323 Vintage Park
Drive,
Suite B, Foster City, CA 94404. These
premises serve to accommodate the relocation and consolidation of our corporate
headquarters and operations.
18
BioCheck
occupies approximately 15,000 square feet of
administrative, laboratory and manufacturing space located at Vintage Park,
323
Vintage Park Drive, Foster City, CA 94404, pursuant to a lease expiring
in
December 2008. The facility has been certified according to the U.S. Food
and
Drug Administration, or FDA, Good Manufacturing Practice standards, which
are
subject to annual audits by the FDA. In addition, the facility has been
certified to meet the highest international manufacturing standard (ISO
13485)
generally accepted in Europe and Asia, according to the International
Organization for Standardization, or ISO. BioCheck believes that it is
in
compliance with all other regulatory certifications applicable to its line
of
business, including Device Manufacturing License for the state of California,
Registration of Device Establishment, Certificate of Foreign Government
and
Certificate of Exportability.
ITEM
3. LEGAL
PROCEEDINGS
A
member
of our board of directors, Steven T. Guillen, who was terminated from his
position as our President and Chief Executive Officer on September 15,
2006,
filed a lawsuit against us and up to 25 unnamed additional defendants.
The
complaint alleges breaches of contract relating to Mr. Guillen’s employment
agreement and a promissory note that is in default, breach of implied covenant
of good faith and fair dealing, wrongful termination and violation of the
California Labor Code in relation to the non-payment of back pay. On March
10,
2006, we received $200,000 in exchange for an unsecured promissory note
with Mr.
Guillen. Interest and principal were due on September 10, 2006 and at September
30, 2006 were in default. On November 2, 2006, we repaid Mr. Guillen the
principal and accrued interest due on the promissory note in the amount
of
$209,000 and back pay with penalties and accrued interest of $96,000.
Settlement
Agreement with Steve Guillen.
In
March 2007, we and Mr. Guillen executed and delivered a Confidential Separation
Agreement (dated February 12, 2007), under which we agreed to pay Mr. Guillen
the sum of $250,000 in twelve equal monthly installments, subject to standard
payroll deductions and withholdings. We also agreed that Mr. Guillen’s stock
options would immediately vest, and that to the extent the shares underlying
such options are not registered, Mr. Guillen would be granted piggyback
registration rights to cover these shares. Mr. Guillen would have the right
to
exercise his options until September of 2009. We also agreed to pay Mr.
Guillen’s health insurance premiums for the twelve-month separation period in
accordance with the Consolidated Omnibus Budget Reconciliation Act of 1985.
In
exchange for these payments and
benefits, Mr. Guillen and OXIS agreed to mutually release all claims, dismiss
all complaints as applicable, and neither party shall pursue any future
claims
regarding Mr. Guillen’s prior employment and compensation arrangements with us.
A copy of the separation agreement is included as Exhibit 10.43 filed with
this
annual report on Form 10-K.
No
other
director, officer or affiliate of ours, and no owner of record or beneficial
owner of more than five percent (5%) of the securities of the Company,
or any
associate of any such director, officer or security holder is a party adverse
to
us or any of our subsidiaries or has a material interest adverse to us
or any of
our subsidiaries in reference to pending litigation.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matter
was submitted during the fourth quarter of 2006 to a vote of security holders,
through solicitation or proxies or otherwise.
19
PART
II
ITEM
5. MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock continues to be traded in the Over-The-Counter Bulletin Board
and
remains listed in France on the Nouveau Marché and in Germany on the Frankfurt
Stock Exchange.
The
market represented by the OTCBB is limited and the price for our common
stock
quoted on the OTCBB is not necessarily a reliable indication of the value
of our
common stock. The following table sets forth the high and low bid prices
for
shares of our common stock for the periods noted, as reported on the OTCBB.
Quotations reflect inter-dealer prices, without retail mark-up, mark-down
or
commission and may not represent actual transactions.
|
YEAR
|
|
PERIOD
|
|
HIGH
|
|
LOW
|
|
|||
|
Fiscal
Year 2004
|
|
|
First
Quarter
|
|
$
|
0.90
|
|
$
|
0.52
|
|
|
|
|
|
Second
Quarter
|
|
$
|
0.84
|
|
$
|
0.45
|
|
|
|
|
|
Third
Quarter
|
|
$
|
0.69
|
|
$
|
0.32
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
0.65
|
|
$
|
0.41
|
|
|
Fiscal
Year 2005
|
|
|
First
Quarter
|
|
$
|
0.57
|
|
$
|
0.28
|
|
|
|
|
|
Second
Quarter
|
|
$
|
0.43
|
|
$
|
0.27
|
|
|
|
|
|
Third
Quarter
|
|
$
|
0.48
|
|
$
|
0.28
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
0.39
|
|
$
|
0.24
|
|
|
Fiscal
Year 2006
|
|
|
First
Quarter
|
|
$
|
0.38
|
|
$
|
0.26
|
|
|
|
|
|
Second
Quarter
|
|
$
|
0.44
|
|
$
|
0.32
|
|
|
|
|
|
Third
Quarter
|
|
$
|
0.36
|
|
$
|
0.21
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
0.28
|
|
$
|
0.18
|
|
Stockholders
As
of
December 31, 2006, we had approximately 43,610,773 shares of common stock
issued
and outstanding which were held by approximately 2,834 stockholders of record,
which total does not include stockholders who hold their shares in street
name.
The transfer agent for our common stock is ComputerShare, whose address is
250
Royall Street, Canton, Massachusetts 02021.
DIVIDEND
POLICY
Our
board
of directors determines any payment of dividends. We utilize our assets to
develop our business and, consequently, we have never paid a dividend and
does
not expect to pay dividends in the foreseeable future. Any future decision
with
respect to dividends will depend on future earnings, operations, capital
requirements and availability, restrictions in future financing agreements
and
other business and financial considerations.
20
Recent
Sales of Unregistered Securities
January
2004 Bridge Financing.
On
January 14, 2004, we completed a private placement of securities pursuant
to
which (i) certain investors paid us $570,000 in the aggregate, (ii) we issued
promissory notes to the investors in principal amount of $570,000 in the
aggregate, which promissory notes are convertible in due course into up to
1,425,000 shares of our common stock or into up to 3,800,000 shares of common
stock in the event of a default by OXIS and if notified of such by the note
holders (to which no notice was received) and (iii) we issued warrants to
the
investors exercisable for up to 1,250,000 shares of common stock at an exercise
price of $0.50 per share. We received notice on December 30, 2004, that all
investors had signed irrevocable letters of intent to convert their promissory
notes and accrued interest into common stock. As a result, we issued 1,520,932
shares of common stock to the note holders. In connection with the note holders
converting their notes to common stock, we issued 760,469 new warrants having
a
$1.00 exercise price and a five-year life. The private placement was exempt
from
registration under Section 4(2) of the Securities Act of 1933.
December
2004 Common Stock and Warrant Financing.
On
December 30, 2004, we entered into definitive agreements with investors relating
to the private placement of $6.5 million of our securities through the sale
of
12,264,158 shares of our common stock at $0.53 per share. On January 6, 2005,
we
closed the private placement transaction with the investors. The transaction
resulted in the issuance on or about January 10, 2005 of 12,264,158 shares
of
our common stock for which we received gross proceeds of $0.53 per share.
In
addition, on January 6, 2005, we issued to the purchasers in the private
placement transaction warrants to purchase an additional 12,264,158 shares
of
our common stock, 50% at an exercise price of $0.66 per share and 50% at
an
exercise price of $1.00 per share. Upon the closing of the private placement
transaction, as partial consideration for services rendered as the placement
agent for the private placement transaction, we issued to Rodman & Renshaw,
LLC a warrant to purchase 306,604 shares of our common stock at an exercise
price of $0.66 per share and a warrant to purchase 306,604 shares of our
common
stock at an exercise price of $1.00 per share. The offer, sale and issuance
of
securities to the purchasers in the private placement were exempt from
registration under the Securities Act, pursuant to Section 4(2) thereof,
and
Rule 506 promulgated by the SEC under the Securities Act. The 12,264,158
shares
of common stock issuable on December 30, 2004 and the 12,264,158 shares of
common stock to be issued upon exercise of warrants were registered under
a Form
SB-2 registration statement that was declared effective on May 27,
2005.
April
2005 Note Conversion.
During
April 2005, 459,355 shares of common stock were issued in exchange for
cancellation of a note payable for $160,000 and accrued interest of $84,000.
The
private placement was exempt from registration under Section 4(2) of the
Securities Act of 1933.
Series
B Preferred Stock Financing.
During
the third quarter of 2005, 428,389 outstanding shares of Series B preferred
stock were converted into 85,678 shares of common stock. The Series B preferred
stock had certain preferential rights with respect to liquidation and dividends.
Holders of Series B preferred stock were entitled to noncumulative annual
dividends at the rate of $0.115 per share if and when declared by our board
of
directors. No dividends to Series B preferred stockholders were issued or
unpaid
during 2005. The private placement was exempt from registration under Section
4(2) of the Securities Act of 1933.
October
2006 Convertible Debenture and Warrant Financing.
On
October 25, 2006, we entered into a Securities Purchase Agreement, or Purchase
Agreement, with four accredited investors, or the Purchasers. In conjunction
with the signing of the Purchase Agreement, we issued Secured Convertible
Debentures, or Debentures, and Series A, B, C, D, and E Common Stock Warrants,
or Warrants, to the Purchasers, and the parties also entered into a registration
rights agreement and a Security Agreement, or collectively, the Transaction
Documents.
21
Pursuant
to the terms of the Purchase Agreement, we issued the Debentures in an aggregate
principal amount of $1,694,250 to the Purchasers. The Debentures are subject
to
an original issue discount of 20.318% resulting in proceeds to OXIS of
$1,350,000 from the transaction. The Debentures mature on October 25, 2008,
but
may be prepaid by us at any time provided that the common stock issuable
upon
conversion and exercise of the Warrants is covered by an effective registration
statement. The Debentures are convertible, at the option of the Purchasers,
at
any time, into shares of common stock at $0.35 per share, as adjusted pursuant
to a full ratchet anti-dilution provision, or the Conversion Price. Beginning
on
February 1, 2007, we began to amortize the Debentures in equal installments
on a
monthly basis resulting in a complete repayment by the maturity date, or
the
Monthly Redemption Amounts. The Monthly Redemption Amounts can be paid in
cash
or in shares, subject to certain restrictions. If we choose to make any Monthly
Redemption Amount payment in shares of common stock, the price per share
is the
lesser of the Conversion Price then in effect and 85% of the weighted average
price for the 10 trading days prior to the due date of the Monthly Redemption
Amount.
Pursuant
to the Debentures, we covenanted that we will not incur additional indebtedness
for borrowed money, other than our current Bridge Bank Promissory Note which
was
owing at the time the Debenture financing was completed. The Bridge Bank
Promissory Note was paid in full in February 2007. We also covenant that
we will
not pledge, grant or convey any new liens on its assets. The obligation to
pay
all unpaid principal will be accelerated upon an event of default, including
upon failure to perform its obligations under the Debenture covenants, failure
to make required payments, default on any of the Transaction Documents or
any
other material agreement, lease, document or instrument to which we are
obligated, the bankruptcy of OXIS or related events. The Purchasers have
a right
of first refusal to participate in up to 100% of any future financing undertaken
by us until the later of the date that the Debentures are no longer outstanding
and the one year anniversary of the effective date of the registration
statement. We are restricted from issuing shares of common stock or instruments
convertible into common stock for 90 days after the effective date of the
registration statement with certain exceptions. We are also prohibited from
completing any subsequent financing involving a variable rate transaction
until
such time as no Purchaser holds any of the Debentures. In addition, until
such
time as any Purchaser holds any of the securities issued in the Debenture
transaction, if we issue or sell any common stock or instruments convertible
into common stock which a Purchaser reasonably believes is on terms more
favorable to such investors than the terms pursuant to the Transaction
Documents, we are obligated to amend the terms of the Transaction Documents
to
such Purchaser the benefit of such better terms. We may prepay the entire
outstanding principal amount of the Debentures, plus accrued interest and
other
amounts payable, at our option at any time without penalty, provided that
a
registration statement is available for the resale of shares underlying the
Debentures and Warrants, as more fully described in the Debentures. The purpose
of this Debenture transaction is to provide us with intermediate term financing
as we seek longer term financing.
On
October 25, 2006 in conjunction with the signing of the Purchase Agreement,
we
issued to the Purchasers five year Series A Warrants to purchase an aggregate
of
2,420,357 shares of common stock at an initial exercise price of $0.35 per
share, one year Series B Warrants to purchase 2,420,357 shares of common
stock
at an initial exercise price of $0.385 per share, and two year Series C Warrants
to purchase an aggregate of 4,840,714 shares of common stock at an initial
exercise price of $0.35 per share. In addition, we issued to the Purchasers
Series D and E Warrants which become exercisable on a pro-rata basis only
upon
the exercise of the Series C warrants. The six year Series D Warrants to
purchase 2,420,357 shares of common stock have an initial exercise price
of
$0.35 per share. The six year Series E Warrants to purchase 2,420,357 shares
of
common stock have an initial exercise price of $0.385 per share. The initial
exercise prices for each warrant are adjustable pursuant to a full ratchet
anti-dilution provision and upon the occurrence of a stock split or a related
event.
Pursuant
to the registration rights agreement, we filed a registration statement covering
the public resale of the shares underlying the Series A, B, C, D and E Warrants
and the Debentures within 45 days of the closing of the transaction and caused
the registration to be declared effective within 120 days of the closing
date,
The registration statement was declared effective by the SEC on February
12,
2007.
22
Pursuant
to the Security Agreement, we agreed to grant the Purchasers a security interest
in substantially all of our assets. We also agreed to pledge our respective
ownership interests in our wholly-owned subsidiaries, OXIS Therapeutics,
OXIS
Isle of Man, and our partial subsidiary, BioCheck, Inc. Our subsidiaries,
OXIS
Therapeutics and OXIS Isle of Man, also provided a subsidiary guarantee to
the
Purchasers in connection with the transaction.
As
of
March 31, 2007 we were in technical default under the October 2006 debentures,
because of non-payment of the monthly redemption payments which became due
beginning on February 1, 2007. We are currently in negotiations with the
debenture holders regarding the form of payment of these monthly redemption
amounts, which may be in the form of shares of our common stock or cash.
Anti-dilution
Adjustments Under Warrant to Fagan Capital.
In
connection with a loan, we issued a warrant to Fagan Capital on June 2, 2006,
for the purchase of up to 1,158,857 shares of our common stock at an exercise
price of $0.35 per share. This warrant contained an anti-dilution clause,
which
if triggered, would cause the warrant to be adjusted to increase the number
of
shares of common stock purchasable, and would lower the exercise price of
the
warrant. Specifically, the anti-dilution provision provides that if the Company
should issue common stock for a per share price below $0.35, excluding up
to 2.3
million shares issued for any purpose, then the exercise price (initially
$0.35
per share) would be adjusted downward to equal the per-share price net of
selling expenses received by the Company for such common stock (including
the
issuance of warrants or options with an exercise price below $0.35 per share).
