U.
S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
20549
FORM
10-QSB
þ Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the
quarterly period ended June 30, 2007
|
¨
|
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 þ NO
¨
Indicate
by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
YES
¨ NO
þ
At
August
10, 2007, the issuer had outstanding the indicated number of shares of common
stock: 45,588,587.
Transitional
Small Business Disclosure Format YES ¨ NO
þ
OXIS
INTERNATIONAL, INC.
FORM
10-QSB
For
the Quarter Ended June 30, 2007
Table
of Contents
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PART
I – FINANCIAL INFORMATION
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Page
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Item
1.
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Item
2.
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Item
3.
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PART
II – OTHER INFORMATION
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Item
1.
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Item
2.
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Item
3.
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Item
4.
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Item
5.
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Item
6.
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PART
I. FINANCIAL INFORMATION
OXIS
INTERNATIONAL, INC.
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June
30, 2007 (Unaudited)
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December
31, 2006
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ASSETS
|
|
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|
|
|
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Current
Assets:
|
|
|
|
|
|
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|
Cash
and cash equivalents
|
|
$ |
1,208,000
|
|
|
$ |
1,208,000
|
|
|
Accounts
receivable, net
|
|
|
1,126,000
|
|
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|
732,000
|
|
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Inventory
|
|
|
530,000
|
|
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561,000
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Prepaid
expenses and other current assets
|
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|
80,000
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130,000
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Deferred
tax assets
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11,000
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10,000
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Restricted
cash
|
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—
|
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3,060,000
|
|
|
Total
Current Assets
|
|
|
2,947,000
|
|
|
|
5,701,000
|
|
|
Property,
plant and equipment, net
|
|
|
207,000
|
|
|
|
244,000
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|
|
Patents,
net
|
|
|
764,000
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|
|
|
761,000
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|
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Goodwill
and other assets, net
|
|
|
1,291,000
|
|
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|
1,291,000
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Total
Other Assets
|
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2,270,000
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|
2,296,000
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TOTAL
ASSETS
|
|
$ |
5,217,000
|
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|
$ |
7,997,000
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| |
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LIABILITIES
AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
|
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Current
Liabilities:
|
|
|
|
|
|
|
|
|
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Accounts
payable
|
|
$ |
899,000
|
|
|
$ |
714,000
|
|
|
Accrued
expenses
|
|
|
967,000
|
|
|
|
838,000
|
|
|
Accounts
payable to related party
|
|
|
56,000
|
|
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|
49,000
|
|
|
Warrant
liability
|
|
|
1,470,000
|
|
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|
2,314,000
|
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Accrued
derivative liability
|
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|
405,000
|
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678,000
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Notes
Payable
|
|
|
—
|
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|
3,060,000
|
|
|
Total
Current Liabilities
|
|
|
3,797,000
|
|
|
|
7,653,000
|
|
|
Long-term
deferred taxes
|
|
|
25,000
|
|
|
|
25,000
|
|
|
Convertible
debentures, net of discounts of $892,000
|
|
|
458,000
|
|
|
|
124,000
|
|
|
Total
Liabilities
|
|
|
4,280,000
|
|
|
|
7,802,000
|
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|
Minority
interest
|
|
|
905,000
|
|
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|
770,000
|
|
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Commitments
and Contingencies
|
|
|
—
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—
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Stockholders’
Equity (Deficit):
|
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Convertible
preferred stock - $0.01 par value; 15,000,000 shares
authorized:
|
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—
|
|
|
|
—
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Series
B – 0 and 0 shares issued and outstanding at June 30, 2007 and December
31, 2006, respectively (aggregate liquidation preference of
$1,000)
|
|
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—
|
|
|
|
—
|
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Series
C – 96,230 shares issued and outstanding
|
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1,000
|
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|
|
1,000
|
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Common
stock - $0.001 par value; 150,000,000 shares authorized; 44,527,476
and
44,527,476 shares issued and outstanding at June 30, 2007 and December
31,
2006
|
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45,000
|
|
|
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45,000
|
|
|
Additional
paid-in capital
|
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|
70,411,000
|
|
|
|
70,115,000
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Accumulated
deficit
|
|
|
(70,008,000 |
) |
|
|
(70,319,000 |
) |
|
Accumulated
other comprehensive loss
|
|
|
(417,000 |
) |
|
|
(417,000 |
) |
|
Total
stockholders’ equity (deficit)
|
|
|
32,000
|
|
|
|
(575,000 |
) |
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
$ |
5,217,000
|
|
|
$ |
7,997,000
|
|
See
accompanying condensed notes to consolidated financial statements.
OXIS
INTERNATIONAL, INC.
(UNAUDITED)
| |
|
Three
Months Ended June 30,
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Six
Months Ended June 30,
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2007
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2006
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2007
|
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2006
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Revenue:
|
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Product
revenues
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|
$ |
1,207,000
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$ |
1,356,000
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$ |
2,475,000
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$ |
2,869,000
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License
revenues
|
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606,000
|
|
|
|
—
|
|
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729,000
|
|
|
|
—
|
|
|
Total
Revenue
|
|
|
1,813,000
|
|
|
|
1,356,000
|
|
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|
3,204,000
|
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2,869,000
|
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|
Cost
of product
revenues
|
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|
773,000
|
|
|
|
833,000
|
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|
1,502,000
|
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1,649,000
|
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|
Gross
profit
|
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|
1,040,000
|
|
|
|
523,000
|
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|
1,702,000
|
|
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|
1,220,000
|
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|
Operating
expenses:
|
|
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|
|
|
|
|
|
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Research
and
development
|
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|
194,000
|
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|
178,000
|
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|
|
367,000
|
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|
391,000
|
|
|
Selling,
general and administrative
|
|
|
441,000
|
|
|
|
837,000
|
|
|
|
1,382,000
|
|
|
|
1,901,000
|
|
|
Total
operating
expenses
|
|
|
635,000
|
|
|
|
1,015,000
|
|
|
|
1,749,000
|
|
|
|
2,292,000
|
|
|
Income
(loss) from
operations
|
|
|
405,000
|
|
|
|
(492,000 |
) |
|
|
(47,000 |
) |
|
|
(1,072,000 |
) |
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
—
|
|
|
|
11,000
|
|
|
|
25,000
|
|
|
|
31,000
|
|
|
Other
income
|
|
|
13,000
|
|
|
|
2,000
|
|
|
|
33,000
|
|
|
|
2,000
|
|
|
Reduction
in fair value of warrant and derivative liabilities
|
|
|
1,053,000
|
|
|
|
—
|
|
|
|
1,117,000
|
|
|
|
—
|
|
|
Interest
expense
|
|
|
(259,000 |
) |
|
|
(28,000 |
) |
|
|
(500,000 |
) |
|
|
(55,000 |
) |
|
Other
expense
|
|
|
8,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
other income (expenses)
|
|
|
815,000
|
|
|
|
(15,000 |
) |
|
|
675,000
|
|
|
|
(22,000 |
) |
|
Minority
interest in
subsidiary
|
|
|
(57,000 |
) |
|
|
(36,000 |
) |
|
|
(134,000 |
) |
|
|
(86,000 |
) |
|
Income
(loss) before provision for income taxes
|
|
|
1,163,000
|
|
|
|
(543,000 |
) |
|
|
494,000
|
|
|
|
(1,180,000 |
) |
|
Provision
for income
taxes
|
|
|
78,000
|
|
|
|
36,000
|
|
|
|
183,000
|
|
|
|
89,000
|
|
|
Net
income
(loss)
|
|
$ |
1,085,000
|
|
|
$ |
(579,000 |
) |
|
$ |
311,000
|
|
|
$ |
(1,269,000 |
) |
|
Net
income (loss) per share – basic
|
|
$ |
0.02
|
|
|
$ |
(0.01 |
) |
|
$ |
0.01
|
|
|
$ |
(0.03 |
) |
|
Net
income (loss) per share –diluted
|
|
$ |
0.02
|
|
|
$ |
(0.01 |
) |
|
$ |
0.01
|
|
|
$ |
(0.03 |
) |
|
Weighted
average shares outstanding – basic
|
|
|
44,527,476
|
|
|
|
42,621,928
|
|
|
|
44,527,476
|
|
|
|
42,580,393
|
|
|
Weighted
average shares outstanding –diluted
|
|
|
44,823,548
|
|
|
|
42,621,928
|
|
|
|
44,884,985
|
|
|
|
42,580,393
|
|
See
accompanying condensed notes to consolidated financial statements.
OXIS
INTERNATIONAL, INC.
(UNAUDITED)
| |
|
Six
Months Ended June 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
311,000
|
|
|
$ |
(1,269,000 |
) |
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
of property, plant and equipment
|
|
|
37,000
|
|
|
|
38,000
|
|
|
Amortization
of intangible
assets
|
|
|
79,000
|
|
|
|
64,000
|
|
|
Stock
compensation expense for options and warrants issued to employees
and
non-employees
|
|
|
296,000
|
|
|
|
180,000
|
|
|
Amortization
of debt
discounts
|
|
|
334,000
|
|
|
|
—
|
|
|
Reduction
in fair value of warrant and derivative liabilities
|
|
|
(1,117,000 |
) |
|
|
—
|
|
|
Minority
interest in
subsidiary
|
|
|
135,000
|
|
|
|
86,000
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(394,000 |
) |
|
|
(65,000 |
) |
|
Inventory
|
|
|
31,000
|
|
|
|
27,000
|
|
|
Prepaid
expenses and other current
assets
|
|
|
50,000
|
|
|
|
110,000
|
|
|
Accounts
payable
|
|
|
185,000
|
|
|
|
241,000
|
|
|
Accrued
expenses
|
|
|
128,000
|
|
|
|
(93,000 |
) |
|
Accounts
payable to related
party
|
|
|
7,000
|
|
|
|
(65,000 |
) |
|
Net
cash used in operating
activities
|
|
|
82,000
|
|
|
|
(746,000 |
) |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Investment
in restricted certificate of
deposit
|
|
|
—
|
|
|
|
(3,060,000 |
) |
|
Proceeds
from restricted certificate of
deposit
|
|
|
3,060,000
|
|
|
|
3,060,000
|
|
|
Capital
expenditures
|
|
|
—
|
|
|
|
(38,000 |
) |
|
Increase
in
patents
|
|
|
(82,000 |
) |
|
|
(32,000 |
) |
|
Net
cash provided by (used in) investing activities
|
|
|
2,978,000
|
|
|
|
(70,000 |
) |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock
options
|
|
|
—
|
|
|
|
63,000
|
|
|
Proceeds
from short-term
borrowing
|
|
|
—
|
|
|
|
3,660,000
|
|
|
Repayment
of short-term
borrowings
|
|
|
(3,060,000 |
) |
|
|
(3,060,000 |
) |
|
Net
cash provided by (used in) financing activities
|
|
|
(3,060,000 |
) |
|
|
663,000
|
|
|
Net
increase in cash and cash
equivalents
|
|
|
—
|
|
|
|
(153,000 |
) |
|
Cash
and cash equivalents - beginning of
period
|
|
|
1,208,000
|
|
|
|
614,000
|
|
|
Cash
and cash equivalents - end of
period
|
|
$ |
1,208,000
|
|
|
$ |
461,000
|
|
See
accompanying condensed notes to consolidated financial statements.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
1. The
Company and Summary of Significant Accounting Policies
OXIS
International, Inc. with its subsidiaries (collectively, “OXIS” or the
“Company”) is 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
twenty-five research assays to measure markers of oxidative stress.
OXIS’
majority owned subsidiary, BioCheck Inc. (“BioCheck”) offers its clinical
laboratory and in vitro diagnostics customers over 40 clinical
diagnostic assays. BioCheck’s primary product line consists of enzyme
linked immunosorbentassay, or ELISA, kits that are widely used in medical
laboratory settings. These test kits are applicable to cardiac markers,
infectious disease, thyroid function markers, fertility hormones, and other
miscellaneous clinical diagnostic markers. BioCheck currently has several
products under development for cancer, cardiac/inflammatory and angiogenesis
research applications. In addition to clinical and research assay
products, BioCheck provides various research services to pharmaceutical and
diagnostic companies worldwide.
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 and certain stockholders of BioCheck to purchase all of the common
stock of BioCheck for $6.0 million in cash. On December 6, 2005, the
Company purchased 51% of the common stock of BioCheck from each of the
shareholders of BioCheck on a pro rata basis, for $3,060,000 in
cash.
The
Company had net income of $1,085,000 and $311,000 for the three month and six
month period ended June 30, 2007 compared to a net loss of $579,000 and
$1,269,000 for the three month and six month period ended June 30,
2006. Net income in 2007 was primarily affected by non-cash income
relating to decrease in warrant and derivative liabilities. For the
three months ending June 30, 2007 such non-cash income was $1,053,000 and for
the six months ending June 30, 2007, such non-cash income was
$1,117,000. During 2006, the Company obtained debt financing in the
amount of $1,350,000. Such financing resulted in non-cash financing charges
of
$1,674,000 in 2006.
