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 June 30, 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
------- -------
At June 30, 1999, the issuer had outstanding the indicated number of shares of
common stock: 7,871,196
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
1999 1998 1999 1998
Revenues:
Sales $ 2,681,000 $ 1,435,000 $ 4,087,000 $ 2,731,000
Royalties and license fees 20,000 20,000 70,000 71,000
----------- ----------- ----------- -----------
Total revenues 2,701,000 1,455,000 4,157,000 2,802,000
Costs and expenses:
Cost of product sales 1,406,000 1,053,000 2,413,000 2,312,000
Cost of technology sold 1,279,000 -- 1,279,000 --
Research and development 952,000 759,000 1,722,000 1,690,000
Selling, general and administrative 830,000 730,000 1,688,000 1,654,000
----------- ----------- ----------- -----------
Total costs and expenses 4,467,000 2,542,000 7,102,000 5,656,000
----------- ----------- ----------- -----------
Operating loss (1,766,000) (1,087,000) (2,945,000) (2,854,000)
Interest income 7,000 34,000 25,000 45,000
Interest expense (23,000) (88,000) (53,000) (172,000)
----------- ----------- ----------- -----------
Net loss (1,782,000) (1,141,000) (2,973,000) (2,981,000)
Other comprehensive income
(loss) - foreign currency
translation adjustments (43,000) 2,000 (31,000) (57,000)
----------- ----------- ----------- -----------
Comprehensive loss $(1,825,000) $(1,139,000) $(3,004,000) $(3,038,000)
=========== =========== =========== ===========
Net loss per share - basic and diluted $ (.23) $ (.17) $ (.38) $ (.48)
=========== =========== =========== ===========
Weighted average number of
shares used in computation 7,871,196 6,583,316 7,858,631 6,161,391
=========== =========== =========== ===========
1
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $1,109,000 $ 2,575,000
Accounts receivable 910,000 992,000
Note receivable 569,000 --
Inventories 1,443,000 1,576,000
Prepaid and other 92,000 258,000
---------- -----------
Total current assets 4,123,000 5,401,000
Property and equipment, net 897,000 2,817,000
Technology for developed products 957,000 2,570,000
Other assets 310,000 380,000
---------- -----------
Total assets $6,287,000 $11,168,000
========== ===========
2
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 724,000 $ 724,000
Accounts payable 636,000 716,000
Accrued payroll, payroll taxes and other 540,000 820,000
Current portion of long-term debt 48,000 111,000
------------ ------------
Total current liabilities 1,948,000 2,371,000
Long-term debt due after one year 159,000 1,613,000
Shareholders' equity:
Preferred stock - $.01 par value; 15,000,000 shares
authorized:
Series B - 428,389 shares issued and outstanding
at June 30, 1999 (liquidation
preference of $1,000,000) 4,000 4,000
Series C - 807,878 shares issued and outstanding
at June 30, 1999 8,000 8,000
Common stock - $.001 par value; 95,000,000 shares
authorized; 7,871,196 shares issued and outstanding
at June 30, 1999 8,000 8,000
Additional paid in capital 52,754,000 52,754,000
Accumulated deficit (48,276,000) (45,303,000)
Accumulated translation adjustments (318,000) (287,000)
------------ ------------
Total shareholders' equity 4,180,000 7,184,000
------------ ------------
Total liabilities and shareholders' equity $ 6,287,000 $ 11,168,000
============ ============
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-------------------------
1999 1998
Cash flows from operating activities:
Net loss $(2,973,000) $(2,981,000)
Adjustments to reconcile net loss to cash
used for operating activities:
Depreciation and amortization 550,000 708,000
Gain on sale of land and building (16,000) --
Loss on sale of technology 368,000 --
Cash proceeds from sale of technology 342,000 --
Changes in assets and liabilities:
Accounts receivable 80,000 747,000
Inventories 124,000 (34,000)
Other current assets 163,000 47,000
Accounts payable (111,000) (686,000)
Customer deposits (120,000) --
Accrued payroll, payroll taxes and other (127,000) (245,000)
----------- -----------
Net cash used for operating activities (1,720,000) (2,444,000)
Cash flows from investing activities:
Proceeds from sale of land and building 1,959,000 --
Purchases of equipment (142,000) (29,000)
Additions to other assets (59,000) (79,000)
Other, net (4,000) (12,000)
----------- -----------
Net cash provided by (used for) investing activities 1,754,000 (120,000)
Cash flows from financing activities:
Proceeds from issuance of notes -- 555,000
Proceeds from issuance of stock, net of related costs -- 5,231,000
Repayment of short-term borrowings -- (443,000)
Repayment of long-term debt and capital lease obligations (1,517,000) (54,000)
Redemption of Series D Preferred Stock -- (700,000)
----------- -----------
Net cash provided by (used for) financing activities (1,517,000) 4,589,000
Effect of exchange rate changes on cash 17,000 (52,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,466,000) 1,973,000
Cash and cash equivalents - beginning of period 2,575,000 1,290,000
----------- -----------
Cash and cash equivalents - end of period $ 1,109,000 $ 3,263,000
=========== ===========
Non-cash transactions:
Issuance of common stock in exchange
for cancellation of notes and accrued interest $ -- $ 543,000
Note received as part of proceeds from sale
of technology 569,000 --
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/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 and specific identification
methods. Inventories at June 30, 1999 and December 31, 1998, consisted of
the following:
June 30, December 31,
1999 1998
Raw materials $ 724,000 $ 817,000
Work in process 470,000 406,000
Finished goods 249,000 353,000
---------- ----------
Total $1,443,000 $1,576,000
========== ==========
3. SALE OF TECHNOLOGY
Effective June 28, 1999, the Company sold the intellectual property,
contract rights and finished goods inventory relating to its therapeutic
drug monitoring assays. Proceeds from the sale consisted of $500,000 cash, a
non-interest bearing note in the amount of $588,000 due November 30, 1999
and a warrant granting the Company the right to acquire an equity interest
in the purchaser of the assets. The note is secured by the assets sold and
the purchaser's accounts receivable, inventories and other personal
property.
