U.
S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-QSB
T Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the
quarterly period ended September 30, 2006
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the
transition period from
to
.
Commission
File Number 0-8092
(Exact
name of small business issuer as specified in its charter)
|
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
94-1620407
(I.R.S.
employer
identification
number)
|
|
323
Vintage Park Drive, Suite B, Foster City, CA 94404
(Address
of principal executive offices and zip code)
(650)
212-2568
(Registrant’s
telephone number, including area
code)
|
Check
mark whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2)
has been subject to such filing requirements for the past 90 days. YES
T NO
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES
NO
T
At
November 10, 2006, the issuer had outstanding the indicated number of shares
of
common stock: 43,505,254.
Transitional
Small Business Disclosure Format YES
NO
T
OXIS
International, Inc.
Form
10-QSB
For
the Quarter Ended September 30, 2006
Table
of Contents
|
PART
I - FINANCIAL INFORMATION
|
Page
|
|
Item
1.
|
Financial
Statements
|
|
| |
Consolidated
Balance Sheets as of September 30, 2006 (Unaudited) and December
31,
2005
|
1
|
| |
Consolidated
Statements of Operations for the periods ended September 30, 2006
and 2005
(Unaudited)
|
2
|
| |
Consolidated
Statements of Cash Flows for the periods ended September 30, 2006
and 2005
(Unaudited)
|
3
|
| |
Condensed
Notes to Consolidated Financial Statements
|
4
|
|
Item
2.
|
Management’s
Discussion and Analysis or Plan of Operation
|
19
|
|
Item
3.
|
Controls
and Procedures
|
49
|
|
PART
II - OTHER INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
50
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
50
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
50
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
50
|
|
Item
5.
|
Other
Information
|
51
|
|
Item
6.
|
Exhibits
|
51
|
|
SIGNATURE
|
52
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial
Statements.
OXIS
INTERNATIONAL, INC.
CONSOLIDATED
BALANCE SHEETS
| |
|
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
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Convertible
preferred stock - $0.01 par value; 15,000,000 shares authorized;
Series C
- 96,230 shares issued and outstanding
|
|
|
1,000
|
|
|
1,000
|
|
|
Common
stock- $0.001 par value; 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
shareholders’ 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
(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
(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 shareholders of BioCheck to purchase all
of the common stock of BioCheck for $6.0 million in cash. On
December 6, 2005, the Company purchased 51% of the common stock of BioCheck
from each of the shareholders of BioCheck on a pro rata basis, for $3,060,000
in
cash. 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.
CONDENSED
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.
CONDENSED
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.
CONDENSED
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
Basic
and diluted - pro forma
|
|
$
$
|
(0.02
(0.02
|
)
)
|
$
$
|
(0.01
(0.01
|
)
)
|
$
$
|
(0.04
(0.04
|
)
)
|
$
$
|
(0.02
(0.02
|
)
)
|
OXIS
INTERNATIONAL, INC.
CONDENSED
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.
CONDENSED
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.
CONDENSED
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 shareholders of BioCheck to purchase all of the common
stock of BioCheck for $6.0 million in cash. BioCheck is a privately held
California corporation engaged in the development of immunoassays, with a number
of clinical diagnostic tests that have been approved by the United States Food
and Drug Administration. On December 6, 2005, the Company purchased 51% of
the common stock of BioCheck from each of the shareholders of BioCheck on a
pro
rata basis, for $3,060,000 in cash. This acquisition was accounted for by the
purchase method of accounting according to Statement of Financial Accounting
Standards 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.
CONDENSED
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.
CONDENSED
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.
CONDENSED
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 shareholder. 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.
CONDENSED
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.
CONDENSED
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.
CONDENSED
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.
CONDENSED
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.
CONDENSED
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 Report, 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.
Item
2. Management’s
Discussion and Analysis or Plan of Operation.
Statement
Regarding Forward-Looking Statements
The
statements contained in this Report on Form 10-QSB that are not purely
historical are forward-looking statements within the meaning of Section 27A
of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, or the Exchange Act, including, without limitation, statements regarding
our expectations, objectives, anticipations, plans, hopes, beliefs, intentions
or strategies regarding the future. Forward-looking statements include, without
limitation, statements regarding:
(1)
our plan to increase revenues to generate sufficient gross profit in excess
of
selling, general and administrative, and research and development expenses
in
order to achieve profitability; (2) our expectation that BioCheck will continue
to be cash flow positive, and that its cash will be sufficient to sustain
its
operating activities; (3) our intention to seek equity financings to obtain
sufficient funds to sustain our operations and purchase the remaining 49%
of
BioCheck for approximately $3.0 million; (4) our plan to increase revenues
by
the introduction of new products; (5) our belief that the adoption of certain
accounting standards will have no impact on our financial condition or results
of operations; (6) our expectation that $84,000 of employee severance package
expenses will be paid during the remainder of 2006 and $193,000 will be paid
during 2007; (7) our plan to pursue the development of novel cardiac markers;
(8) our plan to develop the cardiac marker product through the combination
of
our MPO assay with other in-house assays; (9) our belief that our Ergothioneine
compound may be well suited for development as a nutraceutical supplement
that
can be sold over the counter and our testing of Ergothioneine; (10) our intent
to pursue the development of Ergothioneine for use in over-the-counter markets,
given the availability of sufficient capital resources; (11) our expectation
that a new myeloperoxidase research assay will be ready for commercial launch
in
the fourth quarter of 2006; (12) our expectation that the ID protein assays
and
reagents will be ready for commercial launch by late 2006;(134) our projections
for 2006, which are based upon our expectations that BioCheck will incur
similar
revenues and costs in 2006 as it incurred in 2005; (14) our expectation that
in
the fourth quarter 2006, product revenues will increase modestly from the
third
quarter as we introduce new products; (15) our intention to develop new
diagnostic test kits and evaluate our product offerings, pricing and
distribution network in order to increase sales volume; (16) our expectation
that fourth quarter 2006 product costs will increase proportionally with
any
increases in revenues; (17) our expectation that revenues and expenses will
increase substantially from 2005 to 2006 with the consolidation of all of
BioCheck’s results of operations during 2006; (18) our expectation that the
actual amount of research and development expenses will fluctuate with the
availability of funding; (19) our expectation that fourth quarter 2006 selling,
general and administrative expenses will approximately the same as the third
quarter; (20) our expectation that interest expense will increase signinficantly
from the third quarter of 2006 with additional debt financing during October
2006;
and
(21) our expectation that our cash position may not be sufficient to sustain
our
operations through the first
quarter of 2007 without
additional financing.
