SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
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Exchange Act of 1934 for the quarterly period ended March 31, 1999.
______ 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
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At March 31, 1999, the issuer had outstanding the indicated number of shares of
common stock: 7,871,196
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
March 31
------------------------
1999 1998
Revenues:
Product sales $ 1,406,000 $ 1,296,000
Royalties and license fees 50,000 51,000
----------- -----------
Total revenues 1,456,000 1,347,000
Costs and expenses:
Cost of sales 1,007,000 1,259,000
Research and development 770,000 931,000
Selling, general and administrative 858,000 981,000
----------- -----------
Total costs and expenses 2,635,000 3,171,000
----------- -----------
Operating loss (1,179,000) (1,824,000)
Interest income 18,000 11,000
Interest expense (30,000) (27,000)
----------- -----------
Net loss (1,191,000) (1,840,000)
Other comprehensive income (loss) -
Foreign currency translation adjustments 12,000 (59,000)
----------- -----------
Comprehensive loss $(1,179,000) $(1,899,000)
=========== ===========
Net loss per share - basic and diluted $ (.15) $ (.32)
=========== ===========
Weighted average number of
shares used in computation - basic and
diluted 7,845,926 5,734,778
=========== ===========
1
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $1,483,000 $ 2,575,000
Accounts receivable 1,117,000 992,000
Inventories 1,565,000 1,576,000
Prepaid and other 490,000 258,000
---------- -----------
Total current assets 4,655,000 5,401,000
Property and equipment, net 858,000 2,817,000
Technology for developed products
and custom assays, net 2,382,000 2,570,000
Other assets 324,000 380,000
---------- -----------
Total assets $8,219,000 $11,168,000
========== ===========
2
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 724,000 $ 724,000
Accounts payable 563,000 716,000
Accrued payroll, payroll taxes and other 705,000 820,000
Current portion of long-term debt 48,000 111,000
------------ ------------
Total current liabilities 2,040,000 2,371,000
Long-term debt due after one year 174,000 1,613,000
Shareholders' equity:
Preferred stock - $.01 par value; 15,000,000 shares
authorized:
Series B - 428,389 shares issued and outstanding
at March 1999 (liquidation
preference of $1,000,000) 4,000 4,000
Series C - 807,878 shares issued and outstanding
at March 31, 1999 8,000 8,000
Common stock - $.001 par value; 95,000,000 shares
authorized; 7,871,196 shares issued and outstanding
at March 31, 1999 8,000 8,000
Additional paid in capital 52,754,000 52,754,000
Accumulated deficit (46,494,000) (45,303,000)
Accumulated translation adjustments (275,000) (287,000)
------------ ------------
Total shareholders' equity 6,005,000 7,184,000
------------ ------------
Total liabilities and shareholders' equity $ 8,219,000 $ 11,168,000
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3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
----------------------------
1999 1998
Cash flows from operating activities:
Net loss $(1,191,000) $(1,840,000)
Adjustments to reconcile net loss to cash
used for operating activities:
Depreciation and amortization 289,000 362,000
Gain on sale of land and building (16,000) --
Changes in assets and liabilities:
Accounts receivable (130,000) 784,000
Inventories -- (47,000)
Prepaid and other current assets (233,000) 31,000
Accounts payable (145,000) (262,000)
Accrued payroll, payroll taxes and other (96,000) 136,000
----------- -----------
Net cash used for operating activities (1,522,000) (836,000)
Cash flows from investing activities:
Proceeds from sale of land and building 1,959,000 --
Purchases of equipment (25,000) (10,000)
Additions to other assets (24,000) (58,000)
Other, net (1,000) (13,000)
----------- -----------
Net cash provided by (used for) investing activities 1,909,000 (81,000)
Cash flows from financing activities:
Proceeds from issuance of notes -- 546,000
Stock issuance costs -- (28,000)
Repayment of short-term borrowings -- (424,000)
Repayment of long-term debt (1,502,000) (20,000)
----------- -----------
Net cash provided by (used for) financing activities (1,502,000) 74,000
Effect of exchange rate changes on cash 23,000 (37,000)
----------- -----------
Net decrease in cash and cash equivalents (1,092,000) (880,000)
Cash and cash equivalents - beginning of period 2,575,000 1,290,000
----------- -----------
Cash and cash equivalents - end of period $ 1,483,000 $ 410,000
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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/A) has been filed with the Securities and
Exchange Commission ("Commission") for the year ended December 31, 1998.
