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
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