It
is
important to note that our actual results could differ materially from those
included in such forward-looking statements due to a variety of factors
including (1) failure to complete our acquisition of BioCheck or to adequately
integrate the operations of the two companies; (2) failure to achieve any
benefits in connection with the recent changes in management or personnel;
(3)
disruption in operations due to the relocation plan and reduction in workforce;
(4) failure to comply with our obligations under the debenture transaction
agreements or to repay the debentures when such payments are due; (5) inability
to hire employees or management; (6) failure to make payments when required
under our Mutual Services Agreement with BioCheck to avoid termination; (7)
failure to find alternative suppliers; (8) failure to develop or market
products successfully; (9) failure to obtain necessary financing;
(10) the cost of complying with regulatory requirements;
(11) uncertainties exist relating to issuance, validity
and
ability to enforce and protect patents, other intellectual property and certain
proprietary information; (12) our products may not
meet product performance specifications; (13) new
products may be unable to compete successfully in either existing or new
markets; (14) availability and future costs of
materials and other operating expenses; (15) weakness
in the global economy and changing market conditions, together with general
economic conditions affecting our target industries, could cause our operating
results to fluctuate; (16) miscalculations in the assessment of our cash
position; and (17) our failure to accurately predict the impact of the adoption
of certain accounting standards. These and other factors could cause actual
results to differ materially from the forward looking statements. For a detailed
explanation of such risks, please see the section entitled “Factors that May
Affect Future Operating Results” beginning on page 36 of
this Report on Form 10-QSB. Such risks, as well as such other risks and
uncertainties as are detailed in our Securities and Exchange Commission,
or the
SEC, reports and filings for a discussion of the factors that could cause
actual
results to differ materially from the forward- looking statements. Given
these
uncertainties, readers are cautioned not to place undue reliance on the
forward-looking statements. All forward-looking
statements included in this Report on Form 10-QSB are based on
information available to us on the date hereof, and we assume no obligation
to
update any such forward-looking
statements.
The
following discussion of our financial condition and plan of operation should
be
read in conjunction with our consolidated financial statements and related
notes
included in this Report and our audited consolidated financial statements and
related notes for the year ended December 31, 2005 included in our Annual Report
on Form 10-KSB.
Overview
OXIS
International, Inc. develops technologies and products to research, diagnose,
treat and prevent diseases of oxidative stress associated with damage from
free
radical and reactive oxygen species. We derive our revenues primarily from
sales
of research diagnostic assays to research laboratories. Our diagnostic products
include approximately 30 research assays to measure markers of oxidative
stress. We
hold
the rights to three therapeutic classes of compounds in the area of oxidative
stress, and have focused our commercialization programs in clinical
cardiovascular markers, including MPO (myeloperoxidase) and GPx (glutathione
peroxidase), as well as a potent antioxidant, Ergothioneine, that may be
appropriate for sale over-the-counter as a dietary supplement. OXIS has acquired
a 51% interest in and has the option to purchase the remaining 49% of BioCheck,
Inc., or BioCheck.
Our
majority-held subsidiary, BioCheck, is
a
leading producer of clinical diagnostic assays, including high quality enzyme
immunoassay research services and immunoassay kits for cardiac and tumor
markers, infectious diseases, thyroid function, steroids, and fertility hormones
designed to improve the accuracy, efficiency, and cost-effectiveness of
in
vitro
(outside
the body) diagnostic testing in clinical laboratories. BioCheck
focuses primarily on the immunoassay segment of the clinical diagnostics market.
BioCheck
offers over 40 clinical diagnostic assays
manufactured in its 15,000 square-foot, U.S. Food and Drug Administration,
or
FDA, certified Good Manufacturing Practices device-manufacturing facility in
Foster City, California.
We
incurred net losses of $1.9 million in the nine months ended September 30,
2006 and $3.1 million in 2005. We began expensing stock options effective
January 1, 2006 in accordance with the Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payments,” or SFAS 123R. We
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 financing and the additional non-cash charges related to stock options
may
delay profitability. Our plan is to increase revenues to generate sufficient
gross profit in excess of selling, general and administrative, and research
and
development expenses in order to achieve profitability. However, we cannot
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 $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.
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. We have incurred
negative operating cash flows of $0.5 million during the first nine months
of
2006 and $2.1 million during 2005. The OXIS parent company incurred negative
operating cash flows of $0.9 million during the first nine months of 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, 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. We plan
to
increase revenues by the introduction of 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. The financial statements
do
not include any adjustments relating to the recoverability and classification
of
recorded assets, or the amounts and classification of liabilities that might
be
necessary in the event OXIS cannot continue in existence.
Recent
Developments
Current
significant financial and operating events and strategies are summarized as
follows:
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, or the Commencement Date. 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 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.
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, 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, 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.
Consulting
Agreement with John E. Repine, M.D.
On
November 6, 2006, OXIS entered into an consulting agreement with John E. Repine,
M.D. that commenced retroactively at October 15, 2006, or the Commencement
Date
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, 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, 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.
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,
or Warrants, to the Purchasers, and the parties also entered into a registration
rights agreement and a Security Agreement, or collectively, the Transaction
Documents.
Pursuant
to the terms of the Purchase Agreement, we issued the Debentures in an aggregate
principal amount of $1,694,250 to the Purchasers. The Debentures are subject
to
an original issue discount of 20.318% resulting in proceeds to OXIS of
$1,350,000 from the transaction. The Debentures mature on October 25, 2008,
but
may be prepaid by us at any time provided that the common stock issuable upon
conversion and exercise of the Warrants is covered by an effective registration
statement. The Debentures are convertible, at the option of the Purchasers,
at
any time, into shares of common stock at $0.35 per share, as adjusted pursuant
to a full ratchet anti-dilution provision, or the Conversion Price. Beginning
on
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 shall amortize the Debentures in equal installments
on
a monthly basis resulting in a complete repayment by the maturity date, or
the
Monthly Redemption Amounts. The Monthly Redemption Amounts can be paid in cash
or in shares, subject to certain restrictions. If we choose to make any Monthly
Redemption Amount payment in shares of common stock, the price per share is
the
lesser of the Conversion Price then in effect and 85% of the weighted average
price for the 10 trading days prior to the due date of the Monthly Redemption
Amount.
Pursuant
to the Debentures, we covenant 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.
Pursuant
to the Security Agreement, we agreed to grant the Purchasers, pari passu, 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.
