Filed
Pursuant to Rule 424(b)(3)
Registration No. 333-139216
PROSPECTUS
OXIS
INTERNATIONAL, INC.
19,362,857
Shares of Common Stock
This
prospectus relates to an aggregate of up to 19,362,857 shares of our common
stock, which may be offered by the selling security holders identified in this
prospectus for their own account. Of such shares, 4,840,714 shares
are issuable to the selling security holders upon conversion of our convertible
debentures held by them, and 14,522,143 shares
are issuable upon exercise of warrants issuable to the selling security holders
upon the exercise of warrants held by them. Our filing of the registration
statement of which this prospectus is a part is intended to satisfy our
obligations to certain of the selling security holders to register for resale
the shares issuable upon the conversion of the debentures and the exercise
of
the warrants held them. The selling security holders may sell common stock
from
time to time through the market on which the stock is quoted, at the prevailing
market price or in negotiated transactions.
This
offering is not an underwritten offering. The securities will be offered for
sale by the selling security holders identified in this prospectus in accordance
with the methods and terms described in the section of this prospectus entitled
“Plan of Distribution.” We will not receive any proceeds from the sale of the
shares by these selling security holders.
Our
common stock is listed on the Over the Counter Bulletin Board under the symbol
“OXIS.OB”. The last reported sales price per share of our common stock, as
reported by the Over the Counter Bulletin Board on February 27, 2007 was $0.27.
INVESTING
IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE “RISK FACTORS” BEGINNING
ON PAGE 10.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date of this prospectus is February 27, 2007
TABLE
OF CONTENTS
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Page
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Cautionary
Notice About Forward-Looking Statements
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2
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Prospectus
Summary
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3 |
| Use of
Proceeds |
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5 |
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Selling
Security Holders
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6 |
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Plan
of Distribution
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8 |
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Risk
Factors
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10 |
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Market
for Common Equity and Related Stockholder Matters
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25 |
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Dividend
Policy
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25 |
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Business
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26 |
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Management’s
Discussion and Analysis and Plan of Operation
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41 |
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Directors,
Executive Officers, Promoters and Control Persons
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62 |
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Certain
Relationships and Related Transactions
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72 |
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Security
Ownership of Certain Beneficial Owners and Management
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76 |
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Description
of Securities
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80 |
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Indemnification
for Securities Act Liabilities
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84 |
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Legal
Matters
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85 |
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Experts
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85 |
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Available
Information
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85 |
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Index
to Consolidated Financial Statements
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F-1
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WE
HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU SHOULD
NOT RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO
SELL
OR BUY ANY SHARES IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL. THE INFORMATION
IN THIS PROSPECTUS IS CURRENT AS OF THE DATE ON THE COVER.
CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus, any supplement to this prospectus and the documents incorporated
by
reference include “forward-looking statements.” To the extent that the
information presented in this prospectus discusses financial projections,
information or expectations about our business plans, results of operations,
products or markets, or otherwise makes statements about future events, such
statements are forward-looking. Such forward-looking statements can be
identified by the use of words such as “may,” “will,” “should,” “might,”
“would,” “intends,” “anticipates,” “believes,” “estimates,” “projects,”
“forecasts,” “expects,” “plans,” and “proposes.” Although we believe that the
expectations reflected in these forward-looking statements are based on
reasonable assumptions, there are a number of risks and uncertainties that
could
cause actual results to differ materially from such forward-looking statements.
These include, among others, the cautionary statements in the “Risk Factors” and
“Management’s Discussion and Analysis and Plan of Operation” sections of this
prospectus. These cautionary statements identify important factors that could
cause actual results to differ materially from those described in the
forward-looking statements. When considering forward-looking statements in
this
prospectus, you should keep in mind the cautionary statements in the “Risk
Factors” section above and “Management’s Discussion and Analysis or Plan of
Operation” section below, and other sections of this prospectus.
The
statements contained in this Registration Statement that are not purely
historical are forward-looking statements within the meaning of Section 27A
of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including, without limitation, statements regarding our expectations,
objectives, anticipations, plans, hopes, beliefs, intentions or strategies
regarding the future.
All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. It is important to note that our actual results
could differ materially from those included in such forward-looking statements.
For a more detailed explanation of such risks, please see “Risk Factors” below.
Such risks, as well as such other risks and uncertainties as are detailed in
our
SEC reports and filings for a discussion of the factors that could cause actual
results to differ materially from the forward- looking statements.
The
following discussion should be read in conjunction with the audited consolidated
financial statements and the notes included in this prospectus and the section
entitled “Management’s Discussion and Analysis or Plan of Operation”
included in this prospectus.
PROSPECTUS
SUMMARY
The
following summary highlights selected information contained in this prospectus.
This summary does not contain all the information you should consider before
investing in our securities. Before making an investment decision, you should
read the entire prospectus carefully, including the “Risk Factors” section, the
financial statements and the notes to the financial statements. Unless the
context otherwise requires, throughout this prospectus the terms “OXIS
International,” “OXIS”, the “Company”, “we”, “us” or “our” refer to OXIS
International, Inc.
Our
Company
OXIS
International, Inc. develops technologies and products to research, diagnose,
treat and prevent diseases of oxidative stress associated with damage from
free
radical and reactive oxygen species. We derive our revenues primarily from
sales
of research diagnostic assays to research laboratories. Our diagnostic products
include approximately 30 research assays to measure markers of oxidative
stress. We
hold
the rights to three therapeutic classes of compounds in the area of oxidative
stress, and have focused our commercialization programs in clinical
cardiovascular markers, including MPO (myeloperoxidase) and GPx (glutathione
peroxidase), as well as a potent antioxidant, Ergothioneine, that may be
appropriate for sale over-the-counter as a dietary supplement. OXIS has acquired
a 51% interest in and has the option to purchase the remaining 49% of BioCheck,
Inc.
Oxidative
stress is associated with an excess of free radicals, reactive oxygen species
and a decrease in antioxidant levels resulting in the development of tissue
or
organ damage. Oxidative stress can cause tissue injury by triggering cell death
or inciting a tissue-damaging inflammatory response. We have invested
significant resources to build a substantial patent position on both our
antioxidant therapeutic technologies and selected oxidative stress assays.
Our
majority-held subsidiary, BioCheck, is
a
leading producer of clinical diagnostic assays, including high quality enzyme
immunoassay research services and immunoassay kits for cardiac and tumor
markers, infectious diseases, thyroid function, steroids, and fertility hormones
designed to improve the accuracy, efficiency, and cost-effectiveness of
in
vitro
(outside
the body) diagnostic testing in clinical laboratories. BioCheck
focuses primarily on the immunoassay segment of the clinical diagnostics market.
BioCheck
offers over 40 clinical diagnostic assays
which it
manufactures in its 15,000 square foot, U.S. Food and Drug Administration,
or
FDA, certified Good Manufacturing Practices device-manufacturing facility in
Foster City, California.
In
1965,
the corporate predecessor of OXIS, Diagnostic Data, Inc. was incorporated in
the
State of California. Diagnostic Data changed its state of incorporation to
Delaware in 1972; and changed its name to DDI Pharmaceuticals, Inc. in 1985.
In
1994, DDI Pharmaceuticals merged with International BioClinical, Inc. and
Bioxytech S.A. and changed its name to OXIS International, Inc. Our principal
executive offices were relocated to 323 Vintage Park Drive, Suite B, Foster
City, California 94404 on February 15, 2006. Our telephone number is (650)
212-2568.
Recent
Financing
On
October 25, 2006, we entered into a securities purchase agreement with four
accredited investors. At the closing of this financing, we sold and issued
Secured Convertible Debentures and Series A, B, C, D, and E common stock
warrants (referred to throughout this prospectus as the “warrants”) to the
purchasers, and also entered into a registration rights agreement and a security
agreement.
Pursuant
to the terms of the securities purchase agreement, we issued debentures in
an
aggregate principal amount of $1,694,250 to the Purchasers. The debentures
were
issued with an original issue discount of 20.318%, and resulted in proceeds
to
us of $1,350,000. The debentures are convertible, at the option of the holders,
at any time into shares of common stock at $0.35 per share, as adjusted in
accordance with a full ratchet anti-dilution provision (referred to in this
prospectus as the “conversion price”). Beginning on the first of the month
following the earlier of the effective date of the registration statement to
be
filed pursuant to the registration rights agreement and February 1, 2007, we
will amortize the debentures in equal installments on a monthly basis resulting
in a complete repayment by the maturity date (the “Monthly Redemption Amounts”).
The Monthly Redemption Amounts can be paid in cash or in shares, subject to
certain restrictions. If we choose to make any Monthly Redemption Amount payment
in shares of our common stock, the stock will be valued at a price per share
that is the lesser of the conversion price then in effect and 85% of the
weighted average price for the ten trading days prior to the due date of the
Monthly Redemption Amount. For additional details regarding the terms and
conditions of the debentures and warrants, see Exhibits 10.2 and 10.3 to our
current report on Form 8-K filed with the SEC on October 26, 2006. The above
description is qualified in its entirety by reference to the full text of these
instruments.
The
performance of our duties and obligations under the debentures are secured
by
substantially all of our assets under a security agreement. As additional
security to the debenture holders, we have also pledged the shares we hold
in
our subsidiaries, including 51% of BioCheck, Inc., and all of the shares of
capital stock of our wholly-owned subsidiaries, OXIS Therapeutics, Inc. and
OXIS
Isle of Man Limited. In addition, OXIS Therapeutics, Inc. and OXIS Isle of
Man
Limited have each provided the debenture holders with a subsidiary guarantee
in
which these subsidiaries have guaranteed the performance, at the parent level,
of our obligations under the debentures. For additional details regarding the
terms and conditions of the security agreement, see Exhibit 10.5 to our current
report on Form 8-K filed with the SEC on October 26, 2006. The above description
is qualified in its entirety by reference to the full text of this agreement.
On
October 25, 2006 in conjunction with the issuance of the debentures, we also
issued (1) five year Series A warrants to purchase an aggregate of 2,420,357
shares of common stock at an initial exercise price of $0.35 per share, (2)
one
year Series B warrants to purchase 2,420,357 shares of common stock at an
initial exercise price of $0.385 per share, (3) two year Series C warrants
to
purchase an aggregate of 4,840,714 shares of common stock at an initial exercise
price of $0.35 per share, (4) six year Series D warrants to purchase 2,420,357
shares of common stock have an initial exercise price of $0.35 per share, which
become exercisable on a pro-rata basis only upon the exercise of the Series
C
warrants, and (5) six year Series E warrants to purchase 2,420,357 shares of
common stock with an initial exercise price of $0.385 per share, which similar
to the Series D warrants, become exercisable on a pro-rata basis only upon
the
exercise of the Series C warrants. The debenture holders were issued Series
A,
B, C, D and E warrants in proportion to the amounts invested by the debenture
holders in our debentures. The initial exercise prices for each warrant are
adjustable in accordance with a full ratchet anti-dilution provision and upon
the occurrence of a stock split or a related event. For purposes of illustrating
the effect of the anti-dilution provision, if for instance we offered and issued
shares of our common stock in an offering at a price per share below the
exercise price of any of the warrants, the exercise price of the applicable
warrant would be adjusted to match the lower price per share in the offering,
and the number of shares purchasable under the warrant would be adjusted upward,
so that the aggregate exercise price would be equal to the aggregate exercise
price of the applicable warrant before the anti-dilution adjustment was made.
For additional details regarding the terms and conditions of the warrants,
see
Exhibit 10.3 to our current report on Form 8-K filed with the SEC on October
26,
2006. The above description is qualified in its entirety by reference to the
full text of these instruments.
THE
OFFERING
We
are
registering shares of our common stock for sale by the selling security holders
identified in the section of this prospectus entitled “Selling Security
Holders.” The shares included in the table identifying the selling security
holders consist of:
| · |
4,840,714
shares of common stock underlying the debentures issued in our private
placement on October 25, 2006;
|
| · |
9,681,429
shares of common stock underlying Series A, Series C and Series D
common
stock warrants issued in our private placement on October 25, 2006;
and
|
| · |
4,840,714
shares of common stock underlying Series B and Series E common stock
warrants issued in our private placement on October 25, 2006.
|
We
are
registering a total of 19,362,857 shares of our common stock that may become
issuable upon conversion of the debentures and exercise of the warrants by
the
selling security holders, assuming the full conversion and exercise of these
securities for the maximum number of shares issuable. This amount represents
approximately 43.5% of our current outstanding stock, based on 44,527,476 shares
of common stock outstanding as of December 1, 2006, which excludes: (i) 96,230
shares of Series C preferred stock convertible into 27,800 shares of common
stock, which are not being registered for resale; (ii) up to 6,738,789 shares
of
common stock reserved for issuance to employees, directors and consultants
as
outstanding stock options or available for issuance under our 2003 Stock
Incentive Plan; (iii) warrants to purchase an aggregate of 712,500 shares of
common stock at a price of $0.50 per share, which are not being registered
for
resale, (iv) warrants to purchase an aggregate of 1,127,969 shares of common
stock at a price of $1.00 per share, which are not being registered for resale,
(v) warrants to purchase an aggregate of 108,000 shares of common stock at
a
price of $0.39 per share, which are not being registered for resale, (vi)
warrants to purchase an aggregate of 1,158,857 shares of common stock at a
price
of $0.35 per share, which are not being registered for resale, (vii) warrants
to
purchase an aggregate of 2,416,108 shares of common stock at a price of $0.20
per share, which are not being registered for resale, (viii) warrants to
purchase an aggregate of 6,438,685 shares of common stock at a price of $0.66
per share, which were previously registered for resale, and (ix) warrants to
purchase an aggregate of 6,438,681 shares of common stock at a price of $1.00
per share, which were previously registered for resale. Upon full conversion
of
the debentures and exercise of the warrants, assuming no issuance of additional
shares by us, and no adjustments to the conversion price of the debentures
or
the exercise prices of the warrants, we would have a total of 63,890,333 shares
of common stock issued and outstanding.
USE
OF PROCEEDS
This
prospectus relates to 19,362,857 shares of our common stock, which may be sold
from time to time by the selling security holders. We will not receive any
part
of the proceeds from the sale of common stock by the selling security holders.
However, in order for the selling security holders to obtain the common stock
underlying the warrants held by them, the selling security holders must either
exercise the warrants by paying us a cash exercise price, or exercise the
warrants without cash by forfeiting underlying shares.
Up
to
14,522,143 shares of common stock are issuable upon exercise of outstanding
warrants issued pursuant to the October 25, 2006 private placement. Of these
warrants, (i) 9,681,429 have an exercise price of $0.35 per share and (ii)
4,840,714 have an exercise price of $0.385 per share. As of the date of this
prospectus, February 27, 2007, the last sale price of our common stock as quoted
on the OTCBB was $0.27 per share. If all such warrants are fully exercised
without using any applicable cashless exercise provisions and assuming no
anti-dilution adjustment of the applicable exercise prices, we will receive
approximately $5,252,175 in cash from the warrant holders. We anticipate that
any proceeds received by us from the exercise of the warrants will be used
by us
for general corporate purposes. There can be no assurance that any warrants
will
be exercised, or that we will receive any proceeds from the exercise of
warrants. If the quoted price of our common stock for the duration of the
warrants does not justify exercise of the warrants by their holders, we may
not
receive any proceeds from the warrants.
SELLING
SECURITY HOLDERS
This
prospectus covers the offer and sale by the selling security holders of up
to
4,840,714 shares of our common stock issuable upon conversion of debentures
and
an additional 14,522,143 shares of Common Stock issuable upon exercise of
warrants. The terms of the warrants preclude the holders thereof from exercising
such warrants if the exercise would result in the holder and/or its affiliates
beneficially owning in excess of either 4.99% or 9.99%, as elected by the holder
at the time of purchase of the warrants held by such holder, of our outstanding
common stock following the exercise. Each warrant holder can waive this
provision with respect to the warrants it holds by providing 61 days’ advance
written notice to us.
Except
as
listed below, none of the selling security holders had a material relationship
with us within the past three years.
We
are
required to pay the fees and expenses incurred by us incident to the
registration of the shares under this registration statement of which this
prospectus is a part. We have also agreed to indemnify certain of the selling
security holders against losses, claims, damages and liabilities arising out
of
relating to any misstatements or omissions in this registration statement or
prospectus, including liabilities under the Securities Act.
In
the
purchase agreements, each of the selling security holders represented that
it
had acquired the shares for investment purposes only and with no present
intention of distributing those shares, except in compliance with all applicable
securities laws. In addition, each of the selling security holders represented
that it qualifies as an “accredited investor” as such term is defined in Rule
501 under the Securities Act.
The
table
below sets forth information concerning the resale of the shares of common
stock
by the selling security holders. We will not receive any proceeds from the
resale of common stock issuable pursuant to conversion of the debentures by
the
selling security holders. We will receive proceeds from the warrants, if
exercised. The following table also sets forth the name of each security holder
who is offering the resale of shares of common stock for resale under this
prospectus, the number of shares of common stock beneficially owned by each
selling security holder, the number of shares of common stock that may be sold
in this offering and the number of shares of common stock each selling security
holder will own after the offering, assuming they sell all of the shares
offered. The number and percentage of shares beneficially owned is determined
in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling security holder has sole or shared voting power or investment power
and also any shares the selling security holder has the right to acquire within
60 days.
| Name
of beneficial
owner |
|
|
Number
of Shares Owned Before Offering
|
|
|
|
Number
of Shares Being Offered (1)
|
|
|
Number
of Shares Owned After Offering (2)
|
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| |
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Bristol
Investment Fund, Ltd.
|
|
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13,472,994
|
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(3)
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|
5,737,144
|
|
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7,735,850
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Alpha
Capital Anstalt
|
|
|
5,737,144
|
|
(4)
|
|
5,737,144
|
|
|
0
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Whalehaven
Capital Fund Limited
|
|
|
4,302,856
|
|
(5)
|
|
4,302,856
|
|
|
0
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Cranshire
Capital, L.P.
|
|
|
4,717,791
|
|
(6)
|
|
3,585,714
|
|
|
1,132,076
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL:
|
|
|
|
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|
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19,362,857
|
|
|
|
|
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*
|
Denotes
broker-dealer.
|
| |
|
|
**
|
Denotes
affiliate of broker-dealer.
|
| |
|
|
(1)
|
As
required by SEC rules, the number of shares in the table includes
shares
which can be purchased within 60 days, or, shares with respect to
which a
person may obtain voting power or investment power within 60 days.
|
|
(2)
|
Assumes
for purposes of this table that all selling security holders will
have
converted the debentures and exercised the warrants to purchase our
common
stock in this offering, and will have later sold in the offering
all
shares of our common stock underlying the debentures and warrants.
|
|
(3)
|
Holdings
of Bristol Investment Fund, Ltd. include 3,867,925 shares of common
stock,
1,434,286 shares issuable upon the voluntary conversion by Bristol
Investment Fund of a secured convertible debenture at the current
conversion price of $0.35 per share, warrants to purchase 1,933,963
shares
of common stock at a price of $0.66 per share, warrants to purchase
1,933,962 shares of common stock at a purchase price of $1.00 per
share,
warrants to purchase 2,868,572 shares of common stock at a purchase
price
of $0.35 per share, and warrants to purchase 1,434,286 shares of
common
stock at a purchase price of $0.385 per share. Paul Kessler, manager
of
Bristol Capital Advisors, LLC, the investment advisor to Bristol
Investment Fund, Ltd., has voting and investment control over the
securities held by Bristol Investment Fund, Ltd. Mr. Kessler disclaims
beneficial ownership of these securities.
|
| |
|
|
(4)
|
Holdings
of Alpha Capital Anstalt include 1,434,286 shares issuable upon the
voluntary conversion by Alpha Capital Anstalt of a secured convertible
debenture at the current conversion price of $0.35 per share, warrants
to
purchase 2,868,572 shares of common stock at a purchase price of
$0.35 per
share, and warrants to purchase 1,434,286 shares of common stock
at a
purchase price of $0.385 per share.
|
|
(5)
|
Holdings
of Whalehaven Capital Fund Limited include 1,075,714 shares issuable
upon
the voluntary conversion by Whalehaven Capital Fund of a secured
convertible debenture at the current conversion price of $0.35 per
share,
warrants to purchase 2,151,428 shares of common stock at a purchase
price
of $0.35 per share, and warrants to purchase 1,075,714 shares of
common
stock at a purchase price of $0.385 per share.
|
|
(6)
|
Holdings
of Cranshire Capital, LP. include 896,429 shares issuable upon the
voluntary conversion by Cranshire Capital of a secured convertible
debenture at the current conversion price of $0.35 per share, warrants
to
purchase 283,019 shares of common stock at a price of $0.66 per share,
warrants to purchase 283,019 shares of common stock at a purchase
price of
$1.00 per share, warrants to purchase 1,792,857 shares of common
stock at
a purchase price of $0.35 per share, and warrants to purchase 896,428
shares of common stock at a purchase price of $0.385 per share. Mitchell
P. Kopin, the President of Downsview Capital, Inc., the General Partner
of
Cranshire Capital, L.P., has sole investment power and voting control
over
the securities held by Cranshire Capital,
L.P.
|
PLAN
OF DISTRIBUTION
The
selling security holders (referred to throughout this prospectus as the “selling
security holders”) of our common stock and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which
the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling security holders may use any one or more of
the
following methods when selling shares:
|
|
·
|
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
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|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
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|
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purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
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|
an
exchange distribution in accordance with the rules of the applicable
exchange;
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privately
negotiated transactions;
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settlement
of short sales entered into after the date of the initial final prospectus
covering the resale of common stock by the selling security holders;
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broker-dealers
may agree with the selling security holders to sell a specified number
of
such shares at a stipulated price per share;
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a
combination of any such methods of sale;
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through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise; or
|
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any
other method permitted pursuant to applicable law.
|
The
selling security holders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling security holders may arrange for other broker-dealers
to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling security holders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, but,
except as set forth in a supplement to this Prospectus, in the case of an agency
transaction not in excess of a customary brokerage commission in compliance
with
NASDR Rule 2440; and in the case of a principal transaction a markup or markdown
in compliance with NASDR IM-2440.
In
connection with the sale of the common stock or interests therein, the selling
security holders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
security holders may also sell shares of the common stock short and deliver
these securities to close out their short positions, or loan or pledge the
common stock to broker-dealers that in turn may sell these securities. The
selling security holders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The
selling security holders and any broker-dealers or agents that are involved
in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each selling security holder has informed
us
that it does not have any written or oral agreement or understanding, directly
or indirectly, with any person to distribute the common stock. In no event
shall
any broker-dealer receive fees, commissions and markups which, in the aggregate,
would exceed eight percent (8%).
We
are
required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling security
holders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
Because
selling security holders may be deemed to be “underwriters” within the meaning
of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by
this
prospectus which qualify for sale pursuant to Rule 144 under the Securities
Act
may be sold under Rule 144 rather than under this prospectus. Each selling
security holder has advised us that they have not entered into any written
or
oral agreements, understandings or arrangements with any underwriter or
broker-dealer regarding the sale of the resale shares. There is no underwriter
or coordinating broker acting in connection with the proposed sale of the resale
shares by the selling security holders.
We
agreed
to keep this prospectus effective until the earlier of (i) the date on which
the
shares have been sold or may be resold by the selling security holders without
registration and without regard to any volume limitations by reason of Rule
144(e) under the Securities Act or any other rule of similar effect or (ii)
the
expiration of twenty-four (24) months following the date on which the SEC
initially declared the Registration Statement effective. The resale shares
will
be sold only through registered or licensed brokers or dealers if required
under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale
in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged
in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to the common stock for a period of two business
days prior to the commencement of the distribution. In addition, the selling
security holders will be subject to applicable provisions of the Exchange Act
and its rules and regulations, including Regulation M, which may limit the
timing of purchases and sales of shares of the common stock by the selling
security holders or any other person. We will make copies of this prospectus
available to the selling security holders and have informed them of the need
to
deliver a copy of this prospectus to each purchaser at or prior to the time
of
the sale.
We
will
not receive any part of the proceeds from the sale of these shares by any of
the
selling security holders although we may receive proceeds in the event that
some
or all of the warrants held by the selling security holders are exercised.
The
selling security holders are not restricted as to the price or prices at which
they may sell the shares of our common stock offered under this prospectus.
Also, the selling security holders are not restricted as to the number of shares
which may be sold at any one time.
There
is
no assurance that any of selling security holder will sell any or all of the
shares described in this prospectus and may transfer, devise or gift these
securities by other means not described in this prospectus.
RISK
FACTORS
This
investment involves a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below. If any of the
following risks are realized, our business, operating results and financial
condition could be harmed and the value of our stock could go down. This means
you could lose all or a part of your investment.
Risks
Related to Our Business
We
operate in a rapidly changing environment that involves a number of risks,
some
of which are beyond our control. The following discussion highlights some of
these risks and others are discussed elsewhere in this prospectus.
We
will need to raise additional capital to fund our general and administrative
expenses, and if we are unable to raise such capital, we will have to curtail
or
cease operations.
We
had
cash and cash equivalents of $21,000 at our parent level at September 30, 2006.
We cannot access the cash held by our majority-held subsidiary, BioCheck, to
pay
for our operating expenses at the parent level, since currently BioCheck is
not
our wholly-owned subsidiary. We obtained debt financing in the amount of
$1,350,000 on October 25, 2006 and are seeking additional equity financing
to
obtain sufficient funds to sustain operations, including our development and
commercialization programs and purchase the remaining 49% share of BioCheck
that
we currently do not own. We have incurred significant obligations in relation
to
the termination of our former president and chief executive officer. We repaid
debt including accrued interest and expenses in the amount of $426,000 to Fagan
Capital and $209,000 to our former chief executive officer. If we are unable
to
raise additional capital in the first quarter of 2007, we may have to curtail
or
cease operations.
If we
raise short term capital by incurring additional debt, we will have to obtain
equity financing sufficient to repay such debt and accrued interest. Further,
incurring additional debt may make it more difficult for us to successfully
consummate future equity financings.
Restrictive
provisions of the Securities Purchase Agreement signed with purchasers of
debentures and warrants in our recent convertible debt and warrant financing
may
prohibit us from consummating an equity financing
transaction.
Pursuant
to the Securities Purchase Agreement entered into with four accredited
purchasers on October 25, 2006, we are prohibited from issuing shares of common
stock or securities convertible into common stock except pursuant to options
issued under its stock option plan and other limited exceptions, until ninety
days after the effective date of the registration statement that we are required
to file in relation to the securities issued in our October 25, 2006 financing,
unless the volume weighted average quoted price of our common stock for each
of
the twenty days immediately prior to any such issuance of equity securities
is
higher than $0.40 per share, subject to adjustment for stock splits. Given
the
recent price range of our common stock between $0.20 and $0.35, unless the
price
of our common stock increases significantly within the next six to seven months,
we will be unable to raise additional funds through an equity financing. Under
the Securities Purchase Agreement in our October 25, 2006 financing, the
purchasers of the debentures have the right to participate in up to 100% of
any
future equity financing involving issuance of common stock or securities
convertible into or exercisable for common stock that we undertake within one
year after the effective date of the registration statement which we are
required to file in relation to the securities issued in our October 25, 2006
financing. This provision may make potential investors reluctant to enter into
term sheets with us for future equity transactions.
Repayment
of recently issued debentures in shares and the exercise of recently issued
warrants would cause substantial dilution to our stockholders and would likely
to depress our stock price, making it more difficult for us to consummate future
equity financings.
In
our
October 25, 2006 debenture financing with four accredited purchasers, we issued
secured convertible debentures in an aggregate principal amount of $1,694,250.
We also issued Series A, B, C, D, and E warrants to the purchasers of the
debentures, which provide them the right to purchase of an aggregate of
approximately 14.5 million shares of our common stock, at initial exercise
prices ranging from $0.35 to $0.385 per share, subject to adjustment as provided
in the warrants, including a full ratchet anti-dilution provision which will
lower the exercise price in the event that we conduct a financing at a price
per
share below $0.35 or $0.385 per share, respectively. The Series D and E warrants
are only exercisable on a pro rata basis, if the Series C warrants are
exercised. The debentures were issued with an original issue discount of
20.318%, and resulted in proceeds to us of $1,350,000. The debentures are
convertible, at the option of the holders, at any time into shares of common
stock at $0.35 per share, as adjusted in accordance with a full ratchet
anti-dilution provision (referred to in this prospectus as the “conversion
price”). Beginning on the first of the month following the earlier of the
effective date of the registration statement to be filed pursuant to the
registration rights agreement and February 1, 2007, we will amortize the
debentures in equal installments on a monthly basis resulting in a complete
repayment by the maturity date (the “Monthly Redemption Amounts”). The Monthly
Redemption Amounts can be paid in cash or in shares, subject to certain
restrictions. If we choose to make any Monthly Redemption Amount payment in
shares of common stock, the price per share is the lesser of the conversion
price then in effect and 85% of the weighted average price for the ten trading
days prior to the due date of the Monthly Redemption Amount.
Due
to
the floating conversion price of the debentures that applies when we choose
to
repay the debentures in shares, we would need to issue approximately ten million
shares to the holders of the debentures, assuming that stock prices remain
in
their recent price range. The number of shares that we may have to issue to
the
debenture holders could increase significantly if our stock price declines
from
the current price range. In addition, we would have to issue approximately
five
million shares if the debenture holders exercise their Series A and B warrants,
an additional approximately five million shares would be issued upon exercise
of
their Series C warrants and finally, an additional approximately five million
shares would be issued upon exercise of their Series D and E warrants pro rata
subsequent to the exercise of the Series C warrants. The future potential
dilution due to exercise of the above warrants could be increased if the full
ratchet anti-dilution provision applicable to the exercise price of the warrants
is triggered. This future potential dilution would likely depress our stock
price, making it difficult for us to consummate a future equity
financing.
Restrictions
on our ability to repay the debentures in shares rather than in cash may deplete
our cash resources and will require future financings to avoid
default.
Under
the
terms of the debentures we issued in October 2006, our right to make monthly
redemption payments is conditioned upon several factors. Beginning on the first
of the month following the earlier of the effective date of the registration
statement to be filed pursuant to the registration rights agreement, and
February 1, 2007, we are obligated to amortize the debentures in equal
installments on a monthly basis resulting in a complete repayment by the
maturity date either in cash or in shares. The monthly redemptions, if made
in
cash to all debenture holders would equal approximately $85,000 per month.
We
may not make the monthly redemption in shares if, among other conditions, the
issuance of the shares to the debenture holders would cause any debenture holder
to beneficially own in excess of either 9.99% or 4.99% of our total outstanding
shares at that time (depending on the particular debenture holder, either the
9.99% or the 4.99% threshold applies). One of the debenture holders currently
beneficially owns approximately 9% of our total outstanding shares. In addition,
we may not make monthly redemption payments to any debenture holder in shares
rather than cash if the daily trading volume for our common stock does not
exceed 50,000 shares per trading day for a period of twenty trading days prior
to any applicable date in question beginning after April 25, 2007. If we must
make all or a substantial amount of its monthly redemption payments to the
debenture holders in cash rather than shares, its cash reserves will be depleted
and it will have to raise substantial additional capital to avoid default of
the
debentures.
As
we have failed to make payments due to BioCheck under our Mutual Services
Agreement, BioCheck could exercise its rights under the default provisions
of
that agreement to terminate the agreement and cease production of many of our
research test kit assays.
As
mentioned above, on June 23, 2006, we entered into a mutual services agreement
with our majority owned subsidiary, BioCheck. Pursuant to the agreement, we
agreed to pay BioCheck approximately $103,000 that we owed to BioCheck for
services that BioCheck had provided to us during the nine months ended September
30, 2006. As of the date of this prospectus, we have not made that payment.
If
we receive written notice of breach of the mutual services agreement due to
this
non-payment, it will have 15 days to cure that breach. If we fail to cure the
breach during the cure period, BioCheck would have the right to terminate the
agreement. Pursuant to the agreement, BioCheck is manufacturing the bulk of
our
research assay test kits, assisting in packaging and shipping such research
assay test kits to our customers, and undertaking research and development
of
certain new OXIS research assay test kits. If BioCheck ceases to perform
services under the agreement, we will have to turn to third party suppliers
for
the manufacturing of its research assay test kits, where that is possible,
and
will likely have to cease research and development of new OXIS research assay
test kits. There can be no assurance that possible third party suppliers of
research assay test kits will be willing or able to manufacture our research
assay test kits at competitive prices or at all, or that we would be able to
pay
for such services. Disruption or cessation of manufacturing due to the
termination of the mutual services agreement would have immediate and
deleterious effects on our future revenues.
We
will need to raise additional capital in order to complete our acquisition
of
the outstanding shares of BioCheck that we do not own, which constitutes 49%
of
BioCheck’s issued and outstanding shares.
On
September 19, 2005 we entered into a stock purchase agreement with BioCheck
and
the stockholders of BioCheck pursuant to which we undertook to purchase up
to
all of the outstanding shares of common stock of BioCheck for an aggregate
purchase price of $6.0 million in cash. On December 6, 2005, pursuant to
the terms of the stock purchase agreement with BioCheck, at the initial closing,
we purchased an aggregate of fifty-one percent (51%) of the outstanding shares
of common stock of BioCheck from each of the stockholders of BioCheck on a
pro
rata basis, for an aggregate of $3,060,000 in cash. Pursuant to the stock
purchase agreement, we will use its reasonable best efforts to consummate a
follow-on financing transaction to raise additional capital with which to
purchase the remaining outstanding shares of BioCheck in one or more additional
closings. The purchase price for any BioCheck shares purchased after the initial
closing will be increased by an additional 8% per annum from the date of the
initial closing through the date of such purchase. Under the terms of our
purchase agreements with BioCheck and its stockholders, BioCheck’s earnings
(specifically, its earnings before interest, taxes, depreciation and
amortization expenses, or EBITDA), if any, will be used to repurchase the
remaining outstanding BioCheck shares at one or more additional closings. There
can be no assurance that BioCheck will generate any earnings in the next several
years which would be sufficient to purchase additional shares of BioCheck
pursuant to the stock purchase agreement. Even if BioCheck generates earnings,
there can be no assurance that such earnings would be sufficient to complete
our
acquisition of the remaining 49% of BioCheck’s outstanding shares.
To
avoid
an increase in the purchase price of the remaining shares of BioCheck at the
rate of 8% per annum, we would need to consummate a financing transaction to
complete the acquisition of the remaining 49% of the outstanding shares of
BioCheck. The successful completion of our acquisition of BioCheck in this
manner is dependent upon obtaining financing on acceptable terms. No assurances
can be given that we will be able to complete such a financing sufficient to
undertake our acquisition of the outstanding shares of BioCheck on terms
favorable to us, or at all. Any financing that we do undertake to finance the
acquisition of BioCheck would likely involve dilution of our common stock if
it
is an equity financing, or will involve the assumption of significant debt
by
us.
We
will need additional financing in order to complete our development and
commercialization programs.
As
of
September 30, 2006, we had an accumulated deficit of approximately $67,301,000.
We currently do not have sufficient capital resources to complete the
development and commercialization of our antioxidant therapeutic technologies
and oxidative stress assays, and no assurances can be given that we will be
able
to raise such capital in the future on terms favorable to us, or at all. The
lack of availability of additional capital could cause us to cease or curtail
our operations and/or delay or prevent the development and marketing of our
potential products. In addition, we may choose to abandon certain issued United
States and international patents that we consider to be of lesser importance
to
our strategic direction, in an effort to preserve our financial resources.
Our
future capital requirements will depend on many factors including the following:
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continued
scientific progress in our research and development programs and
the
commercialization of additional products;
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the
cost of our research and development and commercialization activities
and
arrangements, including sales and
marketing;
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the
costs associated with the scale-up of manufacturing;
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the
success of pre-clinical and clinical trials;
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the
establishment of and changes in collaborative relationships;
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the
time and costs involved in filing, prosecuting, enforcing and defending
patent claims;
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the
time and costs required for regulatory approvals;
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the
acquisition of additional technologies or businesses;
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technological
competition and market developments;
and
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the
cost of complying with the requirements of the Autorité des Marchés
Financiers, or AMF, the French regulatory agency overseeing the Nouveau
Marché in France.
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We
will
need to raise additional capital to fund our development and commercialization
programs. Our current capital resources are not sufficient to sustain operations
and our development program with respect to our Ergothioneine as a nutraceutical
supplement. We have granted a licensee exclusive worldwide rights, in certain
defined areas of cardiovascular indications, to develop, manufacture and market
BXT-51072 and related compounds from our library of such antioxidant compounds.
The licensee is responsible for worldwide product development programs with
respect to the licensed compounds. Due to the lack of financial resources,
we
ceased further testing of BXT-51072 but continue to review the possibility
of
further developing applications for BXT-51072 and related compounds outside
of
the areas defined in the license. However, further development and
commercialization of antioxidant therapeutic technologies, oxidative stress
assays or currently unidentified opportunities, or the acquisition of additional
technologies or businesses, may require additional capital. The fact that
further development and commercialization of a product or technology would
require us to raise additional capital, would be an important factor in our
decision to engage in such further development or commercialization. No
assurances can be given that we will be able to raise such funds in the future
on terms favorable to us, or at all.
If
we complete our acquisition of BioCheck, our business could be materially and
adversely affected if we fail to adequately integrate the operations of the
two
companies.
If
we
complete the acquisition of BioCheck as planned, and we do not successfully
integrate the operations of the two companies, or if the benefits of the
transaction do not meet the expectations of financial or industry analysts,
the
market price of our common stock may decline. The acquisition could result
in
the use of significant amounts of cash, dilutive issuances of equity securities,
or the incurrence of debt or expenses related to goodwill and other intangible
assets, any of which, or all taken together, could materially adversely affect
our business, operating results and financial condition.
We
may
not be able to successfully integrate the BioCheck business into our existing
business in a timely and non-disruptive manner, or at all. In addition, the
acquisition may result
in, among other things, substantial
charges
associated with acquired in-process research and development, future write-offs
of goodwill that is deemed to be impaired, restructuring charges related to
consolidation of operations, charges associated with unknown or unforeseen
liabilities of acquired businesses and increased general and administrative
expenses. Furthermore, the acquisition may not produce revenues, earnings or
business synergies that we anticipate. There
can
be no assurance that BioCheck will continue to manufacture our research assay
test kits if that agreement is terminated.
In
addition, in general, acquisitions such as these involve numerous risks,
including:
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difficulties
in assimilating the operations, technologies, products and personnel
of an
acquired company;
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risks
of entering markets in which we have either no or limited prior
experience;
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diversion
of management’s attention from other business concerns; and
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potential
loss of key employees of an acquired company.
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The
time,
capital management and other resources spent on the acquisition, if it fails
to
meet our expectations, could cause our business and financial condition to
be
materially and adversely affected.
Our
relocation plan could adversely affect our operations.
As
part
of our decision to acquire BioCheck, we implemented a relocation and integration
plan, including a strategy to reduce our cost structure. In doing so, we
significantly reduced our employee workforce from 15 full time employees to
six
at November 10, 2006, outsourced certain company functions and have taken other
steps intended to reduce costs and improve efficiencies. Our
business may continue to be disrupted and adversely affected by this reduction
in work force until we employ new personnel to replace certain open positions.
We may also experience disruption to our business as a result of our move to
new
facilities.
The
payment of severance benefits resulting from employee terminations will cause
us
to utilize cash. There can be no assurances that we will be able to improve
efficiencies and function properly following such reductions.
We
may experience disruption or may fail to achieve any benefits in connection
with
the recent changes in executive management and in board membership.
During
the second quarter of 2004, our former Chief Executive Officer retired, and
during the third quarter of 2004 our Chief Operating and Financial Officer
resigned from his position at our company. As a result, others who had limited
experience within our senior management were appointed to serve as acting Chief
Executive Officer, acting Chief Operating Officer and acting Chief Financial
Officer. On February 28, 2005, the Board appointed Mr. Steven T.
Guillen as our President and Chief Executive Officer, and as a member of our
board. On January 6, 2006, we hired Michael D. Centron as our Vice President
and
Chief Financial Officer. On
September 15, 2006, Mr. Guillen’s employment as President and Chief Executive
Officer was terminated, and Marvin S. Hausman, M.D. was appointed our new
President and Chief Executive Officer. On November 15, 2006 Michael Centron,
our
Vice President and Chief Financial Officer resigned. In
addition, during 2004 and early 2005, following the acquisition of a
then-majority interest in our company by Axonyx, eight directors resigned from
our board resulting in a four-person board. During 2005 we added independent
director John E. Repine, M.D., and Gary M. Post joined our board of directors
on
March 15, 2006, resulting in a six-person board. Timothy C. Rodell, M.D.,
declined to stand for re-election at the Annual Meeting of Stockholders held
on
August 1, 2006. All five directors currently serving on the board commenced
their service on the board during the period of 2004 through the date hereof.
One
impact of such changes has been to delay our sales promotions in the research
assay market and in the development of Ergothioneine market opportunities.
Further, we narrowed our strategic focus to concentrate resources, including
discontinuing our Animal Health Profiling program. In addition, the decreased
sales at our parent company level during the third quarter of 2006 are
attributable to lower sales volume that was caused, in part, by the disruption
arising from relocating our operations from Portland, Oregon to Foster City,
California and consolidating our product offerings. There can be no assurances
that these changes will not cause further disruptions in, or otherwise adversely
affect, our business and results of operations.
If
we fail to attract and retain key personnel, our business could suffer.
Our
future depends, in part, on our ability to attract and retain key personnel.
We
may not be able to hire and retain such personnel at compensation levels
consistent with our existing compensation and salary structure. We deferred
the
hiring of senior management personnel in order to allow our newly-engaged full
time Chief Executive Officer to select such key personnel. We cannot predict
whether we will be successful in finding suitable new candidates for our key
management positions. On September 15, 2006, Mr. Guillen’s employment as
President and Chief Executive Officer was terminated, and Marvin S. Hausman,
M.D. was appointed our new President and Chief Executive Officer. On November
15, 2006, Michael Centron resigned as our Vice President and Chief Financial
Officer. Dr.
Hausman has assumed the role of chief financial and accounting officer on an
interim basis. While we have entered into an employment agreement with
Dr. Hausman, he is free to terminate his employment “at will.” Further, we
cannot predict whether Dr.
Hausman will
be
successful in his role as our President and Chief Executive Officer, or whether
senior management personnel hires will be effective. The loss of services of
executive officers or key personnel, any transitional difficulties with our
new
Chief Executive Officer or the inability to attract qualified personnel could
have a material adverse effect on our financial condition and business. As
we
currently do not have a Chief Financial Officer, it is crucial that we find
a
qualified individual to fill that role and to oversee and certify the periodic
reports we must file with the Securities and Exchange Commission. As we
currently have limited cash resources, if any of our key personnel leaves,
replacing them will be difficult. We
do not
have any key employee life insurance policies with respect to any of our
executive officers.
The
success of our business depends upon our ability to successfully develop and
commercialize products.
We
cannot
assure you that our efforts to develop and commercialize a cardiac predictor
product, an Ergothioneine
nutraceutical product or any other products will be successful. The cost of
such
development and commercialization efforts can be significant and the likelihood
of success of any such programs is difficult to predict. The failure to develop
or commercialize such new products could be materially harmful to us and our
financial condition.
Our
future profitability is uncertain.
We
cannot
predict our ability to reduce our costs or achieve profitability. We may be
required to increase our research and development expenses in order to develop
potential new products. As evidenced by the substantial net losses during and
the first six months of 2006 and in fiscal year 2005, losses and expenses may
increase and fluctuate from quarter to quarter. There can be no assurance that
we will ever achieve profitable operations.
We
have no biopharmaceutical or clinical diagnostic products available for sale
and
we may not be able to successfully develop products suitable for
commercialization.
All
of
our biopharmaceutical and clinical diagnostic candidates are at an early stage
of development and all of such therapeutic and clinical diagnostic candidates
will require expensive and lengthy testing and regulatory clearances. None
of
our therapeutic or clinical diagnostic candidates have been approved by
regulatory authorities. We have no therapeutic or clinical diagnostic products
available for sale and we may not have any products commercially available
for
several years, if at all. There are many reasons we may fail in our efforts
to
develop our therapeutic and clinical diagnostic candidates,
including:
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our
therapeutic and clinical diagnostic candidates may be ineffective,
toxic
or may not receive regulatory
clearances,
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our
therapeutic and clinical diagnostic candidates may be too expensive
to
manufacture or market or may not achieve broad market
acceptance,
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third
parties may hold proprietary rights that may preclude us from developing
or marketing our therapeutic and clinical diagnostic candidates,
or
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third
parties may market equivalent or superior
products.
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Clinical
development is inherently uncertain and expense levels may fluctuate
unexpectedly because we cannot accurately predict the timing and level of such
expenses.
Our
future success may depend in part upon the results of clinical trials undertaken
by us or our licensees designed to assess the safety and efficacy of our
potential products. We do not have substantial experience in developing and
running clinical trials. The completion of clinical trials often depends
significantly upon the rate of patient enrollment, and our expense levels will
vary depending upon the rate of enrollment. In addition, the length of time
necessary to complete clinical trials and submit an application for marketing
and manufacturing approvals varies significantly and is difficult to predict.
The expenses associated with each phase of development depend upon the design
of
the trial. The design of each phase of trials depends in part upon results
of
prior phases, and additional trials may be needed at each phase. As a result,
the expense associated with future phases cannot be predicted in advance.
Further, if we undertake clinical trials, we may decide to terminate or suspend
ongoing trials. Failure to comply with extensive FDA regulations may result
in
unanticipated delay, suspension or cancellation of a trial or the FDA’s refusal
to accept test results. The FDA may also suspend our clinical trials at any
time
if it concludes that the participants are being exposed to unacceptable risks.
As a result of these factors, we cannot predict the actual expenses that we
will
incur with respect to clinical trials for any of our potential products, and
we
expect that our expense levels will fluctuate unexpectedly in the future.
Competition
in most of our primary current and potential market areas is intense and
expected to increase.
The
diagnostic, pharmaceutical and nutraceutical industries are highly competitive.
The main commercial competition at present in our research assay business is
represented by, but not limited to, the following companies: Cayman Chemical
Company, Assay Designs and Randox Laboratories Ltd. In addition, our competitors
and potential competitors include large pharmaceutical/nutraceutical companies,
universities and research institutions. Compared to us, these competitors may
have substantially greater capital resources, research and development staffs,
facilities, as well as greater expertise manufacturing and making products.
In
addition, these companies, as well as others, may have or may develop new
technologies or use existing technologies that are, or may in the future be,
the
basis for competitive products. There can be no assurance that we can compete
successfully.
In
addition, current and potential competitors may make strategic acquisitions
or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their products to address the needs of our
current and prospective customers. Accordingly, it is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Such competition could materially
adversely affect our ability to commercialize existing technologies or new
technologies on terms favorable to us. Further, competitive pressures could
require us to reduce the price of our products and technologies, which could
materially adversely affect our business, operating results and financial
condition. We may not be able to compete successfully against current and future
competitors and any failure to do so would have a material adverse effect upon
our business, operating results and financial condition.
TorreyPines
Therapeutics, Inc. holds significant stockholder voting power, and may be in
a
position to influence matters affecting us.
TorreyPines
Therapeutics, Inc. or TorreyPines, which merged with Axonyx Inc. in October
2006, currently owns approximately 32% of our issued and outstanding stock.