The warrant further provides that each time that an adjustment is required
to be
made to the exercise price of the warrant, proportionate adjustments will
also
be made to the number of shares which may be purchased under the warrant,
so
that (i) the total proceeds payable to the Company upon exercise in full
of the
warrant immediately prior to such adjustment to the exercise price shall
equal
(ii) the total proceeds payable to the Company upon exercise in full of the
warrant immediately after such adjustment to the exercise price. In November
2006, we issued options and warrants for the purchase of shares in excess
of the
2.3 million limit, at an exercise price as low as $0.18, to various officers
and
consultants. As a result, the warrant issued to Fagan Capital was adjusted
automatically pursuant to its terms, such that it became exercisable for
up to a
maximum of 2,253,333 shares of common stock, and an exercise price of $0.18
per
share.
Anticipated
Investment by Alteon.
Under
the license agreement dated April 2, 2007 between Alteon, Inc and us, Alteon
agreed to make an equity investment in our common stock, at a per-share price
equal to 125% of the ten-day average trading price following the effective
date
of the agreement and no less than $0.24 per share, resulting in net proceeds
to
us of $500,000.
|
ITEM
6.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
|
The
following discussion and analysis or plan of operation should be read in
conjunction with the consolidated financial statements and related notes.
This
discussion contains forward-looking statements based upon our current
expectations and involves risks and uncertainties. Our actual results and
the
timing of certain events could differ materially from those anticipated in
these
forward-looking statements as a result of certain factors, including those
set
forth in “Risks Related to Our Business,” “Business” and elsewhere in this
document. See the paragraphs following the heading “Forward-Looking Statements”
for additional discussion.
Management’s
Discussion and Analysis or Plan of Operation is based on our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States.
23
Introduction
We
incurred net losses of $4.9 million in 2006 and $3.1 million in 2005.
BioCheck generated a net profit of $0.3 million in 2006 and $0.2 million in
2005. This amount of profit generated from BioCheck is not enough to offset
our
current losses. Our 2006 net loss includes an expense of $1.6 million for
an expense related to the convertible debentures issued in October 2006.
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 $1,208,000 at December
31, 2006 of which $792,000 was held by BioCheck. The cash held by us of $416,000
at December 31, 2006 is not sufficient to sustain our operations through
the
first half of 2007 without additional financings. Since BioCheck has been
and is
expected to continue to be cash flow positive, management believes that
BioCheck’s cash will be sufficient to sustain BioCheck’s operating activities
for the next 12 months. We cannot access the cash held by our majority-held
subsidiary, BioCheck, to pay for our parent level operating expenses. During
March 2006, we received $200,000 from Steven T. Guillen, our President and
Chief
Executive Officer in exchange for a promissory note and we entered into a
Promissory Note, or Note, with Fagan Capital, Inc., pursuant to which Fagan
Capital loaned us $400,000. Both of these notes were repaid from the proceeds
of
our $1,350,000 convertible debenture offering in October 2006.
Overview
OXIS
International, Inc. focuses on the research and development of technologies
and
therapeutic products in the field of oxidative stress/inflammatory reaction,
diseases that are associated with damage from free radicals and reactive
oxygen
species. Biological free radicals are the result of naturally occurring
processes such as oxygen metabolism and inflammatory reactions. Free radicals
react with key organic substances such as lipids, proteins and DNA. Oxidation
of
these biomolecules can damage them, disturbing normal functions and may
contribute to a variety of disease states. Organ systems that are predisposed
to
oxidative stress and damage are the pulmonary system, the brain, the eye,
circulatory system, and reproductive systems. A prime objective of OXIS is
to
use its broad portfolio of oxidative stress biomarkers and look for an
association between reactive biomarker signals and various disease etiologies
and conditions
We
presently derive our revenues primarily from sales of research diagnostic
reagents and assays to medical research laboratories. Our diagnostic products
include approximately 25 research reagents and assays to measure markers
of
oxidative stress.
We hold
the rights to four therapeutic classes of compounds in the area of oxidative
stress and inflammation. One such compound is L-Ergothioneine, a potent
antioxidant produced by OXIS, that may be appropriate for sale over-the-counter
as a dietary supplement. In September 2005 we acquired a 51% interest in
and
have the option to purchase the remaining 49% of BioCheck, Inc.
24
Our
majority-held subsidiary, BioCheck, Inc. 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.
Current
significant financial and operating events and strategies are summarized
as
follows:
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 approximately 4,000
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 employee severances offered to all regular full-time
employees who were not relocated to Foster City, California.
Product
Development
During
2006, we expanded our product portfolio of research assay kits for the research
markets with the addition of eight new assay products. Given the
availability of sufficient capital resources, we plan to pursue research
and
development of additional oxidative stress cardiac markers. We are
planning to expand our cardiovascular and inflammatory products and assays
through the combination of our MPO assay with other in-house assays and new
assays in development. 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.
| · |
Reagents
for the detection of HMGA2, a marker for aggressive breast cancer
(in July
2006);
|
| · |
Research
assays for the detection of HMGA2;
|
| · |
Myeloperoxidase,
an inflammatory protein that has utility as a prognostic marker
for
cardiac events; and
|
| · |
A
new myeloperoxidase research assay.
|
In
addition, BioCheck has developed research assays and rabbit monoclonal
antibodies for the detection of human and mouse Id proteins. Id proteins
play a
central role in cell differentiation, and Id1 and Id3 play a central and
critical role in tumor related angiogenesis. BioCheck began making Id
protein reagents commercially available in January 2007, and it expect that
the
Id protein assays will be ready for commercial launch during 2007.
25
Loans
and Warrants
On
December 6, 2005, we entered into a non-revolving one-year loan agreement
with
KeyBank, N.A., or KeyBank, and received funds of $3,060,000 to purchase 51%
of
BioCheck’s common stock. As security for our repayment obligations, we granted a
security interest to KeyBank in our $3,060,000 certificate of deposit at
KeyBank. This loan was repaid during February 2006 and a new one-year loan
agreement for $3,060,000 was entered into with Bridge Bank. As part of the
loan
arrangement with Bridge Bank, we granted a security interest in a $3,060,000
certificate of deposit moved from KeyBank to Bridge Bank. The loan bears
interest at 3.0% and the certificate of deposit bears interest at 1.0%. This
loan was paid in full in February 2007 primarily with the proceeds of
non-renewal of the certificate of deposit.
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 at that time.
The
related party note bore interest at 7.0%. Interest and principal were due
on
September 10, 2006. Mr. Guillen’s employment was terminated on September 15,
2006. On November 2, 2006, the Company paid to Mr. Guillen amounts owing
under
the note.
On
March
31, 2006, we issued a $400,000 unsecured promissory note to Fagan Capital,
Inc.,
or Fagan Capital. Interest accrued at an annual rate of 8.0% and interest
and
principal were due on June 2, 2006. On July 26, 2006, Fagan Capital extended
the
maturity date of the promissory note to June 1, 2007 and we issued to Fagan
Capital a warrant to purchase 1,158,857 shares of common stock at an initial
exercise price of $0.35 per share. On October 25, 2006, the Company prepaid
the
principal, accrued interest and legal fees due pursuant to the Renewal Note
in
the amount of $426,000 and the Company undertook to finalize a registration
rights agreement covering the shares underlying the common stock purchase
warrant within 7 days of the prepayment of the Renewal Note.
Debt
Financing
On
October 25, 2006, we entered into a Securities Purchase Agreement, or Purchase
Agreement, with four accredited investors, or the Purchasers. In conjunction
with the signing of the Purchase Agreement, we issued Secured Convertible
debentures, or debentures, and Series A, B, C, D, and E common stock warrants,
and we also provided the investors with registration rights under a registration
rights agreement, and a security interest in our assets under a security
agreement to secure the performance of our obligations under the
debentures.
Pursuant
to the terms of the Purchase Agreement, we issued the debentures in an aggregate
principal amount of $1,694,250 to the Purchasers. The debentures were issued
with an original issue discount of 20.318%, and resulted in proceeds to us
of
$1,350,000. The debentures are convertible, at the option of the holders,
at any
time into shares of common stock at $0.35 per share, as adjusted in accordance
with a full ratchet anti-dilution provision (referred to in this prospectus
as
the “conversion price”). Beginning on the first of the month following the
earlier of the effective date of the registration statement to be filed pursuant
to the registration rights agreement and February 1, 2007, we will amortize
the
debentures in equal installments on a monthly basis resulting in a complete
repayment by the maturity date (the “Monthly Redemption Amounts”). The Monthly
Redemption Amounts can be paid in cash or in shares, subject to certain
restrictions. If we choose to make any Monthly Redemption Amount payment
in
shares of common stock, the price per share is the lesser of the conversion
price then in effect and 85% of the weighted average price for the ten trading
days prior to the due date of the Monthly Redemption Amount.
26
The
performance of our duties and obligations under the debentures are secured
by
substantially all of our assets under a security agreement. As additional
security to the debenture holders, we have also pledged the shares we hold
in
our subsidiaries, including 51% of BioCheck, Inc., and all of the shares
of
capital stock of our wholly-owned subsidiaries, OXIS Therapeutics, Inc. and
OXIS
Isle of Man Limited. In addition, OXIS Therapeutics, Inc. and OXIS Isle of
Man
Limited, have each entered into a subsidiary guarantee under which these
subsidiaries have guaranteed the performance, at the parent level, of our
obligations under the debentures.
Under
the
debentures, we agreed that we will not incur additional indebtedness for
borrowed money, other than the Bridge Bank Promissory Note which has now
been
paid off. We also covenant that we will not pledge, grant or convey any new
liens on its assets. The obligation to pay all unpaid principal will be
accelerated upon an event of default, including upon failure to perform its
obligations under the Debenture covenants, failure to make required payments,
default on any of the Transaction Documents or any other material agreement,
lease, document or instrument to which we are obligated, the bankruptcy of
OXIS
or related events. The Purchasers have a right of first refusal to participate
in up to 100% of any future financing undertaken by us until the later of
the
date that the debentures are no longer outstanding and the one year anniversary
of the effective date of the registration statement. We are restricted from
issuing shares of common stock or instruments convertible into common stock
for
90 days after the effective date of the registration statement with certain
exceptions. We are also prohibited from affecting any subsequent financing
involving a variable rate transaction until such time as no Purchaser holds
any
of the debentures. In addition, until such time as any Purchaser holds any
of
the securities issued in the Debenture transaction, if we issue or sell any
common stock or instruments convertible into common stock which a Purchaser
reasonably believes is on terms more favorable to such investors than the
terms
pursuant to the Transaction Documents, we are obligated to amend the terms
of
the Transaction Documents to such Purchaser the benefit of such better terms.
We
may prepay the entire outstanding principal amount of the debentures, plus
accrued interest and other amounts payable, at our option at any time without
penalty, provided that a registration statement is available for the resale
of
shares underlying the debentures and warrants, as more fully described in
the
debentures. The purpose of this Debenture transaction is to provide us with
intermediate term financing as we seek longer term financing.
On
October 25, 2006 in conjunction with the signing of the Purchase Agreement,
we
issued to the Purchasers five year Series A warrants to purchase an aggregate
of
2,420,357 shares of common stock at an initial exercise price of $0.35 per
share, one year Series B warrants to purchase 2,420,357 shares of common
stock
at an initial exercise price of $0.385 per share, and two year Series C warrants
to purchase an aggregate of 4,840,714 shares of common stock at an initial
exercise price of $0.35 per share. In addition, we issued to the Purchasers
Series D and E warrants which become exercisable on a pro-rata basis only
upon
the exercise of the Series C warrants. The six year Series D warrants to
purchase 2,420,357 shares of common stock have an initial exercise price
of
$0.35 per share. The six year Series E warrants to purchase 2,420,357 shares
of
common stock have an initial exercise price of $0.385 per share. The initial
exercise prices for each warrant are adjustable pursuant to a full ratchet
anti-dilution provision and upon the occurrence of a stock split or a related
event.
Under
the
security agreement, we agreed to grant to each of the investors a security
interest in substantially all of our assets. We also agreed to pledge our
respective ownership interests in our wholly-owned subsidiaries, OXIS
Therapeutics, OXIS Isle of Man, and our partial subsidiary, BioCheck, Inc.
OXIS
Therapeutics and OXIS Isle of Man also provided a subsidiary guarantee to
the
Purchasers in connection with the transaction.
27
Stockholder
Approval
On
August
1, 2006, at the OXIS 2006 Annual Meeting of Stockholders, the five nominated
directors were re-elected, the proposal to amend the Company’s Certificate of
Incorporation to increase the number of authorized shares of common stock
from
95,000,000 to 150,000,000 was approved, and the proposal to increase the
number
of shares reserved for issuance under the OXIS 2003 Stock Incentive Plan
from
3,600,000 shares to 5,600,000 shares was also approved by the
stockholders.
License
Agreement with Alteon
OXIS
entered into an Amended and Restated Exclusive License Agreement with Alteon,
Inc. with an effective date of April 5, 2007. Pursuant to the license agreement
OXIS grants Alteon an exclusive, sole, worldwide license to develop, manufacture
and market BXT-51072 and related compounds covered by certain patent rights,
with the right to sublicense. This license agreement amends and supersedes
the
Exclusive License and Supply Agreement previously entered into between OXIS
and
HaptoGuard, Inc. (now part of Alteon) on September 28, 2004, as amended.
Alteon’s lead compound under the previous license, ALT-2074 (formerly BXT 51072)
is currently in a Phase 2 clinical study for cardiovascular indications and
is
one of a family of licensed compounds that are orally bioavailable
organoselenium compounds that have demonstrated potent anti-oxidant and
anti-inflammatory properties in clinical and preclinical studies. Unlike
the
previous license agreement with HaptoGuard, in this Amended and Restated
Exclusive License Agreement, the license is not limited in relation to
particular clinical indications. Under the license agreement, Alteon is
responsible for funding product development programs with respect to the
licensed compounds. OXIS shall receive a non-refundable up-front license
fee of
$500,000 and Alteon is obligated to pay royalties on net sales of licensed
products, with certain adjustments under certain conditions, as well as
additional fees for the achievement of certain development and regulatory
approval milestones. There can be no assurances that royalty payments will
result or that milestone payments will be realized. In addition, within 14
days
of the effective date of the license agreement, Alteon will purchase shares
of
common stock at a premium to the market price in the aggregate amount of
$500,000. Alteon shall control, prosecute and maintain all licensed patents
and
shall be responsible for all costs and expenses in connection with the filing,
prosecution and maintenance of the licensed patents.
As
a part
of the agreement, Alteon agreed to make an equity investment in our common
stock, at a per-share price equal to 125% of the ten-day average trading
price
following the effective date of the agreement and no less than $0.24 per
share,
resulting in net proceeds to us of $500,000.
We
have
the right to terminate the license agreement if Alteon fails to pay us any
required payments under the license agreement and such failure is not cured
after written notice. Alteon may terminate the agreement by providing us
with
180 days’ written notice. Either party may terminate the agreement upon 30 days’
written notice upon certain events relating to the other party’s bankruptcy,
insolvency, dissolution, winding up or assignment for the benefit of creditors,
or upon the other party’s uncured breach of any material provision of the
agreement. Otherwise, the license agreement terminates upon the expiration
of
the underlying patents relating to the licensed compounds, on a country by
country basis.