Termination
of our President and Chief Executive Officer, and related note and
lawsuit
On
March
10, 2006, we received $200,000 in exchange for an unsecured promissory note
with
Mr. Guillen. The related party note bears interest at 7.0%. Interest and
principal were due on September 10, 2006 and at September 30, 2006 were in
default. Mr. Guillens’s employment was terminated on September 15, 2006.
Mr. Guillen, who remains a member of our board of directors, filed a lawsuit
against OXIS 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 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.
To the date of this Report, the complaint has not been served upon OXIS or
any
other defendant.
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., or
HaptoGuard, 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.
Acquisition
of BioCheck
On
September 19, 2005, we entered into a stock purchase agreement with BioCheck
and
its shareholders to purchase all of its common stock for $6.0 million in
cash. BioCheck is a leading producer of enzyme immunoassay diagnostic kits
for
clinical laboratories. On December 6, 2005, we purchased 51% of the
shares of BioCheck’s common stock from each of its shareholders on a pro rata
basis for $3,060,000 in cash. This acquisition was accounted for by the purchase
method of accounting according to Statement of Financial Accounting Standards
No. 141, “Business Combinations.” The consolidated 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 December 31, 2005 and September
30, 2006. Pursuant to the stock purchase agreement, OXIS will use its
reasonable best efforts to consummate a follow-on financing transaction to
raise
additional capital with which to purchase the remaining outstanding shares
of
BioCheck in one or more additional closings.
Mutual
Services Agreement
On
June
23, 2006, we 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.
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.
Other
Loans and Warrant
The
$3,060,000 loan with KeyBank, N.A., or KeyBank, was repaid during February
2006
and a new one-year loan agreement for $3,060,000 was entered into with Bridge
Bank, National Association, or Bridge Bank. As part of the loan arrangement
with
Bridge Bank, we granted a security interest in a $3,060,000 certificate of
deposit transferred from KeyBank to Bridge Bank. The loan bears interest at
3.0%
and the certificate of deposit bears interest at 1.0%.
On
March
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 included in this Report.
The
purpose of these loans was to provide us with short term financing as we sought
longer term financing.
Relocation
of Operations
On
December 6, 2005, we initiated a relocation plan to cease our operations in
Portland, Oregon and relocate to Foster City, California. We decided to relocate
after reviewing and evaluating all aspects of our operations to determine the
profitability and viability of continuing in the Portland, Oregon location.
During February 2006, we signed a lease agreement for 4,136
square feet of space located immediately adjacent to those of BioCheck and
relocated our manufacturing operations to Foster City, California.
On
February 15, 2006, we ceased operations at the Portland, Oregon facility and
most of the Portland, Oregon employees were terminated. In connection with
the
relocation, we accrued $119,000 during 2005 for 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.
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 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 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
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 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, shareholder 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, shareholder 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.
Interest
Income
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 included in this Report.
Liquidity
and Capital Resources
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.
The
cash
held by the OXIS parent company was $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. We have incurred negative
operating cash flows of $0.5 million during the nine months ended September
30,
2006. The OXIS parent company 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 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
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 entered into a securities purchase agreement, or Purchase
Agreement, with four accredited investors, or the Purchasers. In conjunction
with the signing of the Purchase Agreement, we issued secured convertible
debentures, or Debentures, and Series A, B, C, D, and E common stock warrants,
or Warrants to the Purchasers, and the parties also entered into a registration
rights agreement and a Security Agreement. The Warrants issued to the Purchasers
are for the purchase of an aggregate of approximately 14.5 million shares of
OXIS common stock, at initial exercise prices ranging from $0.35 to $0.385
per
share, subject to adjustment as provided therein, including full ratchet
anti-dilution. OXIS issued secured convertible debentures, or Debentures, in
an
aggregate principal amount of $1,694,250 to the Purchasers. The Series D and
E
Warrants are only exercisable pro rata subsequent to the exercise of the Series
C Warrants. The Debentures are subject to an original issue discount of 20.318%
resulting in proceeds to OXIS of $1,350,000 from the transaction. The Debentures
are convertible, at the option of the Purchasers, at any time, into shares
of
common stock at $0.35 per share, as adjusted pursuant to a full ratchet
anti-dilution provision, or 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 or 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.
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 Report. 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 a 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
with Bridge Bank.
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. 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.
Critical
Accounting Policies
We
consider the following accounting policies to be critical given they involve
estimates and judgments made by management and are important for our investors’
understanding of our operating results and financial condition.
Basis
of Consolidation
The
consolidated financial statements contained in this Report include the accounts
of OXIS International, Inc. and its subsidiaries. All intercompany balances
and
transactions have been eliminated. On December 6, 2005, we purchased 51% of
the common stock of BioCheck. This acquisition was accounted for by the purchase
method of accounting according to Statement of Financial Accounting Standards
No. 141, “Business Combinations.” The consolidated 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.
Revenue
Recognition
We
manufacture, or have manufactured on a contract basis, research and diagnostic
assays and fine chemicals, which are our primary products sold to customers.
Revenue from the sale of our products, including shipping fees, is recognized
when title to the products is transferred to the customer which usually occurs
upon shipment or delivery, depending upon the terms of the sales order and
when
collectibility is reasonably assured. Revenue from sales to distributors of
our
products is recognized, net of allowances, upon delivery of product to the
distributors. According to the terms of individual distributor contracts, a
distributor may return product up to a maximum amount and under certain
conditions contained in its contract. Allowances are calculated based upon
historical data, current economic conditions and the underlying contractual
terms. Our mix of product sales are substantially at risk to market conditions
and demand, which may change at anytime.
We
recognize license fee revenue for licenses to our intellectual property when
earned under the terms of the agreements. Generally, revenue is recognized
upon
transfer of the license unless we have continuing obligations for which fair
value cannot be established, in which case the revenue is recognized over the
period of the obligation. We consider all arrangements with payment terms
extending beyond twelve months not to be fixed or determinable. In certain
licensing arrangements there is provision for a variable fee as well as a
non-refundable minimum amount. In such arrangements, the amount of the
non-refundable minimum guarantee is recognized upon transfer of the license
and
collectibility is reasonably assured or over the period of the obligation,
as
applicable, and the amount of the variable fee is recognized as revenue when
it
is fixed and determinable. We recognize royalty revenue based on reported sales
by third party licensees of products containing our materials, software and
intellectual property. Non-refundable royalties, for which there are no further
performance obligations, are recognized when due under the terms of the
agreements.