In
addition, Dr. Marvin Hausman is a member of the board of directors of
TorreyPines and is our President and Chief Executive Officer and the chairman
of
our board of directors. Given these circumstances, TorreyPines may influence
our
business direction and policies, and, thus, may have the ability to control
certain material decisions affecting us. In addition, such concentration of
voting power could have the effect of delaying, deterring or preventing a change
of control or other business combination that might otherwise be beneficial
to
our stockholders. Section 203 of the Delaware General Corporation Law prohibits
a Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years unless the transaction meets
certain conditions. Section 203 also limits the extent to which an
interested stockholder can receive benefits from our assets. These provisions
could complicate or prohibit certain transactions (including a financing
transaction between us and TorreyPines), or limit the price that other investors
might be willing to pay in the future for shares of our common
stock.
If
we are unable to develop and maintain alliances with collaborative partners,
we
may have difficulty developing and selling our products and services.
Our
ability to realize significant revenues from new products and technologies
is
dependent upon, among other things, our success in developing business alliances
and licensing arrangements with nutraceutical, biopharmaceutical and/or health
related companies to develop and market these products. To date, we have had
limited success in establishing foundations for such business alliances and
licensing arrangements and there can be no assurance that our efforts will
result in the development of mature relationships or that any such relationships
will be successful. Further, relying on these or other alliances is risky to
our
future success because:
|
|
·
|
our
partners may develop products or technologies competitive with our
products and technologies;
|
|
|
·
|
our
partners may not devote sufficient resources to the development and
sale
of our products and technologies;
|
|
|
·
|
our
collaborations may be unsuccessful; or
|
|
|
·
|
we
may not be able to negotiate future alliances on acceptable terms.
|
Our
revenues and quarterly results have fluctuated historically and may continue
to
fluctuate, which could cause our stock price to decrease.
Our
revenues and operating results may fluctuate due in part to factors that are
beyond our control and which we cannot predict. Material shortfalls in revenues
will materially adversely affect our results and may cause us to experience
losses. In particular, our revenue growth and profitability depend on sales
of
our research assays and fine chemicals. Factors that could cause sales for
these
products and other products to fluctuate include:
|
|
·
|
an
inability to produce products in sufficient quantities and with
appropriate quality;
|
|
|
·
|
an
inability to obtain sufficient raw
materials;
|
|
|
·
|
the
loss of or reduction in orders from key customers;
|
|
|
·
|
variable
or decreased demand from our customers;
|
|
|
·
|
the
receipt of relatively large orders with short lead times;
|
|
|
·
|
our
customers’ expectations as to how long it takes us to fill future orders;
|
|
|
·
|
customers’
budgetary constraints and internal acceptance review procedures;
|
|
|
·
|
there
may be only a limited number of customers that are willing to purchase
our
research assays and fine chemicals;
|
|
|
·
|
a
long sales cycle that involves substantial human and capital resources;
and
|
|
|
·
|
potential
downturns in general or in industry specific economic
conditions.
|
Each
of
these factors has impacted, and may in the future impact, the demand for and
availability of our products and our quarterly operating results. For example,
due to the unavailability of beef liver as a source for bSOD we were unable
to
sell any bSOD during 2005 and 2004, as compared to sales of $562,000 in 2003.
We
do not
anticipate this source becoming available again within the foreseeable future
and do not anticipate any revenues from sales of this product in the foreseeable
future. In addition, a decrease in the demand for our Ergothioneine product
resulted in a reduction of sales of Ergothioneine to $18,000 in 2005 and $87,000
in 2004, compared to $333,000 in 2003. We cannot predict with any certainty
our
future sales of Ergothioneine.
If
the
sales or development cycles for research assays and fine chemicals lengthen
unexpectedly, our revenues may decline or not grow as anticipated and our
results from operations may be harmed.
Changes
in accounting standards regarding stock option plans could increase our reported
losses, cause our stock price to decline and limit the desirability of granting
stock options.
In
December 2004, the FASB issued SFAS 123R. SFAS 123R replaces SFAS No. 123 and
supersedes APB Opinion No. 25. SFAS 123R establishes standards for the
accounting for share-based payment transactions in which an entity exchanges
its
equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity’s equity instruments or that may be
settled by the issuance of those equity instruments. SFAS 123R covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights
and
employee share purchase plans. SFAS 123R requires a public entity to measure
the
cost of employee services received in exchange for an award of equity
instruments based on the fair value of the award on the grant date (with limited
exceptions). That cost will be recognized in the entity’s financial statements
over the period during which the employee is required to provide services in
exchange for the award. Management implemented SFAS 123R effective January
1,
2006. Expensing such stock options will add to our losses or reduce our profits,
if any. In addition, stock options are an important employee recruitment and
retention tool, and we may not be able to attract and retain key personnel
if we
reduce the scope of our employee stock option program.
Our
income may suffer if we receive relatively large orders with short lead times,
or our manufacturing capacity does not otherwise match our demand.
Because
we cannot immediately adapt our production capacity and related cost structures
to rapidly changing market conditions, when demand does not meet our
expectations, our manufacturing capacity will likely exceed our production
requirements. Fixed costs associated with excess manufacturing capacity could
adversely affect our income. Similarly, if we receive relatively large orders
with short lead times, we may not be able to increase our manufacturing capacity
to meet product demand, and, accordingly, we will not be able to fulfill orders
in a timely manner. During a market upturn, we may not be able to purchase
sufficient supplies to meet increasing product demand. In addition, suppliers
may extend lead times, limit supplies or increase prices due to capacity
constraints or other factors. These factors could materially and adversely
affect our results.
Our
success will require that we establish a strong intellectual property position
and that we can defend ourselves against intellectual property claims from
others.
Maintaining
a strong patent position is important to us in order to establish and maintain
a
competitive advantage. We currently have 81 patents either granted or applied
for in 16 countries with expiration dates ranging from 2009 to 2025. Litigation
on patent-related matters has been prevalent in our industry and we expect
that
this will continue. Patent law relating to the scope of claims in the technology
fields in which we operate is still evolving and the extent of future protection
is highly uncertain, so there can be no assurance that the patent rights we
have
or may obtain will be valuable. Others may have filed, or may in the future
file, patent applications that are similar or identical to ours. To determine
the priority of inventions, we may have to participate in interference
proceedings declared by the United States Patent and Trademark Office that
could
result in substantial costs in legal fees and could substantially affect the
scope of our patent protection. We cannot assure investors that any such patent
applications will not have priority over our patent applications. Further,
we
may choose to abandon certain issued United States and international patents
that we consider to be of lesser importance to our strategic direction, in
an
effort to preserve our financial resources. Abandonment of patents could
substantially affect the scope of our patent protection. In addition, we may
in
future periods incur substantial costs in litigation to defend against patent
suits brought by third parties or if we initiate such suits.
In
addition to patent protection, we also rely upon trade secret protection for
our
confidential and proprietary information. There can be no assurance, however,
that such measures will provide adequate protection for our trade secrets or
other proprietary information. In addition, there can be no assurance that
trade
secrets and other proprietary information will not be disclosed, that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to or disclose our trade secrets and
other proprietary information. If we cannot obtain, maintain or enforce our
intellectual property rights, competitors may seize the opportunity to design
and commercialize competing technologies.
We
may
face challenges from third parties regarding the validity of our patents and
proprietary rights, or from third parties asserting that we are infringing
their
patents or proprietary rights, which could result in litigation that would
be
costly to defend and could deprive us of valuable rights.
Extensive
litigation regarding patents and other intellectual property rights has been
common in the biotechnology and pharmaceutical industries. The defense and
prosecution of intellectual property suits, United States Patent and Trademark
Office interference proceedings, and related legal and administrative
proceedings in the United States and internationally involve complex legal
and
factual questions. As a result, such proceedings are costly and time-consuming
to pursue and their outcome is uncertain. Litigation may be necessary to:
|
|
·
|
enforce
patents that we own or license;
|
|
|
·
|
protect
trade secrets or know-how that we own or license; or
|
|
|
·
|
determine
the enforceability, scope and validity of the proprietary rights
of
others.
|
Our
involvement in any litigation, interference or other administrative proceedings
could cause us to incur substantial expense and could significantly divert
the
efforts of our technical and management personnel. An adverse determination
may
subject us to loss of our proprietary position or to significant liabilities,
or
require us to seek licenses that may not be available from third parties. An
adverse determination in a judicial or administrative proceeding, or a failure
to obtain necessary licenses, may restrict or prevent us from manufacturing
and
selling our products. Costs associated with these arrangements may be
substantial and may include ongoing royalties. Furthermore, we may not be able
to obtain the necessary licenses on satisfactory terms, if at all. These
outcomes could materially harm our business, financial condition and results
of
operations.
We
may be exposed to liability due to product defects.
The
risk
of product liability claims is inherent in the testing, manufacturing, marketing
and sale of our products. We may seek to acquire additional insurance for
liability risks. We may not be able to obtain such insurance or general product
liability insurance on acceptable terms or in sufficient amounts. A product
liability claim or recall could have a serious adverse effect on our business,
financial condition and results of operations.
Disclosure
controls are no assurance that the objectives of the control system are
met.
Although
we have an extensive operating history, resources are limited for the
development and maintenance of our control environment. We have a very limited
number of personnel and therefore segregation of duties can be somewhat limited
as to their scope and effectiveness. We believe, however, that we are in
reasonable compliance with the best practices given the environment in which
we
operate. Although existing controls in place are deemed appropriate for the
prevention, detection and minimization of fraud, theft and errors, they may
result in only limited assurances, at best, that the total objectives of the
control system are met. Due to the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, can be detected and/or prevented and as such
this is a risk area for investors to consider.
Risks
Related to Our Common Stock
Our
common stock is traded on the OTCBB, our stock price is highly volatile, and
you
may not be able to sell your shares of our common stock at a price greater
than
or equal to the price you paid for such shares.
Our
shares of common stock are currently traded on the Over the Counter Bulletin
Board, or OTCBB. Stocks traded on the OTCBB generally have limited trading
volume and exhibit a wide spread between bid and ask quotations. The market
price of our common stock is extremely volatile. To demonstrate the volatility
of our stock price, during the nine-month period ending on September 30, 2006,
the volume of our common stock traded on any given day ranged from 0 to
2,786,900 shares. Moreover, during that period, our common stock traded as
low
as $0.21 per
share
and as high as $0.46 per share, a 119% difference. This may impact an investor’s
decision to buy or sell our common stock. As of September 30, 2006 there were
approximately 5,200 holders of our common stock. Factors affecting our stock
price include:
|
|
·
|
fluctuations
in our operating results;
|
|
|
·
|
announcements
of technological innovations or new commercial health care products
or
therapeutic products by us or our competitors;
|
|
|
·
|
developments
in patents or other intellectual property rights;
|
|
|
·
|
developments
in our relationships with customers and potential customers; and
|
|
|
·
|
general
market conditions.
|
Furthermore,
volatility in the stock price of other companies has often led to securities
class action litigation against those companies. Any such securities litigation
against us could result in substantial costs and divert management’s attention
and resources, which could seriously harm our business and financial
condition.
Our
common stock may be subject to “penny stock” rules which may be detrimental to
investors.
Our
common stock may be, or may become, subject to the regulations promulgated
by
the SEC for “penny stock.” SEC regulation relating to penny stock is presently
evolving, and the OTCBB may react to such evolving regulation in a way that
adversely affects the market liquidity of our common stock. Penny stock
currently includes any non-NASDAQ equity security that has a market price of
less than $5.00 per share, subject to certain exceptions. The regulations
require that prior to any non-exempt buy/sell transaction in a penny stock,
a
disclosure schedule set forth by the SEC relating to the penny stock market
must
be delivered to the purchaser of such penny stock. This disclosure must include
the amount of commissions payable to both the broker-dealer and the registered
representative and current price quotations for the common stock. The
regulations also require that monthly statements be sent to holders of penny
stock that disclose recent price information for the penny stock and information
of the limited market for penny stocks. These requirements may adversely affect
the market liquidity of our common stock.
Sales
of our common stock may require broker-dealers to make special suitability
determinations regarding prospective purchasers.
Our
common stock may be, or may become, subject to Rule 15g-1 through 15g-9 under
the Exchange Act, which imposes certain sales practice requirements on
broker-dealers which sell our common stock to persons other than established
customers and “accredited investors” (generally, individuals with a net worth in
excess of $1,000,000 or an annual income exceeding $200,000 (or $300,000
together with their spouses)). For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser’s written consent to the transaction prior to
the sale. Applicability of this rule would adversely affect the ability of
broker-dealers to sell our common stock and purchasers of our common stock
to
sell their shares of such common stock. Accordingly, the market for our common
stock may be limited and the value negatively impacted.
We
will incur expenses in connection with registration of our shares which may
be
significant.
We
are
required to pay fees and expenses incident to the registration with the SEC
of
the shares issued in the private placement of equity which closed on January
6,
2005 and maintain adequate disclosure in connection with such registration,
including updating prospectuses and under certain circumstances, filing amended
registration statements. These expenses were $302,000 in 2005, and we may incur
significant additional expenses in the future related to maintaining effective
registration statements for prior financings and any additional registrations
related to future financings. We have also agreed to indemnify such selling
security holders against losses, claims, damages and liabilities arising out
of
relating to any misstatements or omissions in our registration statement and
related prospectuses, including liabilities under the Securities Act. In the
event such a claim is made in the future, such losses, claims, damages and
liabilities arising therefrom could be significant in relation to our
revenues.
A
large number of additional shares may be sold into the public market in the
near
future, which may cause the market price of our common stock to decline
significantly, even if our business is successful.
Sales
of
a substantial amount of common stock in the public market, or the perception
that these sales may occur, could adversely affect the market price of our
common stock. After our October 25, 2006 debenture and warrant financing, and
assuming the full conversion of the debentures and full exercise of the Series
A, B, C, D and E warrants for the maximum number of shares for which such
warrants are exercisable, we would have approximately [63,890,333] shares of
common stock outstanding. Upon full issuance of these shares of common stock
upon conversion of the debentures and exercise of the warrants, the market
price
of our common stock could drop significantly if the holders of these shares
sell
them or are perceived by the market as intending to sell them.
A
large number of common shares are issuable upon exercise of outstanding common
share warrants and upon conversion of our outstanding debentures. The exercise
or conversion of these securities could result in the substantial dilution
of
your investment in terms of your percentage ownership in OXIS as well as the
book value of your common shares. The sale of a large amount of common shares
received upon exercise of these warrants on the public market to finance the
exercise price or to pay associated income taxes, or the perception that such
sales could occur, could substantially depress the prevailing market prices
for
our shares.
As
of
December 1, 2006, there are outstanding warrants entitling the holders to
purchase up to a maximum of 9,681,840 common shares at an exercise price of
$0.35 per share. In addition, there are outstanding warrants entitling the
holders to purchase up to a maximum of 4,840,740 common shares at an exercise
price of $0.385 per share. There are also debentures outstanding which are
convertible into a maximum of 4,840,740 common shares at a conversion price
per
common share of $0.35 per common share. The exercise price for all of the
aforesaid warrants may be less than your cost to acquire our common shares.
In
the event of the exercise and/or conversion of these securities, you could
suffer substantial dilution of your investment in terms of your percentage
ownership in the company as well as the book value of your common shares. In
addition, the holders of the common share purchase warrants may sell common
shares in tandem with their exercise of those warrants to finance that exercise,
or may resell the shares purchased in order to cover any income tax liabilities
that may arise from their exercise of the warrants.
If
we fail to maintain the adequacy of our internal controls, our ability to
provide accurate financial statements and comply with the requirements of the
Sarbanes-Oxley Act of 2002 could be impaired, which could cause our stock price
to decrease substantially.
We
are
continuing to take measures to address and improve our financial reporting
and
compliance capabilities and we are in the process of instituting changes to
satisfy our obligations in connection with being a public company. We plan
to
obtain additional financial and accounting resources to support and enhance
our
ability to meet the requirements of being a public company. We will need to
continue to improve our financial and managerial controls, reporting systems
and
procedures, and documentation thereof. If our financial and managerial controls,
reporting systems or procedures fail, we may not be able to provide accurate
financial statements on a timely basis or comply with the Sarbanes-Oxley Act
of
2002 as it applies to us. Any failure of our internal controls or our ability
to
provide accurate financial statements could cause the trading price of our
common stock to decrease substantially.
Our
common shares are thinly traded and, if you are a holder of debentures, you
may
be unable to sell at or near ask prices or at all if you need to convert your
debentures into common stock and sell your shares to raise money or otherwise
desire to liquidate such shares.
We
cannot
predict the extent to which an active public market for our common stock will
develop or be sustained. Our common shares have historically been sporadically
or “thinly-traded” on the “Over-The-Counter Bulletin Board,” meaning that the
number of persons interested in purchasing our common shares at or near bid
prices at any given time may be relatively small or non-existent. This situation
is attributable to a number of factors, including the fact that we are a small
company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate
or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price. We cannot give you any assurance
that a broader or more active public trading market for our common stock will
develop or be sustained, or that current trading levels will be sustained.
The
market price for our common stock is particularly volatile given our status
as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share price. The
price at which you convert your debentures into our common stock many be
indicative of the price that will prevail in the trading market. You may be
unable to sell your common stock at or above your purchase price if at all,
which may result in substantial losses to you.
The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and/or thinly traded. As
a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by its shareholders may disproportionately influence the
price of those shares in either direction. The price for its shares could,
for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact
on
its share price. Secondly, an investment in us is a speculative or “risky”
investment due to our lack of revenues or profits to date and uncertainty of
future market acceptance for current and potential products. As a consequence
of
this enhanced risk, more risk-adverse investors may, under the fear of losing
all or most of their investment in the event of negative news or lack of
progress, be more inclined to sell their shares on the market more quickly
and
at greater discounts than would be the case with the stock of a seasoned issuer.
Investors
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse.
Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales
and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups
by
selling broker-dealers; and (5) the wholesale dumping of the same securities
by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect
to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
We
do not anticipate paying any cash dividends.
We
presently do not anticipate that we will pay any dividends on any of our capital
stock in the foreseeable future. The payment of dividends, if any, would be
contingent upon our revenues and earnings, if any, capital requirements, and
general financial condition. The payment of any dividends will be within the
discretion of our board of directors. We presently intend to retain all
earnings, if any, to implement our business plan; accordingly, we do not
anticipate the declaration of any dividends in the foreseeable future.
The
market represented by the OTCBB is limited and the price for our common stock
quoted on the OTCBB is not necessarily a reliable indication of the value of
our
common stock. The following table sets forth the high and low bid prices for
shares of our common stock for the periods noted, as reported on the OTCBB.
Quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
|
YEAR
|
|
PERIOD
|
|
HIGH
|
|
LOW
|
|
|
Fiscal
Year 2004
|
|
|
First
Quarter
|
|
$
|
0.90
|
|
$
|
0.52
|
|
|
|
|
|
Second
Quarter
|
|
$
|
0.84
|
|
$
|
0.45
|
|
|
|
|
|
Third
Quarter
|
|
$
|
0.69
|
|
$
|
0.32
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
0.65
|
|
$
|
0.41
|
|
|
Fiscal
Year 2005
|
|
|
First
Quarter
|
|
$
|
0.57
|
|
$
|
0.28
|
|
|
|
|
|
Second
Quarter
|
|
$
|
0.43
|
|
$
|
0.27
|
|
|
|
|
|
Third
Quarter
|
|
$
|
0.48
|
|
$
|
0.28
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
0.39
|
|
$
|
0.24
|
|
|
Fiscal
Year 2006
|
|
|
First
Quarter
|
|
$
|
0.38
|
|
$
|
0.26
|
|
|
|
|
|
Second
Quarter
|
|
$
|
0.44
|
|
$
|
0.32
|
|
|
|
|
|
Third
Quarter
|
|
$
|
0.36
|
|
$
|
0.21
|
|
| |
|
|
Fourth
Quarter
|
|
$
|
0.28
|
|
$
|
0.18
|
|
Stockholders
As
of
December 1, 2006, we had approximately 44,527,476 shares of common stock issued
and outstanding which were held by approximately 5,200 stockholders, including
approximately 2,200 stockholders who hold their shares in street name. The
transfer agent for our common stock is ComputerShare, whose address is 250
Royall Street, Canton, Massachusetts 02021.
DIVIDEND
POLICY
Our
board
of directors determines any payment of dividends. We utilize our assets to
develop our business and, consequently, we have never paid a dividend and does
not expect to pay dividends in the foreseeable future. Any future decision
with
respect to dividends will depend on future earnings, operations, capital
requirements and availability, restrictions in future financing agreements
and
other business and financial considerations.
BUSINESS
Overview
We
develop technologies and products to research, diagnose, treat and prevent
diseases of oxidative stress associated with damage from free radical and
reactive oxygen species. We derive our revenues primarily from sales of research
diagnostic assays to research laboratories. Our diagnostic products include
approximately 30 research assays to measure markers of oxidative
stress. We
hold
the rights to three therapeutic classes of compounds in the area of oxidative
stress, and have focused our commercialization programs in clinical
cardiovascular markers, including MPO (myeloperoxidase) and GPx (glutathione
peroxidase), as well as a potent antioxidant, Ergothioneine, that may be
appropriate for sale over-the-counter as a dietary supplement. We have acquired
a 51% interest in and has the option to purchase the remaining 49% of BioCheck,
Inc.
Our
majority-held subsidiary, BioCheck, Inc.
is a
leading producer of clinical diagnostic assays, including high quality enzyme
immunoassay research services and immunoassay kits for cardiac and tumor
markers, infectious diseases, thyroid function, steroids, and fertility hormones
designed to improve the accuracy, efficiency, and cost-effectiveness of
in
vitro
(outside
the body) diagnostic testing in clinical laboratories. BioCheck
focuses primarily on the immunoassay segment of the clinical diagnostics market.
BioCheck
offers over 40 clinical diagnostic assays manufactured in its 15,000
square-foot, U.S. Food and Drug Administration, or FDA, certified Good
Manufacturing Practices device-manufacturing facility in Foster City,
California.
We
are
presenting the business descriptions of the parent company OXIS International,
Inc., followed by that of our partial subsidiary, BioCheck, Inc., in separate
sections because currently we own a 51% share of BioCheck.
OXIS
INTERNATIONAL, INC.
OXIS
International, Inc. develops technologies and products to research, diagnose,
treat and prevent diseases of oxidative stress associated with damage from
free
radical and reactive oxygen species. We derive our revenues primarily from
sales
of research diagnostic assays to research laboratories. Our diagnostic products
include approximately 30 research assays to measure markers of oxidative
stress. We
hold
the rights to three therapeutic classes of compounds in the area of oxidative
stress, and have focused our commercialization programs in clinical
cardiovascular markers, including MPO (myeloperoxidase) and GPx (glutathione
peroxidase), as well as a potent antioxidant, Ergothioneine, that may be
appropriate for sale over-the-counter as a dietary supplement. We have acquired
a 51% interest in and have the option to purchase the remaining 49% of BioCheck,
Inc.
Oxidative
stress is associated with an excess of free radicals, reactive oxygen species
and a decrease in antioxidant levels resulting in the development of tissue
or
organ damage. Oxidative stress can cause tissue injury by triggering cell death
or inciting a tissue-damaging inflammatory response. We have invested
significant resources to build a substantial patent position on both our
antioxidant therapeutic technologies and selected oxidative stress assays.
Our
majority-held subsidiary, BioCheck, is
a
leading producer of clinical diagnostic assays, including high quality enzyme
immunoassay research services and immunoassay kits for cardiac and tumor
markers, infectious diseases, thyroid function, steroids, and fertility hormones
designed to improve the accuracy, efficiency, and cost-effectiveness of
in
vitro
(outside
the body) diagnostic testing in clinical laboratories. BioCheck
focuses primarily on the immunoassay segment of the clinical diagnostics market.
BioCheck
offers over 40 clinical diagnostic assays
manufactured in its 15,000 square-foot, U.S. Food and Drug Administration,
or
FDA, certified Good Manufacturing Practices device-manufacturing facility in
Foster City, California.
In
1965,
the corporate predecessor of OXIS, Diagnostic Data, Inc. was incorporated in
the
State of California. Diagnostic Data changed its incorporation to the State
of
Delaware in 1972; and changed its name to DDI Pharmaceuticals, Inc. in 1985.
In
1994, DDI Pharmaceuticals merged with International BioClinical, Inc. and
Bioxytech S.A. and changed its name to OXIS International, Inc. Our principal
executive offices were relocated to 323 Vintage Park Drive, Suite B, Foster
City, California 94404 on February 15, 2006. Our phone number is (650)
212-2568.
Our
lead
therapeutic antioxidant drug candidate, BXT-51072, completed a Phase IIA
clinical trial in inflammatory bowel disease in 1999, but due to the lack of
financial resources, we ceased further testing of BXT-51072. In September 2004,
we entered into an Exclusive Licensing Agreement relating to BXT-51072 and
related compounds with HaptoGuard, Inc., which has since been merged into Alteon
Inc. Under the agreement, we granted HaptoGuard exclusive worldwide rights,
in
certain defined areas of cardiovascular indications, to develop, manufacture
and
market BXT-51072 and related compounds from our library of such antioxidant
compounds. Under the license agreement, HaptoGuard is responsible for worldwide
product development programs with respect to the licensed
compounds.
We
intend
to pursue development of our
MPO,
a
research assay, for sale either alone or in combination with other assays into
the clinical diagnostic market. We are also pursuing development of
Ergothioneine for marketing as a nutraceutical supplement.
As
discussed above, our therapeutic and nutraceutical product portfolio includes
three classes of small molecular weight antioxidant molecules: glutathione
peroxidase mimics including BXT-51072, Ergothioneine analogs and lipid soluble
antioxidants. We intend to focus on and intensify our efforts to consummate
diagnostic, pharmaceutical and nutraceutical relationships and strategic
partnerships with larger companies for the purpose of further developing and
exploiting our antioxidant molecules. No assurance can be given that our efforts
will generate the results anticipated by our management or will in the future
be
favorable to us.
Marketed
Products
We
have
developed, commercialized and marketed an extensive product line that provides
several types of tools for researchers to identify and measure the balance
between oxidative, nitrosative, antioxidant and inflammatory biomarkers in
biological samples. We offer more than 60 research products for sale, including
25 research diagnostic assay test kits for markers of oxidative and nitrosative
stress. We also market antibodies, enzymes and controls for use primarily in
research laboratories. The antibodies provide detection of oxidative,
nitrosative, antioxidant and inflammatory markers different from those measured
by assay test kits. The enzymes have been shown in early in
vitro
studies
and preclinical animal studies to allow manipulation and control of oxidative
biomarkers of protein and DNA, nitric oxide, antioxidant enzymes and
inflammatory neutrophils. Controls have been shown in controlled in
vitro
studies
and in
vivo
preclinical studies to allow regulation and monitoring of oxidative biomarkers
of lipids, proteins and DNA, and nitrosative and antioxidant biomarkers. In
addition, we have marketed the antioxidant Ergothioneine to selected customers
in the cosmetics industry.
Research
Diagnostic Assays
Our
primary research diagnostic assay product line is comprised of approximately
30
assay test kits which measure key markers in free radical biochemistry for
oxidative and nitrosative stress. Specifically, these assays measure levels
of
general and specific antioxidant activity, oxidative alterations to organic
lipid, protein and DNA substrates, and pro-oxidant activation of specific white
blood cells. Fifteen of our research assays were manufactured at our facility
in
Portland, Oregon and with the closing of the Portland facility, the
manufacturing of our research assays was transferred to BioCheck’s Foster City
facility during the first quarter of 2006. As of the date of this prospectus,
BioCheck is manufacturing our research assays under a mutual services agreement
with us. If BioCheck ceased manufacturing our research assays before we engaged
an alternative manufacturer, our business would be adversely affected. Ten
other
research assays are manufactured by third party suppliers pursuant to private
label arrangements.
Our
research diagnostic assay test kits utilize either chemical (colorimetric)
or
immunoenzymatic reactions that can be read using laboratory spectrophotometers
and microplate readers, respectively. We believe our assays offer advantages
over conventional laboratory methods, including ease of use, speed, specificity
and accuracy. Our
research diagnostic assays for markers of oxidative stress are generally
protected by trade secrets, and to some extent, patents. Five U.S. patents
and
eight international patents have been issued with respect to these assays.
The
oxidative stress assays are sold under the registered trademark
“BioxytechÒ.”
We
continue to offer a few proprietary antioxidants and specialty chemicals but
our
product development focus and support are directed at assays, antibodies and
enzymes in the area of oxidative and nitrosative stress.
Revenues
from sales of our research diagnostic assays and Ergothioneine comprised 95%
and
81% of total revenues in 2005 and 2004, respectively.
Ergothioneine
Ergothioneine
is a naturally occurring, water soluble, antioxidant amino acid molecule found
in most animals and plants. It is considered one of the most powerful
antioxidants available. Ergothioneine neutralizes hydroxyl free radicals and
selectively increases the activity of the special antioxidant enzymes. It
increases respiration and oxidation of fat, protects the mitochondria from
damage due to environmental ultraviolet radiation and aids in the detoxification
of the liver. We have developed a proprietary method for producing synthetically
derived L-Ergothioneine in commercial quantities. We hold the patents and patent
applications for the protective effect of Ergothioneine on mitochondria, the
commercial preparation process and the neuroprotectant methods and compositions
of Ergothioneine.
We
sell
Ergothioneine to selected customers as an anti-aging product in skin care
products sold in the cosmetics industry. Sales of Ergothioneine were $18,000
in
2005 and $87,000 in 2004. Sales during 2005 and 2004 were to one customer in
the
cosmetics industry
in
connection with such customer’s marketing campaign of a formulation of cosmetics
which included, among other things, Ergothioneine. We have not received any
indication that additional orders are expected. We can give no assurances that
sales of Ergothioneine to this customer or other cosmetics industry customers
will resume.
Raw
Material Suppliers
During
2005 we purchased raw materials from several suppliers, of whom the top three
comprised 34%, 13% and 12% of our raw materials costs. We believe we could
readily find alternative suppliers, or that we could readily market alternative
products with adequate raw material supply, if necessary. Accordingly, we
believe there is limited risk of over reliance on any supplier.
Marketing
We
market
products and technologies related to oxidative stress. Oxidative stress occurs
as a result of an imbalance between damaging free-radicals and related molecules
and their inactivation by antioxidants. Oxidative stress can cause tissue injury
by triggering cell death or inciting a tissue-damaging inflammatory
response.
During
2005, we continued to market our research diagnostic assay products to
professional scientists in academia, industry and government through our
OXISResearch
catalog. Our marketing program is centered on targeting medical, environmental
and various industry audiences interested in oxidative and nitrosative stress.
Nitrosative stress occurs when the generation of reactive nitrogen species
in a
system exceeds the system’s ability to neutralize and eliminate them. Primary
vehicles for this marketing program include printed literature, the OXISResearch
website and attendance at conferences targeting neuroscience, cancer, cardiac
and nutritional researchers.
Our
assays for markers of oxidative stress are currently being sold both directly
by
us and through a network of distributors to researchers primarily in the United
States, Europe and the Pacific Rim. We estimate that there are more than 10,000
scientists and clinicians who are working directly in research on free radical
biochemistry, and who are potential customers for these research diagnostic
assays. We
continue to seek to strengthen our international distribution network by adding
new distributors around the world. These distributors are primarily focused
on
sales of research products in the life science market. In 2005, 20 distributors
accounted for approximately 53% of our total revenues. Although we have not
recruited distributors for Ergothioneine, we intend to establish and implement
a
plan to do so in the future.
During
2005, approximately 15% of our total revenues were from EMD Biosciences, Inc.,
a
distributor customer located in the United States. We expect revenues from
sales
to EMD Biosciences, Inc. for fiscal year 2006 to be similar to those in 2005.
Foreign
Operations and Export Sales
Revenues
attributed to countries outside the United States based on the location of
customers were:
| |
|
2005
|
|
2004
|
|
|
Japan
|
|
$
|
163,000
|
|
$
|
221,000
|
|
|
France
|
|
|
94,000
|
|
|
145,000
|
|
|
Korea
|
|
|
76,000
|
|
|
43,000
|
|
|
Poland
|
|
|
54,000
|
|
|
28,000
|
|
|
Canada
|
|
|
47,000
|
|
|
31,000
|
|
|
United
Kingdom
|
|
|
47,000
|
|
|
55,000
|
|
|
Other
foreign countries
|
|
|
275,000
|
|
|
282,000
|
|
Revenues
to other foreign countries included sales in more than 30 countries, with no
single country the site of more than $40,000 in annual sales.
Ergothioneine
as a Nutraceutical Supplement
We
believe that our Ergothioneine compound may be well suited for development
as a
nutraceutical supplement that can be sold over the counter and we intend to
pursue the development of Ergothioneine for use in such markets. We have
outsourced the manufacturing of the raw material and we are working to expand
this manufacturing capacity. We are currently testing Ergothioneine produced
in
bulk to ensure that its purity level is acceptable.
Myeloperoxidase
Assay/Cardiovascular Predictor Product
Given
sufficient capital resources, we intend to pursue development of our
myeloperoxidase
assay, or MPO, a research assay, which could be utilized either alone or in
combination with other assays in the clinical diagnostic market. Currently,
biomarkers used for myocardial infarction present significant limitations in
predictive quality due to variability of patient population, the range for
abnormal test results and other factors. In contrast, blood plasma MPO levels,
as measured by our MPO kit using our proprietary monoclonal antibody, appear
to
be a better predictor of patients at risk for cardiac events before they occur,
according to a report in the October 23, 2003 New England Journal of Medicine.
Our MPO assay kit was used in that study to evaluate myeloperoxidase levels
in
604 hospital emergency room patients with chest pain. A single measurement
of
plasma myeloperoxidase using our MPO assay kit was able to identify patients
at
early risk for a heart attack, even when no tissue damage to the heart was
evident. Furthermore, the test independently predicted the risk of a major
cardiac event following the initial visit to the emergency room.
We
have
undertaken collaborative research with selected research scientists on the
development of a cardiovascular predictor product using our
MPO
assay
combined with other assays currently in-house or under development. We
are
reassessing this development program in the context of our partial acquisition
of BioCheck.
Out-Licensed
Technology
Our
lead
therapeutic drug candidate, BXT-51072, is a low molecular weight oral drug
that
mimics the antioxidant enzyme glutathione peroxidase. It directly neutralizes
hydrogen peroxide and appears to protect cells from peroxide mediated damage.
It
also inhibits nucleic transcription and prevents the activation of cytokines,
adhesion molecules and inflammatory enzymes, which are all mediators of
inflammation. We completed a Phase IIA clinical trial in inflammatory bowel
disease with BXT-51072 in 1999. This Phase IIA trial was a multi-center,
nonrandomized, open-label, two-arm study which assessed the safety,
pharmacokinetics, and efficacy of BXT-51072. Due to the lack of financial
resources, we ceased further testing of BXT-51072.
In
September 2004, we entered into an Exclusive License and Supply Agreement
relating to BXT-51072 and related compounds with HaptoGuard, Inc., a New York
based biopharmaceutical company which has since been merged into Alteon Inc.
Under the agreement, we granted HaptoGuard exclusive worldwide rights, in
certain defined areas of cardiovascular indications, to develop, manufacture
and
market BXT-51072 and related compounds from our library of
such
antioxidant compounds. Under the license agreement, HaptoGuard is responsible
for worldwide product development programs with respect to the licensed
compounds. We received an upfront license fee of $450,000, and HaptoGuard is
obligated to pay royalties on net sales of certain licensed products, as well
as
additional fees for the achievement of development milestones in excess of
$21
million if all milestones are met and regulatory approvals are granted. There
can be no assurances that royalty payments will result or that milestone
payments will be realized.
We
have
the right to terminate the license agreement if HaptoGuard fails to pay us
any
required payments under the license agreement or if HaptoGuard fails to comply
with certain development plan and timeline requirements relating to the
development of the licensed compounds. In December 2005, HaptoGuard elected
to
take a one-time six month extension of their obligation to begin Phase II
clinical studies of a licensed product in cardiovascular disease pursuant to
the
development plan timeline. As provided in the license agreement, HaptoGuard
paid
a fee of $100,000 for the extension.
On
July
20, 2006, we entered into an amendment to the exclusive license and supply
agreement originally signed on September 28, 2004 with HaptoGuard. We granted
HaptoGuard three-month extensions to fulfill its obligation to begin Phase
II
clinical trials with a licensed product. HaptoGuard may obtain three such
extensions upon payment of $50,000 for each extension. In addition, we agreed
to
change the timeline for initiation of Phase IIb clinical trials with a licensed
product under the license agreement and agreed to allow the same extension
arrangement for that milestone. We received a $50,000 payment from HaptoGuard
on
July 24, 2006 for the first extension ending on September 30, 2006.
HaptoGuard
may terminate the agreement by providing us with 180 days’ written notice.
Either party may terminate the agreement upon 30 days’ written notice upon
certain events relating to the other party’s bankruptcy, insolvency,
dissolution, winding up or assignment for the benefit of creditors, or upon
the
other party’s uncured breach of any material provision of the agreement.
Otherwise, the license agreement terminates upon the expiration of the
underlying patents relating to the licensed compounds.
Government
Regulation
In
the
United States, our current products and manufacturing practices are not subject
to regulation by the United States Food and Drug Administration, or FDA,
pursuant to the Federal Food, Drug and Cosmetic Act as it relates to research
products. Development, manufacture and marketing of clinical diagnostic products
which we are currently pursuing and therapeutic compounds are regulated by
the
FDA. We believe that we currently are in compliance with all such regulations
and intend that in the future all of our diagnostic and therapeutic developments
will be in compliance with these regulations.
Patents
and Trademarks
We
are
substantially dependent on our ability to obtain and maintain patents and
proprietary rights for our marketed products and to avoid infringing the
proprietary rights of others. We have an extensive portfolio of patents for
diagnostic assays and several series of small molecular weight molecules to
detect, treat and monitor diseases associated with damage from free radicals
and
reactive oxygen species. This portfolio provides opportunities to apply our
technologies to a wide range of diseases and conditions of oxidative
stress.
Currently,
we have 82 currently issued patents or patent applications filed
internationally. We have 51 patents issued by the United States Patent and
Trademark Office and 31 pending patent applications. Patent coverage includes
aspects of all three of our classes of small molecular weight antioxidant
molecules. We
hold
the patents and patent applications for the protective effect of Ergothioneine
on mitochondria, the commercial preparation process and the neuroprotectant
methods and compositions of Ergothioneine. We
have
sublicensed to HaptoGuard, Inc. three patents and one patent application related
to BXT-51072. Our assays for markers of oxidative stress are generally protected
by trade secrets, and to some extent, patents. Five U.S. patents and eight
international patents have been issued with respect to these assays. The
oxidative stress assays are sold under the registered trademark
BioxytechÒ.
Associated foreign patents have been issued in most cases and foreign patent
applications have been filed associated with the listed patents and patent
applications.
Below
we
have listed selected patents and patent applications relating to our core
business including marketed products and sublicenses.
Research
Assay Patents
| · |
U.S.
Patent 5,726,063 issued March 10, 1998 for “Method of Colorimetric
Analysis of Malonic Dialdehyde and 4-Hydroxy-2-Enaldehydes as Indexes
of
Lipid Peroxidation, Kits for Carrying Out Said Method, Substituted
Indoles
for Use in Said Method and their Preparation” will expire on May 6,
2014.
|
| · |
U.S.
Patent 5,543,298 issued August 6, 1996 for “Method for Assaying the SOD
Activity by Using a Self-Oxidizable Compound Necessary for its
Implementation, Self-Oxidizable Compounds and Preparation Thereof” will
expire on August 6, 2013.
|
| · |
U.S.
Patent 6,235,495 issued May 1, 2001 for “Methods for the Quantiation of In
Vivo Levels of Oxidized Glutathione” will expire on November 12,
2019.
|
| · |
U.S.
Patent 5,861,262 issued January 19, 1999 for “Method of the Specific
Immunoassay of Human Plasma Glutathione Peroxidase, Kit for its
Implementation, Oligopeptides and Antibodies Specific for the Method” will
expire on January 19, 2016.
|
| · |
U.S.
Patent 5,817, 520 issued October 6, 1998 for “Spectrophotometric Methods
for Assaying Total Mercaptans, Reduced Glutathione (GSH) and Mercaptans
other than GSH in an Aqueous Medium, Reagents and Kits for Implementing
Same” will expire on December 15,
2012.
|
Ergothioneine
Patents
| · |
U.S.
Patent 5,438,151 issued August 1, 1995 entitled “Process for the
Preparation of Ergothioneine” will expire on February 8,
2014.
|
| · |
U.S.
Patent 6,103,746 issued August 8, 2000 entitled “Methods and Compositions
for the Protection of Mitochondria” will expire on February 19,
2018.
|
| · |
Patent
Application Serial No. 60/367,845 filed March 26, 2002 entitled
“Neuroprotectant Methods, Compositions and Screening Methods
Thereof”.
|
Selected
Licensed BXT-51072 Patents
| · |
U.S.
Patent 5,968,920 issued October 19, 1999 entitled “Novel Compounds having
a Benzoisoelen-Azoline and -Azine Structure, Method for Preparing
Same and
Therapeutic Uses Thereof” will expire on April 7,
2015.
|
| · |
U.S.
Patent 6,093,532 issued July 25, 2000 entitled “Method for Storing a
Biological Organ Transplant Graft Using a Benzisoelen-Azoline or
-Azine
Compound” will expire on April 7,
2015.
|
| · |
U.S.
Patent 5,973,009 issued October 26, 1999 entitled “Aromatic Diselenides
and Selenosulfides, their Preparation and their Uses, more Particularly
their Therapeutic Use” will expire on December 23,
2017.
|
| · |
U.S.
Patent 6,525,040 issued February 25, 2003 entitled “Cyclic Organoselenium
Compounds, their Preparation and their Uses” will expire on December 23,
2017.
|
These
patents can expire earlier if they are abandoned or are not adequately
maintained. We cannot assure you that corresponding patents will be issued
or
that the scope of the coverage claimed in our patent applications will not
be
significantly reduced prior to any patent being issued.
Competition
The
diagnostic, pharmaceutical and nutraceutical industries are highly competitive.
Competition in most of our primary current and potential market areas is intense
and expected to increase. There can be no assurance that we can compete
successfully.
Presently
the main commercial competition in our research assay business is represented
by, but not limited to Cayman Chemical Company, Assay Designs and Randox
Laboratories, Ltd. In addition, our competitors and potential competitors
include large pharmaceutical and nutraceutical companies, universities and
research institutions. These competitors may have substantially greater capital
resources, research and development staffs, facilities and manufacturing
expertise than us. In addition, our competitors may develop new technologies
or
use existing technologies that may be the basis for competitive products.
Employees
As
of
December 31, 2005, we had 11 full time employees. On December 1, 2006, we had
five full time employees,
including one scientist in manufacturing/research and development, one employee
in marketing and three employees in administrative and operational
support.
On
December 6, 2005, we initiated a relocation plan to cease our operations in
Portland, Oregon and relocate to Foster City, California at premises adjacent
to
those of BioCheck. We decided to relocate after reviewing and evaluating all
aspects of our operations to determine the profitability and viability of
continuing in the Portland, Oregon location. As part of the relocation that
was
effective February 15, 2006, we offered all regular full-time employees who
were
not relocated to Foster City, California severance benefits under an employee
incentive package estimated to cost approximately $119,000.
None
of
our employees are subject to a collective bargaining agreement. We believe
our
relationship with our employees is good, and we have never experienced an
employee-related work stoppage.
BIOCHECK,
INC.
On
September 19, 2005, we entered into a stock purchase agreement with
BioCheck and its stockholders to purchase all of its common stock for
$6.0 million in cash. BioCheck is a leading producer of enzyme immunoassay
diagnostic kits for clinical laboratories. On December 6, 2005, we
purchased 51% of the shares of BioCheck’s common stock from each of its
stockholders on a pro rata basis for $3,060,000 in cash. Pursuant to the stock
purchase agreement, we will use our reasonable best efforts to consummate a
follow-on financing transaction to raise additional capital with which to
purchase the remaining outstanding shares of BioCheck in one or more additional
closings.
We
are
presenting the business summaries of the OXIS parent company and BioCheck
separately because we do not currently own 100% of BioCheck. If we successfully
acquire the remaining 49% equity interest in BioCheck by OXIS, the combined
company plans to leverage its expertise to focus on the growing clinical
diagnostic biomarker market and to develop diagnostic assays designed to help
physicians provide more timely and accurate diagnoses and treatment plans for
their patients.
BioCheck
is a
leading producer of clinical diagnostic assays, including high quality enzyme
immunoassay research services and products offering immunoassay kits designed
to
improve the accuracy, efficiency, and cost-effectiveness of in
vitro
(outside
the body) diagnostic testing in clinical laboratories. BioCheck’s mission is to
develop unique, proprietary immunoassays designed to help physicians provide
more timely and accurate diagnoses, prognoses and treatment plans for their
patients.
The
clinical diagnostics market consists of companies that develop and manufacture
a
wide array of instruments, immunoassays reagents and data analysis tools.
Diagnostic instruments are the key hardware components, such as automated
immunoassay analyzers, used in the automatic processing of the diagnostic tests.
Reagents are the bioactive test ingredients which, when combined with the
biologically derived samples, provide the diagnostic test results. The analysis
tools, such as software programs and applications, assist the researchers and
clinicians in the interpretation of data collected from high-volume analyzers
and reagents.
BioCheck
focuses primarily on the immunoassay segment of the clinical diagnostics market.
The simplified, basic components of any immunoassay system are: an antigen,
an
antibody specific to this antigen, and a system to measure the amount of the
antigen in a given sample. The commonly used immunoassays share four common
components required to produce a high quality immunoassay product: a supply
of
high-purity antigens, a supply of high quality, specific monoclonal or
polyclonal antibodies, a stable detection system, and a precise method for
separating the bound detection system at the end of the reaction. The ability
to
develop, isolate and maintain the antibodies is a critical component of
immunoassay technology.
The
senior management of BioCheck has several decades of combined research and
development, clinical and operational experience in the biotechnology and
pharmaceutical industries. BioCheck’s management has a core competency and a
proven scientific and business development track record in developing and
manufacturing high-quality immunoassay products.
Customers
of BioCheck consist of small and medium-sized laboratories, and larger volume
clinical diagnostics laboratories that outsource or license their reagent
assembly to BioCheck under research services agreements. BioCheck’s products are
also sold through its global distribution network of third-party distributors
and re-sellers.
BioCheck’s
clinical immunoassays are applicable to the diagnosis and management of
infectious diseases; detection of certain types of cancer, and cardiac,
reproductive, and thyroid disorders; and the measurement of the effects of
therapeutic drug administration. The testing process is performed in
vitro
in
samples of blood, urine, and other bodily fluids.
Products
and Services
Clinical
Diagnostics Immunoassay
Kits
BioCheck
offers its clinical laboratory and in
vitro
diagnostics customers over 40 clinical diagnostic assays manufactured in its
15,000 square-foot, U.S. Food and Drug Administration, or FDA, certified Good
Manufacturing Practices device-manufacturing facility in Foster City,
California. Of the 40 total clinical diagnostic assays offered by BioCheck,
17
clinical diagnostic assays have been cleared by the FDA for marketing and sales
and a number of its products have FDA certificates to foreign governments and
certificates of exportability. BioCheck’s clinical diagnostic kits have been
registered in Brazil, China, India, Italy, Taiwan, Turkey, and the United
Kingdom, and BioCheck’s distributors deliver its products to countries in
Central and South America, Europe, the Middle East, and Asia.
BioCheck’s
primary product line consists of enzyme linked immunoassay, or ELISA, kits
that
are widely used in medical laboratory settings. An ELISA test consists of
linking an antibody or antigen to an enzyme in order to detect a match between
the antibody and antigen. An ELISA test is used to detect specific antigens
in a
biological sample and the presence of antibodies attached to specific antigenic
sites on proteins or other molecules in a biological sample.
The
primary antibody development platform of BioCheck utilizes hybridoma technology.