28
Agreements
with Ambient Advisors LLC
On
May
12, 2006, we entered into an engagement letter with Ambient Advisors LLC,
(“Ambient Advisors”). Gary M. Post, a member of the board of directors, is the
manager of Ambient Advisors. Ambient Advisors provided certain services
pertaining to strategic planning, investor communications and financing
strategies and other projects at the request of our chief executive officer
for
a one year period in return for monthly compensation of $5,000. We granted
Ambient Advisors a ten year warrant to purchase 108,000 shares of OXIS
common
stock at an exercise price of $0.39 per share, with 9,000 shares becoming
exercisable each month over the term of the agreement. On October 12, 2006,
we
mutually agreed with Gary M. Post to terminate the engagement letter with
Ambient Advisors LLC, effective October 15, 2006, replace it with a new
consulting agreement and accelerate the vesting of the warrant to be fully
vested effective October 15, 2006.
On
November 6, 2006, we entered into an advisory agreement with Ambient Advisors
that commenced retroactively at October 15, 2006, or the Commencement Date.
Ambient Advisors will provide certain services pertaining to operations,
strategic planning, financial planning and budgeting, investor relations,
corporate finance and such additional roles and responsibilities as requested
for a three year period from the Commencement Date, after this period on
a
year-to-year basis. Ambient Advisors will receive annual compensation in
the
amount of $83,333, payable quarterly in advance in cash, common stock based
on a
price equal to 85% of average of the five closing prices for the five trading
days prior to the date that the issuance was first authorized by the board
of
directors in November 2006, or in ten year warrants equal to that number
of
warrants equal to 1.5 times the number of shares that would otherwise be
received. For the initial quarterly payment, Ambient Advisors received a
ten
year warrant to purchase 173,608 shares of common stock with an exercise
price
of $0.20 per share, vesting immediately. As part of the compensation, we
granted
Ambient Advisors a ten year common stock purchase warrant to purchase 550,000
shares of OXIS common stock at an exercise price of $0.20 per share, vesting
as
follows: (i) 275,000 warrant shares vesting in four equal quarterly installments
commencing on January 15, 2007 and every three months thereafter and (ii)
and
the remaining 275,000 warrant shares vesting in eight quarterly installments
over two years. Additionally, OXIS granted Ambient Advisors, as a sign on
bonus,
a non-qualified option to purchase 333,333 shares at exercise price of $0.20
per
share, with vesting in six equal installments, commencing on November 14,
2006,
through the 180th day after the Commencement Date. During the three year
term of
the agreement, Ambient Advisors will receive an annual bonus based upon the
attainment of agreed upon goals and milestones as determined by the board
of
directors and its compensation committee. During the remainder of calendar
year
2006, Ambient Advisors’ bonus will be pro rated on an annual bonus rate in the
range of 25% to 50% of the advisory fee, and the bonus for subsequent years
of
the term of the agreement will be in a similar target range. The bonuses
payable
hereunder will be paid in cash, although at Ambient Advisors’ sole option, they
may be paid in stock (or in the form of ten year warrants with cashless exercise
provisions, with 1.5 times the number of warrant shares to be issued in lieu
of
the number of shares of common stock), based upon the average of the closing
bid
and asked prices for the 5 trading days immediately prior to the awarding
to
Ambient Advisor of the bonus for a particular year.
On
September 15, 2006, our board of directors appointed Marvin S. Hausman, M.D.
as
President and Chief Executive Officer of OXIS. Dr. Hausman remains the Chairman
of the board of directors.
On
October 12, 2006, we mutually agreed with Marvin S. Hausman, M.D. to terminate
the consulting agreement with NW Medical Research Partners, of which Dr.
Hausman
is the sole member and manager, effective October 15, 2006. Under the consulting
agreement dated October 1, 2005, Dr. Hausman provided certain services
pertaining to licensing of intellectual property, development of potential
products, financing activities and other issues at the request of our Chief
Executive Officer. In conjunction with the termination of the consulting
agreement, the board of directors approved the issuance of 330,769 shares
of
restricted common stock to Dr. Hausman in lieu of cash payment of $67,000
in
fees and expenses due under the consulting agreement to the date of
termination.
29
On
November 6, 2006, we entered into an employment agreement with Dr. Hausman
that
commenced retroactively at October 15, 2006. Dr. Hausman will serve as our
President and Chief Executive Officer for a three year period from the
commencement date of October 15, 2006, and after this period on a year-to-year
basis. Dr. Hausman will receive annual compensation in the amount of $250,000,
payable quarterly in advance in cash, common stock based on a price equal
to 85%
of average of the five closing prices for the five trading days prior to
the
date that the issuance is authorized by the board of directors, or in ten
year
warrants equal to that number of warrants equal to 1.5 times the number of
shares that would otherwise be received. For the initial quarterly payment,
Dr.
Hausman was issued 347,222 restricted shares of common stock. During the
three
year term of the agreement, Dr. Hausman will receive an annual bonus based
upon
the attainment of agreed upon goals and milestones as determined by the board
of
directors and its compensation committee. During the remainder of calendar
year
2006, Dr. Hausman’s bonus will be pro rated on an annual bonus rate in the range
of 25% to 50% of his base salary, and the bonus for subsequent years of the
term
of the agreement will be in a similar target range. The bonuses payable
hereunder will be paid in cash, although at Dr. Hausman’s sole option, they may
be paid in stock (or in the form of ten year warrants with cashless exercise
provisions, with 1.5 times the number of warrant shares to be issued in lieu
of
the number of shares of common stock), based upon the average of the closing
bid
and asked prices for the 5 trading days immediately prior to the awarding
to Dr.
Hausman of the bonus for a particular year. Once we have raised at least
$2.5
million in one or more financings (equity, debt or convertible debt, in addition
to the financing closed on October 25, 2006) or in a strategic transaction,
Dr.
Hausman may elect, at any time, in lieu of receiving a quarterly issuance
of
stock (or warrants in lieu thereof), to receive his base salary in cash,
payable
monthly on our regular pay cycle for professional employees. As part of the
compensation, we granted Dr. Hausman a ten year a non-qualified option to
purchase 495,000 shares of OXIS common stock at an exercise price of $0.20
per
share, vesting as follows: (i) 247,500 option shares vesting in four equal
quarterly installments commencing on January 15, 2007 and every three months
thereafter and (ii) and the remaining 247,500 option shares vesting in eight
quarterly installments over two years. Additionally, we granted Dr. Hausman,
as
a sign on bonus, 500,000 restricted shares of common stock and a ten year
common
stock purchase warrant to purchase 1,505,000 shares at an exercise price
of
$0.20 per share, with vesting in six equal installments, commencing on November
14, 2006, through the 180th day after the Commencement Date.
We
are
providing Dr. Hausman with an annual office expense allowance of $50,000,
for
the costs of maintaining an office in the Stevenson, Washington area, payable
quarterly in advance in the form of common stock, at a price equal to 85%
of the
market price. For the first installment, representing $12,500 of the office
expense allowance, Dr. Hausman was issued 69,444 restricted shares of common
stock. Once we have completed a qualifying financing, the office expense
allowance will be paid in cash in advance, commencing for the quarter next
following the quarter in which the Qualifying Financing occurred. Additionally,
Dr. Hausman will receive family health and dental insurance benefits and
short-term and long-term disability policies.
Consulting
Agreement with John E. Repine, M.D.
On
November 6, 2006, we entered into a consulting agreement with John E. Repine,
M.D. that commenced retroactively at October 15, 2006.
30
Dr.
Repine
will advise us concerning matters of antioxidant and inflammation research
and
potential acquisitions (including products/compounds/intellectual property,
companies), product research and development, and the development and
establishment of reference labs for oxidative stress and inflammatory reactions
for a three year period from the commencement date of October 15, 2006, and
after this period on a year-to-year basis. Dr. Repine will receive annual
compensation in the amount of $36,000, payable quarterly in advance in cash,
common stock based on a price equal to 85% of average of the five closing
prices
for the five trading days prior to the date that the issuance was first
authorized by the board of directors in November 2006, or in ten year warrants
equal to that number of warrants equal to 1.5 times the number of shares
that
would otherwise be received. For the initial quarterly payment, Dr. Repine
received 50,000 restricted shares of common stock. As part of the compensation
under the consulting agreement, OXIS granted Dr. Repine a ten year stock
option
to purchase 200,000 shares of OXIS common stock at an exercise price of $0.20
per share, vesting as follows: (i) 100,000 option shares vesting in four
equal
quarterly installments commencing on January 15, 2007 and every three months
thereafter and (ii) and the remaining 100,000 option shares vesting in eight
quarterly installments over two years. Additionally, we granted Dr. Repine,
as a
sign on bonus, a non-qualified option to purchase 200,000 shares at exercise
price of $0.20 per share, with vesting in six equal installments, commencing
on
November 14, 2006, through the 180th day after the Commencement Date. During
the
term of the consulting agreement, Dr. Repine is eligible to receive annual
and
special bonuses based upon the attainment of agreed upon goals and milestones
as
determined by our Chief Executive Officer. Each bonus payable will be paid
in
cash, although at Dr. Repine’s sole option, such bonus may be paid in stock (or
in the form of ten year warrants with cashless exercise provisions, with
1.5
times the number of warrant shares to be issued in lieu of the number of
shares
of common stock), based upon the average of the closing bid and asked prices
for
the 5 trading days immediately prior to the awarding to Dr. Repine of the
particular bonus.
Preferred
Stock Conversion
During
2005, 85,678 shares of common stock were issued for the conversion and
cancellation of all 428,389 outstanding shares of Series B Preferred Stock
that
were valued at $4,000.
Note
Conversion
During
April 2005, 459,355 shares of common stock were issued for cancellation of
a
note payable for $160,000 and accrued interest of $84,000.
Management
Team and Board of Directors
On
February 28, 2005, Steve T. Guillen was appointed as our President and Chief
Executive Officer. Mr. Guillen replaced Marvin S. Hausman, M.D., as acting
Chief
Executive Officer and Dr. Hausman remained as Chairman of the board of
directors. During October 2005 John Repine, M.D., Chief Executive Officer,
President and Scientific Director of the Webb-Waring Institute for Cancer,
Aging
and Antioxidant Research joined our board of directors. Effective
December 6, 2005, Dr. John Chen entered into an executive employment
agreement with us as President of BioCheck. 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. Timothy C. Rodell, M.D., declined to stand for re-election
at the Annual Meeting of Stockholders held on August 1, 2006. On September
15,
2006, Steven T. Guillen’s employment as the Company’s President and Chief
Executive Officer was terminated. Mr. Guillen remained a member of the board
of
directors. On September 15, 2006, Marvin S. Hausman, M.D., was appointed
by the
board of directors as President and Chief Executive Officer of the Company.
Dr.
Hausman remains Chairman of the board of directors. Mr. Centron resigned
as an
officer and employee effective November 15, 2006. On
April
12, 2007, Mr. Guillen resigned from the board of directors.
31
Loan
Repayment
On
June 1, 2004, we received $1,200,000 in exchange for a note and entered
into a loan agreement with our majority stockholder at that time, Axonyx,
Inc.
We repaid the note on January 6, 2005.
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 stockholders 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 statements of operations
include the results of operations of BioCheck from December 6, 2005, the
date of
acquisition, and the consolidated balance sheets include the assets and
liabilities of BioCheck at December 31, 2005 and December 31, 2006.
The purchase price of $3,337,000 was based on cash paid to BioCheck’s
stockholders of $3,060,000, legal expense of $155,000 and a finder’s fee of
$122,000. 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.
On
June
23, 2006, we entered into a mutual services agreement with BioCheck. Each
of
OXIS and BioCheck will provide certain services to the other corporation
to be
charged monthly at an hourly rate with an overhead surcharge. The services
that
BioCheck will provide include assisting in manufacturing the bulk of our
research assay test kits, assisting in packaging and shipping such research
assay test kits to our customers, and undertaking research and development
of
certain new OXIS research assay test kits on a case-by-case basis to be agreed
upon between the parties. We will provide services to BioCheck, including
marketing and sales, website management and materials requirement and control
systems.
The
agreement terminates on December 6, 2009, or earlier upon mutual consent
of the
parties, upon 90 day prior written notice by either party, by either party
if a
monthly billing is unpaid after 60 days if a 15 day notice and opportunity
to
cure has been provided, or upon a material breach of the Agreement after
30
days’ notice and opportunity to cure the breach.
Results
of Operations
Our
revenues and expenses increased substantially from 2005 to 2006 with the
consolidation of all of BioCheck’s results of operations for the year ended
December 31, 2006. Only one month of BioCheck’s revenues and expenses are
included in the results of operations for the year ended December 31, 2005
because they were not acquired until December 6, 2005.
32
Revenues
The
following table presents the changes in revenues from 2005 to 2006:
|
Increase
(Decrease) from 2005
|
|||||||||
|
2006
|
2005
|
Amount
|
%
|
||||||
|
Product
revenues
|
$
|
5,201,000
|
$
|
2,397,000
|
$
|
2,804,000
|
117%
|
||
|
License
revenues
|
575,000
|
100,000
|
475,000
|
475%
|
|||||
|
Total
revenues
|
$
|
5,776,000
|
$
|
2,497,000
|
$
|
3,279,000
|
131%
|
||
For
the
three year ended December 31, 2006 the increase in revenues was primarily
attributable to the consolidation of $4,282,000 of revenues from BioCheck
partially offset by a $729,000 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 2007 product revenues to increase modestly from 2006
as we
introduce new products such as our improved MPO. We intend to develop new
diagnostic test kits and evaluate our product offerings, pricing and
distribution network with the plan of increasing sales volume.
Cost
of Product Revenues
The
following table presents the changes in cost of product revenues from 2005
to
2006:
|
Increase
(Decrease) from 2005
|
|||||||||
|
2006
|
2005
|
Amount
|
%
|
||||||
|
Cost
of product revenues
|
$
|
3,084,000
|
$
|
1,345,000
|
$
|
1,739,000
|
129%
|
||
For
the
year ended December 31, 2006, the increase in cost of product revenues is
attributable to the consolidation of $2,203,000 of costs from the operations
of
BioCheck that were partially offset by a decrease from the OXIS parent
company due to the decrease in sales.
Gross
profit of $2,692,000 in 2006 was significantly higher than the gross profit
of
$1,152,000 in 2005 because the additional gross profits generated from BioCheck.
Gross profit as a percentage of revenues remained constant at approximately
46%.
33
Research
and Development Expenses
The
following table presents the changes in research and development expenses
from
2005 to 2006:
|
Increase
(Decrease) from 2005
|
|||||||||
|
2006
|
2005
|
Amount
|
%
|
||||||
|
Research
and development
|
$
|
708,000
|
$
|
499,000
|
$
|
209,000
|
42%
|
||
For
the
year ended December 31, 2006, the increase in research and development expenses
is primarily attributable to the consolidation of $518,000 of costs from
the
operations of BioCheck and increased patent amortization expense of $94,000.
The
increase was partially offset by decreased salary and benefits costs and
direct
project expenses. We expect 2007 research and development costs to be
approximately the same as 2006. 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:
|
Increase
(Decrease) from 2005
|
|||||||||
|
2006
|
2005
|
Amount
|
%
|
||||||
|
Selling,
general and administrative
|
$
|
4,654,000
|
$
|
2,342,000
|
$
|
2,312,000
|
99%
|
||
For
the
year ended December 31, 2006, the increase in selling, general and
administrative expenses is primarily attributed to the consolidation of costs
from the operations of BioCheck of $1,170,000, severance charges and increased
costs for accounting, legal, stockholder communication and investor relations
activities; labor and related costs including contract labor and associated
transportation costs; and non-cash compensation. We expect 2007 selling,
general
and administrative expenses to be approximately the same as 2006.