Inventories
Inventories
are stated at the lower of cost to purchase and/or manufacture the inventory
or
the current estimated market value of the inventory. We regularly review our
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and/or
our
ability to sell the products and production requirements. Demand for our
products can fluctuate significantly. Factors which could affect demand for
our
products include unanticipated changes in consumer preferences, general market
conditions or other factors, which may result in cancellations of advance orders
or a reduction in the rate of reorders placed by customers and/or continued
weakening of economic conditions. Additionally, our estimates of future product
demand may be inaccurate, which could result in an understated or overstated
provision required for excess and obsolete inventory. Our estimates are based
upon our understanding of historical relationships which can change at
anytime.
Long-Lived
Assets
Our
long-lived assets include property, plant and equipment, capitalized costs
of
filing patent applications and goodwill and other assets. We evaluate our
long-lived assets for impairment in accordance with SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be
recoverable. Estimates of future cash flows and timing of events for evaluating
long-lived assets for impairment are based upon management’s judgment. If any of
our intangible or long-lived assets are considered to be impaired, the amount
of
impairment to be recognized is the excess of the carrying amount of the assets
over its fair value.
Applicable
long-lived assets are amortized or depreciated over the shorter of their
estimated useful lives, the estimated period that the assets will generate
revenue, or the statutory or contractual term in the case of patents. Estimates
of useful lives and periods of expected revenue generation are reviewed
periodically for appropriateness and are based upon management’s judgment.
Goodwill and other assets are not amortized.
Share-Based
Compensation
In
December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS
123R. SFAS 123R 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 included
in this Report for more information on the amounts, methodologies and variables
related to non-cash share-based compensation charges.
FACTORS
THAT MAY AFFECT FUTURE OPERATING RESULTS
We
operate in a rapidly changing environment that involves a number of risks,
some
of which are beyond our control. The following discussion highlights some of
these risks and others are discussed elsewhere in this report or in our Annual
Report on Form 10-KSB for the period ended December 31, 2005 and our
Post-Effective Amendment No. 1 to Form SB-2 Registration Statement (SEC
File No. 333-123008).
Risks
Related to Our Business
We
will need to raise additional capital to fund our general and administrative
expenses, and if we are unable to raise such capital, we will have to curtail
or
cease operations.
The
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. 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, including our development and commercialization programs and
purchase the remaining 49% of BioCheck common stock we 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 legal fees 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 the recent debt financing may prohibit OXIS from
consummating an equity financing transaction.
Pursuant
to the Securities Purchase Agreement entered into with four accredited
purchasers on October 25, 2006, OXIS is 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 OXIS is
required to file in relation to the Debenture transaction, unless the volume
weighted average price of our common stock for each of the twenty days
immediately prior to any such issuance of equity securities is in excess of
$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. Pursuant
to another provision of the Securities Purchase Agreement, 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 issuable into common
stock which OXIS undertakes within one year after the effective date of the
registration statement which OXIS is required to file regarding the Debenture
transaction. This provision may make potential investors reluctant to enter
into
term sheets with OXIS 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 OXIS to consummate
future equity financings.
In
the
debt financing transaction which OXIS entered into in October 2006 with four
accredited purchasers or the Purchasers, OXIS issued Secured Convertible
Debentures in an aggregate principal amount of $1,694,250 to the Purchasers.
OXIS also issued Series A, B, C, D, and E warrants to the Purchasers for the
purchase of an aggregate of approximately 14.5 million shares of OXIS common
stock, at initial exercise prices ranging from $0.35 to $0.385 per share,
subject to adjustment as provided therein, including full ratchet
anti-dilution.. The Series D and E warrants are only exercisable pro rata
subsequent to the exercise of the Series C warrants. The Debentures are subject
to an original issue discount of 20.318% resulting in proceeds to OXIS of
$1,350,000 from the transaction. The Debentures are convertible, at 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.
Due
to
the floating conversion price of the Debentures applicable when OXIS chooses
to
repay the Debentures in shares, OXIS would need to issue approximately ten
million shares to the Purchasers, assuming that stock prices remain in their
recent price range. The number of shares which OXIS may have to issue to the
Purchasers could increase significantly if the stock price declines from the
current price range. In addition, OXIS would have to issue approximately five
million shares if the Purchasers exercise the Series A and B warrants, an
additional approximately five million shares would be issued upon exercise
of
the Series C warrants and finally, an additional approximately five million
shares would be issued upon exercise of the 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 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 OXIS’ ability to repay the Debentures in shares rather than in cash may
deplete OXIS’ cash resources and will require future financings to avoid
default.
Under
the
terms of the Debentures issued to purchasers in October 2006, OXIS right to
make
its monthly redemption payments to the Purchasers of the Debentures 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, OXIS is
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 Purchasers would equal
approximately $85,000 per month. OXIS may not make the monthly redemption in
shares if, among other conditions, the issuance of the shares to the Purchasers
would cause any such Purchaser to beneficially own in excess of either 9.99%
or
4.99% of the total outstanding shares of OXIS at that time (depending on the
particular Purchaser either the 9.99% or the 4.99% applies). One of the
Purchasers currently beneficially owns approximately 9% of the total outstanding
shares. In addition, OXIS may not make monthly redemption payments to any
Purchasers in shares rather than cash if the daily trading volume for OXIS’
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 OXIS must make all or a substantial amount of its monthly
redemption payments to the Purchasers 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,
or Agreement, with our majority owned subsidiary, BioCheck. Pursuant to the
Agreement, OXIS agreed to pay BioCheck approximately $103,000 that it owed
to
BioCheck for services that BioCheck had provided to OXIS during the nine months
ended September 30, 2006. 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. Pursuant
to
the Agreement, BioCheck is 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. If BioCheck ceases to perform services under the Agreement,
OXIS 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 OXIS’ research assay test kits at competitive
prices or at all, or that OXIS would be able to pay for such services.
Disruption or cessation of manufacturing due to the termination of the Agreement
would have immediate and deleterious effects on OXIS future
revenues.
We
will need to raise additional capital in order to complete our acquisition
of
the outstanding shares of BioCheck.
