PART I
ITEM 1. BUSINESS.
INTRODUCTION
Certain of the statements contained in this report are forward-looking
statements based on current expectations which involve a number of
uncertainties. The events described herein may not occur due to risks
inherent in research and product development, the uncertainty of market
acceptance of Company products, the possible inability to obtain financing,
and other factors. Accordingly, the Company's future activities may differ
materially from those projected in the forward-looking statements.
OXIS International, Inc., (the "Company"), a Delaware corporation, is a
leader in the discovery, development and commercialization of therapeutic
and diagnostic products to diagnose, treat and prevent diseases of
oxidative stress. Oxidative stress occurs when the concentration of free
radicals and reactive oxygen species ("ROS"), highly reactive molecules
produced during oxidative processes, exceed the body's antioxidant defense
mechanisms.
The Company consists of two closely related operating units: an
international diagnostic business which markets research and commercial
diagnostic assays and fine chemicals to research and clinical laboratories;
and a drug discovery business focused on new drugs to treat diseases
associated with tissue damage from free radicals and reactive oxygen
species.
The Company has targeted its drug discovery and development programs to
address diseases that have underlying pathologies based on oxidative
stress, and for which there is currently no optimum treatment. The Company
has identified lead molecules from two series of small molecular weight
antioxidants. The first of these lead molecules has completed Phase I
clinical trials, and the second is in preclinical development. In addition,
the Company is developing a series of earlier stage compounds for the
treatment of cancer.
The Company derives current business revenues from its diagnostic assays
and two fine chemicals, ergothioneine and bovine superoxide dismutase
("bSOD"). The Company's diagnostic products portfolio includes fourteen
commercial therapeutic drug monitoring ("TDM") assays based on fluorescence
polarization immunoassay technology ("FPIA"); twelve drugs of abuse assays
which utilize an enzyme-multiplied immunoassay technique ("EMIT"); and six
assays to measure oxidative stress.
The Company's twelve FDA-cleared therapeutic drug monitoring ("TDM") assays
are sold to clinical and reference laboratories, primarily through a
network of international distributors. The assays for markers of oxidative
stress are sold through international distribution and catalog sales to
basic researchers and clinicians working in oxidative stress research. The
Company's TDM assays are designed to run on Abbott's TDx(R) and TDx/FLx(R)
instruments, while the enzyme immunoassays and colorimetric assays run on a
variety of commercially available instruments.
1
The Company has invested significant resources to build an early and
substantial patent position on both its antioxidant therapeutic
technologies and selected oxidative stress assays.
The Company's corporate offices are located in a 15,000 sq. ft. facility at
6040 N. Cutter Circle, Suite 317, Portland, OR 97217. Research operations
of the Company are located outside of Paris at Z.A. des Petits Carreaux, 2,
av. des Coquelicots, 94385 Bonneuil-Sur-Marne, Cedex, France.
ACQUISITIONS/MERGERS
In September 1994, the Company acquired Bioxytech S.A. located in Paris,
France, and merged with International BioClinical, Inc. ("IBC"), an Oregon
corporation, and changed its name from DDI Pharmaceuticals, Inc. to OXIS
International, Inc. Bioxytech S.A. was subsequently renamed OXIS
International S.A. ("OXIS S.A."). At the time of the acquisition, OXIS
S.A.'s research and development programs were focused on the synthesis of
novel antioxidant therapeutic molecules and assays to measure markers of
oxidative stress. OXIS S.A. was also selling six research assays for
measuring specific markers of oxidative stress. IBC was selling thirteen
therapeutic drug monitoring ("TDM") assays at the time of its acquisition
by the Company. It was also developing one additional TDM assay and a
(beta)-lactamase rapid detection test, both of which were completed during
1995.
In July 1995, OXIS acquired Therox Pharmaceuticals, Inc. ("Therox"), a
Delaware corporation, through an exchange of stock. Therox was merged into
a subsidiary of the Company. Therox was founded in 1994 by S.R. One,
Limited (the venture investment arm of SmithKline Beecham) and Brantley
Venture Partners II, L.P. Therox was focused on the development of membrane
active antioxidants and molecules that combine antioxidant activity with
other key therapeutic effects. The acquisition provided the Company with
complimentary therapeutic technologies, seven patents and several
relationships with university scientists.
Prior to the acquisitions of Bioxytech S.A. and International BioClinical,
Inc. in 1994, substantially all of the Company's research and development
efforts involved superoxide dismutase ("SOD") and poly-ethylene glycol
("PEG"). The 1994 and 1995 acquisitions substantially expanded the
Company's research and development capabilities in the areas of synthetic
chemistry, biochemistry and diagnostic assay development.
RESEARCH AND DEVELOPMENT
The Company's research and development programs are focused primarily on
the discovery and development of new therapeutic molecules to combat
diseases related to damage from oxidative stress. OXIS believes that the
control or elimination of oxidative stress represents an important but
largely untapped area for drug development. The Company's technical
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approach is to supplement the natural defense systems through unique,
synthetic molecules which, because of their pharmacological and/or
distribution properties, will reduce oxidative stress in target cells and
tissues.
The Company has designed and synthesized several series of novel compounds,
including: low-molecular-weight biomimetic antioxidants (Glutathione
Peroxidase Mimics Program) and pro-oxidants (Cancer Therapeutics Program)
that are based on unique selenium chemistry; and lipid soluble antioxidants
and combination enzyme inhibitors/lipid soluble antioxidants (Lipid Soluble
Antioxidants Program). OXIS has demonstrated that certain of its
therapeutic molecules may act via two mechanisms to reduce oxidative stress
in cells: through direct control of oxidative damage; and by decreasing
specific signals that trigger the inflammatory cycle. Both of the Company's
lead therapeutic molecules have been shown to inhibit levels of
NF-(kappa)B, a transcription factor believed to be activated by elevated
concentrations of ROS. NF-(kappa)B is known to activate genes involved in
initiating the inflammatory response. The Company believes that the control
of ROS, and associated decreases in NF-(kappa)B activation, will block the
initiation of the inflammatory response earlier in the cycle than most
drugs currently used to treat certain complex inflammatory diseases.
A brief summary of the Company's synthetic therapeutics research and
development programs follows:
GLUTATHIONE PEROXIDASE MIMICS PROGRAM (GPX). The GPx mimics are small
molecular weight, orally bioavailable compounds that were designed to
catalyze the inactivation of toxic hydroperoxides. These molecules act as
chemical catalysts. The lead molecule, BXT-51072, has demonstrated
significant protection of endothelial cells from direct peroxidase damage
and down regulates various inflammatory mediators and neutrophil adhesion.
An oral formulation of BXT-51072 is being developed for the treatment of
Inflammatory Bowel Disease ("IBD"), with Acute Respiratory Distress
Syndrome ("ARDS") projected to be a secondary indication for the
intravenous formulation of the drug. BXT-51072 has demonstrated activity in
animal models of IBD, and in a porcine model of restenosis. A Phase I
clinical trial was just completed at the end of 1996 and an investigational
new drug application has been filed with the Food and Drug Administration
(the "FDA") for a Phase II study in patients with IBD. This trial is
expected to begin in mid-1997.
A patent on this class of compounds has been issued in France and patent
applications are pending in the United States, Japan, Canada, Australia and
Europe.
LIPID SOLUBLE ANTIOXIDANTS PROGRAM (LSA). The LSA compounds were designed
to combine the antioxidant capabilities of ascorbic acid with the
membrane-protecting effects of vitamin E. The lead molecule from this
series, TX-153, has also shown significant protection of endothelial cells
from direct peroxide damage, and, like BXT-51072, suppresses various
inflammatory mediators and reduces neutrophil adhesion. Although TX-153
apparently acts to control ROS in cells through a different pathway than
the GPx mimics, it also appears to inhibit NF-(kappa)B.
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TX-153 is entering preclinical toxicology studies, with Phase I clinical
studies anticipated to begin in 1998.
The Company has four issued U.S. patents, and patent applications pending
in the United States, Mexico, Japan, Canada and Europe on these compounds.
CANCER THERAPEUTICS PROGRAM. The Company has designed compounds which
utilize the destructive nature of free radicals to treat hormone-dependent
cancers by selectively killing tumor cells by activating ROS.
Hormone-dependent cancers such as breast and prostate cancer were chosen as
potential indications for this series of molecules due to the specific
hormone receptors on their cell membranes. Molecules that mimic the enzyme
glutathione oxidase have been synthesized, and two strategies are being
investigated to deliver the molecules to tumor cells and initiate the
production of ROS inside these cells. Specific steroid molecules are being
tested for their ability to target tumor cells, and a prodrug approach is
being used to provide a source of ROS that can be turned on inside the
cell. A lead molecule has not yet been selected for this series. The
indications for this series of drugs include breast and prostate cancer,
but the approach may also be applicable to other tumors.
The Company has filed patent applications on this series of pro-oxidant
molecules in the United States and France.
