SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 for the quarterly period ended June 30, 1996.
- --- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
------ -------
Commission File Number O-8092
OXIS INTERNATIONAL, INC.
A Delaware corporation
I.R.S. Employer Identification No. 94-1620407
6040 N. Cutter Circle, Suite 317
Portland, OR 97217
Telephone: (503) 283-3911
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 X NO
---- ----
At June 30, 1996, the issuer had outstanding the indicated number of
shares of common stock: 13,289,896
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended Six months ended
June 30 June 30
--------------------------- --------------------------------
1996 1995 1996 1995
Revenues:
Product sales $ 1,200,000 $ 1,065,000 $ 2,537,000 $ 3,140,000
Royalties 28,000 21,000 58,000 72,000
----------- ----------- ----------- -----------
Total revenues 1,228,000 1,086,000 2,595,000 3,212,000
Cost and expenses:
Cost of sales 652,000 681,000 1,577,000 1,858,000
Research and development 1,179,000 990,000 2,361,000 2,019,000
Selling, general and administrative 881,000 846,000 1,626,000 1,491,000
----------- ----------- ----------- -----------
Total costs and expenses 2,712,000 2,517,000 5,564,000 5,368,000
----------- ----------- ----------- -----------
Operating loss (1,484,000) (1,431,000) (2,969,000) (2,156,000)
Interest income 13,000 14,000 21,000 20,000
Interest expense (48,000) (45,000) (117,000) (83,000)
----------- ----------- ----------- -----------
Net loss $(1,519,000) $(1,462,000) $(3,065,000) $(2,219,000)
=========== =========== =========== ===========
Net loss per share $ (.12) $ (.15) $ (.25) $ (.23)
=========== =========== =========== ===========
Weighted average number of
shares used in computation 12,204,520 10,015,050 12,164,472 9,698,138
=========== =========== =========== ===========
2
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1996 1995
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $1,129,000 $ 727,000
Accounts receivable 622,000 823,000
Inventories 726,000 953,000
Prepaid and other 121,000 262,000
---------- ----------
Total current assets 2,598,000 2,765,000
Property and equipment, net 908,000 1,092,000
Assets under capital leases, net 1,017,000 1,198,000
Technology for developed products
and custom assays, net 4,140,000 4,498,000
Other assets 265,000 317,000
---------- ----------
Total assets $8,928,000 $9,870,000
========== ==========
3
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1996 1995
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 296,000 $ 1,616,000
Accounts payable 942,000 1,182,000
Customer deposits 125,000 250,000
Accrued liabilities 798,000 903,000
Current portion of capital lease obligations 179,000 283,000
------------ ------------
Total current liabilities 2,340,000 4,234,000
Capital lease obligations and other 18,000 77,000
8% convertible subordinated debentures -- 1,255,000
Shareholders' equity:
Preferred stock - $.01 par value; 15,000,000 shares
authorized:
Series B - 642,583 shares issued and outstanding
(liquidation preference of $1,500,000) 6,000 6,000
Series C - 1,697,157 shares issued and
outstanding 17,000 --
Series D - 2,000 shares issued and outstanding -- --
Common stock - $.50 par value; 40,000,000 shares
authorized; 13,289,896 shares issued and outstanding 6,645,000 6,062,000
Additional paid in capital 30,030,000 25,210,000
Accumulated deficit (30,096,000) (27,031,000)
Accumulated translation adjustments (32,000) 57,000
------------ ------------
Total shareholders' equity 6,570,000 4,304,000
------------ ------------
Total liabilities and shareholders' equity $ 8,928,000 $ 9,870,000
============ ============
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
-----------------------------
1996 1995
Cash flows from operating activities:
Net loss $(3,065,000) $(2,219,000)
Adjustments to reconcile net loss to cash provided
by (used for) operating activities:
Depreciation and amortization 712,000 690,000
Changes in assets and liabilities:
Accounts receivable 201,000 (148,000)
Inventories 227,000 103,000
Other current assets 141,000 124,000
Accounts payable (240,000) (500,000)
Customer deposits (125,000) (866,000)
Accrued liabilities 27,000 152,000
----------- -----------
Net cash used for operating activities (2,122,000) (2,664,000)
Cash flows from investing activities:
Redemption of certificates of deposit -- 397,000
Purchases of equipment (24,000) (4,000)
Other, net 59,000 (118,000)
----------- -----------
Net cash provided by investing activities 35,000 275,000
Cash flows from financing activities:
Proceeds from issuance of short-term notes 65,000 1,366,000
Proceeds from issuance of stock, net of related cost 3,205,000 1,676,000
Repayment of short-term borrowings (619,000) (340,000)
Repayment of long-term debt and capital lease obligations (162,000) (180,000)
----------- -----------
Net cash provided by financing activities 2,489,000 2,522,000
----------- -----------
Net increase in cash and cash equivalents 402,000 133,000
Cash and cash equivalents - beginning of period 727,000 936,000
----------- -----------
Cash and cash equivalents - end of period $ 1,129,000 $ 1,069,000
=========== ===========
5
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS AND CONDENSED NOTES
The unaudited consolidated financial statements, which have been prepared in
accordance with the instructions to Form 10-Q, do not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements. All adjustments considered necessary by
management for a fair presentation have been included. Operating results for
interim periods are not necessarily indicative of the results that may be
expected for the full year.