On
September 19, 2005 we entered into a stock purchase agreement with BioCheck
and
the shareholders of BioCheck pursuant to which OXIS undertook to purchase up
to
all of the outstanding shares of common stock of BioCheck for an aggregate
purchase price of $6.0 million in cash. On December 6, 2005, pursuant to
the terms of the stock purchase agreement with BioCheck, at the initial closing,
we purchased an aggregate of fifty-one percent (51%) of the outstanding shares
of common stock of BioCheck from each of the shareholders of BioCheck on a
pro
rata basis, for an aggregate of $3,060,000 in cash. Pursuant to the stock
purchase agreement, OXIS will use its reasonable best efforts to consummate
a
follow-on financing transaction to raise additional capital with which to
purchase the remaining outstanding shares of BioCheck in one or more additional
closings. The purchase price for any BioCheck shares purchased after the initial
closing will be increased by an additional 8% per annum from the date of the
initial closing through the date of such purchase. If OXIS has not purchased
all
of the outstanding shares of BioCheck within twelve months of the initial
closing, the earnings before interest, taxes, depreciation and amortization
expenses, or EBITDA, if any, of BioCheck will be used to repurchase the
remaining outstanding BioCheck shares at one or more additional closings. There
can be no assurance that there will be any EBITDA of BioCheck in the next
several years which could be utilized to purchase additional shares of BioCheck
pursuant to the stock purchase agreement. Even if there is some amount of
BioCheck EBITDA available to purchase additional shares of BioCheck, there
can
be no assurance that such EBITDA would be sufficient to complete our acquisition
of the remaining 49% of BioCheck outstanding shares.
To
avoid
an increase in the purchase price of the remaining shares of BioCheck at the
rate of 8% per annum, we will need to consummate a financing transaction to
complete the acquisition of the remaining 49% of the outstanding shares of
BioCheck. The successful completion of our acquisition of BioCheck is dependent
upon obtaining financing on acceptable terms. No assurances can be given that
we
will be able to complete such a financing sufficient to undertake our
acquisition of the outstanding shares of BioCheck on terms favorable to us,
or
at all. Any financing that we do undertake to finance the acquisition of
BioCheck will likely involve dilution of our common stock if it is an equity
financing or will involve the assumption of significant debt by
OXIS.
We
will need additional financing in order to complete our development and
commercialization programs.
As
of
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
unavailability of additional capital could cause us to cease or curtail our
operations and/or delay or prevent the development and marketing of our
potential products. In addition, we may choose to abandon certain issued United
States and international patents that we deem to be of lesser importance to
our
strategic direction, in an effort to preserve our financial resources.
Our
future capital requirements will depend on many factors including the following:
• continued
scientific progress in our research and development programs and the
commercialization of additional products;
• the
cost
of our research and development and commercialization activities and
arrangements, including sales and marketing;
• the
costs
associated with the scale-up of manufacturing;
• the
success of pre-clinical and clinical trials;
• the
establishment of and changes in collaborative relationships;
• the
time
and costs involved in filing, prosecuting, enforcing and defending patent
claims;
• the
time
and costs required for regulatory approvals;
• the
acquisition of additional technologies or businesses;
• technological
competition and market developments; and
• the
cost
of complying with the requirements of the Autorité des Marchés Financiers, or
AMF, the French regulatory agency overseeing the Nouveau Marché in
France.
We
will
need to raise additional capital to fund our development and commercialization
programs. Our current capital resources are not sufficient to sustain operations
and our development 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, or the Acquisition, as planned, and we
do
not successfully integrate the operations of the two companies, or if the
benefits of the transaction do not meet the expectations of financial or
industry analysts, the market price of our common stock may decline. The
Acquisition could result in the use of significant amounts of cash, dilutive
issuances of equity securities, or the incurrence of debt or expenses related
to
goodwill and other intangible assets, any of which could materially adversely
affect our business, operating results and financial condition.
We
may
not be able to successfully integrate the BioCheck business into our existing
business in a timely and non-disruptive manner, or at all. In addition, the
Acquisition may result
in, among other things, substantial
charges
associated with acquired in-process research and development, future write-offs
of goodwill that is deemed to be impaired, restructuring charges related to
consolidation of operations, charges associated with unknown or unforeseen
liabilities of acquired businesses and increased general and administrative
expenses. Furthermore, the Acquisition may not produce revenues, earnings or
business synergies that we anticipate. There
can
be no assurance that BioCheck will continue to manufacture our research assay
test kits if that agreement is terminated.
In
addition, acquisitions in general involve numerous risks, including:
• difficulties
in assimilating the operations, technologies, products and personnel of an
acquired company;
• risks
of
entering markets in which we have either no or limited prior
experiences;
• the
diversion of management’s attention from other business concerns; and
• the
potential loss of key employees of an acquired company.
The
time,
capital management and other resources spent on the Acquisition, if it fails
to
meet our expectations, could cause our business and financial condition to
be
materially and adversely affected.
Our
relocation plan could adversely affect our operations.
As
part
of our decision to acquire BioCheck, we 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.
Our business may also be disrupted due to our move to new
facilities.
The
payment of severance benefits resulting from employee terminations will cause
us
to utilize cash. There can be no assurances that we will be able to improve
efficiencies and function properly following such reductions.
We
may experience disruption or may fail to achieve any benefits in connection
with
the recent changes in executive management and in Board membership.
During
the second quarter of 2004, our former Chief Executive Officer retired, and
during the third quarter of 2004 our Chief Operating and Financial Officer
left
the employment of our company. As a result, others who had limited experience
with OXIS were appointed to serve as acting Chief Executive Officer, acting
Chief Operating Officer and acting Chief Financial Officer.
On February 28, 2005, the Board appointed Mr. Steven T. Guillen to the
positions of President and Chief Executive Officer of OXIS, and as a member
of
our board. On January 6, 2006, we hired Michael D. Centron as our Vice President
and Chief Financial Officer. 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. In
addition, during 2004 and early 2005, following the acquisition of a
then-majority interest in OXIS by Axonyx, eight directors resigned from the
board resulting in a four person board. During 2005 we added independent
director John E. Repine, M.D., and 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
OXIS parent company sales during the third quarter of 2006 are attributable
to
lower sales volume that was caused, in part, by the interruption arising from
moving operations from Portland, Oregon to Foster City, California and
consolidating our product offerings. There can be no assurances that these
changes will not cause further disruptions in, or otherwise adversely affect,
our business and results of operations.
If
we
fail to attract and retain key personnel, our business could suffer.
Our
future depends, in part, on our ability to attract and retain key personnel.
We
may not be able to hire and retain such personnel at compensation levels
consistent with our existing compensation and salary structure. We deferred
the
hiring of senior management personnel in order to allow our newly-engaged full
time Chief Executive Officer to select such key personnel. While we succeeded
in
engaging Mr. Steven T. Guillen as our President and Chief Executive Officer
in
February 2005 and Michael D. Centron as our Chief Financial Officer in January
2006, we cannot predict whether we will be successful in finding suitable new
candidates for key management positions within OXIS. 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. While we have entered into a letter agreement of employment with Mr.