The Company recognized $911,000 as compensation for the intellectual
property and contract rights. This amount has been included in sales for the
three-month and six-month
5
periods ended June 30, 1999. Sales of therapeutic drug monitoring assays for
the quarter ended June 30, 1999 include $158,000 for the sale of the
therapeutic drug monitoring finished goods inventory. The Company has
entered into an agreement with the purchaser of the therapeutic drug
monitoring assays pursuant to which the Company will continue to manufacture
the products and perform certain other services for the purchaser through
the third quarter of 2000.
4. OPERATING SEGMENTS
The following table presents information about the Company's two operating
segments:
Health Therapeutic
Products Development Total
------------ ------------ ------------
Quarter ended June 30, 1999:
Revenues from external
customers $ 2,655,000 $ 46,000 $ 2,701,000
Intersegment revenues -- 279,000 279,000
Net loss (834,000) (948,000) (1,782,000)
As of June 30, 1999 -
Total assets 5,067,000 1,220,000 6,287,000
Quarter ended June 30, 1998:
Revenues from external
customers $ 1,455,000 $ -- $ 1,455,000
Intersegment revenues -- 129,000 129,000
Net loss (397,000) (744,000) (1,141,000)
As of June 30, 1998 -
Total assets 8,225,000 4,940,000 13,165,000
Six months ended June 30, 1999:
Revenues from external
customers $ 4,083,000 $ 74,000 $ 4,157,000
Intersegment revenues -- 303,000 303,000
Net loss (1,243,000) (1,730,000) (2,973,000)
Six ended June 30, 1998:
Revenues from external
customers $ 2,802,000 $ -- $ 2,802,000
Intersegment revenues -- 158,000 158,000
Net loss (1,359,000) (1,622,000) (2,981,000)
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 half of 1999 from
$3,030,000 at December 31, 1998 to $2,175,000 at June 30, 1999. The decrease
in the Company's working capital resulted primarily from the net loss for the
first half of 1999 ($2,973,000 less non-cash charges of $550,000) offset by
increases in net working capital of $543,000 from the sale of land and
buildings and payment of related debt and $911,000 from the sale of technology
and contract rights relating to the Company's therapeutic drug monitoring
assay business.
Cash and cash equivalents decreased from $2,575,000 at December 31, 1998 to
$1,109,000 at June 30, 1999.
The Company is currently restructuring its therapeutic development operations.
In the first half of 1999 the Company closed its French research laboratory in
order to reduce expenses and refocus its resources on its later stage
therapeutic products, particularly BXT-51072. As part of this restructuring
process, the Company is seeking corporate partners and additional capital
funding to support its therapeutic development projects. While these processes
are ongoing, activities and expenditures on therapeutics projects will be
minimal.
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 or
to raise additional capital 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.
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 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 used by the Company has been identified by the
Company as not being Year 2000 compliant, particularly certain packaged
software used in the
7
Company's accounting systems. The Company is in the process of upgrading that
software to year 2000 compliant versions and has completed this process for
its most critical accounting systems. If the Company were unable to replace
software or 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.
The Company has reviewed all of its systems, including embedded technology in
non-information technology systems, which might be affected by the Year 2000
issue. The Company has reviewed communications, security, and environmental
monitoring and control systems as well as certain laboratory and manufacturing
equipment and equipment manufactured for customers. Certain equipment or
components have been upgraded, and the Company expects to complete its
upgrades and replacement of equipment by early in the fourth quarter of 1999.
