UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 for the fiscal year ended December 31, 1995.
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
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.50 par value
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
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 18, 1996 (assuming conversion of all outstanding
preferred stock into common stock ) was $17,282,555.
Number of shares outstanding of Registrant's common stock as of March 18, 1996:
12,124,423 shares.
Certain of the information required by Part III of this Form 10-K is
incorporated by reference from a portion of the Company's Proxy Statement for
1996 Annual Meeting of Stockholders.
CONTENTS
PART I PAGE
Item 1. Business........................................... 1
Item 2. Properties......................................... 12
Item 3. Legal Proceedings.................................. 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters................................ 13
Item 6. Selected Financial Data............................ 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 14
Item 8. Financial Statements and Supplementary Data........ 19
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............. 40
PART III
Item 10. Directors and Executive Officers of the Registrant. 41
Item 11. Executive Compensation............................. 41
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................... 41
Item 13. Certain Relationships and Related Transactions..... 41
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................ 42
SIGNATURES....................................................... 43
EXHIBIT INDEX.................................................... 44
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Certain of the statements contained in this report are forward-looking
statements based on current expectations which involve a number of
uncertainties. The events described herein may not occur due to risks
inherent in research and product development, the uncertainty of market
acceptance of Company products, the possible inability to obtain financing,
and other factors. Accordingly, the Company's future activities may differ
materially from those projected in the forward-looking statements.
OXIS International, Inc. ("OXIS" or the, (the "Company"), a Delaware Corporation,corporation, is a
leader in the discovery, development and commercialization of therapeutic
and diagnostic products to diagnose, treat and prevent diseases of
oxidative stress. Oxidative stress occurs when the concentration of free
radicals and reactive oxygen species (ROS) -("ROS"), highly reactive molecules
produced during oxidative processes, - exceed the body's antioxidant defense
mechanisms.
Recent advances in molecular biologyThe Company consists of two closely related operating units: an
international diagnostic business which markets research and an increased understanding of the
mechanism(s) of action ofcommercial
diagnostic assays and fine chemicals to research and clinical laboratories;
and a drug discovery business focused on new drugs to treat diseases
associated with tissue damage from free radicals ROS, and antioxidantsreactive oxygen
species.
The Company has ledtargeted its drug discovery and development programs to
increased acceptance ofaddress diseases that have underlying pathologies based on oxidative
stress, asand for which there is currently no optimum treatment. The Company
has identified lead molecules from two series of small molecular weight
antioxidants. The first of these lead molecules has completed Phase I
clinical trials, and the second is in preclinical development. In addition,
the Company is developing a basic disease mechanism.series of earlier stage compounds for the
treatment of cancer.
The Company derives current business revenues from its diagnostic assays
and two fine chemicals, ergothioneine and bovine superoxide dismutase
("bSOD"). The Company's extensivediagnostic products portfolio includes fourteen
commercial therapeutic drug monitoring ("TDM") assays based on fluorescence
polarization immunoassay technology ("FPIA"); twelve drugs of novel antioxidant compoundsabuse assays
which utilize an enzyme-multiplied immunoassay technique ("EMIT"); and six
assays to measure oxidative stress.
The Company's twelve FDA-cleared therapeutic drug monitoring ("TDM") assays
are sold to clinical and reference laboratories, primarily through a
network of international distributors. The assays for markers of oxidative
stress provides multiple opportunitiesare sold through international distribution and catalog sales to
address several
major disease markets. In July 1995,basic researchers and clinicians working in oxidative stress research. The
Company's TDM assays are designed to run on Abbott's TDx(R) and TDx/FLx(R)
instruments, while the Company expanded its portfolioenzyme immunoassays and colorimetric assays run on a
variety of synthetic antioxidants through the acquisition of Therox Pharmaceuticals,
Inc., ("Therox"). OXIScommercially available instruments.
1
The Company has invested significant resources to build an early and
comprehensivesubstantial patent position on both its antioxidant therapeutic
technologies and selected oxidative stress assays.
OXIS also has technologies and products which currently produce revenue for
the Company. The Company's 32 research and commercial diagnostic assays are
sold through a combination of international distribution and a small in-house
sales staff. OXIS also derives revenues from licensing agreements, and from
sales of both its bulk antioxidants and its veterinary drug, Palosein/(R)/.
The Company's corporate offices are located in a 15,000 sq. ft. facility at
6040 N. Cutter Circle, Suite 317, Portland, OR 97217. Research operations
of OXISthe Company are located outside of Paris at 395 Phoenixville Pike, Malvern, PA 19355; and Z.A. des Petits Carreaux, 2,
av. des Coquelicots, 94385 Bonneuil-Sur-Marne, Cedex, France (outside of Paris).France.
ACQUISITIONS/MERGERS
In September 1994, the Company acquired Bioxytech S.A. (now "OXIS S.A."),
basedlocated in Paris,
France, and merged with International BioClinical, Inc. ("IBC"), an Oregon
corporation, and changed its name from DDI Pharmaceuticals, Inc. to OXIS
International, Inc. Bioxytech S.A. was subsequently renamed OXIS
International S.A. ("OXIS S.A."). At the time of the acquisition, OXIS
S.A.'s research and development effortsprograms were focused on the synthesis of
novel biomimetic
antioxidant compounds designedtherapeutic molecules and assays to target specific tissues. Itmeasure markers of
oxidative stress. OXIS S.A. was also had
1
developed and was selling six research assays for
measuring various aspectsspecific markers of oxidative stress. IBC was selling thirteen
therapeutic drug monitoring ("TDM") assays at the time of its acquisition
by the Company. It was also developing one additional TDM assay and a
beta-lactamase(beta)-lactamase rapid detection test, both of which projects were completed during
1995.
In July 1995, OXIS acquired Therox Pharmaceuticals, Inc. ("Therox"), a
Delaware corporation, through an exchange of stock. Therox was merged into
a subsidiary of the Company. Therox was founded in 1994 by S.R. One,
Limited (the venture investment arm of SmithKline Beecham) and Brantley
Venture Partners II, L.P. Therox was focused on the development of membrane
active antioxidants and molecules that combine antioxidant activity with
other key therapeutic effects. The acquisition provided the Company with
complimentary therapeutic technologies, seven patents and several
relationships with university scientists.
Prior to the acquisitions of Bioxytech S.A. and International BioClinical,
Inc. in 1994, substantially all of the Company's research and development
efforts involved SODsuperoxide dismutase ("SOD") and poly(ethylene glycol) (PEG)poly-ethylene glycol
("PEG"). The 1994 and 1995 acquisitions substantially expanded the
Company's research and development capabilities in the areaareas of synthetic
chemistry, as well as in the
development ofbiochemistry and diagnostic assays in general.assay development.
RESEARCH AND DEVELOPMENT
OXIS'The Company's research and development programs are focused primarily on
the discovery and development of new therapeutic molecules to combat
diseases related to damage from oxidative stress. OXIS believes that the
control or elimination of oxidative stress represents an important but
largely untapped area for drug development. The Company's technical
2
approach is to supplement the natural defense systems through unique,
synthetic molecules which, because of their pharmacological and/or
distribution properties, will reduce oxidative stress in target cells and
tissues.