Purchased
In-process Research and Development
In
connection with our acquisition of 51% of the outstanding shares of BioCheck
on
December 6, 2005, $1.5 million of purchased in-process research and development
was identified as an intangible asset. The applicable research projects were
subsequently deemed not to have future uses or markets. As such, this identified
intangible asset was expensed in 2005 at the date of acquisition.
Financing
Fees
In
connection with the $1,350,000 convertible debenture in October 2006, we
incurred non-cash financing charges of $1,674,000 related to the warrants
and
beneficial conversion feature of the notes.
34
Interest
Expense
Interest
expense of $484,000 during the year ended December 31, 2006 was primarily
due to
the loan with KeyBank that was transferred to Bridge Bank incurred in connection
with the BioCheck acquisition, the addition of new debt of $600,000 in March
2006 and the convertible debenture in October 2006 and non-cash financing
expense of $166,000 related to the renewal of a note with Fagan
Capital.
Liquidity
and Capital Resources
On
a
consolidated basis, we had cash and cash equivalents of $1,208,000 at December
31, 2006 of which $792,000 was held by BioCheck. The cash held by us of $416,000
at December 31, 2006 is not sufficient to sustain our operations through
the
first half of 2007 without additional financings. Since BioCheck has been
and is
expected to continue to be cash flow positive, management believes that
BioCheck’s cash will be sufficient to sustain BioCheck’s operating activities
for the next 12 months. We cannot access the cash held by our majority-held
subsidiary, BioCheck, to pay for our parent level operating expenses. During
March 2006, we received $200,000 from Steven T. Guillen, our President and
Chief
Executive Officer in exchange for a promissory note and we entered into a
Promissory Note, or Note, with Fagan Capital, Inc., pursuant to which Fagan
Capital loaned us $400,000. Both of these notes were repaid from the proceeds
of
our $1,350,000 convertible debenture offering in October 2006. In addition,
in
connection with the license agreement between Alteon and us, Alteon agreed
to
make an equity investment in our common stock, at a per-share price equal
to
125% of the ten-day average trading price following the effective date of
the
agreement and no less than $0.24 per share, resulting in net proceeds to
us of
$500,000.
The
current rate of cash usage at our parent level raises substantial doubt about
our 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
obtained debt financing in which we received proceeds of $1,350,000 in October
2006 and we are seeking additional equity financing to obtain sufficient
funds
to sustain operations . From this debt financing, $635,000 was used to repay
existing debt, accrued interest and related legal fees. We plan to increase
revenues by introducing new products. However, we cannot provide assurance
that
we will successfully obtain equity or other financing, if any, sufficient
to
finance our goals or that we will increase product related revenues. Our
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 that we
cannot continue in existence.
During
2005 we spent $3.2 million on the acquisition of 51% of BioCheck’s common
stock and $3.1 million on a restricted certificate of deposit at KeyBank,
which was used as collateral under the loan agreement with KeyBank. Capital
expenditures were $64,000 and $33,000 in 2006 and 2005 respectively. We had
no
commitments for capital expenditure at December 31, 2006. We
anticipate that in 2007 the BioCheck manufacturing facility in Foster City,
California will require expenditures to support our business objective. We
spent
$44,000 and $172,000 to file patents in 2006 and 2005,
respectively.
Net
cash provided by financing activities
On
June 1, 2004, we received $1,200,000 in exchange for a note and entered
into a loan agreement with our majority stockholder at the time, Axonyx,
Inc. We
repaid the note on January 6, 2005. In a $6,500,000 private placement of
our
common stock on December 30, 2004, we received net proceeds of $5,818,000
in
exchange for 12,264,158 shares of common stock which were issuable at December
31, 2004.
35
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. Steven T. Guillen, our -president and chief executive officer
at
that time, purchased 600,000 shares of common stock for $240,000, pursuant
to
the terms of an employment agreement on February 28, 2005. This loan has
since
been repaid.
On
October 25, 2006, we completed a private placement of debentures and warrants
under a securities purchase agreement with four accredited investors. In
this
financing we issued secured convertible debentures in an aggregate principal
amount of $1,694,250 (referred to in this prospectus as the “debentures”), and
Series A, B, C, D, and E common stock warrants (referred to in this prospectus
as the “warrants”). We also provided the investors registration rights under a
registration rights agreement, and a security interest in our assets under
a
security agreement to secure performance of our duties and obligations under
the
debentures. Under the warrants, the investors have the right to purchase
an
aggregate of approximately 14.5 million shares of our common stock, at initial
exercise prices ranging from $0.35 to $0.385 per share, and these exercise
prices are adjustable according to a full ratchet anti-dilution provision,
i.e.,
the exercise price may be adjusted downward in the event that we conduct
a
financing at a price per share below $0.35 or $0.385 per share, respectively.
The Series D and E warrants are only exercisable pro rata subsequent to the
exercise of the Series C warrants. The debentures were issued with an original
issue discount of 20.318%, and resulted in proceeds to us of $1,350,000.
The
debentures are convertible, at the option of the holders, at any time into
shares of common stock at $0.35 per share, as adjusted in accordance with
a full
ratchet anti-dilution provision (referred to in this prospectus as the
“conversion price”). Beginning on the first of the month following the earlier
of the effective date of the registration statement to be filed pursuant
to the
registration rights agreement and February 1, 2007, we will amortize the
debentures in equal installments on a monthly basis resulting in a complete
repayment by the maturity date (the “Monthly Redemption Amounts”). The Monthly
Redemption Amounts can be paid in cash or in shares, subject to certain
restrictions. If we choose to make any Monthly Redemption Amount payment
in
shares of common stock, the price per share is the lesser of the conversion
price then in effect and 85% of the weighted average price for the ten trading
days prior to the due date of the Monthly Redemption Amount.
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 at that time.
The
related party note bears interest at 7.0%. Interest and principal were due
on
September 10, 2006. Mr. Guillen’s employment was terminated on September 15,
2006. We were in default on this note at December 31, 2006. Subsequent to
December 31, 2006, Mr. Guillen sued the Company for payment of interest and
principal due under the note. On November 2, 2006, we repaid the principal
and
accrued interest due on the promissory note with Mr. Guillen in the amount
of
$209,000.
On
March
31, 2006, we issued a $400,000 unsecured promissory note to Fagan Capital.
Interest accrues at an annual rate of 8.0% and interest and principal were
due
on June 2, 2006. On July 26, 2006, Fagan Capital extended the maturity date
of
the promissory note to June 1, 2007 and we issued to Fagan Capital a warrant
to
purchase 1,158,857 shares of common stock at an initial exercise price of
$0.35
per share. On October 25, 2006, we prepaid the principal, accrued interest
and
legal fees due in the amount of $426,000.
Our
partial subsidiary, BioCheck, leases facilities under operating leases in
Foster
City, California that expire in December 2008. During 2004, BioCheck entered
into a sublease of an unused Foster City, California facility to the end
of the
lease term in 2008 that reduced our operating lease commitments. Net minimum
lease payments to which we are committed under these leases at December 31,
2005
are $227,000 in 2006, $201,000 in 2007 and $208,000 in 2008. In addition,
we
entered into an operating lease for 4,136 square feet of space adjacent to
space
occupied by our BioCheck subsidiary in Foster City, California starting on
April
1, 2006 and ending on March 31, 2009. The annual base rent under the lease
agreement begins at $62,000 per year and increases incrementally to $66,000
by
the end of the lease term.
36
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. On December 6, 2005, we purchased 51% of the common stock of
BioCheck. Pursuant to the stock purchase agreement, we will use our 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 will be increased by
an
additional 8% per annum from December 6, 2005. If we have 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.
As
described above, on October 25, 2006 we completed a convertible debenture
and
warrant financing under a securities purchase agreement with accredited
investors. In this financing, we issued secured convertible debentures in
an
aggregate principal amount of $1,694,250. We also provided the investors
registration rights under a registration rights agreement, and a security
interest in our assets under a security agreement to secure to secure the
performance of our duties and obligations under the debentures. The debentures
were issued with an original issue discount of 20.318%, and resulted in proceeds
to us of $1,350,000. The debentures are convertible, at the option of the
holders, at any time into shares of common stock at $0.35 per share, as adjusted
in accordance with a full ratchet anti-dilution provision (referred to in
this
prospectus as the “conversion price”). Beginning on the first of the month
following the earlier of the effective date of the registration statement
to be
filed pursuant to the registration rights agreement and February 1, 2007,
we
will amortize the debentures in equal installments on a monthly basis resulting
in a complete repayment by the maturity date (the “Monthly Redemption Amounts”).
The Monthly Redemption Amounts can be paid in cash or in shares, subject
to
certain restrictions. If we choose to make any Monthly Redemption Amount
payment
in shares of common stock, the price per share is the lesser of the conversion
price then in effect and 85% of the weighted average price for the ten trading
days prior to the due date of the Monthly Redemption Amount.
The
performance of our duties and obligations under the debentures are secured
by
substantially all of our assets under a security agreement. As additional
security to the debenture holders, we have also pledged the shares we hold
in
our subsidiaries, including 51% of BioCheck, Inc., and all of the shares
of
capital stock of our wholly-owned subsidiaries, OXIS Therapeutics, Inc. and
OXIS
Isle of Man Limited. In addition, OXIS Therapeutics, Inc. and OXIS Isle of
Man
Limited, have each entered into a subsidiary guarantee under which these
subsidiaries have guaranteed the performance, at the parent level, of our
obligations under the debentures.
Critical
Accounting Policies
Our
accounting policies are explained in Note 1 to the audited consolidated
financial statements for the year ended December 31, 2006 included in this
Form
10KSB. 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 prospectus 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, or SFAS, No. 141, “Business Combinations.” The
consolidated statements of operations include the results of operations of
BioCheck from December 6, 2005, the date of acquisition, and the consolidated
balance sheets include the assets and liabilities of BioCheck at December
31,
2006.
37
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 12 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. See Notes 1, 4,
5 and
6 to the audited consolidated financial statements for the year ended December
31, 2005 included in this prospectus for more detail regarding our long-lived
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.
38
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.
Certain
Expenses and Liabilities
On
an
ongoing basis, management evaluates its estimates related to certain expenses
and accrued liabilities. We base our estimates on historical experience and
on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of liabilities that are not readily apparent from other
sources. Actual results may differ materially from these estimates under
different assumptions or conditions.
Share-Based
Compensation
In
December 2004, the FASB issued SFAS 123R, which replaces FASB Statement No.
123,
“Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” or APB Opinion No. 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.
SFAS 123R 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 implemented SFAS 123R
effective January 1, 2006. Methodologies used for calculations such as the
Black-Scholes 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.
Inflation
We
believe that inflation has not had a material adverse impact on our business
or
operating results during the periods presented.
Off-balance
Sheet Arrangements
We
have
no off-balance sheet arrangements.
Changes
or Disagreements with Accountants
There
were no changes in, or disagreements with, our independent registered public
accounting firm during 2005 or 2006.
39
RISK
FACTORS
Risks
Related to Our Business
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.
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.
We
had
cash and cash equivalents of $416,000 at our parent level at December 31,
2006.
We cannot access the cash held by our majority-held subsidiary, BioCheck,
to pay
for our operating expenses at the parent level, since currently BioCheck
is not
our wholly-owned subsidiary. We obtained debt financing in the amount of
$1,350,000 on October 25, 2006 and are seeking additional equity financing
to
obtain sufficient funds to sustain operations, including our development
and
commercialization programs and purchase the remaining 49% share of BioCheck
that
we currently do not own. We have incurred significant obligations in relation
to
the termination of our former president and chief executive officer. We repaid
debt including accrued interest and expenses in the amount of $426,000 to
Fagan
Capital and $209,000 to our former chief executive officer. If we are unable
to
raise additional capital in 2007, we may 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.
Restrictive
provisions of the Securities Purchase Agreement signed with purchasers of
debentures and warrants in our recent convertible debt and warrant financing
may
prohibit us from consummating an equity financing
transaction.
Pursuant
to the Securities Purchase Agreement entered into with four accredited
purchasers on October 25, 2006, we are prohibited from issuing shares of
common
stock or securities convertible into common stock except pursuant to options
issued under its stock option plan and other limited exceptions, until ninety
days after the effective date of the registration statement that we are required
to file in relation to the securities issued in our October 25, 2006 financing,
unless the volume weighted average quoted price of our common stock for each
of
the twenty days immediately prior to any such issuance of equity securities
is
higher than $0.40 per share, subject to adjustment for stock splits. Given
the
recent price range of our common stock between $0.20 and $0.35, unless the
price
of our common stock increases significantly within the next six to seven
months,
we will be unable to raise additional funds through an equity financing.
Under
the Securities Purchase Agreement in our October 25, 2006 financing, the
purchasers of the debentures have the right to participate in up to 100%
of any
future equity financing involving issuance of common stock or securities
convertible into or exercisable for common stock that we undertake within
one
year after the effective date of the registration statement which we are
required to file in relation to the securities issued in our October 25,
2006
financing. This provision may make potential investors reluctant to enter
into
term sheets with us for future equity transactions.
40
Repayment
of recently issued debentures in shares and the exercise of recently issued
warrants would cause substantial dilution to our stockholders and would likely
to depress our stock price, making it more difficult for us to consummate
future
equity financings.
In
our
October 25, 2006 debenture financing with four accredited purchasers, we
issued
secured convertible debentures in an aggregate principal amount of $1,694,250.
We also issued Series A, B, C, D, and E warrants to the purchasers of the
debentures, which provide them the right to purchase of an aggregate of
approximately 14.5 million shares of our common stock, at initial exercise
prices ranging from $0.35 to $0.385 per share, subject to adjustment as provided
in the warrants, including a full ratchet anti-dilution provision which will
lower the exercise price in the event that we conduct a financing at a price
per
share below $0.35 or $0.385 per share, respectively. The Series D and E warrants
are only exercisable on a pro rata basis, if the Series C warrants are
exercised. The debentures were issued with an original issue discount of
20.318%, and resulted in proceeds to us of $1,350,000. The debentures are
convertible, at the option of the holders, at any time into shares of common
stock at $0.35 per share, as adjusted in accordance with a full ratchet
anti-dilution provision (referred to in this report as the “conversion price”).
Pursuant to the terms of the debentures, beginning on February 1, 2007, we
began
to amortize the debentures in equal installments on a monthly basis resulting
in
a complete repayment by the maturity date (the “Monthly Redemption Amounts”).
The Monthly Redemption Amounts can be paid in cash or in shares, subject
to
certain restrictions. If we choose to make any Monthly Redemption Amount
payment
in shares of common stock, the price per share is the lesser of the conversion
price then in effect and 85% of the weighted average price for the ten trading
days prior to the due date of the Monthly Redemption Amount.
Due
to
the floating conversion price of the debentures that applies when we choose
to
repay the debentures in shares, we would need to issue approximately ten
million
shares to the holders of the debentures, assuming that stock prices remain
in
their recent price range. The number of shares that we may have to issue
to the
debenture holders could increase significantly if our stock price declines
from
the current price range. In addition, we would have to issue approximately
five
million shares if the debenture holders exercise their Series A and B warrants,
an additional approximately five million shares would be issued upon exercise
of
their Series C warrants and finally, an additional approximately five million
shares would be issued upon exercise of their Series D and E warrants pro
rata
subsequent to the exercise of the Series C warrants. The future potential
dilution due to exercise of the above warrants could be increased if the
full
ratchet anti-dilution provision applicable to the exercise price of the warrants
is triggered. This future potential dilution would likely depress our stock
price, making it difficult for us to consummate a future equity
financing.