Centron and an employment agreement with Dr. Hausman, they are free to terminate
their employment “at will.” Further, we cannot predict whether Dr.
Hausman or Mr. Centron will
be
successful in their roles as our President and Chief Executive Officer, and
Chief Financial Officer, or whether senior management personnel hires will
be
effective. The loss of services of executive officers or key personnel, any
transitional difficulties with our new Chief Financial Officer or the inability
to attract qualified personnel could have a material adverse effect on our
financial condition and business. 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 never be successful in developing products suitable for
commercialization.
All
of
our biopharmaceutical and clinical diagnostic candidates are at an early stage
of development and all of such therapeutic and clinical diagnostic candidates
will require expensive and lengthy testing and regulatory clearances. None
of
our therapeutic or clinical diagnostic candidates have been approved by
regulatory authorities. We have no therapeutic or clinical diagnostic products
available for sale and we may not have any products commercially available
for
several years, if at all. There are many reasons we may fail in our efforts
to
develop our therapeutic and clinical diagnostic candidates,
including:
• our
therapeutic and clinical diagnostic candidates may be ineffective, toxic or
may
not receive regulatory clearances,
• our
therapeutic and clinical diagnostic candidates may be too expensive to
manufacture or market or may not achieve broad market acceptance,
• third
parties may hold proprietary rights that may preclude us from developing or
marketing our therapeutic and clinical diagnostic candidates, or
• third
parties may market equivalent or superior products.
Clinical
development is inherently uncertain and expense levels may fluctuate
unexpectedly because we cannot accurately predict the timing and level of such
expenses.
Our
future success may depend in part upon the results of clinical trials undertaken
by us or our licensees designed to assess the safety and efficacy of our
potential products. We do not have substantial experience in developing and
running clinical trials. The completion of clinical trials often depends
significantly upon the rate of patient enrollment, and our expense levels will
vary depending upon the rate of enrollment. In addition, the length of time
necessary to complete clinical trials and submit an application for marketing
and manufacturing approvals varies significantly and is difficult to predict.
The expenses associated with each phase of development depend upon the design
of
the trial. The design of each phase of trials depends in part upon results
of
prior phases, and additional trials may be needed at each phase. As a result,
the expense associated with future phases cannot be predicted in advance.
Further, if we undertake clinical trials, we may decide to terminate or suspend
ongoing trials. Failure to comply with extensive FDA regulations may result
in
unanticipated delay, suspension or cancellation of a trial or the FDA's refusal
to accept test results. The FDA may also suspend our clinical trials at any
time
if it concludes that the participants are being exposed to unacceptable risks.
As a result of these factors, we cannot predict the actual expenses that we
will
incur with respect to clinical trials for any of our potential products, and
we
expect that our expense levels will fluctuate unexpectedly in the future.
Competition
in most of our primary current and potential market areas is intense and
expected to increase.
The
diagnostic, pharmaceutical and nutraceutical industries are highly competitive.
The main commercial competition at present in our research assay business is
represented by, but not limited to, the following companies: Cayman Chemical
Company, Assay Designs and Randox Laboratories Ltd. In addition, our competitors
and potential competitors include large pharmaceutical/nutraceutical companies,
universities and research institutions. Relative to OXIS, these competitors
may
have substantially greater capital resources, research and development staffs,
facilities, as well as greater expertise manufacturing and making products.
In
addition, these companies, as well as others, may have or may develop new
technologies or use existing technologies that are, or may in the future be,
the
basis for competitive products. There can be no assurance that we can compete
successfully.
In
addition, current and potential competitors may make strategic acquisitions
or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their products to address the needs of our
current and prospective customers. Accordingly, it is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Such competition could materially
adversely affect our ability to commercialize existing technologies or new
technologies on terms favorable to us. Further, competitive pressures could
require us to reduce the price of our products and technologies, which could
materially adversely affect our business, operating results and financial
condition. We may not be able to compete successfully against current and future
competitors and any failure to do so would have a material adverse effect upon
our business, operating results and financial condition.
TorreyPines
Therapeutics, Inc. holds the voting power 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 shareholders. Section 203 of the Delaware General Corporation Law prohibits
a Delaware corporation from engaging in any business combination with any
interested shareholder for a period of three years unless the transaction meets
certain conditions. Section 203 also limits the extent to which an
interested shareholder can receive benefits from our assets. These provisions
could complicate or prohibit certain transactions (including a financing
transaction between OXIS and 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 to develop
such business relationships will progress to mature relationships or that any
such relationships will be successful. Further, relying on these or other
alliances is risky to our future success because:
• our
partners may develop products or technologies competitive with our products
and
technologies;
• our
partners may not devote sufficient resources to the development and sale of
our
products and technologies;
• our
collaborations may be unsuccessful; or
• we
may
not be able to negotiate future alliances on acceptable terms.
Our
revenues and quarterly results have fluctuated historically and may continue
to
fluctuate, which could cause our stock price to decrease.
Our
revenues and operating results may fluctuate due in part to factors that are
beyond our control and which we cannot predict. Material shortfalls in revenues
will materially adversely affect our results and may cause us to experience
losses. In particular, our revenue growth and profitability depend on sales
of
our research assays and fine chemicals. Factors that could cause sales for
these
products and other products to fluctuate include:
• an
inability to produce products in sufficient quantities and with appropriate
quality;
• an
inability to obtain sufficient raw materials;
• the
loss
of or reduction in orders from key customers;
• variable
or decreased demand from our customers;
• the
receipt of relatively large orders with short lead times;
• our
customers' expectations as to how long it takes us to fill future orders;
• customers'
budgetary constraints and internal acceptance review procedures;
• there
may
be only a limited number of customers that are willing to purchase our research
assays and fine chemicals;
• a
long
sales cycle that involves substantial human and capital resources;
and
• potential
downturns in general or in industry specific economic conditions.
Each
of
these factors has impacted, and may in the future impact, the demand for and
availability of our products and our quarterly operating results. For example,
due to the unavailability of beef liver as a source for bSOD we were unable
to
sell any bSOD during 2005 and 2004, as compared to sales of $562,000 in 2003.
We
do not
anticipate this source becoming available again within the foreseeable future
and do not anticipate any revenues from sales of this product in the foreseeable
future. In addition, a decrease in the demand for our Ergothioneine product
resulted in a reduction of sales of Ergothioneine to $18,000 in 2005 and $87,000
in 2004, compared to $333,000 in 2003. We cannot predict with any certainty
our
future sales of Ergothioneine.