The Company has designed and synthesized several series of novel compounds,
including: low-molecular-
weightlow-molecular-weight biomimetic antioxidants (Glutathione
Peroxidase Mimics Program) and pro-oxidants (Cancer Therapeutics Program)
that are based on unique selenium chemistry; and sulfur chemistries, respectively; enzyme inhibitors;lipid soluble antioxidants
and combination enzyme inhibitors/antioxidants. Leadlipid soluble antioxidants (Lipid Soluble
Antioxidants Program). OXIS has demonstrated that certain of its
therapeutic molecules frommay act via two mechanisms to reduce oxidative stress
in cells: through direct control of oxidative damage; and by decreasing
specific signals that trigger the inflammatory cycle. Both of the Company's
focuslead therapeutic molecules have been shown to inhibit levels of
NF-(kappa)B, a transcription factor believed to be activated by elevated
concentrations of ROS. NF-(kappa)B is known to activate genes involved in
initiating the inflammatory response. The Company believes that the control
of ROS, and associated decreases in NF-(kappa)B activation, will block the
initiation of the inflammatory response earlier in the cycle than most
drugs currently used to treat certain complex inflammatory diseases.
A brief summary of the Company's synthetic therapeutics research and
development programs follows:
GLUTATHIONE PEROXIDASE MIMICS PROGRAM (GPX). The GPx mimics are small
molecular weight, orally bioavailable compounds that were designed to
catalyze the inactivation of toxic hydroperoxides. These molecules act as
chemical catalysts. The lead molecule, BXT-51072, has demonstrated
significant protection of endothelial cells from direct peroxidase damage
and down regulates various inflammatory mediators and neutrophil adhesion.
An oral formulation of BXT-51072 is being developed for the treatment of
Inflammatory Bowel Disease ("IBD"), with Acute Respiratory Distress
Syndrome ("ARDS") projected to be a secondary indication for the
intravenous formulation of the drug. BXT-51072 has demonstrated activity in
animal models of IBD, and in a porcine model of restenosis. A Phase I
clinical trial was just completed at the end of 1996 and an investigational
new drug application has been filed with the Food and Drug Administration
(the "FDA") for a Phase II study in patients with IBD. This trial is
expected to begin in mid-1997.
A patent on this class of compounds has been issued in France and patent
applications are pending in the United States, Japan, Canada, Australia and
Europe.
LIPID SOLUBLE ANTIOXIDANTS PROGRAM (LSA). The LSA compounds were designed
to combine the antioxidant capabilities of ascorbic acid with the
membrane-protecting effects of vitamin E. The lead molecule from this
series, TX-153, has also shown significant protection of endothelial cells
from direct peroxide damage, and, like BXT-51072, suppresses various
inflammatory mediators and reduces neutrophil adhesion. Although TX-153
apparently acts to control ROS in cells through a different pathway than
the GPx mimics, it also appears to inhibit NF-(kappa)B.
3
TX-153 is entering preclinical toxicology studies, with Phase I clinical
studies anticipated to begin in 1998.
The Company has four issued U.S. patents, and patent applications pending
in the United States, Mexico, Japan, Canada and Europe on these compounds.
CANCER THERAPEUTICS PROGRAM. The Company has designed compounds which
utilize the destructive nature of free radicals to treat hormone-dependent
cancers by selectively killing tumor cells by activating ROS.
Hormone-dependent cancers such as breast and prostate cancer were chosen as
potential indications for this series of molecules due to the specific
hormone receptors on their cell membranes. Molecules that mimic the enzyme
glutathione peroxidase (GPx)
mimicsoxidase have been synthesized, and lipid soluble antioxidant (LSA)two strategies are being
investigated to deliver the molecules to tumor cells and initiate the
production of ROS inside these cells. Specific steroid molecules are being
tested for their ability to target tumor cells, and a prodrug approach is
being used to provide a source of ROS that can be turned on inside the
cell. A lead molecule has not yet been selected for this series. The
indications for this series of drugs include breast and prostate cancer,
but the approach may also be applicable to other tumors.
The Company has filed patent applications on this series of pro-oxidant
molecules in the United States and France.
In addition to its research and development programs in synthetic
antioxidants, OXIS also has conducted research programs in the development
of oxidative stress assays, bovine superoxide dismutase and poly-ethylene
glycol technology. The status of these programs are moving forward on
regulatory pathways toward initiating first-time-in-man clinical testing
during the next twelve months.
OXISas follows:
OXIDATIVE STRESS ASSAYS. The Company has also developed six research assay kits
for markers of oxidative stress that are designed to ultimately facilitate
diagnosis and optimize therapy of free radical-associated diseases. These
assays also provide developmental synergy for the pharmaceutical R&D programs. Additionalresearch
and development programs by facilitating the assessment of oxidative stress
in laboratory studies and in patients. The Company intends to develop
additional assays for key markers of oxidative stress will be developed as part of the
Company'sits
ongoing R&Dresearch and development efforts in oxidative stress diagnostics.
OXISBOVINE SUPEROXIDE DISMUTASE (BSOD). The Company also has extensive
experience in developing, manufacturing and marketing bovine superoxide
dismutase (bSOD)("bSOD"). Bovine superoxide dismutase has been previously studied
in numerous clinical trials by OXIS and other companies. OXIS is not
currently pursuing an active research program in bSOD, but supplies bulk
bSOD for human use and sells an injectable dosage form of the drug for
veterinary applications under the registered trademark Palosein(R).
POLY-ETHYLENE GLYCOL TECHNOLOGY (PEG). Additionally, the Company has
developed a patented, high-molecular weight PEG technology that extends the
half-life of SOD and other therapeutic proteins. 2
Research and development expenses were $4,299,000, $1,670,000, and $813,000
for the years ended December 31, 1995, 1994 and 1993, respectively.
THERAPEUTICS PROGRAMS - SYNTHETIC ANTIOXIDANTS
OXIS' long term goal is to develop new drugs based on unique, proprietary
know-how in free radical biochemistry. The Company's strengths in the
discovery and development of synthetic antioxidants and free-radical
scavenging enzymes is reflected in its substantial portfolio of potential
therapeutic molecules for treating diseases and conditions of oxidative
stress.
The Company's technical strategy to target specific phases of the free
radical and ROS cycle will provide opportunities to treat several major
acute and chronic diseases. OXIS is developing new synthetic antioxidants
which are intended to protect selected cells and organs from free radical
and peroxide-induced damage. OXIS' synthetic antioxidants exhibit overlap
in synthetic chemistry, disease targets, and preclinical development design
that has allowed the Company to build core and platform technologies. The
Company's antioxidant molecules are designed to be cytoprotective agents,
specifically for endothelial cells, cardiac myocytes and lymphocytes.