This process creates monoclonal antibodies to precisely measure very low
concentrations of proteins in blood and plasma. The ability to express, isolate
and maintain high-quality antibodies is a critical component of immunoassay
test
kit technology. BioCheck uses standard chromatography technology and its
proprietary antibody conjugation methods for its antibody purification services
and antibody conjugates. We believe that BioCheck’s products and services exceed
industry average standards for stability and purity.
Test
kits
manufactured by BioCheck
identify
the existence, and in some cases the amount, of a specific molecule, or marker,
that is an indicator of a condition or disease state. These test kits are
applicable to cardiac markers; tumor markers for liver, ovarian, breast,
prostate and gastrointestinal conditions; infectious diseases including
pregnancy-related panel screens for toxoplasmosis, rubella, cytomegalovirus,
and
the herpes virus; thyroid function; steroids including
Estradiol, Progesterone, Testosterone, and Estriol; and fertility
hormones.
BioCheck’s
revenues from product shipments were $2.7 million in the nine months ended
September 30, 2006, $3.5 million in 2005, $3.9 million in 2004, and $3.3 million
in 2003.
Research
Services
In
addition to clinical and research assay products, BioCheck provides various
research services to pharmaceutical and diagnostic companies worldwide. Research
services consist primarily of highly specialized laboratory testing that
enhances the speed, and lowers the clinical risk, of the pharmaceutical
development process. The services include custom immunoassay development,
antibody purification and conjugation, and immunoassay assembly.
Custom
Immunoassay Development
- With
over 30 years of experience and the development over 40 immunoassay products,
BioCheck’s in-house research and development team provides antibodies and
antigens, and assists biotechnology and pharmaceutical customers with the
development of their immunoassay test kits.
Antibody
Purification and Conjugation
- Using
chromatography technology and proprietary antibody conjugation methods, BioCheck
offers antibody purification services and antibody conjugates. Stability testing
has indicated that BioCheck’s conjugates remain active for five
years.
Immunoassay
Assembly Services
- Having
developed over 40 immunoassay products, BioCheck has exceptional test kit
packaging experience and can provide custom immunoassay assembly services for
our customers.
Research
Reagents and Assay Kits - BioCheck
currently has several products under development for cancer,
cardiac/inflammatory and angiogenesis research applications. A research
assay and reagents for the detection of HMGA2, a marker for aggressive breast
cancer have been marketed since July 2006. Myeloperoxidase is an
inflammatory protein that has utility as a prognostic marker for cardiac
events. A new myeloperoxidase research assay has been developed that have
resulted in commercial sales in November 2006.
Id
proteins play a central role in cell differentiation, and Id1 and Id3 play
a central and critical role in tumor related angiogenesis. BioCheck has
developed research assays and rabbit monoclonal antibodies for the detection
of
human and mouse Id proteins. These Id protein assays and reagents were available
for commercial launch in the fourth quarter of 2006.
Cardiovascular
Markers
Coronary
heart disease, or CHD, is the most common form of heart disease caused by a
narrowing of the coronary arteries that feed the heart. It is the number one
cause of mortality for both men and women in the U.S. Approximately seven
million Americans suffer from CHD and more than 500,000 Americans die of heart
attacks caused by CHD every year.
The
National Heart, Lung, and Blood Institute sponsored a multi-center epidemiologic
study in 2003. Increased levels of lipoprotein-associated phospholipase, or
Lp-PLA2, in patients followed in this study have been linked to increased risk
of CHD. In collaboration with diaDexus, BioCheck has developed and manufactures
an FDA cleared clinical diagnostic test for Lp-PLA2 called the PLAC test. While
the PLAC test is not a stand-alone test for predicting CHD, it provides
supportive evidence when used with clinical evaluation and other tools for
patient risk assessment. An elevated PLAC level with an LDL-cholesterol level
of
less than 130 mg/dL suggests that patients have two to three times the risk
of
having coronary heart disease when compared with patients having lower PLAC
test
results. BioCheck manufactures the PLAC test and diaDexus promotes and sells
it
to the medical community.
BioCheck’s
revenues from PLAC test manufacturing and services were approximately $350,000
in the nine months ended September 30, 2006, $340,000 in 2005, $580,000 in
2004,
and $470,000 in 2003.
Senior
Management
John
Chen, Ph.D., co-founded BioCheck in January 1997 and has since served as Chief
Executive Officer and Chairman of the Board. He is a biochemist and clinical
chemist with 30 years of research and development and assay development
expertise. Dr. Chen has developed over 50 enzyme immunoassay and rapid tests,
a
number of which have been approved for marketing by the FDA. His technical
expertise in immunology and biochemistry is complemented by his ability to
facilitate technology transfer from research and development to
manufacturing.
Dr.
Chen
co-founded Rapid Diagnostics, Inc. in 1998, specializing in the development
of
rapid diagnostic test kits for the drugs of abuse. The company was acquired
by
ICN Pharmaceuticals, Inc. in 2002.
Prior
to
co-founding BioCheck, Dr. Chen co-founded Medix Biotech, Inc. in 1983,
specializing in monoclonal/polyclonal antibodies, enzyme immunoassay test kits,
and rapid test kits. Following Medix Biotech’s acquisition by Genzyme
Corporation in 1992, Dr. Chen remained as Vice President of Research and
Development until 1995. Between 1981 and 1983, he co-founded Pacific Biotech
Inc. that was subsequently acquired by Eli Lilly and Company in 1990. At Pacific
Biotech, Dr. Chen was instrumental in the development of the first rapid
pregnancy test. He also previously served research scientist roles at Sigma
Chemical, Mallinckrodt, and Beckman Instruments. Dr. Chen holds a B.S. in
Chemistry from Tunghai University in Taiwan and a Ph.D. in Biochemistry from
the
University of Alberta, Edmonton, Canada.
Effective
December 6, 2005 and in connection with our acquisition of a 51% majority
stake in BioCheck, Dr. Chen entered into an executive employment agreement,
under which Dr. Chen became employed as President of BioCheck. Dr. Chen has
agreed to devote not less than 90% of his business time and efforts to the
primary business of BioCheck. In the event that BioCheck terminates the
employment of Dr. Chen at any time other than for cause, Dr. Chen will receive
an amount equal to 12 months of his then-current base salary.
Patents
and Trademarks
As
of
December 31, 2005, BioCheck had filed two patent applications covering research
and diagnostic assays to detect molecules and proteins related to tumor
angiogenesis and certain cardiac conditions. Angiogenesis is the formation
of
blood vessels in tumors.
In
April
2004, AngioGenex,
Inc., or AngioGenex, based in New York City,
and
BioCheck entered into an agreement to develop cancer diagnostic and prognostic
products based on the Id-gene platform technology licensed exclusively to
AngioGenex by the Albert Einstein College of Medicine and the Memorial Sloan
Kettering Cancer Center. The
agreement assigns to BioCheck exclusive rights to develop and market diagnostics
based on AngioGenex’s Id technology in return for royalties.
A
critical component of the clinical validation of an Id-protein based
diagnostic/prognostic product is the development of monoclonal antibodies,
or
mAbs, to the Id proteins. Id proteins play a significant role in the process
of
tumor related angiogenesis and other functions related to blood vessel
formation. BioCheck has developed rabbit monoclonal anti-Id1, Id2 and Id3
antibodies for Western Blot analyses and immunohistochemistry staining, and
ELISA tests for measuring Id1, Id2 and Id3 in cell culture supernatants, and
cell and tissue extracts.
AngioGenex
and BioCheck have filed joint patent applications for the mAbs to the
Id-proteins.
Under
the joint patent application, BioCheck has the exclusive rights to the
diagnostic applications of the Id proteins while AngioGenex owns the rights
for
the therapeutic drug applications. U.S. Provisional Application Serial No.
60/691,060 was filed on June 16, 2005 related to the Id1 protein, titled “Novel
Rabbit Monoclonal Antibodies to Id1”. The patent application related to the Id3
protein, titled “Rabbit Monoclonal Antibody Against Human Id3 Protein” was filed
on January 27, 2006.
BioCheck
has filed a patent application for a clinical diagnostic related to the
troponin protein
complex. Certain types of troponin including cardiac troponin I and T are highly
sensitive and specific indicators of damage to the heart muscle. Myocardial
infarction, or a heart attack, can be differentiated from unstable angina,
or
pain, by measuring troponin in the blood in patients with chest pain. Patent
application serial number 11/116,290 was filed April 28, 2005 titled
“Immunoassay for Cardiac Troponin-I in Non-Human Mammalian Species.” John Chen
is a co-inventor of the invention that is the subject of this patent
application.
Sales
and Marketing
BioCheck
develops, manufactures and markets high quality immunoassay products and
technologies designed to improve the accuracy, efficiency, and
cost-effectiveness of in
vitro
diagnostic testing in clinical laboratories. The company also provides research
services to pharmaceutical and diagnostic companies worldwide. These services
consist primarily of highly specialized laboratory testing that enhances the
speed and lowers the clinical risk of the pharmaceutical development process.
During
2005, BioCheck marketed its products and research services to professional
clinicians and researchers primarily through the company’s product catalog,
printed materials, website and attendance at key industry tradeshows and
conferences. A portion of BioCheck’s 2005 sales volume was also generated
through referrals from existing customers. BioCheck’s products are sold directly
to customers and through a network of international distributors, who deliver
its products to purchasers in North, Central and South America, Europe, the
Middle East, and Asia. BioCheck does not plan to establish an in-house sales
force to distribute its products.
In
2005,
the top twenty direct customers accounted for approximately 67% of BioCheck’s
gross sales revenue and no single customer accounted for more than 15% of total
gross sales revenue. BioCheck is seeking to identify and secure additional
opportunities for research services agreements.
Competition
According
to Boston Biomedical Consultants and Morgan Stanley Research Estimates, the
worldwide clinical diagnostics market including instruments, immunoassays,
rapid
diagnostic tests and data analysis tools was approximately $22
billion in
sales
revenue in 2004 and increased approximately 9% from the previous year.
Competition in the clinical diagnostics market is intense and highly fragmented,
with the largest competitor, Roche Diagnostics, holding a 16% market share.
BioCheck’s
direct competitors are developers and manufacturers of research and clinical
diagnostic products and include, but are not limited to, Adaltis Inc., BioSource
International, Inc., Diagnostic Products Corporation, Monobind, Inc. and
BioClone Australia Pty Ltd.
In
order
to continue to successfully market BioCheck’s products and services, the company
will be required to demonstrate that its immunoassay products meet or exceed
the
industry standards for quality as measured by high levels of purity, stability,
precision of measurement and cost effectiveness. The company’s competitors may
succeed in developing or marketing products that are more effective or
commercially attractive. The launch of these competitive products may adversely
impact the market pricing for BioCheck’s products as some of these competitors
have substantially greater financial, technical, research and development
resources and more established marketing, sales, distribution and service
organizations.
Raw
Material Suppliers
The
development and production of BioCheck’s products requires the company to
purchase bulk quantities of antibodies,
enzymes, microtiter plates and serum from outside vendors. BioCheck does not
rely on any single supplier for its raw material purchases.
Research
and Development
BioCheck
invested $432,000, $726,000 and $839,000 in research and development in the
nine
months ended September 30, 2006, and the years 2005 and 2004, respectively.
As
of December 31, 2005, BioCheck employed seven employees in research and
development. During 2005, BioCheck’s research staff was primarily used to
produce compounds for diagnostic use and optimize methods for binding these
compounds to biological reagents such as antibodies. BioCheck employs a
proprietary process for antibody conjugation resulting in highly stable
products. BioCheck also developed proprietary clinical diagnostics tests
that
include promising new angiogenesis tumor markers and an aggressive breast
cancer
marker, which were launched in the fourth quarter of 2006.
Angiogenesis
Tumor Markers
In
April
2004, BioCheck entered into a development and marketing agreement with
AngioGenex for the diagnostic/prognostic applications of Id proteins in
angiogenesis, which is the formation of blood vessels. The therapeutic and
diagnostic applications of this process were patented by Memorial
Sloan-Kettering Cancer Center and Albert Einstein Medical College and licensed
to AngioGenex. The diagnostic application was subsequently licensed to BioCheck.
Id
genes
are expressed at high levels to produce Id proteins in many tissues during
human
embryonic development, but are generally not expressed, or expressed at very
low
levels, in adults except in some tumor cell types and tumor blood vessels.
Id1,
Id2 and Id3 proteins have been closely implicated in tumor-associated
angiogenesis. Interfering with the action of the Id proteins may prove to be
very effective in preventing the growth and metastases of both early and
established tumors. The effectiveness of this approach has been demonstrated
in
commercially available therapeutic drugs, such as Avastin™, which targets the
vascular endothelial growth factor. Such therapeutics have been modestly
effective, suggesting the need for research and development to identify more
powerful and specific agents for cancer therapy.
BioCheck’s
goal is to clinically validate an Id-based diagnostic/prognostic product in
collaboration with AngioGenex. During
2005, BioCheck’s research staff continued to work on the clinical validation of
potential diagnostic products based on Id proteins related to tumor
angiogenesis. Monoclonal
antibodies to the Id proteins are required
in order
to develop highly
sensitive ELISA diagnostic and prognostic tests. BioCheck has developed rabbit
monoclonal anti-Id1, Id2 and Id3 antibodies that can be used in cell and tissue
extracts through commonly utilized detection methods including Western Blot
analysis, immunohistochemistry staining and ELISA tests. Western Blot
analysis
is a
method of separating proteins by mass through a gel based process.
Immunohistochemistry staining is a process
of localizing proteins in cells by tagging their respective antibodies with
color producing tags.
ELISA
tests are used for measuring the amount of Id1, Id2 and Id3 proteins in cell
culture supernatants, and cell and tissue extracts.
Aggressive
Breast Cancer Marker
In
2005,
BioCheck entered into a development and marketing agreement with HMGene, Inc.,
or HMGene, based in Piscataway, New Jersey for the development and manufacturing
of an ELISA test for the HMGA2 gene. The HMGA2 gene has been implicated in
aggressive forms of breast cancer. The detection technology for tissue staining
and peripheral blood samples related to the HMGA2 gene has been patented by
HMGene and licensed to BioCheck for the development of rabbit polyclonal and
monoclonal anti-HMGA2 antibodies. These antibodies can be used for Western
Blot
analyses, immunohistochemistry staining and ELISA assays.
While
we
believe that these are potentially promising diagnostic products, no assurances
can be given that the company will have sufficient funding and resources to
continue research, development and commercialization of these technologies.
Employees
As
of
December 1, 2006, BioCheck employed 25 full-time employees, including 13
technicians in manufacturing, seven scientists and research associates in
research and development, two specialists in quality control functions, and
three professionals in administrative and operational support.
Facilities
On
December 6, 2005 we purchased 51% of BioCheck and initiated a transition plan
to
consolidate all operations at BioCheck’s manufacturing facility. Consequently,
during 2006, we entered into a three-year lease agreement commencing
on April 1, 2006 for
4,136
square feet of space immediately adjacent to BioCheck at 323 Vintage Park Drive,
Suite B, Foster City, CA 94404. These
premises serve to accommodate the relocation and consolidation of our corporate
headquarters and operations.
BioCheck
occupies approximately 15,000 square feet of administrative, laboratory and
manufacturing space located at Vintage Park, 323 Vintage Park Drive, Foster
City, CA 94404, pursuant to a lease expiring in December 2008. The facility
has
been certified according to the U.S. Food and Drug Administration, or FDA,
Good
Manufacturing Practice standards, which are subject to annual audits by the
FDA.
In addition, the facility has been certified to meet the highest international
manufacturing standard (ISO 13485) generally accepted in Europe and Asia,
according to the International Organization for Standardization, or ISO.
BioCheck believes that it is in compliance with all other regulatory
certifications applicable to its line of business, including Device
Manufacturing License for the state of California, Registration of Device
Establishment, Certificate of Foreign Government and Certificate of
Exportability.
LEGAL
PROCEEDINGS
A
member
of our board of directors, Steven T. Guillen, who was terminated from his
position as our President and Chief Executive Officer on September 15, 2006,
filed a lawsuit against us and up to 25 unnamed additional defendants. To the
date of this prospectus, the complaint has not been served upon us or any other
defendant. The complaint alleges breaches of contract relating to Mr. Guillen’s
employment agreement and a promissory note that is in default, breach of implied
covenant of good faith and fair dealing, wrongful termination and violation
of
the California Labor Code in relation to the non-payment of back pay. On March
10, 2006, we received $200,000 in exchange for an unsecured promissory note
with
Mr. Guillen. Interest and principal were due on September 10, 2006 and at
September 30, 2006 were in default. On November 2, 2006, we repaid Mr. Guillen
the principal and accrued interest due on the promissory note in the amount
of
$209,000 and back pay with penalties and accrued interest of $96,000. We are
in
ongoing negotiations with Mr. Guillen’s counsel to settle the lawsuit.
Other
than Mr. Guillen, no other director, officer or affiliate of ours, and no owner
of record or beneficial owner of more than five percent (5%) of the securities
of the Company, or any associate of any such director, officer or security
holder is a party adverse to us or any of our subsidiaries or has a material
interest adverse to us or any of our subsidiaries in reference to pending
litigation.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The
following discussion and analysis or plan of operation should be read in
conjunction with the financial statements and related notes. This discussion
contains forward-looking statements based upon our current expectations and
involves risks and uncertainties. Our actual results and the timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in “Risks
Related to Our Business,” “Business” and elsewhere in this document. See the
paragraphs following the heading “Forward-Looking Statements” for additional
discussion.
Management’s
Discussion and Analysis or Plan of Operation is based on our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States.
Introduction
We
incurred net losses of $3.1 million in 2005 and $2.7 million in 2004.
BioCheck generated a net profit of $0.2 million in 2005. This amount of
profit would not be enough to offset our current losses. Our 2005 net loss
includes an expense of $1.5 million for purchased in-process research and
development that is not anticipated to reoccur in 2006. We incurred net losses
of $1.9 million in the nine months ended September 30, 2006. Our plan is to
increase revenues to generate sufficient gross profit in excess of selling,
general and administrative, and research and development expenses in order
to
achieve profitability. However, we can not assure you that we will accomplish
this task and there are many factors that may prevent us from reaching our
goal
of profitability.
On
a
consolidated basis, we had cash and cash equivalents of $614,000 at December
31,
2005 of which $282,000 was held by BioCheck. The cash held by us of $332,000
at
December 31, 2005 was not sufficient to sustain our operations through the
first
quarter of 2006 without additional financings. During March 2006, we received
$200,000 from Steven T. Guillen, our President and Chief Executive Officer
in
exchange for a promissory note and we entered into a Promissory Note, or Note,
with Fagan Capital, Inc., pursuant to which Fagan Capital loaned us
$400,000.
On
a
consolidated basis, we had cash and cash equivalents of $677,000 at September
30, 2006, of which $656,000 was held by BioCheck. Since BioCheck has been and
is
expected to continue to be cash flow positive, management believes that
BioCheck’s cash will be sufficient to sustain BioCheck’s operating
activities.
We
had
cash and cash equivalents of $21,000 at our parent level at September 30, 2006.
We cannot access the cash held by our majority-held subsidiary, BioCheck, to
pay
for our parent level operating expenses. We incurred negative operating cash
flows of $0.5 million during the nine months ended September 30, 2006 and $2.1
million during 2005, at our parent level. We incurred negative operating cash
flows of $0.9 million during the nine months ended September 30, 2006 at our
parent level. The current rate of cash usage at our parent level raises
substantial doubt about our ability to continue as a going concern, absent
any
new sources of significant cash flows. In an effort to mitigate this near-term
concern, we obtained debt financing in which we received proceeds of $1,350,000
subsequent to September 30, 2006 and we are seeking additional equity financing
to obtain sufficient funds to sustain operations and purchase the remaining
49%
of BioCheck for approximately $3.0 million. From this debt financing, $635,000
was used to repay existing debt, accrued interest and related legal fees. We
plan to increase revenues by introducing new products. However, we cannot
provide assurance that we will successfully obtain equity financing, if any,
sufficient to finance our goals or that we will increase product related
revenues. Our financial statements do not include any adjustments relating
to
the recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event that we
cannot continue in existence.
Overview
OXIS
International, Inc. develops technologies and products to research, diagnose,
treat and prevent diseases of oxidative stress associated with damage from
free
radical and reactive oxygen species. We derive our revenues primarily from
sales
of research diagnostic assays to research laboratories. Our diagnostic products
include approximately 30 research assays to measure markers of oxidative
stress. We
hold
the rights to three therapeutic classes of compounds in the area of oxidative
stress, and have focused our commercialization programs in clinical
cardiovascular markers, including MPO (myeloperoxidase) and GPx (glutathione
peroxidase), as well as a potent antioxidant, Ergothioneine, that may be
appropriate for sale over-the-counter as a dietary supplement. OXIS has acquired
a 51% interest in and has the option to purchase the remaining 49% of BioCheck,
Inc., or BioCheck.
Our
majority-held subsidiary, BioCheck, Inc.
is a
leading producer of clinical diagnostic assays, including high quality enzyme
immunoassay research services and immunoassay kits for cardiac and tumor
markers, infectious diseases, thyroid function, steroids, and fertility hormones
designed to improve the accuracy, efficiency, and cost-effectiveness of
in
vitro
(outside
the body) diagnostic testing in clinical laboratories. BioCheck
focuses primarily on the immunoassay segment of the clinical diagnostics market.
BioCheck
offers over 40 clinical diagnostic assays manufactured in its 15,000
square-foot, U.S. Food and Drug Administration, or FDA, certified Good
Manufacturing Practices device-manufacturing facility in Foster City,
California.
Current
significant financial and operating events and strategies are summarized as
follows:
Relocation
of Operations
On
December 6, 2005, we initiated a relocation plan to cease our operations in
Portland, Oregon and relocate to Foster City, California. We decided to relocate
after reviewing and evaluating all aspects of our operations to determine the
profitability and viability of continuing in the Portland, Oregon location.
During February 2006, we signed a lease agreement for approximately
4,000 square feet of space located immediately adjacent to those of BioCheck
and
relocated our manufacturing operations to Foster City, California.
On
February 15, 2006, we ceased operations at the Portland, Oregon facility and
most of the Portland, Oregon employees were terminated. In connection with
the
relocation, we accrued $119,000 during 2005 for employee severances offered
to
all regular full-time employees who were not relocated to Foster City,
California. Of this amount, $103,000 has been paid during the first nine months
of 2006, resulting in $16,000 of accrued expenses at September 30, 2006. We
expect $8,000 of this amount to be paid during the remainder of 2006 and $8,000
is to be paid during 2007.
Product
Development
During
the nine months ended September 30, 2006, we expanded our product portfolio
of
research assay kits for the research markets with the addition of eight new
assay products. Given the availability of sufficient capital resources, we
plan to pursue the development of cardiac markers. We are planning to
expand our cardiovascular and inflammatory products through the combination
of
our myeloperoxidase, or MPO, assay with other in-house assays and new assays
in
development. We also believe that our Ergothioneine compound may be well
suited for development as a nutraceutical supplement that can be sold over
the
counter. We are currently testing Ergothioneine produced in bulk to ensure
that its purity level is acceptable. Given the availability of sufficient
capital resources and the successful scale-up to a bulk manufacturing process
that ensures an acceptable level of purity, we intend to pursue the development
of Ergothioneine for use in the over the counter market, however, there can
be
no assurance as to when or if we will launch Ergotheioneine on a commercial
basis as a nutraceutical.
BioCheck
currently has several products under development for cancer,
cardiac/inflammatory and angiogenesis research applications. A research
assay and reagents for the detection of HMGA2, a marker for aggressive breast
cancer, are under development. Myeloperoxidase is an inflammatory
protein that has utility as a prognostic marker for cardiac events. A new
myeloperoxidase research assay has been developed that we expect will result
in
commercial sales in the fourth quarter of 2006.
Id
proteins play a central role in cell differentiation, and Id1 and Id3 play
a central and critical role in tumor related angiogenesis. BioCheck has
developed research assays and rabbit monoclonal antibodies for the detection
of
human and mouse Id proteins. We currently expect that the Id protein assays
and
reagents will be ready for commercial launch by late 2006.
Loans
and Warrants
On
December 6, 2005, we entered into a non-revolving one-year loan agreement with
KeyBank, N.A., or KeyBank, and received funds of $3,060,000 to purchase 51%
of
BioCheck’s common stock. As security for our repayment obligations, we granted a
security interest to KeyBank in our $3,060,000 certificate of deposit at
KeyBank. This loan was repaid during February 2006 and a new one-year loan
agreement for $3,060,000 was entered into with Bridge Bank. As part of the
loan
arrangement with Bridge Bank, we granted a security interest in a $3,060,000
certificate of deposit moved from KeyBank to Bridge Bank. The loan bears
interest at 3.0% and the certificate of deposit bears interest at
1.0%.
On
March
10, 2006, we received $200,000 in exchange for an unsecured promissory note
with
Steven T. Guillen, our president and chief executive officer at that time.
The
related party note bears interest at 7.0%. Interest and principal were due
on
September 10, 2006. Mr. Guillen’s employment was terminated on September 15,
2006. We were in default on this note at September 30, 2006. Subsequent to
September 30, 2006, Mr. Guillen has sued the Company for payment of interest
and
principal due under the note. On November 2, 2006, the Company paid to Mr.
Guillen amounts owing under the note.
On
March
31, 2006, we issued a $400,000 unsecured promissory note to Fagan Capital,
Inc.,
or Fagan Capital. Interest accrues at an annual rate of 8.0% and interest and
principal were due on June 2, 2006. On July 26, 2006, Fagan Capital extended
the
maturity date of the promissory note to June 1, 2007 and we issued to Fagan
Capital a warrant to purchase 1,158,857 shares of common stock at an initial
exercise price of $0.35 per share. On October 25, 2006, the Company prepaid
the
principal, accrued interest and legal fees due pursuant to the Renewal Note
in
the amount of $426,000 and the Company undertook to finalize a registration
rights agreement covering the shares underlying the common stock purchase
warrant within 7 days of the prepayment of the Renewal Note. See Notes 3 and
7
to the unaudited consolidated financial statements for the nine months ended
September 30, 2006, included in this prospectus. The purpose of these loans
was
to provide us with short term financing as we sought longer term
financing.
Debt
Financing
On
October 25, 2006, we entered into a Securities Purchase Agreement, or Purchase
Agreement, with four accredited investors, or the Purchasers. In conjunction
with the signing of the Purchase Agreement, we issued Secured Convertible
debentures, or debentures, and Series A, B, C, D, and E common stock warrants,
and we also provided the investors with registration rights under a registration
rights agreement, and a security interest in our assets under a security
agreement to secure the performance of our obligations under the debentures.
Pursuant
to the terms of the Purchase Agreement, we issued the debentures in an aggregate
principal amount of $1,694,250 to the Purchasers. The debentures were issued
with an original issue discount of 20.318%, and resulted in proceeds to us
of
$1,350,000. The debentures are convertible, at the option of the holders, at
any
time into shares of common stock at $0.35 per share, as adjusted in accordance
with a full ratchet anti-dilution provision (referred to in this prospectus
as
the “conversion price”). Beginning on the first of the month following the
earlier of the effective date of the registration statement to be filed pursuant
to the registration rights agreement and February 1, 2007, we will amortize
the
debentures in equal installments on a monthly basis resulting in a complete
repayment by the maturity date (the “Monthly Redemption Amounts”). The Monthly
Redemption Amounts can be paid in cash or in shares, subject to certain
restrictions. If we choose to make any Monthly Redemption Amount payment in
shares of common stock, the price per share is the lesser of the conversion
price then in effect and 85% of the weighted average price for the ten trading
days prior to the due date of the Monthly Redemption Amount.
The
performance of our duties and obligations under the debentures are secured
by
substantially all of our assets under a security agreement. As additional
security to the debenture holders, we have also pledged the shares we hold
in
our subsidiaries, including 51% of BioCheck, Inc., and all of the shares of
capital stock of our wholly-owned subsidiaries, OXIS Therapeutics, Inc. and
OXIS
Isle of Man Limited. In addition, OXIS Therapeutics, Inc. and OXIS Isle of
Man
Limited, have each entered into a subsidiary guarantee under which these
subsidiaries have guaranteed the performance, at the parent level, of our
obligations under the debentures.
Under
the
debentures, we agreed that we will not incur additional indebtedness for
borrowed money, other than our current Bridge Bank Promissory Note. We also
covenant that we will not pledge, grant or convey any new liens on its assets.
The obligation to pay all unpaid principal will be accelerated upon an event
of
default, including upon failure to perform its obligations under the Debenture
covenants, failure to make required payments, default on any of the Transaction
Documents or any other material agreement, lease, document or instrument to
which we are obligated, the bankruptcy of OXIS or related events. The Purchasers
have a right of first refusal to participate in up to 100% of any future
financing undertaken by us until the later of the date that the debentures
are
no longer outstanding and the one year anniversary of the effective date of
the
registration statement. We are restricted from issuing shares of common stock
or
instruments convertible into common stock for 90 days after the effective date
of the registration statement with certain exceptions. We are also prohibited
from effecting any subsequent financing involving a variable rate transaction
until such time as no Purchaser holds any of the debentures. In addition, until
such time as any Purchaser holds any of the securities issued in the Debenture
transaction, if we issue or sell any common stock or instruments convertible
into common stock which a Purchaser reasonably believes is on terms more
favorable to such investors than the terms pursuant to the Transaction
Documents, we are obligated to amend the terms of the Transaction Documents
to
such Purchaser the benefit of such better terms. We may prepay the entire
outstanding principal amount of the debentures, plus accrued interest and other
amounts payable, at our option at any time without penalty, provided that a
registration statement is available for the resale of shares underlying the
debentures and warrants, as more fully described in the debentures. The purpose
of this Debenture transaction is to provide us with intermediate term financing
as we seek longer term financing.
On
October 25, 2006 in conjunction with the signing of the Purchase Agreement,
we
issued to the Purchasers five year Series A warrants to purchase an aggregate
of
2,420,357 shares of common stock at an initial exercise price of $0.35 per
share, one year Series B warrants to purchase 2,420,357 shares of common stock
at an initial exercise price of $0.385 per share, and two year Series C warrants
to purchase an aggregate of 4,840,714 shares of common stock at an initial
exercise price of $0.35 per share. In addition, we issued to the Purchasers
Series D and E warrants which become exercisable on a pro-rata basis only upon
the exercise of the Series C warrants. The six year Series D warrants to
purchase 2,420,357 shares of common stock have an initial exercise price of
$0.35 per share. The six year Series E warrants to purchase 2,420,357 shares
of
common stock have an initial exercise price of $0.385 per share. The initial
exercise prices for each warrant are adjustable pursuant to a full ratchet
anti-dilution provision and upon the occurrence of a stock split or a related
event.
Pursuant
to the registration rights agreement, we must file a registration statement
covering the public resale of the shares underlying the Series A, B, C, D and
E
warrants and the debentures within 45 days of the closing of the transaction
and
cause the registration to be declared effective within 120 days of the closing
date. Cash liquidated damages equal to 2% of the face value of the debentures
per month are payable to the purchasers for any failure to timely file or obtain
an effective registration statement.
Under
the
security agreement, we agreed to grant to each of the investors a security
interest in substantially all of our assets. We also agreed to pledge our
respective ownership interests in our wholly-owned subsidiaries, OXIS
Therapeutics, OXIS Isle of Man, and our partial subsidiary, BioCheck, Inc.
OXIS
Therapeutics and OXIS Isle of Man also provided a subsidiary guarantee to the
Purchasers in connection with the transaction.
Stockholder
Approval
On
August
1, 2006, at the OXIS 2006 Annual Meeting of Stockholders, the five nominated
directors were re-elected, the proposal to amend the Company’s Certificate of
Incorporation to increase the number of authorized shares of common stock from
95,000,000 to 150,000,000 was approved, and the proposal to increase the number
of shares reserved for issuance under the OXIS 2003 Stock Incentive Plan from
3,600,000 shares to 5,600,000 shares was also approved by the
stockholders.
License
Agreement Extension
On
July
20, 2006, we entered into an amendment to the exclusive license and supply
agreement originally signed on September 28, 2004 with HaptoGuard, Inc., which
has since been merged into Alteon Inc. We granted HaptoGuard three-month
extensions to fulfill its obligation to begin Phase II clinical trials with
a
licensed product. HaptoGuard may obtain three such extensions upon payment
of
$50,000 for each extension. In addition, we agreed to change the timeline for
initiation of Phase IIb clinical trials with a licensed product under the
license agreement and agreed to allow the same extension arrangement for that
milestone. We received a $50,000 payment from HaptoGuard on July 24, 2006 for
the first extension ending on September 30, 2006.
Agreements
with Ambient Advisors LLC
On
May
12, 2006, we entered into an engagement letter with Ambient Advisors LLC, or
Ambient Advisors. Gary M. Post, a member of the board of directors, is the
manager of Ambient Advisors. Ambient Advisors provided certain services
pertaining to strategic planning, investor communications and financing
strategies and other projects at the request of our chief executive officer
for
a one year period in return for monthly compensation of $5,000. We granted
Ambient Advisors a ten year warrant to purchase 108,000 shares of OXIS common
stock at an exercise price of $0.39 per share, with 9,000 shares becoming
exercisable each month over the term of the agreement. On October 12, 2006,
we
mutually agreed with Gary M. Post to terminate the engagement letter with
Ambient Advisors LLC, effective October 15, 2006, replace it with a new
consulting agreement and accelerate the vesting of the warrant to be fully
vested effective October 15, 2006.
On
November 6, 2006, we entered into an advisory agreement with Ambient Advisors
that commenced retroactively at October 15, 2006, or the Commencement Date.
Ambient Advisors will provide certain services pertaining to strategic planning,
financial planning and budgeting, investor relations, corporate finance and
such
additional roles and responsibilities as requested for a three year period
from
the Commencement Date, after this period on a year-to-year basis. Ambient
Advisors will receive annual compensation in the amount of $83,333, payable
quarterly in advance in cash, common stock based on a price equal to 85% of
average of the five closing prices for the five trading days prior to the date
that the issuance is authorized by the board of directors, or in ten year
warrants equal to that number of warrants equal to 1.5 times the number of
shares that would otherwise be received. For the initial quarterly payment,
Ambient Advisors received a ten year warrant to purchase 173,608 shares of
common stock with an exercise price of $0.20 per share, vesting immediately.
As
part of the compensation, we granted Ambient Advisors a ten year common stock
purchase warrant to purchase 550,000 shares of OXIS common stock at an exercise
price of $0.20 per share, vesting as follows: (i) 275,000 warrant shares vesting
in four equal quarterly installments commencing on January 15, 2007 and every
three months thereafter and (ii) and the remaining 275,000 warrant shares
vesting in eight quarterly installments over two years. Additionally, OXIS
granted Ambient Advisors, as a sign on bonus, a non-qualified option to purchase
333,333 shares at exercise price of $0.20 per share, with vesting in six equal
installments, commencing on November 14, 2006, through the 180th
day
after the Commencement Date. During the three year term of the agreement,
Ambient Advisors will receive an annual bonus based upon the attainment of
agreed upon goals and milestones as determined by the board of directors and
its
compensation committee. During the remainder of calendar year 2006, Ambient
Advisors’ bonus will be pro rated on an annual bonus rate in the range of 25% to
50% of the advisory fee, and the bonus for subsequent years of the term of
the
agreement will be in a similar target range. The bonuses payable hereunder
will
be paid in cash, although at Ambient Advisors’ sole option, they may be paid in
stock (or in the form of ten year warrants with cashless exercise provisions,
with 1.5 times the number of warrant shares to be issued in lieu of the number
of shares of common stock), based upon the average of the closing bid and asked
prices for the 5 trading days immediately prior to the awarding to Ambient
Advisor of the bonus for a particular year.
Appointment
of New President and Chief Executive Officer
On
September 15, 2006, our board of directors appointed Marvin S. Hausman, M.D.
as
President and Chief Executive Officer of OXIS. Dr. Hausman remains the Chairman
of the board of directors.
On
October 12, 2006, we mutually agreed with Marvin S. Hausman, M.D. to terminate
the consulting agreement with NW Medical Research Partners, of which Dr. Hausman
is the sole member and manager, effective October 15, 2006. Under the consulting
agreement dated October 1, 2005, Dr. Hausman provided certain services
pertaining to licensing of intellectual property, development of potential
products, financing activities and other issues at the request of our Chief
Executive Officer. In conjunction with the termination of the consulting
agreement, the board of directors approved the issuance of 330,769 shares of
restricted common stock to Dr. Hausman in lieu of cash payment of $67,000 in
fees and expenses due under the consulting agreement to the date of
termination.
On
November 6, 2006, we entered into an employment agreement with Dr. Hausman
that
commenced retroactively at October 15, 2006. Dr. Hausman will serve as our
President and Chief Executive Officer for a three year period from the
commencement date of October 15, 2006, and after this period on a year-to-year
basis. Dr. Hausman will receive annual compensation in the amount of $250,000,
payable quarterly in advance in cash, common stock based on a price equal to
85%
of average of the five closing prices for the five trading days prior to the
date that the issuance is authorized by the board of directors, or in ten year
warrants equal to that number of warrants equal to 1.5 times the number of
shares that would otherwise be received. For the initial quarterly payment,
Dr.
Hausman was issued 347,222 restricted shares of common stock. During the three
year term of the agreement, Dr. Hausman will receive an annual bonus based
upon
the attainment of agreed upon goals and milestones as determined by the board
of
directors and its compensation committee. During the remainder of calendar
year
2006, Dr. Hausman’s bonus will be pro rated on an annual bonus rate in the range
of 25% to 50% of his base salary, and the bonus for subsequent years of the
term
of the agreement will be in a similar target range. The bonuses payable
hereunder will be paid in cash, although at Dr. Hausman’s sole option, they may
be paid in stock (or in the form of ten year warrants with cashless exercise
provisions, with 1.5 times the number of warrant shares to be issued in lieu
of
the number of shares of common stock), based upon the average of the closing
bid
and asked prices for the 5 trading days immediately prior to the awarding to
Dr.
Hausman of the bonus for a particular year. Once we have raised at least $2.5
million in one or more financings (equity, debt or convertible debt, in addition
to the financing closed on October 25, 2006) or in a strategic transaction,
Dr.
Hausman may elect, at any time, in lieu of receiving a quarterly issuance of
stock (or warrants in lieu thereof), to receive his base salary in cash, payable
monthly on our regular pay cycle for professional employees. As part of the
compensation, we granted Dr. Hausman a ten year a non-qualified option to
purchase 495,000 shares of OXIS common stock at an exercise price of $0.20
per
share, vesting as follows: (i) 247,500 option shares vesting in four equal
quarterly installments commencing on January 15, 2007 and every three months
thereafter and (ii) and the remaining 247,500 option shares vesting in eight
quarterly installments over two years. Additionally, we granted Dr. Hausman,
as
a sign on bonus, 500,000 restricted shares of common stock and a ten year common
stock purchase warrant to purchase 1,505,000 shares at an exercise price of
$0.20 per share, with vesting in six equal installments, commencing on November
14, 2006, through the 180th
day
after the Commencement Date.
We
are
providing Dr. Hausman with an annual office expense allowance of $50,000, for
the costs of maintaining an office in the Stevenson, Washington area, payable
quarterly in advance in the form of common stock, at a price equal to 85% of
the
market price. For the first installment, representing $12,500 of the office
expense allowance, Dr. Hausman was issued 69,444 restricted shares of common
stock. Once we have completed a qualifying financing, the office expense
allowance will be paid in cash in advance, commencing for the quarter next
following the quarter in which the Qualifying Financing occurred. Additionally,
Dr. Hausman will receive family health and dental insurance benefits and
short-term and long-term disability policies.
Consulting
Agreement with John E. Repine, M.D.
On
November 6, 2006, we entered into an consulting agreement with John E. Repine,
M.D. that commenced retroactively at October 15, 2006.
Dr.
Repine will advise us concerning matters of antioxidant and inflammation
research and potential acquisitions (including products/compounds/intellectual
property, companies), product research and development, and the development
and
establishment of reference labs for oxidative stress and inflammatory reactions
for a three year period from the commencement date of October 15, 2006, and
after this period on a year-to-year basis. Dr. Repine will receive annual
compensation in the amount of $36,000, payable quarterly in advance in cash,
common stock based on a price equal to 85% of average of the five closing prices
for the five trading days prior to the date that the issuance is authorized
by
the board of directors, or in ten year warrants equal to that number of warrants
equal to 1.5 times the number of shares that would otherwise be received. For
the initial quarterly payment, Dr. Repine received 50,000 restricted shares
of
common stock. As part of the compensation under the consulting agreement, OXIS
granted Dr. Repine a ten year stock option to purchase 200,000 shares of OXIS
common stock at an exercise price of $0.20 per share, vesting as follows: (i)
100,000 option shares vesting in four equal quarterly installments commencing
on
January 15, 2007 and every three months thereafter and (ii) and the remaining
100,000 option shares vesting in eight quarterly installments over two years.
Additionally, we granted Dr. Repine, as a sign on bonus, a non-qualified option
to purchase 200,000 shares at exercise price of $0.20 per share, with vesting
in
six equal installments, commencing on November 14, 2006, through the
180th
day
after the Commencement Date. During the term of the consulting agreement, Dr.
Repine is eligible to receive annual and special bonuses based upon the
attainment of agreed upon goals and milestones as determined by our Chief
Executive Officer. Each bonus payable will be paid in cash, although at Dr.
Repine’s sole option, such bonus may be paid in stock (or in the form of ten
year warrants with cashless exercise provisions, with 1.5 times the number
of
warrant shares to be issued in lieu of the number of shares of common stock),
based upon the average of the closing bid and asked prices for the 5 trading
days immediately prior to the awarding to Dr. Repine of the particular bonus.
Preferred
Stock Conversion
During
the third quarter of 2005, 85,678 shares of common stock were issued for the
conversion and cancellation of all 428,389 outstanding shares of Series B
Preferred Stock that were valued at $4,000.
Note
Conversion
During
April 2005, 459,355 shares of common stock were issued for cancellation of
a
note payable for $160,000 and accrued interest of $84,000.
Management
Team and Board of Directors
On
February 28, 2005, Steve T. Guillen was appointed as our President and Chief
Executive Officer. Mr. Guillen replaced Marvin S. Hausman, M.D., as acting
Chief
Executive Officer and Dr. Hausman remained as Chairman of the board of
directors. During October 2005 John Repine, M.D., Chief Executive Officer,
President and Scientific Director of the Webb-Waring Institute for Cancer,
Aging
and Antioxidant Research joined our board of directors. Effective
December 6, 2005, Dr. John Chen entered into an executive employment
agreement with us as President of BioCheck. Michael D. Centron was appointed
as
our Vice President and Chief Financial Officer during January 2006, replacing
Dr. Hausman as acting Chief Financial Officer. During February 2006, Randall
Moeckli was appointed as our Senior Director of Sales and Marketing. On March
15, 2006, Gary M. Post, Managing Director of Ambient Advisors, LLC, joined
our
board of directors. Timothy
C. Rodell, M.D., declined to stand for re-election at the Annual Meeting of
Stockholders held on August 1, 2006. On
September 15, 2006, Steven T. Guillen’s employment as the Company’s President
and Chief Executive Officer was terminated. Mr. Guillen remains a member of
the
board of directors. On September 15, 2006, Marvin S. Hausman, M.D., was
appointed by the board of directors as President and Chief Executive Officer
of
the Company. Dr. Hausman remains Chairman of the board of directors. Mr. Centron
resigned as an officer and employee effective November 15, 2006.
Loan
Repayment
On
June 1, 2004, we received $1,200,000 in exchange for a note and entered
into a loan agreement with our majority stockholder, Axonyx, Inc. We repaid
the
note on January 6, 2005.
Common
Stock Issuance
On
December 30, 2004, we sold 12,264,158 shares of common stock and issued warrants
to purchase 12,877,366 shares of common stock for $6,500,000 in a private
placement with net proceeds of $5,818,000 received in December 2004 and January
2005 after expenses and the cost of the related registration statement. The
warrants were issued for the purchase of 6,438,685 shares of common stock at
an
exercise price of $0.66 per share and 6,438,681 shares of common stock at an
exercise price of $1.00 per share.
Acquisition
of BioCheck
On
September 19, 2005, we entered into a stock purchase agreement with BioCheck
and
its stockholders to purchase all of its common stock for $6.0 million in
cash. BioCheck is a leading producer of enzyme immunoassay diagnostic kits
for
clinical laboratories. On December 6, 2005, we purchased 51% of the
shares of BioCheck’s common stock from each of its stockholders on a pro rata
basis for $3,060,000 in cash. This acquisition was accounted for by the purchase
method of accounting according to Statement of Financial Accounting Standards
No. 141, “Business Combinations.” The consolidated statements of operations
include the results of operations of BioCheck from December 6, 2005, the date
of
acquisition, and the consolidated balance sheets include the assets and
liabilities of BioCheck at December 31, 2005 and September 30, 2006.
The purchase price of $3,337,000 was based on cash paid to BioCheck’s
stockholders of $3,060,000, legal expense of $155,000 and a finder’s fee of
$122,000. Pursuant to the stock purchase agreement, OXIS will use its reasonable
best efforts to consummate a follow-on financing transaction to raise additional
capital with which to purchase the remaining outstanding shares of BioCheck
in
one or more additional closings.
We
have
previously disclosed on a Report on Form 8-K filed with the SEC the allocation
of acquisition costs and pro forma financials statements related to the
acquisition of BioCheck that were based on the information available at that
date. The disclosures contained within this prospectus have been presented
with
the information and using estimates currently available. We may obtain
additional independent valuations of BioCheck’s assets related to the
acquisition of the remaining 49% of BioCheck and additional acquisition costs
may be incurred. Such information and costs may affect the disclosures as
presented herein. See Note 2 of the audited consolidated financial statements
for the year ended December 31, 2005 for the allocation of the purchase price
and other information related to the BioCheck acquisition.
Mutual
Services Agreement with BioCheck
On
June
23, 2006, we entered into a mutual services agreement with BioCheck. Each of
OXIS and BioCheck will provide certain services to the other corporation to
be
charged monthly at an hourly rate with an overhead surcharge. The services
that
BioCheck will provide include manufacturing the bulk of our research assay
test
kits, assisting in packaging and shipping such research assay test kits to
our
customers, and undertaking research and development of certain new OXIS research
assay test kits on a case-by-case basis to be agreed upon between the parties.
We will provide services to BioCheck, including marketing and sales, website
management and materials requirement and control systems.
The
agreement terminates on December 6, 2009, or earlier upon mutual consent of
the
parties, upon 90 day prior written notice by either party, by either party
if a
monthly billing is unpaid after 60 days if a 15 day notice and opportunity
to
cure has been provided, or upon a material breach of the Agreement after 30
days’ notice and opportunity to cure the breach. We owe BioCheck approximately
$73,000 for services that BioCheck had provided to us prior to the signing
of
the Agreement, on or before June 30, 2006. We have not made that payment as
of
the date of this prospectus. If we receive written notice of breach of the
agreement due to this non-payment, it will have 15 days to cure that breach.
If
we fails to cure the breach during the cure period, BioCheck would have the
right to terminate the agreement.
Results
of Operations
We
expect
revenues and expenses to increase substantially as described below from 2005
to
2006 with the consolidation of all of BioCheck’s results of operations for the
nine months ended September 30, 2006. BioCheck’s revenues and expenses are not
included in the results of operations for the nine months ended September 30,
2005 because they were incurred before the December 6, 2005 date of
acquisition. Our projections for 2006 are based upon our expectations that
BioCheck will incur similar revenues and costs in 2006 as it incurred in 2005.
