SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X
----- Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1998.
----- 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 March 31, 1998, the issuer had outstanding the indicated number of shares of
common stock: 28,775,324
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
March 31
-------------------------
1998 1997
Revenues:
Product sales $ 1,296,000 $ 1,127,000
Royalties and license fees 51,000 35,000
----------- -----------
Total revenues 1,347,000 1,162,000
Costs and expenses:
Cost of sales 1,259,000 772,000
Research and development 931,000 1,106,000
Selling, general and administrative 981,000 604,000
----------- -----------
Total costs and expenses 3,171,000 2,482,000
----------- -----------
Operating loss (1,824,000) (1,320,000)
Interest income 11,000 3,000
Interest expense (27,000) (30,000)
----------- -----------
Net loss $(1,840,000) $(1,347,000)
=========== ===========
Net loss per share - basic $ (.06) $ (.10)
=========== ===========
Weighted average number of
shares used in computation - basic 28,673,888 14,108,668
=========== ===========
1
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 410,000 $ 1,290,000
Accounts receivable 1,051,000 2,011,000
Inventories 1,874,000 1,828,000
Prepaid and other 48,000 79,000
----------- -----------
Total current assets 3,383,000 5,208,000
Property and equipment, net 3,768,000 3,968,000
Technology for developed products
and custom assays, net 2,886,000 3,065,000
Other assets 413,000 334,000
----------- -----------
Total assets $10,450,000 $12,575,000
=========== ===========
2
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,403,000 $1,423,000
Accounts payable 1,285,000 1,553,000
Accrued payroll, payroll taxes and other 1,121,000 1,181,000
Current portion of long-term debt 91,000 93,000
----------- ----------
Total current liabilities 3,900,000 4,250,000
Long-term debt due after one year 1,694,000 1,570,000
Shareholders' equity:
Preferred stock - $.01 par value;
15,000,000 shares authorized:
Series B - 642,583 shares issued and
outstanding at March 1998 (liquidation
preference of $1,500,000) 6,000 6,000
Series C - 1,021,697 shares issued and
outstanding at March 31, 1998 11,000 11,000
Series D - 700 shares issued and
outstanding at March 31, 1998 -- --
Common stock - $.50 par value; 50,000,000
shares authorized; 28,775,324 shares issued
and outstanding at March 31, 1998 14,388,000 14,298,000
Additional paid in capital 30,778,000 30,868,000
Accumulated deficit (40,014,000) (38,174,000)
Accumulated translation adjustments (313,000) (254,000)
----------- -----------
Total shareholders' equity 4,856,000 6,755,000
----------- -----------
Total liabilities and shareholders' equity $10,450,000 $12,575,000
=========== ===========
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
-------------------------
1998 1997
Cash flows from operating activities:
Net loss $(1,840,000) $(1,347,000)
Adjustments to reconcile net loss to cash
used for operating activities:
Depreciation and amortization 362,000 452,000
Changes in assets and liabilities:
Accounts receivable 784,000 (152,000)
Inventories (47,000) 46,000
Prepaid and other current assets 31,000 110,000
Accounts payable (262,000) 686,000
Customer deposits -- 26,000
Accrued payroll, payroll taxes and other 136,000 95,000
----------- -----------
Net cash used for operating activities (836,000) (84,000)
Cash flows from investing activities:
Purchases of equipment (10,000) (2,000)
Additions to other assets (58,000) (5,000)
Other, net (13,000) (121,000)
----------- -----------
Net cash used for investing activities (81,000) (128,000)
Cash flows from financing activities:
Proceeds from issuance of notes 546,000 213,000
Stock issuance costs (28,000) (99,000)
Repayment of short-term borrowings (424,000) (12,000)
Repayment of long-term debt and capital lease obligations (20,000) (40,000)
----------- -----------
Net cash provided by financing activities 74,000 62,000
Effect of exchange rate changes on cash (37,000) --
----------- -----------
Net decrease in cash and cash equivalents (880,000) (150,000)
Cash and cash equivalents - beginning of period 1,290,000 422,000
----------- -----------
Cash and cash equivalents - end of period $ 410,000 $ 272,000
=========== ===========
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, 1997. 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.
2. SUBSEQUENT EVENTS - ADDITIONAL FINANCING
Between April 28 and May 8, 1998, the Company completed the first closing of
a private placement of its common stock together with warrants to a series
of institutional investors. The units, consisting of one share of common
stock plus a warrant to purchase one share of common stock, were priced at
the NASDAQ closing price the day prior to the signing of the subscription
agreements. The prices ranged from $.875 to $1.125. In the first closing
6,936,142 common shares and warrants to purchase an equal number of common
shares were issued in exchange for gross proceeds of $5,716,000 in cash and
conversion of $543,000 of short-term notes and accrued interest payable. The
excercise price of each warrant is equal to 125% of the price paid per unit.