The Company's synthetic antioxidant therapeutics portfolio is summarized as
follows:
GLUTATHIONE PEROXIDASE MIMICS based on unique selenium chemistry --
patent applications are pending.
LIPID SOLUBLE ANTIOXIDANTS possessing rapid and high membrane
partitioning for cytoprotection from oxidative stress-induced diseases
including ophthalmic, cardiovascular and cosmetic applications -- two
patents issued and one patent application is pending.
LOW-MOLECULAR-WEIGHT BIFUNCTIONAL ANTIOXIDANTS that include inducers of
glutathione biosynthesis and free radical scavenging activity targeted
as a therapeutic for AIDS -- patent application is in preparation.
SULFUR-CONTAINING MOLECULES that exhibit both lipid and protein
antioxidant properties targeted for cardiac protection -- one patent is
issued and another patent application is pending.
PRO-OXIDANT FREE RADICAL GENERATORS linked to appropriate delivery
molecules for breast and prostate cancer.
DUAL FUNCTIONING INHIBITORS OF CYCLOOXYGENASE (COX) AND REACTIVE OXYGEN
SPECIES which have been shown to participate in various inflammatory
disorders -- one patent is issued.
3
INJECTABLE FORM OF A XANTHINE OXIDASE INHIBITOR with or without
antioxidant activity for the treatment of remote tissue injury, multiple
organ failure and adult respiratory distress syndrome (ARDS).
MEMBRANE ANCHORS consisting of rigid, structural anchors with dual
affinities for both the hydrophobic and hydrophilic regions of
membranes.
FOCUS - SYNTHETIC THERAPEUTICS PROGRAMS
OXIS does not have sufficient resources to simultaneously develop all of
the major series of novel antioxidant molecules in its pipeline.
Therefore, the Company has focused its investments on two lead therapeutics
programs, the GPx mimics and the lipid soluble antioxidants. The remaining
series of synthetic antioxidants may be developed through partners, sold
or licensed to provide additional revenue to the Company, although no
assurance can be given when, or if, this will occur. The following
represents a brief summary of the status of the Company's two lead
therapeutics research and development programs:
GLUTATHIONE PEROXIDASE (GPx) MIMICS PROGRAM:
GOAL: A well-tolerated, low-molecular-weight, orally active mimic of the
naturally occurring antioxidant enzyme, glutathione peroxidase.
POSSIBLE CLINICAL TARGETS: Inflammatory Bowel Disease; Restenosis;
Arterial Allograft Rejection; Acute Respiratory Distress Syndrome.
RATIONALE: The endothelium has historically been viewed as a passive
vascular lining. However, it has become clear that the endothelium is very
much an active tissue that controls vascular tone, maintains hemostatic
integrity and modulates immune and inflammatory responses. As these
physiological functions have been further defined, functional abnormalities
of the endothelium have been identified in association with diseases such
as hypercholesterolemia, atherosclerosis, hypertension and intravascular
thrombosis. A syndrome of endothelial dysfunction has been described in
the literature in which vasoconstricting, proinflammatory and prothrombotic
events occur in response to physical, chemical and biological injury to
endothelial cells. Glutathione peroxidase is proposed to protect the
endothelium from damage by hydroperoxides generated by the damaged
endothelium, and from activated leukocytes within the microvasculature.
GPx mimics, like the native enzyme, are designed to catalyze the reduction
(inactivation) of toxic hydroperoxides (H\2\O\2\ and lipid peroxides) by
glutathione.
CURRENT STATUS: Of its several series of proprietary organoselenium
molecules (molecular weight less than 300) that possess glutathione
peroxidase activity, the Company has selected a lead compound. The lead
compound was selected for further evaluation based on a favorable
glutathione peroxidase/oxidase activity ratio, its demonstrated profile of
concentration-dependent protection of human umbilical vein endothelial
cells (HUVEC) from damage by
4
H\2\O\2\, lipid peroxides, activated human neutrophils, TNFalpha and
IL-1alpha, and its toxicity profile observed with sub-chronic oral
administration in rats. Pharmacology studies are in progress in animal
models of restenosis following balloon angioplasty, inflammatory bowel
disease, and acute hepatitis. Other pharmacology studies in animal models
of arterial allograft, post-radiation fibrosis and acute respiratory
distress syndrome may be initiated in 1996. As part of the preclinical
testing program for the GPx mimics, genotoxicity, GLP toxicity and
metabolism studies are in progress. The GPx program is on track to enter
into first-time-in-man clinical testing in mid-1996, with IND and CTX
filings scheduled for submission at the end of third quarter 1996 to obtain
approval to initiate Phase II human clinical trials in first quarter 1997,
provided, however, no assurances can be given that the foregoing timetable
will be met.
PATENTS: A patent application on these compounds was filed in France in
April 1994 and became public in October 1995. A PCT filing was made in
April 1995.
LIPID SOLUBLE ANTIOXIDANT (LSA) PROGRAM:
GOAL: An orally, parenterally and/or topically active ascorbic acid analog
with improved cell membrane-protective properties arising from increased
free radical scavenging activity and extended plasma membrane residency
compared to vitamin C.
POSSIBLE CLINICAL TARGETS: Reperfusion injury; Solar radiation-induced
skin damage; Restenosis.
RATIONALE: Extensive experimental and epidemiological data exists
suggesting that various antioxidants alone or in combination have a
significant beneficial effect in a wide variety of disease including
atherosclerosis, asthma, inflammatory bowel disease and various central
nervous system disorders. Low-molecular-weight antioxidant defense
systems have evolved in order to control the inadvertent release of
reactive oxygen species or mitigate their impact. These systems generally
fall into two distinct classes: water-soluble antioxidants whose radical-
scavenging activity resides primarily in the hydrophilic intra- and extra-
cellular spaces, and lipophilic antioxidants, such as vitamin E, which act
within cell membranes. Ascorbic acid (vitamin C) is believed to be the
most active of the naturally occurring, water-soluble antioxidants.
Although significantly less effective than ascorbic acid, vitamin E is
believed to play a critical role as a cytoprotective agent by minimizing
lipid peroxidation and inactivation of membrane-bound proteins. The
affinity of ascorbic acid for aqueous environments limits its usefulness
for prevention of membrane lipid peroxidation. Development of a membrane-
targeted antioxidant that combines the potency of ascorbic acid with the
membrane protective effects of vitamin E should provide a novel antioxidant
with unique clinical activity.
CURRENT STATUS: Selected lead compounds from this program have
demonstrated 20 to 40 times the antioxidant activity of vitamin E in
various membrane models including sarcolemma membranes isolated from
ventricular myocytes, hepatic microsomal preparations and models of LDL
oxidation. The compounds have been tested in isolated perfused hearts and
endotoxin-induced shock. In vitro studies have shown the LSA molecules to
be effective scavengers of secondary lipid radicals, as well as having the
ability to partially ablate nitric oxide release
5
secondary to endotoxin administration. Based on results of compound
validation, a lead molecule is moving forward on a regulatory path toward
initiation of human testing within the next twelve months provided,
however, that no assurances can be given that this schedule will be met.