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
JUNE
30, 2007
As
shown
in the accompanying consolidated financial statements, the Company has incurred
an accumulated deficit of $70,008,000 through June 30, 2007. On a consolidated
basis, the Company had cash and cash equivalents of $1,208,000 at June 30,
2007
of which $1,011,000 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. Management believes
and
presently anticipates that the cash held by the OXIS parent company of $197,000
at June 30, 2007 plus the $200,000 in license fees received from Alteon on
August 10, 2007 and the $500,000 equity investment by Alteon expected to occur
in August 2007 (See Note 5) will provide sufficient cash flow to sustain the
Company’s operations through the end of 2007. Approximately
$3,000,000 would be needed in order for OXIS to exercise its option to purchase
the remaining 49% of BioCheck. However, the Company may not
successfully obtain debt or equity financing on terms acceptable to the Company,
or at all, that will be sufficient to finance the Company’s goals or to
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 operations.
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, 2006 included in the Company’s
Annual Report on Form 10-KSB/A.
The
consolidated financial statements include the accounts of OXIS International,
Inc. and its subsidiaries. All intercompany balances and transactions
have been eliminated. 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,
2007.
Revenue
Recognition
The
Company manufactures, or has manufactured on a contract basis,
research and clinical diagnostic assays and fine chemicals, which are
its primary products sold to customers. Revenue from the sale of the
Company’s products, including shipping fees, is recognized when title to
the products is transferred to the customer which usually occurs upon shipment
or delivery, depending upon the terms of the sales order and when collectibility
is reasonably assured. Revenue from sales to distributors of the
Company’s products is recognized, net of allowances, upon delivery of
product to the distributors. According to the terms of individual distributor
contracts, a distributor may return product up to a maximum amount and under
certain conditions contained in its contract. Allowances are calculated based
upon historical data, current economic conditions and the underlying contractual
terms. The Company’s mix of product sales are substantially at risk to
market conditions and demand, which may change at anytime.
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
JUNE
30, 2007
License
arrangements may consist of non-refundable upfront license fees, exclusive
licensed rights to patented or patent pending technology, and various
performance or sales milestones and future product royalty payments. Some
of
these arrangements are multiple element arrangements.
Non-refundable,
up-front fees that are not contingent on any future performance by the Company,
and require no consequential continuing involvement on the Company’s part,
are recognized as revenue when the license term commences and the licensed
data,
technology and/or compound is delivered The Company defers
recognition of non-refundable upfront fees if the Company has continuing
performance obligations without which the technology, right, product or service
conveyed in conjunction with the non-refundable fee has no utility to the
licensee that is separate and independent of the Company’s performance
under the other elements of the arrangement. In addition, if the
Company has continuing involvement through research and development
services that are required because its know-how and expertise related to
the technology is proprietary to the Company, or can only be performed by
the
Company, then such up-front fees are deferred and recognized over the period
of
continuing involvement.
Payments
related to substantive, performance-based milestones in a research and
development arrangement are recognized as revenue upon the achievement of
the
milestones as specified in the underlying agreements when they represent
the
culmination of the earnings process.
The
Company recognizes royalty revenues from licensed products when earned in
accordance with the terms of the license agreements. Net sales figures used
for
calculating royalties include deductions for costs of unsaleable returns,
managed care chargebacks, cash discounts, freight and warehousing, and
miscellaneous write-offs.
Segment
Reporting
The
Company operates in one reportable segment.
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. This loan agreement was subsequently transferred to Bridge
Bank. Consequently, the certificate of deposit is classified as
restricted cash on the consolidated balance sheet at December 31, 2006 as the
cash is restricted as to use. In February 2007, the Company used the
proceeds from cashing in the certificate of deposit to pay off the loan with
Bridge Bank.
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
JUNE
30, 2007
Stock-Based
Compensation
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 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. The Company recognized $116,000 and $131,000 in
share-based compensation expense for the six months ended June 30, 2007 and
2006, respectively.
The
Company issued 55,000 and 280,000 stock options to employees and directors
during the six months ended June 30, 2007 and 2006, respectively. The
fair values of employee stock options are estimated for the calculation of
the
pro forma adjustments in the above table at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions during 2007 and 2006: expected volatility of 176% and 90%,
respectively; average risk-free interest rate of 5.0% and 4.45%, respectively;
initial expected life of 9.0 years and 4.45 years, respectively; no expected
dividend yield; and amortized over the vesting period of typically one to four
years.
The
Company undertook a comprehensive study of options issued over the life of
the
Company’s option plans 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
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.
Earnings
Per Share
Basic
earnings 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 earnings per share is computed by dividing the
earnings 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 following is a reconciliation of the
number of shares (denominator) used in the basic and diluted earnings per share
(“EPS”) computations.
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
JUNE
30, 2007
| |
|
Three
Months Ended June 30,
|
|
| |
|
2007
|
|
|
2006
|
|
| |
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
|
Per
|
|
| |
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
1,085,000
|
|
|
|
|
|
|
|
|
$ |
(579,000 |
) |
|
|
|
|
|
|
|
Weighed
shares outstanding
|
|
|
|
|
|
|
44,527,476
|
|
|
|
|
|
|
|
|
|
|
44,527,476
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
$ |
0.02
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.01 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
1,085,000
|
|
|
|
|
|
|
|
|
|
|
$ |
(579,000 |
) |
|
|
|
|
|
|
|
|
|
Weighed
average shares outstanding
|
|
|
|
|
|
|
44,527,476
|
|
|
|
|
|
|
|
|
|
|
|
44,527,476
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and options
|
|
|
|
|
|
|
296,072
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
| |
|
|
|
|
|
|
44,823,548
|
|
|
|
|
|
|
|
|
|
|
|
44,527,476
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
$ |
0.02
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.01 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six
Months Ended June 30,
|
|
| |
|
2007
|
|
|
2006
|
|
| |
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
| |
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
311,000
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,269,000 |
) |
|
|
|
|
|
|
|
|
|
Weighed
shares outstanding
|
|
|
|
|
|
|
44,527,476
|
|
|
|
|
|
|
|
|
|
|
|
44,527,476
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
$ |
0.01
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.03 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
311,000
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,269,000 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
44,527,476
|
|
|
|
|
|
|
|
|
|
|
|
44,527,476
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and options
|
|
|
|
|
|
|
357,509
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
| |
|
|
|
|
|
|
44,884,985
|
|
|
|
|
|
|
|
|
|
|
|
44,527,476
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
$ |
0.01
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.03 |
) |
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
JUNE
30, 2007
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” This statement clarifies the definition of fair
value, establishes a framework for measuring fair value and expands the
disclosures on fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. Management has not
determined the effect, if any, the adoption of this statement will have on
the
Company’s financial statements.
In
September 2006, the FASB issued SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans−An
amendment of FASB Statements No. 87, 88, 106,
and 132(R).” One objective of this standard is to make it
easier for investors, employees, retirees and other parties to understand and
assess an employer’s financial position and its ability to fulfill the
obligations under its benefit plans. SFAS No. 158 requires employers to
fully recognize in their financial statements the obligations associated with
single-employer defined benefit pension plans, retiree healthcare plans, and
other postretirement plans. SFAS No. 158 requires an employer to fully
recognize in its statement of financial position the overfunded or underfunded
status of a defined benefit postretirement plan (other than a multiemployer
plan) as an asset or liability and to recognize changes in that funded status
in
the year in which the changes occur through comprehensive
income. This statement also requires an employer to measure the
funded status of a plan as of the date of its year-end statement of financial
position, with limited exceptions. SFAS No. 158 requires an entity to
recognize as a component of other comprehensive income, net of tax, the gains
or
losses and prior service costs or credits that arise during the period but
are
not recognized as components of net periodic benefit cost pursuant to SFAS
No. 87. This statement requires an entity to disclose in the
notes to financial statements additional information about certain effects
on
net periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits, and
transition asset or obligation. The company is required to initially
recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures for fiscal years ending after
December 15, 2006. Management believes that this statement will not
have a significant impact on the company’s financial statements.
In
February of 2007 the FASB issued SFAS 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of
FASB Statement No. 115.” The statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The statement is effective as of
the beginning of an entity’s first fiscal year that begins after November 15,
2007. The Company is analyzing the potential accounting
treatment.
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
JUNE
30, 2007
FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No.109.” Interpretation 48 prescribes
a recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. Benefits from tax positions should be recognized in the
financial statements only when it is more likely than not that the tax position
will be sustained upon examination by the appropriate taxing authority that
would have full knowledge of all relevant information. The amount of
tax benefits to be recognized for a tax position that meets the
more-likely-than-not recognition threshold is measured as the largest amount
of
benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. Tax benefits relating to tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent financial reporting period in which that
threshold is met or certain other events have occurred. Previously
recognized tax benefits relating to tax positions that no longer meet the
more-likely-than-not recognition threshold should be derecognized in the first
subsequent financial reporting period in which that threshold is no longer
met. Interpretation 48 also provides guidance on the accounting for
and disclosure of tax reserves for unrecognized tax benefits, interest and
penalties and accounting in interim periods. Interpretation 48 is effective
for
fiscal years beginning after December 15, 2006. The change in net
assets as a result of applying this pronouncement will be a change in accounting
principle with the cumulative effect of the change required to be treated as
an
adjustment to the opening balance of retained earnings on January 1, 2007,
except in certain cases involving uncertainties relating to income taxes in
purchase business combinations. In such instances, the impact of the
adoption of Interpretation 48 will result in an adjustment to
goodwill. While the Company’s analysis of the impact of adopting
Interpretation 48 is not yet complete, management does not currently anticipate
it will have a material impact on the Company’s financial
statements.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements,” (“SAB
108”),which provides interpretive guidance on the consideration of the
effects of prior year misstatements in quantifying current year misstatements
for the purpose of a materiality assessment. The Company adopted SAB
108 in the fourth quarter of 2006 with no impact on its financial
statements.
Use
of Estimates
The
financial statements and notes are representations of the Company’s management,
which is responsible for their integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United
States of America, and have been consistently applied in the preparation of
the
financial statements. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts
of
assets, liabilities revenues and expenses and disclosures of contingent assets
and liabilities at the date of the financial statements. Actual results could
differ from those estimates.
2. Notes
Payable
| |
|
June
30, 2007
|
|
|
December
31, 2006
|
|
|
Note
payable to KeyBank, N.A.
|
|
$ |
—
|
|
|
$ |
3,060,000
|
|
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
JUNE
30, 2007
On
December 2, 2005, the Company 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. 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 granted a security
interest in its $3,060,000 certificate of deposit transferred from KeyBank
to
Bridge Bank. The loan bore interest at 3.0% and the certificate of deposit
bore
interest at 1.0%. This loan was repaid in full in February 2007
primarily from the proceeds of cashing in the certificate of
deposit.
Convertible
debentures
On
October 25, 2006, the Company entered into a securities purchase agreement
(“Purchase Agreement”) with four accredited investors (the “Purchasers”). In
conjunction with the signing of the Purchase Agreement, the Company 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, the Company 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 the
Company of $1,350,000 from the transaction. The Debentures mature on October
25,
2008, but may be prepaid by the Company 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”). Pursuant to the terms of the debentures, beginning on February 1, 2007,
the Company began to amortize the debentures in equal installments on a monthly
basis resulting in a complete repayment by the maturity date (the “Monthly
Redemption Amounts”). The Monthly Redemption Amounts can be paid in cash or in
shares, subject to certain restrictions. If the Company 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. The Company has not made the required Monthly
Redemption Amounts and as of the date of this report, the Company is in default
and is seven months behind on these payments. The Monthly Redemption
Amount is approximately $85,000 per month. As of about August 1,
2007, the Company would have to issue approximately 3,624,000 shares of common
stock to satisfy the Monthly Redemption Amount in arrears in an amount of
$595,000 and unpaid interest of $25,000, for a total of approximately $620,000
in arrears.
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
JUNE
30, 2007
Pursuant
to the Debentures, the Company agreed that it will not incur additional
indebtedness for borrowed money, other than its current Bridge Bank promissory
note which has now been repaid. The Company also agreed 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 the Company is
obligated, the bankruptcy of the Company or related events. The Purchasers
have
a right of first refusal to participate in up to 100% of any future financing
undertaken by the Company 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. The Company 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. The
Company 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 the Company 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, the Company is obligated to amend the
terms of the Transaction Documents to such Purchaser the benefit of such better
terms. The Company 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 was
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,
the
Company 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, the Company 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, the Company 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. The registration statement was filed and declared effective
within the 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 maintain an effective registration
statement.
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
JUNE
30, 2007
Pursuant
to the Security Agreement, the Company agreed to grant the purchasers, pari
passu, a security interest in substantially all of the Company’s assets. The
Company also agreed to pledge its respective ownership interests in its
wholly-owned subsidiaries, OXIS Therapeutics, OXIS Isle of Man, and its 51%
owned subsidiary, BioCheck, Inc. In addition, OXIS Therapeutics and OXIS Isle
of
Man each provided a subsidiary guarantee to the Purchasers in connection with
the transaction.