An annual report (Form 10-K) has been filed with the Securities and Exchange
Commission ("Commission") for the year ended December 31, 1995. That report
contains, among other information, a description of the business of OXIS
International, Inc. ("OXIS" or the "Company"), audited financial statements,
notes to the financial statements, the report of the independent auditors
and management's discussion and analysis of results of operations and
financial condition. Readers of this report are presumed to be familiar with
that annual report.
The functional currency of OXIS International S.A. ("OXIS S.A"), the
Company's foreign subsidiary, is the French franc. OXIS S.A.'s assets and
liabilities are translated using the exchange rate at the end of the period.
Its statement of operations is translated at the average exchange rate
during the period. Gains or losses resulting from foreign currency
translation are accumulated as a separate component of shareholders' equity.
2. BASIS OF PRESENTATION
These financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company has incurred losses in each of
the last three years, and for the six months ended June 30, 1996. The
Company's continuation as a going concern is contingent upon its ability to
obtain additional financing, and to generate revenue and cash flow to meet
its obligations on a timely basis. These financial statements do not include
any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
may be necessary should the Company be unable to continue as a going
concern.
The Company is currently seeking additional capital through another private
placement of equity securities. If the Company is unable to raise additional
capital during the remainder of 1996, it intends to curtail its operations
through the reduction of personnel and facility costs and by slowing its
research and development efforts. If the Company were unable to sufficiently
curtail its costs in such a situation, it might be forced to seek protection
of the courts through reorganization, bankruptcy or insolvency proceedings.
6
3. INVENTORIES
Inventories are stated at the lower of cost or market. Cost has been
determined by using the first-in, first-out and specific identification
methods. Inventories at June 30, 1996 and December 31, 1995, consisted of
the following:
June 30, December 31,
1996 1995
Raw materials $166,000 $173,000
Work in process 215,000 354,000
Finished goods 345,000 426,000
-------- --------
Total $726,000 $953,000
======== ========
4. SHAREHOLDERS' EQUITY
During the first six months of 1996, the Company has issued 1,125,590 shares
of its Series C Preferred Stock for cash of $1,463,000. In addition, in May
1996, the Company issued 648,490 shares of its Series C Preferred Stock in
exchange for the cancellation of $766,000 principal plus accrued interest of
$77,000 on 8% notes payable to former shareholders of the Company's French
subsidiary. Each share of Series C Preferred Stock is initially convertible
into one share of the Company's common stock at the option of the holder at
any time. After six months following the closing of the sales of Series C
Preferred Stock, the conversion ratio may be adjusted under certain
circumstances, and after eight months following the closing, the Company has
the right to automatically convert the Series C Preferred Stock into common
stock under certain circumstances. Each share of Series C Preferred Stock is
entitled to the number of votes equal to 1.30 divided by the average closing
bid price of the Company's common stock during the fifteen consecutive
trading days immediately prior to the date such shares of Series C Preferred
Stock were purchased.