As
of
March 31, 2007 we were in technical default under the October 2006 debentures,
because of non-payment of the Monthly Redemption Amounts which became due
beginning on February 1, 2007. We are currently in negotiations with the
debenture holders regarding the form of payment of these Monthly Redemption
Amounts, which may be in the form of shares of our common stock or cash.
41
Restrictions
on our ability to repay the debentures in shares rather than in cash may
deplete
our cash resources and will require future financings to avoid
default.
Under
the
terms of the debentures we issued in October 2006, our right to make monthly
redemption payments is conditioned upon several factors. Beginning on February
1, 2007, we are obligated to amortize the debentures in equal installments
on a
monthly basis resulting in a complete repayment by the maturity date either
in
cash or in shares. The monthly redemptions, if made in cash to all debenture
holders would equal approximately $85,000 per month. We may not make the
monthly
redemption in shares if, among other conditions, the issuance of the shares
to
the debenture holders would cause any debenture holder to beneficially
own in
excess of either 9.99% or 4.99% of our total outstanding shares at that
time
(depending on the particular debenture holder, either the 9.99% or the
4.99%
threshold applies). One of the debenture holders currently beneficially
owns
approximately 9% of our total outstanding shares. In addition, we may not
make
monthly redemption payments to any debenture holder in shares rather than
cash
if the daily trading volume for our common stock does not exceed 50,000
shares
per trading day for a period of twenty trading days prior to any applicable
date
in question beginning after April 25, 2007. If we must make all or a substantial
amount of its monthly redemption payments to the debenture holders in cash
rather than shares, its cash reserves will be depleted and it will have
to raise
substantial additional capital to avoid default of the debentures.
As we have failed to make payments due to BioCheck under our Mutual Services Agreement, BioCheck could exercise its rights under the default provisions of that agreement to terminate the agreement and cease production of many of our research test kit assays.
As
mentioned above, on June 23, 2006, we entered into a mutual services agreement
with our majority owned subsidiary, BioCheck. Pursuant to the agreement,
we
agreed to pay BioCheck approximately $128,000 that we owed to BioCheck for
services that BioCheck had provided to us during the twelve months ended
September 30, 2006. As mutually agreed with BioCheck, we did not make this
payment to BioCheck, and instead we agreed to use these funds to repurchase
BioCheck shares from its current shareholders. If, however, we receive written
notice of breach of the mutual services agreement due to non-payment of any
other obligations, it will have 15 days to cure that breach. If we fail to
cure
the breach during the cure period, BioCheck would have the right to terminate
the agreement. We currently manufacture the bulk of our research assay test
kits
together with BioCheck, which assists in packaging and shipping such research
assay test kits to our customers, and undertaking research and development
of
certain new OXIS research assay test kits. If BioCheck ceases to perform
these
services, we will have to turn to third party suppliers for the manufacturing
of
its research assay test kits, where that is possible, and will likely have
to
cease research and development of new OXIS research assay test kits. There
can
be no assurance that possible third party suppliers of research assay test
kits
will be willing or able to manufacture our research assay test kits at
competitive prices or at all, or that we would be able to pay for such services.
Disruption or cessation of manufacturing due to the termination of the mutual
services agreement would have immediate and deleterious effects on our future
revenues.
42
Raising
additional capital may be necessary in order to complete our acquisition
of the
outstanding shares of BioCheck that we do not own, which constitutes 49%
of
BioCheck’s issued and outstanding shares.
On
September 19, 2005 we entered into a stock purchase agreement with BioCheck
and
the stockholders of BioCheck pursuant to which we 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 stockholders of BioCheck on
a pro
rata basis, for an aggregate of $3,060,000 in cash. Pursuant to the stock
purchase agreement, we 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. Under the terms of our
purchase agreements with BioCheck and its stockholders, BioCheck’s earnings
(specifically, its earnings before interest, taxes, depreciation and
amortization expenses, or EBITDA), if any, will be used to repurchase the
remaining outstanding BioCheck shares at one or more additional closings.
There
can be no assurance that BioCheck will generate any earnings in the next
several
years which would be sufficient to purchase additional shares of BioCheck
pursuant to the stock purchase agreement. Even if BioCheck generates earnings,
there can be no assurance that such earnings would be sufficient to complete
our
acquisition of the remaining 49% of BioCheck’s outstanding shares.
To
avoid
an increase in the purchase price of the remaining shares of BioCheck at
the
rate of 8% per annum, we would 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 in this
manner 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 would likely involve dilution of our common stock
if it
is an equity financing, or will involve the assumption of significant debt
by
us.
As
of
December 31, 2006, we had an accumulated deficit of approximately $69,100,000.
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
lack of availability 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 consider to be of lesser importance
to
our strategic direction, in an effort to preserve our financial
resources.
43
Our
future capital requirements will depend on many factors including the
following:
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·
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continued
scientific progress in our research and development programs and
the
commercialization of additional products;
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·
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the
cost of our research and development and commercialization activities
and
arrangements, including sales and marketing;
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·
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the
costs associated with the scale-up of manufacturing;
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·
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the
success of pre-clinical and clinical trials;
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·
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the
establishment of and changes in collaborative
relationships;
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·
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the
time and costs involved in filing, prosecuting, enforcing and defending
patent claims;
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·
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the
time and costs required for regulatory approvals;
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·
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the
acquisition of additional technologies or businesses;
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·
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technological
competition and market developments; and
|
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·
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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 program with respect to our 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.
44
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 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, or all taken together, 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. There can be no assurance that BioCheck
will continue to manufacture our research assay test kits if that agreement
is
terminated.
In
addition, in general, acquisitions such as these involve numerous risks,
including:
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·
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difficulties
in assimilating the operations, technologies, products and personnel
of an
acquired company;
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·
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risks
of entering markets in which we have either no or limited prior
experience;
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diversion
of management’s attention from other business concerns;
and
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·
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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.
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
resigned from his position at our company. As a result, others who had limited
experience within our senior management 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 as our President and Chief Executive Officer, and as a member of
our
board. On January 6, 2006, we hired Michael D. Centron as our Vice President
and
Chief Financial Officer. On September 15, 2006, Mr. Guillen’s employment as
President and Chief Executive Officer was terminated, and Marvin S. Hausman,
M.D. was appointed our new President and Chief Executive Officer. On November
15, 2006 Michael Centron, our Vice President and Chief Financial Officer
resigned. In addition, during 2004 and early 2005, following the acquisition
of
a then-majority interest in our company by Axonyx, eight directors resigned
from
our board resulting in a four-person board. During 2005 we added independent
director John E. Repine, M.D., and Gary M. Post joined our board of directors
on
March 15, 2006, resulting in a six-person board. Timothy C. Rodell, M.D.,
declined to stand for re-election at the Annual Meeting of Stockholders held
on
August 1, 2006. On January 11, 2007, Matthew Spolar was appointed to our
board
of directors. All six directors currently serving on the board commenced
their
service on the board during the period of 2004 through the date
hereof.
45
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
sales at our parent company level during 2006 are attributable to lower
sales
volume that was caused, in part, by the disruption arising from relocating
our
operations from Portland, Oregon to Foster City, California, the consolidation
of our product offerings, and the lowering of sale prices for some of our
products for competitive reasons. 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. We cannot predict
whether we will be successful in finding suitable new candidates for our
key
management positions. On September 15, 2006, Mr. Guillen’s employment as
President and Chief Executive Officer was terminated, and Marvin S. Hausman,
M.D. was appointed our new President and Chief Executive Officer. On November
15, 2006, Michael Centron resigned as our Vice President and Chief Financial
Officer. Dr. Hausman has assumed the role of chief financial and accounting
officer on an interim basis. While we have entered into an employment agreement
with Dr. Hausman, he is free to terminate his employment “at will.” Further, we
cannot predict whether Dr. Hausman will be successful in his role as our
President and Chief Executive 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 Executive Officer
or
the inability to attract qualified personnel could have a material adverse
effect on our financial condition and business. As we currently do not have
a
Chief Financial Officer, it is crucial that we find a qualified individual
to
fill that role and to oversee and certify the periodic reports we must file
with
the Securities and Exchange Commission. As we currently have limited cash
resources, if any of our key personnel leaves, replacing them will be difficult.
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 increase our revenues or achieve profitability. We
may be
required to increase our research and development expenses in order to develop
potential new products. As evidenced by the substantial net losses during
and
2006 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.
Our
ability to successfully develop and commercialize our nutraceutical or clinical
diagnostic product candidates, and make them available for sale, is uncertain.
46
All
of
our nutraceutical and clinical diagnostic candidates are at an early stage
of
development and all of such nutraceutical and clinical diagnostic candidates
will require expensive and lengthy testing and regulatory clearances. None
of
our nutracutical or clinical diagnostic candidates have been approved by
regulatory authorities. We may not be able to make many of our product
candidates commercially available for several years, if at all. There are
many
reasons we may fail in our efforts to develop our nutraceutical and clinical
diagnostic candidates, including:
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·
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our
nutraceutical and clinical diagnostic candidates may be ineffective,
toxic
or may not receive regulatory clearances,
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our
nutraceutical and clinical diagnostic candidates may be too expensive
to
manufacture or market or may not achieve broad market
acceptance,
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third
parties may hold proprietary rights that may preclude us from developing
or marketing our nutraceutical and clinical diagnostic candidates,
or
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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.
47
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. Compared to us, 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.
TorreyPines
Therapeutics, Inc. holds significant stockholder voting power, and may be
in a
position to influence matters affecting us.
TorreyPines
Therapeutics, Inc. or TorreyPines, which merged with Axonyx Inc. in October
2006, currently owns approximately 32% of our issued and outstanding stock.
In
addition, Dr. Marvin Hausman is a member of the board of directors of
TorreyPines and is our President and Chief Executive Officer and the chairman
of
our board of directors. Given these circumstances, TorreyPines 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 stockholders. Section 203 of the Delaware General Corporation Law prohibits
a Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years unless the transaction
meets
certain conditions. Section 203 also limits the extent to which an
interested stockholder can receive benefits from our assets. These provisions
could complicate or prohibit certain transactions (including a financing
transaction between us and TorreyPines), or limit the price that other investors
might be willing to pay in the future for shares of our common
stock.
48
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 will
result in the development of mature relationships or that any such relationships
will be successful. Further, relying on these or other alliances is risky
to our
future success because:
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our
partners may develop products or technologies competitive with
our
products and technologies;
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our
partners may not devote sufficient resources to the development
and sale
of our products and technologies;
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·
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our
collaborations may be unsuccessful; or
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·
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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:
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an
inability to produce products in sufficient quantities and with
appropriate quality;
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an
inability to obtain sufficient raw materials;
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the
loss of or reduction in orders from key customers;
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variable
or decreased demand from our customers;
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the
receipt of relatively large orders with short lead
times;
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49
|
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·
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our
customers’ expectations as to how long it takes us to fill future
orders;
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·
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customers’
budgetary constraints and internal acceptance review
procedures;
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there
may be only a limited number of customers that are willing to purchase
our
research assays and fine chemicals;
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·
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a
long sales cycle that involves substantial human and capital resources;
and
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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 2006, 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
$1,000 in 2006, $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 FASB issued SFAS 123R. SFAS 123R replaces SFAS No. 123
and
supersedes APB Opinion No. 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. SFAS 123R 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 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.
50
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 us in order to establish and maintain
a
competitive advantage. We currently have 81 patents either granted or applied
for in 16 countries with expiration dates ranging from 2009 to 2025. 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 consider 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 our
intellectual property rights, competitors may seize the opportunity to 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:
51
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enforce
patents that we own or license;
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·
|
protect
trade secrets or know-how that we own or license; or
|
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·
|
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. Due to 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.
52
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 bid and ask quotations. The market
price of our common stock is extremely volatile. To demonstrate the volatility
of our stock price, during 2006, the volume of our common stock traded on
any
given day ranged from 0 to 2,786,900 shares. Moreover, during that period,
our
common stock traded as low as $0.18
per
share and as high as $0.44 per share, a 144% difference. This may impact
an
investor’s decision to buy or sell our common stock. As of December 31, 2006
there were approximately 5,200 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.
53
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 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 placements of equity which closed on January
6,
2005 and October 25, 2006 and maintain adequate disclosure in connection
with
such registration, including updating prospectuses and under certain
circumstances, filing amended registration statements. These expenses were
approximately $302,000 in 2006, 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 security holders 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.
A
large number of additional shares may be sold into the public market in the
near
future, which may cause the market price of our common stock to decline
significantly, even if our business is successful.
Sales
of
a substantial amount of common stock in the public market, or the perception
that these sales may occur, could adversely affect the market price of our
common stock. After our October 25, 2006 debenture and warrant financing,
and
assuming the full conversion of the debentures and full exercise of the Series
A, B, C, D and E warrants for the maximum number of shares for which such
warrants are exercisable, we would have approximately 64 million shares of
common stock outstanding (assuming no other issuances of common stock). Upon
full issuance of these shares of common stock upon conversion of the debentures
and exercise of the warrants, the market price of our common stock could
drop
significantly if the holders of these shares sell them or are perceived by
the
market as intending to sell them.
54
A
large number of common shares are issuable upon exercise of outstanding common
share options and warrants and upon conversion of our outstanding debentures.
The exercise or conversion of these securities could result in the substantial
dilution of your investment in terms of your percentage ownership in OXIS
as
well as the book value of your common shares. The sale of a large amount
of
common shares received upon exercise of these options and warrants on the
public
market to finance the exercise price or to pay associated income taxes, or
the
perception that such sales could occur, could substantially depress the
prevailing market prices for our shares.
As
of
December 31, 2006, there are outstanding warrants entitling the holders to
purchase up to a maximum of 9,681,840 common shares at an exercise price
of
$0.35 per share. In addition, there are outstanding warrants entitling the
holders to purchase up to a maximum of 4,840,740 common shares at an exercise
price of $0.385 per share. There are also debentures outstanding which are
convertible into a maximum of 4,840,740 common shares at a conversion price
per
common share of $0.35 per common share. Further, we have relied heavily on
option and warrant grants as an alternative to cash as a means of compensating
our officers, advisors and consultants. In 2006, we issued options and warrants
to officers, director and consultants for the purchase of approximately 4.4
million shares of our common stock, with exercise prices ranging from $0.18
to
$0.39 per share. The exercise price for all of the aforesaid options and
warrants may be less than your cost to acquire our common shares. In the
event
of the exercise and/or conversion of these securities, you could suffer
substantial dilution of your investment in terms of your percentage ownership
in
the company as well as the book value of your common shares. In addition,
the
holders of the options and warrants may sell underlying common shares in
tandem
with their exercise of those warrants to finance that exercise, or may resell
the shares purchased in order to cover any income tax liabilities that may
arise
from their exercise of the options and warrants.
If
we fail to maintain the adequacy of our internal controls, our ability to
provide accurate financial statements and comply with the requirements of
the
Sarbanes-Oxley Act of 2002 could be impaired, which could cause our stock
price
to decrease substantially.