Per
EITF
00-19, paragraph 4, these convertible debentures do not meet the definition
of a
“conventional convertible debt instrument” since the debt is not convertible
into a fixed number of shares. The Monthly Redemption Amounts can be paid with
common stock at a conversion price that is a percentage of the market price;
therefore the number of shares that could be required to be delivered upon
“net-share settlement” is essentially indeterminate. Therefore, the
convertible debenture is considered “non-conventional,” which means that the
conversion feature must be bifurcated from the debt and shown as a separate
derivative liability. This beneficial conversion liability has been
calculated to be $690,000 on October 25, 2006. In addition, since the
convertible debenture is convertible into an indeterminate number of shares
of
common stock, it is assumed that the Company could never have enough authorized
and unissued shares to settle the conversion of the warrants issued in this
transaction into common stock. Therefore, the warrants issued in connection
with
this transaction have a fair value of $2,334,000 at October 20, 2006. The
value of the warrants was calculated using the Black-Scholes model using the
following assumptions: Discount rate of 4.5%, volatility of 158% and expected
term of one to six years. The fair value of the beneficial conversion
feature and the warrant liability will be adjusted to fair value on each balance
sheet date with the change being shown as a component of net loss.
The
fair
value of the beneficial conversion feature and the warrants at the inception
of
these convertible debentures were $690,000 and $2,334,000, respectively.
The first $1,350,000 of these discounts has been shown as a discount to
the convertible debentures which will be amortized over the term of the
convertible debenture and the excess of $1,674,000 has been shown as financing
costs in the statement of operations for the year ended December 31,
2006.
At
June
30, 2007, the Company determined the fair value of the beneficial conversion
feature and the warrants was $405,000 and $1,470,000, respectively. The fair
value was calculated using the Black-Scholes model using the following
assumptions: discount rate of 4.5%, volatility of 176%; dividend yield of 0%
and
expected term of 1.32 to 5.33 years. The aggregate decrease in fair value
of these two liabilities from December 31, 2006 to June 30, 2007 of $1,117,000
is shown as other income in the accompanying consolidated statements of
operations for the six months ended June 30, 2007. The fair value of beneficial
conversion feature and the warrants will be determined at each balance sheet
date with the change from the prior period being reported as other income
(expense).
3. Supplemental
Cash Flow Disclosures
The
Company recognized non-cash compensation expense of $180,000 and $49,000 related
to the issuance and vesting of stock options issued to consultants in the six
months ended June 30, 2007 and 2006, respectively. The Company
recognized non-cash compensation expense of $116,000 and $131,000 related to
the
issuance and vesting of stock options issued to employees in the six months
ended June 30, 2007 and 2006, respectively. Cash interest paid was $0
and $0 in the six months ended June 30, 2007 and 2006,
respectively.
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
JUNE
30, 2007
4. Related
Party Transactions
On
March
8, 2007, the Company entered into a Confidential Separation Agreement (dated
February 12, 2007) with Steve Guillen, under which the Company agreed to pay
Mr.
Guillen the sum of $250,000 in monthly installments of $10,000 each, subject
to
standard payroll deductions and withholdings. The Company also agreed
to pay Mr. Guillen’s health insurance premiums for a twelve-month separation
period in accordance with the Consolidated Omnibus Budget Reconciliation Act
of
1985. During the quarter ending June 30, 2007, OXIS paid Mr. Guillen
$83,500, including compensation and health insurance premiums.. The
separation agreement also provides that in the event the Company obtains
additional financing in the amount of $1 million or more after February 12,
2007, whether in one transaction or multiple transactions and whether in the
form of debt or equity, or in the event of a change in control as defined in
the
employment agreement between the Company and Mr. Guillen, then no later than
10
days thereafter, the Company shall pay Mr. Guillen an amount equal to $10,833.33
multiplied by the number of months that he has been paid $10,000 toward the
separation benefit (the “First Catch-Up Payment”), and thereafter will be paid
$20,833.33 per month, provided that the total separation benefit, including
any
Catch-Up Payment, shall not exceed $250,000. In the event that the
total additional financing received after February 12, 2007 reaches $2 million
or more, then no later than 10 days thereafter, the Company shall pay Mr.
Guillen up to an additional $104,166.65 (the “Second Catch-Up Payment”
representing amounts which might have been paid on the separation benefit prior
to the execution of the Separation Agreement), provided that in no event shall
the total amount of monthly payments toward the separation benefit and the
First
and Second Catch-Up Payments exceed the $250,000 total amount due as separation
benefit. The Company also agreed that Mr. Guillen’s stock options
would immediately vest, and that to the extent the shares underlying such
options are not registered, Mr. Guillen would be granted piggyback registration
rights to cover these shares. The value of the unvested options that became
immediately vested is $58,533. Mr. Guillen would have the right to
exercise his options until the later of the fifth anniversary of the date that
the Company’s compensation committee approved Mr. Guillen’s stock options, or
February 15, 2010. A copy of a registration rights agreement between the Company
and Mr. Guillen regarding these securities is included as Exhibit 99.1 on the
Company’s current report on Form 8-K/A filed on May 3, 2007. In
exchange for these payments and benefits, Mr. Guillen and the Company agreed
to
mutually release all claims, dismiss all complaints as applicable, and neither
party shall pursue any future claims regarding Mr. Guillen’s prior employment
and compensation arrangements with the Company. A copy of the
separation agreement was included as Exhibit 10.43 to the Company’s annual
report on Form 10-KSB/A for the year ended December 31, 2006.
5. Exclusive
License Agreement with Alteon
On
April
2, 2007, the Company entered into an Amended and Restated Exclusive License
Agreement with Alteon, Inc. (“Alteon”), under which the Company granted Alteon
worldwide exclusive rights to a family of orally bioavailable organoselenium
compounds that have demonstrated potent anti-oxidant and anti-inflammatory
properties in clinical and preclinical studies. In July 2007 Alteon
changed its name to Synvista Therapeutics, Inc. Previously, OXIS was
a party to a license agreement dated September 28, 2004 with HaptoGuard, Inc.,
which was subsequently acquired by Alteon. The amended and restated
exclusive license agreement supercedes and replaces the prior agreement with
HaptoGuard. The new agreement expands the scope of the original
agreement to also include non-cardiovascular indications.
OXIS
INTERNATIONAL, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
JUNE
30, 2007
Under
the
new agreement, Alteon agreed to invest a minimum of $7.5 million over a
three-year period following the effective date of the agreement, in its
development program for the development, discovery and manufacture of licensed
products based on the processes and compounds covered under the
license. Alteon agreed to pay the Company a non-refundable sum of
$500,000, payable in six monthly installments of $50,000, with the remaining
$200,000 payable upon the closing of a financing of Alteon approved by Alteon’s
shareholders. As of August 10, 2007, the Company has so far received
the full $500,000 license fee.
The
agreement also provides for milestone payments to the Company upon certain
significant milestone events in the development of a potential drug
product. The agreement also entitles the Company to various levels of
sublicensing fees and royalties based on a percentage of net sales of the
licensed product.
As
part
of the agreement, Alteon agreed to make an equity investment in the Company’s
common stock, at a per-share price equal to 125% of the trading price on the
trading day immediately proper to such purchase, and no less than $0.24 per
share, resulting in net proceeds to the Company of $500,000.
The
agreement is terminable for cause by either party, by Alteon with or without
cause with 180 days’ prior written notice, or by the Company if Alteon does not
make timely payments under the license.
Item
2. Management’s
Discussion and Analysis or Plan of Operation.
CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This
quarterly report on Form 10-QSB and the documents incorporated by reference
include “forward-looking statements.” To the extent that the
information presented in this report discusses financial projections,
information or expectations about our business plans, results of operations,
products or markets, or otherwise makes statements about future events, such
statements are forward-looking. Such forward-looking statements can
be identified by the use of words such as “may,” “will,” “should,” “might,”
“would,” “intends,” “anticipates,” “believes,” “estimates,” “projects,”
“forecasts,” “expects,” “plans,” and “proposes.” Although we believe that the
expectations reflected in these forward-looking statements are based on
reasonable assumptions, there are a number of risks and uncertainties that
could
cause actual results to differ materially from such forward-looking
statements. These include, among others, the cautionary statements in
the “Risk Factors” and “Management’s Discussion and Analysis and Plan of
Operation” sections of this report. These cautionary statements
identify important factors that could cause actual results to differ materially
from those described in the forward-looking statements. When
considering forward-looking statements in this report, you should keep in mind
the cautionary statements in the “Risk Factors” and “Management’s Discussion and
Analysis or Plan of Operation” sections below, and other sections of this
report.
The
statements contained in this 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, including,
without limitation, statements regarding our expectations, objectives,
anticipations, plans, hopes, beliefs, intentions or strategies regarding the
future.
All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. It is important to note that our actual results
could differ materially from those included in such forward-looking statements.
For a more detailed explanation of such risks, please see “Risk Factors” below.
Such risks, as well as such other risks and uncertainties as are detailed in
our
SEC reports and filings for a discussion of the factors that could cause actual
results to differ materially from the forward-looking statements.
The
following discussion should be read in conjunction with the consolidated
financial statements and the notes included in this report on Form
10-QSB.
Overview
OXIS
International, Inc. focuses on the research and development of technologies
and
therapeutic products in the field of oxidative stress/inflammatory reaction,
diseases that are associated with damage from free radicals and reactive oxygen
species. Biological free radicals are the result of naturally occurring
processes such as oxygen metabolism and inflammatory reactions. Free radicals
react with key organic substances such as lipids, proteins and DNA. Oxidation
of
these biomolecules can damage them, disturbing normal functions and may
contribute to a variety of disease states. Organ systems that are predisposed
to
oxidative stress and damage are the pulmonary system, the brain, the eye,
circulatory system, and reproductive systems. A prime objective of
OXIS is to use its broad portfolio of oxidative stress biomarkers to identify
associations between reactive biomarker signals and various disease etiologies
and conditions.
We
presently derive our revenues primarily from sales of research diagnostic
reagents and assays to medical research laboratories. Our diagnostic products
include approximately 25 research reagents and assays to measure markers of
oxidative stress. We hold the rights to four therapeutic
classes of compounds in the area of oxidative stress and inflammation. One
such
compound is L-Ergothioneine, a potent antioxidant produced by OXIS, that may
be
appropriate for sale over-the-counter as a dietary supplement. In
September 2005 we acquired a 51% interest in and have the option to purchase
the
remaining 49% of BioCheck, Inc.
Our
majority-held subsidiary, BioCheck, Inc. is a leading producer of clinical
diagnostic assays, including high quality enzyme immunoassay research services
and immunoassay kits for cardiac and tumor markers, infectious diseases, thyroid
function, steroids, and fertility hormones designed to improve the accuracy,
efficiency, and cost-effectiveness of in vitro (outside the body)
diagnostic testing in clinical laboratories. BioCheck focuses primarily on
the
immunoassay segment of the clinical diagnostics market. BioCheck offers over
40
clinical diagnostic assays manufactured in its 15,000 square-foot, U.S. Food
and
Drug Administration, or FDA, certified Good Manufacturing Practices
device-manufacturing facility in Foster City, California.
The
Company had net income of $1,085,000 and $311,000 for the three month and six
month period ended June 30, 2007 compared to a net loss of $579,000 and
$1,269,000 for the three month and six month period ended June 30,
2006. Net income in 2007 was primarily affected by non-cash income
relating to decrease in warrant and derivative liabilities. For the
three months ending June 30, 2007 such non-cash income was $1,053,000 and for
the six months ending June 30, 2007, such non-cash income was
$1,117,000. During 2006, the Company obtained debt financing in the
amount of $1,350,000. Such financing resulted in non-cash financing charges
of
$1,674,000 in 2006. Our plan is to increase revenues to generate
sufficient gross profit in excess of selling, general and administrative, and
research and development expenses in order to achieve profitability. However,
we
can not assure you that we will accomplish this task and there are many factors
that may prevent us from reaching our goal of profitability.
As
shown
in the accompanying consolidated financial statements, we have incurred an
accumulated deficit of $70,008,000 through June 30, 2007. On a consolidated
basis, we had cash and cash equivalents of $1,208,000 at June 30, 2007 of which
$1,011,000 was held by BioCheck. Since BioCheck has been and is expected to
continue to be cash flow positive, management believes that its cash will be
sufficient to sustain its operating activities. We may seek
additional loan and/or equity financing to expand operations, implement our
marketing campaign, and hire additional personnel. Additionally, we plan
to acquire the remaining 49% of BioCheck that we currently do not own, and
this
may require additional financing. We plan to increase revenues by our
marketing campaign and the introduction of new products. However, we may not
successfully obtain debt or equity financing on terms acceptable to us, or
at
all, that will be sufficient to finance our goals or to 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
we cannot continue our operations.