In May 1996, the Company issued 2,000 shares of its Series D Preferred Stock
and warrants to purchase 810,126 shares of common stock for cash of
$2,000,000. The Series D Preferred Stock entitles the holder thereof to
convert its shares into a number of shares of common stock determined by
dividing the stated value of the Series D Preferred Stock (i.e., $1,000 per
share), plus a premium in the amount of 8% per annum of the stated value
from the date of issuance, by a conversion price equal to the lesser of (i)
$2.30 and (ii) a percentage (ranging from 100% on or before June 24, 1996 to
75% after July 3, 1996) of the average of the closing bid prices for shares
of common stock for the five trading days immediately prior to conversion,
but limited to a maximum of 2,424,884 shares of common stock.
7
In June 1996, $1,255,000 principal plus accrued interest of $58,000 on the
Company's 8% convertible subordinated debentures were converted into
1,050,217 shares of common stock.
5. STOCK OPTIONS
The Company has a stock incentive plan under which 2,200,000 shares of the
Company's common stock are reserved for issuance. The plan permits granting
stock options to acquire shares of the Company's common stock, awarding
stock bonuses of the Company's common stock, and granting stock appreciation
rights. During the six months ended June 30, 1996, options to purchase
612,500 shares at exercise prices of $1.6875 - $2.28125 have been issued
under the plan. As of June 30, 1996, the Company had options outstanding to
purchase 943,000 shares of the Company's common stock under this plan. As of
June 30, 1996, options to purchase 594,494 shares of the Company's common
stock at exercise prices of $1.6875 - $3.50 per share were exercisable.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position has improved substantially during the
first six months of 1996. At December 31, 1995, the Company had a working
capital deficit of $1,469,000. As of June 30, 1996, the Company had positive
working capital of $258,000. The improvement in working capital during the
six-month period resulted primarily from the issuance of stock for cash (net
proceeds of $3,205,000) and redemption of short-term notes and accrued
interest of $843,000 in exchange for Series C Preferred Stock, offset by the
net loss for the six months ($2,353,000, excluding depreciation and
amortization).
The Company's cash and cash equivalents also increased during the six-month
period - from $727,000 as of December 31, 1995 to $1,129,000 as of June 30,
1996.
However, the Company expects to continue to report losses in the near term
as the level of expenses is expected to continue to exceed revenues. The
Company must raise additional capital during the third quarter of 1996.
Although the Company has continued to raise additional funds through private
placements (described below), it cannot predict the source, terms, amount,
form, and/or availability of additional capital to fund its operations to
the end of the current year. Failure to raise such additional capital would
cause the Company to severely curtail or cease operations. For more
information concerning the Company's ability to continue as a going concern,
see Note 2 to the consolidated financial statements.
While the Company believes that its new products and technologies show
considerable promise, its ability to realize significant revenues therefrom
is dependent, in part, upon the Company's success in developing business
alliances with biotechnology and/or pharmaceutical companies that have the
required resources to develop and market certain of these products. There is
no assurance that the Company's effort to develop such business alliances
will be successful. Further, bovine superoxide dismutase sales of recent
years to Sanofi Winthrop Inc. (18% of 1995 revenues) are not expected to
continue. Sanofi Winthrop announced in October 1995 that a second Phase III
trial on its drug, DISMUTEC(TM) (a coupled form of OXIS' bovine superoxide
dismutase ("bSOD")) to treat head trauma failed to show statistically
significant improvements between the treatment and control groups.
During the first six months of 1996, the Company has raised approximately
$3,200,000 cash through the sale of its Series C and Series D Preferred
Stock. The Company expects that additional capital will be required during
1996 to continue operating in accordance with its current plans. However, no
assurances can be given that the Company will successfully raise the needed
capital. If the Company is unable to raise additional capital during the
remainder
9
of 1996, it would endeavor to extend its ability to continue in business
through the reduction of personnel and facility costs, by slowing its
research and development efforts, and by reducing other operating costs;
however, no assurances can be given that it will be able to do so.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996
COMPARED WITH THREE MONTHS ENDED JUNE 30, 1995
REVENUES
The Company's product sales for the quarter ended June 30, 1996 were
$1,200,000, a 13% increase over sales of $1,065,000 for the second quarter
of 1995. The increase in sales resulted from an increase in the quantity of
bulk bSOD sold in the second quarter of 1996 as compared to the second
quarter of 1995 (an increase of $213,000). The increase in bulk bSOD sales
was partially offset by a decrease in sales of the Company's commercial
diagnostics.