If
the
sales or development cycles for research assays and fine chemicals lengthen
unexpectedly, our revenues may decline or not grow as anticipated and our
results from operations may be harmed.
Changes
in accounting standards regarding stock option plans could increase our reported
losses, cause our stock price to decline and limit the desirability of granting
stock options.
In
December 2004, the 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 our 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 deem to be of lesser importance
to our strategic direction, in an effort to preserve our financial resources.
Abandonment of patents could substantially affect the scope of our patent
protection. In addition, we may in future periods incur substantial costs in
litigation to defend against patent suits brought by third parties or if we
initiate such suits.
In
addition to patent protection, we also rely upon trade secret protection for
our
confidential and proprietary information. There can be no assurance, however,
that such measures will provide adequate protection for our trade secrets or
other proprietary information. In addition, there can be no assurance that
trade
secrets and other proprietary information will not be disclosed, that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to or disclose our trade secrets and
other proprietary information. If we cannot obtain, maintain or enforce
intellectual property rights, competitors can design and commercialize competing
technologies.
We
may
face challenges from third parties regarding the validity of our patents and
proprietary rights, or from third parties asserting that we are infringing
their
patents or proprietary rights, which could result in litigation that would
be
costly to defend and could deprive us of valuable rights.
Extensive
litigation regarding patents and other intellectual property rights has been
common in the biotechnology and pharmaceutical industries. The defense and
prosecution of intellectual property suits, United States Patent and Trademark
Office interference proceedings, and related legal and administrative
proceedings in the United States and internationally involve complex legal
and
factual questions. As a result, such proceedings are costly and time-consuming
to pursue and their outcome is uncertain. Litigation may be necessary to:
• enforce
patents that we own or license;
• protect
trade secrets or know-how that we own or license; or
• determine
the enforceability, scope and validity of the proprietary rights of others.
Our
involvement in any litigation, interference or other administrative proceedings
could cause us to incur substantial expense and could significantly divert
the
efforts of our technical and management personnel. An adverse determination
may
subject us to loss of our proprietary position or to significant liabilities,
or
require us to seek licenses that may not be available from third parties. An
adverse determination in a judicial or administrative proceeding, or a failure
to obtain necessary licenses, may restrict or prevent us from manufacturing
and
selling our products. Costs associated with these arrangements may be
substantial and may include ongoing royalties. Furthermore, we may not be able
to obtain the necessary licenses on satisfactory terms, if at all. These
outcomes could materially harm our business, financial condition and results
of
operations.
We
may be exposed to liability due to product defects.
The
risk
of product liability claims is inherent in the testing, manufacturing, marketing
and sale of our products. We may seek to acquire additional insurance for
liability risks. We may not be able to obtain such insurance or general product
liability insurance on acceptable terms or in sufficient amounts. A product
liability claim or recall could have a serious adverse effect on our business,
financial condition and results of operations.
Disclosure
controls are no assurance that the objectives of the control system are
met.
Although
we have an extensive operating history, resources are limited for the
development and maintenance of our control environment. We have a very limited
number of personnel and therefore segregation of duties can be somewhat limited
as to their scope and effectiveness. We believe, however, that we are in
reasonable compliance with the best practices given the environment in which
we
operate. Although existing controls in place are deemed appropriate for the
prevention, detection and minimization of fraud, theft and errors, they may
result in only limited assurances, at best, that the total objectives of the
control system are met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, can be detected and/or prevented
and as such this is a risk area for investors to consider.
Risks
Related to Our Common Stock
Our
common stock is traded on the OTCBB, our stock price is highly volatile, and
you
may not be able to sell your shares of our common stock at a price greater
than
or equal to the price you paid for such shares.
Our
shares of common stock are currently traded on the Over the Counter Bulletin
Board, or OTCBB. Stocks traded on the OTCBB generally have limited trading
volume and exhibit a wide spread between the bid/ask quotation. The market
price
of our common stock is extremely volatile. To demonstrate the volatility of
our
stock price, during the 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:
• our
financial results;
• fluctuations
in our operating results;
• announcements
of technological innovations or new commercial health care products or
therapeutic products by us or our competitors;
• government
regulation;
• developments
in patents or other intellectual property rights;
• developments
in our relationships with customers and potential customers; and
• general
market conditions.
Furthermore,
volatility in the stock price of other companies has often led to securities
class action litigation against those companies. Any such securities litigation
against us could result in substantial costs and divert management's attention
and resources, which could seriously harm our business and financial
condition.
Our
common stock may be subject to “penny stock” rules which may be detrimental to
investors.
Our
common stock may be, or may become, subject to the regulations promulgated
by
the SEC for “penny stock”. SEC regulation relating to penny stock is presently
evolving, and the OTCBB may react to such evolving regulation in a way that
adversely affects the market liquidity of our common stock. Penny stock
currently includes any non-NASDAQ equity security that has a market price of
less than $5.00 per share, subject to certain exceptions. The regulations
require that prior to any non-exempt buy/sell transaction in a penny stock,
a
disclosure schedule set forth by the SEC relating to the penny stock market
must
be delivered to the purchaser of such penny stock. This disclosure must include
the amount of commissions payable to both the broker-dealer and the registered
representative and current price quotations for the common stock. The
regulations also require that monthly statements be sent to holders of penny
stock that disclose recent price information for the penny stock and information
of the limited market for penny stocks. These requirements may adversely affect
the market liquidity of our common stock.
Sales
of our common stock may require broker-dealers to make special suitability
determinations regarding prospective purchasers.
Our
common stock may be, or may become, subject to Rule 15g-1 through 15g-9 under
the Exchange Act, which imposes certain sales practice requirements on
broker-dealers which sell our common stock to persons other than established
customers and “accredited investors” (generally, individuals with a net worth in
excess of $1,000,000 or an annual income exceeding $200,000 (or $300,000
together with their spouses)). For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser’s written consent to the transaction prior to
the sale. Applicability of this rule would adversely affect the ability of
broker-dealers to sell our common stock and purchasers of our common stock
to
sell their shares of such common stock. Accordingly, the market for our common
stock may be limited and the value negatively impacted.
We
will incur expenses in connection with registration of our shares which may
be
significant.
We
are
required to pay fees and expenses incident to the registration with the SEC
of
the shares issued in the private placement of equity which closed on January
6,
2005 and maintain adequate disclosure in connection with such registration,
including updating prospectuses and under certain circumstances, filing amended
registration statements. These expenses were $302,000 in 2005, and we may incur
significant additional expenses in the future related to maintaining effective
registration statements for prior financings and any additional registrations
related to future financings. We have also agreed to indemnify such selling
shareholders against losses, claims, damages and liabilities arising out of
relating to any misstatements or omissions in our registration statement and
related prospectuses, including liabilities under the Securities Act. In the
event such a claim is made in the future, such losses, claims, damages and
liabilities arising therefrom could be significant in relation to our
revenues.