We can give no assurances that we will be able to successfully merge
manufacturing operations without adversely affecting revenues and costs,
increase revenues, develop new products, finance our expansion plans and
purchase the remaining 49% of the BioCheck common stock we do not
own.
Revenues
The
following table presents the changes in revenues from 2004 to 2005:
| |
|
|
|
|
|
Increase
(Decrease) from 2004
|
|
| |
|
2005
|
|
2004
|
|
Amount
|
|
%
|
|
|
Product
revenues
|
|
$
|
2,397,000
|
|
$
|
1,914,000
|
|
|
483,000
|
|
|
25
|
%
|
|
License
revenues
|
|
|
100,000
|
|
|
450,000
|
|
|
(350,000
|
)
|
|
(78
|
%)
|
|
Total
revenues
|
|
$
|
2,497,000
|
|
$
|
2,364,000
|
|
$
|
133,000
|
|
|
6
|
%
|
The
increase in product revenues was primarily attributed to increased sales volume
and was comprised of a $272,000 increase in sales to customers within North
America and $275,000 of revenues from the operations of BioCheck since
December 6, 2005, the date of our acquisition of 51% of BioCheck’s
common stock, that was partially offset by a $64,000 decrease in sales to
customers outside of North America. We expect revenues, excluding license
revenues, to increase by approximately $4.0 million from 2005 to 2006 with
the consolidation of BioCheck’s revenues in 2006 over the entire
year.
License
revenues are attributed to an exclusive license agreement with HaptoGuard during
the third quarter of 2004 and an extension of the license agreement during
the
fourth quarter of 2005. See Note 12 to the audited consolidated financial
statements for the year ended December 31, 2005 included in this prospectus.
We
are unable to predict when we will receive additional license revenues, if
any,
because such revenues are dependent upon HaptoGuard successfully receiving
regulatory approval and marketing the licensed product.
The
following table presents the changes in revenues from 2005 to 2006:
| |
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
| |
|
2006
|
|
2005
|
|
Increase
from 2005
|
|
2006
|
|
2005
|
|
Increase
from 2005
|
|
|
Revenues
|
|
$
|
1,512,000
|
|
$
|
532,000
|
|
$
|
980,000
|
|
|
184
|
%
|
$
|
4,381,000
|
|
$
|
1,718,000
|
|
$
|
2,663,000
|
|
|
155
|
%
|
For
the
three months ended September 30, the increase in revenues was primarily
attributable to the consolidation of $1,128,000 of revenues from BioCheck and
$50,000 license fee payment from HaptoGuard that was partially offset by a
$198,000 decrease in sales from the OXIS parent company. For the nine months
ended September 30, the increase in revenues was primarily attributable to
the
consolidation of $3,204,000 of revenues from BioCheck and $50,000 license fee
payment from HaptoGuard that was partially offset by a $591,000 decrease in
sales from the OXIS parent company. The decrease in OXIS parent company sales
is
attributable to lower sales volume that was caused, in part, by the interruption
arising from moving operations from Portland, Oregon to Foster City, California
and consolidating our product offerings. We expect fourth quarter 2006 product
revenues to increase modestly from the third quarter as we introduce new
products such as our improved MPO. We intend to develop new diagnostic test
kits
and evaluate our product offerings, pricing and distribution network with the
plan of increasing sales volume.
Cost
of product revenues
The
following table presents the changes in cost of product revenues from 2004
to
2005:
| |
|
|
|
|
|
Increase
from 2004
|
|
| |
|
2005
|
|
2004
|
|
Amount
|
|
%
|
|
|
Cost
of product revenues
|
|
$
|
1,345,000
|
|
$
|
1,216,000
|
|
$
|
129,000
|
|
|
11
|
%
|
The
increase in cost of product revenues is attributed to $136,000 of costs from
the
operations of BioCheck since December 6, 2005, the date of our
acquisition of 51% of BioCheck’s common stock. Product costs, other than those
for BioCheck, essentially remained the same as our manufacturing facility and
personnel were more efficiently utilized in 2005 than in 2004 which offset
increased material costs. We expect product costs to increase by approximately
$2.0 million from 2005 to 2006 with the consolidation of BioCheck’s cost of
product revenues in 2006 over the entire year. Product costs may increase by
more than $2.0 million if we successfully increase revenues by an amount
greater than the revenues recorded by each individual company in
2005.
Gross
profit of $1,152,000 in 2005 was essentially the same as the gross profit of
$1,148,000 in 2004 because the additional profits from increased product sales
and higher gross profit margins were offset by a $350,000 decrease in license
revenues. Excluding license fee revenues, gross profit as a percentage of
product revenues increased from 36% in 2004 to 44% in 2005 primarily due to
increased sales from 2004 to 2005 with a smaller corresponding increase in
costs
and higher gross profit margins for BioCheck’s clinical products. With the
addition of BioCheck’s revenues in 2006 of $4.0 million that are expected to be
approximately 170% of 2005 revenues, gross profit as a percentage of product
revenues is expected to increase towards 50% as experienced by BioCheck in
2005.
The
following table presents the changes in cost of product revenues from 2005
to
2006:
| |
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
| |
|
2006
|
|
2005
|
|
Increase
from 2005
|
|
2006
|
|
2005
|
|
Increase
from 2005
|
|
|
Cost
of product revenues
|
|
$
|
725,000
|
|
$
|
333,000
|
|
$
|
392,000
|
|
|
118
|
%
|
$
|
2,374,000
|
|
$
|
906,000
|
|
$
|
1,468,000
|
|
|
162
|
%
|
For
the
three months ended September 30, 2006, the increase in cost of product revenues
is attributable to the consolidation of $512,000 of costs from the operations
of
BioCheck that were partially offset by decreased labor and related costs
including contract labor of $86,000 and facility and related costs of $41,000.
For the nine months ended September 30, 2006, the increase in cost of product
revenues is attributable to the consolidation of $1,620,000 of costs from the
operations of BioCheck that were partially offset by decreased labor and related
costs of $115,000 and facility and related costs of $52,000. We expect fourth
quarter 2006 product costs to increase proportionally with any increases in
revenues.
Gross
profit of $787,000 for the three months ended September 30, 2006 was higher
than
the gross profit of $199,000 in the comparable period of 2005 because of the
additional profits from product sales from BioCheck. Gross profit as a
percentage of revenues was 52% in the three months ended September 30, 2006,
as
compared to 37% in the three months ended September 30, 2005. Gross profit
of
$2,007,000 for the nine months ended September 30, 2006 was higher than the
gross profit of $812,000 in the comparable period of 2005 because of the
additional profits from product sales from BioCheck. Gross profit as a
percentage of revenues was 46% in the nine months ended September 30, 2006,
as
compared to 47% in the nine months ended September 30, 2005.
Research
and development expenses
The
following table presents the changes in research and development expenses from
2004 to 2005:
| |
|
|
|
|
|
Increase
from 2004
|
|
| |
|
2005
|
|
2004
|
|
Amount
|
|
%
|
|
|
Research
and development expenses
|
|
$
|
499,000
|
|
$
|
278,000
|
|
$
|
221,000
|
|
|
79
|
%
|
The
increase in research and development expenses from 2004 to 2005 is primarily
attributed to increased patent amortization expense of $49,000, write-off of
abandoned patents of $105,000 and $49,000 of costs from the operations of
BioCheck since December 6, 2005, the date of our acquisition of 51% of
BioCheck’s common stock. We expect to spend approximately $750,000 on research
and development in 2006 primarily at BioCheck. However, the actual amount of
research and development expenses will fluctuate with the availability of
funding.
The
following table presents the changes in research and development expenses from
2005 to 2006:
| |
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
| |
|
2006
|
|
2005
|
|
Increase
from 2005
|
|
2006
|
|
2005
|
|
Increase
from 2005
|
|
|
Research
and development expenses
|
|
$
|
207,000
|
|
$
|
69,000
|
|
$
|
138,000
|
|
|
200
|
%
|
$
|
598,000
|
|
$
|
191,000
|
|
$
|
407,000
|
|
|
213
|
%
|
For
the
three months ended September 30, 2006, the increase in research and development
expenses is primarily attributable to the consolidation of $131,000 of costs
from the operations of BioCheck and increased patent amortization expense of
$23,000. The increase was partially offset by decreased salary and benefits
costs of $8,000. For the nine months ended September 30, 2006, the increase
in
research and development expenses is primarily attributable to the consolidation
of $432,000 of costs from the operations of BioCheck and increased patent
amortization expense of $63,000. The increase was partially offset by decreased
salary and benefits costs of $50,000 and direct project expenses of $23,000.
We
expect fourth quarter 2006 research and development costs to be approximately
the same as the third quarter. However, the actual amount of research and
development expenses will fluctuate with the availability of funding.
Selling,
general and administrative expenses
The
following table presents the changes in selling, general and administrative
expenses from 2004 to 2005:
| |
|
|
|
|
|
Increase
from 2004
|
|
| |
|
2005
|
|
2004
|
|
Amount
|
|
%
|
|
|
Selling,
general and administrative expenses
|
|
|
2,342,000
|
|
|
1,843,000
|
|
$
|
499,000
|
|
|
27
|
%
|
From
2004
to 2005, selling, general and administrative expenses increased approximately
$150,000 for accounting and legal activities, $150,000 for marketing
consultants, $90,000 for administrative consultants, $70,000 for advertising
and
promotional literature and $80,000 of costs from the operations of BioCheck
since December 6, 2005, the date of our acquisition of 51% of
BioCheck’s common stock. These increased costs were partially offset by
approximately $40,000 of decreased insurance costs and other cost decreases.
We
expect selling, general and administrative expenses to increase by approximately
$0.8 million from 2005 to 2006 with the consolidation of BioCheck’s
selling, general and administrative expenses in 2006 over the entire
year. In
addition, we plan to implement a marketing campaign to increase revenues. The
amount spent on this campaign will depend on the availability of
funds.
The
following table presents the changes in selling, general and administrative
expenses from 2005 to 2006:
| |
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
| |
|
2006
|
|
2005
|
|
Increase
from 2005
|
|
2006
|
|
2005
|
|
Increase
from 2005
|
|
|
Selling,
general and administrative expenses
|
|
$
|
953,000
|
|
$
|
470,000
|
|
$
|
483,000
|
|
|
103
|
%
|
$
|
2,854,000
|
|
$
|
1,551,000
|
|
$
|
1,303,000
|
|
|
84
|
%
|
For
the
three months ended September 30, 2006, the increase in selling, general and
administrative expenses is primarily attributed to the consolidation of costs
from the operations of BioCheck of $197,000, severance charges of $261,000
related to the termination of employment of our president and chief executive
officer, and increased costs for accounting, legal, stockholder communication
and investor relations activities of $20,000; and non-cash compensation of
$69,000 which, effective January 1, 2006, is required for employees to be
included in expenses by SFAS 123R. The increase was partially offset by
decreased costs for labor and related costs including contract labor and
associated transportation costs of $28,000. For the nine months ended September
30, 2006, the increase in selling, general and administrative expenses is
primarily attributed to the consolidation of costs from the operations of
BioCheck of $605,000, severance charges of $261,000 and increased costs for
accounting, legal, stockholder communication and investor relations activities
of $121,000; labor and related costs including contract labor and associated
transportation costs of $74,000; and non-cash compensation of $249,000. We
expect fourth quarter 2006 selling, general and administrative expenses to
be
approximately the same as the third quarter.
Purchased
in-process research and development
In
connection with our acquisition of 51% of the outstanding shares of BioCheck
on
December 6, 2005, $1.5 million of purchased in-process research and development
was identified as an intangible asset. The applicable research projects were
subsequently deemed not to have future uses or markets. As such, this identified
intangible asset was expensed in 2005 at the date of acquisition.
Foreign
legal proceedings
Foreign
legal proceedings during 2004 of $183,000 were related to proceedings of the
Autorité des Marchés Financiers, or AMF, and were comprised of legal expenses of
$121,000 and fines imposed by the AMF of $62,000 as described in Note 8 to
the
audited consolidated financial statements for the year ended December 31, 2005
included in this prospectus. We did not incur such expenses in 2005 and do
not
expect such expenses in 2006.
Restructuring
charges
Restructuring
charges during 2004 of $605,000 related to the Axonyx change of control are
comprised of legal fees of $196,000, management consulting fees of $34,000,
travel expense of $8,000, executive search costs of $22,000 and severance
expenses of $345,000. Related to our relocation of operations from Portland,
Oregon to Foster City, California, we recorded severance benefits of $119,000
in
2005 that were included in selling, general and administrative expenses, and
we
expect to incur relocation expenses of approximately $100,000 in 2006.
Financing
Fees
In
connection with the $570,000 convertible loan financing on January 14, 2004
and
the conversion of it into common stock on December 30, 2004, we paid finders’
fees and professional fees of approximately $84,000 and we incurred non-cash
financing charges of $411,000 related to the conversion feature of the notes,
$159,000 related to initial warrants issued with the notes and $202,000 related
to the incentive warrants issued upon conversion of the notes into common stock
during 2004.
Interest
Income
Interest
income was $110,000 in 2005, primarily due to cash available for investment
activities obtained in the $6,500,000 equity financing received during December
2004 and January 2005. The decrease in interest income from $74,000 for the
nine
months ended September 30, 2005 to $45,000 in the same period in 2006 is
primarily due to reduced cash available for investment activities obtained
in
the $6,500,000 equity financing received during December 2004 and January
2005.
Other
Income
Other
income is related to the sale of surplus equipment.
Interest
Expense
Interest
expense of $146,000 in the nine months ended September 30, 2006 was primarily
due to the loan with KeyBank that was transferred to Bridge Bank incurred in
connection with the BioCheck acquisition, the addition of new debt of $600,000
in March 2006 and non-cash financing expense of $45,000 related to the renewal
of a note with Fagan Capital. We expect interest expense for the fourth quarter
to increase significantly from the third quarter of 2006 with additional debt
financing obtained during October 2006. See Notes 3 and 7 to the unaudited
consolidated financial statements for the nine months ended September 30, 2006
included in this prospectus.
Liquidity
and Capital Resources
On
a
consolidated basis, we had cash and cash equivalents of $614,000 at December
31,
2005 of which $282,000 was held by BioCheck. We held $332,000 in cash at
December 31, 2005, which was not sufficient to sustain our operations through
the first quarter of 2006 without additional financings. During March 2006,
we
received $200,000 from Steven T. Guillen, our resident and chief executive
officer at that time, and $400,000 from Fagan Capital, each in exchange for
a
promissory note.
On
a
consolidated basis, we had cash and cash equivalents of $677,000 at September
30, 2006 of which $656,000 was held by BioCheck. Since BioCheck has been and
is
expected to continue to be cash flow positive, management believes that its
cash
will be sufficient to sustain its operating activities.
We
held
$21,000 in cash at our parent level at September 30, 2006. We cannot access
the
cash held by our majority-held subsidiary, BioCheck, to pay for our parent
level
operating expenses. We have incurred negative operating cash flows of $0.5
million during the nine months ended September 30, 2006. At our parent level
we
incurred negative operating cash flows of $0.9 million during the first nine
months of 2006. Our cash may not be sufficient to sustain our operations through
the first quarter of 2007 without additional financings. We obtained debt
financing in which we received proceeds of $1,350,000 subsequent to September
30, 2006 and are seeking equity financing to obtain sufficient funds to sustain
operations and purchase the remaining 49% of BioCheck for approximately $3.0
million. From the aforementioned debt financing, $635,000 was used to repay
existing debt, accrued interest and related legal fees. We plan to increase
revenues by introducing new products. However, we cannot assure you that we
will
successfully obtain equity financing, if any, sufficient to finance our goals
or
that we will increase product related revenues as such events are subject to
factors beyond our control. If we are unable to raise additional capital in
2007, we will have to curtail or cease operations.
Net
cash used in operating activities
The
following table presents annual cash flows from operating activities from 2004
and 2005:
| |
|
Year
Ended December 31,
|
|
| |
|
2005
|
|
2004
|
|
|
Cash
paid to employees including benefits
|
|
$
|
(1,153,000
|
)
|
$
|
(1,067,000
|
)
|
|
Cash
paid to suppliers
|
|
|
(3,514,000
|
)
|
|
(2,353,000
|
)
|
|
Total
cash paid to employees and suppliers
|
|
|
(4,667,000
|
)
|
|
(3,420,000
|
)
|
|
Cash
received from customers
|
|
|
2,471,000
|
|
|
2,386,000
|
|
|
Interest
received
|
|
|
114,000
|
|
|
20,000
|
|
|
Interest
paid
|
|
|
(11,000
|
)
|
|
(28,000
|
)
|
|
Net
cash used in operating activities
|
|
$
|
(2,093,000
|
)
|
$
|
(1,042,000
|
)
|
The
increase in cash paid to employees is primarily attributed to cash paid by
BioCheck for payroll and benefits since December 6, 2005, the date of
our acquisition of 51% of BioCheck’s common stock.
The
increase in cash paid to suppliers is primarily attributed to increases in
selling, general and administrative expenses of approximately $150,000 for
accounting and legal activities, $150,000 for marketing consultants, $90,000
for
administrative consultants and $70,000 for advertising and promotional
literature. In addition, $583,000 of 2004 expenses recorded as liabilities
at
December 31, 2004 were paid in 2005 and cash expenditures for inventory
increased by $108,000.
The
increase in cash received from customers is attributed to the $133,000 increase
in revenues reduced by the change in accounts receivable.
Interest
received increased in 2005 primarily due to cash available for investment
activities obtained in the $6,500,000 equity financing received during December
2004 and January 2005.
The
following table presents cash flows from operating activities for 2006 and
2005:
| |
|
Nine
Months Ended
September 30,
|
|
| |
|
2006
|
|
2005
|
|
|
Cash
paid to employees including benefits
|
|
$
|
(1,608,000
|
)
|
$
|
(675,000
|
)
|
|
Cash
paid to suppliers
|
|
|
(3,209,000
|
)
|
|
(2,630,000
|
)
|
|
Total
cash paid to employees and suppliers
|
|
|
(4,817,000
|
)
|
|
(3,305,000
|
)
|
|
Cash
received from customers
|
|
|
4,352,000
|
|
|
1,650,000
|
|
|
Interest
and other income received
|
|
|
47,000
|
|
|
74,000
|
|
|
Interest
paid
|
|
|
(88,000
|
)
|
|
(11,000
|
)
|
|
Net
cash used in operating activities
|
|
$
|
(506,000
|
)
|
$
|
(1,592,000
|
)
|
The
increase in cash paid to employees is primarily attributed to $1.0 million
of
cash paid by BioCheck for payroll and benefits. Cash paid to suppliers is
increased by approximately $1.6 million due to BioCheck that was offset by
2004
expenses recorded as liabilities at December 31, 2004 that were paid in the
first quarter of 2005 of approximately $0.5 million and an increase in accounts
payable and accrued expense in the first nine months of 2006 of approximately
$0.5 million. The increase in cash received from customers is attributed to
increased revenues of $2.7 million. Interest paid increased primarily due to
increased debt entered into during December 2005 of $3,060,000.
Cash
used in investing activities
During
2005 we spent $3.2 million on the acquisition of 51% of BioCheck’s common
stock and $3.1 million on a restricted certificate of deposit at KeyBank,
which was used as collateral under the loan agreement with KeyBank. Capital
expenditures were $33,000 and $47,000 in 2005, and 2004 respectively. We had
no
commitments for capital expenditure at December 31, 2005. We
anticipate that in 2006 the BioCheck manufacturing facility in Foster City,
California will require expenditures to support our business objective. We
spent
$172,000 and $262,000 to file patents in 2005 and 2004,
respectively.
During
the first quarter of 2006 we transferred our $3,060,000 restricted certificate
of deposit from KeyBank to Bridge Bank. Capital expenditures during the nine
months ended 2006 were primarily for equipment and leasehold improvements at
our
new Foster City, California location. We had no commitments for capital
expenditures at September 30, 2006. We paid $42,000 and $171,000 for
patent filings that were capitalized during the nine months ended 2006 and
2005,
respectively.
Net
cash provided by financing activities
On
October 25, 2006, we completed a private placement of debentures and warrants
under a securities purchase agreement with four accredited investors. In this
financing we issued secured convertible debentures in an aggregate principal
amount of $1,694,250 (referred to in this prospectus as the “debentures”), and
Series A, B, C, D, and E common stock warrants (referred to in this prospectus
as the “warrants”). We also provided the investors registration rights under a
registration rights agreement, and a security interest in our assets under
a
security agreement to secure performance of our duties and obligations under
the
debentures. Under the warrants, the investors have the right to purchase an
aggregate of approximately 14.5 million shares of our common stock, at initial
exercise prices ranging from $0.35 to $0.385 per share, and these exercise
prices are adjustable according to a full ratchet anti-dilution provision,
i.e.,
the exercise price may be adjusted downward in the event that we conduct a
financing at a price per share below $0.35 or $0.385 per share, respectively.
The Series D and E warrants are only exercisable pro rata subsequent to the
exercise of the Series C warrants. The debentures were issued with an original
issue discount of 20.318%, and resulted in proceeds to us of $1,350,000. The
debentures are convertible, at the option of the holders, at any time into
shares of common stock at $0.35 per share, as adjusted in accordance with a
full
ratchet anti-dilution provision (referred to in this prospectus as the
“conversion price”). Beginning on the first of the month following the earlier
of the effective date of the registration statement to be filed pursuant to
the
registration rights agreement and February 1, 2007, we will amortize the
debentures in equal installments on a monthly basis resulting in a complete
repayment by the maturity date (the “Monthly Redemption Amounts”). The Monthly
Redemption Amounts can be paid in cash or in shares, subject to certain
restrictions. If we choose to make any Monthly Redemption Amount payment in
shares of common stock, the price per share is the lesser of the conversion
price then in effect and 85% of the weighted average price for the ten trading
days prior to the due date of the Monthly Redemption Amount. For additional
details regarding the terms and conditions of the debentures and warrants,
see
Exhibits 10.2 and 10.3 to our current report on Form 8-K filed with the SEC
on
October 26, 2006. The above description is qualified in its entirety by
reference to the full text of these instruments.
On
March
31, 2006, we issued a $400,000 unsecured promissory note to Fagan Capital.
Interest accrues at an annual rate of 8.0% and interest and principal were
due
on June 2, 2006. On July 26, 2006, Fagan Capital extended the maturity date
of
the promissory note to June 1, 2007 and we issued to Fagan Capital a warrant
to
purchase 1,158,857 shares of common stock at an initial exercise price of $0.35
per share. On October 25, 2006, we prepaid the principal, accrued interest
and
legal fees due in the amount of $426,000. See Note 7 to the unaudited
consolidated financial statements included in this prospectus. The purpose
of
this loan was to provide us with short term financing as we sought longer term
financing.
On
March
10, 2006, we received $200,000 in exchange for an unsecured promissory note
with
Steven T. Guillen, our president and chief executive officer at that time.
The
related party note bears interest at 7.0%. Interest and principal were due
on
September 10, 2006. Mr. Guillen’s employment was terminated on September 15,
2006. We were in default on this note at September 30, 2006. Subsequent to
September 30, 2006, Mr. Guillen sued the Company for payment of interest and
principal due under the note. On November 2, 2006, we repaid the principal
and
accrued interest due on the promissory note with Mr. Guillen in the amount
of
$209,000.
On
December 2, 2005, we entered into non-revolving one-year loan agreement
with KeyBank in the amount of $3,060,000, for the purpose of completing the
initial closing of the BioCheck acquisition. This loan was repaid during
February 2006 and a new one-year loan agreement for $3,060,000 was entered
into
at Bridge Bank. Steven T. Guillen, our -president and chief executive officer
at
that time, purchased 600,000 shares of common stock for $240,000, pursuant
to
the terms of an employment agreement on February 28, 2005.
On
June 1, 2004, we received $1,200,000 in exchange for a note and entered
into a loan agreement with our majority stockholder at the time, Axonyx, Inc.
We
repaid the note on January 6, 2005. In a $6,500,000 private placement of our
common stock on December 30, 2004, we received net proceeds of $5,818,000 in
exchange for 12,264,158 shares of common stock which were issuable at December
31, 2004.
The
cash
held by us of $332,000 at December 31, 2005 was not sufficient to sustain its
operations through the first quarter of 2006 without additional financings.
During March 2006, we received $200,000 from Steven T. Guillen, our -president
and chief executive officer at that time, and $400,000 from Fagan Capital,
each
in exchange for a promissory note.
We
had
cash and cash equivalents of $21,000 at the parent level at September 30, 2006.
We cannot access the cash held by its majority-held subsidiary, BioCheck, to
pay
for our operating expenses at the parent level. In an effort to mitigate this
near-term concern, we obtained debt financing in which we received proceeds
of
$1,350,000 subsequent to September 30, 2006 and are seeking equity financings
to
obtain sufficient funds to sustain operations and purchase the remaining 49%
of
BioCheck for approximately $3.0 million. From the aforementioned debt financing,
$635,000 was used to repay existing debt, accrued interest and related legal
fees. However, we cannot assure you that we will successfully obtain equity
financing.
Commitments
and Contingencies
Our
partial subsidiary, BioCheck, leases facilities under operating leases in Foster
City, California that expire in December 2008. During 2004, BioCheck entered
into a sublease of an unused Foster City, California facility to the end of
the
lease term in 2008 that reduced our operating lease commitments. Net minimum
lease payments to which we are committed under these leases at December 31,
2005
are $227,000 in 2006, $201,000 in 2007 and $208,000 in 2008. In addition, we
entered into an operating lease for 4,136 square feet of space adjacent to
space
occupied by our BioCheck subsidiary in Foster City, California starting on
April
1, 2006 and ending on March 31, 2009. The annual base rent under the lease
agreement begins at $62,000 per year and increases incrementally to $66,000
by
the end of the lease term.
We
estimate that our cost of relocating operations from Portland, Oregon to Foster
City, California was approximately $100,000. In addition to these expenses,
and
as part of the relocation of operations, we offered all affected regular
full-time employees whose employment was terminated severance benefits estimated
in total to be $119,000.
At
December 31, 2005, we had a commitment to purchase Ergothioneine manufactured
by
Cambridge Major Labs for $179,000 and we have a contract with them to purchase
additional Ergothioneine as needed.
On
September 19, 2005, we entered into a stock purchase agreement with BioCheck
and
its stockholders to purchase all of its common stock for $6.0 million in
cash. On December 6, 2005, we purchased 51% of the common stock of
BioCheck. Pursuant to the stock purchase agreement, we will use our reasonable
best efforts to consummate a follow-on financing transaction to raise additional
capital with which to purchase the remaining outstanding shares of BioCheck
in
one or more additional closings. The purchase price will be increased by an
additional 8% per annum from December 6, 2005. If we have not purchased all
of the outstanding shares of BioCheck within twelve months of December 6,
2005, the earnings before interest, taxes, depreciation and amortization
expenses, if any, of BioCheck, will be used to repurchase the remaining
outstanding BioCheck shares at one or more additional closings.
As
described above, on October 25, 2006 we completed a convertible debenture and
warrant financing under a securities purchase agreement with accredited
investors. In this financing, we issued secured convertible debentures in an
aggregate principal amount of $1,694,250. We also provided the investors
registration rights under a registration rights agreement, and a security
interest in our assets under a security agreement to secure to secure the
performance of our duties and obligations under the debentures. The debentures
were issued with an original issue discount of 20.318%, and resulted in proceeds
to us of $1,350,000. The debentures are convertible, at the option of the
holders, at any time into shares of common stock at $0.35 per share, as adjusted
in accordance with a full ratchet anti-dilution provision (referred to in this
prospectus as the “conversion price”). Beginning on the first of the month
following the earlier of the effective date of the registration statement to
be
filed pursuant to the registration rights agreement and February 1, 2007, we
will amortize the debentures in equal installments on a monthly basis resulting
in a complete repayment by the maturity date (the “Monthly Redemption Amounts”).
The Monthly Redemption Amounts can be paid in cash or in shares, subject to
certain restrictions. If we choose to make any Monthly Redemption Amount payment
in shares of common stock, the price per share is the lesser of the conversion
price then in effect and 85% of the weighted average price for the ten trading
days prior to the due date of the Monthly Redemption Amount.
The
performance of our duties and obligations under the debentures are secured
by
substantially all of our assets under a security agreement. As additional
security to the debenture holders, we have also pledged the shares we hold
in
our subsidiaries, including 51% of BioCheck, Inc., and all of the shares of
capital stock of our wholly-owned subsidiaries, OXIS Therapeutics, Inc. and
OXIS
Isle of Man Limited. In addition, OXIS Therapeutics, Inc. and OXIS Isle of
Man
Limited, have each entered into a subsidiary guarantee under which these
subsidiaries have guaranteed the performance, at the parent level, of our
obligations under the debentures.
Critical
Accounting Policies
Our
accounting policies are explained in Note 1 to the audited consolidated
financial statements for the year ended December 31, 2005 and Note 1 to the
unaudited consolidated financial statements for the nine months ended September
30, 2006 included in this prospectus. We consider the following accounting
policies to be critical given they involve estimates and judgments made by
management and are important for our investors’ understanding of our operating
results and financial condition.
Basis
of Consolidation
The
consolidated financial statements contained in this prospectus include the
accounts of OXIS International, Inc. and its subsidiaries. All intercompany
balances and transactions have been eliminated. On December 6, 2005, we
purchased 51% of the common stock of BioCheck. This acquisition was accounted
for by the purchase method of accounting according to Statement of Financial
Accounting Standards, or SFAS, No. 141, “Business Combinations.” The
consolidated statements of operations include the results of operations of
BioCheck from December 6, 2005, the date of acquisition, and the consolidated
balance sheets include the assets and liabilities of BioCheck at December 31.
2005 and September 30, 2006.
Revenue
Recognition
We
manufacture, or have manufactured on a contract basis, research and diagnostic
assays and fine chemicals, which are our primary products sold to customers.
Revenue from the sale of our products, including shipping fees, is recognized
when title to the products is transferred to the customer which usually occurs
upon shipment or delivery, depending upon the terms of the sales order and
when
collectibility is reasonably assured. Revenue from sales to distributors of
our
products is recognized, net of allowances, upon delivery of product to the
distributors. According to the terms of individual distributor contracts, a
distributor may return product up to a maximum amount and under certain
conditions contained in its contract. Allowances are calculated based upon
historical data, current economic conditions and the underlying contractual
terms. Our mix of product sales are substantially at risk to market conditions
and demand, which may change at anytime.
We
recognize license fee revenue for licenses to our intellectual property when
earned under the terms of the agreements. Generally, revenue is recognized
upon
transfer of the license unless we have continuing obligations for which fair
value cannot be established, in which case the revenue is recognized over the
period of the obligation. We consider all arrangements with payment terms
extending beyond 12 months not to be fixed or determinable. In certain licensing
arrangements there is provision for a variable fee as well as a non-refundable
minimum amount. In such arrangements, the amount of the non-refundable minimum
guarantee is recognized upon transfer of the license and collectibility is
reasonably assured or over the period of the obligation, as applicable, and
the
amount of the variable fee is recognized as revenue when it is fixed and
determinable. We recognize royalty revenue based on reported sales by third
party licensees of products containing our materials, software and intellectual
property. Non-refundable royalties, for which there are no further performance
obligations, are recognized when due under the terms of the
agreements.
Inventories
Inventories
are stated at the lower of cost to purchase and/or manufacture the inventory
or
the current estimated market value of the inventory. We regularly review our
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and/or
our
ability to sell the products and production requirements. Demand for our
products can fluctuate significantly. Factors which could affect demand for
our
products include unanticipated changes in consumer preferences, general market
conditions or other factors, which may result in cancellations of advance orders
or a reduction in the rate of reorders placed by customers and/or continued
weakening of economic conditions. Additionally, our estimates of future product
demand may be inaccurate, which could result in an understated or overstated
provision required for excess and obsolete inventory. Our estimates are based
upon our understanding of historical relationships which can change at
anytime.
Long-Lived
Assets
Our
long-lived assets include property, plant and equipment, capitalized costs
of
filing patent applications and goodwill and other assets. See Notes 1, 4, 5
and
6 to the audited consolidated financial statements for the year ended December
31, 2005 included in this prospectus for more detail regarding our long-lived
assets. We evaluate our long-lived assets for impairment in accordance with
SFAS
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
whenever events or changes in circumstances indicate that the carrying amount
of
such assets may not be recoverable. Estimates of future cash flows and timing
of
events for evaluating long-lived assets for impairment are based upon
management’s judgment. If any of our intangible or long-lived assets are
considered to be impaired, the amount of impairment to be recognized is the
excess of the carrying amount of the assets over its fair value. The net
carrying values of long-lived assets at December 31, 2005, subject to possible
impairment charges in the future, are presented by location in the following
table below:
| |
|
Foster
City,
California
|
|
Portland,
Oregon
|
|
Total
|
|
|
Furniture
and equipment
|
|
$
|
141,000
|
|
$
|
63,000
|
|
$
|
204,000
|
|
|
Leasehold
improvements
|
|
|
39,000
|
|
|
|
|
|
39,000
|
|
|
Patents
|
|
|
15,000
|
|
|
816,000
|
|
|
831,000
|
|
|
Goodwill
and other assets
|
|
|
1,291,000
|
|
|
—
|
|
|
1,291,000
|
|
| |
|
$
|
1,486,000
|
|
$
|
879,000
|
|
$
|
2,365,000
|
|
Applicable
long-lived assets are amortized or depreciated over the shorter of their
estimated useful lives, the estimated period that the assets will generate
revenue, or the statutory or contractual term in the case of patents. Estimates
of useful lives and periods of expected revenue generation are reviewed
periodically for appropriateness and are based upon management’s judgment.
Goodwill and other assets are not amortized.
Certain
Expenses and Liabilities
On
an
ongoing basis, management evaluates its estimates related to certain expenses
and accrued liabilities. We base our estimates on historical experience and
on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of liabilities that are not readily apparent from other
sources. Actual results may differ materially from these estimates under
different assumptions or conditions.
Share-Based
Compensation
In
December 2004, the FASB issued SFAS 123R, which replaces FASB Statement No.
123,
“Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” or APB Opinion No. 25. SFAS 123R
establishes standards for the accounting for share-based payment transactions
in
which an entity exchanges its equity instruments for goods or services. It
also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity’s equity
instruments or that may be settled by the issuance of those equity instruments.
SFAS 123R covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans. SFAS 123R requires a
public entity to measure the cost of employee services received in exchange
for
an award of equity instruments based on the fair value of the award on the
grant
date (with limited exceptions). That cost will be recognized in the entity’s
financial statements over the period during which the employee is required
to
provide services in exchange for the award. Management implemented SFAS 123R
effective January 1, 2006. Methodologies used for calculations such as the
Black-Scholes option-pricing models and variables such as volatility and
expected life are based upon management’s judgment. Such methodologies and
variables are reviewed and updated periodically for appropriateness and affect
the amount of recorded charges. See Note 1 to the unaudited consolidated
financial statements for the six months ended June 30, 2006 included in this
prospectus for more information on the amounts, methodologies and variables
related to non-cash share-based compensation charges.
Inflation
We
believe that inflation has not had a material adverse impact on our business
or
operating results during the periods presented.
Off-balance
Sheet Arrangements
We
have
no off-balance sheet arrangements.
Changes
or Disagreements with Accountants
There
were no changes in, or disagreements with, our independent registered public
accounting firm during 2004 or 2005.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The
following table sets forth certain information with respect to each of our
directors and executive officers as of December 1, 2006.
|
Name
|
|
Age
|
|
Principal
Occupation
|
|
Served
as
Director
Since
|
|
Marvin
S. Hausman, M.D. (2)
|
|
65
|
|
President,
Chief Executive Officer and Chairman of the Board
|
|
2004
|
|
Steven
T. Guillen (4)
|
|
55
|
|
Director
|
|
2005
|
|
S.
Colin Neill (1) (3)
|
|
60
|
|
Secretary,
Director
|
|
2004
|
|
John
E. Repine, M.D. (1)
|
|
61
|
|
Director
|
|
2005
|
|
Gary
M. Post (1)
|
|
58
|
|
Director
|
|
2006
|
| (1) |
Member
of the Audit Committee.
|
| (2) |
Appointed
President and Chief Executive Officer on September 15, 2006. Member
of the
Compensation Committee. In
addition, on November 15, 2006, following the resignation of Michael
Centron as our Vice President and Chief Financial Officer, Dr. Hausman
has
assumed the role of chief financial and accounting officer on an
interim
basis.
|
| (3) |
Member
of the Nominating Committee.
|
| (4) |
Terminated
as President and Chief Executive Officer on September 15,
2006.
|
Marvin
S. Hausman, M.D., President,
Chief Executive Officer and Chairman of the Board. Dr. Hausman was appointed
to
the board of directors on August 20, 2004. Previously, Dr. Hausman served on
the
board of directors from March 2002 to November 2003. On December 10, 2004,
the
board of directors appointed Marvin S. Hausman, M.D. to serve as Chairman of
the
Board, Acting Chief Executive Officer and Acting Chief Financial Officer of
OXIS. On February 28, 2005, Dr. Hausman ceased to be the Company’s Chief
Executive Officer. On September 15, 2006, Dr. Hausman was appointed to serve
as
President and Chief Executive Officer by the board of directors. Dr. Hausman
served as a director and as Chairman of the Board of Axonyx from 1997 until
the
merger of Axonyx into TorreyPines Therapeutics in October 2006, and had served
as President and Chief Executive Officer of Axonyx from 1997 until September
2003 and March 2005, respectively. Dr. Hausman is currently a member of the
board of directors of TorreyPines Therapeutics. Dr. Hausman served as our Acting
Chief Financial Officer until January 6, 2006 when Michael D. Centron was
appointed as our Chief Financial Officer. Dr. Hausman currently owns
approximately 2.8% of the outstanding common stock of OXIS, and Axonyx currently
owns approximately 33% of the outstanding common stock of OXIS. Dr. Hausman
was
a co-founder of Medco Research Inc., a pharmaceutical biotechnology company
specializing in adenosine products. He has thirty years’ experience in drug
development and clinical care. Dr. Hausman received his medical degree from
New
York University School of Medicine in 1967 and has done residencies in General
Surgery at Mt. Sinai Hospital in New York, and in Urological Surgery at U.C.L.A.
Medical Center in Los Angeles. He also worked as a Research Associate at the
National Institutes of Health, Bethesda, Maryland. He has been a Lecturer,
Clinical Instructor and Attending Surgeon at the U.C.L.A. Medical Center
Division of Urology and Cedars-Sinai Medical Center, Los Angeles. He has been
a
Consultant on Clinical/Pharmaceutical Research to various pharmaceutical
companies, including Bristol-Meyers International, Mead-Johnson Pharmaceutical
Company, Medco Research, Inc., and E.R. Squibb. Since October 1995, Dr. Hausman
has been the President of Northwest Medical Research Partners, Inc., a medical
technology and transfer company. He was a member of the board of directors
of
Medco Research, Inc. from inception (1978) through 1992 and from May 1996 to
July 1998. Dr. Hausman was a member of the board of directors of Regent Assisted
Living, Inc., a company specializing in building assisted living centers
including care of senile dementia residents, from March 1996 to April 2001.
Steven
T. Guillen, Director.
On February 28, 2005, Steven T. Guillen was appointed the Company’s President,
Chief Executive Officer and a member of our board of directors. Mr. Guillen’s
employment was terminated by the board of directors on September 15, 2006.
Mr.
Guillen remains a member of the board of directors. Prior to joining the
Company, from 2001 to 2004, Mr. Guillen served as Vice President, Sales and
Marketing for Amarin Pharmaceuticals, Inc., a neuroscience company focused
on
the development and commercialization of drugs for the treatment of neurological
disorders affecting the central nervous system. From 1996 to 2001, Mr. Guillen
served as the Vice President, Sales and Marketing for Athena Diagnostics, a
company involved with the development and commercialization of diagnostic
testing for neurological diseases. From 1991 until joining Amarin
Pharmaceuticals, Inc., Mr. Guillen held several senior level sales and marketing
positions with Elan Pharmaceuticals, an affiliate of Elan Corporation, PLC,
including from 1996 to 2001 as Vice President of Sales and Marketing for Athena
Diagnostics (Division of Elan), a reference laboratory dedicated to the
development and commercialization of diagnostic testing for neurological
disorders. Prior to joining Elan Pharmaceuticals, Mr. Guillen spent 17 years
at
Merck & Co., Inc., where he held a number of positions of increasing
responsibility, including responsibility for the training and development of
a
350 member sales management team. Mr. Guillen holds a B.S. in Zoology, with
a
minor in Chemistry, from the University of California, Davis, and MBA from
the
University of California, Riverside.
S.
Colin Neill, Secretary
and Director. Mr. Neill was appointed to the board of directors in April 2004.
He has served as Secretary of OXIS since January 2004. Mr. Neill has been the
Senior Vice President and Chief Financial Officer of Pharmos Corporation since
October 2006. Mr. Neill joined Axonyx in September 2003 as Chief Financial
Officer and Treasurer and served in that capacity until October 2006 when Axonyx
was acquired by TorreyPine Therapeutics. From April 2001 to September 2003,
Mr.
Neill had been an independent consultant assisting small development stage
companies raise capital. Previously, Mr. Neill served as Senior Vice President,
Chief Financial Officer, Secretary and Treasurer of ClinTrials Research Inc.,
a
publicly traded global contract research organization in the drug development
business, from 1998 until its sale in April 2001. Prior to that, Mr. Neill
served as Vice President and Chief Financial Officer of Continental Health
Affiliates Inc. and its majority owned subsidiary Infu-Tech Inc. Mr. Neill’s
experience has included that of Acting Vice President Finance and Chief
Financial Officer of Pharmos Corporation, a biopharmaceutical company in the
business of developing novel drug technologies. Earlier experience was gained
as
Vice President Finance and Chief Financial Officer of BTR Inc., a U.S.
subsidiary of BTR plc, a British diversified manufacturing company, and Vice
President Financial Services of The BOC Group Inc., a British owned industrial
gas company with substantial operations in the health care field. Mr. Neill
served for four years with American Express Travel Related Services, first
as
chief internal auditor for worldwide operations and then as head of business
planning and financial analysis. Mr. Neill began his career in public accounting
with Arthur Andersen LLP in Ireland and later with Price Waterhouse LLP as
a
senior manager in New York City. He also served with Price Waterhouse for two
years in Paris, France.
Gary
M. Post, Director.
Mr. Post has served as a director of OXIS since March 15, 2006. Since 1999
Mr.
Post has been the Managing Director and Investment Principal of Ambient
Advisors, LLC. Ambient Advisors primarily invests its own and its partners’
capital in private and public companies with a particular interest in the health
care and life sciences sector and certain other special situations. Ambient
Advisors also actively advises these companies, sometimes taking interim
management roles. In his capacity as Managing Director at Ambient Advisors,
Mr.
Post has acted as an interim Chief Executive Officer in two private early to
mid
stage companies that Ambient had invested in, Opticon Medical, Inc., a medical
device company and OccMeds Billing Services, Inc., a worker’s compensation
pharmacy payment processing company. Most recently, on May 23, 2006, Mr. Post
was appointed President and CEO of VoIP, Inc., a leading provider of Voice
over
Internet Protocol (VoIP) communications solutions for service providers,
resellers and consumers. Mr. Post holds a MBA from the U.C.L.A. Graduate School
of Management and an A.B. in Economics from Stanford University.
John
E. Repine, M.D., Director.
Dr. Repine has served as a director of OXIS since October 2005. Since 1996,
Dr.
Repine has been the James J. Waring Professor of Medicine and Pediatrics at
the
University of Colorado Health Sciences Center. Since 1993, Dr. Repine has been
the Chief Executive Officer and President of the Webb-Waring Institute for
Cancer, Aging and Antioxidant Research. Dr.
Repine graduated from the School of Medicine and completed training in internal
medicine and pulmonary medicine at the University of Minnesota. Dr. Repine
has received many national awards for his research including an Established
Investigator Award from the American Heart Association, the Alton Ochsner Award
Relating Smoking and Health and the Senior Scholar in Aging Award from the
Ellison Medical Foundation. Dr. Repine was the Principal Investigator for 10
years for one of six National Specialized Centers of Research (SCOR) of the
National Institutes of Health for the Study of Acute Lung Injury. Dr.
Repine is a recognized expert in the study of vascular disorders, inflammation,
oxidants and antioxidants. Dr. Repine has served in various capacities
with a number of biotechnology companies.
Audit
Committee and Audit Committee Financial Expert
We
are
not a “listed company” under SEC rules and are therefore not required to have an
audit committee comprised of independent directors. We do, however, have an
audit committee consisting of three members of our board of directors, including
S. Colin Neill, John E. Repine, M.D., and Gary M. Post. The board of directors
has determined that S. Colin Neill, the Chairman of our Audit Committee,
qualifies as an “audit committee financial expert” as defined by the rules of
the Securities and Exchange Commission. In addition, the board of directors
has
determined that each of the members of the audit committee is able to read
and
understand fundamental financial statements and has substantial business
experience that results in that member's financial sophistication. Accordingly,
the board of directors believes that each member of the audit committee has
sufficient knowledge and experience necessary to fulfill such member’s duties
and obligations as an audit committee member.
EXECUTIVE
COMPENSATION
Our
compensation and benefits program is designed to attract, retain and motivate
employees to operate and manage the Company for the best interests of its
constituents. Executive compensation is designed to provide incentives for
those
senior members of management who bear responsibility for our goals and
achievements. The compensation philosophy is based on a base salary, bonuses
and
a stock option program.
The
following table sets forth compensation information for services rendered to
us
by certain executive officers (collectively, the Company’s “Named Executive
Officers”) in all capacities, other than as directors, during each of the prior
three fiscal years. Other than as set forth below, no executive officer’s salary
and bonus exceeded $100,000 in any of the applicable years. The following
information includes the dollar value of base salaries, bonus awards, the number
of stock options granted and certain other compensation, if any, whether paid
or
deferred. Shares issued in lieu of compensation are listed in the year the
salary was due.
SUMMARY
COMPENSATION TABLE
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
|
|
|
Bonus
|
|
Stock
Awards
|
|
|
Option/Warrant
Awards (4)
|
|
Non-Equity
Incentive
Plan Compensation
|
|
All
Other Compensation
|
|
|
Total
|
|
|
Steven
T. Guillen (1)
|
|
|
2006
|
|
$
|
190,000
|
|
|
|
$
|
—
|
|
$
|
|
|
|
|
$
|
68,772
|
|
$
|
|
|
$
|
29,417
|
|
(2)
|
|
$
|
288,189
|
|
|
President,
Chief Executive
|
|
|
2005
|
|
$
|
209,000
|
|
|
|
$
|
|
|
$
|
|
|
|
|
$
|
111,510
|
|
$
|
|
|
$
|
7,000
|
|
(3)
|
|
$
|
327,510
|
|
|
Officer
and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr.
Marvin S. Hausman (5)
|
|
|
2006
|
|
$
|
52,083
|
|
(6)
|
|
$
|
|
|
$
|
164,977
|
|
(7)
|
|
$
|
208,870
|
|
$
|
|
|
$
|
|
|
|
|
$
|
425,930
|
|
|
Chairman
of the Board,
|
|
|
2005
|
|
$
|
|
|
(6)
|
|
$
|
|
|
$
|
|
|
|
|
$
|
10,297
|
|
$
|
|
|
$
|
15,000
|
|
(8)
|
|
$
|
25,297
|
|
|
Former
Acting Chief Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer,
Former Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Mr.