Immediate program activities for the LSA program include initiation of
scale-up synthesis of compound, initiation of pharmacology testing in
animal models for selected diseases and initiation of preclinical testing
(i.e., toxicity, metabolism, genotoxicity).
SOD THERAPEUTICS PROGRAMS
OXIS also has a limited portfolio of free radical scavenging enzymes:
RECOMBINANT HUMAN SUPEROXIDE DISMUTASE (rhSOD) has been coupled to high
molecular weight, activated PEG to produce one of the long-acting forms
of SOD -- PEG-rhSOD. OXIS has patented its long-lasting PEG-rhSOD in the
United States and 24 other countries. A preclinical safety program has
been initiated with PEG-rhSOD to measure the upper limit of doses that
can be safely administered to laboratory animals, to assess the safety
of repeated administration and to identify the manifestations of
toxicity that will require assessment in subsequent human clinical
studies.
Rats and dogs have been injected with a series of increasing doses of
PEG-rhSOD in order to determine the maximum clinically-tolerated dose.
In another study, groups of rats received repeated daily injections of a
constant dose for 28 days. The last study in this series is scheduled
for initiation during 1996. Based on the results of these studies, OXIS
will determine how it will proceed with the PEG-rhSOD technology.
BOVINE SUPEROXIDE DISMUTASE (bSOD) has been previously studied in
numerous clinical trials by OXIS and other companies. OXIS currently
supplies bulk bSOD for human use and sells an injectable dosage form of
the drug for veterinary applications (i.e., Palosein/(R)/).
During 1994, OXIS applied for and received Orphan Drug designation from
the FDA for bSOD as a possible treatment for familial ALS. This
application was based on a limited study of the tolerability and
subjective responses of one familial ALS patient. Due to the expense of
the treatment, difficulties with conducting clinical trials, regulatory
issues, limited market potential and the recent emergence of competing
products, OXIS has decided to not pursue the development of bSOD for
this indication.
HIGH MOLECULAR WEIGHT POLY(ETHYLENE GLYCOL)
These derivatives reduce
the immunogenicity of and extend the life of
4
therapeutic proteins in the body (OXIS'. (The Company's PEG has been shown to
extend the life of its bSOD in vivo by 250 times).
6
During 1994,times.) The Company has four
issued U.S. patents as well as numerous issued patents world-wide on this
technology. The Company is not currently pursuing an active research
program in PEG technology, but is seeking potential partners for this
technology for possible license or sale.
Overall, the Company received a U.S. patent forhas an extensive portfolio of patents that cover its
invention of a form
of PEG for makingsynthetic antioxidant therapeutic proteins immunologically safer and longer
acting. In addition, in 1994, the Company filed an application for a U.S.
patent that would broaden the scope of its intellectual property protection
with respect to both the claimed polymers and the claimed conjugates
including those polymers.
OXIDATIVE STRESS ASSAYS
The Company currently has two new research assays formolecules, superoxide dismutase,
polyethylene glycol technology, markers of oxidative stress and fine
chemicals. The Company currently holds fifteen U.S. patents and eight
French patents and has filed for eight additional U.S. patents.
The Company's overall research and development strategy is to discover and
advance its therapeutic molecules through early stage clinical trials to
demonstrate efficacy in development: a second generation assaythe target disease populations. The Company expects
to seek strategic pharmaceutical partners for glutathione (GSH-2)later stage clinical
development and a second generation lipid peroxidation (LPO-2) kit.commercialization of its therapeutics, but, to date, has
not entered into any such partnership.
Much of the Company's success depends on its potential products which are
in research and development and from which no material revenues have yet
been generated. The GSH-2 assayCompany must sucessfully partner, develop, obtain
regulatory approval for and market or sell its potential therapeutic
products to achieve profitable operations. No assurances can be given that
the Company's product development efforts will be successfully completed,
that required regulatory approvals will be obtained, or that any such
products, if developed and introduced will be successfully marketed.
Competition in the pharmaceutical industry is intense, and no assurances
can be given that OXIS' competitors will not develop technologies and
products that are more effective than those being developed by OXIS is intended to be suitable for
specific measurements of GSH in the low micromolar range. This assay should
be applicable for determining GSH in plasma or circulating lymphocytes.
The improved LPO-2 assay is intended to be more sensitive than its current
LPO assay,OXIS.
Research and capable of being automateddevelopment expenses were $4,908,000, $4,299,000 and
$1,670,000 for the clinical laboratory.
The Company believes that the number and range of its assay kits for
markers of oxidative stress is a distinct competitive advantage for OXIS in
terms of developing potentially clinically relevant diagnostics for
diseases of oxidative stress and monitoring therapy of these diseases. OXIS
plans to use its oxidative stress assays to support the development of its
new pharmaceutical products by employing them as clinical markers whenever
possible.
BETA-LACTAMASE ASSAY
Under a technology development agreement with the University of Iowa, OXIS
also has rights to any intellectual property and inventions created,
together with any patents relevant to the development of beta-lactam-based
technology for the rapid, sensitive detection of beta-lactamases. Beta-
lactamases are a major mechanism of microbial resistance to certain
antibiotics.
The first assay from this agreement was licensed to Becton, Dickinson and
Company in 1995 for product development. A second cephalosporin-based
chromogenic substance is in the final stages of synthesis and purification.
7
PRODUCTS
NEW DIAGNOSTIC ASSAYS
In 1995, OXIS completed development of its fourteenth therapeutic drug
monitoring (TDM) assay. The INNOFLUOR Topiramate Assay will be used to
monitor levels of the new anti-convulsant drug, topiramate. The assay was
introduced in Novemberyears ended December 31, 1996, 1995 and is currently being sold in the UK, the first
country to approve the drug for use.
A patent application was filed for the assay in December 1995; and in February
1996, the Company submitted a 510(k) application requesting clearance for
marketing this assay in the United States.
OXIS received FDA clearance for marketing its product, Beta-Lactamase Rapid
Enzyme Detection Discs, in May of 1995. This product detects the production of
the beta lactamase enzyme, indicating potential antibiotic resistance. In
October 1995, the Company concluded an agreement with Becton, Dickinson and
Company granting them exclusive marketing and manufacturing rights to the
technology.
In early 1996, OXIS introduced the PROCLAIM/TM/ line of twelve assays to test
for drugs of abuse. The kits will be sold initially in Italy, Germany, Benelux
and the UK.1994,
respectively.
PRODUCTS
DIAGNOSTIC ASSAYS
Revenues from sales of the Company's assays comprised 49% of 1996 revenues,
and 44% of 1995 revenues,
and 19% of 1994 revenues.
OXIDATIVE STRESS ASSAYS
The Company has six research assays available for sale which measure key
markers in free radical biochemistry.biochemistry (markers of oxidative stress).
