SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q X Quarterly report pursuant toSection 13 or 15(d) of the Securities ----- Exchange Act of 1934 for the quarterly period ended September 30, 1997. Transition report pursuant to Section 13 or 15(d) of the Securities ----- Exchange Act of 1934 for the transition period from ___ to _______. Commission File Number O-8092 OXIS INTERNATIONAL, INC. A Delaware corporation I.R.S. Employer Identification No. 94-1620407 6040 N. Cutter Circle, Suite 317 Portland, OR 97217 Telephone: (503) 283-3911 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------- ------- At September 30, 1997, the issuer had outstanding the indicated number of shares of common stock: 26,573,175 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended September 30 September 30 -------------------------- --------------------------- 1997 1996 1997 1996 ------------ ------------ ----------- ------------ Revenues: Product sales $ 1,293,000 $ 1,396,000 $ 3,137,000 $ 3,933,000 Royalties and license fees 150,000 6,000 209,000 64,000 ----------- ----------- ----------- ----------- Total revenues 1,443,000 1,402,000 3,346,000 3,997,000 Costs and expenses: Cost of sales 904,000 967,000 2,148,000 2,544,000 Research and development 1,210,000 1,258,000 3,199,000 3,619,000 Selling, general and administrative 717,000 621,000 2,049,000 2,247,000 ----------- ----------- ----------- ----------- Total costs and expenses 2,831,000 2,846,000 7,396,000 8,410,000 ----------- ----------- ----------- ----------- Operating loss (1,388,000) (1,444,000) (4,050,000) (4,413,000) Interest income 30,000 12,000 53,000 33,000 Interest expense (40,000) (7,000) (112,000) (124,000) ----------- ----------- ----------- ----------- Net loss $(1,398,000) $(1,439,000) $(4,109,000) $(4,504,000) =========== =========== =========== =========== Net loss per share $(.05) $(.11) $(.20) $(.36) =========== =========== =========== =========== Weighted average number of shares used in computation 26,306,840 13,301,037 20,144,549 12,546,092 =========== =========== =========== ===========
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CONSOLIDATED BALANCE SHEETS September 30, December 31, 1997 1996 (Unaudited) ASSETS Current assets: Cash and cash equivalents $2,752,000 $ 422,000 Accounts receivable 882,000 861,000 Inventories 733,000 591,000 Prepaid and other 373,000 191,000 ---------- ---------- Total current assets 4,740,000 2,065,000 Property and equipment, net 1,214,000 1,327,000 Assets under capital leases, net -- 309,000 Technology for developed products and custom assays, net 3,244,000 3,782,000 Other assets 255,000 514,000 ---------- ---------- Total assets $9,453,000 $7,997,000 ========== ==========
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CONSOLIDATED BALANCE SHEETS September 30, December 31, 1997 1996 (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 1,148,000 $ 1,221,000 Accounts payable 1,348,000 1,386,000 Customer deposits 116,000 132,000 Accrued liabilities 579,000 655,000 Current portion of long-term obligations 9,000 76,000 ------------ ------------ Total current liabilities 3,200,000 3,470,000 Other liabilities -- 2,000 Shareholders' equity: Preferred stock - $.01 par value; 15,000,000 shares authorized: Series B - 642,583 shares issued and outstanding (liquidation preference of $1,500,000) 6,000 6,000 Series C - 1,021,697 shares issued and outstanding at September 30, 1997 10,000 17,000 Series D - 1,150 shares issued and outstanding at September 30, 1997 -- -- Series E - no shares outstanding at September 30, 1997 -- -- Common stock - $.50 par value; 50,000,000 shares authorized; 26,573,175 shares issued and outstanding at September 30, 1997 13,287,000 6,895,000 Additional paid in capital 30,321,000 30,706,000 Accumulated deficit (37,132,000) (33,023,000) Accumulated translation adjustments (239,000) (76,000) ------------ ------------ Total shareholders' equity 6,253,000 4,525,000 ------------ ------------ Total liabilities and shareholders' equity $ 9,453,000 $ 7,997,000 ============ ============
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, -------------------------- 1997 1996 Cash flows from operating activities: Net loss $(4,109,000) $(4,504,000) Adjustments to reconcile net loss to cash provided by (used for) operating activities: Depreciation and amortization 949,000 1,013,000 Changes in assets and liabilities: Accounts receivable (39,000) (216,000) Inventories (148,000) 348,000 Other current assets (183,000) 56,000 Accounts payable 9,000 430,000 Customer deposits (16,000) 6,000 Accrued liabilities (41,000) (141,000) ----------- ----------- Net cash used for operating activities (3,578,000) (3,008,000) Cash flows from investing activities: Purchases of equipment (85,000) (54,000) Other, net (14,000) 55,000 ----------- ----------- Net cash provided by (used for) investing activities (99,000) 1,000 Cash flows from financing activities: Proceeds from issuance of short-term notes 872,000 65,000 Proceeds from issuance of stock, net of related cost 6,215,000 3,181,000 Repayment of short-term borrowings (946,000) (627,000) Repayment of long-term debt and capital lease obligations (63,000) (199,000) ----------- ----------- Net cash provided by financing activities 6,078,000 2,420,000 Effect of exchange rate changes on cash (71,000) -- ----------- ----------- Net increase (decrease) in cash and cash equivalents 2,330,000 (587,000) Cash and cash equivalents - beginning of period 422,000 727,000 ----------- ----------- Cash and cash equivalents - end of period $ 2,752,000 $ 140,000 =========== ===========