Guillen served as President, Chief Executive Officer and
Director from
February 28, 2005 to September 15,
2006.
|
| (2) |
Includes
$4,250 car allowance, $2,000 for matching contribution under
our 401(k)
plan, $21,792 in penalties and interest paid by the Company
in connection
with back salary, and $1,375 paid by the Company into a medical
spending
account.
|
| (3) |
Includes
$5,000 car allowance and $2,000 for matching contribution
under our 401(k)
plan.
|
| (4) |
Reflects
dollar amount expensed by the company during applicable fiscal
year for
financial statement reporting purposes pursuant to FAS 123R.
FAS 123R
requires the company to determine the overall value of the
options as of
the date of grant based upon the Black Scholes method of
valuation, and to
then expense that value over the service period over which
the options
become exercisable (vest). As a general rule, for time in
service based
options, the company will immediately expense any option
or portion
thereof which is vested upon grant, while expensing the balance
on a pro
rata basis over the remaining vesting term of the
option.
|
| (5) |
Dr.
Hausman served as Acting Chief Executive Officer from December
8, 2004 to
February 28, 2005 and as Acting Chief Financial Officer from
December 8,
2004 until January 6, 2006. On September 15, 2006, Dr. Hausman
was
appointed as Chairman of the board of directors and our President
and
Chief Executive Officer.
|
| (6) |
Dr.
Hausman did not receive a cash salary for his services as
Chairman and
Acting President, Chief Executive Officer and Chief Financial
Officer in
2004 or 2005. See Director Compensation below for Dr. Hausman’s
compensation as a director. In 2006, under the terms of Dr.
Hausman’s
employment agreement with us, Dr. Hausman may elect to receive
his salary
in the form of common stock at a price equal to 85% of the
market price
(the average closing price for the five trading days preceding
the
measurement date), or in the form of a ten year warrant to
purchase 1.5
times the number of shares he would have received in the
foregoing, at an
exercise price equal to such market
price.
|
| (7) |
Dr.
Hausman was issued 330,769 shares of common stock on October
12, 2006, as
payment for compensation and expenses owed by us to NW Medical
Research
Partners, Inc., of which Dr. Hausman is the sole member and
manager. The
amount owed was $67,477, and the shares were valued at approximately
$0.204 per share, and are not subject to repurchase. Also
includes dollar
amount expensed by the company during 2006 for financial
statement
reporting purposes pursuant for FAS 123R in connection with
a grant to Dr.
Hausman of 500,000 restricted shares of common stock vesting
over a 180
day period, for agreeing to serve as our Chief Executive
Officer and
President.
|
| (8) |
Dr.
Hausman earned $15,000 pursuant to a consulting agreement
with NW Medical
Research Partners, Inc. Dr. Hausman is the sole member and
manager of NW
Medical Research
Partners.
|
Outstanding
Equity Awards at Fiscal Year-End
The
following table summarizes the amount of our executive officers’ equity-based
compensation outstanding at the fiscal year ended December 31,
2006.
|
Outstanding
Equity Awards at Fiscal Year-End
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Awards
|
|
Stock
Awards
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Number
of
Securities
Underlying Unexercised
Options
Exercisable
|
|
Number
of Securities Underlying Unexercised
Options
Unexercisable
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
|
|
Option
Exercise
Price
|
|
Option
Expiration
Date
|
|
Number
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
|
|
Market
Value
of
Shares
Or
Units
That
Have
Not
Vested
|
|
Equity
Incentive
Plan
Awards: Number of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
|
|
Equity
Incentive
Plan Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units,
or
Other
Rights
That
Have
Not
Vested
|
|
| |
|
(#)
|
|
(#)
|
|
(#)
|
|
(
$
)
|
|
|
|
(#)
|
|
($)
|
|
(#)
|
|
($)
|
|
|
Steven
T. Guillen
|
|
|
250,000
|
|
|
|
|
|
—
|
|
$
|
0.40
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
$
|
—
|
|
| |
|
|
50,000 |
|
|
50,000 |
|
|
— |
|
$
|
0.40
|
|
|
02/28/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
275,000
|
|
|
225,000
|
|
|
— |
|
$
|
0.29
|
|
|
02/28/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dr.
Marvin S. Hausman |
|
|
30,000 |
|
|
— |
|
|
— |
|
|
0.22
|
|
|
06/14/12
|
|
|
416,667
|
|
$
|
95,833 |
|
|
— |
|
$
|
— |
|
| |
|
|
5,000 |
|
|
— |
|
|
— |
|
|
0.42 |
|
|
06/18/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
11,695 |
|
|
— |
|
|
— |
|
|
0.57 |
|
|
12/03/13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
50,000 |
|
|
— |
|
|
— |
|
|
0.59 |
|
|
10/11/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
—
|
|
|
—
|
|
$
|
0.34
|
|
|
06/22/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
108,000
|
|
|
—
|
|
|
—
|
|
$
|
0.37
|
|
|
10/05/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
500,000
|
|
|
—
|
|
$
|
0.29
|
|
|
12/28/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
5,000
|
|
|
—
|
|
|
—
|
|
$
|
0.27
|
|
|
07/31/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
495,000
|
|
|
—
|
|
$
|
0.20
|
|
|
11/05/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
501,667
|
|
|
1,003,333
|
|
|
—
|
|
$
|
0.20
|
|
|
11/05/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregated
Option Exercises During 2006 and Fiscal Year-End Option
Table
The
following table summarizes information regarding stock options exercised
by the
Named Executive Officers in 2006 and the value of unexercised “in-the-money”
options they held at December 31, 2006.
|
|
|
Shares
of Common Stock Acquired
|
|
Value
|
|
Number
of Securities Underlying Unexercised Options at
December
31, 2006
|
|
Value
of Unexercised
In-the-Money
Options at
December
31, 2006 (3)
|
|
Name
|
|
on
Exercise
|
|
Realized
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
Steven
T. Guillen
|
|
|
—
|
|
|
—
|
|
|
575,000
|
|
|
525,000
|
(1)
|
|
—
|
|
|
—
|
|
Marvin
S. Hausman, M.D.
|
|
|
—
|
|
|
—
|
|
|
711,361
|
|
|
2,003,334
|
(2)
|
$
|
2,508
|
|
|
|
|
(1)
|
Options
for 150,000 shares of common stock became exercisable on February
28,
2006,
with an additional 150,000 shares to become exercisable
annually for two years after this date,
so long as Mr. Guillen continues to serve in the capacity of
either an
employee, outside director or consultant. Options for 200,000
shares of
common stock became exercisable upon grant of a non-qualified
stock option
on December 28, 2005. Options for an additional
75,000 shares of common stock became
exercisable on December 28, 2006,
and shall continue to become exercisable
annually for three years after this date
so
long as Mr. Guillen continues to serve in the capacity of either
an
employee, outside director or consultant.
|
|
(2)
|
Options
for 12,500 shares of common stock became exercisable on October
12, 2006.
Options for 5,000 shares of common stock became exercisable
on June 22,
2006. Options for 9,000 shares of common stock became exercisable
on
January 5, 2006 and monthly for 8 months after this date. Options
for
300,000 shares of common stock become exercisable on February
27, 2007.
Options for 100,000 shares of common stock become exercisable
on December
28, 2007 and December 28, 2008. Options for 5,000 shares become
exercisable on August 1, 2007. Options for 247,500 shares become
exercisable in quarterly installments starting on February
6, 2007 for a
one year period; options for an additional 247,500 shares become
exercisable in eight quarterly installments over the following
two years.
A warrant for the purchase of an aggregate of 1,505,000 shares
of common
stock becomes exercisable in six consecutive monthly installments
beginning on November 14, 2006.
|
|
(3)
|
In-the-money
options represents unexercised options having a per share exercise
price
below $0.205, the closing price of our common stock at December
29, 2006.
The value of unexercised in-the-money options equals the number
of
in-the-money options multiplied by the excess of $0.205 over
the per-share
exercise prices of the options. The value of unexercised in-the-money
options at December 31, 2006, may never be realized by the
option
holders.
|
Director
Compensation
We
pay an
annual fee of $4,000 to each non-employee director and an additional $1,000
to
non-employee directors for serving as committee chair. During 2006, while
we did
not make payments under this policy, such expenses were accrued. We do not
pay
meeting fees but directors are reimbursed for their expenses incurred in
attending meetings. Employee directors receive no other compensation as
directors.
Under
our
2003 Stock Incentive Plan, non-employee directors are automatically awarded
options to purchase 30,000 shares of common stock upon becoming directors and
automatically awarded options to purchase 5,000 shares of common stock annually
after this date.
The
following table represents stock options that were granted during 2006
to
non-employee directors.
|
Director
Compensation
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Fees
Earned
or
Paid in
Cash
(1)
|
|
Stock
Awards
|
|
Option
Awards
|
|
Non-Equity
Incentive
Plan Compensation
|
|
All
Other Compensation
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.
Colin Neill
|
|
$
|
6,000
|
|
$
|
|
|
$
|
11,858
|
|
$
|
|
|
$
|
|
|
$
|
17,858
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
E. Repine, M.D
|
|
$
|
|
|
$
|
|
(2)
|
$
|
21,874
|
(3)
|
$
|
|
|
$
|
|
|
$
|
34,659
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary
Post
|
|
$
|
|
|
$
|
|
|
$
|
101,138
|
(4)
|
$
|
|
|
$
|
|
|
$
|
106,138
|
|
| |
(1)
|
Accrued
but not paid.
|
| |
(2)
|
Includes
39,925 shares of common stock valued at $7,785 on the date of
the grant,
as compensation under a consulting agreement between us and Dr.
Repine,
for the period between October 15, 2006 and December 31, 2006.
|
| |
(3)
|
In
addition to automatic annual option grants made to all directors
for their
service on the board, includes the value of an option for the
purchase of
up to 9,787 shares of common stock at an exercise price of $0.24
per
share, immediately exercisable, in lieu of cash payment under
a consulting
agreement between us and Mr. Repine.
|
| |
(4)
|
In
addition to automatic annual option grants made to all directors
for their
service on the board, includes the value of following options
and warrants
granted to Mr. Post under a consulting agreement between
us and him: (i) a
ten-year option for the purchase of up to 333,333 shares
of common stock,
with an exercise price of $0.20 per share, which vests and
becomes
exercisable in six equal installments over a 180 day period
beginning
November 14, 2006, (ii) a ten-year warrant for the purchase
of 173,608
shares of common stock, with an exercise price of $0.20 per
share, fully
vested and immediately exercisable, (iii) a ten-year warrant
for the
purchase of 550,000 shares of common stock, with an exercise
price of
$0.20 per share, which vests and becomes exercisable with
respect to
225,000 shares in four quarterly installments from January
15, 2007 to
January 15, 2008, and which vests and becomes exercisable
with respect to
an additional 225,000 shares in eight equal installments
from January 15,
2008 to January 15, 2010, and (iv) a ten-year option for
the purchase of
156,250 shares with an exercise price of $0.24 per share,
fully vested and
immediately
exercisable.
|
Employment
Agreements
On
February 28, 2005, we entered into a Letter Agreement, effective as of February
28, 2005, with Steven T. Guillen. The terms of the Letter Agreement included,
but were not limited to, the following:
| · |
Mr.
Guillen would serve as our President and Chief Executive Officer;
|
| · |
Mr.
Guillen’s initial annual base salary was fixed at $250,000, subject to
annual salary and performance reviews and potential salary increases
at
the sole discretion of the Board;
|
| · |
Mr.
Guillen was eligible for a performance-based bonus determined at
the
discretion of the Board, the range of which was expected to be between
25%
and 50% of Mr. Guillen’s annual base salary, depending upon the attainment
of certain goals to be mutually agreed upon between Mr. Guillen and
the
Board;
|
| · |
Mr.
Guillen received irrevocable stock option grants in the aggregate
amount
of 600,000 shares of our common stock under our 2003 Stock Incentive
Plan,
and pursuant to a standalone grant outside of the plan;
|
| · |
Mr.
Guillen’s options would have an exercise price of $0.40 per share;
|
| · |
Mr.
Guillen would be entitled to full vesting of the then-unvested shares
subject to the irrevocable stock option grants upon a “Change of Control”
to include, in general, a merger, consolidation, or reorganization
of the
company, a sale of substantially all of our assets, a corporate
transaction resulting in a change of control of our company, a change
control of our board of directors, or upon Mr. Guillen’s termination of
his employment with our company for “Good Reason” (as the above terms are
defined in the Letter Agreement) (referred to as the “Acceleration
Events”);
|
| · |
Mr.
Guillen would purchase 600,000 fully-vested shares of our common
stock, at
the then-current market price of $0.40 per share from the pool of
shares
reserved in our 2003 Stock Incentive Plan;
|
| · |
Mr.
Guillen would become a member of our board of directors; and
|
| · |
As
further described and qualified in the Letter Agreement, Mr. Guillen
was
entitled to receive certain severance benefits, including payments
equal
to one month of his base salary for a period of 12 months, in the
event
that: (i) we terminated his employment without “cause” (as defined in the
Letter Agreement), (ii) within twelve months after a Change of Control,
Mr. Guillen terminated his employment with “good reason” (as defined in
the Letter Agreement) or (iii) Mr. Guillen’s employment terminated as a
result of his death or disability (each a “Severance Termination”).
|
On
September 15, 2006, Mr. Guillen’s employment as President and Chief Executive
Officer was terminated by the board of directors.
On
January 6, 2006 we signed a Letter Agreement with Michael D. Centron outlining
the basic terms of his employment with us as Vice President and Chief Financial
Officer. On the same day our board of directors ratified the Letter Agreement
and granted stock options to Mr. Centron pursuant to the terms of the Letter
Agreement. Under the terms of the Letter Agreement:
| · |
Mr.
Centron was entitled to a base salary of $150,000 per year with
eligibility for a twenty percent performance based annual
bonus;
|
| · |
Mr.
Centron was granted a ten year incentive stock option to purchase
150,000
shares of our common stock at an exercise price of $0.30 per share,
to be
vested as follows: 25% vest immediately, 25% vest on January 6, 2007,
25%
vest on January 6, 2008 and 25% vest on January 6, 2009.
|
| · |
Mr.
Centron was entitled to receive certain severance payments and benefits
in
the event that we terminated his employment without “cause”, as defined in
the Letter Agreement, if Mr. Centron terminated his employment with
“good
reason”, as defined in the Letter Agreement, within twelve months after
a
change of control (as defined in our 2003 Incentive Stock Plan),
or in the
event that Mr. Centron’s employment terminated as a result of his death or
disability (any of the above referred to as a “Severance Termination”).
|
| · |
In
the event of a Severance Termination, Mr. Centron would have received
a
payment equal to three months of his then effective base salary.
In
addition, the exercise period for any options vested as of the termination
date would have been extended until the later of January 6, 2011
or the
third anniversary of the termination date, provided however that
no
exercise of options would have been allowed after the expiration
of their
term.
|
Mr.
Centron resigned as an officer and employee effective November 15,
2006.
On
November 6, 2006, we entered into an employment agreement with Dr. Hausman
that
commenced retroactively at October 15, 2006, referred to as the commencement
date. Under the terms of our agreement:
| · |
Dr.
Hausman will serve as our President and Chief Executive Officer for
a
three year term from the commencement date of his employment, and
after
this period, on a year-to-year
basis;
|
| · |
Dr.
Hausman will receive annual compensation in the amount of $250,000,
payable quarterly in advance in cash, common stock based on a price
equal
to 85% of average of the five closing prices for the five trading
days
prior to the date that the issuance is authorized by the board of
directors, or in ten year warrants equal to that number of warrants
equal
to 1.5 times the number of shares that would otherwise be
received;
|
| · |
For
the initial quarterly payment, Dr. Hausman was issued 347,222 restricted
shares of common stock;
|
| · |
During
the three year term of the agreement, Dr. Hausman will receive an
annual
bonus based upon the attainment of agreed upon goals and milestones
as
determined by the board of directors and its compensation committee;
|
| · |
During
the remainder of calendar year 2006, Dr. Hausman’s bonus will be pro rated
on an annual bonus rate in the range of 25% to 50% of his base salary,
and
the bonus for subsequent years of the term of the agreement will
be in a
similar target range;
|
| · |
The
bonuses payable will be paid in cash, although at Dr. Hausman’s sole
option, they may be paid in stock (or in the form of ten year warrants
with cashless exercise provisions, with 1.5 times the number of warrant
shares to be issued in lieu of the number of shares of common stock),
based upon the average of the closing bid and asked prices for the
5
trading days immediately prior to the awarding to Dr. Hausman of
the bonus
for a particular year;
|
| · |
Once
we have raised at least $2.5 million in one or more financings (equity,
debt or convertible debt, in addition to the financing closed on
October
25, 2006) or in a strategic transaction, Dr. Hausman may elect, at
any
time, in lieu of receiving a quarterly issuance of stock (or warrants
in
lieu thereof), to receive his base salary in cash, payable monthly
on our
regular pay cycle for professional employees;
|
| · |
As
part of his compensation, we granted Dr. Hausman a ten year a
non-qualified option to purchase 495,000 shares of our common stock
at an
exercise price of $0.20 per share, vesting as follows: (i) 247,500
option
shares vesting in four equal quarterly installments commencing on
January
15, 2007 and every three months thereafter and (ii) and the remaining
247,500 option shares vesting in eight quarterly installments over
two
years;
|
| · |
Additionally,
we granted Dr. Hausman, as a sign on bonus, 500,000 restricted shares
of
common stock and a ten year common stock purchase warrant to purchase
1,505,000 shares at an exercise price of $0.20 per share, with vesting
in
six equal installments, commencing on November 14, 2006, through
the
180th
day after the Commencement Date;
|
| · |
We
are providing Dr. Hausman with an annual office expense allowance
of
$50,000, for the costs of maintaining an office in the Stevenson,
Washington area, payable quarterly in advance in the form of common
stock,
at a price equal to 85% of the market price;
|
| · |
For
the first installment, representing $12,500 of the above office expense
allowance, Dr. Hausman was issued 69,444 restricted shares of common
stock;
|
| · |
Once
we have completed a qualifying financing, the above office expense
allowance will be paid in cash in advance, commencing for the quarter
next
following the quarter in which the Qualifying Financing occurred.
|
| · |
Additionally,
Dr. Hausman will receive family health and dental insurance benefits
and
short-term and long-term disability policies;
|
| · |
Upon
termination for cause, all compensation due to Dr. Hausman under
the
agreement will cease, other than a right to participate in continued
group
health insurance for a certain period of time (this applies to all
terminations, except if Dr, Hausman terminates without good reason)
and
any unexercised portions of his stock options shall expire upon such
termination;
|
| · |
In
the event that we terminate Dr. Hausman’s employment within one year of a
change of control, Dr. Hausman shall receive an amount equal to twelve
months of his base salary for the then current term of the agreement
(which is in addition to the base salary paid to Dr. Hausman after
our
delivery of notice of termination and the actual date of termination)
plus
an amount equal to his bonus in the prior year (and if occurring
before
the determination of the 2007 bonus, an amount equal to 50% of the
then
current base salary), and the full vesting of Dr. Hausman’s stock options,
and extended exercisability of the options until their respective
expiration dates.
|
| · |
In
the event that we terminate our relationship with Dr. Hausman, including
a
non-renewal of the agreement by us, but other than upon a change
of
control, death, disability or cause, Dr. Hausman shall receive the
following: (i) if employment was terminated during the calendar year
2006,
an amount equal to six months of the then current base salary; if
employment was terminated commencing in the calendar year 2007 or
if we
elect not to renew the agreement, an amount equal to twelve months
of base
salary for the then current term of the agreement plus an amount
equal to
the prior year’s bonus (and if occurring before the bonus for 2007 has
been determined, an amount equal to 50% of the then current base
salary);
(ii) if employment was terminated during the calendar year 2006,
50% of
the previously unvested portion of the Initial Option Grant shall
vest and
such vested options shall be exercisable until their respective expiration
dates; if employment was terminated commencing in the calendar year
2007
and thereafter or if we elect not to renew the agreement following
the
initial three year term or any additional term, all stock options
granted
to Dr. Hausman (including without limitation the Initial Option Grant)
shall immediately vest and shall remain exercisable until their respective
expiration dates.
|
| · |
In
the event Dr. Hausman terminates his relationship with us for good
reason
within one (1) year of the occurrence of the event which established
good
reason, or for good reason within one year of a change of control,
Dr.
Hausman shall receive the following: (i) if the termination occurred
during the calendar year 2006 for good reason, an amount equal to
six
months of base salary; if the termination occurred during the calendar
year 2006 due to a change of control, an amount equal to twelve months
of
base salary; if termination for good reason occurred during the calendar
year 2007 or thereafter, an amount equal to twelve months of the
then
current base salary plus an amount equal to the prior year’s bonus (and if
occurring before the bonus for 2007 has been determined, an amount
equal
to 50% of the then current base salary); (ii) if termination occurred
during the calendar year 2006, 50% of the previously unvested portion
of
the Initial Option Grant shall vest and such vested options shall
be
exercisable until their respective expiration dates, except that
if
termination is by Dr. Hausman for good reason subsequent to a change
of
control, then 100% of any option grants to Dr. Hausman (including,
without
limitation, the Initial Option Grant) shall vest and shall remain
exercisable until its respective expiration dates; if employment
was
terminated commencing in the calendar year 2007 and thereafter, all
stock
options granted to Dr. Hausman (including, without limitation, the
Initial
Option Grant) shall immediately vest and shall remain exercisable
until
their respective expiration dates.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Consulting
and Employment Agreements with President, CEO and Chairman
On
October 12, 2006, we mutually agreed with Marvin S. Hausman, M.D. to terminate
the consulting agreement with NW Medical Research Partners, of which Dr. Hausman
is the sole member and manager, effective October 15, 2006. Under the consulting
agreement dated October 1, 2005, Dr. Hausman provided certain services
pertaining to licensing of intellectual property, development of potential
products, financing activities and other issues. In conjunction with the
termination of the consulting agreement, the board of directors approved the
issuance of 330,769 shares of restricted common stock to Dr. Hausman in lieu
of
cash payment of $67,000 in fees and expenses due under the consulting agreement
to the date of termination.
On
November 6, 2006, we entered into an employment agreement with Dr. Hausman
that
commenced retroactively at October 15, 2006, described in the section of this
prospectus entitled “Employment Agreements” beginning on page 61, which is
incorporated by reference.
Engagement
Letter and Advisory Agreement with Director
On
May
12, 2006, we entered into an engagement letter with Ambient Advisors LLC. Gary
M. Post, a member of our board of directors, is the manager of Ambient Advisors.
Ambient Advisors provided certain services pertaining to strategic planning,
investor communications and financing strategies and other projects at the
request of our chief executive officer for a one year period in return for
monthly compensation of $5,000. We granted Ambient Advisors a ten year warrant
to purchase 108,000 shares of our common stock at an exercise price of $0.39
per
share, with 9,000 shares becoming exercisable each month over the term of the
agreement. On October 12, 2006, we mutually agreed with Gary M. Post to
terminate the engagement letter with Ambient Advisors LLC, effective October
15,
2006, replace it with a new consulting agreement and accelerate the vesting
of
the warrant to be fully vested effective October 15, 2006.
On
November 6, 2006, we entered into an advisory agreement with Ambient Advisors
that commenced retroactively at October 15, 2006. Ambient Advisors will provide
certain services pertaining to strategic planning, financial planning and
budgeting, investor relations, corporate finance and such additional roles
and
responsibilities as requested for a three year period beginning from October
15,
2006, and after this date on a year-to-year basis. Ambient Advisors will receive
annual compensation in the amount of $83,333, payable quarterly in advance
in
cash, common stock based on a price equal to 85% of average of the five closing
prices for the five trading days prior to the date that the issuance is
authorized by the board of directors, or in ten year warrants equal to that
number of warrants equal to 1.5 times the number of shares that would otherwise
be received. For the initial quarterly payment, Ambient Advisors received a
ten
year warrant to purchase 173,608 shares of common stock with an exercise price
of $0.20 per share, vesting immediately. As part of the compensation, we granted
Ambient Advisors a ten year common stock purchase warrant to purchase 550,000
shares of our common stock at an exercise price of $0.20 per share, vesting
as
follows: (i) 275,000 warrant shares vesting in four equal quarterly installments
commencing on January 15, 2007 and every three months thereafter and (ii) and
the remaining 275,000 warrant shares vesting in eight quarterly installments
over two years. Additionally, we granted Ambient Advisors, as a sign on bonus,
a
non-qualified option to purchase 333,333 shares at exercise price of $0.20
per
share, with vesting in six equal installments, commencing on November 14, 2006,
through the 180th
day
after the commencement date of the agreement on October 15, 2006. During the
three year term of the agreement, Ambient Advisors will receive an annual bonus
based upon the attainment of agreed upon goals and milestones as determined
by
our board of directors or compensation committee. During the remainder of
calendar year 2006, Ambient Advisors’ bonus will be pro rated on an annual bonus
rate in the range of 25% to 50% of the advisory fee, and the bonus for
subsequent years of the term of the agreement will be in a similar target range.
The bonuses payable under our agreement with Ambient Advisors will be paid
in
cash, although at Ambient Advisors’ sole option, they may elect to receive
compensation in stock (or in the form of ten year warrants with cashless
exercise provisions, with 1.5 times the number of warrant shares to be issued
in
lieu of the number of shares of common stock), based upon the average of the
closing bid and asked prices for the 5 trading days immediately prior to the
awarding to Ambient Advisors of the bonus for a particular year.
If
we
terminate our agreement with Ambient Advisors without cause after the six month
anniversary of November 6, 2006, Ambient Advisors shall receive an amount equal
to twelve months of the advisory fee in a lump sum payment and all outstanding
stock options shall become fully vested and the warrants vested as of the date
of termination and the stock options shall remain exercisable through their
respective expiration dates. If we terminate our agreement with Ambient Advisors
without cause prior the six month anniversary of November 6, 2006, Ambient
Advisors will be paid any expenses due to it and all vested stock options and
warrants shall remain exercisable through their respective expiration dates.
If
we terminate Ambient Advisors for cause, Ambient Advisors will not be entitled
to any further payments of its advisory fee, and any unexercised stock options
will expire. If Ambient Advisors resigns for whatever reason, or if Gary M.
Post
dies or becomes disabled, Ambient Advisors will not be entitled to any further
payments of the advisory fee under our agreement, all unvested stock options
and
warrants will expire, and all vested stock options and warrants will remain
exercisable until their respective expiration dates.
Consulting
Agreement with Director
On
November 6, 2006, we entered into a consulting agreement with John E. Repine,
M.D. that commenced retroactively at October 15, 2006, or the Commencement
Date.
Dr. Repine is a member of our board of directors.
Under
our
consulting agreement with Dr. Repine, he advises us concerning matters of
antioxidant and inflammation research and potential acquisitions (including
products/compounds/intellectual property, companies), product research and
development, and the development and establishment of reference labs for
oxidative stress and inflammatory reactions. Our agreement has a three year
term
commencing on October 15, 2006, and is renewable on an annual basis following
this initial term. Dr. Repine receives annual compensation in the amount of
$36,000, payable quarterly in advance in cash, common stock based on a price
equal to 85% of average of the five closing prices for the five trading days
prior to the date that the issuance is authorized by the board of directors,
or
in ten year warrants equal to that number of warrants equal to 1.5 times the
number of shares that would otherwise be received. For the initial quarterly
payment, Dr. Repine received 50,000 restricted shares of common stock. As part
of the compensation under the consulting agreement, we granted Dr. Repine a
ten
year stock option to purchase 200,000 shares of our common stock at an exercise
price of $0.20 per share, vesting as follows: (i) 100,000 option shares vesting
in four equal quarterly installments commencing on January 15, 2007 and every
three months thereafter and (ii) and the remaining 100,000 option shares vesting
in eight quarterly installments over two years. Additionally, we granted Dr.
Repine, as a sign on bonus, a non-qualified option to purchase 200,000 shares
at
exercise price of $0.20 per share, with vesting in six equal installments,
commencing on November 14, 2006, through the 180th
day
after the commencement date of October 15, 2006. During the term of the
consulting agreement, Dr. Repine is eligible to receive annual and special
bonuses based upon the attainment of agreed upon goals and milestones as
determined by our Chief Executive Officer. Each bonus payable will be paid
in
cash, although at Dr. Repine’s sole option, such bonus may be paid in stock (or
in the form of ten year warrants with cashless exercise provisions, with 1.5
times the number of warrant shares to be issued in lieu of the number of shares
of common stock), based upon the average of the closing bid and asked prices
for
the 5 trading days immediately prior to the awarding to Dr. Repine of the
particular bonus.
If
we
terminate the Consulting Agreement without cause after the six month anniversary
of November 6, 2006, Dr. Repine will receive an amount equal to twelve months
of
the advisory fee in a lump sum payment and all outstanding stock options will
become fully vested and the warrants vested as of the date of termination and
the stock options shall remain exercisable through their respective expiration
dates. If we terminate our agreement with Dr. Repine without cause prior the
six
month anniversary of November 6, 2006, Dr. Repine will be paid any expenses
due
to him and all vested stock options and warrants shall remain exercisable
through their respective expiration dates. If we terminate Dr. Repine for cause,
Dr. Repine shall not be entitled to any further payments of his advisory fee
hereunder, and any unexercised stock options shall expire. If Dr. Repine resigns
for whatever reason, or if he dies or becomes disabled, Dr. Repine shall not
be
entitled to any further payments of the consulting fee hereunder, all unvested
stock options and warrants shall expire, and all vested stock options and
warrants shall remain exercisable until their respective expiration
dates.
Letter
Agreement and Promissory Note with former President, CEO and
Director
On
February 28, 2005, we entered into the Letter Agreement with Steven T. Guillen
as described under “Employment Agreements.” Mr. Guillen acted as our president
and chief executive officer from February 2005 to September 2006. Mr. Guillen
is
currently a member of our board of directors.
On
March
10, 2006, we received $200,000 in exchange for an unsecured promissory note
with
Mr. Guillen, our president and chief executive officer at that time. The related
party note bears interest at 7.0%. Interest and principal were due on September
10, 2006. Mr. Guillen’s employment was terminated on September 15, 2006. We were
in default on this note at September 30, 2006. After September 30, 2006, Mr.
Guillen sued the Company for payment of interest and principal due under the
note. On November 2, 2006, the Company paid to Mr. Guillen amounts owing under
the note.
Letter
Agreement with Vice President and Chief Financial Officer
On
January 6, 2006, we entered into the Letter Agreement with Michael D. Centron
as
described in the section above entitled “Employment Agreements” beginning on
page 61 of this prospectus, incorporated by reference.
Arrangement
Regarding Change in Composition of the Board of Directors
As
reported in our Information Statement to Stockholders, filed with the SEC and
mailed to Stockholders on April 15, 2004, we made an arrangement with our
controlling stockholder, Axonyx, under which three of our six directors (William
G. Pryor, Ted Ford Webb and Thomas M. Wolf) were asked, and agreed, to resign
from the board of directors on March 10, 2004. On the same date, our board
of
directors designated four new individuals (Gosse B. Bruinsma, S. Colin Neill,
Gerard J. Vlak and Steven H. Ferris), pursuant to Section 223(d) of the Delaware
General Corporation Law, to fill vacancies on the board of directors. The change
in membership of the board of directors became effective on April 25, 2004,
ten
(10) days after we mailed to record stockholders the Information Statement
concerning such change.
Loan
from Axonyx
On
June
1, 2004, we secured a $1,200,000 loan from Axonyx. To evidence the loan from
Axonyx, we issued to Axonyx a one-year secured promissory note bearing interest
at an annual rate of 7%. Under the terms of the loan from Axonyx, we promised
to
pay Axonyx $1.2 million plus accrued interest upon the receipt by us of at
least
$2,000,000 in net proceeds from a debt or equity offering. We became obligated
to repay our loan from Anonyx when we completed a private placement in early
2005. On January 6, 2005 after the closing of the private placement transaction,
we repaid our indebtedness under the loan from Axonyx in full, in the amount
of
$1,222,380.82.
Convertible
Debenture and Warrant Financing
On
October 25, 2006, pursuant to the terms of a securities purchase agreement
with
four accredited investors, we issued debentures in an aggregate principal amount
of $1,694,250, with an original issue discount of 20.318%, resulting in proceeds
to us of $1,350,000. In addition, investors in our private placement on October
25, 2006 were issued Series A, B, C, D and E common stock warrants for the
purchase of a maximum of up to approximately 14.5 million shares of our common
stock, as described in the section above in this prospectus entitled “Recent
Financing” on page 1, incorporated by reference. Included among the investors in
our October 25, 2006 convertible debenture and warrant financing were Bristol
Investment Fund, Ltd., Alpha Capital Anstalt, and Whalehaven Capital Fund
Limited, each of which beneficially owns over 5% of our issued and outstanding
capital stock.
As
permitted by Delaware law, our Certificate of Incorporation provides that we
will indemnify our directors and officers against expenses and liabilities
they
incur to defend, settle, or satisfy any civil, criminal, administrative or
investigative proceeding brought against them on account of their being or
having been our directors or officers to the fullest extent permitted by
Delaware law. Further, we have entered into an indemnification agreement with
each of our directors providing, among other things, for indemnification and
advancement of certain litigation-related expenses.
Exclusion
of Liability
Pursuant
to the Delaware General Corporation Law, our Certificate of Incorporation
excludes personal liability for its directors for monetary damages based upon
any violation of their fiduciary duties as directors, except as to liability
for
any breach of the duty of loyalty, acts or omissions not in good faith or which
involve intentional misconduct or any transaction from which a director receives
an improper personal benefit.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information known by us with respect to
the
beneficial ownership of our common stock as of December 1, 2006 by (i) each
person who is known by us to own beneficially more than 5% of common stock,
(ii)
each of the Named Executive Officers (see the section above entitled “Executive
Compensation”), (iii) each of our directors and (iv) all of our current officers
and directors as a group. Except as otherwise listed below, the address of
each
person is c/o OXIS International, Inc., 323 Vintage Park Drive, Suite B, Foster
City, California 94404.
The
percentage of shares beneficially owned is based on 44,527,476 shares of common
stock outstanding as of December 1, 2006. Shares of common stock subject to
stock options and warrants that are currently exercisable or exercisable within
60 days of December 1, 2006 are deemed to be outstanding for the purpose of
computing the percentage ownership of that person but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person. Unless indicated below, the persons and entities named in the table
have
sole voting and sole investment power with respect to all shares beneficially
owned, subject to community property laws where applicable.
|
Name
and Address of Beneficial Owner
|
|
Number
of Shares of Common Stock Beneficially
Owned
|
|
Percent of
Shares
of Outstanding Common
Stock
|
|
|
TorreyPines
Therapeutics, Inc. (1)
11085
N. Torrey Pines Road
La
Jolla, CA 92037
|
|
|
16,386,647
|
|
|
36.80
|
%
|
| |
|
|
|
|
|
|
|
|
Bristol
Investment Fund, Ltd. (2)
Bristol
Capital Advisors, LLC
10990
Wilshire Boulevard, Suite 1410
Los
Angeles, CA 90024
|
|
|
13,472,994
|
|
|
25.57
|
%
|
| |
|
|
|
|
|
|
|
|
Alpha
Capital Anstalt (3)
c/o
LH Financial
150
Central Park South, 2nd
Floor
New
York, NY 10019
|
|
|
5,737,143
|
|
|
12.01
|
%
|
| |
|
|
|
|
|
|
|
|
Whalehaven
Capital Fund Limited (4)
3rd
Floor, 14 Par-La-Ville Rd.
P.
O. Box HM1027
Hamilton
HMDX Bermuda
|
|
|
4,302,857
|
|
|
9.01
|
%
|
| |
|
|
|
|
|
|
|
|
Cranshire
Capital, LP (5)
3100
Dundee Rd., Suite 703
Northbrook,
IL 60062
|
|
|
4,717,791
|
|
|
9.99
|
%
|
| |
|
|
|
|
|
|
|
|
Marvin
S. Hausman, M.D. (6)
|
|
|
17,410,717
|
|
|
38.22
|
%
|
|
S.
Colin Neill (7)
|
|
|
181,875
|
|
|
*
|
|
|
Steven
T. Guillen (8)
|
|
|
1,175,000
|
|
|
2.61
|
%
|
|
John
E. Repine, M.D. (9)
|
|
|
233,387
|
|
|
0.52
|
%
|
|
Gary
M. Post (10)
|
|
|
688,275
|
|
|
1.52
|
%
|
|
Executive
officers and directors as a group — 5 persons (11)
|
|
|
19,689,254
|
|
|
41.73
|
%
|
|
(1)
|
Based
in part on a Schedule 13D/A filed with the SEC on March 5, 2004,
filed on
behalf of Axonyx Inc., which was acquired by TorreyPines Therapeutics
in
October 2006, and Dr. Hausman. Pursuant to the Schedule 13D/A Axonyx
has
sole voting power as to 13,982,567 and (with a correction to the
number of
shares reported in such Schedule 13D/A as being held by Dr. Hausman)
shared voting power as to 16,386,647 shares. In addition, Axonyx
has sole
dispositive power as to 13,982,567 shares and (with a correction
to the
number of shares reported in such Schedule 13D/A as being held by
Dr.
Hausman) shared dispositive power as to 16,386,647 shares. Axonyx
in the
Schedule 13D/A disclaims beneficial ownership of Dr. Hausman’s
shares.
|
| |
|
|
(2)
|
The
holdings of Bristol Investment Fund, Ltd. include 3,867,925 shares
of
common stock, 1,434,286 shares issuable upon the voluntary conversion
by
Bristol Investment Fund of a secured convertible debenture at the
current
conversion price of $0.35 per share, warrants to purchase 1,933,963
shares
of common stock at a price of $0.66 per share, warrants to purchase
1,933,962 shares of common stock at a purchase price of $1.00 per
share,
warrants to purchase 2,868,572 shares of common stock at a purchase
price
of $0.35 per share, and warrants to purchase 1,434,286 shares of
common
stock at a purchase price of $0.385 per share. Paul Kessler, manager
of
Bristol Capital Advisors, LLC, the investment advisor to Bristol
Investment Fund, Ltd., has voting and investment control over the
securities held by Bristol Investment Fund, Ltd. Mr. Kessler disclaims
beneficial ownership of these
securities.
|
|
(3)
|
The
holdings of Alpha Capital Anstalt include 1,434,286 shares issuable
upon
the voluntary conversion by Alpha Capital Anstalt of a secured convertible
debenture at the current conversion price of $0.35 per share, warrants
to
purchase 2,868,572 shares of common stock at a purchase price of
$0.35 per
share, and warrants to purchase 1,434,286 shares of common stock
at a
purchase price of $0.385 per share.
|
| |
|
|
(4)
|
The
holdings of Whalehaven Capital Fund Limited include 1,075,714 shares
issuable upon the voluntary conversion by Whalehaven Capital Fund
of a
secured convertible debenture at the current conversion price of
$0.35 per
share, warrants to purchase 2,151,428 shares of common stock at a
purchase
price of $0.35 per share, and warrants to purchase 1,075,714 shares
of
common stock at a purchase price of $0.385 per share.
|
| |
|
|
(5)
|
The
holdings of Cranshire Capital, LP. include 896,429 shares issuable
upon
the voluntary conversion by Cranshire Capital of a secured convertible
debenture at the current conversion price of $0.35 per share, warrants
to
purchase 283,019 shares of common stock at a price of $0.66 per share,
warrants to purchase 283,019 shares of common stock at a purchase
price of
$1.00 per share, warrants to purchase 1,792,857 shares of common
stock at
a purchase price of $0.35 per share, and warrants to purchase 896,428
shares of common stock at a purchase price of $0.385 per
share. Mitchell P. Kopin, the President of Downsview Capital, Inc.,
the General Partner of Cranshire Capital, L.P., has sole investment
power
and voting control over the securities held by Cranshire Capital,
L.P.
|
| |
|
|
(6)
|
The
holdings of Marvin S. Hausman, M.D. include 2,404,080 shares of common
stock, 271,570 shares issuable upon exercise of options that are
exercisable currently or within 60 days of December 1, 2006, 752,500
warrant shares exercisable currently or within 60 days of December
1,
2006, and 13,982,567 shares held by TorreyPine Therapeutics, which
acquired Axonyx Inc. in October 2006. Dr. Hausman has sole dispositive
power as to 2,404,080 shares and shared dispositive power as to 16,386,647
shares, including 13,982,567 shares held by TorreyPine Therapeutics.
Dr.
Hausman is a director of TorreyPine Therapeutics. Dr. Hausman in
the
Schedule 13D/A disclaims beneficial ownership of TorreyPine’s shares.
|
| |
|
|
(7)
|
The
holdings of S. Colin Neill include 135,000 shares issuable upon exercise
of options that are exercisable currently or within 60 days of December
1,
2006, and 46,875 warrant shares exercisable currently or within 60
days of
December 1, 2006.
|
| |
|
|
(8)
|
The
holdings of Steven T. Guillen include 600,000 shares of common stock
and
575,000 shares issuable upon exercise of options that are exercisable
currently or within 60 days of December 1,
2006.
|
|
(9)
|
The
holdings of director John E. Repine include 50,000 shares of common
stock
and 183,387 shares issuable upon exercise of options that are exercisable
currently or within 60 days of December 1, 2006.
|
| |
|
|
(10)
|
The
holdings of director Gary M. Post include 337,917 shares issuable
upon
exercise of options that are exercisable currently or within 60 days
of
December 1, 2006 and 350,358 warrant shares exercisable currently
or
within 60 days of December 1, 2006.
|
| |
|
|
(11)
|
The
holdings of the executive officers and directors as a group include
an
aggregate 17,036,647 shares of common stock, 1,502,874 shares issuable
upon exercise of options that are exercisable currently or within
60 days
of December 1, 2006 and 1,149,733 warrant shares exercisable currently
or
within 60 days of December 1, 2006.
|
Series
C Preferred Stock
The
following table sets forth certain information, as of October 31, 2006, with
respect to persons known by us to be the beneficial owner of more than five
percent (5%) of the OXIS Series C Preferred Stock.
|
Name
and address
|
|
Number
of Shares of Series C Preferred Stock Beneficially
Owned
|
|
Percent of
class
(1)
|
|
|
American
Health Care Fund, L.P.
|
|
|
77,000
|
|
|
80
|
%
|
|
2748
Adeline, Suite A
|
|
|
|
|
|
|
|
|
Berkeley,
CA 94703 (1)
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Megapolis
BV
|
|
|
19,230
|
|
|
20
|
%
|
|
Javastraaat
10
|
|
|
|
|
|
|
|
|
2585
The Hague, Netherlands (1)
|
|
|
|
|
|
|
|
|
(1)
|
As
required by SEC rules, the number of shares in the table includes
shares
which can be purchased within 60 days, or, shares with respect to
which a
person may obtain voting power or investment power within 60 days.
Also
required by such regulations, each percentage reported in the table
for
these individuals is calculated as though shares which can be purchased
within 60 days have been purchased by the respective person or group
and
are outstanding.
|
Equity
Compensation Plan Information
The
following table provides information as of December 31, 2005 with respect
to
shares of our common stock that may be issued under our equity compensation
plans.
The
following is a summary of our equity compensation plans at December 31,
2005:
|
Plan
Category
|
|
Number
of Securities to
be
Issued Upon Exercise of Outstanding 0ptions,
Warrants
and Rights (a)
|
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and
Rights
(b)
|
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding Securities Reflected in Column (a))
(c)
|
|
|
Equity
compensation plans approved by security holders (1)
|
|
|
4,874,352
|
|
$
|
0.70
|
|
|
493,270
|
|
|
Equity
compensation plans not approved by security holders (2)
|
|
|
1,503,438
|
|
$
|
0.26
|
|
|
—
|
|
|
Total
|
|
|
6,377,790
|
|
|
|
|
|
493,270
|
|
(1) As
of
December 31, 2005, we have granted options to purchase 2,136,730 shares of
common stock under our 2003 Stock Incentive Plan and 2,737,622 shares of
common
stock under the 1994 Stock Incentive Plan. Our 1994 Stock Incentive Plan
terminated on April 30, 2004 and no additional grants may be made under that
plan. As approved by stockholders, we may grant additional options to purchase
up to 493,270 shares of common stock under our 2003 Stock Incentive Plan
as of
December 31, 2005. The number of shares reserved for issuance pursuant to
options under the 2003 Stock Incentive Plan was increased by 300,000 shares
on
January 1, 2006 pursuant to an evergreen provision in the stock option plan.
On
August 1, 2006, at the OXIS 2006 Annual Meeting of Stockholders, a proposal
to
increase the number of shares reserved for issuance under the OXIS 2003 Stock
Incentive Plan from 3,600,000 shares to 5,600,000 shares was approved by
the
stockholders. Those additional share reserves are not included in the above
numbers.
(2) As
of
December 31, 2005, we have granted an aggregate of 1,503,438 options to
officers, directors, consultants and advisors outside of our 1994 Stock
Incentive Plan and our 2003 Stock Incentive Plan on a case by case basis
at the
discretion of the board of directors.
The
following description includes the material terms of our common stock. However,
it is a summary and is qualified in its entirety by the provisions of our
Certificate of Incorporation, with amendments, all of which have been filed
as
exhibits to our registration statement of which this prospectus is a part or
have been incorporated by reference from earlier filing with the SEC.
Our
authorized capital stock consists of 165,000,000 shares of stock. We are
authorized to issue two classes of stock that consist of 15,000,000 shares
of
preferred stock with a par value of $0.01 per share and 150,000,000 shares
of
common stock with a par value of $0.001 per share.
Common
Stock
Each
issued and outstanding share of our common stock is fully paid and
non-assessable. No pre-emptive rights exist with respect to any of our common
stock. Holders of shares of our common stock are entitled to one vote for each
share on all matters to be voted on by the stockholders. Holders of shares
of
our common stock have no cumulative voting rights. Holders of shares of our
common stock are entitled to share ratably in dividends, if any, as may be
declared, from time to time by our board of directors in its discretion, from
funds legally available for any such dividends. In the event of a liquidation,
dissolution or winding up of our company, the holders of shares of its common
stock are entitled to their pro rata share of all assets.
Preferred
Stock
Our
preferred stock may be divided into such number of series as our board of
directors may determine. Our board of directors is authorized to determine
and
alter the rights, preferences, privileges and restrictions granted to and
imposed upon any wholly unissued series of preferred stock, and to fix the
number of shares of any series of preferred stock and the designation of any
such series of preferred stock. As long as they stay within the limits and
restrictions of any prior resolution or resolutions originally fixing the number
of shares constituting any series of preferred stock, our board of directors
may
increase or decrease (but not below the number of shares of such series
outstanding at that time) the number of shares of any series subsequent to
the
issue of shares of that series.
As
of the
date of this prospectus 96,230 shares of Series C Preferred Stock are
outstanding. Each issued and outstanding share of our Series C Preferred Stock
is fully paid and non-assessable.
Conversion
Rights
Each
share of Series C Preferred Stock was initially convertible into one share
of
our common stock. On October 21, 1998, however, we effected a 1-for-5 reverse
stock split of our shares of common stock. While the reverse stock split did
not
affect the number of shares of Series C Preferred Stock outstanding, it did
affect the conversion ratio for such shares. As a result of the reverse stock
split, each share of Series C Preferred Stock is currently convertible into
0.2889 shares of our common stock. 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 .20 nor more than .2889 common shares for each Series
C
Preferred share. The conversion ratio may be adjusted under certain
circumstances such as stock splits or stock dividends.
We
have a
right to convert shares of Series C Preferred into shares of common stock
automatically if at any time the average closing bid price of our common stock
for 15 consecutive trading days is equal to or greater than $2.60.
Voting
Rights
Shares
of
Series C Preferred Stock generally vote with shares of common stock, and have
a
number of votes equal to the number of shares of common stock into which they
could convert. As such, on most matters shares of Series C Preferred Stock
have
1/5th of a vote per share.