We
are
continuing to take measures to address and improve our financial reporting
and
compliance capabilities and we are in the process of instituting changes
to
satisfy our obligations in connection with being a public company. We plan
to
obtain additional financial and accounting resources to support and enhance
our
ability to meet the requirements of being a public company. We will need
to
continue to improve our financial and managerial controls, reporting systems
and
procedures, and documentation thereof. If our financial and managerial controls,
reporting systems or procedures fail, we may not be able to provide accurate
financial statements on a timely basis or comply with the Sarbanes-Oxley
Act of
2002 as it applies to us. Any failure of our internal controls or our ability
to
provide accurate financial statements could cause the trading price of our
common stock to decrease substantially.
55
Our
common shares are thinly traded and, if you are a holder of debentures, you
may
be unable to sell at or near ask prices or at all if you need to convert
your
debentures into common stock and sell your shares to raise money or otherwise
desire to liquidate such shares.
We
cannot
predict the extent to which an active public market for our common stock
will
develop or be sustained. Our common shares have historically been sporadically
or “thinly-traded” on the “Over-The-Counter Bulletin Board,” meaning that the
number of persons interested in purchasing our common shares at or near bid
prices at any given time may be relatively small or non-existent. This situation
is attributable to a number of factors, including the fact that we are a
small
company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate
or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our
shares
is minimal or non-existent, as compared to a seasoned issuer which has a
large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price. We cannot give you any assurance
that a broader or more active public trading market for our common stock
will
develop or be sustained, or that current trading levels will be
sustained.
The
market price for our common stock is particularly volatile given our status
as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share price.
The
price at which you convert your debentures into our common stock many be
indicative of the price that will prevail in the trading market. You may
be
unable to sell your common stock at or above your purchase price if at all,
which may result in substantial losses to you.
The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors.
First,
as noted above, our common shares are sporadically and/or thinly traded.
As a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by its shareholders may disproportionately influence
the
price of those shares in either direction. The price for its shares could,
for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to
a
seasoned issuer which could better absorb those sales without adverse impact
on
its share price. Secondly, an investment in us is a speculative or “risky”
investment due to our lack of revenues or profits to date and uncertainty
of
future market acceptance for current and potential products. As a consequence
of
this enhanced risk, more risk-adverse investors may, under the fear of losing
all or most of their investment in the event of negative news or lack of
progress, be more inclined to sell their shares on the market more quickly
and
at greater discounts than would be the case with the stock of a seasoned
issuer.
56
Investors
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse.
Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales
and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups
by
selling broker-dealers; and (5) the wholesale dumping of the same securities
by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect
to be
in a position to dictate the behavior of the market or of broker-dealers
who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
We
do not anticipate paying any cash dividends.
We
presently do not anticipate that we will pay any dividends on any of our
capital
stock in the foreseeable future. The payment of dividends, if any, would
be
contingent upon our revenues and earnings, if any, capital requirements,
and
general financial condition. The payment of any dividends will be within
the
discretion of our board of directors. We presently intend to retain all
earnings, if any, to implement our business plan; accordingly, we do not
anticipate the declaration of any dividends in the foreseeable
future.
ITEM
7. FINANCIAL
STATEMENTS
The
Audited Financial Statements for this Form 10-KSB appear on pages F-1 through
F-43 following the signature page below.
ITEM
8. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
57
ITEM
8A. CONTROLS
AND PROCEDURES
As
of the end of the period covered by this report, we carried out an evaluation,
under the supervision and with the participation of our Chief Executive
Officer
and Chief Financial Officer, of the effectiveness of the design and operation
of
our disclosure controls and procedures. Based on this evaluation, our Chief
Executive officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting management to
material
information required to be included in this report. It should be noted
that the
design of any system of controls is based in part upon certain assumptions
about
the likelihood of future events, and there can be no assurance that any
design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
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.
ITEM
8B. OTHER INFORMATION
None.
58
PART
III
ITEM
9. DIRECTORS,
EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
The
following table sets forth certain information with respect to each of our
directors and executive officers as of March 23, 2007.
|
Name
|
|
Age
|
|
Principal
Occupation
|
|
Served
as
Director
Since
|
|
Marvin
S. Hausman, M.D. (2)
|
|
65
|
|
President,
Chief Executive Officer and Chairman of the Board
|
|
2004
|
|
Steven
T. Guillen (4)
|
|
55
|
|
Director
|
|
2005
|
|
S.
Colin Neill (1) (3)
|
|
60
|
|
Secretary,
Director
|
|
2004
|
|
John
E. Repine, M.D. (1)
|
|
62
|
|
Director
|
|
2005
|
|
Gary
M. Post (1)
|
|
58
|
|
Director
|
|
2006
|
|
Matthew
Spolar
|
33
|
Director
|
2007
|
|
(1)
|
Member
of the Audit Committee.
|
|
|
(2)
|
Appointed
President and Chief Executive Officer on September 15, 2006. Member
of the
Compensation Committee. In addition, on November 15, 2006, following
the
resignation of Michael Centron as our Vice President and Chief
Financial
Officer, Dr. Hausman has assumed the role of chief financial and
accounting officer on an interim basis.
|
|
|
(3)
|
Member
of the Nominating Committee.
|
|
|
(4)
|
Terminated
as President and Chief Executive Officer on September 15, 2006.
Resigned
from the board of directors on April 12, 2007.
|
|
Marvin
S. Hausman, M.D.,
President, Chief Executive Officer and Chairman of the Board. Dr. Hausman
was
appointed to the board of directors on August 20, 2004. Previously, Dr. Hausman
served on the board of directors from March 2002 to November 2003. On December
10, 2004, the board of directors appointed Marvin S. Hausman, M.D. to serve
as
Chairman of the Board, Acting Chief Executive Officer and Acting Chief Financial
Officer of OXIS. On February 28, 2005, Dr. Hausman ceased to be the Company’s
Chief Executive Officer. On September 15, 2006, Dr. Hausman was appointed
to
serve as President and Chief Executive Officer by the board of directors.
Dr.
Hausman served as a director and as Chairman of the Board of Axonyx from
1997
until the merger of Axonyx into TorreyPines Therapeutics in October 2006,
and
had served as President and Chief Executive Officer of Axonyx from 1997 until
September 2003 and March 2005, respectively. Dr. Hausman is currently a member
of the board of directors of TorreyPines Therapeutics. Dr. Hausman served
as our
Acting Chief Financial Officer until January 6, 2006 when Michael D. Centron
was
appointed as our Chief Financial Officer. Dr. Hausman currently owns
approximately 2.8% of the outstanding common stock of OXIS, and Torrey Pines
Therapeutics currently owns approximately 33% of the outstanding common stock
of
OXIS. Dr. Hausman was a co-founder of Medco Research Inc., a pharmaceutical
biotechnology company specializing in adenosine products which was subsequently
acquired by King Pharmaceuticals. He has thirty years’ experience in drug
development and clinical care. Dr. Hausman received his medical degree from
New
York University School of Medicine in 1967 and has done residencies in General
Surgery at Mt. Sinai Hospital in New York, and in Urological Surgery at U.C.L.A.
Medical Center in Los Angeles. He also worked as a Research Associate at
the
National Institutes of Health, Bethesda, Maryland. He has been a Lecturer,
Clinical Instructor and Attending Surgeon at the U.C.L.A. Medical Center
Division of Urology and Cedars-Sinai Medical Center, Los Angeles. He has
been a
Consultant on Clinical/Pharmaceutical Research to various pharmaceutical
companies, including Bristol-Meyers International, Mead-Johnson Pharmaceutical
Company, Medco Research, Inc., and E.R. Squibb.
59
Since
October 1995, Dr. Hausman has been the President of Northwest Medical Research
Partners, Inc., a medical technology and transfer company. He was a member
of
the board of directors of Medco Research, Inc. from inception (1978) through
1992 and from May 1996 to July 1998. Dr. Hausman was a member of the board
of
directors of Regent Assisted Living, Inc., a company specializing in building
assisted living centers including care of senile dementia residents, from
March
1996 to April 2001.
Steven
T. Guillen,
Director. On February 28, 2005, Steven T. Guillen was appointed the Company’s
President, Chief Executive Officer and a member of our board of directors.
Mr.
Guillen’s employment was terminated by the board of directors on September 15,
2006. Mr. Guillen resigned
from the board of directors on April 12, 2007. Prior to joining the
Company, from 2001 to 2004, Mr. Guillen served as Vice President, Sales and
Marketing for Amarin Pharmaceuticals, Inc., a neuroscience company focused
on
the development and commercialization of drugs for the treatment of neurological
disorders affecting the central nervous system. From 1996 to 2001, Mr. Guillen
served as the Vice President, Sales and Marketing for Athena Diagnostics,
a
company involved with the development and commercialization of diagnostic
testing for neurological diseases. From 1991 until joining Amarin
Pharmaceuticals, Inc., Mr. Guillen held several senior level sales and marketing
positions with Elan Pharmaceuticals, an affiliate of Elan Corporation, PLC,
including from 1996 to 2001 as Vice President of Sales and Marketing for
Athena
Diagnostics (Division of Elan), a reference laboratory dedicated to the
development and commercialization of diagnostic testing for neurological
disorders. Prior to joining Elan Pharmaceuticals, Mr. Guillen spent 17 years
at
Merck & Co., Inc., where he held a number of positions of increasing
responsibility, including responsibility for the training and development
of a
350 member sales management team. Mr. Guillen holds a B.S. in Zoology, with
a
minor in Chemistry, from the University of California, Davis, and MBA from
the
University of California, Riverside.
S.
Colin Neill,
Secretary and Director. Mr. Neill was appointed to the board of directors
in
April 2004. He has served as Secretary of OXIS since January 2005. Mr. Neill
has
been the Senior Vice President and Chief Financial Officer of Pharmos
Corporation since October 2006. Mr. Neill joined Axonyx in September 2003
as
Chief Financial Officer and Treasurer and served in that capacity until October
2006 when Axonyx was acquired by TorreyPines Therapeutics. From April 2001
to
September 2003, Mr. Neill had been an independent consultant assisting small
development stage companies raise capital. Previously, Mr. Neill served as
Senior Vice President, Chief Financial Officer, Secretary and Treasurer of
ClinTrials Research Inc., a publicly traded global contract research
organization in the drug development business, from 1998 until its sale in
April
2001. Prior to that, Mr. Neill served as Vice President and Chief Financial
Officer of Continental Health Affiliates Inc. and its majority owned subsidiary
Infu-Tech Inc. Mr. Neill’s experience has included that of Acting Vice President
Finance and Chief Financial Officer of Pharmos Corporation, a biopharmaceutical
company in the business of developing novel drug technologies. Earlier
experience was gained as Vice President Finance and Chief Financial Officer
of
BTR Inc., a U.S. subsidiary of BTR plc, a British diversified manufacturing
company, and Vice President Financial Services of The BOC Group Inc., a British
owned industrial gas company with substantial operations in the health care
field. Mr. Neill served for four years with American Express Travel Related
Services, first as chief internal auditor for worldwide operations and then
as
head of business planning and financial analysis. Mr. Neill began his career
in
public accounting with Arthur Andersen LLP in Ireland and later with Price
Waterhouse LLP as a senior manager in New York City. He also served with
Price
Waterhouse for two years in Paris, France. Mr. Neill graduated from Trinity
College, Dublin with a first class honors degree in Business/Economics and
he
holds a masters degree in Accounting and Finance from the London School of
Economics. He is a Certified Public Accountant in New York State and a Chartered
Accountant in Ireland.
60
Gary
M.
Post,
Director. Mr. Post has served as a director of OXIS since March 15, 2006
and
currently, though an advisory agreement, serves part-time as Acting Chief
Operating Officer of the Company. Since 1999 Mr. Post has been the Managing
Director and Investment Principal of Ambient Advisors, LLC. Ambient Advisors
primarily invests its own and its partners’ capital in private and public
companies with a particular interest in the health care and life sciences
sector
and certain other special situations. Ambient Advisors also actively advises
these companies, sometimes taking interim management roles. In his capacity
as
Managing Director at Ambient Advisors, Mr. Post has acted as an interim Chief
Executive Officer in two private early to mid stage companies that Ambient
had
invested in, Opticon Medical, Inc., a medical device company and OccMeds
Billing
Services, Inc., a worker’s compensation pharmacy payment processing company. Mr.
Post also served as a President and CEO of VoIP, Inc., a leading provider
of
Voice over Internet Protocol (VoIP) communications solutions for service
providers, resellers and consumers during 2006 and continues as a member
of the
VoIP, Inc. Board of Directors. Mr. Post holds a MBA from the U.C.L.A. Graduate
School of Management and an A.B. in Economics from Stanford
University.
John
E. Repine, M.D.,
Director. Dr. Repine has served as a director of OXIS since October 2005.
Since
1996, Dr. Repine has been the James J. Waring Professor of Medicine and
Pediatrics at the University of Colorado Health Sciences Center. Since 1993,
Dr.
Repine has been the Chief Executive Officer and President of the Webb-Waring
Institute for Cancer, Aging and Antioxidant Research. Dr. Repine
graduated from the School of Medicine and completed training in internal
medicine and pulmonary medicine at the University of Minnesota. Dr. Repine
has received many national awards for his research including an Established
Investigator Award from the American Heart Association, the Alton Ochsner
Award
Relating Smoking and Health and the Senior Scholar in Aging Award from the
Ellison Medical Foundation. Dr. Repine was the Principal Investigator for
10
years for one of six National Specialized Centers of Research (SCOR) of the
National Institutes of Health for the Study of Acute Lung Injury. Dr.
Repine is a recognized expert in the study of vascular disorders, inflammation,
oxidants and antioxidants. Dr. Repine has served in various capacities
with a number of biotechnology companies.
Matthew
Spolar,
Director. Mr. Spolar has served as a director of OXIS since January 2007,
and
currently serves as Vice President, Product Technology for Atkins Nutritionals,
Inc., a market-leading portable nutrition foods company. Since 1999, Mr.
Spolar
has spearheaded new product development, product optimization, scientific
affairs, quality systems management, and technical production support for
Atkins. Mr. Spolar helped to arrange an acquisition of Atkins by Parthenon
Capital and Goldman Sachs in October, 2003 for more than $500 million,
participated in improving the company's balance sheet through a pre-packaged
bankruptcy where two-thirds of liabilities were exchanged for equity, and
witnessed the company's emergence from bankruptcy just six months later.
Prior
to joining Atkins, Mr. Spolar served as an analyst with Datamonitor, Inc.,
a
global management consultancy, where he specialized in providing information
solutions for Fortune 500 consumer packaged goods companies. Mr. Spolar was
awarded BS and MS degrees in Food Science from the Pennsylvania State
University.
There
are
no family relationships between the officer and directors.
61
On
March
8, 2007, we and Mr. Guillen entered into a Confidential Separation Agreement
(dated February 12, 2007), under which we agreed to pay Mr. Guillen the sum
of
$250,000 in twelve equal monthly installments, subject to standard payroll
deductions and withholdings. We also agreed that Mr. Guillen’s stock options
would immediately vest, and that to the extent the shares underlying such
options are not registered, Mr. Guillen would be granted piggyback registration
rights to cover these shares. Mr. Guillen would have the right to exercise
his
options until September of 2009. We also agreed to pay Mr. Guillen’s health
insurance premiums for the twelve-month separation period in accordance with
the
Consolidated Omnibus Budget Reconciliation Act of 1985. In exchange for these
payments and
benefits, Mr. Guillen and OXIS agreed to mutually release all claims, dismiss
all complaints as applicable, and neither party shall pursue any future claims
regarding Mr. Guillen’s prior employment and compensation arrangements with us.