In addition to its research and development programs in synthetic
antioxidants, OXIS also has conducted research programs in the development
of oxidative stress assays, bovine superoxide dismutase and poly-ethylene
glycol technology. The status of these programs are as follows:
OXIDATIVE STRESS ASSAYS. The Company has developed six research assay kits
for markers of oxidative stress that are designed to ultimately facilitate
diagnosis and optimize therapy of free radical-associated diseases. These
assays also provide developmental synergy for the pharmaceutical research
and development programs by facilitating the assessment of oxidative stress
in laboratory studies and in patients. The Company intends to develop
additional assays for key markers of oxidative stress as part of its
ongoing research and development efforts in oxidative stress diagnostics.
BOVINE SUPEROXIDE DISMUTASE (BSOD). The Company also has extensive
experience in developing, manufacturing and marketing bovine superoxide
dismutase ("bSOD"). Bovine superoxide dismutase has been previously studied
in numerous clinical trials by OXIS and other companies. OXIS is not
currently pursuing an active research program in bSOD, but supplies bulk
bSOD for human use and sells an injectable dosage form of the drug for
veterinary applications under the registered trademark Palosein(R).
POLY-ETHYLENE GLYCOL TECHNOLOGY (PEG). Additionally, the Company has
developed a patented, high-molecular weight PEG technology that extends the
half-life of SOD and other therapeutic proteins. These derivatives reduce
the immunogenicity of and extend the life of
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therapeutic proteins in the body . (The Company's PEG has been shown to
extend the life of its bSOD in vivo by 250 times.) The Company has four
issued U.S. patents as well as numerous issued patents world-wide on this
technology. The Company is not currently pursuing an active research
program in PEG technology, but is seeking potential partners for this
technology for possible license or sale.
Overall, the Company has an extensive portfolio of patents that cover its
synthetic antioxidant therapeutic molecules, superoxide dismutase,
polyethylene glycol technology, markers of oxidative stress and fine
chemicals. The Company currently holds fifteen U.S. patents and eight
French patents and has filed for eight additional U.S. patents.
The Company's overall research and development strategy is to discover and
advance its therapeutic molecules through early stage clinical trials to
demonstrate efficacy in the target disease populations. The Company expects
to seek strategic pharmaceutical partners for later stage clinical
development and commercialization of its therapeutics, but, to date, has
not entered into any such partnership.
Much of the Company's success depends on its potential products which are
in research and development and from which no material revenues have yet
been generated. The Company must sucessfully partner, develop, obtain
regulatory approval for and market or sell its potential therapeutic
products to achieve profitable operations. No assurances can be given that
the Company's product development efforts will be successfully completed,
that required regulatory approvals will be obtained, or that any such
products, if developed and introduced will be successfully marketed.
Competition in the pharmaceutical industry is intense, and no assurances
can be given that OXIS' competitors will not develop technologies and
products that are more effective than those being developed by OXIS.
Research and development expenses were $4,908,000, $4,299,000 and
$1,670,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
PRODUCTS
DIAGNOSTIC ASSAYS
Revenues from sales of the Company's assays comprised 49% of 1996 revenues,
and 44% of 1995 revenues.
OXIDATIVE STRESS ASSAYS
The Company has six research assays available for sale which measure key
markers in free radical biochemistry (markers of oxidative stress).
Specifically, these assays measure levels of antioxidant protection,
oxidative alterations, and pro-oxidant activation of specific white blood
cells. OXIS' research assays include:
SOD-525 (superoxide dismutase)
GSH-400 (reduced glutathione)
pl-GPx-EIA (human plasma-specific glutathione
peroxidase)
LPO-586 (lipid peroxidation)
MPO-EIA (human myeloperoxidase)
Lactoferrin-EIA (human lactoferrin).
These assay kits utilize either chemical (colorimetric) or immunoenzymatic
(EIA) reactions that can be read using laboratory spectrophotometers and
microplate readers, respectively. The
5
Company's assays offer advantages over conventional laboratory methods,
including ease of use, speed, specificity and accuracy.
The assays for markers of oxidative stress are currently being sold to
researchers in Europe, Japan and the United States, primarily through
distributors. The Company estimates that there are more than 3,500
scientists and clinicians who are working directly in research on free
radical biochemistry, and who are potential customers for these research
assays.
Through June 1996, assays for markers of oxidative stress were manufactured
at the Company's facility in France. Since July 1996, these assays have
been manufactured at the Company's facility in Portland, Oregon. All of the
oxidative stress assays are manufactured in batches in anticipation of
customer orders. Orders are generally filled within a few days; therefore,
the Company does not have any significant backlog of orders. The Company
believes that adequate supplies of raw materials are either currently on
hand, available from commercial suppliers or available through development
on a custom basis by commercial contractors, as needed.
The Company's assays for markers of oxidative stress are protected by trade
secrets and patents. Seven French patent applications have been filed with
respect to these assays, two of which have resulted in the issuance of
patents. The oxidative stress assays are sold under the registered
trademark "Bioxytech(R)".
Several companies other than OXIS have developed assays for markers of
oxidative stress. One company offers assays for superoxide dismutase and
glutathione peroxidase which compete directly with the Company's products;
and a few competitive assays for lipid peroxidation are available from
selected companies. The Company believes that the number and range of its
assay kits for markers of oxidative stress is a distinct competitive
advantage.
THERAPEUTIC DRUG MONITORING (TDM) ASSAYS
The Company sells fourteen TDM assays which are based on FPIA technology.
These products are sold under the trade name INNOFLUOR(TM). The Company's
test menu encompasses approximately 90% of the TDM tests performed by
clinical and reference laboratories worldwide. These assays are designed
for use on the Abbott Laboratories TDx(R) and TDx/FLx(R) analyzers.
The TDM products are sold through a combination of direct customer sales
and distributors in the United States, and through a network of
distributors outside the United States, principally in Europe.
The TDM assays are manufactured at the Company's facility in Portland,
Oregon. All of the TDM assays are manufactured in batches in anticipation
of customer orders. Orders are generally filled within a few days;
therefore, the Company does not have any significant backlog of orders. The
Company believes that adequate supplies of raw materials are either
6
currently on hand, available from commercial suppliers or available through
development on a custom basis by commercial contractors as needed.
The Company has one pending U.S. patent application, in addition to relying
on trade secrets, know-how and trademark laws to protect its TDM assays.
The Company's TDM assays have been sold under the trade name INNOFLUOR(TM)
since the mid-1980s.
Six major diagnostic companies dominate the therapeutic drug monitoring
market. Each of these six companies provides a range of both
instrumentation and assays to clinical laboratories. Of these, Abbott
Laboratories holds the largest market share. OXIS competes most directly
with Abbott Laboratories, because OXIS' assays are designed to be run on
Abbott's analyzers. The Company competes based on high product quality, an
aggressive pricing strategy and technical services. Abbott Laboratories and
certain of the Company's other competitors have substantially greater
financial and other resources than the Company and there can be no
assurances that the Company can effectively compete with Abbott
Laboratories and such other competitors.
THERAPEUTIC PRODUCTS
Revenues from sales of bulk bSOD, royalties on bSOD products sold by
licensees, and sales of Palosein(R), the Company's veterinary bSOD product,
comprised approximately 50% of the Company's total revenues in 1996, 48% in
1995 and 76% in 1994.
BOVINE SOD (BSOD) PRODUCTS
Commercial-scale manufacture and quality control of bulk bSOD, as well as
subsequent quality control and processing of United States Department of
Agriculture-inspected edible beef liver into highly purified bulk bSOD
requires a complex, multi-step process, OXIS has significant knowledge
regarding the manufacture of bSOD that is protected through trade secrets
and proprietary know-how.
The Company has an agreement with Diosynth B.V., a Dutch contract
manufacturer of pharmaceutical ingredients, to manufacture bulk bSOD and
supply it to OXIS under the terms of a license based on the Company's
processes. Diosynth B.V. is an affiliate of AKZO-Nobel N.V., a large, Dutch
multinational chemical and health care company. The Company believes that
its present source of bSOD is adequate for its near-term foreseeable needs.
With the exception of recently developed, patent protected long-acting SOD
derivatives, the Company's older patents protecting the manufacture of bSOD
have expired. Expiration of the Company's patents may enable other
companies to benefit from research and development efforts of the Company,
but such other companies would not receive the benefits of the Company's
unpatented trade secrets and know-how or unpublished preclinical or
clinical data. Such Companies would still be required to expend
considerable resources to conduct preclinical
7
and clinical studies of their own pharmaceutical preparations of SOD to
gain regulatory approval.
The Company sells bulk bSOD for human use, but does not market dosage forms
of bSOD for human use. Palosein(R) is OXIS' registered trademark for its
veterinary brand of bSOD. Although there are other sources of bSOD and
other laboratory and pilot-scale processes to produce bSOD, the Company
believes that it is the only company manufacturing bSOD on a commercial
scale for pharmaceutical uses.
The Company's Spanish licensee, Tedec-Meiji Farma, S.A., which distributes
bSOD for human use in Spain, has been responsible for a substantial portion
of the Company's revenues in recent years. Sales of bSOD to Tedec-Meiji
were 39% of the Company's revenues in 1996, 16% in 1995 and 18% in 1994.