Holders
of a majority of the outstanding shares of Series C Preferred Stock voting
separately as a separate class, must consent prior to us taking any action
which
alters or changes any of the rights, privileges or preferences of the Series
C
Preferred Stock, including without limitation increasing or decreasing the
aggregate number of authorized shares of such series other than an increase
incident to a stock split.
If
we
propose to merge or consolidate with or into another corporation, or sell,
lease
or convey all or substantially all of its assets, we are required to send to
holders of Series C Preferred Stock notice of the proposal at least twenty
(20)
days prior to taking such action.
Liquidation
Preference
Shares
of
Series C Preferred Stock participate on an equal basis with the holders of
the
common stock (as if the Series C Preferred Stock had converted into common
stock) in any distribution of any of the assets or surplus funds of our company.
Convertible
Debentures
On
October 25, 2006, we issued we issued convertible debentures with an aggregate
principal amount of $1,694,250 to the Purchasers. The debentures were issued
with an original issue discount of 20.318%, and resulted in proceeds to us
of
$1,350,000. The debentures are convertible, at the option of the holders, at
any
time into shares of common stock at $0.35 per share, as adjusted in accordance
with a full ratchet anti-dilution provision (referred to in this prospectus
as
the “conversion price”). Beginning on the first of the month following the
earlier of the effective date of the registration statement to be filed pursuant
to the registration rights agreement and February 1, 2007, we will amortize
the
debentures in equal installments on a monthly basis resulting in a complete
repayment by the maturity date (the “Monthly Redemption Amounts”). The Monthly
Redemption Amounts can be paid in cash or in shares, subject to certain
restrictions. If we choose to make any Monthly Redemption Amount payment in
shares of common stock, the price per share is the lesser of the conversion
price then in effect and 85% of the weighted average price for the ten trading
days prior to the due date of the Monthly Redemption Amount.
The
performance of our duties and obligations under the debentures are secured
by
substantially all of our assets under a security agreement. As additional
security to the debenture holders, we have also pledged the shares we hold
in
our subsidiaries, including 51% of BioCheck, Inc., and all of the shares of
capital stock of our wholly-owned subsidiaries, OXIS Therapeutics, Inc. and
OXIS
Isle of Man Limited. In addition, OXIS Therapeutics, Inc. and OXIS Isle of
Man
Limited, have each entered into a subsidiary guarantee under which these
subsidiaries have guaranteed the performance, at the parent level, of our
obligations under the debentures.
Warrants
On
October 25, 2006 in conjunction with the issuance of the debentures, we also
issued (1) five year Series A warrants to purchase an aggregate of 2,420,357
shares of common stock at an initial exercise price of $0.35 per share, (2)
one
year Series B warrants to purchase 2,420,357 shares of common stock at an
initial exercise price of $0.385 per share, (3) two year Series C warrants
to
purchase an aggregate of 4,840,714 shares of common stock at an initial exercise
price of $0.35 per share, (4) six year Series D warrants to purchase 2,420,357
shares of common stock have an initial exercise price of $0.35 per share, which
become exercisable on a pro-rata basis only upon the exercise of the Series
C
warrants, and (5) six year Series E warrants to purchase 2,420,357 shares of
common stock with an initial exercise price of $0.385 per share, which similar
to the Series D warrants, become exercisable on a pro-rata basis only upon
the
exercise of the Series C warrants. The initial exercise prices for each warrant
are adjustable pursuant to a full ratchet anti-dilution provision and upon
the
occurrence of a stock split or a related event.
Registration
Rights
We
have
agreed to file a registration statement to register the common stock underlying
the debentures and warrants described above on or before December 9, 2006,
and
cause the registration statement to become effective on or before February
22,
2007. We will be obligated to pay the investors a monthly penalty of 2% (up
to a
maximum of 36%) of the offering amount if we fail to meet the foregoing
registration deadlines, until the registration statement becomes effective.
For
additional details regarding the terms and conditions of the registration rights
agreement, see Exhibit 10.4 to our current report on Form 8-K filed with the
SEC
on October 26, 2006. The above description is qualified in its entirety by
reference to the full text of this agreement.
Registration
of these shares of common stock upon exercise of these registration rights
would
result in the holders being able to trade these shares without restriction
under
the Securities Act once the applicable registration statement is declared
effective. We have agreed to pay all registration expenses related to the
registration of these shares of common stock. All registration rights terminate,
as to any individual holder, when the holder can sell all of the holder’s shares
pursuant to Rule 144(k) under the Securities Act.
Anti-Takeover
Provisions and Delaware Law
Certificate
of Incorporation and Bylaws
Some
provisions of Delaware law and our certificate of incorporation and bylaws
contain provisions that could make the following transactions more difficult:
|
|
·
|
|
acquisition
of us by means of a tender offer;
|
|
|
·
|
|
acquisition
of us by means of a proxy contest or otherwise; or
|
|
|
·
|
|
removal
of our incumbent officers and directors.
|
These
provisions, summarized below, are expected to discourage coercive takeover
practices and inadequate takeover bids and to promote stability in our
management. These provisions are also designed to encourage persons seeking
to
acquire control of us to first negotiate with our board of directors.
|
|
·
|
|
Undesignated
Preferred Stock. The
ability to authorize undesignated preferred stock makes it possible
for
our board of directors to issue one or more series of preferred stock
with
voting or other rights or preferences that could impede the success
of any
attempt to change control of us. These and other provisions may have
the
effect of deterring hostile takeovers or delaying changes in control
or
management of our company.
|
|
|
·
|
|
Stockholder
Meetings. Our
charter documents provide that a special meeting of stockholders
may be
called only by the chairman of the board, by our president, or by
a
resolution adopted by a majority of our board of directors.
|
|
|
·
|
|
Requirements
for Advance Notification of Stockholder Nominations and
Proposals. Our
bylaws establish advance notice procedures with respect to stockholder
proposals and the nomination of candidates for election as directors,
other than nominations made by or at the direction of the board of
directors or a committee of the board of directors.
|
|
|
·
|
|
No
Stockholder Action by Written Consent. Under
our certificate of incorporation, our stockholders may not act by
written
consent without a meeting.
|
|
|
·
|
|
Board
of Directors. Our
certificate of incorporation and bylaws provide that, subject to
any
rights of holders of preferred stock to elect additional directors
under
specified circumstances, the number of directors will be fixed from
time
to time exclusively by resolution by the board of directors. In addition,
subject to any rights of holders of preferred stock, newly created
directorships resulting from any increase in the number of directors
and
any vacancies on the board of directors resulting from death, resignation,
disqualification, removal or other cause will be filled by the affirmative
vote of a majority of the remaining directors then in office, even
if less
than a quorum, and not by the stockholders. No decrease in the number
of
directors constituting the board of directors will shorten the term
of any
incumbent director. Subject to the rights of holders of preferred
stock,
generally any director may be removed from office by the affirmative
vote
of the holders of at least a majority of our outstanding common stock.
|
|
|
·
|
|
Supermajority
Approval of Certain Corporate Actions. Under
our certificate of incorporation, the affirmative vote of two-thirds
of
our outstanding stock is required for us to take the following actions:
(a) to approve the lease, sale, exchange or transfer or other disposition
of all or substantially all of our assets or business to a related
company
or its affiliate; to consolidate or merge with a related company
or its
affiliate; or to acquire substantially all of the assets of a corporation,
or the securities representing such assets, in which we are the acquiring
corporation and our voting shares are issued or transferred to a
related
company or its affiliate, or to stockholders of a related company,
its
affiliate or an associated person; (b) to approve any agreement providing
for any action in (a), or (c) to amend our certificate of incorporation
to
change the provisions of the section that requires supermajority
approval
of such actions. For purposes of this section, “related company” is
defined as any person or entity which together with affiliates or
associated persons, owns 10% of our outstanding shares. In addition,
with
respect to any such transaction, our stockholders will be entitled
to
dissenting stockholder rights under Section 262 of the Delaware General
Corporation Law or as provided for in our certificate of
incorporation.
|
|
|
·
|
|
No
Cumulative Voting.
Our certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors. Cumulative voting provides for
a
minority stockholder to vote a portion or all of its shares for one
or
more candidates for seats on the board of directors. Without cumulative
voting, a minority stockholder will not be able to gain as many seats
on
our board of directors based on the number of shares of our stock
that
such stockholder holds than if cumulative voting were permitted and
makes
it more difficult for a minority stockholder to gain a seat on our
board
of directors to influence the board of directors’ decision regarding a
takeover.
|
Delaware
Anti-Takeover Statute
We
are
subject to Section 203 of the Delaware General Corporation Law. This law
prohibits a publicly-held Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that the stockholder became an interested stockholder unless:
|
|
·
|
|
prior
to the date of the transaction, the board of directors of the corporation
approved either the business combination or the transaction which
resulted
in the stockholder becoming an interested stockholder;
|
|
|
·
|
|
upon
consummation of the transaction which resulted in the stockholder
becoming
an interested stockholder, the interested stockholder owned at least
85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the
number of
shares outstanding those shares owned by persons who are directors
and
also officers and by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares
held
subject to the plan will be tendered in a tender or exchange offer;
or
|
|
|
·
|
|
on
or subsequent to the date of the transaction, the business combination
is
approved by the board of directors and authorized at an annual or
special
meeting of stockholders, and not by written consent, by the affirmative
vote of at least two-thirds of the outstanding voting stock which
is not
owned by the interested stockholder.
|
Section 203
defines “business combination” to include:
|
|
·
|
|
any
merger or consolidation involving the corporation and the interested
stockholder;
|
|
|
·
|
|
any
sale, transfer, pledge or other disposition of 10% or more of our
assets
involving the interested stockholder;
|
|
|
·
|
|
in
general, any transaction that results in the issuance or transfer
by us of
any of our stock to the interested stockholder;
|
|
|
·
|
|
in
general, any transaction that has the effect of increasing the
proportionate share of our stock of any class or series to be owned
by the
interested stockholder; or
|
|
|
·
|
|
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided
by or
through the corporation.
|
In
general, Section 203 defines an “interested stockholder” as an entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person. Upon its acquisition of our common stock
in
2004, Axonyx and its affiliates (including certain of the members of our board
of directors) became “interested stockholders” pursuant to Section
203.
The
Delaware General Corporate Law and the terms of indemnity agreements entered
into by us provide for indemnification of our directors and certain officers
for
liabilities and expenses that they may incur in such capacities. In general,
our
directors and certain officers are indemnified with respect to actions taken
in
good faith and in a manner such person believed to be in our best interests,
and
with respect to any criminal action or proceedings, actions that such person
has
no reasonable cause to believe were unlawful. Furthermore, the personal
liability of our directors is limited as provided in our Certificate of
Incorporation.
We
maintain directors and officers liability insurance with an aggregate coverage
limit of $4,000,000.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933,
as
amended (the “Securities Act”) may be permitted to directors, officers or
persons controlling us pursuant to the foregoing provisions, we have been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
The
validity of the shares of common stock being offered was passed upon for us
by
Richardson & Patel LLP, Los Angeles, California.
Our
audited financial statements at December 31, 2005 appearing in this prospectus
and registration statement have been audited by Williams & Webster, P.S., as
set forth on their report thereon appearing elsewhere in this prospectus, and
are included in reliance upon such report given upon the authority of such
firm
as experts in accounting and auditing.
We
have
filed a registration statement on Form SB-2 under the Securities Act of 1933,
as
amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of OXIS International, Inc., filed as
part
of the registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance
with
the rules and regulations of the Securities and Exchange Commission (“SEC”).
We
are
subject to the informational requirements of the Securities Exchange Act of
1934, which requires us to file reports, proxy statements and other information
with the SEC. Such reports, proxy statements and other information may be
inspected at the public reference room of the SEC at 100 F Street, N.E.,
Washington D.C. 20549. Copies of such material can be obtained from the facility
at prescribed rates. Please call the SEC toll free at 1-800-SEC-0330 for
information about its public reference room. Because we file documents
electronically with the SEC, you may also obtain this information by visiting
the SEC’s Internet website at http://www.sec.gov or our website at
http://www.oxis.com. Information contained in our web site is not part of this
prospectus.
Our
statements in this prospectus about the contents of any contract or other
document are not necessarily complete. You should refer to the copy of our
contract or other document we have filed as an exhibit to the registration
statement for complete information.
You
should rely only on the information incorporated by reference or provided in
this prospectus. We have not authorized anyone else to provide you with
different information. The selling security holders are not making an offer
of
these securities in any state where the offer is not permitted. You should
not
assume that the information in this prospectus is accurate as of any date other
than the date on the front of the document.
We
furnish our stockholders with annual reports containing audited financial
statements.
OXIS
INTERNATIONAL, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
| |
|
|
Consolidated
Balance Sheets for the years ended December 31, 2005 and
2004
|
F-3
|
| |
|
|
Consolidated
Statements of Operations for the years ended December 31, 2005 and
2004
|
F-4
|
| |
|
|
Consolidated
Statement of Stockholders’ Equity for the years ended December 31, 2005
and 2004
|
F-5
|
| |
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2005 and
2004
|
F-6
|
| |
|
|
Notes
to Consolidated Financial Statements for the years ended December
31, 2005
and 2004
|
F-7
|
| |
|
|
Consolidated
Balance Sheets as of September 30, 2006 (Unaudited) and December
31,
2005
|
F-31
|
| |
|
|
Consolidated
Statements of Operations for the periods ended September 30, 2006
and 2005
(Unaudited)
|
F-32
|
| |
|
|
Consolidated
Statements of Cash Flows for the periods ended September 30, 2006
and 2005
(Unaudited)
|
F-33
|
| |
|
|
Condensed
Notes to Consolidated Financial Statements for the period ending
September
30, 2006
|
F-34
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors
OXIS
International, Inc.
Foster
City, California
We
have
audited the accompanying consolidated balance sheets of OXIS International,
Inc.
and subsidiaries as of December 31, 2005 and 2004 and the related consolidated
statements of operations, stockholders’ equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 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 audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of OXIS International, Inc., and
subsidiaries as of December 31, 2005 and 2004 and the results of its operations,
stockholders’ equity and its cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company’s significant and ongoing operating losses raise
substantial doubt about its ability to continue as a going concern. Management’s
plans regarding the resolution of this issue are also discussed in Note 1.
The
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty.
/s/
Williams & Webster, P.S.
Williams
& Webster, P.S.
CERTIFIED
PUBLIC ACCOUNTANTS
Spokane,
Washington
March
27,
2006
OXIS
INTERNATIONAL, INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands of dollars)
| |
|
December
31,
|
|
| |
|
2005
|
|
2004
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
614
|
|
$
|
4,687
|
|
|
Accounts
receivable, net of allowance of $2 and $7, respectively
|
|
|
865
|
|
|
229
|
|
|
Private
placement proceeds receivable
|
|
|
—
|
|
|
2,250
|
|
|
Inventories
|
|
|
650
|
|
|
246
|
|
|
Prepaid
expenses and other current assets
|
|
|
238
|
|
|
128
|
|
|
Deferred
tax assets
|
|
|
14
|
|
|
—
|
|
|
Restricted
cash
|
|
|
3,060
|
|
|
—
|
|
|
Total
current assets
|
|
|
5,441
|
|
|
7,540
|
|
|
Property,
plant and equipment, net
|
|
|
243
|
|
|
61
|
|
|
Patents,
net
|
|
|
831
|
|
|
875
|
|
|
Goodwill
and other assets, net
|
|
|
1,291
|
|
|
—
|
|
| |
|
$
|
7,806
|
|
$
|
8,476
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
505
|
|
$
|
491
|
|
|
Accrued
expenses
|
|
|
468
|
|
|
829
|
|
|
Accounts
payable to related party
|
|
|
194
|
|
|
—
|
|
|
Note
payable
|
|
|
3,060
|
|
|
—
|
|
|
Notes
payable to stockholders
|
|
|
—
|
|
|
1,360
|
|
|
Total
current liabilities
|
|
|
4,227
|
|
|
2,680
|
|
|
Long-term
deferred taxes
|
|
|
41
|
|
|
—
|
|
|
Total
liabilities
|
|
|
4,268
|
|
|
2,680
|
|
|
Minority
interest
|
|
|
604
|
|
|
—
|
|
|
Commitments
and contingencies
|
|
|
—
|
|
|
—
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Convertible
preferred stock - $0.01 par value; 15,000,000 shares
authorized:
|
|
|
|
|
|
|
|
|
Series
B - None and 428,389 shares issued and outstanding at December 31,
2005
and 2004, respectively (aggregate liquidation preference of
$1,000)
|
|
|
—
|
|
|
4
|
|
|
Series
C - 96,230 shares issued and outstanding
|
|
|
1
|
|
|
1
|
|
|
Common
stock - $0.001 par value; 95,000,000 shares authorized; 42,538,397
shares
issued and outstanding at December 31, 2005 and 28,807,040 shares
issued
and outstanding and 12,264,158 issuable at December 31,
2004
|
|
|
43
|
|
|
41
|
|
|
Additional
paid-in capital
|
|
|
68,686
|
|
|
68,437
|
|
|
Accumulated
deficit
|
|
|
(65,379
|
)
|
|
(62,270
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(417
|
)
|
|
(417
|
)
|
|
Total
stockholders’ equity
|
|
|
2,934
|
|
|
5,796
|
|
| |
|
$
|
7,806
|
|
$
|
8,476
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
OXIS
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands of dollars, except earnings per share data)
| |
|
Years
Ended December 31,
|
|
| |
|
2005
|
|
2004
|
|
|
Product
revenues
|
|
$
|
2,397
|
|
$
|
1,914
|
|
|
License
revenues
|
|
|
100
|
|
|
450
|
|
|
Total
revenue
|
|
|
2,497
|
|
|
2,364
|
|
|
Cost
of product revenues
|
|
|
1,345
|
|
|
1,216
|
|
|
Gross
profit
|
|
|
1,152
|
|
|
1,148
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
499
|
|
|
278
|
|
|
Selling,
general and administrative
|
|
|
2,342
|
|
|
1,843
|
|
|
Purchased
in-process research and development
|
|
|
1,500
|
|
|
—
|
|
|
Foreign
legal proceedings
|
|
|
—
|
|
|
183
|
|
|
Restructuring
charges
|
|
|
—
|
|
|
605
|
|
|
Total
operating expenses
|
|
|
4,341
|
|
|
2,909
|
|
|
Loss
from operations
|
|
|
(3,189
|
)
|
|
(1,761
|
)
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
110
|
|
|
1
|
|
|
Other
income
|
|
|
4
|
|
|
19
|
|
|
Financing
fees
|
|
|
—
|
|
|
(856
|
)
|
|
Interest
expense
|
|
|
(26
|
)
|
|
(101
|
)
|
|
Total
other income and expenses
|
|
|
88
|
|
|
(937
|
)
|
|
Minority
interest in subsidiary
|
|
|
(6
|
)
|
|
—
|
|
|
Loss
before provision for income taxes
|
|
|
(3,107
|
)
|
|
(2,698
|
)
|
|
Provision
for income taxes
|
|
|
(2
|
)
|
|
—
|
|
|
Net
loss
|
|
|
(3,109
|
)
|
|
(2,698
|
)
|
|
Other
comprehensive loss
-
foreign
currency translation adjustment
|
|
|
—
|
|
|
(26
|
)
|
|
Comprehensive
loss
|
|
$
|
(3,109
|
)
|
$
|
(2,724
|
)
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.07
|
)
|
$
|
(0.10
|
)
|
|
Weighted
average shares outstanding
-
basic and diluted
|
|
|
42,213,275
|
|
|
26,828,289
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
OXIS
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
(in
thousands of dollars, except Shares)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Other
|
|
Total
|
|
| |
|
Preferred
Stock
|
|
Common
Stock
|
|
Paid-in
|
|
Accumulated
|
|
Comprehensive
|
|
Stockholders’
|
|
| |
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Loss
|
|
Equity
|
|
|
Balance,
December 31, 2003
|
|
|
524,619
|
|
$
|
5
|
|
|
26,427,910
|
|
$
|
26
|
|
$
|
60,724
|
|
$
|
(59,572
|
)
|
$
|
(391
|
)
|
$
|
792
|
|
|
Exercise
of stock options
|
|
|
|
|
|
|
|
|
791,532
|
|
|
1
|
|
|
136
|
|
|
|
|
|
|
|
|
137
|
|
|
Issuance
of common stock for services
|
|
|
|
|
|
|
|
|
66,666
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
46
|
|
|
Stock
compensation expense for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
issued to non-employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
44
|
|
|
Conversion
of note payable into
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stock and issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
related warrants
|
|
|
|
|
|
|
|
|
1,520,932
|
|
|
2
|
|
|
1,379
|
|
|
|
|
|
|
|
|
1,381
|
|
|
Issuable
common stock and warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
private placement
|
|
|
|
|
|
|
|
|
12,264,158
|
|
|
12
|
|
|
6,108
|
|
|
|
|
|
|
|
|
6,120
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,698
|
)
|
|
|
|
|
(2,698
|
)
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
|
(26
|
)
|
|
Balance,
December 31, 2004
|
|
|
524,619
|
|
|
5
|
|
|
41,071,198
|
|
|
41
|
|
|
68,437
|
|
|
(62,270
|
)
|
|
(417
|
)
|
|
5,796
|
|
|
Cost
of registration statement related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
private placement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(302
|
)
|
|
|
|
|
|
|
|
(302
|
)
|
|
Exercise
of stock options
|
|
|
|
|
|
|
|
|
322,166
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
45
|
|
|
Issuance
of common stock
|
|
|
|
|
|
|
|
|
600,000
|
|
|
1
|
|
|
239
|
|
|
|
|
|
|
|
|
240
|
|
|
Stock
compensation expense for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
issued to non-employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
20
|
|
|
Conversion
of stockholder note payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
into
common stock
|
|
|
|
|
|
|
|
|
459,355
|
|
|
1
|
|
|
243
|
|
|
|
|
|
|
|
|
244
|
|
|
Conversion
of Series B preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
into
common stock
|
|
|
(428,389
|
)
|
|
(4
|
)
|
|
85,678
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
—
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,109
|
)
|
|
|
|
|
(3,109
|
)
|
|
Balance,
December 31, 2005
|
|
|
96,230
|
|
$
|
1
|
|
|
42,538,397
|
|
$
|
43
|
|
$
|
68,686
|
|
$
|
(65,379
|
)
|
$
|
(417
|
)
|
$
|
2,934
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
OXIS
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands of dollars)
| |
|
Years
Ended December 31,
|
|
| |
|
2005
|
|
2004
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,109
|
)
|
$
|
(2,698
|
)
|
|
Adjustments
to reconcile net loss to net cash used
in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
of property, plant and equipment
|
|
|
28
|
|
|
21
|
|
|
Amortization
of intangible assets
|
|
|
126
|
|
|
152
|
|
|
Purchased
in-process research and development expense
|
|
|
1,500
|
|
|
—
|
|
|
Write-off
of capitalized patent costs
|
|
|
105
|
|
|
—
|
|
|
Stock
compensation expense
|
|
|
20
|
|
|
90
|
|
|
Common
stock issued for accrued interest
|
|
|
—
|
|
|
38
|
|
|
Amortization
of deferred financing costs
|
|
|
—
|
|
|
654
|
|
|
Common
stock warrants issued for financing fees
|
|
|
—
|
|
|
202
|
|
|
Minority
interest in subsidiary
|
|
|
6
|
|
|
—
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(26
|
)
|
|
22
|
|
|
Inventories
|
|
|
(108
|
)
|
|
49
|
|
|
Prepaid
expenses and other current assets
|
|
|
(62
|
)
|
|
11
|
|
|
Other
assets
|
|
|
—
|
|
|
30
|
|
|
Accounts
payable
|
|
|
(152
|
)
|
|
(118
|
)
|
|
Accrued
expenses
|
|
|
(431
|
)
|
|
505
|
|
|
Accounts
payable to related party
|
|
|
10
|
|
|
—
|
|
|
Net
cash used by operating activities
|
|
|
(2,093
|
)
|
|
(1,042
|
)
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of common shares of subsidiary
|
|
|
(3,215
|
)
|
|
—
|
|
|
Investment
in restricted certificate of deposit
|
|
|
(3,060
|
)
|
|
—
|
|
|
Cash
acquired in business combination
|
|
|
407
|
|
|
—
|
|
|
Capital
expenditures
|
|
|
(33
|
)
|
|
(47
|
)
|
|
Increase
in patents
|
|
|
(172
|
)
|
|
(262
|
)
|
|
Net
cash used by investing activities
|
|
|
(6,073
|
)
|
|
(309
|
)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Collection
of private placement proceeds receivable,
net
of registration statement costs
|
|
|
1,948
|
|
|
—
|
|
|
Proceeds
from issuance of stock and related warrants,
net
of financing charges
|
|
|
—
|
|
|
3,870
|
|
|
Proceeds
from short-term borrowings and issuance of
related
warrant, net of financing charges
|
|
|
—
|
|
|
486
|
|
|
Proceeds
from issuance of common stock
|
|
|
240
|
|
|
—
|
|
|
Proceeds
from exercise of stock options
|
|
|
45
|
|
|
136
|
|
|
Proceeds
from short-term borrowing
|
|
|
3,060
|
|
|
1,200
|
|
|
Repayment
of short-term borrowings
|
|
|
(1,200
|
)
|
|
—
|
|
|
Net
cash provided by financing activities
|
|
|
4,093
|
|
|
5,692
|
|
|
Other
comprehensive gain (loss) - foreign currency translation
|
|
|
—
|
|
|
(26
|
)
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(4,073
|
)
|
|
4,315
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
4,687
|
|
|
372
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
614
|
|
$
|
4,687
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2005 AND 2004
1. The
Company and Summary of Significant Accounting Policies
OXIS
International, Inc. and its subsidiaries (collectively, “OXIS” or the “Company”)
is a clinical diagnostics company engaged in the development of clinical and
research assays, diagnostics, nutraceutical and therapeutic products, which
include new technologies applicable to conditions and diseases associated with
oxidative stress. OXIS derives its revenues primarily from sales of research
diagnostic assays to research laboratories during 2005. The Company’s diagnostic
products include twenty-five research assays to measure markers of oxidative
stress.
In
1965,
the corporate predecessor of OXIS, Diagnostic Data, Inc. was incorporated in
the
State of California. Diagnostic Data changed its incorporation to the State
of
Delaware in 1972; and changed its name to DDI Pharmaceuticals, Inc. in 1985.
In
1994, DDI Pharmaceuticals merged with International BioClinical, Inc. and
Bioxytech S.A. and changed its name to OXIS International, Inc. The Company’s
principal executive offices were relocated to Foster City, California from
Portland, Oregon on February 15, 2006.
On
September 19, 2005, the Company entered into a stock purchase agreement with
BioCheck, Inc. (“BioCheck”) and certain stockholders of BioCheck to purchase all
of the common stock of BioCheck for $6.0 million in cash. On December 6,
2005, the Company purchased 51% of the common stock of BioCheck from each of
the
stockholders of BioCheck on a pro rata basis, for $3,060,000 in cash. The
consolidated statement of operations for the year ended December 31, 2005
includes the results of operations of BioCheck from December 6, 2005, the date
of acquisition, and the consolidated balance sheet at
December 31, 2005 includes the assets and liabilities of BioCheck.
With the BioCheck acquisition, the Company anticipates that over fifty percent
of its revenues will be derived from sales of clinical diagnostic assays in
2006.
The
Company incurred net losses of $3.1 million in 2005 and $2.7 million
in 2004. BioCheck generated a profit of $0.2 million in 2005. This amount
of profit would not be enough to offset the Company’s current losses. The 2005
loss includes an expense of $1.5 million for purchased in-process research
and development that will not reoccur in 2006. However, the Company is seeking
debt financing that may have related warrants. Such a financing may result
in
large non-cash financing charges that could delay profitability. The Company’s
plan is to increase revenues to generate sufficient gross profit in excess
of
selling, general and administrative, and research and development expenses
in
order to achieve profitability. However, the Company can not assure you that
it
will accomplish this task and there are many factors that may prevent the
Company from reaching its goal of profitability.
As
shown
in the accompanying financial statements, the Company has incurred an
accumulated deficit of $65,379,000 through December 31, 2005. On a consolidated
basis, the Company had cash and cash equivalents of $614,000 at December 31,
2005 of which $282,000 was held by BioCheck. Since BioCheck has been and is
expected to continue to be cash flow positive, management believes that its
cash
will be sufficient to sustain its operating activities. The cash held by the
OXIS parent company of $332,000 at December 31, 2005 is not sufficient to
sustain its operations through the first quarter of 2006 without additional
financings. During March 2006, the Company received $200,000 from its president
and chief executive officer in exchange for a promissory note.
An
estimated $1.0 million is believed necessary to continue operations through
the
next fiscal year and approximately $3.0 million is required to purchase the
remaining 49% of BioCheck. The Company is seeking additional loan and equity
financings to obtain sufficient funds to sustain operations, implement its
marketing campaign and purchase the remaining 49% of BioCheck. The Company
plans
to increase revenues by its marketing campaign and the introduction of new
products. However, we cannot assure you that we will successfully obtain debt
or
equity financing, if any, sufficient to finance our goals or that we will
increase product related revenues as such events are subject to factors beyond
our control. The financial statements do not include any adjustments relating
to
the recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
Basis
of Consolidation and Comprehensive Income
The
accompanying consolidated financial statements include the accounts of OXIS
International, Inc. and its subsidiaries. All intercompany balances and
transactions have been eliminated. The Company’s financial statements are
prepared using the accrual method of accounting. On December 6, 2005, the
Company purchased 51% of the common stock of BioCheck. The consolidated
statement of operations for the year ended December 31, 2005 includes the
results of operations of BioCheck from December 6, 2005, the date of
acquisition, and the consolidated balance sheet at December 31, 2005 includes
the assets and liabilities of BioCheck. The foreign subsidiaries’ assets and
liabilities are translated at the exchange rates at the end of the year, and
their statements of operations are translated at the average exchange rates
during each year. Gains and losses resulting from foreign currency translation
are recorded as other comprehensive income or loss and accumulated as a separate
component of stockholders’ equity. There were no items of other comprehensive
income or loss in 2005 and, therefore, comprehensive loss is the same as net
loss for 2005.
Segment
Reporting
The
Company currently manages its business on the basis of one reportable segment.
The Company’s management uses consolidated results of the Company’s operations
to make decisions affecting product development, manufacturing, and marketing.
The Company determines and discloses its segments in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments
of an Enterprise and Related Information” (hereinafter “SFAS No. 131”) which
uses a “management” approach for determining segments. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company’s
reportable segments. SFAS No. 131 also requires disclosures about products
or
services, geographic areas, and major customers (see Note 13). The Company’s
management reporting structure provided for two segments prior to 2004 and
the
first quarter of 2004 and accordingly, separate segment information was
presented.
Use
of Estimates
The
financial statements and notes are representations of the Company’s management,
which is responsible for their integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United
States of America, and have been consistently applied in the preparation of
the
financial statements. The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities revenues
and
expenses and disclosures of contingent assets and liabilities at the date of
the
financial statements. Actual results could differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Concentrations
of Credit Risk
Revenues
from sales to one of the Company’s distributors located outside of the United
States were 15% and 11% of total revenues during 2005 and 2004, respectively.
Approximately 38% of the Company’s revenues were attributed to seven customers
in 2005 and 40% of the Company’s sales revenues were attributed to six customers
in 2004. In addition, the Company signed an exclusive license agreement during
the third quarter of 2004, resulting in revenues of $450,000, or 19% of total
revenues for 2004 (see Note 12).
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
The
Company’s cash and cash equivalents, marketable securities and accounts
receivable are monitored for exposure to concentrations of credit risk. Cash
equivalents and marketable securities consist of high quality credit instruments
and management regularly monitors their composition and maturities. The Company
maintains cash in money market accounts and a bank certificate of deposit.
Management monitors the amount of credit exposure related to accounts receivable
on an ongoing basis and generally requires no collateral from customers. The
Company maintains allowances for estimated probable losses, when applicable.
Derivative
instruments
In
February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
155, “Accounting for Certain Hybrid Financial Instruments, an Amendment of FASB
Standards No. 133 and 140” ( “SFAS No. 155”). This statement established the
accounting for certain derivatives embedded in other instruments. It simplifies
accounting for certain hybrid financial instruments by permitting fair value
remeasurement for any hybrid instrument that contains an embedded derivative
that otherwise would require bifurcation under SFAS No. 133 as well as
eliminating a restriction on the passive derivative instruments that a
qualifying special-purpose entity (“SPE”) may hold SFAS No. 140 “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”
(“SFAS No. 140”). This statement allows a public entity to irrevocably elect to
initially and subsequently measure a hybrid instrument that would be required
to
be separated into a host contract and derivative in its entirety at fair value
(with changes in fair value recognized in earnings) so long as that instrument
is not designated as a hedging instrument pursuant to the statement. SFAS No.
140 previously prohibited
a qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. This
statement is effective for fiscal years beginning after September 15, 2006,
with
early adoption permitted as of the beginning of an entity’s fiscal year.
Management believes the adoption of this statement will have no impact on the
Company’s financial condition or results of operations.
If
certain conditions are met, a derivative may be specifically designated as
a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of the changes in the fair value
of the hedged asset or liability that are attributable to the hedged risk or
the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income
in
the period of change. The Company has not entered into derivatives contracts
to
hedge existing risks or for speculative purposes. During 2005 and 2004, the
Company has not engaged in any transactions that would be considered derivative
instruments.
Fair
value of Financial Instruments
The
carrying amount of cash and cash equivalents, restricted cash, accounts
receivable, inventory, accounts payable and accrued expenses approximate fair
value because of the short-term nature of these instruments. The fair value
of
debt is based upon current interest rates for debt instruments with comparable
maturities and characteristics and approximates the carrying amount.
Accounts
receivable
The
Company carries its accounts receivable at cost less an allowance for doubtful
accounts. On a periodic basis, the Company evaluates its accounts receivable
and
establishes an allowance for doubtful accounts, based on a history of past
write-offs and collections and current credit conditions. The following table
summarizes the activity for the Company’s allowance for doubtful
accounts:
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
| |
|
Balance
at Beginning of Period
|
|
Additions
|
|
Deductions
|
|
Balance
at End of Period
|
|
|
Year
ended December 31, 2004
|
|
$
|
4,000
|
|
$
|
3,000
|
|
$
|
—
|
|
$
|
7,000
|
|
|
Year
ended December 31, 2005
|
|
|
7,000
|
|
|
—
|
|
|
(5,000
|
)
|
|
2,000
|
|
Inventories
Inventories
are stated at the lower of cost or market. Cost has been determined by using
the
first-in, first-out method. The Company periodically reviews its reserves for
slow moving and obsolete inventory and believes that such reserves are adequate
at December 31, 2005 and 2004.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs— an
amendment of ARB No. 43, Chapter 4”. This statement amends the
guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43,
Chapter 4, previously stated that “. . . under some circumstances, items
such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current period
charges. . . .” This statement requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of “so
abnormal.” In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. This statement is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Management does
not believe the adoption of this statement will have any immediate material
impact on the Company.
Restricted
Cash
The
Company invested $3,060,000 of cash into a 30-day certificate of deposit at
KeyBank, N.A. (“KeyBank”) and entered into $3,060,000 non-revolving one-year
loan agreement with KeyBank on December 2, 2005 for the purpose of
completing the initial closing of the BioCheck acquisition. The Company granted
a security interest in its $3,060,000 certificate of deposit to KeyBank under
the loan agreement. Consequently, the certificate of deposit is classified
as
restricted cash on the consolidated balance sheet at December 31, 2005 as the
cash is restricted as to use.
Property,
Plant and Equipment
Property,
plant and equipment is stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets, which are
3
to 10 years for machinery and equipment, the shorter of the lease term or
estimated economic life for leasehold improvements. For the Company’s BioCheck
subsidiary, depreciation has been computed on a double-declining basis over
the
estimated useful lives of the assets, which generally has been 7 years for
machinery and equipment, and 39 years for leasehold improvements. BioCheck
will
conform to the Company’s straight-line depreciation method for assets purchased
after 2005.
Patents
Acquired
patents are capitalized at their acquisition cost or fair value. The legal
costs, patent registration fees and models and drawings required for filing
patent applications are capitalized if they relate to commercially viable
technologies. Commercially viable technologies are those technologies that
are
projected to generate future positive cash flows in the near term. Legal costs
associated with patent applications that are not determined to be commercially
viable are expensed as incurred. All research and development costs incurred
in
developing the patentable idea are expensed as incurred. Legal fees from the
costs incurred in successful defense to the extent of an evident increase in
the
value of the patents are capitalized.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
Capitalized
cost for pending patents are amortized on a straight-line basis over the
remaining twenty year legal life of each patent after the costs have been
incurred. Once each patent is issued, capitalized costs are amortized on a
straight-line basis over the shorter of the patent’s remaining statutory life,
estimated economic life or ten years.
Goodwill
In
connection with the acquisition of BioCheck (see Note 2), the Company recorded
goodwill equal to the excess of the fair value of the consideration given over
the estimated fair value of the assets and liabilities received. The goodwill
was primarily attributed to the reputation of the principals and the cGMP/ISO
9000 compliant manufacturing facilities in Foster City, California.
Impairment
of Long Lived Assets
The
Company’s long-lived assets include capitalized patents, goodwill, property and
equipment related to the Company’s manufacturing facilities in California and
Oregon. The Company evaluates its long-lived assets for impairment in accordance
with SFAS (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. If any of the Company’s
long-lived assets are considered to be impaired, the amount of impairment to
be
recognized is equal to the excess of the carrying amount of the assets over
the
fair value of the assets (see Notes 4, 5 and 6).
Financial
Accounting Standards No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 144”) establishes a single accounting model for
long-lived assets to be disposed of by sale, including discontinued operations.
SFAS No. 144 requires that these long-lived assets be measured at the lower
of
carrying amount or fair value less cost to sell, whether reported in continuing
operations or discontinued operations. The Company relocated manufacturing
and
administrative functions from Portland, Oregon to Foster City, California during
the first quarter of 2006 and closed the Portland, Oregon facility. Certain
assets will be disposed of or sold during 2006. Since the Company has not yet
determined those individual assets for sale or disposition at December 31,
2005,
no assets have been reclassified to property, plant and equipment held for
sale
and disposition. The Company believes that no adjustments are needed to the
carrying value of these assets at December 31, 2005 and 2004.
In
connection with the acquisition of BioCheck (see Note 2), the Company recorded
goodwill equal to the excess of the fair value of the consideration given over
the estimated fair value of the assets and liabilities received. The Company
adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”)
that discontinued the amortization of goodwill and requires the testing of
goodwill for impairment annually, or sooner, if indicators of potential
impairment exist, based upon a fair value approach. In accordance with SFAS
No.
142, OXIS performed an impairment test of goodwill as of December 6, 2005 and
found no evidence of impairment. The Company evaluated several factors to
determine the fair value of the BioCheck business including projected cash
flows
from product sales and cash receipts expected from those sales.
Revenue
Recognition
The
Company manufactures, or has manufactured on a contract basis, research and
diagnostic assays and fine chemicals, which are its primary products sold to
customers. Revenue from the sale of the Company’s products, including shipping
fees, if any, is recognized when title to the products is transferred to the
customer which usually occurs upon shipment or delivery, depending upon the
terms of the sales order and when collectibility is reasonably assured. Revenue
from sales to distributors of the Company’s products is recognized, net of
allowances, upon delivery of product to the distributors. According to the
terms
of individual distributor contracts, a distributor may return product up to
a
maximum amount and under certain conditions contained in its contract.
Allowances are calculated based upon historical data, current economic
conditions and the underlying contractual terms.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
The
Company recognizes license fee revenue for licenses to its intellectual property
when earned under the terms of the agreements. Generally, revenue is recognized
upon transfer of the license unless the Company has continuing obligations
for
which fair value cannot be established, in which case the revenue is recognized
over the period of the obligation. The Company considers all arrangements with
payment terms extending beyond twelve months not to be fixed or determinable.
In
certain licensing arrangements there is provision for a variable fee as well
as
a non-refundable minimum amount. In such arrangements, the amount of the
non-refundable minimum guarantee is recognized upon transfer of the license
and
collectibility is reasonably assured or over the period of the obligation,
as
applicable, and the amount of the variable fee is recognized as revenue when
it
is fixed and determinable. The Company recognizes royalty revenue based on
reported sales by third party licensees of products containing its materials,
software and intellectual property. Non-refundable royalties, for which there
are no further performance obligations, are recognized when due under the terms
of the agreements.
Research
and Development
Research
and development costs are expensed as incurred and reported as research and
development expense.
Advertising
and promotional fees
Advertising
expenses consist primarily of costs incurred in the design, development, and
printing of Company literature and marketing materials. The Company expenses
all
advertising expenditures as incurred. The Company’s advertising expenses were
$51,000 and $1,000 for the years ended December 31, 2005 and 2004,
respectively.
Stock-Based
Compensation
The
Company has historically accounted for stock options granted to employees and
directors and other stock-based employee compensation plans using the intrinsic
value method of accounting in accordance with Accounting Principles Board
Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees” and
related interpretations. As such, the Company recognized compensation expense
for stock options only if the quoted market value of the Company’s common stock
exceeded the exercise price of the option on the grant date. Any compensation
expense realized using this intrinsic value method is being amortized over
the
vesting period of the option.
In
December 2004, the FASB issued a revision to SFAS No. 123 (revised 2004),
“Share-Based Payments” ( “SFAS No. 123R”). This statement replaces SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS 123”), and supersedes APB
Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123R
establishes standards for the accounting for share-based payment transactions
in
which an entity exchanges its equity instruments for goods or services. It
also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity’s equity
instruments or that may be settled by the issuance of those equity instruments.
This statement covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based award, share
appreciation rights and employee share purchase plans. SFAS No. 123R requires
a
public entity to measure the cost of employee services received in exchange
for
an award of equity instruments based on the fair value of the award on the
grant
date ( with limited exceptions). That cost will be recognized in the entity’s
financial statements over the period during which the employee is required
to
provide services in exchange for the award. Management is evaluating the effects
of SFAS 123R and believes its implementation effect on the Company’s financial
statements will be similar as disclosed below. The following table presents
the
effect on net loss and net loss per share if the Company had applied the fair
value recognition provisions of SFAS 123 to stock-based awards to
employees:
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
| |
|
Year
Ended December 31,
|
|
| |
|
2005
|
|
2004
|
|
|
Net
loss as reported
|
|
$
|
(3,109,000
|
)
|
$
|
(2,698,000
|
)
|
|
Stock-based
employee compensation expense determined using the fair value method
for
all awards
|
|
|
(195,000
|
)
|
|
(324,000
|
)
|
|
Pro
forma net loss
|
|
$
|
(3,304,000
|
)
|
$
|
(3,022,000
|
)
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
Basic
and diluted - as reported
|
|
$
|
(0.07
|
)
|
$
|
(0.10
|
)
|
|
Basic
and diluted - pro forma
|
|
$
|
(0.08
|
)
|
$
|
(0.11
|
)
|
The
fair
values of employee stock options are estimated for the calculation of the pro
forma adjustments in the above table at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions during 2005 and 2004: expected volatility of 170% and 73%,
respectively; average risk-free interest rate of 4.22% and 4.25%, respectively;
initial expected life of six years and ten years, respectively; and no expected
dividend yield and amortized over the vesting period of typically one to four
years.
Stock
options issued to non-employees as consideration for services provided to the
Company have been accounted for under the fair value method in accordance with
SFAS 123 and Emerging Issues Task Force No. 96-18, “Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services,” which requires that compensation
expense be recognized for all such options.
Income
Taxes
The
Company accounts for income taxes using the asset and liability approach whereby
deferred income tax assets and liabilities are recognized for the estimated
future tax effects, based on current enacted tax laws, of temporary differences
between financial and tax reporting for current and prior periods. Deferred
tax
assets are reduced, if necessary, by a valuation allowance if the corresponding
future tax benefits may not be realized (see Note 11).
Net
Loss Per Share
Basic
net
loss per share is computed by dividing the net loss for the period by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share is computed by dividing the net loss for the period by the
weighted average number of common shares outstanding during the period, plus the
potential dilutive effect of common shares issuable upon exercise or conversion
of outstanding stock options and warrants during the period. The weighted
average number of potentially dilutive common shares are 1,217,435 in 2005
and
1,981,598 in 2004. These shares were excluded from diluted loss per share
because of their anti-dilutive effect.
Recent
Accounting Pronouncements
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets—an amendment of FASB Statement No. 140.” This statement requires an
entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract in any of the following situations: a transfer of the
servicer’s financial assets that meets the requirements for sale accounting; a
transfer of the servicer’s financial assets to a qualifying special-purpose
entity in a guaranteed mortgage securitization in which the transferor retains
all of the resulting securities and classifies them as either available-for-sale
securities or trading securities; or an acquisition or assumption of an
obligation to service a financial asset that does not relate to financial assets
of the servicer or its consolidated affiliates. The statement also requires
all
separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable and permits an entity to choose either
the amortization or fair value method for subsequent measurement of each class
of servicing assets and liabilities. The statement further permits, at its
initial adoption, a one-time reclassification of available for sale securities
to trading securities by entities with recognized servicing rights, without
calling into question the treatment of other available for sale securities
under
Statement 115, provided that the available for sale securities are identified
in
some manner as offsetting the entity’s exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value and requires separate presentation of servicing assets
and
servicing liabilities subsequently measured at fair value in the statement
of
financial position and additional disclosures for all separately recognized
servicing assets and servicing liabilities. This statement is effective for
fiscal years beginning after September 15, 2006, with early adoption permitted
as of the beginning of an entity’s fiscal year. Management believes the adoption
of this statement will have no impact on the Company’s financial condition or
results of operations.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
(hereinafter “SFAS No. 154”) which replaces Accounting Principles Board Opinion
No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in
Interim Financial Statements - An Amendment of APB Opinion No. 28”. SFAS No. 154
provides guidance on accounting for and reporting changes in accounting
principle and error corrections. SFAS No. 154 requires that changes in
accounting principle be applied retrospectively to prior period financial
statements and is effective for fiscal years beginning after December 15, 2005.
The Company does not expect SFAS No. 154 to have a material impact on its
consolidated financial position, results of operations, or cash
flows.
In
December 2004, the FASB issued SFAS No. 153. This statement addresses the
measurement of exchanges of nonmonetary assets. The guidance in APB Opinion
No.
29, “Accounting for Nonmonetary Transactions,” is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value
of
the assets exchanged. The guidance in that opinion, however, included certain
exceptions to that principle. This statement amends Opinion 29 to eliminate
the
exception for nonmonetary exchanges of similar productive assets and replaces
it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This statement is effective for financial statements for fiscal
years beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges incurred during fiscal years beginning after the
date of this statement is issued. Management believes the adoption of this
statement will have no impact on the financial statements of the Company.
In
December 2004, the FASB issued SFAS No. 152, which amends FASB statement No.
66,
“Accounting for Sales of Real Estate,” to reference the financial accounting and
reporting guidance for real estate time-sharing transactions that is provided
in
AICPA Statement of Position (SOP) 04-2, “Accounting for Real Estate Time-Sharing
Transactions.” This statement also amends FASB Statement No. 67, “Accounting for
Costs and Initial Rental Operations of Real Estate Projects,” to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real
estate projects does not apply to real estate time-sharing transactions. The
accounting for those operations and costs is subject to the guidance in SOP
04-2. This statement is effective for financial statements for fiscal years
beginning after June 15, 2005. Management believes the adoption of this
statement will have no impact on the financial statements of the
Company.