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. INVENTORIES
Inventories are stated at the lower of cost or market. Cost has been
determined by using the first-in, first-out method. Inventories at March
31, 1999 and December 31, 1998, consisted of the following:
March 31, December 31,
1999 1998
Raw materials $ 867,000 $ 817,000
Work in process 325,000 406,000
Finished goods 373,000 353,000
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Total $1,565,000 $1,576,000
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3. OPERATING SEGMENTS
The following table presents information about the Company's two operating
segments:
5
Health Therapeutic
Products Development Total
-------- ----------- -----
Quarter ended March 31, 1999:
Revenues from external
customers $1,428,000 $ 28,000 $ 1,456,000
Intersegment revenues -- 24,000 24,000
Segment loss (409,000) (782,000) (1,191,000)
As of March 31, 1999 -
Segment assets 5,885,000 2,334,000 8,219,000
Quarter ended March 31, 1998:
Revenues from external
customers $1,347,000 $ -- $ 1,347,000
Intersegment revenues -- 29,000 29,000
Segment loss (962,000) (878,000) (1,840,000)
As of March 31, 1998 -
Segment assets 8,211,000 2,239,000 10,450,000
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 1999 by
$415,000, from $3,030,000 at December 31, 1998 to $2,615,000 at March 31,
1999. The reduction in working capital resulted primarily from the effect
of the net loss for the quarter ($1,191,000 less non-cash charges of
$289,000), offset by a $543,000 net increase in working capital from the
sale of land and buildings and payment of related debt.
Cash and cash equivalents decreased from $2,575,000 at December 31, 1998 to
$1,483,000 at March 31, 1999.
While the Company believes that its new therapeutic 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.
The Company expects to continue to report losses in 1999 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. New
revenue sources or additional capital will be required during 1999 for the
Company to continue operating in accordance with its current plans. Failure
to either generate new revenue sources or to raise additional capital would
cause the Company to severely curtail or cease operations.
INFORMATION SYSTEMS AND THE YEAR 2000
As is the case with most other companies using computers in their
operations, the Company is in the process of addressing the Year 2000
problem. The Company has reviewed most of its computer hardware and
software to determine whether they will consistently and properly recognize
the Year 2000. Certain of the Company's systems include hardware and
packaged software recently purchased from vendors who have represented that
these systems are already Year 2000 compliant.
Other hardware and software currently being used by the Company has been
identified by the Company as not being Year 2000 compliant, particularly
certain packaged software used in the Company's accounting systems. The
Company is in the process of upgrading that software to year 2000 compliant
versions. If the Company were unable to replace software and hardware to
make its accounting and manufacturing systems Year 2000 compliant, the
Company believes that it could implement manual systems to carry out its
business without significant interruption.
7
The Company expects to complete its review of all of its systems, including
embedded technology in non-information technology systems, which might be
affected by the Year 2000 issue by the second quarter of 1999. The Company
has reviewed or is reviewing communications, security, and environmental
monitoring and control systems as well as certain laboratory and
manufacturing equipment and equipment manufactured for customers. The
Company believes that, in the worst likely case, such systems or components
thereof can be replaced to make such systems Year 2000 compliant.
The Company expects that the total cost for upgrades and replacements of
software, older computer hardware and other systems or components including
embedded technology that might be affected by the Year 2000 issue will not
exceed $100,000.
The Company relies on a number of vendors and suppliers including banks,
telecommunications providers, transportation companies and other providers
of goods and services. The inability of certain of these third parties to
conduct their business for a significant period of time due to the Year
2000 issue could have a material impact on the Company's operations. The
Company does not have the resources to determine whether all such vendors
and suppliers are Year 2000 compliant. However, the Company expects that it
could find other vendors and suppliers if any of its current vendors or
suppliers are unable to continue to provide goods or services to the
Company, but no assurances can be given as to how long it will take to find
substitute vendors and suppliers.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1999
COMPARED WITH THREE MONTHS ENDED MARCH 31, 1998
REVENUES
The Company's revenues for the quarters ended March 31, 1999 and 1998 were
as follows:
1999 1998
Diagnostic and research assays $ 848,000 $ 416,000
Instrument sales and development 487,000 810,000
Other 121,000 121,000
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$1,456,000 $1,347,000
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Sales of the Company's diagnostic and research assays increased from
$416,000 in the first quarter of 1998 to $848,000 in the first quarter of
1999. This increase of $432,000 was primarily due to increased sales
volumes to the Company's distributors in the first quarter of 1999,
following below normal sales volumes in the first quarter of 1998.