Recent
Developments
Current
significant financial and operating events and strategies are summarized as
follows:
Product
Development
During
2006, we expanded our OXIS product portfolio of research assay kits for the
research markets with the addition of eight new assay products. The OXIS
parent company offers approximately 25 research diagnostic assay test kits
for
markers of oxidative and nitrosative stress. We also market antibodies, enzymes
and controls for use primarily in research laboratories. Given the availability
of sufficient capital resources, we plan to pursue development of additional
products relating to oxidative stress markers. We are planning to expand
our cardiovascular and inflammatory products and assays through the combination
of the new BioCheck 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. Among
these products, BioCheck has marketed the following ELISA kits to the research
market in 2006 and early 2007:
|
·
|
Reagents
for the detection of HMGA2, a marker for aggressive breast
cancer;
|
|
·
|
Research
assays for the detection of HMGA2;
and
|
|
·
|
A
new myeloperoxidase research assay ,based on an inflammatory protein
that
has utility as a prognostic marker for cardiac
events;
|
In
addition, BioCheck has developed research assays and rabbit monoclonal
antibodies for the detection of human and mouse Id proteins. Id
proteins play a central role in cell differentiation, and Id1 and Id3 play
a central and critical role in tumor related angiogenesis. BioCheck began
making Id protein reagents commercially available in January 2007, and the
Id
protein assays were launched commercially in the first quarter of
2007.
Management
Team and Board of Directors
During
2006, Michael D. Centron was appointed as our Vice President and Chief Financial
Officer (in January 2006), replacing Dr. Hausman as acting Chief Financial
Officer. In February 2006, we hired Randall Moeckli as a full time
employee and Senior Director of Sales and Marketing, however, we subsequently
mutually agreed with Mr. Moeckli to change his status from full time employee
to
an independent consultant. On March 15, 2006, Gary M. Post, Managing
Director of Ambient Advisors, LLC, joined our board of
directors. Timothy C. Rodell, M.D., declined to stand for re-election
at the Annual Meeting of Stockholders held on August 1, 2006. On
September 15, 2006, Steven T. Guillen’s employment as the Company’s President
and Chief Executive Officer was terminated. Mr. Guillen remained a
member of the board of directors until his resignation in April
2007. On September 15, 2006, Marvin S. Hausman, M.D., was appointed
by the board of directors as President and Chief Executive Officer of the
Company. Dr. Hausman remains Chairman of the board of directors. Mr.
Centron resigned as an officer and employee effective November 15,
2006.
During
the first half of 2007, Matthew Spolar, Vice President, Product Technology
for
Atkins Nutritionals, Inc., was appointed to our board of directors, effective
January 11, 2007. Also on January 11, 2007, the board of directors
approved an amendment to our bylaws to fix the number of authorized directors
at
six. In March 2007, we retained Kevin Pickard, a certified public
accountant, to provide management with support and assistance with regard to
certain matters previously handled by Michael Centron, our former Chief
Financial Officer. On April 12, 2007, Steve Guillen resigned from the
board of directors of OXIS. His resignation was pursuant to a
separation agreement described in Note 4 above.
Loan
On
December 6, 2005, we entered into a non-revolving one-year loan agreement with
KeyBank, N.A., or KeyBank, and received funds of $3,060,000 to purchase 51%
of
BioCheck’s common stock. As security for our repayment obligations, we granted a
security interest to KeyBank in our $3,060,000 certificate of deposit at
KeyBank. This loan was repaid during February 2006 and a new one-year loan
agreement for $3,060,000 was entered into with Bridge Bank. As part of the
loan
arrangement with Bridge Bank, we granted a security interest in a $3,060,000
certificate of deposit moved from KeyBank to Bridge Bank. The loan bore interest
at 3.0% and the certificate of deposit bore interest at 1.0%. This
loan was paid in full in February 2007 primarily with the proceeds from the
non-renewal of the certificate of deposit.
Debt
Financing
On
October 25, 2006, we entered into a Securities Purchase Agreement, or Purchase
Agreement, with four accredited investors, or the Purchasers. In conjunction
with the signing of the Purchase Agreement, we issued Secured Convertible
debentures, or debentures, and Series A, B, C, D, and E common stock warrants,
and we also provided the investors with registration rights under a registration
rights agreement, and a security interest in our assets under a security
agreement to secure the performance of our obligations under the
debentures.
Pursuant
to the terms of the Purchase Agreement, we issued the debentures in an aggregate
principal amount of $1,694,250 to the Purchasers. The debentures were issued
with an original issue discount of 20.318%, and resulted in proceeds to us
of
$1,350,000. The debentures are convertible, at the option of the holders, at
any
time into shares of common stock at $0.35 per share, as adjusted in accordance
with a full ratchet anti-dilution provision (referred to in this prospectus
as
the “conversion price”). Pursuant to the terms of the debentures,
beginning on February 1, 2007, we began to amortize the debentures in equal
installments on a monthly basis resulting in a complete repayment by the
maturity date (the “Monthly Redemption Amounts”). The Monthly
Redemption Amounts can be paid in cash or in shares, subject to certain
restrictions. If we choose to make any Monthly Redemption Amount payment in
shares of common stock, the price per share is the lesser of the conversion
price then in effect and 85% of the weighted average price for the ten trading
days prior to the due date of the Monthly Redemption Amount.
The
performance of our duties and obligations under the debentures are secured
by
substantially all of our assets under a security agreement. As additional
security to the debenture holders, we have also pledged the shares we hold
in
our subsidiaries, including 51% of BioCheck, Inc., and all of the shares of
capital stock of our wholly-owned subsidiaries, OXIS Therapeutics, Inc. and
OXIS
Isle of Man Limited. In addition, OXIS Therapeutics, Inc. and OXIS Isle of
Man
Limited, have each entered into a subsidiary guarantee under which these
subsidiaries have guaranteed the performance, at the parent level, of our
obligations under the debentures.
Under
the
debentures, we agreed that we will not incur additional indebtedness for
borrowed money, other than the Bridge Bank Promissory Note which has now been
repaid. 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 was to provide us with
intermediate term financing as we seek longer term financing.
We
have
not made required monthly redemption payments beginning on February 1, 2007
to
purchasers of debentures issued in October 2006. Pursuant to the
provisions of the Secured Convertible Debentures, such non-payment is an event
of default. Penalty interest accrues on any unpaid redemption balance
at an interest rate equal to the lesser of 18% per annum or the maximum rate
permitted by applicable law until such amount is paid in full. Upon
an event of default, each purchaser has the right to accelerate the cash
repayment of at least 130% of the outstanding principal amount of the debenture
plus accrued but unpaid liquidated damages and interest. If we fail
to make such payment in full, the purchasers have the right sell substantially
all of our assets pursuant to their security interest to satisfy any such unpaid
balance. We are negotiating with such purchasers for waivers from
such events of default and the right to issue shares in lieu of cash payment
of
the unpaid redemption payments plus accrued interest to the purchasers. The
Monthly Redemption Amount is approximately $85,000 and as of August 1, 2007
we
are currently seven months behind. We would have to issue
approximately 3,624,000 shares of common stock to satisfy the Monthly Redemption
Amount and unpaid interest of approximately $620,000 in arrears. We
cannot give any assurance that the each of the four purchasers will accept
such
a cure for this default.
On
October 25, 2006 in conjunction with the signing of the Purchase Agreement,
we
issued to the Purchasers five year Series A warrants to purchase an aggregate
of
2,420,357 shares of common stock at an initial exercise price of $0.35 per
share, one year Series B warrants to purchase 2,420,357 shares of common stock
at an initial exercise price of $0.385 per share, and two year Series C warrants
to purchase an aggregate of 4,840,714 shares of common stock at an initial
exercise price of $0.35 per share. In addition, we issued to the Purchasers
Series D and E warrants which become exercisable on a pro-rata basis only upon
the exercise of the Series C warrants. The six year Series D warrants to
purchase 2,420,357 shares of common stock have an initial exercise price of
$0.35 per share. The six year Series E warrants to purchase 2,420,357 shares
of
common stock have an initial exercise price of $0.385 per share. The initial
exercise prices for each warrant are adjustable pursuant to a full ratchet
anti-dilution provision and upon the occurrence of a stock split or a related
event.
Pursuant
to the registration rights agreement, we filed a registration statement covering
the public resale of the shares underlying the Series A, B, C, D and E warrants
and the debentures. This registration statement was declared
effective by the Securities and Exchange Commission in February
2007.
Under
the
security agreement, we agreed to grant to each of the investors a security
interest in substantially all of our assets. We also agreed to pledge our
respective ownership interests in our wholly-owned subsidiaries, OXIS
Therapeutics, OXIS Isle of Man, and our partial subsidiary, BioCheck, Inc.
OXIS
Therapeutics and OXIS Isle of Man also provided a subsidiary guarantee to the
Purchasers in connection with the transaction.
Exclusive
License Agreement with Alteon
On
April
2, 2007, we entered into an Amended and Restated Exclusive License Agreement
with Alteon, Inc. (recently renamed Synvista Therapeutics, Inc.), under which
we
granted Alteon worldwide exclusive rights to a family of orally bioavailable
organoselenium compounds that have demonstrated potent anti-oxidant and
anti-inflammatory properties in clinical and preclinical
studies. Previously, OXIS was a party to a license agreement dated
September 28, 2004 with HaptoGuard, Inc., which was subsequently acquired by
Alteon. The amended and restated exclusive license agreement
supercedes and replaces the prior agreement with HaptoGuard. The new
agreement expands the scope of the original agreement to also include
non-cardiovascular indications.
Under
the
new agreement, Alteon agreed to invest a minimum of $7.5 million over a
three-year period following the effective date of the agreement, in its
development program for the development, discovery and manufacture of licensed
products based on the processes and compounds covered under the
license. Alteon agreed to pay us a non-refundable sum of $500,000,
payable in six monthly installments of $50,000, with the remaining $200,000
payable upon the closing of a financing of Alteon approved by Alteon’s
shareholders. As of August 1, 2007, we have so far received
$300,000. The agreement also provides for milestone payments to us
upon certain significant milestone events in the development of a potential
drug
product. The agreement also entitles us to various levels of
sublicensing fees and royalties based on a percentage of net sales of the
licensed product.
As
part
of the agreement, Alteon agreed to make an equity investment in our common
stock, at a per-share price equal to 125% of the trading price on the trading
day immediately prior to such purchase, and no less than $0.24 per share,
resulting in net proceeds to us of $500,000.
The
agreement is terminable for cause by either party, by Alteon with or without
cause with 180 days’ prior written notice, or by us if Alteon does not make
timely payments under the license.
Lawsuit
On
or
around April 13, 2007, Applied Genetics Incorporated Dermatics (“AGI”) initiated
a lawsuit against OXIS alleging in part that AGI’s production, use and sale of
L-ergothioneine does not infringe the patents held by OXIS. The
complaint also alleges that certain actions taken by OXIS to protect and enforce
its patents have caused damage to AGI, and asserts claims of unfair competition,
tortious interference with prospective economic advantage and contractual
relations. The complaint also challenges the validity of one of our
patents. Management believes these claims, allegations and assertions
are groundless, and we intend to vigorously pursue the Company’s legal rights to
enforce and protect its patent rights.
Results
of Operations
Revenues
The
following table presents the changes in revenues from 2006 to 2007:
| |
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
Increase
(Decrease) from 2006
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(Decrease) from 2006
|
|
|
Product
revenues
|
|
$ |
1,207,000
|
|
|
$ |
1,356,000
|
|
|
$ |
(149,000 |
) |
|
$ |
2,475,000
|
|
|
$ |
2,869,000
|
|
|
$ |
(394,000 |
) |
|
License
revenues
|
|
$ |
606,000
|
|
|
|
-
|
|
|
$ |
606,000
|
|
|
$ |
729,000
|
|
|
|
-
|
|
|
|
729,000
|
|
The
decrease in product revenues was primarily attributable to loss of an account
from 2006 to 2007 and some reduction in product pricing. We expect
third quarter 2007 product revenues to be approximately the same as the second
quarter. However, we are developing new diagnostic test kits and
evaluating our product offerings, pricing and distribution network in order
to
increase sales volume.
The
increase in license revenues was attributable to the Amended and Restated
Exclusive License Agreement with Alteon. Specifically, the Company
recorded revenues of $500,000 related to the non-refundable fees associated
with
entering into the Agreement.
Cost
of product revenues
The
following table presents the changes in cost of product revenues from 2006
to
2007:
| |
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
| |
|
2007
|
|
|
2006
|
|
Decrease
from 2006
|
|
|
2007
|
|
|
2006
|
|
Decrease
from 2006
|
|
|
Cost
of product revenues
|
|
$ |
773,000
|
|
|
$ |
833,000
|
|
|
$ |
60,000
|
|
|
$ |
1,502,000
|
|
|
$ |
1,649,000
|
|
|
$ |
147,000
|
|
The
decrease in cost of product revenues is attributable to the decrease in product
sales. We expect third quarter 2007 product costs to be
approximately the same as the second quarter adjusted for any changes in
revenues.