Reclassifications
Certain
2004 amounts have been reclassified to conform to the 2005 presentation. This
reclassification has resulted in no changes to the Company’s accumulated deficit
or net losses presented.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
2. Acquisition
of BioCheck
On
September 19, 2005, the Company entered into a stock purchase agreement with
BioCheck and certain stockholders of BioCheck to purchase all of the common
stock of BioCheck for $6.0 million in cash. BioCheck was a privately held
California corporation engaged in the development of immunoassays, with a number
of clinical diagnostic tests that have been approved by the United States Food
and Drug Administration. On December 6, 2005, the Company purchased 51% of
the common stock of BioCheck from each of the stockholders of BioCheck on a
pro
rata basis, for $3,060,000 in cash. This acquisition was accounted for by the
purchase method of accounting according to SFAS No. 141, “Business
Combinations.”
Pursuant
to the stock purchase agreement, OXIS will use its reasonable best efforts
to
consummate a follow-on financing transaction to raise additional capital with
which to purchase the remaining outstanding shares of BioCheck in one or more
additional closings. The purchase price for any BioCheck shares purchased after
the initial closing will be increased by an additional 8% per annum from
December 6, 2005. If OXIS has not purchased all of the outstanding shares
of BioCheck within twelve months of December 6, 2005, the earnings before
interest, taxes, depreciation and amortization expenses, if any, of BioCheck,
will be used to repurchase the remaining outstanding BioCheck shares at one
or
more additional closings. The purchase of the remaining outstanding shares
of
BioCheck acquisition will be accounted for the same as the initial purchase
of
51% of BioCheck using the purchase method of accounting according to SFAS No.
141. The additional purchase price will be allocated over the purchased assets
of BioCheck and the consolidated statement of operations will continue to
include the results of operations of BioCheck reduced by the minority interest,
if any, in BioCheck. The Company may obtain additional independent valuations
of
BioCheck’s assets related to the acquisition of the remaining 49% of BioCheck
and additional acquisition costs may be incurred. Such information and costs
may
affect the disclosures as presented herein.
The
primary reasons for the acquisition was BioCheck’s products under development,
cGMP/ISO 9000 facilities and sales volume in growing markets. In addition,
BioCheck’s
management has a core competency and a proven scientific and business
development track record in developing and manufacturing of high-quality
immunoassay products. Senior management has several decades of combined research
and development, clinical and operational experience in the biotechnology and
pharmaceutical industries.
The
purchase price of $3,337,000 was based on cash paid to BioCheck’s stockholders
of $3,060,000, legal expense of $155,000 and a finder’s fee of $122,000. The
consolidated statement of operations for the year ended December 31, 2005
includes the results of operations of BioCheck from December 6, 2005, the date
of acquisition.
The
allocation of the cost of the acquisition at December 6, 2005 is as
follows:
|
Cash
|
|
$
|
407,000
|
|
|
Accounts
receivable
|
|
|
610,000
|
|
|
Inventory
|
|
|
296,000
|
|
|
Other
current assets
|
|
|
62,000
|
|
|
Property,
plant and equipment
|
|
|
177,000
|
|
|
In-process
research and development (expensed)
|
|
|
1,500,000
|
|
|
Patents
and other assets
|
|
|
107,000
|
|
|
Goodwill
|
|
|
1,199,000
|
|
|
Minority
interest
|
|
|
(598,000
|
)
|
|
Assumed
liabilities
|
|
|
(423,000
|
)
|
|
Total
acquisition costs
|
|
$
|
3,337,000
|
|
The
intangibles assets include in-process research and development, patents and
goodwill. The intangibles assets were valued using applicable costs incurred
by
BioCheck prior to the acquisition and an independent report prepared prior
to
the acquisition that valued the BioCheck business.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
Purchased
in-process research and development was expensed at the date of acquisition
and
presented on the statement of operations as purchased in-process research and
development. It represents the value of purchased in-process research and
development projects that had not reached technological feasibility at the
date
of acquisition. These projects relate to the development of specific
immunoassays including the Id-protein
based diagnostic/prognostic product
and
HMGA2 gene breast cancer marker.
This
technology can only be used for detection of the target protein. No alternative
future uses or markets were identified for these projects because of the
applicability to specific disease markers.
Patents
were capitalized and will be amortized according to the Company’s patent
amortization policy over 20 years for pending patents from the date of filing
and 10 years after the patents are issued.
The
goodwill was attributed to the reputation of the principals and the cGMP/ISO
9000 compliant manufacturing facility in Foster City, California. Goodwill
is
expected to be deductible for tax purposes. Such amounts were tested for
impairment on the date of acquisition resulting in no impairment charge and
will
be tested at least annually thereafter.
The
following unaudited pro forma information gives effect to the acquisition of
BioCheck as if the acquisition had occurred on January 1, 2004.
| |
|
2005
|
|
2004
|
|
|
Revenues
|
|
$
|
6,299,000
|
|
$
|
6,441,000
|
|
|
Net
loss
|
|
$
|
(1,492,000
|
)
|
$
|
(4,052,000
|
)
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.04
|
)
|
$
|
(0.15
|
)
|
3. Inventories
| |
|
December
31,
|
|
| |
|
2005
|
|
2004
|
|
|
Raw
materials
|
|
$
|
304,000
|
|
$
|
121,000
|
|
|
Work
in process
|
|
|
185,000
|
|
|
23,000
|
|
|
Finished
goods
|
|
|
161,000
|
|
|
102,000
|
|
| |
|
$
|
650,000
|
|
$
|
246,000
|
|
4. Property,
Plant and Equipment
| |
|
December
31,
|
|
| |
|
2005
|
|
2004
|
|
|
Laboratory
and manufacturing equipment
|
|
$
|
1,165,000
|
|
$
|
655,000
|
|
|
Furniture
and office equipment
|
|
|
408,000
|
|
|
295,000
|
|
|
Leasehold
improvements
|
|
|
105,000
|
|
|
63,000
|
|
| |
|
|
1,678,000
|
|
|
1,013,000
|
|
|
Accumulated
depreciation
|
|
|
(1,435,000
|
)
|
|
(952,000
|
)
|
| |
|
$
|
243,000
|
|
$
|
61,000
|
|
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
The
Company relocated its manufacturing and administrative functions from Portland,
Oregon to Foster City, California during the first quarter of 2006 and closed
its Portland, Oregon facility. Certain assets will be disposed of or sold during
2006. Since the Company has not yet determined those individual assets that
will
be sold or disposed of at December 31, 2005, no assets have been
reclassified to property, plant and equipment held for sale and disposition.
The
Company believes that no adjustments are needed to the carrying value of these
assets at December 31, 2005. Depreciation expense was $28,000 and $21,000 during
2005 and 2004, respectively.
5. Patents
| |
|
December
31,
|
|
| |
|
2005
|
|
2004
|
|
|
Capitalized
patent costs
|
|
$
|
1,114,000
|
|
$
|
1,039,000
|
|
|
Accumulated
amortization
|
|
|
(283,000
|
)
|
|
(164,000
|
)
|
| |
|
$
|
831,000
|
|
$
|
875,000
|
|
Periodically,
the Company reviews its patent portfolio and has determined that certain patent
applications no longer possessed commercial viability or were abandoned since
they were inconsistent with the Company’s business development strategy. As a
result, research and development expense included charges of $105,000 in 2005
for the write-off of capitalized patent costs. Research and development expense
includes patent amortization charges of $126,000 and $77,000 in 2005 and 2004,
respectively.
The
following table presents expected future amortization of patent costs that
may
change according to the Company’s amortization policy upon additional patents
being issued or allowed:
|
2006
|
|
$
|
126,000
|
|
|
2007
|
|
|
125,000
|
|
|
2008
|
|
|
114,000
|
|
|
2009
|
|
|
97,000
|
|
|
2010
|
|
|
94,000
|
|
|
Thereafter
|
|
|
275,000
|
|
|
Total
amortization
|
|
$
|
831,000
|
|
6. Goodwill
and Other Assets
| |
|
December
31,
|
|
| |
|
2005
|
|
2004
|
|
|
Goodwill
|
|
$
|
1,199,000
|
|
$
|
—
|
|
|
Strategic
investments
|
|
|
75,000
|
|
|
|
|
|
Lease
deposits
|
|
|
17,000
|
|
|
|
|
| |
|
$
|
1,291,000
|
|
$
|
|
|
In
connection with the acquisition of BioCheck (see Note 2), the Company recorded
goodwill equal to the excess of the fair value of the consideration given over
the estimated fair value of the assets and liabilities received. The goodwill
was primarily attributed to the reputation of BioCheck’s CEO and the cGMP/ISO
9000 compliant manufacturing facilities in Foster City, California. Strategic
investments are investments by BioCheck in two private start-up companies.
One
of those companies has not yet commenced operations. The Company is aware of
private sales in the other company’s stock that exceeded the per share purchase
price of its investment. Lease deposits are cash deposits held as security
for
facility leases in Foster City, California.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
7. Debt
| |
|
December
31,
|
|
| |
|
2005
|
|
2004
|
|
|
Note
payable to KeyBank, N.A.
|
|
$
|
3,060,000
|
|
$
|
—
|
|
|
Note
payable to Axonyx, Inc., stockholder
|
|
|
—
|
|
|
1,200,000
|
|
|
Note
payable to stockholder
|
|
|
—
|
|
|
160,000
|
|
|
Total
debt
|
|
$
|
3,060,000
|
|
$
|
1,360,000
|
|
On
December 2, 2005, the Company entered into non-revolving one-year loan
agreement with KeyBank, N.A. (“KeyBank”) in the amount of $3,060,000, for the
purpose of completing the initial closing of the BioCheck acquisition. The
Company has granted a security interest in its $3,060,000 certificate of deposit
at KeyBank under the loan agreement. The loan bears interest at an annual rate
that is 2.0% greater than the interest rate on the certificate of deposit.
This
loan was repaid during February 2006 and a new loan agreement similar in terms
to this loan and a certificate of deposit were entered into at Bridge
Bank.
On
June 1, 2004, the Company received $1,200,000 in exchange for a note (the
“Note”) and entered into a loan agreement with its majority stockholder, Axonyx,
Inc. The Note, with interest at 7%, was secured by the Company’s intellectual
property and became immediately due and payable upon the Company’s completion of
a private placement of 12,264,158 shares of its common stock for $6,500,000.
The
Company paid to Axonyx the full amount of the note and accrued interest on
January 6, 2005.
The
Company originally issued a promissory note payable for $160,000 on April 9,
1997 to Finovelec, a French société anonyme that was subsequently transferred to
Equitis Entreprise, a French société par actions simplifiée (“Equitis”). The
unsecured note payable bore interest at 8%, was due in May 1997 and was,
therefore, delinquent. On May 23, 2005, Equitis converted the note and accrued
interest of $84,000 into 459,355 shares of common stock.
The
Company received $570,000 in loans and issued 12 month promissory notes
convertible into 1,425,000 shares of the Company’s common stock on January 14,
2004. The Company also issued five-year warrants to the lenders to purchase
712,500 shares of common stock at an exercise price of $0.50 per share. The
Company received notice on December 30, 2004, that all lenders had irrevocably
converted their promissory notes and accrued interest of $39,000 into common
stock. As a result, the Company issued 1,520,932 shares of common stock to
the
note holders. As an incentive for the lenders to convert their notes to common
stock, the Company issued additional five-year warrants to purchase 760,469
shares of common stock at an exercise price of $1.00 per share. During 2004,
financing fees included non-cash financing charges of $411,000 related to the
conversion feature of the notes, $159,000 related to the initial warrants and
$202,000 related to the incentive warrants. The fair values of the conversion
feature of the notes and warrants were determined using the Black-Scholes
pricing model.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
8. Commitments
and Contingencies
The
following table presents future non-cancelable minimum payments under all of
the
Company’s operating leases at December 31, 2005:
| |
|
Operating
Leases
|
|
| |
|
Minimum
Rental
|
|
Sublease
Rental
|
|
Net
Rental Payments
|
|
|
2006
|
|
$
|
265,000
|
|
$
|
(38,000
|
)
|
$
|
227,000
|
|
|
2007
|
|
|
239,000
|
|
|
(38,000
|
)
|
|
201,000
|
|
|
2008
|
|
|
246,000
|
|
|
(38,000
|
)
|
|
208,000
|
|
| |
|
$
|
750,000
|
|
$
|
(114,000
|
)
|
$
|
636,000
|
|
The
Company leases a facility under an operating lease in Portland, Oregon and
incurred facility rental expenses of $138,000 and $134,000 during 2005 and
2004,
respectively. The Company’s subsidiary, BioCheck, leases facilities under
operating leases in Foster City, California included in the table above. During
2004, BioCheck entered into a sublease of an unused Foster City, California
facility to the end of the lease term in 2008 that reduced the Company’s
operating lease commitments.
The
Company has agreements with various consultants who provide operating,
administrative and marketing services to the Company. Generally these agreements
may be terminated by the Company within 30 days. Non-cancelable minimum payments
related to these agreements were $69,000 at December 31, 2005.
At
December 31, 2005, the Company has a commitment to purchase Ergothioneine
manufactured by Cambridge Major Labs for $179,000 and has a contract with them
to purchase additional Ergothioneine as needed.
On
December 6, 2005, the Company committed itself to a plan to cease
operations in Portland, Oregon and relocate operations to Foster City,
California. As part of the relocation of operations, the Company offered all
affected regular full-time employees whose employment was terminated severance
benefits estimated in total to be $119,000 that were included in accrued
expenses at December 31, 2005. The Company estimates that relocating operations
from Portland, Oregon to Foster City, California will cost approximately
$100,000. No amounts have been accrued in 2005 related to relocating
operations.
On
September 19, 2005, the Company entered into a stock purchase agreement with
BioCheck, and its stockholders to purchase all of its common stock for
$6.0 million in cash. On December 6, 2005, the Company purchased 51%
of the common stock of BioCheck. Pursuant to the stock purchase agreement,
the
Company will use its reasonable best efforts to consummate a follow-on financing
transaction to raise additional capital with which to purchase the remaining
outstanding shares of BioCheck in one or more additional closings. The purchase
price will be increased by an additional 8% per annum from December 6,
2005. If the Company has not purchased all of the outstanding shares of BioCheck
within twelve months of December 6, 2005, the earnings before interest,
taxes, depreciation and amortization expenses, if any, of BioCheck, will be
used
to repurchase the remaining outstanding BioCheck shares at one or more
additional closings.
In
1995,
the Company consummated the acquisition of Therox Pharmaceuticals, Inc.
(“Therox”) wherein Therox was merged with and into a wholly owned subsidiary of
the Company. In addition to the issuance of its common stock to Therox
stockholders, the Company agreed to make payments of up to $2,000,000 to the
Therox stockholders based on the successful commercialization of Therox
technologies. As of December 31, 2005, no additional payments have been made.
The Company has not recorded a liability associated with this agreement because
the Company does not believe that it has successfully commercialized any of
the
acquired Therox technologies.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
In
1997,
the Company completed an offering of its common stock to European investors,
and
listed the resulting shares on the Nouveau Marché in France. The Company was
notified that a Paris lower court (Tribunal de grande instance de Paris) on
November 12, 2003, issued an order (the “Order”) requiring the Company to file
its 2002 Document de Reference (“2002 Reference Document”) as required under
French law and the regulations of the Autorité des Marchés Financiers (the
“AMF”), the French regulatory agency overseeing the Nouveau Marché, within eight
days of the court’s Order (“filing deadline”) and if the Company has not filed
with the AMF its 2002 Reference Document by the filing deadline, to pay a fine
of 1,500 Euros for each day until it files its 2002 Reference Document with
the
AMF. Following the issuance of the Order, the Company filed its 2002 Reference
Document with the AMF and received written confirmation that its 2002 Reference
Document has been registered and appealed the Order to the extent that it
imposed fines on the Company. The Company has since dismissed its appeal of
the
Order, and during the first quarter of 2004 paid approximately $11,600 in
settlement of any obligation to pay fines under the Order.
The
AMF
also engaged in a separate investigation relating to the Company’s failing to
file financial and other disclosure information as required under French law
from 1999 through 2002 (the “Investigation”). At a hearing before the
Disciplinary Commission of the AMF on June 17, 2004 the Disciplinary Commission
considered a report of the AMF investigator recommending that the Disciplinary
Commission impose a fine of not less than 100,000 Euros. Following the hearing,
the Disciplinary Commission ordered the Company to pay a fine of 50,000 Euros
(approximately $62,000) with respect to the Company’s failure to file financial
and other disclosure information as required under French law from 1999 through
2002. The Company did not appeal this order and the
fine
has been paid. During 2004, the Company recorded expenses of approximately
$183,000 related to the defense and settlement of this investigation, including
foreign legal expenses of $121,000 and fines imposed by the AMF of $62,000.
These charges were recorded as foreign legal proceedings in the consolidated
statement of operations for 2004.
The
Company and its subsidiaries are also parties to various other claims in the
ordinary course of business. The Company does not believe that there will be
any
material impact on the Company’s financial position, results of operations or
cash flows as a result of these claims.
9. Stockholders’
Equity
Common
Stock
Each
share of common stock is entitled to one vote at the Company’s annual meeting of
stockholders.
The
Company’s president and chief executive officer purchased 600,000 shares of
common stock for $240,000, pursuant to the terms of an employment agreement
on
February 28, 2005 at the closing price of the Company’s common stock on that
date. During April 2005, 459,355 shares of common stock were issued to a note
holder for cancellation of a note payable and accrued interest. During the
third
quarter of 2005, 85,678 shares of common stock were issued for the conversion
and cancellation of all 428,389 outstanding shares of Series B preferred stock.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
In
a
private placement of the Company’s common stock on December 30, 2004, the
Company received $4,250,000 in cash and a receivable of $2,250,000 in exchange
for 12,264,158 shares of common stock and warrants to purchase 12,877,366 shares
of common stock which were issuable at December 31, 2004. After expenses of
$380,000 in 2004 and additional expenses of $302,000 in 2005 for the related
registration statement, net proceeds were $5,818,000. The common stock was
subsequently issued at $0.53 per share and the receivable was collected during
January 2005. The warrants were issued for the purchase of 6,438,685 shares
of
common stock at an exercise price of $0.66 per share and 6,438,681 shares of
common stock at an exercise price of $1.00 per share. Pursuant to a registration
rights agreement entered into in relation to the private placement, OXIS filed
a
registration statement on Form SB-2 covering the shares of common stock and
the
shares underlying the warrants issued in the private placement (the “Registrable
Securities”). Amendment No. 2 to the registration statement on Form SB-2 was
declared effective on May 27, 2005. OXIS undertook to use its commercially
reasonable best efforts to keep the registration statement continuously
effective until the earlier of the date when all the Registrable Securities
covered by the registration statement have been sold or may be sold without
volume restrictions pursuant to Rule 144(k) or May 27, 2007. Until May 27,
2007,
OXIS is obligated to pay each holder of the Registrable Securities cash
liquidated damages, equal to 1.5% of the aggregate purchase price paid by such
holder for any Registrable Securities then held by such holder if the
registration statement covering the Registrable Securities ceases to remain
continuously effective for either any period of 15 consecutive calendar days
or
an aggregate of 20 calendar days during any 12 month period. Such liquidated
damages are also payable on the monthly anniversary of either previously
mentioned violation if the registration statement is not effective during the
period from the date of the violation to the date of its monthly
anniversary.
On
December 30, 2004, promissory notes in the amount of $570,000 and accrued
interest were converted into 1,520,932 shares of common stock. Additional
warrants were also issued as described below and in note 7.
The
Company accounts for the registration rights agreements as separate freestanding
instruments and accounts for the liquidated damages provisions as a derivative
liability subject to SFAS No. 133. The estimated fair value of the derivative
liability is based on estimates of the probability and costs of cash penalties
expected to be incurred and such estimates are revalued at each balance sheet
date with changes in value recorded in other income. As of December 31, 2005
and
2004 the Company has estimated the fair values of these derivative liabilities
to be nominal and accordingly no liability has been recorded. There were no
changes to the estimated fair value during the years ended December 31, 2005
and
2004.
Preferred
Stock
During
the third quarter of 2005, 85,678 shares of common stock were issued for the
conversion and cancellation of all 428,389 outstanding shares of Series B
preferred stock that were valued at $4,000. The Series B preferred stock had
certain preferential rights with respect to liquidation and dividends. Holders
of Series B preferred stock were entitled to noncumulative annual dividends
at
the rate of $0.115 per share if and when declared by the Company’s board of
directors. No dividends to Series B preferred stockholders were issued or unpaid
during 2005.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
The
96,230 shares of Series C preferred stock are convertible into 27,800 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 .20
or
more than .2889 common shares for each Series C preferred share. The conversion
ratio may be adjusted under certain circumstances such as stock splits or stock
dividends. The Company has the right to automatically convert the Series C
preferred stock into common stock if the Company lists its shares of common
stock on the Nasdaq National Market and the average closing bid price of the
Company’s common stock on the Nasdaq National Market for 15 consecutive trading
days exceeds $13.00. Each share of Series C preferred stock is entitled to
the
number of votes equal to .26 divided by the average closing bid price of the
Company’s common stock during the fifteen consecutive trading days immediately
prior to the date such shares of Series C preferred stock were purchased. In
the
event of liquidation, the holders of the Series C preferred stock shall
participate on an equal basis with the holders of the common stock (as if the
Series C preferred stock had converted into common stock) in any distribution
of
any of the assets or surplus funds of the Company. The holders of Series C
preferred stock are entitled to noncumulative dividends if and when declared
by
the Company’s board of directors. No dividends to Series C preferred
stockholders were issued or unpaid during 2005 and 2004.
Common
Stock Warrants
The
Company reserved 1,472,969 shares of common stock for issuance upon the
exercise of a warrants granted in connection with the Company’s January 14, 2004
promissory convertible notes. Warrants to purchase 712,500 shares of common
stock are currently exercisable at $0.50 per share and expire on January 14,
2009. The exercise price is subject to adjustments for stock splits,
combinations, reclassifications and similar events. As of December 31, 2005,
no
such adjustments have occurred. Certain piggy-back registration rights apply
to
the shares underlying these warrants.
On
December 30, 2004, as an incentive for the seven lenders to convert their notes
to common stock, the Company issued additional warrants that are currently
exercisable to purchase 760,469 shares of common stock at an exercise price
of
$1.00 per share that expire on December 29, 2009. The exercise prices are
subject to adjustments for stock splits, combinations, reclassifications and
similar events. As of December 31, 2005, these warrants remain unexercised.
The
fair value of the shares issuable under these warrants was estimated using
the
Black-Scholes option-pricing model with the following weighted-average
assumptions: expected volatility of 73%; risk-free interest rate of 4.25%;
initial expected life of five years and no expected dividend yield. The
resulting fair values of $159,000 related to the initial warrants and $202,000
related to the incentive warrants were recorded during 2004 as financing fees
in
the consolidated statement of operations.
The
Company reserved 12,877,366 shares of common stock for issuance upon the
exercise of a warrants granted on January 6, 2005 in connection with the
Company’s private placement of common stock. See description under common stock
above. The warrants are currently exercisable at an exercise price of $0.66
per
share to purchase 6,438,685 shares of common stock and $1.00 per share to
purchase 6,438,681 shares of common stock. The exercise prices are subject
to
adjustments for stock splits, combinations, reclassifications and similar
events, and the warrants expire on January 6, 2010. As of December 31, 2005
these warrants remain unexercised. The Company has granted the warrant holder
certain registration rights with respect to the shares issuable upon exercise
of
the warrant.
Warrants
to purchase 367,500 shares of common stock are currently exercisable at $1.00
per share and expire on March 1, 2007. These warrants were issued to Meridian
Investment on March 1, 2002 in conjunction with a debt financing. The exercise
price of these warrants is subject to adjustments for stock splits, dividends,
combinations, reclassifications, mergers and similar events. As of December
31,
2005, no such adjustments have occurred.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
Stock
Options
The
Company has reserved 2,630,000 shares of its common stock at December 31, 2005
for issuance under the 2003 Stock Incentive Plan (the “2003 Plan”). The 2003
Plan, approved by stockholders at the 2003 annual meeting, permits the Company
to grant stock options to acquire shares of the Company’s common stock, award
stock bonuses of the Company’s common stock, and grant stock appreciation
rights. At December 31, 2005, 493,270 shares of common stock were
available for grant and options to purchase 2,136,730 shares of common stock
are
outstanding under the 2003 Plan.
The
Company has reserved 2,737,622 shares of its common stock at December 31, 2005
for issuance pursuant to the future exercise of outstanding options granted
under the 1994 Stock Incentive Plan (the “1994 Plan”). The 1994 Plan permitted
the Company to grant stock options to acquire shares of the Company’s common
stock, award stock bonuses of the Company’s common stock, and grant stock
appreciation rights. This Plan expired on April 30, 2003 and no further
issuances will occur. Options to purchase 2,737,622 shares of common stock
are
outstanding at December 31, 2005 under the 1994 Plan.
In
addition, the Company has reserved 1,503,438 shares of its common stock for
issuance outside of its stock incentive plans. At December 31, 2005,
options to purchase 1,503,438 shares of common stock are outstanding outside
of
its stock incentive plans.
The
following table summarizes all outstanding stock options:
| |
|
Number
of Options
|
|
Weighted
Average Exercise
Price
|
|
|
Outstanding,
December 31, 2003
|
|
|
4,486,079
|
|
$
|
0.78
|
|
|
Granted
|
|
|
1,139,720
|
|
|
0.54
|
|
|
Exercised
|
|
|
(791,532
|
)
|
|
(0.17
|
)
|
|
Forfeited
|
|
|
(161,404
|
)
|
|
(2.96
|
)
|
|
Outstanding,
December 31, 2004
|
|
|
4,672,863
|
|
|
0.75
|
|
|
Granted
|
|
|
2,671,000
|
|
|
0.33
|
|
|
Exercised
|
|
|
(322,166
|
)
|
|
(0.14
|
)
|
|
Forfeited
|
|
|
(643,907
|
)
|
|
(0.76
|
)
|
|
Outstanding,
December 31, 2005
|
|
|
6,377,790
|
|
$
|
0.60
|
|
| |
|
|
|
|
|
|
|
|
Exercisable
options:
|
|
|
|
|
|
|
|
|
December 31,
2004
|
|
|
4,137,419
|
|
$
|
0.78
|
|
|
December 31,
2005
|
|
|
4,040,290
|
|
$
|
0.75
|
|
The
weighted-average fair value of options granted was $0.31 in 2005 and $0.46
in
2004. At December 31, 2005, consultants held 793,020 outstanding stock
options.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
The
following table summarizes outstanding stock options approved and not approved
by stockholders:
| |
|
Options
Approved by
Stockholders
|
|
Options
Not Approved by
Stockholders
|
|
Total
Outstanding Options
|
|
|
Outstanding
options:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2004
|
|
|
4,269,425
|
|
|
403,438
|
|
|
4,672,863
|
|
|
December 31,
2005
|
|
|
4,874,352
|
|
|
1,503,438
|
|
|
6,377,790
|
|
The
following table summarizes information about all outstanding and exercisable
stock options at December 31, 2005:
| |
|
Outstanding
Options
|
|
Exercisable
Options
|
|
|
Range
of
Exercise
Prices
|
|
Number
of
Options
|
|
Weighted-Average
Remaining Contractual
Life
|
|
Weighted-Average
Exercise
Price
|
|
Number
of
Options
|
|
Weighted-Average
Exercise
Price
|
|
|
$0.08
to $0.15
|
|
|
1,007,588
|
|
|
6.99
|
|
$
|
0.13
|
|
|
1,007,588
|
|
$
|
0.13
|
|
|
$0.22
to $0.53
|
|
|
4,128,952
|
|
|
8.70
|
|
|
0.33
|
|
|
1,872,702
|
|
|
0.35
|
|
|
$0.56
to $1.38
|
|
|
777,700
|
|
|
8.09
|
|
|
0.61
|
|
|
696,450
|
|
|
0.61
|
|
|
$1.59
to $3.44
|
|
|
326,750
|
|
|
3.52
|
|
|
2.28
|
|
|
326,750
|
|
|
2.28
|
|
|
$4.53
to $11.41
|
|
|
136,800
|
|
|
0.67
|
|
|
7.97
|
|
|
136,800
|
|
|
7.97
|
|
| |
|
|
6,377,790
|
|
|
7.92
|
|
$
|
0.60
|
|
|
4,040,290
|
|
$
|
0.75
|
|
Stock
Compensation
The
Company granted options to consultants to purchase 63,000 and 115,000 shares
of
the Company’s common stock in 2005 and 2004, respectively. The exercise prices
per share for options granted were $0.37 in 2005 and ranged from $0.41 to $0.59
in 2004. The options have a 10-year life and vest over periods ranging from
one
to three years. The fair value of each option was estimated on the date of
grant
and revalued during the vesting period using the Black-Scholes option-pricing
model with the following weighted-average assumptions during 2005 and 2004:
expected volatility of 170% and 73%, respectively; average risk-free interest
rate of 4.54% and 4.25%; initial expected life of ten years; and no expected
dividend yield. Stock compensation expense of $20,000 and $44,000 was recorded
in 2005 and 2004, respectively.
In
2004
the Company issued 66,666 shares of common stock valued at fair value of $46,000
to a non-employee consultant in exchange for advisor services.
10. Change
of Control
and Restructuring
Charges
During
the first quarter of 2004, Axonyx
Inc. (“Axonyx”) acquired approximately 52% of the Company’s common stock. Marvin
S. Hausman, M.D., then Axonyx chairman and chief executive officer, separately
held approximately 4.4% of the Company’s common stock. Axonyx holdings decreased
to approximately 34% and Dr. Hausman’s holdings decreased to approximately 3%
following the private placement of 12,264,158 shares of the Company’s common
stock completed in January 2005. Together with shares of the Company’s common
stock held by Dr. Hausman, the Axonyx affiliated group, controlled approximately
36% and 37% of the Company’s voting stock at December 31, 2005 and 2004,
respectively.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
Restructuring
charges related to the Axonyx change of control are as follows:
| |
|
2004
|
|
|
Legal
fees
|
|
$
|
196,000
|
|
|
Management
consulting
|
|
|
34,000
|
|
|
Travel
|
|
|
8,000
|
|
|
Executive
search
|
|
|
22,000
|
|
|
Severance
expenses
|
|
|
345,000
|
|
| |
|
$
|
605,000
|
|
11. Income
Taxes
OXIS
and
BioCheck will file separate federal and state tax returns for 2005 and will
continue to file separate tax returns until OXIS purchases 80% or more of
BioCheck. Deferred tax assets and liabilities as contained on the consolidated
balance sheet at December 31, 2005 are attributed solely to BioCheck.
Deferred
Taxes
Deferred
taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, and operating losses and tax credit
carryforwards. The significant components of net deferred income tax assets
for
OXIS excluding BioCheck are:
| |
|
December
31,
|
|
| |
|
2005
|
|
2004
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Federal
net operating loss carryforward
|
|
$
|
5,731,000
|
|
$
|
5,009,000
|
|
|
Temporary
deferred tax asset caused by capitalized research and development
expenses
|
|
|
5,883,000
|
|
|
5,898,000
|
|
|
Federal
R&D tax credit carryforward
|
|
|
412,000
|
|
|
457,000
|
|
|
State
net operating loss carryforward and capitalized research and development
expenses
|
|
|
1,393,000
|
|
|
1,246,000
|
|
|
Other
|
|
|
55,000
|
|
|
80,000
|
|
|
Deferred
tax liabilities - book basis in excess and of noncurrent assets acquired
in purchase transactions
|
|
|
(142,000
|
)
|
|
(142,000
|
)
|
|
Deferred
tax assets before valuation
|
|
|
13,332,000
|
|
|
12,548,000
|
|
|
Valuation
allowance
|
|
|
(13,332,000
|
)
|
|
(12,548,000
|
)
|
|
Net
deferred income tax assets
|
|
$
|
—
|
|
$
|
—
|
|
The
prospective tax benefits 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 income tax expense when and if realized.
Due
to the closure of the French subsidiary’s operations in early 1999, it is
unlikely that the Company will ever realize any benefit from the French
subsidiary’s operating loss carryforwards.
The
prospective tax benefits of the net operating losses of $1,032,000 which existed
at the date of acquisition (December 31, 1997) of Innovative Medical Systems
Corp. will be recorded as a reduction of the net unamortized balance of
property, plant and equipment and intangible assets of $465,000 when and if
realized.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
SFAS
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 history
of operating losses, management has provided a valuation allowance equal to
its
net deferred tax assets. The change in deferred tax assets and the related
valuation allowance at December 31, 2005 was $784,000 and primarily related
to
the net increase in net operating losses and decrease in capitalized research
and development expense.
Tax
Carryforward
At
December 31, 2005, the Company had net operating loss carryforwards of
approximately $16,855,000 to reduce United States federal taxable income in
future years, and research and development tax credit carryforwards of $411,000
to reduce United States federal taxes in future years. These carryforwards
expire as follows:
|
Year
of Expiration
|
|
United
States Net Operating Loss Carryforward
|
|
R&D
Tax Credit Carryforward
|
|
|
2006
|
|
$
|
44,000
|
|
$
|
176,000
|
|
|
2007
|
|
|
4,000
|
|
|
18,000
|
|
|
2008
|
|
|
675,000
|
|
|
6,000
|
|
|
2009
|
|
|
29,000
|
|
|
30,000
|
|
|
2010-2015
|
|
|
16,103,000
|
|
|
181,000
|
|
| |
|
$
|
16,855,000
|
|
$
|
411,000
|
|
During
2002, the Company issued preferred stock with voting rights, which would be
regarded as a control change under the Internal Revenue Code (IRC). Under IRC
Section 382, a control change will limit the utilization of the net operating
losses. The Company has not determined the effects of any limitations on the
value of net operating losses or any tax credits outstanding prior to the
control change. In addition, any future control change may further limit the
extent to which the net operating loss carryforwards can be used to offset
future taxable income.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
12. License
Agreement
On
September 28, 2004, the Company and HaptoGuard Inc. (“HaptoGuard”) entered into
a license agreement relating to the Company’s proprietary compound BXT 51072 and
related compounds. Under the agreement, HaptoGuard has
exclusive worldwide rights to develop, manufacture and market BXT-51072 and
related compounds from the Company’s library of such antioxidant
compounds. Further, HaptoGuard is responsible for worldwide product
development programs with respect to licensed compounds. HaptoGuard
has paid the Company an upfront license fee of $450,000. The agreement
provides that HaptoGuard must pay royalties to the Company, as well as
additional fees for the achievement of development milestones in excess of
$21
million if all milestones are met and regulatory approvals are granted.
The material milestones under the agreement which would generate future payments
are as follows: upon initiation of Phase III clinical trials of the products;
upon grant by the Food and Drug Administration (FDA) of marketing approval
of
the products; upon grant by the European Agency for the Evaluation of Medicinal
Products (EMEA) for marketing approval of the products; and upon grant of
marketing approval of the products for each additional regulatory territory.
The
royalties paid by the licensee will begin upon the first commercial sale of
the
licensed products and will vary based upon formulations. The Company has the
right to terminate the agreement if the licensee fails to pay the Company any
required payments under the agreement or if the licensee fails to comply with
certain plan and timeline requirements relating to the development of the
licensed compounds and such failure continues for 30 days after the Company
has
given notice to the licensee of such failure. Either party may terminate the
agreement upon 30 days’ written notice upon certain events relating to the other
party’s bankruptcy, insolvency, dissolution, winding up or assignment for the
benefit of creditors, or upon the other party’s uncured breach of any material
provision of the agreement. Otherwise, the agreement terminates when the
Company’s underlying patents related to the licensed compounds
expire.
During
December 2005, the Company granted HaptoGuard a six-month extension to begin
Phase II, as defined in the original license agreement in exchange for $100,000.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
13.
Geographical Reporting
Revenues
attributed to North America include shipments to customers in the United States,
Canada and Mexico. Revenues attributed to EMEA include shipments to customers
in
Europe, Middle East and Africa. Revenues from shipments to customers by
geographical region are as follows:
| |
|
Year
Ended December 31,
|
|
| |
|
2005
|
|
2004
|
|
|
North
America
|
|
$
|
1,553,000
|
|
$
|
1,142,000
|
|
|
EMEA
|
|
|
493,000
|
|
|
427,000
|
|
|
Latin
America
|
|
|
7,000
|
|
|
10,000
|
|
|
Asia
Pacific
|
|
|
344,000
|
|
|
335,000
|
|
|
Total
|
|
$
|
2,397,000
|
|
$
|
1,914,000
|
|
Revenues
from shipments to countries outside of the United States did not exceed 10%
of
the Company’s consolidated total revenues in 2005 and 2004 except for revenues
from shipments to Japan of $221,000 in 2004. None of the Company’s consolidated
long-lived assets were located outside of the United States.
14. Supplemental
Cash Flow Disclosures
The
Company granted options to consultants to purchase 63,000 and 115,000 shares
of
the Company’s common stock in 2005 and 2004, respectively. Stock compensation
expense of $20,000 and $44,000 was recorded in 2005 and 2004, respectively.
In
2004 the Company issued 66,666 shares of common stock valued at fair value
of
$46,000 to a non-employee consultant in exchange for advisor services. Cash
interest paid was $22,000 and $28,000 in 2005 and 2004, respectively. The
$160,000 notes payable to stockholders and accrued interest of $84,000 were
converted into 459,355 shares of common stock during April 2005.
The
Company received $570,000 in loans and issued 12 month promissory notes
convertible into 1,425,000 shares of the Company’s common stock on January 14,
2004. The Company also issued five-year warrants to the lenders to purchase
up
to 712,500 shares of common stock at an exercise price of $0.50 per share.
The
Company received notice on December 30, 2004, that all lenders had irrevocably
converted their promissory notes and accrued interest of $39,000 into common
stock. As a result, the Company issued 1,520,932 shares of common stock to
the
note holders. As an incentive for the lenders to convert their notes to common
stock, the Company issued additional five-year warrants to purchase 760,469
shares of common stock at an exercise price of $1.00 per share. During 2004,
financing fees included non-cash financing charges of $411,000 related to the
conversion feature of the notes, $159,000 related to the initial warrants and
$202,000 related to the incentive warrants.
15. Related
Party Transactions
Effective
December 6, 2005, the Company, BioCheck and Dr. John Chen entered into an
executive employment agreement, under which Dr. Chen is employed as president
of
BioCheck. In the event that BioCheck terminates the employment of Dr. Chen
other
than for cause, Dr. Chen will be eligible to receive 12 months of his
then-current base salary. The Company has granted to Dr. Chen an option to
purchase 500,000 shares of common stock at an exercise price of $0.26 per share.
Dr. Chen will be eligible for an additional grant of options equal to 250,000
shares of common stock at December 6, 2006 and December 6, 2007, so
long as BioCheck’s net sales for the then most recently completed fiscal year
exceed the net sales of the preceding fiscal year. Stock options vest at 25%
per
annum subject to continued employment, and all options shall be exercisable
for
ten years from the date of grant. Dr. Chen shall have a period of 12 months
following any termination of employment to exercise vested
options.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
Further,
BioCheck and EverNew Biotech, Inc., a California corporation (“EverNew”),
entered into a services agreement dated December 6, 2005 (the “Services
Agreement”). The holders of the shares of capital stock of EverNew immediately
prior to the Initial Closing are substantially the same set of individuals
and
entities who held BioCheck’s common stock immediately prior to the Initial
Closing, including Dr. Chen as a significant stockholder. EverNew is an emerging
point-of-care diagnostics company, with a number of products in development.
EverNew shall render certain services to BioCheck, including assay research
and
development work, and BioCheck shall render certain administrative services
to
EverNew. In consideration of services to be provided by EverNew, BioCheck shall
pay to EverNew $12,000 per month, provided, however, if the sum of EverNew’s
gross revenues for a consecutive three month period during the term of the
Services Agreement equals or exceeds $100,000, then BioCheck shall no longer
be
obligated to pay EverNew any amounts for the remainder of the term of the
Services Agreement. Further, in such event, EverNew shall pay BioCheck an amount
equal to the EverNew Service Cost per month for the remainder of the term of
the
Services Agreement, and the EverNew Service Cost for such month shall be reduced
by the amount of the BioCheck compensation paid to BioCheck for such month.
In
addition, the Company, BioCheck and EverNew entered into an option and
reimbursement agreement dated December 6, 2005 (the “Option Agreement”).
Pursuant to the terms of the option agreement, EverNew and its stockholders
have
granted to the Company a call option and a right of first refusal to purchase
all of the assets or equity securities of EverNew.
On
November 17, 2005, the Company entered into a one year consulting agreement
with
NW Medical Research Partners, Inc. that is renewable for a second year. Marvin
Hausman, M.D. is the sole member and manager of NW Medical Research Partners.
Dr. Hausman had previously been the Company’s interim Chief Executive Officer
and was the Company’s interim Chief Financial Officer at December 31, 2005. Dr.
Hausman is the Chairman of the Company’s Board of Directors and a former
Chairman and Chief Executive Officer of Axonyx Inc., which currently holds
approximately 33% of the Company’s common stock. Dr. Hausman monthly
compensation is $5,000 and $500 per hour for any hours over 20 hours per month
up to a limit of 50 hours per month. Dr. Hausman was granted a stock option
to
purchase 108,000 shares of the Company’s common stock at an exercise price of
$0.37 per share. The option vests monthly over a year. Dr. Hausman will be
reimbursed for his healthcare insurance.
16. Subsequent
Events
On
December 6, 2005, the Company committed itself to a plan to cease
operations in Portland, Oregon and relocate operations to Foster City,
California (the “Relocation”). The Company decided to effect the Relocation
after reviewing and evaluating all aspects of the Company’s operations to
determine the profitability and viability of continuing in the Portland, Oregon
location. During the first quarter of 2006, operations were relocated to
California and on February 15, 2006 the Portland, Oregon facility was closed
with the termination of employment of all Portland based employees who did
not
relocate to California. The Company’s subsidiary, BioCheck, has commenced
manufacturing and shipping of the Company’s products.
As
part
of the Relocation, the Company offered all regular full-time employees who
were
not relocated to Foster City, California benefits under an employee severance
package. The Company estimates that the Relocation will cost approximately
$100,000 for relocating operations and $119,000 for employee severance benefits.
The Company accrued $119,000 in 2005 for employee severance benefit payments,
of
which $111,000 is expected to be paid during 2006 and $8,000 is expected to
be
paid during 2007. The Company accrues for these benefits in the period when
benefits are communicated to the terminated employees. Typically, terminated
employees are not required to provide continued service to receive termination
benefits. In general, the Company uses a formula based on the number of years
of
service to calculate the termination benefits to be provided to affected
employees. No amounts have been accrued in 2005 related to relocating
operations.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS
ENDED DECEMBER 31, 2005 AND 2004
Related
to the Relocation, the Company signed a lease agreement (the “Lease Agreement”)
with Westcore Peninsula Vintage LLC Company (“Landlord”). Under the terms of the
Lease Agreement, the Company has the right to occupy 4,136 square feet of space
adjacent to space occupied by its BioCheck subsidiary in Foster City,
California. The Lease Agreement starts on April 1, 2006 and ends on March 31,
2009. The annual base rent under the Lease Agreement begins at $62,000 per
year
and increases incrementally to $66,000 by the end of the lease term. In addition
to the base rent, the Company will be responsible for its proportionate share
of
the building’s operating expenses and real estate taxes. The Company has a
renewal option to extend the Lease Agreement for one three-year period at the
prevailing market rental value for rentable property in the same
area.
The
Company’s $3,060,000 loan with KeyBank was repaid during February 2006 and a new
one-year loan agreement was entered into at Bridge Bank. The Company has granted
a security interest in its $3,060,000 certificate of deposit moved from KeyBank
to Bridge Bank. The loan bears interest at 3.0% and the certificate of deposit
bears interest at 1.0%.
On
March
10, 2006, the Company received $200,000 in exchange for a note with the
Company’s president and chief executive officer. The note bears interest at 7%.
Interest and principal are due on September 10, 2006 or, at the option of the
holder, the date the Company receives net proceeds in the amount of $500,000
or
more from a debt or equity financing. In addition, if, at any time on or before
the maturity date, the Company enters into an agreement to incur debt, the
holder has the right to rollover this note into such debt arrangement, on the
same terms and conditions offered to such future lenders. The purpose of this
loan was to provide the corporation with short term financing as it seeks longer
term financing.
OXIS
INTERNATIONAL, INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF SEPTEMBER 30, 2006 AND DECEM,BER 31, 2005
| |
|
September
30, 2006
(Unaudited)
|
|
December
31, 2005
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
677,000
|
|
$
|
614,000
|
|
|
Accounts
receivable, net
|
|
|
894,000
|
|
|
865,000
|
|
|
Inventories,
net
|
|
|
554,000
|
|
|
650,000
|
|
|
Prepaid
expenses and other current assets
|
|
|
83,000
|
|
|
238,000
|
|
|
Deferred
tax assets
|
|
|
13,000
|
|
|
14,000
|
|
|
Restricted
cash
|
|
|
3,060,000
|
|
|
3,060,000
|
|
|
Total
current assets
|
|
|
5,281,000
|
|
|
5,441,000
|
|
|
Property,
plant and equipment, net
|
|
|
252,000
|
|
|
243,000
|
|
|
Patents,
net
|
|
|
796,000
|
|
|
831,000
|
|
|
Goodwill
and other assets
|
|
|
1,299,000
|
|
|
1,291,000
|
|
| |
|
$
|
7,628,000
|
|
$
|
7,806,000
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
819,000
|
|
$
|
505,000
|
|
|
Accrued
expenses
|
|
|
682,000
|
|
|
468,000
|
|
|
Accounts
payable to related party
|
|
|
129,000
|
|
|
194,000
|
|
|
Notes
payable to related party
|
|
|
200,000
|
|
|
—
|
|
|
Taxes
payable
|
|
|
115,000
|
|
|
—
|
|
|
Notes
payable
|
|
|
3,345,000
|
|
|
3,060,000
|
|
|
Total
current liabilities
|
|
|
5,290,000
|
|
|
4,227,000
|
|
|
Long-term
deferred taxes
|
|
|
41,000
|
|
|
41,000
|
|
|
Total
liabilities
|
|
|
5,331,000
|
|
|
4,268,000
|
|
|
Minority
interest in subsidiary
|
|
|
778,000
|
|
|
604,000
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Convertible
preferred stock - $0.01 par value; 15,000,000 shares authorized;
Series C
- 96,230 shares issued and outstanding
|
|
|
1,000
|
|
|
1,000
|
|
|
Common
stock- $0.001 par value; 150,000,000 shares authorized; 43,124,485
and
42,538,397 shares issued and outstanding at September 30, 2006 and
December 31, 2005, respectively
|
|
|
43,000
|
|
|
43,000
|
|
|
Additional
paid-in capital
|
|
|
69,193,000
|
|
|
68,686,000
|
|
|
Accumulated
deficit
|
|
|
(67,301,000
|
)
|
|
(65,379,000
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(417,000
|
)
|
|
(417,000
|
)
|
|
Total
stockholders’ equity
|
|
|
1,519,000
|
|
|
2,934,000
|
|
| |
|
$
|
7,628,000
|
|
$
|
7,806,000
|
|
See
accompanying condensed notes to consolidated financial
statements.