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 (including amounts already spent) 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.
8
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1999
COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998
Revenues
The Company's revenues for the quarters ended June 30, 1999 and 1998 were as
follows:
1999 1998
Sales
Therapeutic drug monitoring assays $ 599,000 $ 382,000
Bovine superoxide dismutase (bSOD)
for research and human use 456,000 --
Instrument sales and development 308,000 684,000
Research assays, fine chemicals and other 330,000 320,000
Palosein/(R)/ (bSOD for veterinary use) 77,000 49,000
Sale of rights to therapeutic drug monitoring assays 911,000 --
Royalties and license fees 20,000 20,000
---------- ----------
$2,701,000 $1,455,000
========== ==========
Effective June 28, 1999, the Company sold the intellectual property, contract
rights and finished goods inventory relating to its therapeutic drug
monitoring assays. The Company recognized $911,000 as compensation for the
intellectual property and contract rights. Sales of therapeutic drug
monitoring assays for the quarter ended June 30, 1999 include $158,000 for the
sale of the therapeutic drug monitoring finished goods inventory. The Company
has entered into an agreement with the purchaser of the therapeutic drug
monitoring assays pursuant to which the Company will continue to manufacture
the products and perform certain other services for the purchaser through the
third quarter of 2000.
Sales of bSOD in the second quarter of 1999 were primarily the result of one
shipment of bulk bSOD to the Company' Spanish licensee. No significant sales
of bulk bSOD were made during 1998. The Company has received one additional
order for bulk bSOD from its Spanish licensee for delivery in the fourth
quarter of 1999. This sale is expected to be slightly larger than the second
quarter bSOD sale. However, future sales of bulk bSOD beyond 1999 are largely
dependent on the needs of the Company's Spanish licensee which are uncertain
and difficult to predict and no assurances can be given that the Company will
continue to sell bulk bSOD to its Spanish licensee.
9
Revenue from instrument sales and development declined by $376,000, from
$684,000 in the second quarter of 1998 to $308,000 in the second quarter of
1999. This decrease resulted from reduced orders from certain customers for
whom the Company acts as an original equipment manufacturer. In the near term
the Company does not expect instrument sales to return to 1998 levels.
Costs and Expenses
Including amortization of purchase adjustments, cost of sales was 73% of sales
for the second quarter 1998 and increased to 100% of sales for the second
quarter of 1999. This increase in the cost of sales as a percentage of sales
is due primarily to the excess ($368,000) of the cost of technology sold over
the proceeds from the sale of technology. The reduction of instrument sales
volume in the second quarter of 1999 as compared to 1998 also contributed to
the increase in cost of sales as a percentage of sales. Although the Company
has made significant reductions in the occupancy and personnel costs of its
instrument manufacturing facility in 1999, the cost reductions have not been
in proportion to the reduction in sales.
Cost of sales in the second quarter of both 1998 and 1999 includes
approximately $200,000 in amortization of purchase adjustments relating to
1994 and 1997 business acquisitions. Excluding such amortization and the
effect of the technology sale in 1999 the cost of product sales for the second
quarter of 1998 was approximately 60% of sales and the cost of sales for the
second quarter of 1999 was approximately 67% of product sales.
Research and development expenses increased from $759,000 in the second
quarter of 1998 to $952,000 in the second quarter of 1999. The increase in
research and development expenses resulted primarily from costs in the second
quarter of 1999 relating to the closure of the Company's French research
facility and termination of its employees.
Selling, general and administrative expenses increased from $730,000 in the
second quarter of 1998 to $830,000 in the second quarter of 1999. The
increase was primarily due to selling and administrative costs of the
Company's wellness testing services, started in late 1998.
Interest Income and Expense
Interest income for the second quarter of 1999 was less than for the second
quarter of 1998 because the Company had less cash available for investment
during 1999.
Interest expense for the second quarter of 1999 was less than for the second
quarter of 1998 primarily due to the payment of long-term debt in connection
with the sale of property in the first quarter of 1999.
10
Net Loss
The Company continued to experience losses in the second quarter of 1999. The
second quarter 1999 net loss of $1,782,000 ($.23 per share-basic and diluted)
was $641,000 greater than the $1,141,000 ($.17 per share-basic and diluted)
net loss for the second quarter of 1998. The increase in the net loss is
primarily due to (1) the excess of cost over the proceeds from technology sold
in the second quarter of 1999 ($368,000), and (2) increases in research and
development expenses ($193,000) and selling, general and administrative
expense ($100,000).