EMPLOYEES
As of December 31, 1996, the Company had 51 employees (30 in the United
States and 21 in France). Employees of the Company's French subsidiary are
covered by a government-sponsored collective bargaining agreement. None of
the United States employees are subject to a collective bargaining
agreement. The Company has never experienced a work interruption.
FOREIGN OPERATIONS AND EXPORT SALES
For information regarding the Company's foreign operations and export
sales, see Note 10 to the consolidated financial statements.
ITEM 2. PROPERTIES.
The Company occupies, pursuant to leases, office and laboratory space in
Portland, Oregon and near Paris, France.
The Company's Portland, Oregon lease expires in 1997; the lease of the
facility in France expires in 1998.
Although the premises currently occupied are suitable for the Company's
present requirements, other equally suitable premises are readily
available.
8
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company is a party or
to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.
The Company's common stock is traded on the NASDAQ National Market System
using the symbol OXIS.
Recent quarterly prices of the Company's common stock are as follows:
1996 1995
---- ----
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
High 1 25/32 2 1/8 2 11/16 2 2 13/16 3 1/2 4 1/2 2 7/8
Low 1 7/32 1 1/2 1 7/16 1 1/2 1 1/8 2 1/4 1 3/4 1 5/8
The Company has an estimated 7,800 shareholders, including approximately
3,500 shareholders who have shares in the names of their stockbrokers. The
Company utilizes its assets to develop its business and, consequently, has
never paid a dividend and does not expect to pay dividends in the
foreseeable future.
9
ITEM 6. SELECTED FINANCIAL DATA.
FOR YEARS ENDED
DECEMBER 31: 1996 1995 1994 1993 1992
Total Revenues1/ $ 4,867,000 $ 5,136,000 $ 3,470,000 $ 3,044,000 $2,772,000
--
Net income (loss) $(5,992,000) $(8,892,000)2/ $(5,567,000)3/ $(1,485,000)4/ $ (339,000)
-- -- --
Net income (loss)
per share $ (.47) $ (.82)2/ $ (.88)3/ $ (.30)4/ $ (.07)
-- -- --
AS OF DECEMBER 31: 1996 1995 1994 1993 1992
Total assets $ 7,997,000 $ 9,870,000 $11,194,000 $3,124,000 $4,864,000
Long-term
obligations $ 2,000 $ 1,332,000 $ 376,000 -- --
Common shares
outstanding 13,790,736 12,124,423 9,322,762 4,982,670 4,982,670
1/ Earned interest not included in revenue.
2/ Includes a charge of $3,329,000 ($.31 per share) for the write off of
certain technology of an acquired company.
3/ Includes a charge of $3,675,000 ($.58 per share) for the write off of
certain technology of acquired companies.
4/ Includes a charge of $1,531,000 ($.31 per share) for control contest
expense.
As explained under the caption "ACQUISITIONS" in Management's Discussion
and Analysis of Financial Condition and Results of Operations below, the
Company made significant acquisitions during 1994 and 1995 that affect the
comparability of the amounts reflected in the table above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
ACQUISITIONS
In September 1994, the Company significantly increased its scientific and
technical staff, patent application portfolio, current product offerings,
research and development programs, research and manufacturing facilities
and its customer base by acquiring Bioxytech S.A. (now "OXIS S.A.") and
International BioClinical, Inc. ("IBC") (together the "1994 acquired
businesses"). Both acquisitions were completed through the exchange of
stock, and were accounted for as purchases; accordingly, the acquired
assets and liabilities were recorded at
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their estimated fair values as of the date of acquisition. IBC was merged
into the Company. OXIS S.A. operates as a subsidiary of the Company.
In July 1995, in a transaction which was also accounted for as a purchase,
the Company acquired Therox Pharmaceuticals, Inc. ("Therox") through an
exchange of stock. Therox was merged into a wholly-owned subsidiary of the
Company. The acquisition of Therox provided the Company with a technology
portfolio complementary to its novel therapeutics for treatment of free
radical associated diseases together with university relationships and
seven patents.
Because the acquisitions have been accounted for as purchases, the
Company's consolidated results of operations include the operating results
of the acquired businesses from the dates of acquisition only. Therefore,
the results of operations of the 1994 acquired businesses are included in
the consolidated statements of operations from September 7, 1994, and the
results of Therox's operations are included in the consolidated statements
of operations from July 19, 1995.
Costs relating to the acquisitions and the Company's more complex corporate
structure and the increased research and development investments have
placed significant demand on the Company's limited financial resources. See
"Financial Condition, Liquidity and Capital Resources" below.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During 1996 the Company's working capital deficit decreased slightly from
$1,469,000 at December 31, 1995, to $1,405,000 at December 31, 1996. This
decrease in the Company's working capital deficit resulted primarily from
the effect of the net loss for 1996 ($5,992,000 less non-cash charges of
$1,381,000), offset by proceeds from issuance of stock ($4,305,000) and
convertible term notes ($1,000,000).
Cash and cash equivalents declined from $727,000 at December 31, 1995, to
$422,000 at December 31, 1996.
The Company expects to continue to report losses in 1997 as the level of
expenses is expected to continue to exceed revenues. The Company can give
no assurances as to when and if its revenues will exceed its expenses. The
Company must raise additional capital during the first half of 1997.
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 1 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 upon the Company's success in developing business alliances
with biotechnology and/or
11
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. Although the
Company is currently seeking additional capital (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.
During 1996, the Company raised approximately $5,300,000 cash through the
sale of its Series C, Series D and Series E Preferred Stock and common
stock, and convertible term notes. Substantial additional capital will be
required during 1997 to continue operating in accordance with its current
plans. The Company has engaged an agent to assist on a best-efforts basis
to complete a private placement of its common stock. In addition, the
Company has engaged a French investment banker to act as its underwriter
for a planned public offering of its common stock on the newly opened
French stock market, Le Nouveau Marche, subject to obtaining appropriate
authorization from the French stock market regulatory authorities. 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 first half of 1997, 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
REVENUES
The Company's sales for the past three years consisted of the following:
1996 1995 1994
Diagnostic and research assays $2,364,000 $2,240,000 $ 645,000
Bovine superoxide dismutase (bSOD)
for research and human use 1,935,000 1,817,000 2,130,000
Palosein/(R)/(bSOD for veterinary use) 480,000 555,000 346,000
Other 23,000 370,000 204,000
---------- ---------- ----------
Total sales $4,802,000 $4,982,000 $3,325,000
========== ========== ==========
Diagnostic and research assays are products acquired with the acquisitions
of IBC and OXIS S.A. Sales of these products for 1994 represent sales from
September 8 through the end of the year. The entire years' sales of
diagnostic and research assays are included in the Company's sales for 1995
and 1996.
Bulk bSOD sales in 1994 and 1995 included sales to Sanofi Winthrop, Inc.
Sales of bulk bSOD to Sanofi Winthrop ceased in 1995, when Sanofi Winthrop
announced that the clinical trial in which it was using the Company's bSOD
failed to show the desired results. The
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decline in sales to Sanofi Winthrop has been offset to a large extent by
increases in sales of bSOD to Tedec-Meiji Farma S.A., the Company's Spanish
licensee.
Future sales of bulk bSOD are largely dependent on the needs of the
Company's Spanish licensee. The Company expects its orders for 1997 from
the Spanish licensee to be less than those for 1996. The Company's sales of
bulk bSOD beyond 1997 are uncertain and difficult to predict and no
assurances can be given with respect thereto.
Sales of Palosein/(R)/, which was reintroduced to the U.S. market in 1993
and is sold primarily to veterinary wholesalers in the United States,
increased from $346,000 in 1994 to $555,000 in 1995 as a result of an
active direct mail marketing campaign, but declined to $480,000 in 1996 due
in part to large stocking orders by distributors in late 1995. The decrease
in other sales was principally the result of the completion of an assay
development contract in early 1996. Royalties and license fees are not
expected to be material in 1997.
COSTS AND EXPENSES
Cost of sales as a percent of product sales declined from 62% in 1994 to
59% in 1995. In 1995 the cost of the Company's diagnostic and research
assays declined slightly as a result of increased volumes, and the cost of
bulk bSOD sales also declined from the 1994 level. In 1996 cost of sales
increased to 63% of product sales. The increase was primarily caused by a
decline in the gross margin on bulk bSOD sales. The Company's cost of sales
includes amortization of technology acquired in 1994 ($239,000 in 1994, and
$737,000 in 1995 and 1996).
Research and development costs increased from $1,670,000 in 1994 to
$4,299,000 in 1995, and $4,908,000 in 1996. The increase in 1995 was
primarily due to the cost of the research and development activities
associated with pharmaceutical technologies acquired in the September 1994
and July 1995 business acquisitions. The increase of $609,000 in 1996 is
the result of increased expenditures relating to preclinical development
work and the Phase I clinical trial on the Company's lead therapeutics
program (glutathione peroxidase mimics) of approximately $1,130,000, and a
$230,000 increase in expenses of the former Therox operations, offset by a
cost reduction of approximately $780,000 from the closure of the Company's
Mountain View, California facility in the fourth quarter of 1995. The
expenses of the Therox operations are included in the 1995 expenses
starting in July 1995; the former Therox laboratory facility was closed in
May 1996.