A copy of the separation agreement is included as Exhibit 10.43 to this annual
report on Form 10-KSB.
None
of
our directors, officers or affiliates, and no owner of record or beneficial
owner of more than five percent (5%) of our securities, or any associate
of any
such director, officer or security holder is a party adverse to OXIS or any
of
its subsidiaries or has a material interest adverse to OXIS or any of its
subsidiaries in reference to pending litigation.
Section
16(a) Beneficial Ownership Reporting Compliance
No
director, officer or beneficial owner of more than 10% of any class of our
equity securities failed to file a Form 3 or Form 4 on a timely basis in
2006,
except that a Form 4 was inadvertently filed late on May 23, 2006 with respect
to an option grant to Gary Post.
Code
of Ethics
The
Board
of Directors has adopted a Code of Ethics and Business Conduct to provide
guidance to its directors, officers and employees regarding standards for
conduct of the Company’s business, which code has been delivered to all
directors, officers and employees of the Company. The full text of our Code
of
Ethics and Business Conduct is available on our website at
www.oxis.com. To
the
extent required by law, any amendments to, or waivers from, any provision
of the
code of ethics will promptly be disclosed to the public. To the extent permitted
by such legal requirements, we intend to make such public disclosure by posting
the relevant material on our website in accordance with SEC rules.
Audit
Committee and Audit Committee Financial Expert
We
are
not a “listed company” under SEC rules and are therefore not required to have an
audit committee comprised of independent directors. We do, however, have
an
audit committee consisting of three members of our board of directors, including
S. Colin Neill, John E. Repine, M.D., and Gary M. Post. The board of directors
has determined that S. Colin Neill, the Chairman of our Audit Committee,
qualifies as an “audit committee financial expert” as defined by the rules of
the Securities and Exchange Commission. In addition, the board of directors
has
determined that each of the members of the audit committee is able to read
and
understand fundamental financial statements and has substantial business
experience that results in that member's financial sophistication. Accordingly,
the board of directors believes that each member of the audit committee has
sufficient knowledge and experience necessary to fulfill such member’s duties
and obligations as an audit committee member.
62
ITEM
10. EXECUTIVE
COMPENSATION
Our
compensation and benefits program is designed to attract, retain and motivate
employees to operate and manage the Company for the best interests of its
constituents. Executive compensation is designed to provide incentives for
those
senior members of management who bear responsibility for our goals and
achievements. The compensation philosophy is based on a base salary, bonuses
and
a stock option program.
The
following table sets forth compensation information for services rendered
to us
by certain executive officers (collectively, the Company’s “Named Executive
Officers”) in all capacities, other than as directors, during each of the prior
three fiscal years. Other than as set forth below, no executive officer’s salary
and bonus exceeded $100,000 in any of the applicable years. The following
information includes the dollar value of base salaries, bonus awards, the
number
of stock options granted and certain other compensation, if any, whether
paid or
deferred. Shares issued in lieu of compensation are listed in the year the
salary was due.
|
Name
and Principal Position
|
Year
|
Salary
|
|
Bonus
|
Stock
Awards
|
|
Option/
Warrant
Awards (4)
|
Non-Equity
Incentive
Plan Compen-sation
|
All
Other Compensation
|
|
Total
|
||||||||||||||||||||||||||
|
Steven
T. Guillen (1)
|
2006
|
$
|
190,000
|
$
|
—
|
$
|
—
|
$
|
68,772
|
$
|
—
|
$
|
29,417
|
(2
|
)
|
$
|
288,189
|
||||||||||||||||||||
|
Former
President, Chief Executive
|
2005
|
$
|
209,000
|
$
|
—
|
$
|
—
|
$
|
111,510
|
$
|
—
|
$
|
7,000
|
(3
|
)
|
$
|
327,510
|
||||||||||||||||||||
|
Officer
and Former Director
|
|||||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||
|
Dr.
Marvin S. Hausman (5)
|
2006
|
$
|
52,083
|
(6
|
)
|
$
|
—
|
$
|
164,977
|
(7
|
)
|
$
|
208,870
|
$
|
—
|
$
|
—
|
$
|
425,930
|
||||||||||||||||||
|
Chairman
of the Board,
|
2005
|
$
|
—
|
(6
|
)
|
$
|
—
|
$
|
—
|
$
|
10,297
|
$
|
—
|
$
|
15,000
|
(8
|
)
|
$
|
25,297
|
||||||||||||||||||
|
Chief
Executive Officer
|
|||||||||||||||||||||||||||||||||||||
|
Acting
Chief
|
|||||||||||||||||||||||||||||||||||||
|
Financial
Officer
|
|||||||||||||||||||||||||||||||||||||
|
Michael
Centron (9)
|
2006
|
$
|
133,466
|
$
|
—
|
$
|
—
|
$
|
29,908
|
$
|
—
|
$
|
5,240
|
(10
|
)
|
$
|
168,614
|
||||||||||||||||||||
|
Former
Chief
|
2005
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||||||||||||||
|
Financial
Officer
|
|||||||||||||||||||||||||||||||||||||
63
|
(1)
|
Mr.
Guillen served as President, Chief Executive Officer and Director
from
February 28, 2005 to September 15, 2006. Mr.
Guillen resigned from the board of directors on April 12, 2007.
|
|
(2)
|
Includes
$4,250 car allowance, $2,000 for matching contribution under our
401(k)
plan, $21,792 in penalties and interest paid by the Company in
connection
with back salary, and $1,375 paid by the Company into a medical
spending
account.
|
|
(3)
|
Includes
$5,000 car allowance and $2,000 for matching contribution under
our 401(k)
plan.
|
|
(4)
|
Reflects
dollar amount expensed by the company during applicable fiscal
year for
financial statement reporting purposes pursuant to FAS 123R. FAS
123R
requires the company to determine the overall value of the options
as of
the date of grant based upon the Black Scholes method of valuation,
and to
then expense that value over the service period over which the
options
become exercisable (vest). As a general rule, for time in service
based
options, the company will immediately expense any option or portion
thereof which is vested upon grant, while expensing the balance
on a pro
rata basis over the remaining vesting term of the
option.
|
|
(5)
|
Dr.
Hausman served as Acting Chief Executive Officer from December
8, 2004 to
February 28, 2005 and as Acting Chief Financial Officer from December
8,
2004 until January 6, 2006. On September 15, 2006, Dr. Hausman
was
appointed as Chairman of the board of directors and our President
and
Chief Executive Officer.
|
|
(6)
|
Dr.
Hausman did not receive a cash salary for his services as Chairman
and
Acting President, Chief Executive Officer and Chief Financial Officer
in
2004 or 2005. See Director Compensation below for Dr. Hausman’s
compensation as a director. In 2006, under the terms of Dr. Hausman’s
employment agreement with us, Dr. Hausman may elect to receive
his salary
in the form of common stock at a price equal to 85% of the market
price
(the average closing price for the five trading days preceding
the
measurement date), or in the form of a ten year warrant to purchase
1.5
times the number of shares he would have received in the foregoing,
at an
exercise price equal to such market price.
|
|
(7)
|
Dr.
Hausman was issued 330,769 shares of common stock on October 12,
2006, as
payment for compensation and expenses owed by us to NW Medical
Research
Partners, Inc., of which Dr. Hausman is the sole member and manager.
The
amount owed was $67,477, and the shares were valued at approximately
$0.204 per share, and are not subject to repurchase. Also includes
dollar
amount expensed by the company during 2006 for financial statement
reporting purposes pursuant for FAS 123R in connection with a grant
to Dr.
Hausman of 500,000 restricted shares of common stock vesting over
a 180
day period, for agreeing to serve as our Chief Executive Officer
and
President.
|
|
(8)
|
Dr.
Hausman earned $15,000 pursuant to a consulting agreement with
NW Medical
Research Partners, Inc. Dr. Hausman is the sole member and manager
of NW
Medical Research Partners.
|
|
(9)
|
Mr.
Centron served as our Chief Financial Officer from January 6, 2006
to
November 15, 2006.
|
|
(10)
|
Includes
$3,779 paid to Mr. Centron as a consultant following his departure
as an
employee, and $1,461 paid by the Company into a medical spending
account.
|
64
Outstanding
Equity Awards at Fiscal Year-End
The
following table summarizes the amount of our executive officers’ equity-based
compensation outstanding at the fiscal year ended December 31,
2006.
|
Outstanding
Equity Awards at Fiscal Year-End
|
|
|||||||||||||||||||||||||||
|
Options
Awards
|
|
Stock
Awards
|
|
|||||||||||||||||||||||||
|
Name
|
|
Number
of
Securities
Underlying Unexercised
Options
Exercisable
|
|
Number
of Securities Underlying Unexercised
Options
Unexercisable
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
|
|
Option
Exercise
Price
|
|
Option
Expiration
Date
|
|
Number
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
|
|
Market
Value
of
Shares
Or
Units
That
Have
Not
Vested
|
|
Equity
Incentive
Plan
Awards: Number of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
|
|
Equity
Incentive
Plan Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units,
or
Other
Rights
That
Have
Not
Vested
|
|
|||||||||
|
|
|
(#)
|
|
(#)
|
|
(#)
|
|
(
$
)
|
|
|
|
(#)
|
|
($)
|
|
(#)
|
|
($)
|
|
|||||||||
|
Steven
T. Guillen
|
|
|
250,000
|
|
|
250,000
|
|
|
—
|
|
$
|
0.40
|
|
|
02/28/15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
$
|
—
|
|
|
|
|
|
50,000
|
|
|
50,000
|
|
|
—
|
|
$
|
0.40
|
|
|
02/28/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,000
|
|
|
225,000
|
|
|
—
|
|
$
|
0.29
|
|
|
02/28/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr.
Marvin S. Hausman
|
|
|
30,000
|
|
|
—
|
|
|
—
|
|
$
|
0.22
|
|
|
06/14/12
|
|
|
416,667
|
|
$
|
95,833
|
|
|
—
|
|
$
|
—
|
|
|
|
|
|
5,000
|
|
|
—
|
|
|
—
|
|
$
|
0.42
|
|
|
06/18/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,695
|
|
|
—
|
|
|
—
|
|
$
|
0.57
|
|
|
12/03/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
—
|
|
|
—
|
|
$
|
0.59
|
|
|
10/11/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
—
|
|
|
—
|
|
$
|
0.34
|
|
|
06/22/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,000
|
|
|
—
|
|
|
—
|
|
$
|
0.37
|
|
|
10/05/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
500,000
|
|
|
—
|
|
$
|
0.29
|
|
|
12/28/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
—
|
|
|
—
|
|
$
|
0.27
|
|
|
07/31/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
495,000
|
|
|
—
|
|
$
|
0.20
|
|
|
11/05/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501,667
|
|
|
1,003,333
|
|
|
—
|
|
$
|
0.20
|
|
|
11/05/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
Centron
|
150,000
|
37,500
|
—
|
$
|
0.30
|
01/05/16
|
||||||||||||||||||||||
|
100,000
|
75,000
|
—
|
$
|
0.27
|
07/31/16
|
|||||||||||||||||||||||
65
Aggregated
Option Exercises During 2006 and Fiscal Year-End Option
Table
The
following table summarizes information regarding stock options exercised
by the
Named Executive Officers in 2006 and the value of unexercised “in-the-money”
options they held at December 31, 2006.
| Shares of Common Stock Acquired | Number of Securities Underlying Unexercised Options at December 31, 2006 | Value of Unexercised In-the-Monoey Options at December 31, 2006 (3) | ||||||||||||||||||||||||||||||||
|
Name
|
on
Exercise
|
Value
Realized
|
Exercisable
|
Unexercisable
|
|
Exercisable
|
Unexercisable
|
|||||||||||||||||||||||||||
|
Steven
T. Guillen
|
—
|
—
|
575,000
|
525,000
|
(1
|
)
|
—
|
—
|
||||||||||||||||||||||||||
|
Marvin
S. Hausman, M.D.
|
—
|
—
|
711,361
|
2,003,334
|
(2
|
)
|
$
|
2,508
|
7,492
|
|||||||||||||||||||||||||
|
(1)
|
Options
for 150,000 shares of common stock became exercisable on February
28,
2006, with an additional 150,000 shares to become exercisable annually
for
two years after this date, so long as Mr. Guillen continues to
serve in
the capacity of either an employee, outside director or consultant.
Options for 200,000 shares of common stock became exercisable upon
grant
of a non-qualified stock option on December 28, 2005. Options for
an
additional 75,000 shares of common stock became exercisable on
December
28, 2006, and continue to become exercisable annually for three
years
after this date so long as Mr. Guillen continues to serve in the
capacity
of either an employee, outside director or consultant. Pursuant
to a
Settlement Agreement with Mr. Guillen dated February 12, 2007,
we agreed
to accelerate the vesting of Mr. Guillen’s options, which took effect in
March 2007.
|
|
(2)
|
Options
for 12,500 shares of common stock became exercisable on October
12, 2006.
Options for 5,000 shares of common stock became exercisable on
June 22,
2006. Options for 9,000 shares of common stock became exercisable
on
January 5, 2006 and monthly for 8 months after this date. Options
for
300,000 shares of common stock become exercisable on February 27,
2007.
Options for 100,000 shares of common stock become exercisable on
December
28, 2007 and December 28, 2008. Options for 5,000 shares become
exercisable on August 1, 2007. Options for 247,500 shares become
exercisable in quarterly installments starting on February 6, 2007
for a
one year period; options for an additional 247,500 shares become
exercisable in eight quarterly installments over the following
two years.
A warrant for the purchase of an aggregate of 1,505,000 shares
of common
stock becomes exercisable in six consecutive monthly installments
beginning on November 14, 2006.
|
|
(3)
|
In-the-money
options represents unexercised options having a per share exercise
price
below $0.205, the closing price of our common stock at December
29, 2006.
The value of unexercised in-the-money options equals the number
of
in-the-money options multiplied by the excess of $0.205 over the
per-share
exercise prices of the options. The value of unexercised in-the-money
options at December 31, 2006, may never be realized by the option
holders.
|
66
Director
Compensation
We
pay an
annual fee of $4,000 to each non-employee director and an additional $1,000
to
non-employee directors for serving as committee chair. During 2006, while
we did
not make payments under this policy, such expenses were accrued. We do not
pay
meeting fees but directors are reimbursed for their expenses incurred in
attending meetings. Employee directors receive no other compensation as
directors.
Under
our
2003 Stock Incentive Plan, non-employee directors are automatically awarded
options to purchase 30,000 shares of common stock upon becoming directors
and
automatically awarded options to purchase 5,000 shares of common stock annually
after this date.
The
following table represents stock options that were granted during 2006 to
non-employee directors.
|
Director
Compensation
|
|
||||||||||||||||||
|
Name
|
|
Fees
Earned
or
Paid in
Cash
(1)
|
|
Stock
Awards
|
|
Option
Awards
|
|
Non-Equity
Incentive
Plan Compensation
|
|
All
Other Compensation
|
|
Total
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.
Colin Neill
|
|
$
|
6,000
|
|
$
|
—
|
|
$
|
11,858
|
|
$
|
—
|
|
$
|
—
|
|
$
|
17,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
John
E. Repine, M.D
|
|
$
|
5,000
|
|
$
|
7,785
|
(2)
|
$
|
21,874
|
(3)
|
$
|
—
|
|
$
|
—
|
|
$
|
34,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Gary
Post
|
|
$
|
5,000
|
|
$
|
—
|
|
$
|
101,138
|
(4)
|
$
|
—
|
|
$
|
—
|
|
$
|
106,138
|
|
|
|
(1)
|
Accrued
but not paid.
|
|
|
(2)
|
Includes
39,925 shares of common stock valued at $7,785 on the date of the
grant,
as compensation under a consulting agreement between us and Dr.