Specifically, these assays measure levels of antioxidant protection,
oxidative alterations, and pro-oxidant activation of specific white blood
cells. OXIS' research assays include:
SOD-525 (superoxide dismutase)
GSH-400 (reduced glutathione)
pl-GPx-EIA (human plasma-specific glutathione
peroxidase)
LPO-586 (lipid peroxidation)
MPO-EIA (human myeloperoxidase)
Lactoferrin-EIA (human lactoferrin).
These assay kits utilize either chemical (colorimetric) or immunoenzymatic
(EIA) reactions that can be read using laboratory spectrophotometers and
microplate readers, respectively. The
5
Company's assays offer advantages over conventional laboratory methods,
including ease of use, speed, specificity and accuracy.
8
The assays for markers of oxidative stress are currently being sold to
researchers in Europe, Japan and the United States, primarily through
distributors. The Company estimates that there are more than 3,500
scientists and clinicians who are working directly in research on free
radical biochemistry, and who are potential customers for these research
assays.
TheThrough June 1996, assays for markers of oxidative stress arewere manufactured
at the Company's facility in France. Since July 1996, these assays have
been manufactured at the Company's facility in Portland, Oregon. All of the
oxidative stress assays are manufactured in batches in anticipation of
customer orders. Orders are generally filled within a few days; therefore,
the Company does not have any significant backlog of orders. The Company
believes that adequate supplies of raw materials are either currently on
hand, available from commercial suppliers or available through development
on a custom basis by commercial contractors, as needed.
The Company's assays for markers of oxidative stress are protected by trade
secrets and patents. Seven French patent applications have been filed with
respect to these assays, two of which have resulted in the issuance of
patents. The oxidative stress assays are sold under the registered
trademark "Bioxytech""Bioxytech(R)".
Several companies other than OXIS have developed assays for markers of
oxidative stress. One company offers assays for superoxide dismutase and
glutathione peroxidase which compete directly with OXIS'the Company's products;
and a few competitive assays for lipid peroxidation are available from
selected companies. The Company believes that the number and range of its
assay kits for markers of oxidative stress is a distinct competitive
advantageadvantage.
THERAPEUTIC DRUG MONITORING (TDM) ASSAYS
The Company sells fourteen TDM assays which are based on FPIA technology.
These products are sold under the trade name INNOFLUOR/TM/INNOFLUOR(TM). The Company's
test menu encompasses approximately 90% of the TDM tests performed by
clinical and reference laboratories worldwide. These assays are designed
for use on the Abbott Laboratories TDx/(R)/TDx(R) and TDxFLx/(R)/TDx/FLx(R) analyzers.
The TDM products are sold through a combination of direct customer sales
and distributors in the United States, and through a network of
distributors outside the United States, principally in Europe.
The TDM assays are manufactured at the Company's facility in Portland,
Oregon. All of the TDM assays are manufactured in batches in anticipation
of customer orders. Orders are generally filled within a few days;
therefore, the Company does not have any significant backlog of orders. The
Company believes that adequate supplies of raw materials are either
6
currently on hand, available from commercial suppliers or available through
development on a custom basis by commercial contractors as needed.
9
The Company relies primarilyhas one pending U.S. patent application, in addition to relying
on trade secrets, know-how and trademark laws to protect its TDM assays.
The Company's TDM assays have been sold under the trade name INNOFLUOR/TM/INNOFLUOR(TM)
since the mid-1980s.
Six major diagnostic companies dominate the therapeutic drug monitoring
market. Each of these six companies provides a range of both
instrumentation and assays to clinical laboratories. Of these, Abbott
Laboratories holds the largest market share. OXIS competes most directly
with Abbott Laboratories, because OXIS' assays are designed to be run on
Abbott's analyzers. The Company competes based on high product quality, an
aggressive pricing strategy and technical services. Abbott Laboratories and
certain of the Company's other competitors have substantially greater
financial and other resources than the Company and there can be no
assurances that the Company can effectively compete with Abbott
Laboratories and such other competitors.
THERAPEUTIC PRODUCTS
Revenues from sales of bulk bSOD, royalties on bSOD products sold by
licensees, and sales of Palosein/(R)/Palosein(R), the Company's veterinary bSOD product,
comprised approximately 48%50% of the Company's total revenues in 1996, 48% in
1995 and 76% in 1994 and 97% in 1993.1994.
BOVINE SOD (bSOD)(BSOD) PRODUCTS
Commercial-scale manufacture and quality control of bulk bSOD, as well as
subsequent quality control and processing of bSOD into vials require complex,
multi-step processes, continuously developed and improved by the Company since
1965. The Company's processes refine large masses of United States Department of
Agriculture inspected,Agriculture-inspected edible beef liver into small amounts of highly purified bulk bSOD. The bulk bSOD
is then combined with stabilizing
quantities of sucrose and freeze dried in vials to produce dosage forms. The
sterile dosage formrequires a complex, multi-step process, OXIS has significant knowledge
regarding the manufacture of bSOD in vialsthat is stable at room temperature for four or
more years. Although there are other sources of bSODprotected through trade secrets
and other laboratory and
pilot-scale processes to produce bSOD, the Company believes that it is the
only company manufacturing bSOD on a commercial scale for pharmaceutical uses.proprietary know-how.
The Company maintains no bSOD production facilities and has an agreement with Diosynth B.V., a Dutch contract
manufacturer of pharmaceutical ingredients, to manufacture bulk bSOD and
supply it to OXIS under the terms of a license based on the Company's
processes. Diosynth B.V. is an affiliate of AKZO-Nobel N.V., a large, Dutch
multinational chemical and health care company. The Company believes that
its present source of bSOD is adequate for its near-
termnear-term foreseeable needs.
AlthoughWith the Company continues to have unpatented trade secrets and know-how,
substantially allexception of recently developed, patent protected long-acting SOD
derivatives, the Company's important U.S. and foreignolder patents regarding SOD inventions (other than its recently developed, long-acting SOD
derivatives)protecting the manufacture of bSOD
have expired. Expiration of the Company's
10
patents may enable other
companies to benefit from research and development efforts of the Company,
but such other companies would not receive the benefits of the Company's
unpatented trade secrets and know-how or unpublished preclinical or
clinical data. Such other companiesCompanies would still be required in
some countries to expend
considerable resources to conduct preclinical
studies7
and clinical studies of their own pharmaceutical preparations of SOD and to
seek and secure governmental approval to market such preparations.gain regulatory approval.
The Company sells bulk bSOD for human use, but does not market dosage forms
of bSOD for human use and does not
depend substantially on trademarks. Palosein/(R)/use. Palosein(R) is OXIS' registered trademark for its
veterinary brand of bSOD. Although there are other sources of bSOD and
other laboratory and pilot-scale processes to produce bSOD, the Company
believes that it is the only company manufacturing bSOD on a commercial
scale for pharmaceutical uses.