Item
3. Controls
and Procedures.
Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures as of September 30, 2006, and, based on their evaluation, our
principal executive officer and principal financial officer have concluded
that
these controls and procedures are effective. On
January 6, 2006, we hired Michael D. Centron as our Vice President and Chief
Financial Officer. We
relocated our headquarters on February 15, 2006 from Portland, Oregon to Foster
City, California, and on that date we terminated the employment of our financial
controller. Temporary accounting facilities were established during this
transition period. Our accounting procedures and disclosure controls and
procedures have changed during this period, and management believes that
disclosure controls and procedures have been adequately maintained during this
period and that reporting controls and procedures have been improved. There
has
been no change in our internal control over financial reporting that occurred
during our most recent fiscal quarter that has materially affected or is
reasonably likely to materially affect our internal control over financial
reporting.
Disclosure
controls and procedures are our controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports that
we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by
us in
the reports that we file under the Exchange Act is accumulated and communicated
to our management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosures.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings.
A
member
of the OXIS board of directors, Steven T. Guillen, who was terminated as the
President and Chief Executive Officer of OXIS on September 15, 2006, filed
a
lawsuit against OXIS and up to 25 unnamed additional defendants. To the date
of
this Report, the complaint has not been served upon OXIS 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.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. Submission of Matters to a Vote of Security Holders.
We
held
our Annual Meeting of Stockholders on August 1, 2006. Set forth below is a
summary of each matter voted upon at the meeting and the number of votes cast
for, against, withheld or abstained.
Proposal
#1:
The
election of Marvin S. Hausman, M.D., Steven T. Guillen, S. Colin Neill, John
E.
Repine, M.D. and Gary M. Post to serve on the Company’s Board of
Directors:
|
Nominee
|
|
Total
Votes For All Nominees
|
|
Total
Votes Withheld From All Nominees
|
|
Marvin
S. Hausman, M.D.
|
|
27,831,835
|
|
147,671
|
|
Steven
T. Guillen
|
|
27,864,835
|
|
114,671
|
|
S.
Colin Neill
|
|
27,823,366
|
|
156,140
|
|
John
E. Repine, M.D.
|
|
27,868,705
|
|
110,801
|
|
Gary
M. Post
|
|
27,832,255
|
|
147,251
|
Proposal
#2:
Amendment of the Certificate of Incorporation to increase the number of common
shares authorized from 95,000,000 to 150,000,000:
|
Total
Votes For
|
|
Total
Votes Against
|
|
Abstained
|
|
27,494,463
|
|
372,270
|
|
112,773
|
Proposal
#3:
Amendment of the 2003 Stock Incentive Plan to increase the number of shares
authorized from 3,600,000 to 5,600,000:
|
Total
Votes For
|
|
Total
Votes Against
|
|
Abstained
|
|
19,216,113
|
|
743,311
|
|
31,148
|
Item
5. Other Information.
None.
Item
6. Exhibits
See
Index
to Exhibits on page 53.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
| |
|
|
| |
OXIS
International, Inc. |
|
|
|
| Date:
November 14, 2006 |
By: |
/s/ Michael
D. Centron |
| |
Michael
D. Centron |
| |
Vice
President and Chief Financial
Officer |
Exhibit
Index
| |
|
|
Incorporated
by Reference
|
|
Exhibit
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Filed
Herewith
|
|
10.1
|
|
Engagement
Letter with Ambient Advisors LLC.
|
|
8-K
|
|
5/12/06
|
|
10.1
|
|
|
|
10.2
|
|
Mutual
Services Agreement between OXIS International, Inc. and BioCheck,
Inc.
dated June 23, 2006.
|
|
8-K
|
|
6/23/06
|
|
10.1
|
|
|
|
10.3
|
|
Renewal
and Modification Promissory Note dated June 2, 2006.
|
|
8-K
|
|
7/20/06
|
|
10.1
|
|
|
|
10.4
|
|
Common
Stock Purchase Warrant dated June 2, 2006.
|
|
8-K
|
|
7/20/06
|
|
10.2
|
|
|
|
10.5
|
|
Amendment
#2 to Exclusive License and Supply Agreement dated July 19,
2006.
|
|
8-K
|
|
7/20/06
|
|
10.3
|
|
|
|
10.6
|
|
Form
of Securities Purchase Agreement dated October 25, 2006.
|
|
8-K
|
|
10/26/06
|
|
10.1
|
|
|
|
10.7
|
|
Form
of Secured Convertible Debenture dated October 25, 2006.
|
|
8-K
|
|
10/26/06
|
|
10.2
|
|
|
|
10.8
|
|
Form
of Series A, B, C, D, E Common Stock Purchase Warrant dated October
25,
2006.
|
|
8-K
|
|
10/26/06
|
|
10.3
|
|
|
|
10.9
|
|
Form
of Registration Rights Agreement dated October 25, 2006.
|
|
8-K
|
|
10/26/06
|
|
10.4
|
|
|
|
10.10
|
|
Form
of Security Agreement dated October 25, 2006.
|
|
8-K
|
|
10/26/06
|
|
10.5
|
|
|
|
10.11
|
|
Employment
Agreement between OXIS International, Inc. and Marvin S. Hausman,
M.D.
dated November 6, 2006.
|
|
8-K
|
|
11/13/06
|
|
10.1
|
|
|
|
10.12
|
|
Advisory
Agreement between OXIS International, Inc. and Ambient Advisors,
LLC dated
November 6, 2006.
|
|
8-K
|
|
11/13/06
|
|
10.2
|
|
|
|
10.13
|
|
Consulting
Agreement between OXIS International, Inc. and John E. Repine,
M.D. dated
November 6, 2006.
|
|
8-K
|
|
11/13/06
|
|
10.3
|
|
|
| |
|
|
Incorporated
by Reference
|
|
Exhibit
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Filed
Herewith
|
|
31.1
|
|
Certification
of the Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
|
X
|
|
31.2
|
|
Certification
of the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
|
X
|
|
32.1
|
|
Certification
of the Principal Executive Officer pursuant to 18 U.S.C. Section
1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
|
X
|
|
32.2
|
|
Certification
of the Principal Financial Officer pursuant to 18 U.S.C. Section
1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
|
X
|