4 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. FINANCIAL STATEMENTS AND CONDENSED NOTES The unaudited consolidated financial statements, which have been prepared in accordance with the instructions to Form 10-Q, do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. All adjustments considered necessary by management for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. An annual report (Form 10-K) has been filed with the Securities and Exchange Commission ("Commission") for the year ended December 31, 1996. That report contains, among other information, a description of the Company's business, audited financial statements, notes to the financial statements, the report of the independent auditors and management's discussion and analysis of results of operations and financial condition. Readers of this report are presumed to be familiar with that annual report. NEW ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT ADOPTED In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This Statement is effective for fiscal years beginning after December 15, 1997. In June 1997, FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement is effective for fiscal years beginning after December 15, 1997. The Company has not completed its analysis of which segments it will report on. 5 2. INVENTORIES Inventories are stated at the lower of cost or market. Cost has been determined by using the first-in, first-out and specific identification methods. Inventories at September 30, 1997 and December 31, 1996, consisted of the following:
September 30, December 31, 1997 1996 Raw materials $161,000 $148,000 Work in process 440,000 200,000 Finished goods 132,000 243,000 -------- -------- Total $733,000 $591,000 ======== ========
3. NOTES PAYABLE During March and April 1997 the Company borrowed $808,000 from certain shareholders pursuant to issuance of short-term unsecured promissory notes with a 3% origination fee and bearing interest at an annual rate of 8%. All of the notes were due in May 1997. The majority of the noteholders are indebted to the Company under the terms of a separate indemnification agreement. Payment of certain of these notes has been deferred pending the outcome of ongoing discussions with representatives of the noteholders. 4. SHAREHOLDERS' EQUITY On May 20, 1997, the Company issued 9,000,000 shares of its common stock pursuant to an underwriting agreement with certain underwriters in France. The underwriters purchased the stock at a price of 4.60 French francs per share (an aggregate of $7,328,000). The newly-issued shares have been listed on the French stock market, Le Nouveau Marche, and on the NASDAQ National Market System. During the first nine months of 1997, 625,460 shares of Series C Preferred Stock, 500 shares of Series D Preferred Stock and 2,200 shares of Series E Preferred Stock were converted into an aggregate of 3,712,384 shares of common stock. 6 5. STOCK OPTIONS The Company has a stock incentive plan under which 4,200,000 shares of the Company's common stock are reserved for issuance. The plan permits granting stock options to acquire shares of the Company's common stock, awarding stock bonuses of the Company's common stock, and granting stock appreciation rights. During the nine months ended September 30, 1997, options to purchase 734,800 shares at an exercise price of $.53125 have been issued under the plan. 6. PENDING ACQUISITION In July 1997 the Company entered into a letter of intent to acquire 100% of the capital stock of Innovative Medical Systems Corporation ("IMS"). IMS, located near Philadelphia, Pennsylvania, is a privately-held company which specializes in the development, engineering and manufacture of instruments for the biomedical industry. The acquisition is subject to negotiating and entering into a definitive purchase agreement, the approval of the boards of directors of OXIS and IMS, and the satisfactory completion of OXIS' due diligence investigation. 7. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share." SFAS 128 changes the standards for computing and presenting earnings per share ("EPS") and supersedes APB Opinion No. 15, "Earnings per Share." SFAS 128 simplifies the standards for computing earnings per share and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS 128 is effective for financial statements issued for periods ended after December 15, 1997, including interim periods; earlier application is not permitted. This Statement requires restatement of all prior-period EPS data presented. Earnings per share reported for the nine-month periods ended September 30, 1996 and 1997 are not affected as a result of adopting SFAS 128 due to the Company's losses. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company's working capital increased during the first nine months of 1997 from a deficit of $1,405,000 at December 31, 1996 to positive working capital of $1,540,000 at September 30, 1997. This increase in the Company's working capital resulted primarily from the issuance of common stock (net proceeds of $6,215,000), offset by the effect of the net loss for the first nine months of 1997 ($4,109,000 less non-cash charges of $949,000). Cash and cash equivalents increased from $422,000 at December 31, 1996 to $2,752,000 at September 30, 1997. The Company expects to continue to report losses in 1997 as the level of expenses is expected to continue to exceed revenues. To continue operations in accordance with its current plans, the Company must raise additional capital before the end of the first quarter of 1998. Although the Company has continued to raise additional funds through private placements and a public offering (described below), it cannot predict the sources, terms, amount, form, and/or availability of additional capital to fund its operations to the end of the current year. Failure to raise such additional capital would cause the Company to severely curtail or cease operations. The Company can give no assurances as to when and if its revenues will exceed its expenses. While the Company believes that its new products and technologies show considerable promise, its ability to realize significant revenues therefrom is dependent upon the Company's success in developing business alliances with biotechnology and/or pharmaceutical companies that have the required resources to develop and market certain of these products. There is no assurance that the Company's effort to develop such business alliances will be successful. During March and April 1997, the Company raised $808,000 through the issuance of short-term notes to certain of its shareholders. On May 20, 1997, the Company issued 9,000,000 shares of its common stock pursuant to an underwriting agreement with certain underwriters in France. The underwriters purchased the stock at a price of 4.60 French francs per share (an aggregate of $7,328,000). The newly-issued shares have been listed on the French stock market, Le Nouveau Marche, and on the NASDAQ National Market System. 8 RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1996 REVENUES The Company's product sales for the quarters ended September 30, 1997 and 1996 were as follows:
1997 1996 Diagnostic and research assays $ 557,000 $ 552,000 Bovine superoxide dismutase (bSOD) for research and human use 582,000 688,000 Palosein(R) (bSOD for veterinary use) 84,000 156,000 Other 70,000 -- ---------- ---------- $1,293,000 $1,396,000 ========== ==========
Sales of bulk bSOD for research and human use decreased by $106,000 in the third quarter of 1997 as compared to the third quarter of 1996. The quantity of bSOD sold in the third quarter of 1997 was slightly higher than in the third quarter of 1996. However, the price in 1997 was five percent lower and the Dutch guilder (the currency in which the Company makes its bulk bSOD sales) declined in value compared to the U.S. dollar by approximately 15%, resulting in a net decrease in bSOD sales in the third quarter of 1997 as compared to the third quarter of 1996. The Company's sales of bulk bSOD in 1996 and 1997 have been almost entirely to the Company's Spanish licensee. Future sales of bulk bSOD continue to be largely dependent on the needs of the Company's Spanish licensee. The Company expects its sales for 1997 to the Spanish licensee to be less than those for 1996. The Company's sales of bulk bSOD beyond 1997 are uncertain and difficult to predict and no assurances can be given with respect thereto. Palosein(R) sales, which are primarily to distributors, declined due to a temporary stock shortage at the end of the quarter, and to a lesser extent to the timing of distributors' orders. The Company realized license fee revenue of $150,000 in the third quarter of 1997 from an agreement to license its patented polyethylene glycol technology to Enzon, Inc. on a non-exclusive basis. 9 COSTS AND EXPENSES Cost of sales was 69% of product sales for the third quarter of 1996 and 70% for the third quarter of 1997. Cost of sales in both the third quarter of 1996 and the third quarter of 1997 include approximately $180,000 in amortization of purchase adjustments relating to 1994 business acquisitions. Excluding such amortization the cost of sales for the third quarter of both 1996 and 1997 was approximately 56% of sales. Research and development expenses decreased from $1,258,000 in the third quarter of 1996 to $1,210,000 in the third quarter of 1997. The decrease in research and development expenses resulted from cost reductions in the third quarter of 1997 compared to the third quarter of 1996 of $220,000 in research and development costs of the Company's French subsidiary. This decrease in expenses was partially offset by increases of $90,000 in other research and development costs in the U.S. and $82,000 in expenses for outside development contracts primarily related to preclinical development work and the initiation of clinical trials on the lead molecule from the Company's glutathione peroxidase mimics program. Selling, general and administrative expenses increased from $621,000 in the third quarter of 1996 to $717,000 in the third quarter of 1997. The increase is primarily due to two factors: (1) an increase in U.S. personnel costs of $57,000; and (2) salary, benefits and travel expenses of $48,000 for a sales manager in Europe hired in the fourth quarter of 1996. INTEREST INCOME AND EXPENSE Interest income increased by $18,000 in the third quarter of 1997 as compared with the third