The second closing, for which commitments have been received and funds
relating thereto have been placed in escrow is expected to yield gross
proceeds of $2,465,000 in cash and conversion of $234,000 of short-term
notes and accrued interest payable. The release to the Company of the
proceeds from the second closing is subject to approval by the shareholders
of an increase in the number of authorized common shares. This proposal will
be considered by the Shareholders at the Company's annual meeting scheduled
to be held in July 1998.
5
3. 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 March 31, 1998 and December 31, 1997, consisted of
the following:
March 31, December 31,
1998 1997
Raw materials $1,253,000 $1,319,000
Work in process 334,000 344,000
Finished goods 287,000 165,000
---------- ----------
Total $1,874,000 $1,828,000
========== ==========
4. SHAREHOLDERS' EQUITY
During the first quarter of 1998, 50 shares of Series D Preferred Stock were
converted into 179,004 shares of common stock.
The number of common shares which the holder of the Series D Preferred Stock
can acquire by converting its Series D shares is limited, and the holder has
converted all of the Series D shares which can be converted pursuant to the
terms of the Series D Preferred Stock Certificate of Designations. The
Company has received correspondence from a representative of the holder of
the Series D Preferred Stock claiming that the holder is entitled to certain
interest and other payments and other rights with respect to the remaining
Series D Preferred Stock which is not convertible into common stock. The
Company has advised the holder of the Series D Preferred Stock that it does
not agree with the holder's position with respect to the Series D Preferred
Stock. The Company and the holder of the Series D Preferred Stock are
currently in the process of negotiating a settlement of the dispute
concerning the outstanding shares of Series D Preferred Stock.
5. COMPREHENSIVE LOSS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". The Company's
consolidated comprehensive loss was $1,899,000 and $1,468,000 for the three
months ended March 31, 1998 and 1997, respectively. The differences between
the net loss reported in the consolidated statement of operations and
consolidated comprehensive net loss for the two periods consisted of changes
in foreign currency translation adjustments.
6
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 decreased during the first quarter of 1998 by
$1,475,000, from $958,000 at December 31, 1997 to a deficit of $517,000 at
March 31, 1998. The reduction in working capital resulted primarily from the
effect of the net loss for the quarter ($1,840,000 less non-cash charges of
$362,000).
Cash and cash equivalents decreased from $1,290,000 at December 31, 1997 to
$410,000 at March 31, 1998.
The Company expects to continue to report losses in 1998 as the level of
expenses is expected to continue to exceed revenues. The Company can give no
assurances as to when and if its revenues will exceed its expenses. 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.
Between April 28 and May 8, 1998, the Company completed the first closing of a
private placement of its common stock together with warrants to a series of
institutional investors. The units, consisting of one share of common stock
plus a warrant to purchase one share of common stock, were priced at the
NASDAQ closing price the day prior to the signing of the subscription
agreements. The prices ranged from $.875 to $1.125. In the first closing
6,936,142 common shares and warrants to purchase an equal number of common
shares were issued in exchange for gross proceeds of $5,716,000 in cash and
conversion of $543,000 of short-term notes and accrued interest payable. The
excercise price of each warrant is equal to 125% of the price paid per unit.
The second closing, for which commitments have been received and funds
relating thereto have been placed in escrow is expected to yield gross
proceeds of $2,465,000 in cash and conversion of $234,000 of short-term notes
and accrued interest payable. The release to the Company of the proceeds from
the second closing is subject to approval by the shareholders of an increase
in the number of authorized common shares. This proposal will be considered by
the shareholders at the Company's annual meeting scheduled to be held in July
1998.
7
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1998
COMPARED WITH THREE MONTHS ENDED MARCH 31, 1997
REVENUES
The Company's revenues for the quarters ended March 31, 1998 and 1997 were as
follows:
1998 1997
Instrument sales and development $ 810,000 $ --
Diagnostic and research assays 416,000 548,000
Bovine superoxide dismutase (bSOD)
for research and human use -- 412,000
Palosein/(R)/ (bSOD for veterinary use) 44,000 154,000
Other 26,000 13,000
Royalties and license fees 51,000 35,000
---------- ----------
$1,347,000 $1,162,000
========== ==========
Instrument sales and development revenues are generated by Innovative Medical
Systems Corp. ("IMS"), acquired by the Company on December 31, 1997. Because
the acquisition of IMS was recorded as a purchase, the revenues and expenses
of IMS are not included in the Company's consolidated results of operations
prior to 1998.
Sales of the Company's diagnostic and research assays decreased from $548,000
in the first quarter of 1997 to $416,000 in the first quarter of 1998. This
decrease of $132,000 was primarily due to unusually large sales to
distributors in the fourth quarter of 1997 resulting in below normal sales
volumes in the first quarter of 1998.
Sales of bulk bSOD have been almost entirely to the Company's Spanish
licensee, and no shipments were made to this customer in the first quarter of
1998. Future sales of bulk bSOD continue to be largely dependent on the needs
of the Company's Spanish licensee. The Company expects its orders for 1998
from the Spanish licensee to be less than those for 1997. The Company's sales
of bulk bSOD beyond 1998 are uncertain and difficult to predict and no
assurances can be given with respect thereto.