The Company has licensed three European pharmaceutical companies to market
animal source (including bovine) SODCompany's Spanish licensee, Tedec-Meiji Farma, S.A., which distributes
bSOD for human uses. These licensees have
distributed bSOD for a variety of human uses primarilyuse in Germany, Italy and
Spain, with smaller markets elsewhere in Europe, the Middle East and South
America. However, as discussed in Note 12 to the Company's consolidated
financial statements, the European market for the Company's bSOD has been
adversely impacted by regulatory developments in Europe.
The Company's three European licensees have been responsible for a substantial though decreasing, portion
of the Company's revenues in recent years. Sales of bSOD to and royalties from, Grunenthal GmbH (German licensee),
Tedec-Meiji
Farma, S.A. (Spanish licensee), and SmithKline Beecham
Pharmaceutici S.p.A. (Italian licensee) as a percentagewere 39% of the Company's total
revenues for the past two years, have been as follows:
in 1996, 16% in 1995 1994 1993
Grunenthal 2% 9% 23%
Tedec-Meiji 16% 18% 8%
SmithKline Beecham -- 2% 7%
The Company expects that its revenues from sales to, and royalties from, its
European licensees18% in the foreseeable future will be substantially less than
historical levels. The Company anticipates significant sales1994.
EMPLOYEES
As of bSOD products
only to its Spanish licensee in 1996. The amount of sales to the Spanish
licensee forDecember 31, 1996, and beyond cannot be predicted, as such sales will depend on
a Spanish Ministry of Health ruling regarding distribution and the outcome of
current clinical trials.
During recent years, the Company has been selling bulk bSOD to a major
pharmaceutical company (Sanofi Winthrop Inc., formerly Sterling Winthrop Inc.)
for use in its development of a pharmaceutical product for use in humans.
During 1995, Sanofi Winthrop reported on a Phase III clinical trial in which
results did not reach statistical significance. The Company does not expect
that Sanofi Winthrop will buy bulk bSOD product from OXIS in the foreseeable
future.
11
In the last quarter of 1993, the Company reintroduced its veterinary bSOD
product, Palosein/(R)/, in the United States. Palosein/(R)/ is used
primarily for the treatment of certain musculoskeletal inflammatory
conditions in horses and dogs. Palosein/(R)/ saleshad 51 employees (30 in the United
States and Canada exceeded $550,000 during 1995. Palosein/(R)/ is also distributed in
Germany under a license agreement with Grunenthal.
EMPLOYEES
As of December 31, 1995, the Company had 60 employees (35 in the United
States and 2521 in France). Employees of the Company's French subsidiary are
covered by a government-sponsored collective bargaining agreement. None of
the United States employees are subject to a collective bargaining
agreement. The Company has never experienced a work interruption.
FOREIGN OPERATIONS AND EXPORT SALES
For information regarding the Company's foreign operations and export
sales, see Note 10 to the consolidated financial statements.
ITEM 2. PROPERTIES.
The Company occupies, pursuant to leases, office and laboratory space in
Portland, Oregon; Malvern, Pennsylvania;Oregon and near Paris, France.
The Company's Portland, Oregon lease expires in 1997; the lease of the
Malvern, Pennsylvania facility and the lease of the facility in France expireexpires in 1998.
Although the premises currently occupied are suitable for the Company's
present requirements, other equally suitable premises are readily
available.
8
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company is a party or
to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the year ended December 31, 1995.
12
1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.
The Company's common stock is traded on the NASDAQ National Market System
using the symbol OXIS.
Recent quarterly prices of the Company's common stock are as follows:
1996 1995
1994
---------------------------- ------------------------------ ----
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
High 1 25/32 2 1/8 2 11/16 2 2 13/16 3 1/2 4 1/2 2 7/8
3 1/8 3Low 1 7/32 1 1/2 4 4 3/8
Low1 7/16 1 1/2 1 1/8 2 1/4 1 3/4 1 5/8 1 3/8 2 1/2 2 5/8 3 1/8
The Company has an estimated 7,0007,800 shareholders, including approximately
2,5003,500 shareholders who have shares in the names of their stockbrokers. The
Company utilizes its assets to develop its business and, consequently, has
never paid a dividend and does not expect to pay dividends in the
foreseeable future.
9
ITEM 6. SELECTED FINANCIAL DATA.
FOR YEARS ENDED
DECEMBER 31: 1996 1995 1994 1993 1992 1991
Total Revenues/1/Revenues1/ $ 4,867,000 $ 5,136,000 $ 3,470,000 $ 3,044,000 $2,772,000
$2,650,000--
Net income (loss) $(5,992,000) $(8,892,000)/2/ $(5,567,000)/3/ $(1,485,000)/4/ $ (339,000)
$ (193,000)-- -- --
Net income (loss)
per share $(.82)/$ (.47) $ (.82)2/ $(.88)/$ (.88)3/ $ (.30)/4/ $ (.07)
$ (.04)-- -- --
AS OF DECEMBER 31: 1996 1995 1994 1993 1992
Total assets $ 7,997,000 $ 9,870,000 $ 11,194,000 $ 3,124,000$11,194,000 $3,124,000 $4,864,000 $4,770,000
Long-term
obligations $ 2,000 $ 1,332,000 $ 376,000 -- --
--
Common shares
outstanding 13,790,736 12,124,423 9,322,762 4,982,670 4,982,670 4,982,670
13
/1/1/ Earned interest not included in revenue.
/2/2/ Includes a charge of $3,329,000 ($.31 per share) for the write off of
certain technology of an acquired company.
/3/3/ Includes a charge of $3,675,000 ($.58 per share) for the write off of
certain technology of acquired companies.
/4/4/ Includes a charge of $1,531,000 ($.31 per share) for control contest
expense.
As explained under the caption "ACQUISITIONS" in Management's Discussion
and Analysis of Financial Condition and Results of Operations below, the
Company made significant acquisitions during 1994 and 1995 that affect the
comparability of the amounts reflected in the table above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
ACQUISITIONS
In September 1994, the Company significantly increased its scientific and
technical staff, patent application portfolio, current product offerings,
research and development programs, research and manufacturing facilities
and its customer base by acquiring Bioxytech S.A. (now "OXIS S.A.") and
International BioClinical, Inc. ("IBC") (together the "1994 acquired
businesses"). Both acquisitions were completed through the exchange of
stock, and were accounted for as purchases; accordingly, the acquired
assets and liabilities were recorded at
10
their estimated fair values as of the date of acquisition. IBC was merged
into the Company. OXIS S.A. operates as a subsidiary of the Company.
In July 1995, in a transaction which was also accounted for as a purchase,
the Company acquired Therox Pharmaceuticals, Inc. ("Therox") through an
exchange of stock. Therox was merged into a wholly-owned subsidiary of the
Company. The acquisition of Therox provided the Company with a technology
portfolio complementary to its novel therapeutics for treatment of free
radical associated diseases together with university partnershipsrelationships and
seven patents.
Because the acquisitions have been accounted for as purchases, the
Company's consolidated results of operations include the operating results
of the acquired businesses from the dates of acquisition only. Therefore,
the results of operations of the 1994 acquired businesses are included in
the consolidated statements of operations from September 7, 1994, and the
results of Therox's operations are included in the consolidated statements
of operations from July 19, 1995.