8
Revenue from instrument sales and development declined by $323,000, from
$810,000 in the first quarter of 1998 to $487,000 in the first quarter of
1999. This decrease resulted from reduced orders from certain customers for
whom the Company acts as an original equipment manufacturer.
COSTS AND EXPENSES
Including amortization of purchase adjustments, cost of sales was 97% of
product sales for the first quarter 1998 and decreased to 72% of product
sales for the first quarter of 1999. This decrease in the cost of sales as
a percentage of sales is due primarily to the effect of the fixed
manufacturing costs for the Company's research and diagnostic assays being
spread over manufacturing and sales volume for the first quarter of 1999
which was approximately double that of the first quarter of 1998. Cost of
sales of research and diagnostic assays in the first quarter of 1999 were
$40,000 less than in the first quarter of 1998, despite an increase in
volume. Cost of sales for the Company's instrument sales and development
business also declined, by $260,000 due primarily to lower sales volumes.
Costs of sales in the first quarter of both 1998 and 1999 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 1998 was approximately 81% of
product sales and the cost of sales for the first quarter of 1999 was
approximately 57% of product sales.
Research and development expenses decreased from $931,000 in the first
quarter of 1998 to $770,000 in the first quarter of 1999. The decrease in
research and development expenses resulted from cost reductions in the
first quarter of 1999 compared to the first quarter of 1998 of (1) $30,000
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, (2) $33,000 in research and
development costs of the Company's French subsidiary and (3) $98,000 in
research and development costs in the United States other than the costs of
clinical trials. Research and development expenses in the first quarter of
1998 included severance costs relating to a staff reduction in the United
States.
During the first quarter of 1999 the Company decided to reduce its research
and development costs by closing its French research laboratory.
Substantially all research and development activities carried on by the
Company's French subsidiary were ceased in early 1999. The lease of the
French subsidiary's facility was not renewed when it terminated at the end
of April 1999. Research and development costs of the French subsidiary
decreased from $422,000 in the first quarter of 1998 to $389,000 in the
first quarter of 1999. Costs in the first quarter of 1999 include severance
costs for approximately half of the French employees. The remainder of the
employees, who are involved in the final closure of the operations, are
expected to be terminated during the second quarter of 1999.
9
Selling, general and administrative expenses decreased from $981,000 in the
first quarter of 1998 to $858,000 in the first quarter of 1999. The
decrease is primarily the result of reductions in selling, general and
administrative expenses of OXIS' instrument business in the first quarter
of 1999 as compared to 1998. The cost reductions resulted from the
consolidation of certain sales and administrative functions of OXIS'
instrument business with those of its assay and other health products
business.
NET LOSS
The Company continued to experience losses in the first quarter of 1999.
The first quarter 1999 loss of $1,191,000 ($.15 per share-basic and
diluted) was $649,000 less than the $1,840,000 ($.32 per share-basic and
diluted) loss for the first quarter of 1998. The decrease in the net loss
is primarily due to the increase in gross margin from product sales and
decreases in research and development and selling, general and
administrative costs.
The Company expects to incur a substantial net loss for 1999. If the
Company develops substantial new revenue sources or if substantial
additional capital is raised through further sales of securities (See
Financial Condition, Liquidity and Capital Resources), the Company plans to
continue to invest in research and development activities and incur sales,
general and administrative expenses in amounts greater than its anticipated
near-term product margins. If the Company is unable to raise sufficient
additional capital or to develop new revenue sources, it will have to
cease, or severely curtail, its operations. In this event, while expenses
will be reduced, expense levels, and the potential write down of various
assets, would still be in amounts greater than anticipated revenues.
__________________________
Certain of the matters discussed in this Report such as management's plans
regarding research and development activities and the continuation of its
current business plans are forward-looking statements that involve risks
and uncertainties, including the Company's ability to raise additional
financing, its ability to enter into alliances, 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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - See Exhibit Index on page 12.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OXIS International, Inc.
May 13, 1999 By /s/ Ray R. Rogers
-----------------------------
Ray R. Rogers
Chairman and Chief Executive Officer
May 13, 1999 By /s/ Jon S. Pitcher
-----------------------------
Jon S. Pitcher
Chief Financial Officer
11
EXHIBIT INDEX
Exhibit
Number Description of Document
10(a) Agreement of Sale dated December 2, 1998
10(b) Sublease Agreement dated February 19, 1999
10(c) Rider to Sublease Agreement dated February 19, 1999
27(a) Financial data schedule
12