COSTS AND EXPENSES
Cost of sales as a percentage of sales decreased from 65% for the quarter
ended June 30, 1995 to 55% for the quarter ended June 30, 1996. The decrease
in cost of sales as a percentage of sales resulted primarily from a single
sale of product with a lower than normal cost in the second quarter of 1996.
Research and development expenses increased by $189,000, from $990,000 in
the second quarter of 1995 to $1,179,000 in the second quarter of 1996. This
increase in research and development expense is the result of increased
expenditures relating to preclinical development work on the Company's lead
therapeutics program (glutathione peroxidase mimics) of approximately
$300,000 and the cost (approximately $130,000) of the ongoing operations
formerly carried out by Therox Pharmaceuticals, Inc. ("Therox"), which was
acquired by the Company in July 1995. These increases in costs were offset
by a cost reduction of approximately $200,000 from the closure of the
Company's Mountain View, California facility in the fourth quarter of 1995.
NET LOSS
The Company's net loss increased by $57,000, from $1,462,000 ($.15 per
share) for the second quarter of 1995 to $1,519,000 ($.12 per share) for the
second quarter of 1996. The increase in the net loss was principally caused
by the $189,000 increase in research and development expenses, offset by an
increase of $164,000 in gross margin from product sales.
10
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 COMPARED
WITH SIX MONTHS ENDED JUNE 30, 1995
REVENUES
The Company's product sales for the first six months of 1996 were
$2,537,000, compared to $3,140,000 for the corresponding period in 1995, a
decrease of $603,000. The decrease is composed of decreases in sales of bulk
bSOD ($286,000), Palosein(R) ($94,000), commercial diagnostics ($36,000) and
other products ($268,000). Sales of research assays increased by $81,000.
Bulk bSOD sales in 1995 included a $948,000 sale to Sanofi Winthrop Inc. No
further sales of bSOD to Sanofi Winthrop Inc. are expected. Sales of bSOD to
the Company's Spanish distributor increased during the first six months of
1996 as compared to the 1995 levels, but sales of bulk bSOD for the
remainder of 1996 and beyond are uncertain and difficult to predict and no
assurances can be given with respect thereto.
The decrease in Palosein(R) sales is attributable primarily to a reduction
in volume of Palosein(R) export sales and a reduction of purchases by
domestic distributors in 1996 caused by an increase in purchases by those
distributors during a promotional campaign in the fourth quarter of 1995.
The fourth quarter 1995 promotional campaign is not expected to adversely
affect Palosein(R) sales after the second quarter of 1996. The reduction in
sales of other products is due primarily to the completion of a contract in
early 1996.
COSTS AND EXPENSES
Cost of sales as a percent of product sales increased from 60% in the first
half of 1995 to 62% in the first half of 1996. Cost of sales in both the
first six months of 1995 and 1996 include $368,000 in amortization of
purchase adjustments relating to 1994 business acquisitions. Excluding such
amortization, cost of sales in both six-month periods would have been 48% of
product sales.
Research and development expenses increased by $342,000, from $2,019,000 for
the first six months of 1995 to $2,361,000 for the first six months of 1996.
Increases in research and development expenses included increased expenses
relating to preclinical development work on the Company's lead therapeutics
program ($461,000) and costs of the former Therox operations ($312,000). In
May 1996, the Company closed the laboratory in Malvern, Pennsylvania
formerly occupied by Therox and expects to realize savings from this closure
in the third quarter of 1996. Increases in research and development expenses
were offset by a reduction in costs of approximately $438,000 resulting from
the closure of the Company's Mountain View, California facility in the
fourth quarter of 1995.
11
Selling, general and administrative expenses increased from $1,491,000 for
the first six months of 1995 to $1,626,000 for the first six months of 1996,
an increase of $135,000. Selling, general and administrative expenses in the
first six months of 1996 include $35,000 in fees for listing additional
common shares on the NASDAQ National Market. Additionally, consulting costs
increased by $43,000, consisting mostly of recruiting expenses incurred in
the Company's search for a Chief Operating Officer. The search was concluded
with the hiring of a Chief Operating Officer in March 1996.