OXIS
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND
2005
(UNAUDITED)
| |
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
| |
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Product
revenues
|
|
$
|
1,462,000
|
|
$
|
532,000
|
|
$
|
4,331,000
|
|
$
|
1,718,000
|
|
|
License
revenues
|
|
|
50,000
|
|
|
—
|
|
|
50,000
|
|
|
—
|
|
|
Total
revenues
|
|
|
1,512,000
|
|
|
532,000
|
|
|
4,381,000
|
|
|
1,718,000
|
|
|
Cost
of product revenues
|
|
|
725,000
|
|
|
333,000
|
|
|
2,374,000
|
|
|
906,000
|
|
|
Gross
profit
|
|
|
787,000
|
|
|
199,000
|
|
|
2,007,000
|
|
|
812,000
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
207,000
|
|
|
69,000
|
|
|
598,000
|
|
|
191,000
|
|
|
Selling,
general and administrative
|
|
|
953,000
|
|
|
470,000
|
|
|
2,854,000
|
|
|
1,551,000
|
|
|
Total
operating expenses
|
|
|
1,160,000
|
|
|
539,000
|
|
|
3,452,000
|
|
|
1,742,000
|
|
|
Loss
from operations
|
|
|
(373,000
|
)
|
|
(340,000
|
)
|
|
(1,445,000
|
)
|
|
(930,000
|
)
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
14,000
|
|
|
22,000
|
|
|
45,000
|
|
|
74,000
|
|
|
Other
income
|
|
|
—
|
|
|
—
|
|
|
2,000
|
|
|
—
|
|
|
Interest
expense
|
|
|
(91,000
|
)
|
|
—
|
|
|
(146,000
|
)
|
|
(11,000
|
)
|
|
Total
other income (expenses)
|
|
|
(77,000
|
)
|
|
22,000
|
|
|
(99,000
|
)
|
|
63,000
|
|
|
Allocation
to minority interest in subsidiary
|
|
|
(88,000
|
)
|
|
—
|
|
|
(174,000
|
)
|
|
—
|
|
|
Loss
before provision for income taxes
|
|
|
(538,000
|
)
|
|
(318,000
|
)
|
|
(1,718,000
|
)
|
|
(867,000
|
)
|
|
Provision
for income taxes
|
|
|
115,000
|
|
|
—
|
|
|
204,000
|
|
|
—
|
|
|
Net
loss
|
|
$
|
(653,000
|
)
|
$
|
(318,000
|
)
|
$
|
(1,922,000
|
)
|
$
|
(867,000
|
)
|
|
Net
loss per share - basic and diluted
|
|
|
($0.02
|
)
|
|
($0.01
|
)
|
|
($0.04
|
)
|
|
($0.02
|
)
|
|
Weighted
average shares outstanding - basic
and
diluted
|
|
|
43,090,280
|
|
|
42,438,261
|
|
|
42,752,223
|
|
|
42,104,110
|
|
See
accompanying condensed notes to consolidated financial
statements.
OXIS
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
| |
|
Nine
Months Ended
September
30,
|
|
| |
|
2006
|
|
2005
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,922,000
|
)
|
$
|
(867,000
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
of property, plant and equipment
|
|
|
55,000
|
|
|
21,000
|
|
|
Amortization
of intangible assets
|
|
|
101,000
|
|
|
37,000
|
|
|
Accretion
of interest on discounted note payable
|
|
|
45,000
|
|
|
—
|
|
|
Common
stock issued to vendor for accounts payable
|
|
|
23,000
|
|
|
—
|
|
|
Share-based
compensation expense
|
|
|
249,000
|
|
|
8,000
|
|
|
Minority
interest in subsidiary
|
|
|
174,000
|
|
|
—
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(29,000
|
)
|
|
(68,000
|
)
|
|
Inventories
|
|
|
96,000
|
|
|
(43,000
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
155,000
|
|
|
9,000
|
|
|
Deferred
tax asset
|
|
|
1,000
|
|
|
—
|
|
|
Other
assets
|
|
|
(8,000
|
)
|
|
—
|
|
|
Accounts
payable
|
|
|
290,000
|
|
|
(157,000
|
)
|
|
Accrued
expenses
|
|
|
214,000
|
|
|
(532,000
|
)
|
|
Taxes
payable
|
|
|
115,000
|
|
|
—
|
|
|
Accounts
payable to related party
|
|
|
(65,000
|
)
|
|
—
|
|
|
Net
cash used in operating activities
|
|
|
(506,000
|
)
|
|
(1,592,000
|
)
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of common shares of subsidiary
|
|
|
—
|
|
|
(88,000
|
)
|
|
Investment
in restricted certificate of deposit
|
|
|
(3,060,000
|
)
|
|
—
|
|
|
Purchases
of property, plant and equipment
|
|
|
(64,000
|
)
|
|
(22,000
|
)
|
|
Increase
in patents
|
|
|
(42,000
|
)
|
|
(171,000
|
)
|
|
Proceeds
from restricted certificate of deposit
|
|
|
3,060,000
|
|
|
—
|
|
|
Net
cash used in investing activities
|
|
|
(106,000
|
)
|
|
(281,000
|
)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Collection
of private placement proceeds receivable, net of registration statement
costs
|
|
|
—
|
|
|
1,948,000
|
|
|
Issuance
of common stock
|
|
|
—
|
|
|
239,000
|
|
|
Proceeds
from exercise of stock options
|
|
|
69,000
|
|
|
44,000
|
|
|
Proceeds
from short-term borrowing
|
|
|
3,666,000
|
|
|
—
|
|
|
Repayment
of short-term borrowings
|
|
|
(3,060,000
|
)
|
|
(1,200,000
|
)
|
|
Net
cash provided by financing activities
|
|
|
675,000
|
|
|
1,031,000
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
63,000
|
|
|
(842,000
|
)
|
|
Cash
and cash equivalents - beginning of period
|
|
|
614,000
|
|
|
4,687,000
|
|
|
Cash
and cash equivalents - end of period
|
|
$
|
677,000
|
|
$
|
3,845,000
|
|
See
accompanying condensed notes to consolidated financial statements.
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2006
1. The
Company and Summary of Significant Accounting Policies
OXIS
International, Inc. with its subsidiaries (collectively, “OXIS” or the
“Company”) is a clinical diagnostics company engaged in the development of
clinical and research assays, diagnostics, nutraceutical and therapeutic
products, which include new technologies applicable to conditions and diseases
associated with oxidative stress. OXIS derives its revenues primarily from
sales
of research diagnostic assays to research laboratories. The Company’s diagnostic
products include five cardiac marker assays and 25 research assays to measure
markers of oxidative and nitrosative stress.
In
1965,
the corporate predecessor of OXIS, Diagnostic Data, Inc., was incorporated
in
the State of California. Diagnostic Data changed its incorporation to the State
of Delaware in 1972 and changed its name to DDI Pharmaceuticals, Inc. in 1985.
In 1994, DDI Pharmaceuticals merged with International BioClinical, Inc. and
Bioxytech S.A. and changed its name to OXIS International, Inc. The Company’s
principal executive offices were relocated to Foster City, California from
Portland, Oregon on February 15, 2006.
On
September 19, 2005, the Company entered into a stock purchase agreement with
BioCheck, Inc. (“BioCheck”) and certain stockholders of BioCheck to purchase all
of the common stock of BioCheck for $6.0 million in cash. On
December 6, 2005, the Company purchased 51% of the common stock of BioCheck
from each of the stockholders of BioCheck on a pro rata basis, for $3,060,000
in
cash. BioCheck’s products include over 40 clinical diagnostic assays. The
consolidated statements of operations for the three and nine months ended
September 30, 2006 include the results of operations of BioCheck and the
consolidated balance sheets at December 31, 2005 and September 30,
2006 include the assets and liabilities of BioCheck.
The
Company incurred net losses of $1.9 million in the nine months ended
September 30, 2006 and $3.1 million in 2005. The Company began expensing
stock options effective January 1, 2006 in accordance with the Statement of
Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payments”
(“SFAS 123R”). The Company extended the terms of existing debt during the third
quarter of 2006 and obtained additional debt financings subsequent to September
30, 2006 that included the issuance of warrants. Non-cash financing charges
resulting from such financings and the additional non-cash charges related
to
stock options may delay profitability. The Company’s plan is to increase
revenues to generate sufficient gross profit in excess of selling, general
and
administrative, and research and development expenses in order to achieve
profitability. However, the Company cannot provide assurances that it will
accomplish this task and there are many factors that may prevent the Company
from reaching its goal of profitability.
On
a
consolidated basis, the Company had cash and cash equivalents of $677,000 at
September 30, 2006, of which $656,000 was held by BioCheck. Since BioCheck
has
been and is expected to continue to be cash flow positive, management believes
that its cash will be sufficient to sustain its operating
activities.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2006
The
OXIS
parent company had cash and cash equivalents of $21,000 at September 30, 2006.
OXIS cannot access the cash held by its majority-held subsidiary, BioCheck,
to
pay for the corporate purposes of the OXIS parent company. The Company incurred
negative operating cash flows of $0.5 million during the nine months ended
September 30, 2006 and $2.1 million during 2005. The OXIS parent company
incurred negative operating cash flows of $0.9 million during the nine months
ended September 30, 2006. The current rate of cash usage raises substantial
doubt about the OXIS parent Company’s ability to continue as a going concern,
absent any new sources of significant cash flows. In an effort to mitigate
this
near-term concern, the Company obtained debt financing in which it received
proceeds of $1,350,000 subsequent to September 30, 2006 and is seeking equity
financings to obtain sufficient funds to sustain operations and purchase the
remaining 49% of BioCheck for approximately $3.0 million. From the
aforementioned debt financing, $635,000 was used to repay existing debt, accrued
interest and related legal fees. The Company plans to increase revenues by
introducing new products. However, the Company cannot provide assurances that
it
will successfully obtain equity financing, if any, sufficient to finance its
goals or that the Company will increase product related revenues. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue
in
existence.
Basis
of Presentation
The
consolidated financial statements have been prepared by the Company in
accordance with the rules and regulations of the Securities and Exchange
Commission regarding interim financial information. Accordingly, these financial
statements and notes thereto do not include certain disclosures normally
associated with financial statements prepared in accordance with accounting
principles generally accepted in the United States of America. This interim
financial information should be read in conjunction with the Company’s audited
consolidated financial statements and notes thereto for the year ended December
31, 2005 included in the Company’s Annual Report on Form 10-KSB.
The
consolidated financial statements include the accounts of OXIS International,
Inc. and its subsidiaries. All intercompany balances and transactions have
been
eliminated. On December 6, 2005, the Company purchased 51% of the common
stock of BioCheck. The consolidated statements of operations for the three
and
nine months ended September 30, 2006 include the results of operations of
BioCheck and the consolidated balance sheets include the assets and liabilities
of BioCheck at September 30, 2006 and December 31, 2005.
BioCheck’s revenues and expenses are not included in the consolidated statements
of operations for the three and nine months ended September 30, 2005
because those results of operations were incurred before the
December 6, 2005 date of acquisition. In the opinion of the Company’s
management, the consolidated financial statements include all adjustments
(consisting of only normal recurring adjustments) and disclosures considered
necessary for a fair presentation of the results of the interim periods
presented. This interim financial information is not necessarily indicative
of
the results of any future interim periods or for the Company’s full year ending
December 31, 2006.
Segment
Reporting
The
Company operates in one reportable segment.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2006
Restricted
Cash
The
Company invested $3,060,000 of cash into a 30-day certificate of deposit at
KeyBank, N.A. (“KeyBank”) and entered into a $3,060,000 non-revolving one-year
loan agreement with KeyBank on December 2, 2005 for the purpose of
completing the initial closing of the BioCheck acquisition. The Company granted
a security interest in its $3,060,000 certificate of deposit to KeyBank under
the loan agreement. The $3,060,000 loan with KeyBank was repaid during February
2006 and a new one-year loan agreement for $3,060,000 was entered into at Bridge
Bank, N.A. (“Bridge Bank”). As part of the loan arrangement with Bridge Bank,
the Company granted a security interest in a $3,060,000 certificate of deposit
transferred from KeyBank to Bridge Bank. The certificate of deposit bears
interest at 1.0%. Consequently, these certificates of deposit were classified
as
restricted cash on the consolidated balance sheets at September 30, 2006 and
December 31, 2005 as the cash is restricted as to use.
Share-Based
Compensation
The
Company has historically accounted for stock options granted to employees and
directors and other share-based employee compensation plans using the intrinsic
value method of accounting in accordance with Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and
related interpretations. As such, the Company recognized compensation expense
for stock options only if the quoted market value of the Company’s common stock
exceeded the exercise price of the option on the grant date. Any compensation
expense realized using this intrinsic value method is being amortized over
the
vesting period of the option.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS
123R, which requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the fair value
of the award on the grant date (with limited exceptions). That cost will be
recognized in the entity’s financial statements over the period during which the
employee is required to provide services in exchange for the award.
Management
implemented SFAS 123R effective January 1, 2006, using the modified prospective
application method. Under the modified prospective application method, SFAS
123R
applies to new awards and to awards modified, repurchased or cancelled after
January 1, 2006. Additionally, compensation costs for the portion of awards
for
which the requisite service has not been rendered that are outstanding as of
January 1, 2006 are recognized as the requisite service is rendered on or after
January 1, 2006. The compensation cost for that portion of awards is based
on
the grant-date fair value of those awards as calculated for proforma disclosures
under Statement of Financial Accounting Standards No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”). The compensation cost for awards issued
prior to January 1, 2006 attributed to services performed in years after January
1, 2006 uses the attribution method applied prior to January 1, 2006 according
to SFAS 123, except that the method of recognizing forfeitures only as they
occur was not continued.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2006
The
recognition of share-based employee compensation costs during 2006 had no
related tax effect since the Company provides a valuation allowance equal to
its
net deferred tax assets. The adoption of SFAS 123R had no effect on cash flow
from operations, cash flow from financing activities and basic and diluted
earnings per share. The effect of adoption of SFAS 123R on the results of
operations for the nine months ended September 30, 2006 was:
| |
|
Loss
from Operations
|
|
Loss
Before Provision
for Income
Taxes
|
|
Net
Loss
|
|
|
Results
as reported
|
|
$
|
(1,445,000
|
)
|
$
|
(1,718,000
|
)
|
$
|
(1,922,000
|
)
|
|
Additional
compensation expense - effect of adoption of SFAS 123R
|
|
|
191,000
|
|
|
191,000
|
|
|
191,000
|
|
|
Proforma
results applying the original provisions of SFAS 123 using the intrinsic
value method of APB 25
|
|
$
|
(1,254,000
|
)
|
$
|
(1,527,000
|
)
|
$
|
(1,731,000
|
)
|
The
following table presents the effect on net loss and net loss per share if the
Company had applied the fair value recognition provisions of SFAS 123 to
share-based awards to employees prior to January 1, 2006:
| |
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
| |
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Net
loss as reported
|
|
$
|
(653,000
|
)
|
$
|
(318,000
|
)
|
$
|
(1,922,000
|
)
|
$
|
(867,000
|
)
|
|
Share-based
employee compensation expense included in reported net loss
|
|
|
60,000
|
|
|
—
|
|
|
191,000
|
|
|
—
|
|
|
Share-based
employee compensation expense that would have been included in net
income
if the fair value method had been applied to all awards
|
|
|
(60,000
|
)
|
|
(34,000
|
)
|
|
(191,000
|
)
|
|
(124,000
|
)
|
|
Pro
forma net loss
|
|
$
|
(653,000
|
)
|
$
|
(352,000
|
)
|
$
|
(1,922,000
|
)
|
$
|
(991,000
|
)
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted - as reported
|
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
$
|
(0.02
|
)
|
|
Basic
and diluted - pro forma
|
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
$
|
(0.02
|
)
|
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2006
The
Company undertook a comprehensive study of options issued from 1994 through
2001
to determine historical patterns of options being exercised and forfeited.
The
results of this study were used as a source to estimate expected life and
forfeiture rates. The new estimated life of 4.45 years was applied only to
determine the fair value of awards issued after January 1, 2006. The estimated
forfeiture rate of 40% was applied to all awards that vested after January
1,
2006, including awards issued prior to that date, to determine awards expected
to be exercised.
The
Company issued options to purchase 120,000 shares of the Company’s common stock
to employees and directors during the three months ended September 30, 2006.
The
Company issued no options to employees and directors during the three months
ended September 30, 2005. The Company issued options to purchase 400,000 and
615,000 shares of the Company’s common stock to employees and directors during
the nine months ended September 30, 2006 and 2005, respectively. The fair values
of employee stock options are estimated for the calculation of employee
compensation expense in 2006 and the pro forma adjustments in 2005 in the above
table at the date of grant using the Black-Scholes option-pricing model with
the
following weighted-average assumptions during 2006 and 2005: expected volatility
of 90% and 170%, respectively; average risk-free interest rate of 4.59% and
4.00%, respectively; initial expected life of 4.45 years and 6 years,
respectively; no expected dividend yield; and amortization over the vesting
period of typically one to four years.
Stock
options issued to non-employees as consideration for services provided to the
Company have been accounted for under the fair value method in accordance with
SFAS 123 and Emerging Issues Task Force No. 96-18, “Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services,” which requires that compensation
expense be recognized for all such options. The Company issued options to
purchase 50,000 shares of the Company’s common stock to non-employees and a
warrant to purchase 108,000 shares of the Company’s common stock to a director
under a consulting agreement during the nine months ended September 30, 2006.
The Company issued no options to non-employees during the nine months ended
September 30, 2005.
Net
Loss Per Share
Basic
net
loss per share is computed by dividing the net loss for the period by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share is computed by dividing the net loss for the period by the
weighted average number of common shares outstanding during the period, plus
the
potential dilutive effect of common shares issuable upon exercise or conversion
of outstanding stock options and warrants during the period. The weighted
average number of potentially dilutive common shares were 318,940 and 769,558
for the three months ended September 30, 2006 and 2005, respectively, and
611,497 and 869,352 for the nine months ended September 30, 2006 and 2005,
respectively. These shares were excluded from net diluted loss per share because
of their anti-dilutive effect.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2006
Recent
Accounting Pronouncements
In
February 2006, the FASB issued Statement of Financial Accounting Standards
No.
155, “Accounting for Certain Hybrid Financial Instruments, an Amendment of FASB
Standards No. 133 and 140” (“SFAS No. 155”). SFAS No. 155 established the
accounting for certain derivatives embedded in other instruments. It simplifies
accounting for certain hybrid financial instruments by permitting fair value
remeasurement for any hybrid instrument that contains an embedded derivative
that otherwise would require bifurcation under Statement of Financial Accounting
Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities”
as well as eliminating a restriction on the passive derivative instruments
that
a qualifying special-purpose entity (“SPE”) may hold under Statement of
Financial Accounting Standards No. 140 “Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities” (“SFAS No. 140”). SFAS
No. 155 allows a public entity to irrevocably elect to initially and
subsequently measure a hybrid instrument that would be required to be separated
into a host contract and derivative in its entirety at fair value (with changes
in fair value recognized in earnings) so long as that instrument is not
designated as a hedging instrument pursuant to the statement. SFAS No. 140
previously prohibited
a qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. SFAS
No.
155 is effective for fiscal years beginning after September 15, 2006, with
early
adoption permitted as of the beginning of an entity’s fiscal year. Management
believes the adoption of SFAS No. 155 will have no impact on the Company’s
financial condition or results of operations.
In
March
2006, the FASB issued Statement of Financial Accounting Standards No. 156,
“Accounting for Servicing of Financial Assets—an amendment of FASB Statement No.
140” (“SFAS No. 156”). SFAS No. 156 requires an entity to recognize a servicing
asset or servicing liability each time it undertakes an obligation to service
a
financial asset by entering into a servicing contract in any of the following
situations: a transfer of the servicer’s financial assets that meets the
requirements for sale accounting; a transfer of the servicer’s financial assets
to a qualifying special-purpose entity in a guaranteed mortgage securitization
in which the transferor retains all of the resulting securities and classifies
them as either available-for-sale securities or trading securities; or an
acquisition or assumption of an obligation to service a financial asset that
does not relate to financial assets of the servicer or its consolidated
affiliates. SFAS No. 156 also requires all separately recognized servicing
assets and servicing liabilities to be initially measured at fair value, if
practicable and permits an entity to choose either the amortization or fair
value method for subsequent measurement of each class of servicing assets and
liabilities. SFAS No. 156 further permits, at its initial adoption, a one-time
reclassification of available for sale securities to trading securities by
entities with recognized servicing rights, without calling into question the
treatment of other available for sale securities under Statement of Financial
Accounting Standards No. 115, “Accounting for Certain Investments in Debt and
Equity Securities”, provided that the available for sale securities are
identified in some manner as offsetting the entity’s exposure to changes in fair
value of servicing assets or servicing liabilities that a servicer elects to
subsequently measure at fair value and requires separate presentation of
servicing assets and servicing liabilities subsequently measured at fair value
in the statement of financial position and additional disclosures for all
separately recognized servicing assets and servicing liabilities. SFAS No.
156
is effective for fiscal years beginning after September 15, 2006, with early
adoption permitted as of the beginning of an entity’s fiscal year. Management
believes the adoption of SFAS No. 156 will have no impact on the Company’s
financial condition or results of operations.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2006
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company does not expect the adoption of FIN 48 to have
a
material impact on its financial reporting, and the Company is currently
evaluating the impact, if any, the adoption of FIN 48 will have on its
disclosure requirements.
In
September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No.
157”) which defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (“GAAP”), and expands disclosures
about fair value measurements. Where applicable, SFAS No. 157 simplifies
and codifies related guidance within GAAP and does not require any new fair
value measurements. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. Earlier adoption is encouraged. The
Company does not expect the adoption of SFAS No. 157 to have a significant
effect on its financial position or results of operation.
2. Acquisition
of BioCheck
On
September 19, 2005, the Company entered into a stock purchase agreement with
BioCheck and certain stockholders of BioCheck to purchase all of the common
stock of BioCheck for $6.0 million in cash. BioCheck is a privately held
California corporation engaged in the development of immunoassays, with a number
of clinical diagnostic tests that have been approved by the United States Food
and Drug Administration. On December 6, 2005, the Company purchased 51% of
the common stock of BioCheck from each of the stockholders of BioCheck on a
pro
rata basis, for $3,060,000 in cash. This acquisition was accounted for by the
purchase method of accounting according to Statement of Financial Accounting
Standards No. 141, “Business Combinations,” (“SFAS No. 141”).
Pursuant
to the stock purchase agreement, OXIS will use its reasonable best efforts
to
consummate a follow-on financing transaction to raise additional capital with
which to purchase the remaining outstanding shares of BioCheck in one or more
additional closings. The purchase price for any BioCheck shares purchased after
the initial closing will be increased by an additional 8% per annum from
December 6, 2005. If OXIS has not purchased all of the outstanding shares
of BioCheck within twelve months of December 6, 2005, the earnings before
interest, taxes, depreciation and amortization expenses, if any, of BioCheck,
will be used to repurchase the remaining outstanding BioCheck shares at one
or
more additional closings. The purchase of the remaining outstanding shares
of
BioCheck will be accounted for the same as the initial purchase of 51% of
BioCheck using the purchase method of accounting according to SFAS No. 141.
The
additional purchase price will be allocated over the purchased assets of
BioCheck and the consolidated statements of operations will continue to include
the results of operations of BioCheck reduced by the minority interest, if
any,
in BioCheck. The Company may obtain additional independent valuations of
BioCheck’s assets related to the acquisition of the remaining 49% of BioCheck
and additional acquisition costs may be incurred. Such information and costs
may
affect the disclosures as presented herein.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2006
On June 23, 2006, OXIS entered into a mutual services agreement with BioCheck.
Both OXIS and BioCheck will provide certain services to the other corporation
to
be charged monthly at an hourly rate with an overhead surcharge. The services
that BioCheck will provide include manufacturing the bulk of OXIS’ research
assay test kits, assisting in packaging and shipping such research assay
test
kits to OXIS customers, and undertaking research and development of certain
new
OXIS research assay test kits on a case-by-case basis to be agreed upon between
the parties. OXIS will provide services to BioCheck, including marketing
and
sales, website management and materials requirement and control
systems.
The
agreement terminates on December 6, 2009, or earlier upon mutual consent of
the
parties, upon 90 day prior written notice by either party, by either party
if a
monthly billing is unpaid after 60 days if a 15 day notice and opportunity
to
cure has been provided, or upon a material breach of the agreement after 30
days’ notice and opportunity to cure the breach. As of September 30, 2006, OXIS
owed BioCheck approximately $103,000 for services rendered under the agreement.
OXIS has not made that payment. If OXIS receives written notice of breach of
the
agreement due to this non-payment, it will have 15 days to cure that breach.
If
OXIS fails to cure the breach during the cure period, BioCheck would have the
right to terminate the agreement.
3. Notes
Payable
| |
|
September
30, 2006
|
|
December
31, 2005
|
|
| |
|
Maturity
Value
|
|
Discounted
Value
|
|
|
|
|
Note
payable to KeyBank, N.A.
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3,060,000
|
|
|
Note
payable to Bridge Bank, N.A.
|
|
|
3,060,000
|
|
|
3,060,000
|
|
|
—
|
|
|
Note
payable to the Company’s former President & CEO
|
|
|
200,000
|
|
|
200,000
|
|
|
—
|
|
|
Note
payable to Fagan Capital, Inc.
|
|
|
406,000
|
|
|
285,000
|
|
|
—
|
|
|
Total
notes payable
|
|
$
|
3,666,000
|
|
$
|
3,545,000
|
|
$
|
3,060,000
|
|
On
December 2, 2005, the Company entered into non-revolving one-year loan
agreement with KeyBank in the amount of $3,060,000, for the purpose of
completing the initial closing of the BioCheck acquisition. The Company granted
a security interest in its $3,060,000 certificate of deposit at KeyBank under
the loan agreement. The loan bore interest at an annual rate that was 2.0%
greater than the interest rate on the certificate of deposit. The Company’s
$3,060,000 loan with KeyBank was repaid during February 2006 and a new one-year
loan agreement was entered into with Bridge Bank. The Company has granted a
security interest in its $3,060,000 certificate of deposit transferred from
KeyBank to Bridge Bank. The loan bears interest at 3.0% and the certificate
of
deposit bears interest at 1.0%.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2006
On
March
10, 2006, the Company received $200,000 in exchange for an unsecured promissory
note with Steven T. Guillen, the Company’s president and chief executive officer
at that time. The related party note bears interest at 7.0%. Interest and
principal were due on September 10, 2006. Mr. Guillen’s employment with the
Company was terminated on September 15, 2006. The Company was in default on
this
note at September 30, 2006. Subsequent to September 30, 2006, Mr. Guillen sued
the Company for payment of interest and principal due under the note. On
November 2, 2006, the Company repaid Mr. Guillen the principal and accrued
interest due on the promissory note in the amount of $209,000. The purpose
of
this loan was to provide the Company with short term financing as it sought
longer term financing.
On
March
31, 2006, the Company issued a $400,000 unsecured promissory note to Fagan
Capital, Inc. (“Fagan Capital”). Interest accrued at an annual rate of 8.0% and
interest and principal were initially due on June 2, 2006. The purpose of this
loan was to provide the Company with short term financing as it sought longer
term financing. On July 26, 2006, Fagan Capital extended the maturity date
of
the promissory note by entering into a renewal and modification promissory
note
(“Renewal Note”). The Renewal Note had a principal amount of $406,000, comprised
of the principal amount of the original promissory note plus accrued interest
of
$6,000. The effective date of the Renewal Note was June 2, 2006. On October
25,
2006, the Company paid to Fagan Capital amounts
owing under the Renewal Note
as
described in Note 7.
In
conjunction with the issuance of the Renewal Note, on July 26, 2006 the Company
issued to Fagan Capital a common stock purchase warrant to purchase 1,158,857
shares of common stock at an initial exercise price of $0.35 per share. The
exercise price is adjustable pursuant to certain anti-dilution provisions and
upon the occurrence of a stock split. The common stock purchase warrant expires
on June 1, 2014. On October 23, 2006, the parties signed a registration rights
agreement covering the shares underlying the common stock purchase warrant.
This
warrant was valued using the Black-Scholes option-pricing model and the proceeds
of $406,000 were allocated to the warrant and note based on their relative
fair
values. This resulted in the note being recorded as a liability at a discounted
value of $240,000 and the warrant being record as equity under additional
paid-in capital at a value of $166,000. The discounted note will accrete to
its
maturity value over the life of the loan. This resulted in a non-cash interest
expense of $45,000 during the quarter ended September 30, 2006. With the payment
of this note from the proceeds of the Company’s October 25, 2006 financing, the
remaining discount of $121,000 will be accelerated and recorded as interest
expense during October 2006.
4. Supplemental
Cash Flow Disclosures
The
Company recognized non-cash compensation expense of $58,000 and $8,000 related
to the issuance and vesting of stock options issued to consultants in the nine
months ended September 30, 2006 and 2005, respectively. The Company recognized
non-cash compensation expense of $191,000 related to the issuance and vesting
of
stock options issued to employees in the nine months ended September 30, 2006.
No employee non-cash compensation expense was recognized in the nine months
ended September 30, 2005 prior to the implementation of SFAS 123R. Cash interest
paid was $88,000 and $11,000 in the nine months ended September 30, 2006 and
2005, respectively. Interest expense attributed to the accretion of interest
on
discounted note payable was $45,000 in the three and nine months ended September
30, 2006.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2006
5. Relocation
of Operations
On
December 6, 2005, the Company committed itself to a plan to cease
operations in Portland, Oregon and relocate operations to Foster City,
California (the “Relocation”). The Company decided to effect the Relocation
after reviewing and evaluating all aspects of the Company’s operations to
determine the profitability and viability of continuing in the Portland, Oregon
location. During the first quarter of 2006, operations were relocated to
California and on February 15, 2006 the Portland, Oregon facility was closed
with the termination of employment of all Portland based employees who did
not
relocate to California. The Company’s subsidiary, BioCheck, has commenced
shipping of the Company’s products and is manufacturing all of its research
assay kit products not manufactured by third party suppliers.
In
connection with the Relocation, the Company accrued $119,000 during 2005 for
employee severances offered to all regular full-time employees who were not
relocated to Foster City, California. Of this amount, $103,000 has been paid
during the first nine months of 2006, resulting in $16,000 of accrued expenses
at September 30, 2006. The Company expects $8,000 of this amount to be paid
during the remainder of 2006 and $8,000 is to be paid during 2007. The Company
accrues for these benefits in the period when benefits are communicated to
the
terminated employees. Typically, terminated employees are not required to
provide continued service to receive termination benefits. In general, the
Company uses a formula based on the number of years of service to calculate
the
termination benefits to be provided to affected employees.
In
connection with the Relocation, the Company signed a lease agreement to occupy
4,136 square feet of space adjacent to space occupied by its BioCheck subsidiary
in Foster City, California. The lease commenced on April 1, 2006 at an annual
base rent of $62,000 per year that increases incrementally to $66,000 by the
end
of the lease term on March 31, 2009. In addition to the base rent, the Company
will be responsible for its proportionate share of the building’s operating
expenses and real estate taxes. The Company has a renewal option to extend
the
lease for one three-year period at the prevailing market rental value for
rentable property in the same area.
6.
Related Party Transactions
BioCheck
and EverNew Biotech, Inc., a California corporation (“EverNew”), entered into a
services agreement dated December 6, 2005 (the “Services Agreement”). The
holders of the shares of capital stock of EverNew are substantially the same
set
of individuals and entities who held BioCheck’s common stock immediately prior
to the initial closing of OXIS’ acquisition of BioCheck, including Dr. John
Chen, President of BioCheck, as a significant stockholder. EverNew is an
emerging point-of-care diagnostics company, with a number of products in
development. EverNew renders certain services to BioCheck, including assay
research and development work, and BioCheck renders certain administrative
services to EverNew. In consideration of services provided by EverNew, BioCheck
agreed to pay to EverNew $12,000 per month, provided, however, if the sum of
EverNew’s gross revenues for a consecutive three month period during the term of
the Services Agreement equals or exceeds $100,000, then BioCheck shall no longer
be obligated to pay EverNew any amounts for the remainder of the term of the
Services Agreement. Further, in such event, EverNew shall pay BioCheck an amount
equal to the EverNew Service Cost per month for the remainder of the term of
the
Services Agreement, and the EverNew Service Cost for such month shall be reduced
by the amount of the BioCheck compensation paid to BioCheck for such month
under
the Services Agreement. As
used
in the Services Agreement, EverNew Service Cost means the cost of all BioCheck
services provided by BioCheck each month under the Services Agreement, as
incurred and determined in good faith by BioCheck. Amounts
due to EverNew from BioCheck are $129,000 and $194,000 at September 30, 2006
and
December 31, 2005, respectively.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2006
7. Subsequent
Events
On
September 15, 2006, Marvin S. Hausman, M.D. was appointed by the board of
directors as President and Chief Executive Officer of the Company. Dr. Hausman
remains Chairman of the board of directors. On November 6, 2006, OXIS entered
into an employment agreement with Dr. Hausman. The commencement date of the
agreement was set retroactively at October 15, 2006 (the “Commencement
Date”).
Pursuant
to the employment agreement, Dr. Hausman will serve as the President and Chief
Executive Officer of OXIS for a three year period from the Commencement Date,
thereafter on a one year basis. Dr. Hausman will receive annual compensation
in
the amount of $250,000, payable quarterly in advance in cash, common stock
based
on a price equal to 85% of average of the five closing prices for the five
trading days prior to the date that the issuance is authorized by the Board
of
Directors, or in ten year warrants equal to that number of warrants equal to
1.5
times the number of shares that would otherwise be received. For the initial
quarterly payment, Dr. Hausman was issued 347,222 restricted shares of common
stock. During the three year term of the agreement, Dr. Hausman shall receive
an
annual bonus based upon the attainment of agreed upon goals and milestones
as
determined by the Board of Directors and its Compensation Committee. During
the
remainder of calendar year 2006, Dr. Hausman’s bonus shall be pro rated on an
annual bonus rate in the range of 25% to 50% of his base salary, and the bonus
for subsequent years of the term of the agreement shall be in a similar target
range. The bonuses payable hereunder shall be paid in cash, although at Dr.
Hausman’s sole option, they may be paid in stock (or in the form of ten year
warrants with cashless exercise provisions, with 1.5 times the number of warrant
shares to be issued in lieu of the number of shares of common stock), based
upon
the average of the closing bid and asked prices for the 5 trading days
immediately prior to the awarding to Dr. Hausman of the bonus for a particular
year. Once OXIS has raised at least $2.5 million in one or more financings
(equity, debt or convertible debt, in addition to the financing closed on
October 25, 2006) or in a strategic transaction (in each case, a Qualifying
Financing), Dr. Hausman may elect, at any time, in lieu of receiving a quarterly
issuance of stock (or warrants in lieu thereof), to receive his base salary
in
cash, payable monthly on OXIS’s regular pay cycle for professional employees. As
part of the compensation under the employment agreement, OXIS granted Dr.
Hausman a ten year a non-qualified option to purchase 495,000 shares of OXIS
common stock at an exercise price of $0.20 per share, vesting as follows: (i)
247,500 option shares vesting in four equal quarterly installments commencing
on
January 15, 2007 and every three months thereafter and (ii) and the remaining
247,500 option shares vesting in eight quarterly installments over two years
(the “Initial Option Grant”). Additionally, OXIS granted Dr. Hausman, as a sign
on bonus, 500,000 restricted shares of common stock and a ten year common stock
purchase warrant to purchase 1,505,000 shares at an exercise price of $0.20
per
share, with vesting in six equal installments, commencing on November 14, 2006,
through the 180th
day
after the Commencement Date. OXIS shall provide Dr. Hausman with an annual
office expense allowance of $50,000, for the costs of maintaining an office
in
the Stevenson, Washington area. The office expense allowance shall be payable
quarterly in advance in the form of common stock, at a price equal to 85% of
the
Market Price. For the first installment, representing $12,500 of the office
expense allowance, Dr. Hausman was issued 69,444 restricted shares of common
stock. Hereafter, the office allowance expense will be paid promptly after
the
determination of the Market Price on the dates that are three months, six months
and nine months from the date hereof, and quarterly thereafter for the duration
of the term of the agreement. Notwithstanding the foregoing, once OXIS has
completed a Qualifying Financing, the office expense allowance will be paid
in
cash in advance, commencing for the quarter next following the quarter in which
the Qualifying Financing occurred. Additionally, Dr. Hausman shall receive
family health and dental insurance benefits and short-term and long-term
disability policies.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2006
On
November 6, 2006, OXIS entered into an advisory agreement with Ambient Advisors
LLC (“Ambient Advisors”). Gary M. Post, a member of the board of directors, is
the manager of Ambient Advisors. The commencement date of the agreement was
set
retroactively at October 15, 2006 (the “Commencement Date”).
Pursuant
to the advisory agreement, Ambient Advisors will provide certain services
pertaining to strategic planning, financial planning and budgeting, investor
relations, corporate finance and such additional roles and responsibilities
as
requested for a three year period from the Commencement Date, thereafter on
a
one year basis. Ambient Advisors will receive annual compensation in the amount
of $83,333, payable quarterly in advance in cash, common stock based on a price
equal to 85% of average of the five closing prices for the five trading days
prior to the date that the issuance is authorized by the Board of Directors,
or
in ten year warrants equal to that number of warrants equal to 1.5 times the
number of shares that would otherwise be received. For the initial quarterly
payment, Ambient Advisors received a ten year warrant to purchase 173,608 shares
of common stock with an exercise price of $0.20 per share, vesting immediately.
As part of the compensation under the advisory agreement, OXIS granted Ambient
Advisors a ten year common stock purchase warrant to purchase 550,000 shares
of
OXIS common stock at an exercise price of $0.20 per share, vesting as follows:
(i) 275,000 warrant shares vesting in four equal quarterly installments
commencing on January 15, 2007 and every three months thereafter and (ii) and
the remaining 275,000 warrant shares vesting in eight quarterly installments
over two years. Additionally, OXIS granted Ambient Advisors, as a sign on bonus,
a non-qualified option to purchase 333,333 shares at exercise price of $0.20
per
share, with vesting in six equal installments, commencing on November 14, 2006,
through the 180th
day
after the Commencement Date. During the three year term of the agreement,
Ambient Advisors shall receive an annual bonus based upon the attainment of
agreed upon goals and milestones as determined by the Board of Directors and
its
Compensation Committee. During the remainder of calendar year 2006, Ambient
Advisors’ bonus shall be pro rated on an annual bonus rate in the range of 25%
to 50% of the advisory fee, and the bonus for subsequent years of the term
of
the agreement shall be in a similar target range. The bonuses payable hereunder
shall be paid in cash, although at Ambient Advisors’ sole option, they may be
paid in stock (or in the form of ten year warrants with cashless exercise
provisions, with 1.5 times the number of warrant shares to be issued in lieu
of
the number of shares of common stock), based upon the average of the closing
bid
and asked prices for the 5 trading days immediately prior to the awarding to
Ambient Advisors of the bonus for a particular year.
On
November 6, 2006, OXIS entered into a consulting agreement with John E. Repine,
M.D. The commencement date of the agreement was set retroactively at October
15,
2006 (the “Commencement Date”).
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2006
Pursuant
to the consulting agreement, Dr. Repine shall advise OXIS concerning matters
of
antioxidant and inflammation research and potential acquisitions (including
products/compounds/intellectual property, companies), product research and
development, and the development and establishment of reference labs for
oxidative stress and inflammatory reactions for a three year period from the
Commencement Date, thereafter on a one year basis. Dr. Repine will receive
annual compensation in the amount of $36,000, payable quarterly in advance
in
cash, common stock based on a price equal to 85% of average of the five closing
prices for the five trading days prior to the date that the issuance is
authorized by the Board of Directors, or in ten year warrants equal to that
number of warrants equal to 1.5 times the number of shares that would otherwise
be received. For the initial quarterly payment, Dr. Repine received 50,000
restricted shares of common stock. As part of the compensation under the
consulting agreement, OXIS granted Dr. Repine a ten year stock option to
purchase 200,000 shares of OXIS common stock at an exercise price of $0.20
per
share, vesting as follows: (i) 100,000 option shares vesting in four equal
quarterly installments commencing on January 15, 2007 and every three months
thereafter and (ii) and the remaining 100,000 option shares vesting in eight
quarterly installments over two years. Additionally, OXIS granted Dr. Repine,
as
a sign on bonus, a non-qualified option to purchase 200,000 shares at exercise
price of $0.20 per share, with vesting in six equal installments, commencing
on
November 14, 2006, through the 180th
day
after the Commencement Date. During the term of the consulting agreement, Dr.
Repine shall be eligible to receive annual and special bonuses based upon the
attainment of agreed upon goals and milestones as determined by the OXIS Chief
Executive Officer. Each bonus payable shall be paid in cash, although at Dr.
Repine’s sole option, such bonus may be paid in stock (or in the form of ten
year warrants with cashless exercise provisions, with 1.5 times the number
of
warrant shares to be issued in lieu of the number of shares of common stock),
based upon the average of the closing bid and asked prices for the 5 trading
days immediately prior to the awarding to Dr. Repine of the particular bonus.
On
October 25, 2006, OXIS entered into a securities purchase agreement (“Purchase
Agreement”) with four accredited investors (the “Purchasers”). In conjunction
with the signing of the Purchase Agreement, OXIS issued secured convertible
debentures (“Debentures”) and Series A, B, C, D, and E common stock warrants
(“Warrants”) to the Purchasers, and the parties also entered into a registration
rights agreement and a security agreement (collectively, the “Transaction
Documents”).
Pursuant
to the terms of the Purchase Agreement, OXIS issued the Debentures in an
aggregate principal amount of $1,694,250 to the Purchasers. The Debentures
are
subject to an original issue discount of 20.318% resulting in proceeds to OXIS
of $1,350,000 from the transaction. The Debentures mature on October 25, 2008,
but may be prepaid by OXIS at any time provided that the common stock issuable
upon conversion and exercise of the Warrants is covered by an effective
registration statement. The Debentures are convertible, at the option of the
Purchasers, at any time, into shares of common stock at $0.35 per share, as
adjusted pursuant to a full ratchet anti-dilution provision (the “Conversion
Price”). Beginning on the first of the month following the earlier of the
effective date of the registration statement to be filed pursuant to the
registration rights agreement and February 1, 2007, OXIS shall amortize the
Debentures in equal installments on a monthly basis resulting in a complete
repayment by the maturity date (the “Monthly Redemption Amounts”). The Monthly
Redemption Amounts can be paid in cash or in shares, subject to certain
restrictions. If OXIS chooses to make any Monthly Redemption Amount payment
in
shares of common stock, the price per share is the lesser of the Conversion
Price then in effect and 85% of the weighted average price for the 10 trading
days prior to the due date of the Monthly Redemption Amount.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2006
Pursuant
to the Debentures, OXIS covenants that it will not incur additional indebtedness
for borrowed money, other than its current Bridge Bank promissory note. OXIS
also covenants that it will not pledge, grant or convey any new liens on its
assets. The obligation to pay all unpaid principal will be accelerated upon
an
event of default, including upon failure to perform its obligations under the
Debenture covenants, failure to make required payments, default on any of the
Transaction Documents or any other material agreement, lease, document or
instrument to which OXIS is obligated, the bankruptcy of OXIS or related events.
The Purchasers have a right of first refusal to participate in up to 100% of
any
future financing undertaken by OXIS until the later of the date that the
Debentures are no longer outstanding and the one year anniversary of the
effective date of the registration statement. OXIS is restricted from issuing
shares of common stock or instruments convertible into common stock for 90
days
after the effective date of the registration statement with certain exceptions.
OXIS is also prohibited from effecting any subsequent financing involving a
variable rate transaction until such time as no Purchaser holds any of the
Debentures. In addition, until such time as any Purchaser holds any of the
securities issued in the Debenture transaction, if OXIS issues or sells any
common stock or instruments convertible into common stock which a Purchaser
reasonably believes is on terms more favorable to such investors than the terms
pursuant to the Transaction Documents, OXIS is obligated to amend the terms
of
the Transaction Documents to such Purchaser the benefit of such better terms.
OXIS may prepay the entire outstanding principal amount of the Debentures,
plus
accrued interest and other amounts payable, at its option at any time without
penalty, provided that a registration statement is available for the resale
of
shares underlying the Debentures and Warrants, as more fully described in the
Debentures. The purpose of this Debenture transaction is to provide the
corporation with intermediate term financing as it seeks longer term financing.
On
October 25, 2006, in conjunction with the signing of the Purchase Agreement,
OXIS issued to the Purchasers five year Series A Warrants to purchase an
aggregate of 2,420,357 shares of common stock at an initial exercise price
of
$0.35 per share, one year Series B Warrants to purchase 2,420,357 shares of
common stock at an initial exercise price of $0.385 per share, and two year
Series C Warrants to purchase an aggregate of 4,840,714 shares of common stock
at an initial exercise price of $0.35 per share. In addition, OXIS issued to
the
Purchasers Series D and E Warrants which become exercisable on a pro-rata basis
only upon the exercise of the Series C Warrants. The six year Series D Warrants
to purchase 2,420,357 shares of common stock have an initial exercise price
of
$0.35 per share. The six year Series E Warrants to purchase 2,420,357 shares
of
common stock have an initial exercise price of $0.385 per share. The initial
exercise prices for each warrant are adjustable pursuant to a full ratchet
anti-dilution provision and upon the occurrence of a stock split or a related
event.
Pursuant
to the registration rights agreement, OXIS must file a registration statement
covering the public resale of the shares underlying the Series A, B, C, D and
E
Warrants and the Debentures within 45 days of the closing of the transaction
and
cause the registration to be declared effective within 120 days of the closing
date. Cash liquidated damages equal to 2% of the face value of the Debentures
per month are payable to the purchasers for any failure to timely file or obtain
an effective registration statement.
Pursuant
to the Security Agreement, OXIS agreed to grant the purchasers, pari passu,
a
security interest in substantially all of the Company’s assets. OXIS also agreed
to pledge its respective ownership interests in its wholly-owned subsidiaries,
OXIS Therapeutics, OXIS Isle of Man, and its partial subsidiary, BioCheck,
Inc.
OXIS Therapeutics and OXIS Isle of Man also provided a subsidiary guarantee
to
the Purchasers in connection with the transaction.
OXIS
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2006
On
September 15, 2006, Steven T. Guillen’s employment as the Company’s President
and Chief Executive Officer was terminated. Mr. Guillen remains a member of
the
board of directors. Pursuant to the employment agreement with Mr. Guillen and
in
connection with his termination, the Company accrued $261,000 at September
30,
2006 for severance obligations including continued coverage under the Company’s
health plan. The Company expects $76,000 of this amount to be paid during the
remainder of 2006 and $185,000 is to be paid during 2007 contingent upon Mr.
Guillen’s execution of a waiver and release of all claims against the Company.
In addition, the Company accrued back salary of approximately $75,000 at
September 30, 2006 owed to Mr. Guillen. On October 16, 2006, Mr. Guillen filed
a
lawsuit against the Company and up to 25 unnamed additional defendants. The
complaint alleges breaches of contract relating to Mr. Guillen’s employment
agreement and a promissory note that is in default, breach of implied covenant
of good faith and fair dealing, wrongful termination and violation of the
California Labor Code in relation to the non-payment of back pay. On March
10,
2006, we received $200,000 in exchange for an unsecured promissory note with
Mr.
Guillen. Interest and principal were due on September 10, 2006 and at September
30, 2006 were in default. On November 2, 2006, the Company repaid Mr. Guillen
the principal and accrued interest due on the promissory note in the amount
of
$209,000 and back pay with penalties and accrued interest of $96,000. We are
in
ongoing negotiations with Mr. Guillen’s counsel to settle the lawsuit. To the
date of this prospectus, the complaint has not been served upon OXIS or any
other defendant.
The
Company issued a $400,000 unsecured promissory note to Fagan Capital on March
31, 2006 and a modification and renewal note on July 26, 2006 as described
in
Note 3. In conjunction with the issuance of the renewal note, the Company issued
to Fagan Capital a common stock purchase warrant. On October 25, 2006, the
Company prepaid the principal, accrued interest and legal fees due pursuant
to
the renewal note in the amount of $426,000.