Sales, general and administrative expenses increased in 1995 to $3,332,000
from $1,652,000 in 1994. The increase in 1995 was due primarily to the
inclusion for the entire year of general and administrative costs of the
businesses acquired in 1994, further increases in sales and marketing costs
relating to Palosein/(R)/ and the new products from the 1994 acquisitions,
and increased legal fees and other expenses relating to the Company's
ongoing need to raise capital and more complex corporate structure.
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In 1996, sales, general and administrative expenses decreased by $491,000,
to $2,841,000. Most of the decrease was a decrease in the selling, general
and administrative expenses of the Company's French subsidiary. In the
third quarter of 1996 all of the Company's manufacturing operations were
consolidated in the United States and the French subsidiary became a
research facility. In connection with this restructuring, two
administrative positions have been eliminated and certain other costs which
were previously charged to administrative expenses are now being classified
as research and development costs. The administrative costs of the
Company's French subsidiary decreased $359,000 in 1996 as compared to 1995.
Expenses included charges of $3,675,000 and $3,329,000 to operations for
1994 and 1995, respectively, reflecting the write-off of purchased
in-process technology, as described in Note 3 to the consolidated financial
statements.
INTEREST INCOME AND EXPENSE
Interest income decreased and interest expense increased in 1995 as the
Company liquidated certificates of deposit and borrowed funds pursuant to
short-term and long-term interest bearing obligations to finance increased
research and development efforts.
NET LOSS
The Company incurred net losses in 1994, 1995 and 1996. The 1994 loss
includes a $3,675,000 ($.58 per share) charge to operations for the
write-off of purchased in-process technology related to the acquisitions of
OXIS S.A. and IBC. Similarly, the 1995 loss includes a $3,329,000 ($.31 per
share) charge to operations for the write-off of purchased in-process
technology related to the acquisition of Therox. Excluding these unusual
charges, the Company would have incurred a net loss of $1,892,000, or $.30
per share for 1994; a net loss of $5,563,000, or $.51 per share for 1995,
as compared to a net loss of $5,992,000, or $.47 per share for 1996.
Increased research and development expenditures and selling, general and
administrative expenses from the businesses acquired late in the third
quarter of 1994 and increased research and development expenditures
relating to the acquisition of Therox early in the third quarter of 1995
contributed to the increased losses in 1995 as compared to 1994. The
increased loss for 1996 as compared to 1995 (excluding the unusual charge)
is attributable primarily to the increased research and development costs
relating to the Company's glutathione peroxidase mimics program.
The Company expects to incur a substantial net loss for 1997. If
substantial additional capital is raised through further sales of
securities (See Financial Condition, Liquidity and Capital Resources), the
Company plans to continue to invest in research and development activities
and incur sales, general and administrative expenses in amounts greater
than its anticipated near-term product margins. If the Company is unable to
raise sufficient
14
additional capital, it will have to cease, or severely curtail, its
operations. In this event, while expenses will be reduced, expense levels,
and the potential write down of various assets, would still be in amounts
greater than anticipated revenues.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 422,000 $ 727,000
Accounts receivable 861,000 823,000
Inventories 591,000 953,000
Prepaid and other 191,000 262,000
---------- ----------
Total current assets 2,065,000 2,765,000
Property and equipment, net 1,327,000 1,092,000
Assets under capital leases, net 309,000 1,198,000
Technology for developed products and
custom assays, net 3,782,000 4,498,000
Other assets 514,000 317,000
---------- ----------
Total assets $7,997,000 $9,870,000
========== ==========
See accompanying notes.
16
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,221,000 $ 1,616,000
Accounts payable 1,386,000 1,182,000
Customer deposits 132,000 250,000
Accrued liabilities 655,000 903,000
Current portion of capital lease obligations 76,000 283,000
-------------- --------------
Total current liabilities 3,470,000 4,234,000
Capital lease obligations -- 47,000
8% convertible subordinated debentures -- 1,255,000
Other liabilities 2,000 30,000
Commitments and contingencies (Notes 1, 3 and 11)
Shareholders' equity:
Preferred stock - $.01 par value; 15,000,000 shares authorized:
Series B - 642,583 shares issued and outstanding at December 31, 1996
and 1995 (liquidation
preference of $1,500,000) 6,000 6,000
Series C - 1,647,157 shares issued and outstanding
at December 31, 1996 17,000 --
Series D - 1,650 shares issued and outstanding
at December 31, 1996 -- --
Series E - 2,200 shares issued and outstanding
at December 31, 1996 -- --
Common stock - $.50 par value; 40,000,000 shares
authorized; 13,790,736 shares issued and outstanding 6,895,000 6,062,000
Additional paid in capital 30,706,000 25,210,000
Accumulated deficit (33,023,000) (27,031,000)
Accumulated translation adjustments (76,000) 57,000
-------------- --------------
Total shareholders' equity 4,525,000 4,304,000
-------------- -------------
Total liabilities and shareholders' equity $ 7,997,000 $ 9,870,000
============== =============
See accompanying notes.
17
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
Revenues:
Sales $ 4,802,000 $ 4,982,000 $ 3,325,000
Royalties and license fees 65,000 154,000 145,000
------------ ------------ -------------
Total revenues 4,867,000 5,136,000 3,470,000
Costs and expenses:
Cost of sales 3,009,000 2,939,000 2,074,000
Research and development 4,908,000 4,299,000 1,670,000
Sales, general and administrative 2,841,000 3,332,000 1,652,000
Purchased in-process technology (Note 3) -- 3,329,000 3,675,000
------------ ------------ -------------
Total costs and expenses 10,758,000 13,899,000 9,071,000
------------ ------------ -------------
Operating loss (5,891,000) (8,763,000) (5,601,000)
Interest income 37,000 42,000 82,000
Interest expense (138,000) (171,000) (48,000)
------------ ------------ -----------
Net loss $ (5,992,000) $ (8,892,000) $(5,567,000)
============ ============ ===========
Net loss per share $ (.47) $ (0.82) $ (0.88)
============ ============ ===========
Weighted average number of shares
used in computation 12,821,544 10,854,149 6,350,097
============ ============ ===========
See accompanying notes.
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
Cash flows from operating ativities:
Net loss $(5,992,000) $(8,892,000) $(5,567,000)
Adjustments to reconcile net loss to cash provided
by (used for) operating activities:
Depreciation and amortization 1,381,000 1,369,000 551,000
Purchased in-process technology -- 3,329,000 3,675,000
Changes in assets and liabilities:
Accounts receivable (50,000) (70,000) 258,000
Inventories 355,000 (17,000) (186,000)
Other current assets (2,000) 209,000 (19,000)
Accounts payable 220,000 (565,000) 562,000
Customer deposits (118,000) (866,000) 1,116,000
Accrued liabilities (69,000) 251,000 (8,000)
----------- ----------- ------------
Net cash provided by (used for)
operating activities (4,275,000) (5,252,000) 382,000
Cash flows from investing activities:
Redemption of certificates of deposit -- 496,000 884,000
Purchase of equipment (58,000) (99,000) (40,000)
Acquisition and stock issuance costs (Note 3) -- -- (1,361,000)
Cash of businesses acquired (Note 3) -- 143,000 273,000
Additions to patent and deferred financing costs (350,000) -- --
Other (1,000) (136,000) 19,000
----------- ----------- ------------
Net cash provided by (used for)
investing activities (409,000) 404,000 (225,000)
Cash flows from financing activities:
Short-term borrowing 1,061,000 1,366,000 296,000
Proceeds from issuance of long-term debt -- 1,255,000 --
Costs in connection with issuance of long-term debt -- (152,000) --
Proceeds from issuance of stock, net of related cost 4,305,000 3,077,000 --
Repayment of short-term notes (690,000) (340,000) --
Repayment of capital lease obligations and
other liabilities (294,000) (573,000) (275,000)
----------- ----------- ------------
Net cash provided by financing activities 4,382,000 4,633,000 21,000
Effect of exchange rate changes on cash (3,000) 6,000 --
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents (305,000) (209,000) 178,000
Cash and cash equivalents - beginning of year 727,000 936,000 758,000
----------- ----------- ------------
Cash and cash equivalents - end of year $ 422,000 $ 727,000 $ 936,000
=========== =========== ============
See accompanying notes.
19
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
Supplemental schedule of noncash operating and
financing activities:
Inventory purchase with deferred payment terms -- $250,000 --
Common stock issued as incentive to purchase notes -- $156,000 --
Issuance of Series C Preferred Stock in exchange
for cancellation of notes $ 844,000 -- --
Conversion of 8% Convertible Subordinated Debentures
into Common Stock $1,312,000 -- --
Conversion of Series C and D Preferred Stock into
Common Stock $ 515,000 -- --
See accompanying notes.