Costs relating to the acquisitions and the Company's more complex corporate
structure and the increased research and development investments have
placed significant demand on the Company's limited financial resources. See
"Financial Condition, Liquidity and Capital Resources" below.
14
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During 19951996 the Company's working capital deficit increaseddecreased slightly from $1,046,000
at December 31, 1994, to
$1,469,000 at December 31, 1995.1995, to $1,405,000 at December 31, 1996. This
increasedecrease in the Company's working capital deficit resulted primarily from
the effect of the net loss for 19951996 ($8,892,0005,992,000 less non-cash charges of
$4,698,000)$1,381,000), offset by proceeds from issuance of stock ($2,925,000)4,305,000) and
long-term debtconvertible term notes ($1,255,000)1,000,000).
Shareholders who hold $766,000 of notes that are included in
current liabilitiesCash and cash equivalents declined from $727,000 at December 31, 1995, have commitments to
invest an
amount at least equal to the note balances in equity securities of the
Company. During March 1996 the Company is negotiating with these
shareholders terms for converting these notes to stock of the Company. If
all such notes are converted to Company stock, the Company's working
capital deficit will be reduced by $766,000.
Cash and certificates of deposit declined from $1,432,000$422,000 at December 31, 1994, to $727,000 at December 31, 1995.1996.
The Company expects to continue to report losses in the near term1997 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. The
Company must raise additional capital during the first half of 1996.1997.
Failure to raise such additional capital would cause the Company to
severely curtail or cease operations. For more information concerning the
Company's ability to continue as a going concern, see Note 1 to the
consolidated financial statements.
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
11
pharmaceutical companies that have the required resources to develop and
market certain of these products. TheseThere is no assurance that the Company's
effort to develop such business alliances will be successful. Further, bovine superoxide dismutase sales of recent years
to Sanofi Winthrop Inc. (18% of 1995 revenues) are not expected to
continue. Sanofi Winthrop announced in October 1995 that a second Phase
III trial on its drug, DISMUTEC (a coupled form of OXIS' bovine superoxide
dismutase) to treat head trauma failed to show statistically significant
improvements between the treatment and control groups. Although the
Company is currently seeking additional funds through a private placementcapital (described below), it
cannot predict the source, terms, amount, form, and/or availability of
additional capital to fund its operations to the end of the current year.
During 1996, the Company raised approximately $5,300,000 cash through the
sale of its Series C, Series D and Series E Preferred Stock and common
stock, and convertible term notes. Substantial additional capital will be
required during 1997 to continue operating in accordance with its current
plans. The Company has engaged an agent to assist on a best-efforts basis
to raise
up to $4,000,000 in the first quarter of 1996 through the salecomplete a private placement of its Series C Preferred Stock. On March 4, 1996,common stock. In addition, the
Company announcedhas engaged a French investment banker to act as its underwriter
for a planned public offering of its common stock on the first closing of the offering, with proceeds of $763,000newly opened
French stock market, Le Nouveau Marche, subject to obtaining appropriate
authorization from the sale of
Series C Preferred Stock. Even if the Company is able to sell the entire
$4,000,000 of Series C Preferred Stock, it expects that additional capital
will be required during 1996 to continue operating in accordance with its
current plans.French stock market regulatory authorities. However,
no
15
assurances can be given that the Company will successfully raise the
needed capital. If the Company is unable to raise additional capital during
the remainderfirst half of 1996,1997, it would endeavor to extend its ability to continue
in business through the reduction of personnel and facility costs, by
slowing its research and development efforts, and by reducing other
operating costs, however, no assurances can be given that it will be able
to do so.
RESULTS OF OPERATIONS
REVENUES
The Company's sales for the past three years consisted of the following:
1996 1995 1994 1993
Diagnostic and research assays $2,364,000 $2,240,000 $ 645,000 $ --
Bovine superoxide dismutase (bSOD)
for research and human use 1,935,000 1,817,000 2,130,000
2,098,000
Palosein/(R)/ (bSOD(bSOD for veterinary use) 480,000 555,000 346,000
123,000
Other 23,000 370,000 204,000 94,000
---------- ---------- ----------
Total sales $4,802,000 $4,982,000 $3,325,000 $2,315,000
========== ========== ==========
Diagnostic and research assays are products acquired with the acquisitions
of IBC and OXIS S.A..S.A. Sales of these products for 1994 represent sales from
September 8 through the end of the year. The entire year'syears' sales of
diagnostic and research assays are included in the Company's sales for 1995.
Reductions of bulk1995
and 1996.
Bulk bSOD sales in 1994 and 1995 included sales to Sanofi Winthrop, andInc.
Sales of bulk bSOD to Sanofi Winthrop ceased in 1995, when Sanofi Winthrop
announced that the clinical trial in which it was using the Company's German licenseebSOD
failed to show the desired results. The
12
decline in 1994 were offset by an increase in sales to the
Company's Spanish licensee, resulting in a slight increase in bulk bSOD
sales in 1994. In 1995 bulk bSOD sales to Sanofi Winthrop declined
further, and there were no saleshas been offset to the Company's German licensee. These
decreases were partially offseta large extent by
a further increaseincreases in sales to the
Spanish licensee.
Since no further sales of bSOD to either Sanofi Winthrop orTedec-Meiji Farma S.A., the Company's German licensee are anticipated, futureSpanish
licensee.
Future sales of bulk bSOD are largely dependent on the needs of the
Company's Spanish licensee. AlthoughThe Company expects its orders for 1997 from
the Spanish licensee has continued to purchase bSOD in the first quarter of
1996, the Company has received no further firm ordersbe less than those for bSOD beyond what
has been shipped in the first quarter of 1996. Thus, theThe Company's sales of
bulk bSOD for 1996 and beyond 1997 are uncertain and difficult to predict and no
assurances can be given with respect thereto.
16
Sales of Palosein/(R)/, which was reintroduced to the U.S. market in 1993
and is sold primarily to veterinary wholesalers in the United States,
increased from $123,000 in 1993 to $346,000 in 1994 andto $555,000 in 1995 as a result of an
active direct mail marketing campaign, which the Company
intends to continue.
Royalty income in 1994but declined to $145,000, from $729,000$480,000 in 1993. As
discussed1996 due
in Note 12part to large stocking orders by distributors in late 1995. The decrease
in other sales was principally the consolidated financial statements, the Company
anticipates that royalties from licensees of its bSOD products will be
minimal in the future becauseresult of the recent regulatory developmentscompletion of an assay
development contract in Europe. A further declineearly 1996. Royalties and license fees are not
expected to be material in royalties in 1995 was offset by a fee
generated from an agreement to license rights to the Company's technology
for the rapid detection of antibiotic resistance.1997.