INTEREST EXPENSE
Interest expense increased by $34,000 in the first six months of 1996 as
compared to the first six months of 1995, primarily due to interest on the
Company's 8% convertible subordinated debentures issued in the fourth
quarter of 1995. During the second quarter of 1996 the Company substantially
reduced its interest-bearing obligations through cash payments of $619,000,
the cancellation of $766,000 of 8% notes in exchange for Series C Preferred
Stock, and conversion of $1,255,000 of 8% convertible subordinated
debentures into common stock. These transactions will result in a
substantial reduction of the Company's interest expense in the third quarter
of 1996.
NET LOSS
The Company's loss for the first six months of 1996 was $3,065,000 ($.25 per
share) compared to a loss of $2,219,000 ($.23 per share) for the first six
months of 1995. The increase in the net loss is primarily due to reduced
profit margins on product sales ($322,000), increased research and
development expenses ($342,000) and increased selling, general and
administrative expenses ($135,000).
12
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 1996 Annual Meeting of Stockholders held on June 13, 1996
("1996 Stockholders Meeting"), the Company's stockholders elected the following
persons to the Company's Board of Directors:
Common Common
Name Shares FOR Shares WITHHELD
---- ---------- ---------------
Ray R. Rogers 10,279,367 388,238
Anna D. Barker, Ph.D. 10,295,546 372,059
Timothy Biro 10,270,746 396,859
Stuart S. Lang 10,270,796 396,809
James D. McCamant 10,270,166 397,439
Gerald D. Mayer, Ph.D. 10,272,796 394,809
David A. Needham, Ph.D. 10,297,796 369,809
A.R. Sitaraman 10,268,066 399,539
In addition to the common shares, Series B Preferred Stock with voting rights
equivalent to 642,583 common shares and Series C Preferred Stock with voting
rights equivalent to 294,082 common shares voted for each nominee for director.
No holders of Series B or Series C Preferred Stock withheld votes.
At the 1996 Stockholders Meeting, the stockholders also approved (1) an
amendment of the Company's 1994 Stock Incentive Plan (as described in greater
detail in the Proxy Statement dated April 26, 1996) to increase the number of
shares of common stock available for issuance thereunder by 1,000,000 shares, to
an aggregate of 2,200,000 shares (7,362,435 common shares, Series B Preferred
shares with 642,583 equivalent common votes and Series C Preferred shares with
294,082 equivalent common votes voting for; 646,260 common shares voting
against; 122,051 common shares abstaining; and 2,526,859 broker non-votes) and
(2) an amendment of the Company's Restated Certificate of Incorporation to (i)
increase the authorized number of shares of OXIS common stock from 25,000,000
shares to 40,000,000 shares and (ii) increase the authorized number of shares of
OXIS preferred stock from 5,000,000 shares to 15,000,000 shares (7,318,526
common shares, Series B Preferred shares with 642,583 equivalent common votes
and Series C Preferred with 294,082 equivalent common votes voting for; 568,625
common shares voting against; 46,558 common shares abstaining; and 2,733,896
broker non-votes.)
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - See Exhibit Index on page 15.
(b) Reports on Form 8-K.
The Company filed with the Commission a Report on Form 8-K on May 24, 1996 which
reports the sale of Series C and Series D Preferred Stock.
The Company also filed with the Commission a Report on Form 8-K on June 21,
1996, which demonstrates compliance with the NASD minimum requirement for net
tangible assets of NASDAQ National Market Issuers.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OXIS International, Inc.
August 8, 1996 By /s/Anna D. Barker
-------------------
Anna D. Barker
President and Chief Executive Officer
August 8, 1996 By /s/Jon S. Pitcher
------------------
Jon S. Pitcher
Chief Financial Officer
14
EXHIBIT INDEX
Exhibit Page
Number Description of Document Number
3(a) Certificate of Designations,
Preferences, and Rights of
Series D Preferred Stock of
the Company (1)
27(A) Financial data schedule 16
__________
(1) Incorporated by reference to the Company's Report on Form 8-K filed with
the Commission on May 24, 1996.
15