20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Preferred Stock Common Stock Additional
--------------- ------------ paid-in
Shares Amount Shares Amount capital
Balances,
January 1, 1994 4,982,670 $ 2,491,000 $12,863,000
Series A preferred and
common shares issued in
connection with 1994
business combinations
(Note 3) 40,000 $ -- 4,340,092 2,170,000 7,367,000
Accumulated
translation adjustments
Net loss
---------- ------- ---------- ---------- ----------
Balances,
December 31, 1994 40,000 -- 9,322,762 4,661,000 20,230,000
Shares issued in
connection with short-
term notes 93,300 47,000 109,000
Sale of common shares 1,227,625 614,000 1,089,000
Conversion of Series A
preferred shares to
common (40,000) -- 40,000 20,000 (20,000)
Shares issued in
connection with 1995
business combination
(Note 3) 1,440,736 720,000 2,633,000
Series B preferred shares
issued (Note 3) 642,583 6,000 1,169,000
Accumulated translation
adjustments
Net loss
---------- ------- ---------- ---------- ----------
Balances,
December 31, 1995 642,583 6,000 12,124,423 6,062,000 25,210,000
Sale of Series C preferred
shares for cash 1,125,590 11,000 1,225,000
Series C preferred shares
issued in exchange for
cancellation of notes 648,490 7,000 837,000
Sale of Series D
preferred shares 2,000 -- 1,939,000
Accumulated Total
Accumulated translation shareholders'
deficit adjustments equity
------- ----------- ------
Balances,
January 1, 1994 $(12,572,000) $ 2,782,000
Series A preferred and
common shares issued in
connection with 1994
business combinations
(Note 3) 9,537,000
Accumulated translation
adjustments $(53,000) (53,000)
Net loss (5,567,000) (5,567,000)
----------- ------- ----------
Balances,
December 31, 1994 (18,139,000) (53,000) 6,699,000
Shares issued in
connection with short-
term notes 156,000
Sale of common shares 1,703,000
Conversion of Series A
preferred shares to
common --
Shares issued in
connection with 1995
business combination
(Note 3) 3,353,000
Series B preferred shares
issued (Note 3) 1,175,000
Accumulated translation
adjustments 110,000 110,000
Net loss (8,892,000) (8,892,000)
----------- ------- ----------
Balances,
December 31, 1995 (27,031,000) 57,000 4,304,000
Sale of Series C preferred
shares for cash 1,236,000
Series C preferred shares
issued in exchange for
cancellation of notes 844,000
Sale of Series D
preferred shares 1,939,000
21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Preferred Stock Common Stock
--------------- ------------
Shares Amount Shares Amount
Common shares issued
upon conversion of
debentures 1,050,217 525,000
Conversion of Series C
preferred shares to
common stock (126,923) (1,000) 136,924 69,000
Conversion of Series D
preferred shares to
common stock (350) -- 360,839 180,000
Sale of Series E preferred
and common shares for
cash 2,200 -- 55,000 27,000
Other issuances of common
shares 63,333 32,000
Accumulated translation
adjustments
Net Loss
--------- ------- ---------- ----------
Balances,
December 31, 1996 2,293,590 $23,000 13,790,736 $6,895,000
========= ======= ========== ==========
Additional Accumulated Total
paid-in Accumulated translation shareholders'
capital deficit adjustments equity
Common shares issued
upon conversion of
debentures 787,000 1,312,000
Conversion of Series C
preferred shares to
common stock (68,000) --
Conversion of Series D
preferred shares to
common stock (180,000) --
Sale of Series E preferred
and common shares for
cash 923,000 950,000
Other issuances of common
shares 33,000 65,000
Accumulated translation
adjustments (133,000) (133,000)
Net Loss (5,992,000) (5,992,000)
----------- ------------ --------- ----------
Balances,
December 31, 1996 $30,706,000 $(33,023,000) $ (76,000) $4,525,000
=========== ============ ========= ==========
See accompanying notes.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
OXIS International, Inc. (the "Company") develops, manufactures and markets
selected therapeutic and diagnostic products. The Company's research and
development efforts are concentrated principally in the development of
products to diagnose, treat and prevent diseases associated with free
radicals and reactive oxygen species. The Company is headquartered in
Portland, Oregon and operates a research and development facility near
Paris, France.
The Company has historically licensed and sold pharmaceutical forms of
superoxide dismutase (SOD) for human and veterinary use. In 1994, with the
acquisitions of businesses as described in Note 3, the Company began
selling therapeutic drug monitoring assays and research assays to measure
markers of oxidative stress.
Therapeutic drug monitoring assays are manufactured by the Company in the
United States and are sold to hospital clinical laboratories and reference
laboratories by an in-house sales force and a network of distributors both
within and outside the United States. Assays to measure markers of
oxidative stress are manufactured by the Company in the United States (in
France prior to July, 1996) and are sold directly to researchers and to
distributors for resale to researchers, primarily in Europe, the United
States and Japan.
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 at December 31, 1996, the
Company's current liabilities exceeded its current assets by $1,405,000.
These factors, among others, may indicate that the Company may be unable to
continue as a going concern for a reasonable period of time. 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'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.
During 1996, the Company raised approximately $5,300,000 cash through the
sale of its Series C, Series D and Series E Preferred Stock and common
stock, and convertible term notes. The Company expects that additional
capital will be required during 1997 to continue operating in accordance
with its current plans. The Company has engaged an agent to assist on a
best-efforts basis to complete a private placement of its common stock. In
addition, the Company has engaged a French investment banker to act as its
underwriter for a planned public offering of its common stock on the newly
opened French stock market, Le Nouveau
23
Marche, subject to obtaining appropriate authorization from the French
stock market regulatory authorities. If the Company is unable to raise
additional capital it intends to curtail its operations through the
reduction of personnel and facility costs and by reducing its research and
development efforts. If the Company were to be 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.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying balance sheets include the
accounts of the Company as well as its subsidiaries. The results of
operations of the Company's French subsidiary since its purchase by the
Company on September 7, 1994, are included in the accompanying statements
of operations and cash flows. The functional currency of the Company's
French subsidiary is the French franc. The French subsidiary's assets and
liabilities are translated at the exchange rate at the end of the year, and
its statement of operations is translated at the average exchange rates
during the period for which its revenues and expenses are included in the
consolidated statement of operations. Gains or losses resulting from
foreign currency translation are accumulated as a separate component of
shareholders' equity. All significant intercompany balances and
transactions are eliminated in consolidation.
CASH EQUIVALENTS consist of money market accounts with commercial banks.
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 December 31, 1996 and 1995, consisted of the
following:
1996 1995
Raw materials $148,000 $173,000
Work in process 200,000 354,000
Finished goods 243,000 426,000
-------- --------
Total $591,000 $953,000
======== ========
PROPERTY AND EQUIPMENT is stated at cost, or, in the case of property and
equipment acquired in transactions accounted for by the purchase method, at
the estimated fair market value at the date of the acquisition (which is
then considered to be the Company's cost). Depreciation of equipment is
computed using the straight-line method over estimated useful lives of
three to ten years. Leasehold improvements are amortized over the shorter
of five years or the remaining lease term. Assets acquired under capital
leases are being amortized over estimated useful lives of four to ten
years.
24
Property and equipment at December 31, 1996 and 1995, consisted of the
following:
1996 1995
Furniture and office equipment $ 369,000 $ 346,000
Laboratory and manufacturing
equipment 2,495,000 707,000
Automobile 15,000 15,000
Leasehold improvements 766,000 806,000
----------- ----------
Property and equipment, at cost 3,645,000 1,874,000
Accumulated depreciation and
amortization (2,318,000) (782,000)
----------- -----------
Property and equipment, net $ 1,327,000 $1,092,000
=========== ==========
During 1996 certain equipment under capital lease was purchased, and the
cost and accumulated amortization of that equipment was reclassified to
property and equipment.
TECHNOLOGY - Technology for developed products and custom assays, which was
acquired in the 1994 business combinations described in Note 3, is being
amortized over estimated useful lives of seven to ten years. Accumulated
amortization of technology for developed products and custom assays was
$1,682,000 as of December 31, 1996 and $973,000 as of December 31, 1995.
The Company periodically reviews net cash flows from sales of products and
projections of net cash flows from sales of products on an undiscounted
basis to assess recovery of intangible assets.
STOCK OPTIONS - The Company applies the intrinsic value based method
described in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", in accounting for its stock incentive plan.
REVENUE RECOGNITION - The Company recognizes product sales upon shipment of
the product to the customer.
INCOME TAXES - Deferred income taxes, reflecting the net tax effects of
temporary differences between the carrying amount of assets and liabilities
recognized for financial reporting purposes and the amounts recognized for
income tax purposes, are based on tax laws currently enacted. A valuation
allowance is established when necessary to reduce deferred tax assets to
the amount expected to be realized.
NET LOSS PER SHARE - Net loss per share is computed based upon the average
number of common shares outstanding and, if dilutive, the incremental
shares issuable upon the assumed exercise of stock options or warrants and
the assumed conversion of convertible debentures and preferred stock.
25
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of sales and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount reported in the
balance sheet for cash and cash equivalents, accounts receivable, notes
payable, customer deposits and accrued liabilities approximates fair value
due to the short-term nature of the accounts. The carrying amount reported
in the balance sheet for secured convertible term notes and 8% convertible
subordinated debentures approximates fair value because the terms of the
notes and debentures were determined and the notes and debentures were sold
shortly before the dates of the balance sheets in which they appear.