Palosein/(R)/ sales in the first quarter of 1997 included a substantial sale
to a distributor in Germany. The Company expects to have a similar order
later in 1998, but has not yet received such an order.
8
COSTS AND EXPENSES
Including amortization of purchase adjustments, cost of sales was 69% of
product sales for the first quarter 1997 and increased to 97% of product sales
for the first quarter of 1998. This increase in the cost of sales as a
percentage of sales is due primarily to the effect of the fixed manufacturing
costs being spread over manufacturing and sales volume for the first quarter
of 1998 that the Company believes is unusually low. Management expects
manufacturing and sales volumes to increase in the second quarter of 1998,
resulting in a reduction of cost of sales as a percentage of sales; provided,
however, that no assurances can be given that such an increase will take
place. Cost of sales as a percentage of sales was also higher in the first
quarter of 1998 as compared to the first quarter of 1997 due to the reductions
in sales of bSOD and Palosein/(R)/, which contributed approximately $150,000
more in profit margins in the first quarter of 1997 than in 1998.
Cost of sales in the first quarter of 1997 includes approximately $180,000 in
amortization of purchase adjustments relating to 1994 business acquisitions.
Costs of sales in the first quarter of 1998 includes approximately $210,000 in
amortization of purchase adjustments relating to 1994 and 1997 business
acquisitions. Excluding such amortization the cost of product sales for the
first quarter of 1997 was approximately 53% of sales and the cost of sales for
the first quarter of 1998 was approximately 81% of product sales.
Research and development expenses decreased from $1,106,000 in the first
quarter of 1997 to $931,000 in the first quarter of 1998. The decrease in
research and development expenses resulted from cost reductions in the first
quarter of 1998 compared to the first quarter of 1997 of (1) $190,000 for
outside development contracts primarily relating to the development of the
Company's lead molecule, BXT-51072, which is currently in Phase II clinical
trials for ulcerative colitis and (2) $170,000 in research and development
costs of the Company's French subsidiary. During the first quarter of 1998 the
Company's lead molecule was in the early part of a Phase II clinical trial
which did not require as much outside contract support as earlier parts of the
clinical trials. Costs relating to the Phase II trials are expected to
increase during the remainder of 1998 with an increase in patient enrollment
and increasing data analysis needs. These cost reductions were partially
offset by an increase of $185,000 in research and development costs in the
United States other than the costs of clinical trials. This increase consisted
primarily of severance costs relating to a staff reduction during the first
quarter of 1998.
9
Selling, general and administrative expenses increased from $604,000 in the
first quarter of 1997 to $981,000 in the first quarter of 1998. The increase
is primarily the result of $250,000 of selling, general and administrative
expenses of IMS in the first quarter of 1998. Fees aggregating $51,000 in the
first quarter of 1998 for the ongoing listing of the Company's common stock on
Le Nouveau Marche and increased shares listed on NASDAQ National Market also
contributed to the increase in 1998.
NET LOSS
The Company continued to experience losses in the first quarter of 1998. The
first quarter 1998 loss of $1,840,000 ($.06 per share-basic) was $493,000
more than the $1,347,000 ($.10 per share-basic ) loss for the first quarter of
1997. The increase in the net loss is primarily due to the decline in gross
margin from product sales and increased selling, general and administrative
costs. The net loss per share-basic decreased because of the increase in the
number of common shares outstanding.
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 1998.
-------------------------
Certain of the matters discussed in this Report such as management's future
sales expectations, 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.
10
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company has been notified by the Nasdaq Stock Market, Inc. ("Nasdaq")
that, because the bid price of its common stock has been less than USD $1.00,
its common stock is currently not in compliance with the Nasdaq Marketplace
Rule 4450 (a)(5) relating to the Nasdaq minimum bid price requirements. The
Company has been informed by Nasdaq that it is being provided 90 calendar
days, which expires May 28, 1998, in order to regain compliance with this
standard. The Company may regain compliance if the bid price for its common
stock closes at or above the minimum requirement for at least ten (10)
consecutive trade days. If the security does not regain compliance within the
90 days, Nasdaq will issue a delisting letter which will identify the review
procedures available to the Company. The Company may request a review at or
before that time, which, Nasdaq has stated, will stay delisting until a
hearing occurs. As of the date of this filing the Company has not regained
compliance, and no assurance can be given that such compliance will be
regained.
If the Common Stock of the Company ceases to be listed on the Nasdaq
National Market such failure to be listed could have a material adverse effect
on the transferability of the Company's Common Stock, and may have a material
adverse effect on the value of the Common Stock as well.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - See Exhibit Index on page 12.
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.
May 15, 1998 By /s/ Ray R. Rogers
------------------------------------
Ray R. Rogers
Chairman and Chief Executive Officer
May 15, 1998 By /s/ Jon S. Pitcher
------------------------------------
Jon S. Pitcher
Chief Financial Officer
11
EXHIBIT INDEX
Exhibit Page
Number Description of Document Number
10(a) Consulting Agreement and Release of Claims 13
27(a) Financial data schedule 20
12