quarter of 1996, primarily due to an increase in funds available for short-term investments following the sale of common stock in May 1997. Interest expense increased by $33,000 in the third quarter of 1997 as compared with the third quarter of 1996, due to an increase in short-term notes outstanding. NET LOSS The Company continued to experience losses in the third quarter of 1997. The third quarter 1997 loss of $1,398,000 ($.05 per share) was $142,000 less than the $1,439,000 ($.11 per share) loss for the third quarter of 1996. The reduction in the net loss is primarily due to the decreased research and development expenses and increase in royalties and license fees, offset by a decline in gross margin from product sales and an increase in selling, general and administrative expenses. The decrease in net loss per share is primarily due to the increase in the weighted average number of shares outstanding. 10 The Company plans to continue to invest in research and development activities and incur marketing, sales and administrative expenses in amounts greater than its anticipated near-term product margins, and, as a result, expects to incur a substantial net loss for 1997. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1996 REVENUES The Company's product sales for the nine-month periods ended September 30, 1997 and 1996 were as follows:
1997 1996 Diagnostic and research assays $1,735,000 $1,714,000 Bovine superoxide dismutase (bSOD) for research and human use 997,000 1,922,000 Palosein(R) (bSOD for veterinary use) 314,000 297,000 Other 91,000 -- ---------- ---------- $3,137,000 $3,933,000 ========== ==========
Sales of bSOD in 1996 and 1997 have been almost entirely to the Company's Spanish licensee. The reduction in bSOD sales for the first nine months of 1997 compared to 1996 is primarily the result of a reduction in volume of product delivered to the Spanish licensee. A shipment of bSOD is scheduled during the fourth quarter of 1997 which is expected to result in total bSOD sales for 1997 to be approximately 80% of 1996 bSOD sales. COSTS AND EXPENSES Cost of sales as a percent of product sales increased from 65% in the first nine months of 1996 to 68% in the first nine months of 1997. Cost of sales in both the first nine months of 1996 and 1997 include amortization of purchase adjustments relating to 1994 business acquisitions. Excluding such amortization, cost of sales would have been approximately 51% of product sales for the first half of both 1996 and 1997. 11 Research and development expenses decreased by $420,000 from $3,619,000 for the first nine months of 1996 to $3,199,000 for the first nine months of 1997. The decrease in research and development expenses resulted from cost reductions in the first nine months of 1997 compared to the first nine months of 1996 of $395,000 in costs of the Company's French subsidiary, and $152,000 in internal research and development costs in the U.S. Outside development contract costs, primarily relating to the glutathione peroxidase mimics development program, increased by $127,000. Selling, general and administrative expenses decreased from $2,247,000 for the first nine months of 1996 to $2,049,000 for the first nine months of 1997, a decrease of $198,000. The decrease was primarily due to a reduction of $275,000 in general and administrative expenses of the Company's French subsidiary, which was partially offset by salary, benefits and travel expenses of $139,000 for a sales manager in Europe hired in the fourth quarter of 1996. INTEREST INCOME Interest income increased by $20,000 in the first nine months of 1997 as compared to the first nine months of 1996, due to an increase in funds available for investments following the sale of common stock in May 1997. NET LOSS The Company's loss for the first nine months of 1997 was $4,109,000 ($.20 per share) compared to a loss of $4,504,000 ($.36 per share) for the first nine months of 1996. The decrease in the net loss is primarily due to reductions in research and development expenses ($420,000) and selling general and administrative expenses ($198,000) and an increase in royalties and license fees ($145,000), offset by reduced profit margins on product sales ($400,000). The decrease in net loss per share is primarily due to the increase in the weighted average number of shares outstanding. -------------------------- Certain of the matters discussed in this report are forward-looking statements that involve risks and uncertainties, including the timely development and market acceptance of new products, the impact of competitive products and pricing, economic conditions, and other risks. These factors could cause actual results to differ materially from those described in any forward-looking statements. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits - See Exhibit Index on page 14. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OXIS International, Inc. November 10, 1997 By s/Anna D. Barker ------------------ Anna D. Barker, Ph.D. President and Chief Executive Officer November 10, 1997 By s/Jon S. Pitcher ------------------ Jon S. Pitcher Chief Financial Officer 13 EXHIBIT INDEX Exhibit Page Number Description of Document Number 10(a) Non-Exclusive License Agreement between OXIS International, Inc. and Enzon, Inc. dated July 29, 1997 27(a) Financial Data Schedule 14