3. BUSINESS COMBINATIONS
On September 7, 1994, the Company acquired Bioxytech S.A., a French
company, and International BioClinical, Inc. ("IBC"), an Oregon
corporation. The name of Bioxytech S.A. was subsequently changed to OXIS
International S.A. ("OXIS S.A."). OXIS S.A. was acquired through an
exchange of shares that resulted in the Company owning in excess of 99% of
the outstanding stock of OXIS S.A., which thus became a subsidiary of the
Company. IBC was acquired through a merger with and into the Company, which
(1) terminated the separate existence of IBC by merging it into the
Company, and (2) resulted in the conversion of the outstanding stock of IBC
into stock of the Company. Two of the Company's directors were also
directors and major shareholders of IBC.
In exchange for the Bioxytech S.A. shares, the Company issued a total of
2,341,599 shares of the Company's common stock and 40,000 shares of the
Company's non-voting preferred stock (which have subsequently been
converted into 40,000 shares of common stock). In addition, the Bioxytech
S.A. shareholders may receive up to 107,670 shares of the Company's capital
stock if they meet certain participation levels in a contemplated private
placement of equity securities of the Company.
The merger of IBC with and into the Company resulted in the conversion of
IBC's common stock into 1,998,493 shares of the Company's common stock.
The acquisitions of OXIS S.A. and IBC have been accounted for as purchases
and, accordingly, the acquired assets and liabilities were recorded at
their estimated fair market values as of the date of acquisition. The
aggregate purchase price of $9,811,000 (4,380,092 shares issued times the
average per share closing price of the Company's common stock for the five
days ended September 8, 1994, discounted 30% for certain trading
restrictions and less costs of $274,000 directly attributable to issuance
of stock in connection with the acquisitions) plus direct costs for the
acquisitions of $881,000 have been allocated to the
26
assets and liabilities acquired. The Company also issued options to
purchase 214,700 shares of the Company's common stock in connection with
the acquisitions. No value was assigned to these options because the
exercise price of the options was in excess of the market value of the
common stock.
The total cost of the acquisitions of Bioxytech and IBC has been allocated
to the assets acquired and liabilities assumed as follows:
OXIS S.A. IBC Total
--------- --- -----
Cash $ 150,000 $ 123,000 $ 273,000
Other assets 369,000 611,000 980,000
Property, equipment and capitalized
leases 2,434,000 294,000 2,728,000
Technology for developed products and
custom assay development capabilities 1,503,000 3,995,000 5,498,000
Technology for in-process products 3,368,000 307,000 3,675,000
Less liabilities assumed (2,011,000) (451,000) (2,462,000)
----------- ----------- -----------
Total acquisition cost $ 5,813,000 $ 4,879,000 $10,692,000
=========== =========== ===========
The Company's consolidated results of operations include the operating
results of the acquired companies since the acquisitions.
Approximately $3,675,000 ($.58 per share) of the total purchase price
represented technology relating to research and development projects that
were in process by the acquired companies that had no alternative future
use other than the completion of these projects. In accordance with
generally accepted accounting principles, these costs have been charged to
operations immediately upon completion of the acquisitions.
The following table summarizes the unaudited pro forma combined results of
operations for the year ended December 31, 1994 as if the acquisitions had
occurred at the beginning of the year:
1994
Total revenues $ 5,809,000
Net loss $(4,742,000)
Net loss per share (based on 9,322,762
shares outstanding) $ (.51)
27
The above table includes, on an unaudited pro forma basis, the Company's
financial information for the year ended December 31, 1994, combined with
the financial information of OXIS S.A. and IBC for the same twelve-month
period. The above table excludes the one-time $3,675,000 charge for
purchased in-process technology arising from the acquisitions.
The unaudited pro forma combined results of operations are presented for
illustrative purposes only and are not necessarily indicative of the
operating results that would have occurred had the acquisitions been
consummated at the beginning of the period presented, nor are they
necessarily indicative of future operating results.
On July 19, 1995, the Company consummated the acquisition of Therox
Pharmaceuticals, Inc. ("Therox") pursuant to a transaction wherein Therox
was merged with and into a wholly-owned subsidiary of the Company. Therox
was a Philadelphia-based start-up company focused on the development of
therapeutics to treat diseases associated with damage from free radicals.
The Company issued 1,440,736 shares of its common stock to Therox
stockholders in exchange for all of the Therox capital stock. In addition,
the acquisition agreement provides for payment of up to $2,000,000 by the
Company to the Therox stockholders based on the successful
commercialization of the Therox technologies.
The acquisition of Therox has been recorded as a purchase and, accordingly,
the acquired assets and liabilities were recorded at their estimated fair
values as of the date of acquisition. The aggregate purchase price of
$3,353,000 (1,440,736 shares issued times the average per share closing
price of the Company's common stock for the five days ended July 20, 1995,
discounted 30% for certain trading restrictions) has been allocated to the
assets and liabilities acquired.
The cost of the acquisition of Therox has been allocated to the assets
acquired and liabilities assumed as follows:
Cash $ 143,000
Equipment 16,000
Technology for in-process products 3,329,000
Other assets 23,000
Less liabilities assumed (158,000)
----------
Acquisition cost $3,353,000
==========
The Company's consolidated results of operations include the operating
results of the acquired company since the acquisition.
Approximately $3,329,000 of the purchase price represented technology
related to research and development projects that are in process and that
has no alternative future use other than the completion of these projects.
Accordingly, these costs have been charged to operations immediately upon
completion of the acquisition.
28
The following table presents the unaudited pro forma combined results of
operations for the years ended December 31, 1995 and 1994 as if the
acquisition had occurred at the beginning of the periods presented:
1995 1994
---- ----
Total revenues $ 5,136,000 $ 3,470,000
Net loss $(5,990,000) $(6,088,000)
Net loss per share (based
on 12,124,423 shares outstanding) $ (.49) $ (.50)
The above table includes, on an unaudited pro forma basis, the Company's
financial information for the years ended December 31, 1995 and 1994,
combined with the financial information of Therox for the same periods. The
above table excludes the one-time $3,329,000 charge for purchased
in-process technology arising from the 1995 acquisition, but includes
non-recurring costs of $3,675,000 for purchased in-process technology from
the Company's September 1994 business acquisitions.
The unaudited pro forma combined results of operations are presented for
illustrative purposes only and are not necessarily indicative of the
operating results that would have occurred had the acquisition been
consummated at the beginning of the periods presented, nor are they
necessarily indicative of future operating results.
Simultaneously with the Therox acquisition, a Series B Preferred Stock
Purchase Agreement was entered into between the Company and two venture
capital firms (S.R. One, Limited and Brantley Venture Partners II, L.P.)
which were major stockholders of Therox. Pursuant to this agreement, the
Company sold 642,583 shares of its Series B Preferred Stock for an
aggregate price of $1,500,000.
Costs of approximately $325,000 directly attributable to the issuance of
the Series B Preferred Stock and the common stock issued in the Therox
acquisition have been recorded as a reduction in the proceeds from the
issuance of the shares.
29
4. NOTES PAYABLE
Notes payable at December 31, 1996 and 1995 consisted of the following:
1996 1995
Secured convertible term notes $1,000,000 $ --
8% notes payable to certain shareholders who are former
Bioxytech S.A. shareholders, due February 5, 1996, secured
by assets relating to certain of the Company's diagnostic
products -- 766,000
Note payable to Sanofi S.A., due May 4, 1996, interest at prime
plus 2% (10-1/2% as of December 31, 1995), secured by all of
the Company's assets -- 600,000
Liability, without interest, under inventory purchase agreement,
due May 1997 or earlier if 75% of the related inventory
is sold 200,000 250,000
Other 21,000 --
---------- ----------
$1,221,000 $1,616,000
========== ==========
In October 1996, the Company sold $1,000,000 of secured convertible term
notes with warrants to two of the Company's current shareholders. The notes
bear interest at 10% per annum, are due in June 1997, and are initially
convertible into common stock at a price of $1.4125 per share. The warrants
issued entitle the holders to purchase up to 300,000 shares of common
stock, initially at an exercise price of $1.58 per share. The conversion
rate of the convertible term notes and the exercise price of the warrants
are subject to change under certain circumstances. The due date of the
notes can be extended at the option of the Company for 120 days upon
issuance of additional warrants to the holders. The convertible term notes
are secured by assets relating to the Company's clinical diagnostic
products.
As described in Note 7, in May 1996, the 8% notes payable were canceled in
exchange for issuance of Series C
Preferred Stock.
5. CAPITALIZED LEASES
The Company's French subsidiary leases certain equipment, furniture and
fixtures under capital leases. As of December 31, 1996, remaining minimum
lease payments on these capital leases were approximately $48,000, all due
in 1997.
30
Leased assets, which consist principally of laboratory and office
equipment, are reported in the December 31, 1996, balance sheet at $622,000
less accumulated amortization of $313,000.
6. 8% CONVERTIBLE SUBORDINATED DEBENTURES
In November and December 1995, the Company completed a private placement
pursuant to which $1,255,000 of its 8% Convertible Subordinated Debentures
were issued. The debentures were unsecured and were subordinated to other
obligations of the Company up to an aggregate of $3,000,000.