The Company expects to incur a substantial net loss for 1999. If the Company
raises substantial additional capital through further sales of securities or
secures a strategic partnership to support its therapeutic development efforts
(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 partnerships, it will have to cease, or
severely curtail, its operations.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1999
COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
Revenues
The Company's revenues for the six-month periods ended June 30, 1999 and 1998
were as follows:
1999 1998
Sales
Therapeutic drug monitoring assays $1,083,000 $ 642,000
Bovine superoxide dismutase (bSOD)
for research and human use 460,000 1,000
Instrument sales and development 795,000 1,493,000
Research assays, fine chemicals and other 736,000 502,000
Palosein/(R)/ (bSOD for veterinary use) 102,000 93,000
Sale of rights to therapeutic drug monitoring assays 911,000 --
Royalties and license fees 70,000 71,000
---------- ----------
$4,157,000 $2,802,000
========== ==========
Effective June 28, 1999, the Company sold the intellectual property, contract
rights and finished goods inventory relating to its therapeutic drug
monitoring assays. The Company recognized $911,000 as compensation for the
intellectual property and contract rights. Sales of the Company's therapeutic
drug monitoring assays increased by $441,000, from $642,000 in the first six
months of 1998 to $1,083,000 in the first six months of 1999. Sales of
therapeutic drug monitoring assays for the six months ended June 30, 1999
include
11
$158,000 for the sale of the therapeutic drug monitoring finished goods
inventory. The remainder of the increase was primarily due to increased sales
volumes to the Company's distributors.
Sales of bSOD in the first half of 1999 were primarily the result of one
shipment of bulk bSOD to the Company's Spanish licensee. No significant sales
of bulk bSOD were made during 1998.
Revenue from instrument sales and development declined by $698,000, from
$1,493,000 in the first half of 1998 to $795,000 in the first half of 1999.
This decrease resulted from reduced orders from certain customers for whom the
Company acts as an original equipment manufacturer.
The increase in sales of research assays, fine chemicals and other products is
due primarily to an increase in sales volumes of nearly all of the Company's
research assays in the first half of 1999 as compared to the first half of
1998.
Costs and Expenses
Including amortization of purchase adjustments, cost of sales was 85% of sales
for the first half 1998 and increased to 90% of sales for the first half of
1999. This increase in the cost of sales as a percentage of sales is due
primarily to the excess ($368,000) of the cost of technology sold over the
proceeds from the sale of technology. Cost of sales as a percentage of sales
was also increased by an increase in instrument manufacturing costs as a
percentage of instrument sales which resulted from the decline in instrument
sales volumes.
Cost of sales in the first half of both 1998 and 1999 includes in excess of
$400,000 in amortization of purchase adjustments relating to 1994 and 1997
business acquisitions. Excluding such amortization and the effect of the
technology sale in 1999 the cost of product sales for the first half of 1998
was approximately 70% of sales and the cost of sales for the first half of
1999 was approximately 63% of product sales.
Research and development expenses increased from $1,690,000 in the first half
of 1998 to $1,722,000 in the first half of 1999. The increase in research and
development expenses resulted primarily from costs in the first half of 1999
relating to the closure of the Company's French research facility and
termination of its employees. This increase was offset by a reduction of
approximately $105,000 in costs of the Company's therapeutic research and
development operations in the U.S.
Selling, general and administrative expenses increased from $1,654,000 in the
first half of 1998 to $1,688,000 in the first half of 1999. The increase was
primarily due to selling and administrative costs of the Company's wellness
testing services, started in late 1998
12
($154,000 in the first six months of 1999), offset by $93,000 of reductions in
selling, general and administrative expenses of the Company's instrument
manufacturing subsidiary.
Interest Income and Expense
Interest income for the first half of 1999 was less than for the first half of
1998 because the Company had less cash available for investment during 1999.
Interest expense for the first half of 1999 was less than for the first half
of 1998 primarily due to the payment of long-term debt in connection with the
sale of property in the first quarter of 1999.
Net Loss
The Company continued to experience losses in the first six months of 1999.
The first half 1999 net loss of $2,973,000 ($.38 per share-basic and diluted)
was $8,000 less than the $2,981,000 ($.48 per share-basic and diluted) net
loss for the first half of 1998. The excess of cost over the proceeds from
technology sold in 1999 ($368,000) was offset by increased gross margins on
other sales.
---------------------
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.
13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - See Exhibit Index on page 15.
(b) Reports on Form 8-K
On July 13, 1999, the Company filed a Report on Form 8-K reporting the
sale of intellectual property, contract rights and finished goods
relating to its therapeutic drug monitoring products. The sale was
effective June 28, 1999.
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.
August 11, 1999 By /s/Ray R. Rogers
-----------------------------
Ray R. Rogers
Chairman and Chief Executive Officer
August 11, 1999 By /s/Jon S. Pitcher
-----------------------------
Jon S. Pitcher
Chief Financial Officer
14
EXHIBIT INDEX
Exhibit Page
Number Description of Document Number
27(a) Financial data schedule
15