Gross
profit was $1,040,000 and $1,702,000 compared to $523,000 and $1,220,000 for
the
three and six month period ended June 30, 2007 and 2006,
respectively. Gross profit as a percentage of revenues was 57.4% and
53.1% compared to 38.6% and 42.5% for the three and six month period ended
June
30, 2007 and 2006, respectively. The increase in gross profit
percentage is due to the increase in licensing revenues which does not have
an
associated cost of sales while the gross profit on our product sales remained
flat.
Research
and development expenses
The
following table presents the changes in research and development expenses from
2006 to 2007:
| |
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
| |
|
2007
|
|
|
2006
|
|
Increase
from 2006
|
|
|
2007
|
|
|
2006
|
|
Decrease
from 2006
|
|
|
Research
and development expenses
|
|
$ |
194,000
|
|
|
$ |
178,000
|
|
|
$ |
16,000
|
|
|
$ |
367,000
|
|
|
$ |
391,000
|
|
|
$ |
24,000
|
|
The
decrease in research and development expenses is primarily attributable to
a
change in mix from currently expensed research and development towards patent
development and other capitalized research programs and projects. We
expect third quarter 2007 research and development costs to be approximately the
same as the second quarter. However, the actual amount of research
and development expenses will fluctuate with the availability of attractive
projects and the availability of the associated required funding.
Selling,
general and administrative expenses
The
following table presents the changes in selling, general and administrative
expenses from 2006 to 2007:
| |
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
| |
|
2007
|
|
|
2006
|
|
Decrease
from 2006
|
|
|
2007
|
|
|
2006
|
|
Decrease
from 2006
|
|
|
Selling,
general and administrative expenses
|
|
$ |
441,000
|
|
|
$ |
837,000
|
|
|
$ |
396,000
|
|
|
|
1,382,000
|
|
|
$ |
1,901,000
|
|
|
$ |
519,000
|
|
The
decrease in selling, general and administrative expenses is primarily
attributable to a reduction in overhead costs as a result of efficiencies and
reduction in costs gained by our move from Portland to Foster
City. We expect third quarter 2007 selling, general and
administrative expenses to be approximately the same as the second
quarter.
Interest
Income
Interest
income was $0 and $25,000 compared to $11,000 and $31,000 for the three and
six
month period ended June 30, 2007 and 2006, respectively. The decrease
is primarily due to the decrease in cash available for investment
activities.
Change
in value of warrant and derivative liabilities
The
change in the value of warrant and derivative liabilities relates to the change
in fair value of these liabilities recorded by us as a result of the convertible
debentures issued in October 2006.
Interest
Expense
Interest
expense was $259,000 and $500,000 compared to $28,000 and $55,000 for the three
and six month period ended June 30, 2007 and 2006, respectively. The
increase is due to the interest on the convertible debentures and the
amortization of the debt issuance costs associated with the convertible
debentures as well as penalty interest associated with the delinquent payment
of
the issued debentures.
Liquidity
and Capital Resources
On
a
consolidated basis, we had cash and cash equivalents of $1,208,000 at June
30,
2007 of which $1,011,000 was held by BioCheck. The cash held by the
OXIS parent company was $197,000 at June 30, 2007. Cash provided by
operating activities was $82,000 during the second quarter of
2007. The cash held by the OXIS parent company of $197,000 at June
30, 2007 plus the $700,000 additional amount we expect to receive from Alteon
should be sufficient to sustain our operations through 2007. As of
August 10, 2007, we have so far received $500,000 from Alteon pursuant to the
terms of our license agreement with Alteon (see Note 5). Since
BioCheck has been and is expected to continue to be cash flow positive,
management believes that BioCheck’s cash will be sufficient to sustain
BioCheck’s operating activities. However, we cannot access the cash
held by our majority-held subsidiary, BioCheck, to pay for our parent level
operating expenses. In addition, in connection with the license
agreement between Alteon and us, Alteon agreed to make an equity investment
in
our common stock, at a per-share price equal to 125% of the ten-day average
trading price following the effective date of the agreement and no less than
$0.24 per share, which per our agreement is expected to result in net proceeds
to us of $500,000.
On
October 25, 2006, we completed a private placement of debentures and warrants
under a securities purchase agreement with four accredited investors. In this
financing we issued secured convertible debentures in an aggregate principal
amount of $1,694,250 (referred to in this report as the “debentures”), and
Series A, B, C, D, and E common stock warrants (referred to in this report
as
the “warrants”). We also provided the investors registration rights under a
registration rights agreement, and a security interest in our assets under
a
security agreement to secure performance of our duties and obligations under
the
debentures. Under the warrants, the investors have the right to purchase an
aggregate of approximately 14.5 million shares of our common stock, at initial
exercise prices ranging from $0.35 to $0.385 per share, and these exercise
prices are adjustable according to a full ratchet anti-dilution provision,
i.e.,
the exercise price may be adjusted downward in the event that we conduct a
financing at a price per share below $0.35 or $0.385 per share, respectively.
The Series D and E warrants are only exercisable pro rata subsequent to the
exercise of the Series C warrants. The debentures were issued with an original
issue discount of 20.318%, and resulted in proceeds to us of $1,350,000. The
debentures are convertible, at the option of the holders, at any time into
shares of common stock at $0.35 per share, as adjusted in accordance with a
full
ratchet anti-dilution provision (referred to in this prospectus as the
“conversion price”). Pursuant to the terms of the debentures,
beginning on February 1, 2007, we began to amortize the debentures in equal
installments on a monthly basis resulting in a complete repayment by the
maturity date (the “Monthly Redemption Amounts”). The Monthly
Redemption Amounts can be paid in cash or in shares, subject to certain
restrictions. If we choose to make any Monthly Redemption Amount payment in
shares of common stock, the price per share is the lesser of the conversion
price then in effect and 85% of the weighted average price for the ten trading
days prior to the due date of the Monthly Redemption Amount. The Company has
not
made the required Monthly Redemption Amounts and is currently in default on
these payments. We have not made required monthly redemption payments beginning
on February 1, 2007 to purchasers of debentures issued in October
2006. Pursuant to the provisions of the Secured Convertible
Debentures, such non-payment is an event of default. Penalty interest
accrues on any unpaid redemption balance at an interest rate equal to the lesser
of 18% per annum or the maximum rate permitted by applicable law until such
amount is paid in full. Upon an event of default, each purchaser has
the right to accelerate the cash repayment of at least 130% of the outstanding
principal amount of the debenture plus accrued but unpaid liquidated damages
and
interest. If we fail to make such payment in full, the purchasers
have the right sell substantially all of our assets pursuant to their security
interest to satisfy any such unpaid balance. The Monthly Redemption
Amount is approximately $85,000 and as of August 1, 2007 we are currently seven
months behind. We would have to issue approximately 3,624,000 shares
of common stock to satisfy the Monthly Redemption Amount and unpaid interest
totalling approximately $620,000 in arrears.
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,
or SFAS, No. 141, “Business Combinations.
Revenue
Recognition
We
manufacture, or have manufactured on a contract basis, research and clinical
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 any time.
License
arrangements may consist of non-refundable upfront license fees, exclusive
licensed rights to patented or patent pending technology, and various
performance or sales milestones and future product royalty payments. Some
of
these arrangements are multiple element arrangements.
Non-refundable,
up-front fees that are not contingent on any future performance by us, and
require no consequential continuing involvement on our part, are recognized
as
revenue when the license term commences and the licensed data, technology
and/or
compound is delivered We defer recognition of non-refundable upfront
fees if we have continuing performance obligations without which the technology,
right, product or service conveyed in conjunction with the non-refundable
fee
has no utility to the licensee that is separate and independent of our
performance under the other elements of the arrangement. In addition, if
we have
continuing involvement through research and development services that are
required because our know-how and expertise related to the technology is
proprietary to us, or can only be performed by us, then such up-front fees
are
deferred and recognized over the period of continuing
involvement.
Payments
related to substantive, performance-based milestones in a research and
development arrangement are recognized as revenue upon the achievement of
the
milestones as specified in the underlying agreements when they represent
the
culmination of the earnings process.
We
recognize royalty revenues from licensed products when earned in accordance
with
the terms of the license agreements. Net sales figures used for calculating
royalties include deductions for costs of unsaleable returns, managed care
chargebacks, cash discounts, freight and warehousing, and miscellaneous
write-offs.
Inventories
Inventories
are stated at the lower of cost to purchase and/or manufacture the inventory
or
the current estimated market value of the inventory. We regularly review our
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and/or
our
ability to sell the products and production requirements. Demand for our
products can fluctuate significantly. Factors which could affect demand for
our
products include unanticipated changes in consumer preferences, general market
conditions or other factors, which may result in cancellations of advance orders
or a reduction in the rate of reorders placed by customers and/or continued
weakening of economic conditions. Additionally, our estimates of future product
demand may be inaccurate, which could result in an understated or overstated
provision required for excess and obsolete inventory. Our estimates are based
upon our understanding of historical relationships which can change at
anytime.
Long-Lived
Assets
Our
long-lived assets include property, plant and equipment, capitalized costs
of
filing patent applications and goodwill and other assets. See Notes 1, 4, 5
and
6 to the audited consolidated financial statements for the year ended December
31, 2006 included in Form 10-KSB/A for more detail regarding our long-lived
assets. We evaluate our long-lived assets for impairment in accordance with
SFAS
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
whenever events or changes in circumstances indicate that the carrying amount
of
such assets may not be recoverable. Estimates of future cash flows and timing
of
events for evaluating long-lived assets for impairment are based upon
management’s judgment. If any of our intangible or long-lived assets are
considered to be impaired, the amount of impairment to be recognized is the
excess of the carrying amount of the assets over its fair value.
Applicable
long-lived assets are amortized or depreciated over the shorter of their
estimated useful lives, the estimated period that the assets will generate
revenue, or the statutory or contractual term in the case of patents. Estimates
of useful lives and periods of expected revenue generation are reviewed
periodically for appropriateness and are based upon management’s judgment.
Goodwill and other assets are not amortized.
Certain
Expenses and Liabilities
On
an
ongoing basis, management evaluates its estimates related to certain expenses
and accrued liabilities. We base our estimates on historical experience and
on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of liabilities that are not readily apparent from other
sources. Actual results may differ materially from these estimates under
different assumptions or conditions.
Share-Based
Compensation
In
December 2004, the FASB issued SFAS 123R, which replaces FASB Statement No.
123,
“Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” or APB Opinion No. 25. SFAS 123R
establishes standards for the accounting for share-based payment transactions
in
which an entity exchanges its equity instruments for goods or services. It
also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity’s equity
instruments or that may be settled by the issuance of those equity instruments.
SFAS 123R covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans. SFAS 123R requires a
public entity to measure the cost of employee services received in exchange
for
an award of equity instruments based on the fair value of the award on the
grant
date (with limited exceptions). That cost will be recognized in the entity’s
financial statements over the period during which the employee is required
to
provide services in exchange for the award. Management implemented SFAS 123R
effective January 1, 2006. Methodologies used for calculations such as the
Black-Scholes option-pricing models and variables such as volatility and
expected life are based upon management’s judgment. Such methodologies and
variables are reviewed and updated periodically for appropriateness and affect
the amount of recorded charges.
RISK
FACTORS
Risks
Related to Our Business
We
operate in a rapidly changing environment that involves a number of risks,
some
of which are beyond our control. The following discussion highlights
some of these risks and others are discussed elsewhere in this
Report.
We
may need to raise additional capital to fund our general and administrative
expenses, and if we are unable to raise such capital, in the first
quarer of 2008 we will have to curtail or cease
operations.
We
had
cash and cash equivalents of $1,208,000 at our parent level at June 30, 2007.
We
cannot access the cash held by our majority-held subsidiary, BioCheck, to pay
for our operating expenses at the parent level, since currently BioCheck is
not
our wholly-owned subsidiary. We obtained debt financing in the amount of
$1,350,000 on October 25, 2006. In order to expand our operations,
including pursuit of our development and commercialization programs, we may
need
to raise additional equity or debt financing. In addition, if in the
future we choose to exercise our option to purchase the remaining 49% share
of
BioCheck that we currently do not own, this may require additional capital.
We
have incurred significant obligations in relation to the termination of our
former president and chief executive officer. We repaid debt including accrued
interest and expenses in the amount of $426,000 to Fagan Capital and $209,000
to
our former chief executive officer. If we 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.
As
we have not made required monthly redemption payments due to purchasers of
debentures in our October 2006 convertible debt and warrant financing, unless
we
receive applicable waivers from the debenture purchasers, such purchasers could
exercise their rights under the default provisions of the Secured Convertible
Debenture.