The debentures were convertible into shares of the Company's common stock
at the option of the holders. Any time after six months following closing
of the private placement, the Company had the right to require conversion
of the debentures. In June 1996, $1,255,000 principal plus accrued interest
of $57,000 on the Company's 8% Convertible Subordinated Debentures were
converted into 1,050,217 shares of common stock.
7. SHAREHOLDERS' EQUITY
PREFERRED STOCK - Terms of the preferred stock are to be fixed by the Board
of Directors at such time as the preferred stock is issued. The 40,000
shares of Series A Preferred Stock issued during 1994 were nonvoting and
were converted to common stock on a one share for one share basis during
1995. The 642,583 shares of Series B Preferred Stock are convertible into
common stock on a one-for-one basis and have the same voting rights as the
common stock. The Series B Preferred Stock has certain preferential rights
with respect to liquidation and dividends.
During the first six months of 1996, the Company issued 1,125,590 shares of
its Series C Preferred Stock for net cash proceeds of $1,236,000. 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 $78,000 on 8% notes payable to former shareholders of
the Company's French subsidiary. The shares of Series C Preferred Stock are
convertible into shares of the Company's common stock at the option of the
holders at any time. The conversion ratio is based on the average closing
bid price of the common stock for the fifteen consecutive trading days
ending on the date immediately preceding the date notice of conversion is
given, but cannot be less than one nor more than 1.4444 common shares for
each Series C Preferred share. The conversion ratio may be adjusted under
certain circumstances, and 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.
31
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 net cash
proceeds of $1,939,000. 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) 75% 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. The holders of Series D Preferred Stock have no voting power, except
as specifically provided by Delaware General Corporation Law.
In December 1996, the Company issued 2,200 shares of its Series E Preferred
Stock and 55,000 shares of common stock for net cash proceeds of $950,000.
The Series E Preferred Stock entitles the holder thereof, after the earlier
of (i) April 9, 1997 or (ii) 30 days following the closing of a public
offering by the Company, to receive in exchange for its shares of Series E
Preferred Stock, a number of shares of common stock determined by dividing
the stated value of the Series E Preferred Stock (i.e., $500 per share)
("Series E Stated Value"), by a conversion price equal to the lesser of (i)
$2.00 and (ii) 75% of the average of the closing bid prices for shares of
common stock for the five consecutive trading days ending one trading day
prior to conversion, subject to adjustment upon the occurrence of certain
dilutive events. However, the maximum number of shares of common stock
issuable upon conversion of the Series E Preferred Stock plus the number of
shares of common stock issued in connection with the sale of the Series E
Preferred Stock is 2,733,799 shares (subject to adjustment upon the
occurrence of certain dilutive events).
Pursuant to the terms of the Series E Preferred Stock, each holder thereof
can only acquire shares of common stock upon conversion of the Series E
Preferred Stock to the extent that the number of shares of common stock
thereby issuable, together with a number of shares of common stock then
held by such holder and its affiliates (not including shares of common
stock underlying converted shares of Series E Preferred Stock) would not
exceed 4.9% of the then outstanding common stock.
The Series E Preferred Stock has no voting power except as provided under
the Delaware General Corporation Law.
STOCK WARRANTS - In prior years, the Company issued warrants to purchase
shares of common stock to certain officers and key employees (none of whom
any longer hold a position with the Company) and to former directors. These
warrants are exercisable at $2.875 per share and expire through 1999. At
December 31, 1996 and 1995, warrants to purchase 1,012,500 shares were
outstanding and exercisable. No warrants were exercised during 1994, 1995
or 1996.
In connection with the issuance of common stock, 8% Convertible
Subordinated Debentures, and Series B, C and E Preferred Stock, the Company
has issued to its placement agents
32
warrants to purchase 614,573 shares of common stock at prices ranging from
$1.375 to $3.25 per share. The warrants all remained outstanding and were
exercisable at December 31, 1996.
A warrant to purchase 810,126 common shares at $3.09 per share was issued
to the purchaser of the Company's Series D Preferred Stock. The warrant was
immediately exercisable and remained outstanding as of December 31, 1996.
Warrants to purchase 300,000 common shares at $1.58 per share were issued
to the purchasers of the secured convertible term notes in October 1996.
The warrants were immediately exercisable and remained outstanding as of
December 31, 1996.
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. Options granted pursuant to the Plan
have a maximum term of ten years; vesting is determined by the Company's
Compensation Committee. Options granted through 1996 have had vesting
requirements of up to three years. Options granted and outstanding under
the plan are summarized as follows:
1996 1995 1994
---- ---- ----
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at
beginning of year 382,900 $2.93 90,000 $3.44 -- --
Granted 1,090,000 $1.57 317,900 $2.73 90,000 $3.44
Exercised (3,333) $1.69 -- -- -- --
Forfeitures (49,067) $2.17 (25,000) $2.25 -- --
--------- ----- ------- ----- ------ -----
Outstanding at end
of year 1,420,500 $1.92 382,900 $2.93 90,000 $3.44
========= ======= ======
Exercisable at end
of year 619,331 $2.29 219,294 $3.18 75,000 $3.50
======= ======= ======
The number of shares under option, weighted average exercise price and
weighted average remaining contractual life of all options outstanding as
of December 31, 1996, by range of exercise price was as follows:
33
Weighted Weighted
Range of average average
exercise exercise remaining
price Shares price life
$1.31 - $1.69 1,050,000 $1.55 9.5 years
$2.25 - $2.28 125,500 $2.26 7.7 years
$3.00 - $3.50 245,000 $3.31 8.1 years
The number of shares under option and weighted average exercise price of
options exercisable as of December 31, 1996, by range of exercise price was
as follows:
Weighted
Range of average
exercise exercise
price Shares price
$1.31 - $1.69 293,999 $1.48
$2.25 - $2.28 93,666 $2.26
$3.00 - $3.50 231,666 $3.33
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", in accounting for its stock incentive plan.
Accordingly, since the exercise price of all options issued under the plan
has been less than or equal to the fair market value of the stock at the
date of issue of the options, no compensation cost has been recognized for
options granted under the plan. Had compensation cost for options granted
under the plan been determined based on the fair value at the grant dates
in a manner consistent with the method determined under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the net loss and net loss per share for 1996 and 1995 would
have been increased to the pro forma amounts indicated below:
1996 1995
Net loss:
As reported $(5,992,000) $(8,892,000)
Pro forma $(6,389,000) $(9,210,000)
Net loss per share:
As reported $ (.47) $ (.82)
Pro forma $ (.50) $ (.85)
For the purpose of computing the pro forma expense, the fair value of each
option is estimated on the grant date using the Black-Scholes option
pricing model with the following assumptions used for grants in both 1996
and 1995: a dividend yield of zero percent;
34
expected volatility of 75%; risk-free interest rate of 6%; and expected
lives of three years. The weighted average fair value as of the option date
was computed to be $.83 per share for options issued during 1996 and $1.53
per share for options issued during 1995.
8. INCOME TAXES
INCOME TAX PROVISION - Income tax provisions were not necessary in 1996,
1995 and 1994 due to net losses.
DEFERRED TAXES - Deferred taxes reflect the net tax effects of (a)
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes, and (b) operating losses and tax credit carryforwards.
The tax effects of significant items comprising the Company's deferred
taxes as of December 31 were as follows:
United States taxes: 1996 1995
Deferred tax assets:
Federal net operating loss carryforward
and capitalized research and development
expenses $5,194,000 $4,829,000
Federal R&D tax credit carryforward 522,000 495,000
State net operating loss carryforward and capitalized
research and development expenses 211,000 125,000
Deferred tax liabilities - book basis in excess
of noncurrent assets acquired in the
acquisition of IBC (1,102,000) (1,338,000)
----------- ----------
Net deferred tax assets 4,825,000 4,111,000
Valuation allowance (4,825,000) (4,111,000)
----------- ----------
Net deferred taxes $ -- $ --
=========== ==========
French taxes: 1996 1995
Deferred tax assets:
Net operating loss carryforward $5,426,000 $5,721,000
Impact of temporary differences (211,000) (225,000)
------------ -----------
Total 5,215,000 5,496,000
Valuation allowance (5,215,000) (5,496,000)
------------ ----------
Net deferred taxes $ -- $ --
============ ===========
Temporary differences for French taxes result primarily from leases treated
as operating leases for French tax reporting and as capital leases in the
consolidated financial statements.
35
The tax benefits ($5,136,000) of the net operating losses of $15,410,000
which existed at the date of acquisition (September 7, 1994) of the French
subsidiary will be recorded as a reduction of the net unamortized balance
of property, equipment, capitalized lease assets and intangible assets of
$2,421,000 when and if realized, and the remaining benefit will be recorded
as a reduction of income tax expense.
Statement of Financial Accounting Standards No. 109 requires that the tax
benefit of net operating losses, temporary differences and credit
carryforwards be recorded as an asset to the extent that management
assesses that realization is "more likely than not." Realization of the
future tax benefits is dependent on the Company's ability to generate
sufficient taxable income within the carryforward period. Because of the
Company's recent history of operating losses, management has provided a
valuation allowance for its net deferred tax assets.