Repine,
for the period between October 15, 2006 and December 31,
2006.
|
|
|
(3)
|
In
addition to automatic annual option grants made to all directors
for their
service on the board, includes the value of an option for the purchase
of
up to 9,787 shares of common stock at an exercise price of $0.24
per
share, immediately exercisable, in lieu of cash payment under a
consulting
agreement between us and Mr. Repine.
|
|
|
(4)
|
In
addition to automatic annual option grants made to all directors
for their
service on the board, includes the value of following options and
warrants
granted to Mr. Post under an advisory agreement between us and
him: (i) a
ten-year option for the purchase of up to 333,333 shares of common
stock,
with an exercise price of $0.20 per share, which vests and becomes
exercisable in six equal installments over a 180 day period beginning
November 14, 2006, (ii) a ten-year warrant for the purchase of
173,608
shares of common stock, with an exercise price of $0.20 per share,
fully
vested and immediately exercisable, (iii) a ten-year warrant for
the
purchase of 550,000 shares of common stock, with an exercise price
of
$0.20 per share, which vests and becomes exercisable with respect
to
225,000 shares in four quarterly installments from January 15,
2007 to
January 15, 2008, and which vests and becomes exercisable with
respect to
an additional 225,000 shares in eight equal installments from January
15,
2008 to January 15, 2010, and (iv) a ten-year option for the purchase
of
156,250 shares with an exercise price of $0.24 per share, fully
vested and
immediately exercisable.
|
67
Employment
Agreements
On
November 6, 2006, we entered into an employment agreement with Dr. Hausman
that
commenced retroactively at October 15, 2006, referred to as the commencement
date. Under the terms of our agreement:
|
·
|
Dr.
Hausman will serve as our President and Chief Executive Officer
for a
three year term from the commencement date of his employment, and
after
this period, on a year-to-year basis;
|
|
·
|
Dr.
Hausman will receive annual compensation in the amount of $250,000,
payable quarterly in advance in cash, common stock based on a price
equal
to 85% of average of the five closing prices for the five trading
days
prior to the date that the issuance is authorized by the board
of
directors, or in ten year warrants equal to that number of warrants
equal
to 1.5 times the number of shares that would otherwise be
received;
|
|
·
|
For
the initial quarterly payment, Dr. Hausman was issued 347,222 restricted
shares of common stock;
|
|
·
|
During
the three year term of the agreement, Dr. Hausman will receive
an annual
bonus based upon the attainment of agreed upon goals and milestones
as
determined by the board of directors and its compensation
committee;
|
|
·
|
During
the remainder of calendar year 2006, Dr. Hausman’s bonus will be pro rated
on an annual bonus rate in the range of 25% to 50% of his base
salary, and
the bonus for subsequent years of the term of the agreement will
be in a
similar target range;
|
|
·
|
The
bonuses payable will be paid in cash, although at Dr. Hausman’s sole
option, they may be paid in stock (or in the form of ten year warrants
with cashless exercise provisions, with 1.5 times the number of
warrant
shares to be issued in lieu of the number of shares of common stock),
based upon the average of the closing bid and asked prices for
the 5
trading days immediately prior to the awarding to Dr. Hausman of
the bonus
for a particular year;
|
|
·
|
Once
we have raised at least $2.5 million in one or more financings
(equity,
debt or convertible debt, in addition to the financing closed on
October
25, 2006) or in a strategic transaction, Dr. Hausman may elect,
at any
time, in lieu of receiving a quarterly issuance of stock (or warrants
in
lieu thereof), to receive his base salary in cash, payable monthly
on our
regular pay cycle for professional employees;
|
|
·
|
As
part of his compensation, we granted Dr. Hausman a ten year a
non-qualified option to purchase 495,000 shares of our common stock
at an
exercise price of $0.20 per share, vesting as follows: (i) 247,500
option
shares vesting in four equal quarterly installments commencing
on January
15, 2007 and every three months thereafter and (ii) and the remaining
247,500 option shares vesting in eight quarterly installments over
two
years;
|
|
·
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Additionally,
we granted Dr. Hausman, as a sign on bonus, 500,000 restricted
shares of
common stock and a ten year common stock purchase warrant to purchase
1,505,000 shares at an exercise price of $0.20 per share, with
vesting in
six equal installments, commencing on November 14, 2006, through
the 180th
day after the Commencement Date;
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·
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We
are providing Dr. Hausman with an annual office expense allowance
of
$50,000, for the costs of maintaining an office in the Stevenson,
Washington area, payable quarterly in advance in the form of common
stock,
at a price equal to 85% of the market price;
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·
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For
the first installment, representing $12,500 of the above office
expense
allowance, Dr. Hausman was issued 69,444 restricted shares of common
stock;
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·
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Once
we have completed a qualifying financing, the above office expense
allowance will be paid in cash in advance, commencing for the quarter
next
following the quarter in which the Qualifying Financing
occurred.
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·
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Additionally,
Dr. Hausman will receive family health and dental insurance benefits
and
short-term and long-term disability
policies;
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68
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·
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Upon
termination for cause, all compensation due to Dr. Hausman under
the
agreement will cease, other than a right to participate in continued
group
health insurance for a certain period of time (this applies to
all
terminations, except if Dr, Hausman terminates without good reason)
and
any unexercised portions of his stock options shall expire upon
such
termination;
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·
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In
the event that we terminate Dr. Hausman’s employment within one year of a
change of control, Dr. Hausman shall receive an amount equal to
twelve
months of his base salary for the then current term of the agreement
(which is in addition to the base salary paid to Dr. Hausman after
our
delivery of notice of termination and the actual date of termination)
plus
an amount equal to his bonus in the prior year (and if occurring
before
the determination of the 2007 bonus, an amount equal to 50% of
the then
current base salary), and the full vesting of Dr. Hausman’s stock options,
and extended exercisability of the options until their respective
expiration dates.
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·
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In
the event that we terminate our relationship with Dr. Hausman,
including a
non-renewal of the agreement by us, but other than upon a change
of
control, death, disability or cause, Dr. Hausman shall receive
the
following: (i) if employment was terminated during the calendar
year 2006,
an amount equal to six months of the then current base salary;
if
employment was terminated commencing in the calendar year 2007
or if we
elect not to renew the agreement, an amount equal to twelve months
of base
salary for the then current term of the agreement plus an amount
equal to
the prior year’s bonus (and if occurring before the bonus for 2007 has
been determined, an amount equal to 50% of the then current base
salary);
(ii) if employment was terminated during the calendar year 2006,
50% of
the previously unvested portion of the Initial Option Grant shall
vest and
such vested options shall be exercisable until their respective
expiration
dates; if employment was terminated commencing in the calendar
year 2007
and thereafter or if we elect not to renew the agreement following
the
initial three year term or any additional term, all stock options
granted
to Dr. Hausman (including without limitation the Initial Option
Grant)
shall immediately vest and shall remain exercisable until their
respective
expiration dates.
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·
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In
the event Dr. Hausman terminates his relationship with us for good
reason
within one (1) year of the occurrence of the event which established
good
reason, or for good reason within one year of a change of control,
Dr.
Hausman shall receive the following: (i) if the termination occurred
during the calendar year 2006 for good reason, an amount equal
to six
months of base salary; if the termination occurred during the calendar
year 2006 due to a change of control, an amount equal to twelve
months of
base salary; if termination for good reason occurred during the
calendar
year 2007 or thereafter, an amount equal to twelve months of the
then
current base salary plus an amount equal to the prior year’s bonus (and if
occurring before the bonus for 2007 has been determined, an amount
equal
to 50% of the then current base salary); (ii) if termination occurred
during the calendar year 2006, 50% of the previously unvested portion
of
the Initial Option Grant shall vest and such vested options shall
be
exercisable until their respective expiration dates, except that
if
termination is by Dr. Hausman for good reason subsequent to a change
of
control, then 100% of any option grants to Dr. Hausman (including, without
limitation, the Initial Option Grant) shall vest and shall remain
exercisable until its respective expiration dates; if employment
was
terminated commencing in the calendar year 2007 and thereafter,
all stock
options granted to Dr. Hausman (including, without limitation,
the Initial
Option Grant) shall immediately vest and shall remain exercisable
until
their respective expiration dates.
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On
January 6, 2006 we signed a Letter Agreement with Michael D. Centron under
which
he would serve as our Vice President and chief financial officer. On the
same
day our board of directors ratified the Letter Agreement and granted stock
options to Mr. Centron pursuant to the terms of the Letter Agreement. Mr.
Centron resigned as an officer and employee effective November 15,
2006.
69
On
February 28, 2005, we entered into a Letter Agreement, effective as of February
28, 2005, with Steven T. Guillen under which he was hired as our President
and
Chief Executive Officer. On September 15, 2006, Mr. Guillen’s employment as
President and Chief Executive Officer was terminated by the board of directors.
On March 8, 2007, we entered into a Separation Agreement with Mr. Guillen
under
which, among other things, Mr. Guillen agreed to resign from the board of
directors. For further information regarding related matters involving Mr.
Guillen, see the section entitled “Legal Proceedings” on page 19 of this report.
70
ITEM
11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
percentage of shares beneficially owned is based on 44,527,476 shares of
common
stock outstanding as of December 31, 2006. Shares of common stock subject
to
stock options and warrants that are currently exercisable or exercisable
within
60 days of December 31, 2006 are deemed to be outstanding for the purpose
of
computing the percentage ownership of that person but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other
person. Unless indicated below, the persons and entities named in the table
have
sole voting and sole investment power with respect to all shares beneficially
owned, subject to community property laws where applicable.
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Name
and Address of Beneficial Owner
|
Number
of Shares of Common Stock Beneficially
Owned
|
|
Percent of
Shares
of Outstanding Common
Stock
|
|
TorreyPines
Therapeutics, Inc. (1)
11085
N. Torrey Pines Road
La
Jolla, CA 92037
|
16,386,647
|
36.80%
|
|
|
Bristol
Investment Fund, Ltd. (2)
Bristol
Capital Advisors, LLC
10990
Wilshire Boulevard, Suite 1410
Los
Angeles, CA 90024
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13,472,994
|
25.57%
|
|
|
Alpha
Capital Anstalt (3)
c/o
LH Financial
150
Central Park South, 2nd
Floor
New
York, NY 10019
|
5,737,143
|
12.01%
|
|
|
Whalehaven
Capital Fund Limited (4)
3rd
Floor, 14 Par-La-Ville Rd.
P.
O. Box HM1027
Hamilton
HMDX Bermuda
|
4,302,857
|
9.01%
|
|
|
Cranshire
Capital, LP (5)
3100
Dundee Rd., Suite 703
Northbrook,
IL 60062
|
4,717,791
|
9.99%
|
|
|
Marvin
S. Hausman, M.D. (6)
|
17,410,717
|
|
38.22%
|
|
S.
Colin Neill (7)
|
181,875
|
|
*
|
|
Steven
T. Guillen (8)
|
1,175,000
|
2.61%
|
|
|
John
E. Repine, M.D. (9)
|
233,387
|
|
0.52%
|
|
Gary
M. Post (10)
|
688,275
|
1.52%
|
|
|
Executive
officers and directors as a group — 5 persons (11)
|
19,689,254
|
|
41.73%
|
71
|
*
|
Less
than one percent.
|
|
(1)
|
Based
in part on a Schedule 13D/A filed with the SEC on March 5, 2004,
filed on
behalf of Axonyx Inc., which was acquired by TorreyPines Therapeutics
in
October 2006, and Dr. Hausman. Pursuant to the Schedule 13D/A
Axonyx has
sole voting power as to 13,982,567 and (with a correction to
the number of
shares reported in such Schedule 13D/A as being held by Dr. Hausman)
shared voting power as to 16,386,647 shares. In addition, Axonyx
has sole
dispositive power as to 13,982,567 shares and (with a correction
to the
number of shares reported in such Schedule 13D/A as being held
by Dr.
Hausman) shared dispositive power as to 16,386,647 shares. Axonyx
in the
Schedule 13D/A disclaims beneficial ownership of Dr. Hausman’s
shares.
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|
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(2)
|
The
holdings of Bristol Investment Fund, Ltd. include 3,867,925 shares
of
common stock, 1,434,286 shares issuable upon the voluntary conversion
by
Bristol Investment Fund of a secured convertible debenture at
the current
conversion price of $0.35 per share, warrants to purchase 1,933,963
shares
of common stock at a price of $0.66 per share, warrants to purchase
1,933,962 shares of common stock at a purchase price of $1.00
per share,
warrants to purchase 2,151,429 shares of common stock at a purchase
price
of $0.35 per share, and warrants to purchase 717,143 shares of
common
stock at a purchase price of $0.385 per share. Paul Kessler,
manager of
Bristol Capital Advisors, LLC, the investment advisor to Bristol
Investment Fund, Ltd., has voting and investment control over
the
securities held by Bristol Investment Fund, Ltd. Mr. Kessler
disclaims
beneficial ownership of these securities.
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|
|
(3)
|
The
holdings of Alpha Capital Anstalt include 1,434,286 shares issuable
upon
the voluntary conversion by Alpha Capital Anstalt of a secured
convertible
debenture at the current conversion price of $0.35 per share,
warrants to
purchase 2,151,429 shares of common stock at a purchase price
of $0.35 per
share, and warrants to purchase 717,143 shares of common stock
at a
purchase price of $0.385 per share.
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|
|
(4)
|
The
holdings of Whalehaven Capital Fund Limited include 1,075,714
shares
issuable upon the voluntary conversion by Whalehaven Capital
Fund of a
secured convertible debenture at the current conversion price
of $0.35 per
share, warrants to purchase 1,613,571 shares of common stock
at a purchase
price of $0.35 per share, and warrants to purchase 537,857 shares
of
common stock at a purchase price of $0.385 per share.
|
|
|
(5)
|
The
holdings of Cranshire Capital, LP. include 896,429 shares issuable
upon
the voluntary conversion by Cranshire Capital of a secured convertible
debenture at the current onversion price of $0.35 per share,
warrants to
purchase 283,019 shares of common stock at a price of $0.66 per
share,
warrants to purchase 283,019 shares of common stock at a purchase
price of
$1.00 per share, warrants to purchase 1,344,643 shares of common
stock at
a purchase price of $0.35 per share, and warrants to purchase
448,214
shares of common stock at a purchase price of $0.385 per share.
Mitchell
P. Kopin, the President of Downsview Capital, Inc., the General
Partner of
Cranshire Capital, L.P., has sole investment power and voting
control over
the securities held by Cranshire Capital, L.P.
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|
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(6)
|
The
holdings of Marvin S. Hausman, M.D. include 2,404,080 shares
of common
stock, 271,570 shares issuable upon exercise of options that
are
exercisable currently or within 60 days of December 31, 2006,
752,500
warrant shares exercisable currently or within 60 days of December
31,
2006, and 13,982,567 shares held by TorreyPine Therapeutics,
which
acquired Axonyx Inc. in October 2006. Dr. Hausman has sole dispositive
power as to 2,404,080 shares and shared dispositive power as
to 16,386,647
shares, including 13,982,567 shares held by TorreyPine Therapeutics.
Dr | |