We
have
not made required monthly redemption payments beginning on February 1, 2007
to
purchasers of debentures issued in October 2006. Pursuant to the
provisions of the Secured Convertible Debentures, such failure to pay is an
event of default. Penalty interest accrues on any unpaid redemption
balance at an interest rate equal to the lesser of 18% per annum or the maximum
rate permitted by applicable law until such amount is paid in
full. Upon an event of default, each purchaser has the right to
accelerate the cash repayment of at least 130% of the outstanding principal
amount of the debenture plus accrued but unpaid liquidated damages and
interest. If we fail to make such payment in full, the purchasers
have the right sell substantially all of our assets pursuant to their security
interest to satisfy any such unpaid balance. We are negotiating with
such purchasers for waivers from such events of default and the right to issue
shares in lieu of cash payment of the unpaid redemption payments plus accrued
interest to the purchasers. Each monthly redemption amount is
approximately $85,000 and as of August 1, 2007 we are currently seven months
behind. We would have to issue approximately 3,624,000 shares of
common stock to satisfy the monthly redemption amount and unpaid interest of
approximately $620,000 in arrears. We cannot give any assurance that
the each of the four purchasers will accept this arrangement as a cure for
this
default.
Repayment
of recently issued debentures in shares and the exercise of recently issued
warrants would cause substantial dilution to our stockholders and would likely
to depress our stock price, making it more difficult for us to consummate future
equity financings.
In
our
October 25, 2006 debenture financing with four accredited purchasers, we issued
secured convertible debentures in an aggregate principal amount of $1,694,250.
We also issued Series A, B, C, D, and E warrants to the purchasers of the
debentures, which provide them the right to purchase of an aggregate of
approximately 14.5 million shares of our common stock, at initial exercise
prices ranging from $0.35 to $0.385 per share, subject to adjustment as provided
in the warrants, including a full ratchet anti-dilution provision which will
lower the exercise price in the event that we conduct a financing at a price
per
share below $0.35 or $0.385 per share, respectively. The Series D and E warrants
are only exercisable on a pro rata basis, if the Series C warrants are
exercised. The debentures were issued with an original issue discount of
20.318%, and resulted in proceeds to us of $1,350,000. The debentures are
convertible, at the option of the holders, at any time into shares of common
stock at $0.35 per share, as adjusted in accordance with a full ratchet
anti-dilution provision (referred to in this report as the “conversion
price”). Pursuant to the terms of the debentures, beginning on
February 1, 2007, we began to amortize the debentures in equal installments
on a
monthly basis resulting in a complete repayment by the maturity date (the
“Monthly Redemption Amounts”). The Monthly Redemption Amounts can be paid in
cash or in shares, subject to certain restrictions. If we choose to make any
Monthly Redemption Amount payment in shares of common stock, the price per
share
is the lesser of the conversion price then in effect and 85% of the weighted
average price for the ten trading days prior to the due date of the Monthly
Redemption Amount.
Due
to
the floating conversion price of the debentures that applies when we choose
to
repay the debentures in shares, we would need to issue approximately ten to
thirteen million shares to the holders of the debentures, assuming that stock
prices remain in their recent price range. The number of shares that we may
have
to issue to the debenture holders could increase significantly if our stock
price declines from the current price range. In addition, we would have to
issue
approximately five million shares if the debenture holders exercise their Series
A and B warrants, an additional approximately five million shares would be
issued upon exercise of their Series C warrants and finally, an additional
approximately five million shares would be issued upon exercise of their Series
D and E warrants pro rata subsequent to the exercise of the Series C warrants.
The future potential dilution due to exercise of the above warrants could be
increased if the full ratchet anti-dilution provision applicable to the exercise
price of the warrants is triggered. This future potential dilution would likely
depress our stock price, making it difficult for us to consummate a future
equity financing.
As
of
June 30, 2007 we were in technical default under the October 2006 debentures,
because of non-payment of the Monthly Redemption Amounts which became due
beginning on February 1, 2007. We are currently in negotiations with
the debenture holders regarding the form of payment of these Monthly Redemption
Amounts, which may be in the form of shares of our common stock or
cash.
Restrictions
on our ability to repay the debentures in shares rather than in cash may deplete
our cash resources and will require future financings to avoid
default.
Under
the
terms of the debentures we issued in October 2006, our right to make monthly
redemption payments is conditioned upon several factors. Beginning on February
1, 2007, we are obligated to amortize the debentures in equal installments
on a
monthly basis resulting in a complete repayment by the maturity date either
in
cash or in shares. The monthly redemptions, if made in cash to all debenture
holders would equal approximately $85,000 per month. We may not make the monthly
redemption in shares if, among other conditions, the issuance of the shares
to
the debenture holders would cause any debenture holder to beneficially own
in
excess of either 9.99% or 4.99% of our total outstanding shares at that time
(depending on the particular debenture holder, either the 9.99% or the 4.99%
threshold applies). One of the debenture holders currently beneficially owns
approximately 9% of our total outstanding shares. In addition, we may not make
monthly redemption payments to any debenture holder in shares rather than cash
if the daily trading volume for our common stock does not exceed 50,000 shares
per trading day for a period of 20 trading days prior to any applicable date
in
question beginning after April 25, 2007. If we must make all or a substantial
amount of its monthly redemption payments to the debenture holders in cash
rather than shares, its cash reserves will be depleted and it will have to
raise
substantial additional capital to avoid default of the debentures.
Restrictive
provisions of the Securities Purchase Agreement signed with purchasers of
debentures and warrants in our recent convertible debt and warrant financing
may
make it more difficult for us to consummate an equity financing
transaction.
Pursuant
to the Securities Purchase Agreement entered into with four accredited
purchasers on October 25, 2006, the purchasers of the debentures have the right
to participate in up to 100% of any future equity financing involving issuance
of common stock or securities convertible into or exercisable for common stock
that we undertake within one year after the effective date of the registration
statement which we are required to file in relation to the securities issued
in
our October 25, 2006 financing. This provision may make potential investors
reluctant to enter into term sheets with us for future equity
transactions.
Raising
additional capital may be necessary in order to complete our acquisition of
the
outstanding shares of BioCheck that we do not own, which constitutes 49% of
BioCheck’s issued and outstanding shares.
On
September 19, 2005 we entered into a stock purchase agreement with BioCheck
and
the stockholders of BioCheck pursuant to which we undertook to purchase up
to
all of the outstanding shares of common stock of BioCheck for an aggregate
purchase price of $6.0 million in cash. On December 6, 2005, pursuant to
the terms of the stock purchase agreement with BioCheck, at the initial closing,
we purchased an aggregate of fifty-one percent (51%) of the outstanding shares
of common stock of BioCheck from each of the stockholders of BioCheck on a
pro
rata basis, for an aggregate of $3,060,000 in cash. Pursuant to the stock
purchase agreement, we will use our reasonable best efforts to consummate a
follow-on financing transaction to raise additional capital with which to
purchase the remaining outstanding shares of BioCheck in one or more additional
closings. The purchase price for any BioCheck shares purchased after the initial
closing will be increased by an additional 8% per annum from the date of the
initial closing through the date of such purchase. Under the terms of our
purchase agreements with BioCheck and its stockholders, BioCheck’s earnings
(specifically, its earnings before interest, taxes, depreciation and
amortization expenses, or EBITDA), if any, will be used to repurchase the
remaining outstanding BioCheck shares at one or more additional
closings. There can be no assurance that BioCheck will generate any
earnings in the next several years which would be sufficient to purchase
additional shares of BioCheck pursuant to the stock purchase agreement. Even
if
BioCheck generates earnings, there can be no assurance that such earnings would
be sufficient to complete our acquisition of the remaining 49% of BioCheck’s
outstanding shares.
To
avoid
an increase in the purchase price of the remaining shares of BioCheck at the
rate of 8% per annum, we would need to consummate a financing transaction to
complete the acquisition of the remaining 49% of the outstanding shares of
BioCheck. The successful completion of our acquisition of BioCheck in this
manner is dependent upon obtaining financing on acceptable terms. No assurances
can be given that we will be able to complete such a financing sufficient to
undertake our acquisition of the outstanding shares of BioCheck on terms
favorable to us, or at all. Any financing that we do undertake to finance the
acquisition of BioCheck would likely involve dilution of our common stock if
it
is an equity financing, or will involve the assumption of significant debt
by
us.
We
will need additional financing in order to complete our development and
commercialization programs.
As
of
June 30, 2007, we had an accumulated deficit of approximately $70,008,000.
We
currently do not have sufficient capital resources to complete the development
and commercialization of our antioxidant therapeutic technologies and oxidative
stress assays, and no assurances can be given that we will be able to raise
such
capital in the future on terms favorable to us, or at all. The lack of
availability of additional capital could cause us to cease or curtail our
operations and/or delay or prevent the development and marketing of our
potential products. In addition, we may choose to abandon certain issued United
States and international patents that we consider to be of lesser importance
to
our strategic direction, in an effort to preserve our financial
resources.
Our
future capital requirements will depend on many factors including the
following:
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continued
scientific progress in our research and development programs and
the
commercialization of additional products;
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the
cost of our research and development and commercialization activities
and
arrangements, including sales and marketing;
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the
costs associated with the scale-up of manufacturing;
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the
success of pre-clinical and clinical trials;
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the
establishment of and changes in collaborative
relationships;
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the
time and costs involved in filing, prosecuting, enforcing and defending
patent claims;
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the
time and costs required for regulatory approvals;
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the
acquisition of additional technologies or businesses;
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technological
competition and market developments; and
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the
cost of complying with the requirements of the Autorité des Marchés
Financiers, or AMF, the French regulatory agency overseeing the Nouveau
Marché in France.
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We
will
need to raise additional capital to fund all of our potential development and
commercialization programs. Our current capital resources may not be 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 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. 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 specific product or technology
would require us to raise additional capital, would be an important factor
in
our decision to engage in such further development or commercialization. No
assurances can be given that we will be able to raise such funds in the future
on terms favorable to us, or at all.
If
we complete our acquisition of BioCheck, our business could be materially and
adversely affected if we fail to adequately integrate the operations of the
two
companies.
If
we
complete the acquisition of BioCheck as planned, and we do not successfully
integrate the operations of the two companies, or if the benefits of the
transaction do not meet the expectations of financial or industry analysts,
the
market price of our common stock may decline. The acquisition could result
in
the use of significant amounts of cash, dilutive issuances of equity securities,
or the incurrence of debt or expenses related to goodwill and other intangible
assets, any of which, or all taken together, could materially adversely affect
our business, operating results and financial condition.
We
may
not be able to successfully integrate the BioCheck business into our existing
business in a timely and non-disruptive manner, or at all. In addition, the
acquisition may result in, among other things, substantial charges associated
with acquired in-process research and development, future write-offs of goodwill
that is deemed to be impaired, restructuring charges related to consolidation
of
operations, charges associated with unknown or unforeseen liabilities of
acquired businesses and increased general and administrative expenses.
Furthermore, the acquisition may not produce the revenues, earnings or business
synergies that we anticipate.
In
addition, in general, acquisitions such as these involve numerous risks,
including:
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difficulties
in assimilating the operations, technologies, products and personnel
of an
acquired company;
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risks
of entering markets in which we have either no or limited prior
experience;
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diversion
of management’s attention from other business concerns;
and
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potential
loss of key employees of an acquired
company.
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The
time,
capital management and other resources spent on the acquisition, if it fails
to
meet our expectations, could cause our business and financial condition to
be
materially and adversely affected.
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 third quarter of 2006, our former Chief Executive Officer, who had been
appointed by the Board on in the first quarter of 2005, was terminated, and
during the fourth quarter of 2006 our Chief Financial Officer, who had been
hired in January 2006, resigned from his position at our company. As
a result, one person was appointed to serve as both Chief Executive Officer
and
acting Chief Financial Officer, leaving our company with a sole executive
officer. On September 15, 2006 Marvin S. Hausman, M.D. was appointed our new
President and Chief Executive Officer and took the position of Acting Chief
Financial Officer.
In
addition, during 2006 two directors left our Board. Timothy C.
Rodell, M.D., declined to stand for re-election at the Annual Meeting of
Stockholders held on August 1, 2006.and on April 12, 2007, Mr. Guillen resigned
from the board of directors. Gary M. Post joined our Board of
directors on March 15, 2006 and on January 11, 2007 Matthew Spolar was appointed
to our board of directors, resulting in a five member Board. Three of
the five directors currently serving on the board commenced their service on
the
board within the last two years.
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. In late 2006
and
during 2007 we deferred the hiring of senior management personnel due to limited
capital resources. We cannot predict whether we will be successful in
finding suitable new candidates for our key management positions. On September
15, 2006, Mr. Guillen’s employment as President and Chief Executive Officer was
terminated, and Marvin S. Hausman, M.D. was appointed our new President and
Chief Executive Officer. On November 15, 2006, Michael Centron resigned as
our
Vice President and Chief Financial Officer. Dr. Hausman has assumed the role
of
chief financial and accounting officer on an interim basis. While we have
entered into an employment agreement with Dr. Hausman, he is free to terminate
his employment “at will.” Further, we cannot predict whether Dr. Hausman will be
successful in his role as our President and Chief Executive Officer, or whether
senior management personnel hires will be effective. The loss of services of
executive officers or key personnel, any transitional difficulties with our
new
Chief Executive Officer or the inability to attract qualified personnel could
have a material adverse effect on our financial condition and business. We
currently do not have a Chief Financial Officer who is a full time employee,
and
rely upon consultants to perform functions normally handled by a
CFO. As we currently have limited cash resources, if any of our key
personnel leaves, replacing them will be difficult. We do not have any key
employee life insurance policies with respect to any of our executive
officers.