TAX CARRYFORWARDS - At December 31, 1996, the Company had net operating
loss carryforwards of approximately $3,995,000 to reduce United States
federal taxable income in future years, and research and development tax
credit carryforwards of $522,000 to reduce United States federal taxes in
future years. In addition, the Company's French subsidiary had operating
loss carryforwards of $14,801,000 (76,812,000 French francs) to reduce
French taxable income in future years. These carryforwards expire as
follows:
United States R&D tax French
net operating credit operating loss
Year of expiration loss carryforward carryforward carryforward
1997 $2,670,000 $ 1,200,000
1998 208,000 1,240,000
1999 111,000 220,000
2000 -- 6,000
2001 23,000 $123,000 --
2002-2011 983,000 399,000 --
No expiration -- -- 12,135,000
---------- -------- -----------
$3,995,000 $522,000 $14,801,000
========== ======== ===========
Utilization of the United States tax carryforwards is subject to certain
restrictions in the event of a significant change (as defined in Internal
Revenue Service guidelines) in ownership of the Company.
36
9. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
One domestic customer and one foreign licensee have each accounted for
significant portions of the Company's revenues during the past three years.
The percentages of total revenues derived from sales to, and royalties
from, these major customers are as follows:
1996 1995 1994
Domestic customer -- 18% 35%
Spanish licensee 39% 16% 18%
The Company's domestic customer to whom sales of bovine superoxide
dismutase ("bSOD") accounted for 18% and 35% of the Company's revenues in
1995 and 1994, respectively, announced in the fourth quarter of 1995 that
the clinical trial in which it was using bSOD purchased from the Company
failed to show the desired results, and sales of bSOD to this customer have
ceased.
The Company limits its foreign exchange risk by buying and selling bulk
bSOD in a single currency, the Dutch guilder. The Company maintains a bank
account in The Netherlands for receipt and disbursement of Dutch guilders
and had the equivalent of $1,000 and $81,000 in that account at December
31, 1996 and 1995, respectively. Foreign currency transaction gains and
losses were not material.
10. GEOGRAPHIC AREA INFORMATION
The Company operates in a single industry segment: the development,
manufacture and marketing of therapeutic and diagnostic products. The
Company's foreign operations consist of research and development and
manufacturing facilities and certain marketing activities conducted by the
Company's subsidiary in France. Sales and costs associated with bSOD
manufactured in the Netherlands are considered to be United States
operations, since the contract to manufacture bSOD and all related sales
activities are administered in the United States. Similarly, royalties from
foreign customers that relate to bSOD-based products are considered to be
export sales from the United States, since the product was developed in the
United States.
Sales, operating income and identifiable assets, classified by the major
geographic areas in which the Company operates, are as follows:
37
1996 1995 1994
Revenues from unaffiliated customers:
United States $ 1,303,000 $ 2,686,000 $ 2,053,000
Export sales from the U.S. 3,185,000 1,878,000 1,257,000
France 379,000 572,000 160,000
----------- ----------- -----------
Total $ 4,867,000 $ 5,136,000 $ 3,470,000
=========== =========== ===========
Operating loss:
United States $(2,874,000) $(5,653,000) $(1,410,000)
France (3,017,000) (3,110,000) (4,191,000)
----------- ----------- -----------
Total $(5,891,000) $(8,763,000) $(5,601,000)
=========== =========== ===========
Identifiable assets:
United States $ 5,110,000 $ 7,824,000 $ 9,587,000
France 2,942,000 3,866,000 2,570,000
Eliminations (55,000) (1,820,000) (963,000)
----------- ---------- -----------
Total $ 7,997,000 $ 9,870,000 $11,194,000
=========== =========== ===========
11. LEASE COMMITMENTS
The Company leases its facilities in Oregon under an operating lease that
expires in 1997, and leases its facilities in France under an operating
lease that expires in 1998. Future lease payments are scheduled as follows:
1997 $313,000
1998 217,000
Rental expense included in the accompanying statements of operations was
$519,000 in 1996, $492,000 in 1995 and $193,000 in 1994.
12. 401(K) SAVINGS PLAN
The Company has a 401(k) saving plan (the "Plan") which covers all United
States employees who meet certain minimum age and service requirements. The
Company's matching contribution to the Plan for each year is 100% of the
first $1,000 of each employee's salary deferral and 33-1/3% of the next
$3,000 of salary deferral. The Company's contributions have not been
material.
38
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
OXIS International, Inc.:
We have audited the accompanying consolidated balance sheets of OXIS
International, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the management
of OXIS International, Inc. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of OXIS International, Inc.
and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements for the year ended December 31, 1996,
have been prepared assuming that the Company will continue as a going
concern. The Company is engaged in developing, manufacturing and marketing
selected therapeutic and diagnostic products. As discussed in Note 1 to the
financial statements, the Company has incurred losses in each of the last
three years, and at December 31, 1996, the Company's
current liabilities exceeded its current assets by $1,405,000, raising
substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
March 7, 1997
Portland, Oregon
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated herein by reference
from the material contained under the caption "Proposal No. 1-Election of
Directors" in the Company's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by
reference from the material contained under the caption "Compensation of
Executive Officers" in the Company's definitive proxy statement to be filed
with the Commission pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item is incorporated herein by
reference from the material contained under the caption "Proposal No.
1-Election of Directors" in the Company's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required under this item is incorporated herein by
reference from the material contained under the caption "Proposal No.
1-Election of Directors" in the Company's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A.
40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
See pages 16 to 39.
2. FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because they are not applicable or the
required information is included in the financial statements and notes
thereto.
3. EXHIBITS
See Exhibit Index - page 43.
(b) Reports on Form 8-K.
Two reports on Form 8-K were filed by the
Company during the fourth quarter of 1996. The first, filed on
November 4, 1996, reported the issuance of $1,000,000 in secured
convertible term notes and the engagement of an investment banker
to act as underwriter for a public offering of common stock on a
French stock market. The second, filed December 30, 1996, reported
a private placement of Series E Preferred Stock and common stock
for an aggregate of $1,100,000.
(c) Exhibits specified by item 601 of Regulation S-K.
See Exhibit Index - page 43.
(d) Financial statement schedules required by Regulation S-K are omitted because
they are not applicable or the required information is included in the financial
statements and notes hereto.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 25, 1997
OXIS INTERNATIONAL, INC.
Registrant
By: /s/ Anna D. Barker
---------------------------------------
Anna D. Barker
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jon S. Pitcher
---------------------------------------
Jon S. Pitcher
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following directors on behalf of the Registrant.
/s/ Anna D. Barker March 25, 1997 /s/ Timothy G. Biro March 25, 1997
- --------------------------------------- --------------------------------------
Anna D. Barker Date Timothy G. Biro Date
/s/ Stuart S. Lang March 25, 1997 /s/ Gerald D. Mayer March 25, 1997
- --------------------------------------- --------------------------------------
Stuart S. Lang. Date Gerald D. Mayer Date
/s/ James D. McCamant March 25, 1997 /s/ David Needham March 25, 1997
- --------------------------------------- --------------------------------------
James D. McCamant Date David Needham Date
/s/ Ray R. Rogers March 25, 1997 /s/ A.R. Sitaraman March 25, 1997
- --------------------------------------- --------------------------------------
Ray R. Rogers Date A.R. Sitaraman Date
42
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
2 (a) Agreement and Plan of Reorganization and Merger between
OXIS International, Inc., OXIS Acquisition Corporation
and Therox Pharmaceuticals, Inc. Dated July 18, 1995 (1)
2 (b) Amendment No. 1 to Agreement and Plan for Reorganization
and Merger between OXIS International, Inc., OXIS Acquisition
Corporation and Therox Pharmaceuticals, Inc. (2)
3 (a) Second Restated Certificate of Incorporation as filed
September 10, 1996 45
3 (b) Certificate of Designations, Preferences, and Rights of Series E
Preferred Stock of the Company (3)
3 (c) Bylaws of the Company as amended on June 15, 1994 (4)
4 (a) Securities Purchase Agreement, Registration Rights Agreement
and Security Agreement (5)
10 (a) 1987 Stock Purchase Warrants (6)
10 (b) 1988 Stock Purchase Warrants (7)
10 (c) Lease agreement between Bioxytech S.A. and Sofibus (8)
10 (d) OXIS International, Inc. Series B Preferred Stock Purchase Agreement
dated July 18, 1995 (9)
10 (e) Factoring (security) Agreement dated September 6, 1996 between
Silicon Valley Financial Services and OXIS International, Inc. 77
21 (a) Subsidiaries of OXIS International, Inc. 91
23 (a) Independent Auditors' Consent 92
27 (a) Financial data schedule 93
43
(1) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 19, 1995.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
1995 - Exhibit 2 (b).
(3) Incorporated by reference to the Company's Form 8-K Current Report dated
December 30, 1996.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994.
(5) Incorporated by reference to the Company's Form 8-K Current Report dated
November 4, 1996.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
1992 - Exhibit 10(b).
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
1992 - Exhibit 10(c).
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
1994.
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
44