The
success of our business depends upon our ability to successfully develop and
commercialize products.
We
cannot
assure you that our efforts to develop and commercialize a cardiac predictor
product, an Ergothioneine nutraceutical product or any other products will
be
successful. The cost of such development and commercialization efforts can
be
significant and the likelihood of success of any such programs is difficult
to
predict. The failure to develop or commercialize such new products could be
materially harmful to us and our financial condition.
Our
future profitability is uncertain.
We
cannot
predict our ability to increase our revenues or achieve profitability. We may
be
required to increase our research and development expenses in order to develop
potential new products. As evidenced by the substantial net losses during and
2006 and 2005, losses and expenses may increase and fluctuate from quarter
to
quarter. There can be no assurance that we will ever achieve profitable
operations.
Our
ability to successfully develop and commercialize our nutraceutical or clinical
diagnostic product candidates, and make them available for sale, is
uncertain.
Most
of
our nutraceutical and clinical diagnostic candidates are at an early stage
of
development and all of such nutraceutical and clinical diagnostic candidates
may
require expensive and lengthy testing and regulatory clearances. None of our
nutraceutical or clinical diagnostic candidates have been approved by regulatory
authorities. We may not be able to make some of our product candidates
commercially available for several years, if at all. There are many reasons
we
may fail in our efforts to develop our nutraceutical and clinical diagnostic
candidates, including:
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our
nutraceutical and clinical diagnostic candidates may be found to
lack
efficacy, we may not be able to effectively demonstrate the efficacy
of
our products, or our products may not qualify to receive necessary
regulatory clearances,
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our
nutraceutical and clinical diagnostic candidates may not be cost
expensive
to manufacture or market or may not achieve broad market
acceptance,
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third
parties may hold proprietary rights that may preclude us from developing
or marketing our nutraceutical and clinical diagnostic candidates,
or
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third
parties may enter the market with equivalent or superior
products.
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Clinical
development is inherently uncertain and expense levels may fluctuate
unexpectedly because we cannot accurately predict the timing and level of such
expenses.
Our
future success may depend in part upon the results of clinical trials undertaken
by us or our licensees designed to assess the safety and efficacy of our
potential products. We do not have substantial experience in developing and
running clinical trials. The completion of clinical trials often depends
significantly upon the rate of patient enrollment, and our expense levels will
vary depending upon the rate of enrollment. In addition, the length of time
necessary to complete clinical trials and submit an application for marketing
and manufacturing approvals varies significantly and is difficult to predict.
The expenses associated with each phase of development depend upon the design
of
the trial. The design of each phase of trials depends in part upon results
of
prior phases, and additional trials may be needed at each phase. As a result,
the expense associated with future phases cannot be predicted in advance.
Further, if we undertake clinical trials, we may decide to terminate or suspend
ongoing trials. Failure to comply with extensive FDA regulations may result
in
unanticipated delay, suspension or cancellation of a trial or the FDA’s refusal
to accept test results. The FDA may also suspend our clinical trials at any
time
if it concludes that the participants are being exposed to unacceptable risks.
As a result of these factors, we cannot predict the actual expenses that we
will
incur with respect to clinical trials for any of our potential products, and
we
expect that our expense levels will fluctuate unexpectedly in the
future.
Competition
in most of our primary current and potential market areas is
intense.
The
diagnostic, pharmaceutical and nutraceutical industries are highly competitive.
The main commercial competition at present in our research assay business is
represented by, but not limited to, the following companies: Cayman Chemical
Company, Assay Designs and Randox Laboratories Ltd. In addition, our competitors
and potential competitors include large pharmaceutical/nutraceutical companies,
universities and research institutions. Compared to us, these competitors may
have substantially greater capital resources, research and development staffs,
facilities, as well as greater expertise manufacturing and making products.
In
addition, these companies, as well as others, may have or may develop new
technologies or use existing technologies that are, or may in the future be,
the
basis for competitive products. There can be no assurance that we can compete
successfully.
In
addition, current and potential competitors may make strategic acquisitions
or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their products to address the needs of our
current and prospective customers. Accordingly, it is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Such competition could materially
adversely affect our ability to commercialize existing technologies or new
technologies on terms favorable to us. Further, competitive pressures could
require us to reduce the price of our products and technologies, which could
materially adversely affect our business, operating results and financial
condition. We may not be able to compete successfully against current and future
competitors and any failure to do so would have a material adverse effect upon
our business, operating results and financial condition.
TorreyPines
Therapeutics, Inc. holds significant stockholder voting power, and may be in
a
position to influence matters affecting us.
TorreyPines
Therapeutics, Inc. or TorreyPines, which merged with Axonyx Inc. in October
2006, currently owns approximately 31% of our issued and outstanding stock.
In
addition, Dr. Marvin Hausman is a member of the board of directors of
TorreyPines and is our President and Chief Executive Officer and the chairman
of
our board of directors. Given these circumstances, TorreyPines may influence
our
business direction and policies, and, thus, may have the ability to control
certain material decisions affecting us. In addition, such concentration of
voting power could have the effect of delaying, deterring or preventing a change
of control or other business combination that might otherwise be beneficial
to
our stockholders. Section 203 of the Delaware General Corporation Law prohibits
a Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years unless the transaction meets
certain conditions. Section 203 also limits the extent to which an
interested stockholder can receive benefits from our assets. These provisions
could complicate or prohibit certain transactions (including a financing
transaction between us and TorreyPines), or limit the price that other investors
might be willing to pay in the future for shares of our common
stock.
If
we are unable to develop and maintain alliances with collaborative partners,
we
may have difficulty developing and selling certain of our products and
services.
Our
ability to realize significant revenues from new products and technologies
is
dependent upon, among other things, our success in developing business alliances
and licensing arrangements with nutraceutical, biopharmaceutical and/or health
related companies to develop and market these products. To date, we have had
limited success in establishing foundations for such business alliances and
licensing arrangements and there can be no assurance that our efforts will
result in the development of mature relationships or that any such relationships
will be successful. Further, relying on these or other alliances is risky to
our
future success because:
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our
partners may develop products or technologies competitive with our
products and technologies;
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our
partners may not devote sufficient resources to the development and
sale
of our products and technologies;
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our
collaborations may be unsuccessful; or
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we
may not be able to negotiate future alliances on acceptable
terms.
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Our
revenues and quarterly results have fluctuated historically and may continue
to
fluctuate, which could cause our stock price to decrease.
Our
revenues and operating results may fluctuate due in part to factors that are
beyond our control and which we cannot predict. Material shortfalls in revenues
will materially adversely affect our results and may cause us to experience
losses. In particular, our revenue growth and profitability depend on sales
of
our research assays and fine chemicals. Factors that could cause sales for
these
products and other products to fluctuate include:
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an
inability to produce products in sufficient quantities and with
appropriate quality;
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an
inability to obtain sufficient raw materials;
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the
loss of or reduction in orders from key customers;
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variable
or decreased demand from our customers;
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the
receipt of relatively large orders with short lead
times;
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our
customers’ expectations as to how long it takes us to fill future
orders;
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customers’
budgetary constraints and internal acceptance review
procedures;
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there
may be only a limited number of customers that are willing to purchase
our
research assays and fine chemicals;
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a
long sales cycle that involves substantial human and capital resources;
and
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potential
downturns in general or in industry specific economic
conditions.
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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,
a
decrease in the demand for our Ergothioneine product resulted in a reduction
of
sales of Ergothioneine to $1,000 in 2006, $18,000 in 2005 and $87,000 in 2004,
compared to $333,000 in 2003. We cannot predict with any certainty our future
sales of Ergothioneine.
If
the
sales or development cycles for research assays and fine chemicals lengthen
unexpectedly, our revenues may decline or not grow as anticipated and our
results from operations may be harmed.
Changes
in accounting standards regarding stock option plans could increase our reported
losses, cause our stock price to decline and limit the desirability of granting
stock options.
In
December 2004, the FASB issued SFAS 123R. SFAS 123R replaces SFAS No. 123 and
supersedes APB Opinion No. 25. SFAS 123R establishes standards for the
accounting for share-based payment transactions in which an entity exchanges
its
equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity’s equity instruments or that may be
settled by the issuance of those equity instruments. SFAS 123R covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights
and
employee share purchase plans. SFAS 123R requires a public entity to measure
the
cost of employee services received in exchange for an award of equity
instruments based on the fair value of the award on the grant date (with limited
exceptions). That cost will be recognized in the entity’s financial statements
over the period during which the employee is required to provide services in
exchange for the award. Management implemented SFAS 123R effective January
1,
2006. Expensing such stock options will add to our losses or reduce our profits,
if any. In addition, stock options are an important employee recruitment and
retention tool, and we may not be able to attract and retain key personnel
if we
reduce the scope of our employee stock option program.
Our
income may suffer if we receive relatively large orders with short lead times,
or our manufacturing capacity does not otherwise match our
demand.
Because
we cannot immediately adapt our production capacity and related cost structures
to rapidly changing market conditions, when demand does not meet our
expectations, our manufacturing capacity will likely exceed our production
requirements. Fixed costs associated with excess manufacturing capacity could
adversely affect our income. Similarly, if we receive relatively large orders
with short lead times, we may not be able to increase our manufacturing capacity
to meet product demand, and, accordingly, we will not be able to fulfill orders
in a timely manner. During a market upturn, we may not be able to purchase
sufficient supplies to meet increasing product demand. In addition, suppliers
may extend lead times, limit supplies or increase prices due to capacity
constraints or other factors. These factors could materially and adversely
affect our results.
Our
success will require that we establish a strong intellectual property position
and that we can defend ourselves against intellectual property claims from
others.
Maintaining
a strong patent position is important to us in order to establish and maintain
a
competitive advantage. We currently have 81 patents either granted or applied
for in 16 countries with expiration dates ranging from 2009 to 2025. Litigation
on patent-related matters has been prevalent in our industry and we expect
that
this will continue. Patent law relating to the scope of claims in the technology
fields in which we operate is still evolving and the extent of future protection
is highly uncertain, so there can be no assurance that the patent rights we
have
or may obtain will be valuable. Others may have filed, or may in the future
file, patent applications that are similar or identical to ours. To determine
the priority of inventions, we may have to participate in interference
proceedings declared by the United States Patent and Trademark Office that
could
result in substantial costs in legal fees and could substantially affect the
scope of our patent protection. We cannot assure investors that any such patent
applications will not have priority over our patent applications. Further,
we
may choose to abandon certain issued United States and international patents
that we consider to be of lesser importance to our strategic direction, in
an
effort to preserve our financial resources. Abandonment of patents could
substantially affect the scope of our patent protection. In addition, we may
in
future periods incur substantial costs in litigation to defend against patent
suits brought by third parties or if we initiate such suits.
In
addition to patent protection, we also rely upon trade secret protection for
our
confidential and proprietary information. There can be no assurance, however,
that such measures will provide adequate protection for our trade secrets or
other proprietary information. In addition, there can be no assurance that
trade
secrets and other proprietary information will not be disclosed, that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to or disclose our trade secrets and
other proprietary information. If we cannot obtain, maintain or enforce our
intellectual property rights, competitors may seize the opportunity to design
and commercialize competing technologies.
We
may
face challenges from third parties regarding the validity of our patents and
proprietary rights, or from third parties asserting that we are infringing
their
patents or proprietary rights, which could result in litigation that would
be
costly to defend and could deprive us of valuable rights. As a recent
example, in the second quarter of 2007, Applied Genetics Incorporated Dermatics
(“AGI”) initiated a lawsuit against OXIS alleging in part that AGI’s production,
use and sale of L-ergothioneine does not infringe the patents held by
OXIS. The complaint also alleges that certain actions taken by OXIS
to protect and enforce its patents have caused damage to AGI, and asserts claims
of unfair competition, tortious interference with prospective economic advantage
and contractual relations. The complaint also challenges the validity
of one of our patents.
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:
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enforce
patents that we own or license;
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protect
trade secrets or know-how that we own or license; or
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determine
the enforceability, scope and validity of the proprietary rights
of
others.
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Our
involvement in any litigation, interference or other administrative proceedings
could cause us to incur substantial expense and could significantly divert
the
efforts of our technical and management personnel. An adverse determination
may
subject us to loss of our proprietary position or to significant liabilities,
or
require us to seek licenses that may not be available from third parties. An
adverse determination in a judicial or administrative proceeding, or a failure
to obtain necessary licenses, may restrict or prevent us from manufacturing
and
selling our products. Costs associated with these arrangements may be
substantial and may include ongoing royalties. Furthermore, we may not be able
to obtain the necessary licenses on satisfactory terms, if at all. These
outcomes could materially harm our business, financial condition and results
of
operations.
We
may be exposed to liability due to product defects.
The
risk
of product liability claims is inherent in the testing, manufacturing, marketing
and sale of our products. We may seek to acquire additional insurance for
liability risks. We may not be able to obtain such insurance or general product
liability insurance on acceptable terms or in sufficient amounts. A product
liability claim or recall could have a serious adverse effect on our business,
financial condition and results of operations.
Disclosure
controls are no assurance that the objectives of the control system are
met.
Although
we have an extensive operating history, resources are limited for the
development and maintenance of our control environment. We have a very limited
number of personnel and therefore segregation of duties can be somewhat limited
as to their scope and effectiveness. We believe, however, that we are in
reasonable compliance with the best practices given the environment in which
we
operate. Although existing controls in place are deemed appropriate for the
prevention, detection and minimization of fraud, theft and errors, they may
result in only limited assurances, at best, that the total objectives of the
control system are met. Due to the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, can be detected and/or prevented and as such
this is a risk area for investors to consider.
Risks
Related to Our Common Stock
Our
common stock is traded on the OTCBB, our stock price is highly volatile, and
you
may not be able to sell your shares of our common stock at a price greater
than
or equal to the price you paid for such shares.
Our
shares of common stock are currently traded on the Over the Counter Bulletin
Board, or OTCBB. Stocks traded on the OTCBB generally have limited trading
volume and exhibit a wide spread between bid and ask quotations. The market
price of our common stock is extremely volatile. To demonstrate the volatility
of our stock price, during the first six months of 2007, the volume of our
common stock traded on any given day ranged from 0 to 236,000 shares. Moreover,
during that period, our common stock traded as low as $0.13 per share and as
high as $0.29 per share, a 123% difference. This may impact an investor’s
decision to buy or sell our common stock. As of June 30, 2007 there were
approximately 5,200 holders of our common stock. Factors affecting our stock
price include:
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our
financial results;
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fluctuations
in our operating results;
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announcements
of technological innovations or new commercial health care products
or
therapeutic products by us or our competitors;
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government
regulation;
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developments
in patents or other intellectual property rights;
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developments
in our relationships with customers and potential customers;
and
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general
market conditions.
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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 or issuable in the private placements of equity which closed
on January 6, 2005 and shares underlying convertible debt and warrants October
25, 2006 and maintain adequate disclosure in connection with such registration,
including updating prospectuses and under certain circumstances, filing amended
registration statements. These expenses were approximately $302,000 in 2006,
and
$40,000 for the first six months of 2007 and we may incur significant additional
expenses in the future related to maintaining effective registration statements
for prior financings and any additional registrations related to future
financings. We have also agreed to indemnify such selling security holders
against losses, claims, damages and liabilities arising out of relating to
any
misstatements or omissions in our registration statement and related
prospectuses, including liabilities under the Securities Act. In the event
such
claims is made in the future, such losses, claims, damages and liabilities
arising out of those claims could be significant in relation to our
revenues.
A
large number of additional shares may be sold into the public market in the
near
future, which may cause the market price of our common stock to decline
significantly, even if our business is successful.
Sales
of
a substantial amount of common stock in the public market, or the perception
that these sales may occur, could adversely affect the market price of our
common stock. After our October 25, 2006 debenture and warrant financing, and
assuming the full conversion of the debentures and full exercise of the Series
A, B, C, D and E warrants for the maximum number of shares for which such
warrants are exercisable, we would have approximately 64 million shares of
common stock outstanding (assuming no other issuances of common stock). Upon
full issuance of these shares of common stock upon conversion of the debentures
and exercise of the warrants, the market price of our common stock could drop
significantly if the holders of these shares sell them or are perceived by
the
market as intending to sell them.
A
large number of common shares are issuable upon exercise of outstanding common
share options and warrants and upon conversion of our outstanding debentures.
The exercise or conversion of these securities could result in the substantial
dilution of your investment in terms of your percentage ownership in OXIS as
well as the book value of your common shares. The sale of a large amount of
common shares received upon exercise of these options and warrants on the public
market to finance the exercise price or to pay associated income taxes, or
the
perception that such sales could occur, could substantially depress the
prevailing market prices for our shares.
As
of
December 31, 2006, there were outstanding warrants entitling the holders to
purchase up to a maximum of 9,681,840 common shares at an exercise price of
$0.35 per share. In addition, there are outstanding warrants entitling the
holders to purchase up to a maximum of 4,840,740 common shares at an exercise
price of $0.385 per share. There are also debentures outstanding which are
convertible into a maximum of 4,840,740 common shares at a conversion price
per
common share of $0.35 per common share. Further, we have relied
heavily on option and warrant grants as an alternative to cash as a means of
compensating our officers, advisors and consultants. In 2006, we
issued options and warrants to officers, director and consultants for the
purchase of approximately 4.4 million shares of our common stock, with exercise
prices ranging from $0.18 to $0.39 per share. The exercise price for
all of the aforesaid options and warrants may be less than your cost to acquire
our common shares. In the event of the exercise and/or conversion of these
securities, you could suffer substantial dilution of your investment in terms
of
your percentage ownership in the company as well as the book value of your
common shares. In addition, the holders of the options and warrants may sell
underlying common shares in tandem with their exercise of those warrants to
finance that exercise, or may resell the shares purchased in order to cover
any
income tax liabilities that may arise from their exercise of the options and
warrants.
If
we fail to maintain the adequacy of our internal controls, our ability to
provide accurate financial statements and comply with the requirements of the
Sarbanes-Oxley Act of 2002 could be impaired, which could cause our stock price
to decrease substantially.
We
are
continuing to take measures to address and improve our financial reporting
and
compliance capabilities and we are in the process of instituting changes to
satisfy our obligations in connection with being a public company. We plan
to
obtain additional financial and accounting resources to support and enhance
our
ability to meet the requirements of being a public company. We will need to
continue to improve our financial and managerial controls, reporting systems
and
procedures, and documentation thereof. If our financial and managerial controls,
reporting systems or procedures fail, we may not be able to provide accurate
financial statements on a timely basis or comply with the Sarbanes-Oxley Act
of
2002 as it applies to us. Any failure of our internal controls or our ability
to
provide accurate financial statements could cause the trading price of our
common stock to decrease substantially.
Our
common shares are thinly traded and, if you are a holder of debentures, you
may
be unable to sell at or near ask prices or at all if you need to convert your
debentures into common stock and sell your shares to raise money or otherwise
desire to liquidate such shares.
We
cannot
predict the extent to which an active public market for our common stock will
develop or be sustained. Our common shares have historically been sporadically
or “thinly-traded” on the “Over-The-Counter Bulletin Board,” meaning that the
number of persons interested in purchasing our common shares at or near bid
prices at any given time may be relatively small or non-existent. This situation
is attributable to a number of factors, including the fact that we are a small
company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate
or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price. We cannot give you any assurance
that a broader or more active public trading market for our common stock will
develop or be sustained, or that current trading levels will be
sustained.
The
market price for our common stock is particularly volatile given our status
as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share price. The
price at which you convert your debentures into our common stock many be
indicative of the price that will prevail in the trading market. You may be
unable to sell your common stock at or above your purchase price if at all,
which may result in substantial losses to you.
The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and/or thinly traded. As
a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by its shareholders may disproportionately influence the
price of those shares in either direction. The price for its shares could,
for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact
on
its share price. Secondly, an investment in us is a speculative or “risky”
investment due to our lack of revenues or profits to date and uncertainty of
future market acceptance for current and potential products. As a consequence
of
this enhanced risk, more risk-adverse investors may, under the fear of losing
all or most of their investment in the event of negative news or lack of
progress, be more inclined to sell their shares on the market more quickly
and
at greater discounts than would be the case with the stock of a seasoned
issuer.
Investors
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse.
Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales
and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups
by
selling broker-dealers; and (5) the wholesale dumping of the same securities
by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect
to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
We
do not anticipate paying any cash dividends.
We
presently do not anticipate that we will pay any dividends on any of our capital
stock in the foreseeable future. The payment of dividends, if any, would be
contingent upon our revenues and earnings, if any, capital requirements, and
general financial condition. The payment of any dividends will be within the
discretion of our board of directors. We presently intend to retain all
earnings, if any, to implement our business plan; accordingly, we do not
anticipate the declaration of any dividends in the foreseeable
future.
Item
3. Controls
and Procedures.
Under
the
supervision and with the participation of our management (including our
principal executive and financial officer), audit committee, and our external
accounting and financial consultant, we have evaluated the effectiveness of
the
design and operation of our disclosure controls and procedures as of June 30,
2007, and, based on this evaluation, our management has concluded that these
controls and procedures are effective. 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.
We
terminated Steven T. Guillen from his position as our President and Chief
Executive Officer on September 15, 2006. Mr. Guillen subsequently
filed a lawsuit against us and up to 25 unnamed additional defendants. The
complaint alleged breaches of contract relating to Mr. Guillen’s employment
agreement and a promissory note that was 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. The complaint
related in part to a $200,000 unsecured promissory note with Mr. Guillen dated
on or around March 10, 2006. 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. This lawsuit was withdrawn and settled
in the second quarter of 2007 in accordance with the separation agreement
discussed below.
On
March
8, 2007, we entered into a Confidential Separation Agreement (dated February
12,
2007) with Steve Guillen, under which we agreed to pay Mr. Guillen the sum
of
$250,000 in monthly installments of $10,000 each, subject to standard payroll
deductions and withholdings. We also agreed to pay Mr. Guillen’s
health insurance premiums for the twelve-month separation period in accordance
with the Consolidated Omnibus Budget Reconciliation Act of 1985. In
exchange for these payments and benefits, Mr. Guillen and the Company agreed
to
mutually release all claims, dismiss all complaints as applicable, and neither
party shall pursue any future claims regarding Mr. Guillen’s prior employment
and compensation arrangements with us. A copy of the separation
agreement was included as Exhibit 10.43 to the Company’s annual report on Form
10-KSB/A for the year ended December 31, 2006.
On
or
around April 13, 2007, Applied Genetics Incorporated Dermatics (“AGI”) initiated
a lawsuit against OXIS alleging in part that AGI’s production, use and sale of
L-ergothioneine does not infringe the patents held by OXIS. The
complaint also alleges that certain actions taken by OXIS to protect and enforce
its patents have caused damage to AGI, and asserts claims of unfair competition,
tortious interference with prospective economic advantage and contractual
relations. The complaint also challenges the validity of one of our
patents. Management believes these claims, allegations and assertions
are groundless, and the Company intends to vigorously pursue its legal rights
to
enforce and protect its patent rights.
No
director, officer or affiliate of ours, and no owner of record or beneficial
owner of more than five percent (5%) of the securities of the Company, or any
associate of any such director, officer or security holder is a party adverse
to
us or any of our subsidiaries or has a material interest adverse to us or any
of
our subsidiaries in reference to pending litigation.
Item
2. Unregistered
Sales of Securities and
Use of Proceeds.
None.
Item
3. Defaults
Upon Senior
Securities.
We
have
not made required monthly redemption payments beginning on February 1, 2007
to
purchasers of debentures issued in October 2006. Pursuant to the
provisions of the Secured Convertible Debentures, such failure to pay is an
event of default. Penalty interest accrues on any unpaid redemption
balance at an interest rate equal to the lesser of 18% per annum or the maximum
rate permitted by applicable law until such amount is paid in
full. Upon an event of default, each purchaser has the right to
accelerate the cash repayment of at least 130% of the outstanding principal
amount of the debenture plus accrued but unpaid liquidated damages and
interest. If we fail to make such payment in full, the purchasers
have the right sell substantially all of our assets pursuant to their security
interest to satisfy any such unpaid balance. We are negotiating with
such purchasers for waivers from such events of default and the right to issue
shares in lieu of cash payment of the unpaid redemption payments plus accrued
interest to the purchasers. Each monthly redemption amount under the
debentures is approximately $85,000 and as of August 1, 2007 we are currently
seven months behind. We would have to issue approximately 3,624,000
shares of common stock to satisfy the monthly redemption amount and unpaid
interest of approximately 620,000 in arrears. We cannot give any
assurance that the each of the four purchasers will accept this arrangement
as a
cure for this default.
Item
4. Submission
of Matters to a Vote of Security
Holders.
None.
Item
5. Other
Information.
None.
See
Index to
Exhibits on page 50.
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: August 14,
2007 |
By: |
/s/ Marvin S.
Hausman |
| |
Marvin
S. Hausman |
| |
Chief Executive
Officer |
Exhibit
Index
|
Exhibit
Number
|
|
Exhibit
Title or Description
|
| |
10.1*
|
|
Amended
and Restated Exclusive License Agreement with Alteon, Inc. dated
April 2,
2007.
|
| |
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.
|
| |
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.
|
| |
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.
|
| |
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.
|
*
Certain
portions of this agreement are subject to a request for confidential treatment,
pending with the Securities and Exchange Commission.
50