COSTS AND EXPENSES
Cost of sales as a percent of product sales increased from 57% in 1993 to
62% in 1994. This increase in cost was partially due to the inclusion, in
1994, of sales and cost of products of the businesses acquired in September
1994. The cost of those products includes the amortization of acquired
technology ($239,000 in 1994 and $727,000 in 1995). In addition, the cost
of bulk bSOD sales in 1994 was higher than usual due to a significant sale
at less than the Company's historic profit margin.
Cost of sales as a percent of product sales declined from 62% in 1994 to
59% in 1995. In 1995 the cost of the Company's diagnostic and research
assays declined slightly as a result of increased volumes, and the cost of
bulk bSOD sales also declined from the 1994 level. In 1996 cost of sales
increased to 63% of product sales. The increase was primarily caused by a
decline in the gross margin on bulk bSOD sales. The Company's cost of sales
includes amortization of technology acquired in 1994 ($239,000 in 1994, and
$737,000 in 1995 and 1996).
Research and development costs increased from $813,000 in 1993 to
$1,670,000 in 1994 andto
$4,299,000 in 1995.1995, and $4,908,000 in 1996. The increases wereincrease in 1995 was
primarily due to the cost of the research and development activities
associated with pharmaceutical technologies acquired in the September 1994
and July 1995 business acquisitions. The increase of $609,000 in 1996 is
the result of increased expenditures relating to preclinical development
work and the Phase I clinical trial on the Company's lead therapeutics
program (glutathione peroxidase mimics) of approximately $1,130,000, and a
$230,000 increase in expenses of the former Therox operations, offset by a
cost reduction of approximately $780,000 from the closure of the Company's
Mountain View, California facility in the fourth quarter of 1995. The
expenses of the Therox operations are included in the 1995 expenses
starting in July 1995; the former Therox laboratory facility was closed in
May 1996.
Sales, general and administrative expenses increased from $1,008,000 in 19931995 to $3,332,000
from $1,652,000 in 1994. This increase was due to the inclusion of
general and administrative costs of the acquired businesses after the
September 1994 acquisitions, other current expenses relating to the
acquisitions, increases in insurance coverage, and increased marketing
costs relating to Palosein/(R)/ and new products from the 1994
acquisitions.
Sales, general and administrative expenses increased further in 1995 to
$3,332,000. The increase in 1995 was due primarily to the
inclusion for the entire year of general and administrative costs of the
businesses acquired in 1994, further increases in sales and marketing costs
relating to Palosein/(R)/ and the new products from the 1994 acquisitions,
and increased legal fees and other expenses relating to the Company's
ongoing need to raise capital and more complex corporate structure.
1713
In 1996, sales, general and administrative expenses decreased by $491,000,
to $2,841,000. Most of the decrease was a decrease in the selling, general
and administrative expenses of the Company's French subsidiary. In the
third quarter of 1996 all of the Company's manufacturing operations were
consolidated in the United States and the French subsidiary became a
research facility. In connection with this restructuring, two
administrative positions have been eliminated and certain other costs which
were previously charged to administrative expenses are now being classified
as research and development costs. The administrative costs of the
Company's French subsidiary decreased $359,000 in 1996 as compared to 1995.
Expenses included charges of $3,675,000 and $3,329,000 to operations for
1994 and 1995, respectively, reflecting the write-off of purchased
in-
processin-process technology, as described in Note 3 to the consolidated financial
statements.
INTEREST INCOME AND EXPENSE
Interest income decreased and interest expense increased in both 1994 and 1995 as the
Company liquidated certificates of deposit and borrowed funds pursuant to
short-term and long-term interest bearing obligations to finance increased
research and development efforts.
NET LOSS
The Company incurred net losses in 1993, 1994, 1995 and 1995. In 1993 the
Company recorded non-recurring costs and expenses of $1,531,000 ($.31 per
share) relating to a contest for control of the Company.1996. The 1994 loss
includes a $3,675,000 ($.58 per share) charge to operations for the
write-
offwrite-off of purchased in-process technology related to the acquisitions of
OXIS S.A. and IBC. Similarly, the 1995 loss includes a $3,329,000 ($.31 per
share) charge to operations for the write-off of purchased in-process
technology related to the acquisition of Therox. Excluding these unusual
charges, the Company would have incurred a net income of $46,000, or $.01
per share for 1993; a net loss of $1,892,000, or $.30
per share for 1994;
and a net loss of $5,563,000, or $.51 per share for 1995.1995,
as compared to a net loss of $5,992,000, or $.47 per share for 1996.
Increased research and development expenditures and selling, general and
administrative expenses from the businesses acquired late in the third
quarter of 1994 and increased research and development expenditures
relating to the acquisition of Therox early in the third quarter of 1995
contributed to the increased losses.losses in 1995 as compared to 1994. The
increased loss for 1996 as compared to 1995 (excluding the unusual charge)
is attributable primarily to the increased research and development costs
relating to the Company's glutathione peroxidase mimics program.
The Company expects to incur a substantial net loss for 1996.1997. 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
14
additional capital, 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.
1815
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
AND 1994
1995 1994
ASSETS
Current assets:
Cash and cash equivalents $ 727,000 $ 936,000
Certificates of deposit -- 496,000
Accounts receivable 823,000 740,000
Inventories 953,000 673,000
Prepaid and other 262,000 228,000
---------- -----------
Total current assets 2,765,000 3,073,000
Property and equipment, net 1,092,000 1,298,000
Assets under capital leases, net 1,198,000 1,340,000
Technology for developed products and
custom assays, net 4,498,000 5,215,000
Other assets 317,000 268,000
---------- -----------
Total assets $9,870,000 $11,194,0001996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 422,000 $ 727,000
Accounts receivable 861,000 823,000
Inventories 591,000 953,000
Prepaid and other 191,000 262,000
---------- ----------
Total current assets 2,065,000 2,765,000
Property and equipment, net 1,327,000 1,092,000
Assets under capital leases, net 309,000 1,198,000
Technology for developed products and
custom assays, net 3,782,000 4,498,000
Other assets 514,000 317,000
---------- ----------
Total assets $7,997,000 $9,870,000
========== ========== ===========
See accompanying notes.
1916
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 19951996 AND 19941995
1996 1995 1994
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
NoteNotes payable to bank $ --1,221,000 $ 340,000
Other notes payable 1,616,000 --
Accounts payable 1,386,000 1,182,000 1,562,000
Customer deposits 132,000 250,000 1,116,000
Accrued liabilities 655,000 903,000 628,000
Current portion of capital lease obligations 76,000 283,000
473,000
------------ -------------------------- --------------
Total current liabilities 3,470,000 4,234,000 4,119,000
Capital lease obligations -- 47,000 297,000
8% convertible subordinated debentures -- 1,255,000 --
Other liabilities 2,000 30,000 79,000
Commitments and contingencies (Notes 1, 3 and 11)
Shareholders' equity:
Preferred stock - $.01 par value; 5,000,00015,000,000 shares authorized;authorized:
Series B - 642,583 shares issued and outstanding at December 31, 1996
and 1995 (liquidation
preference of $1,500,000) 6,000 6,000
Series C - 1,647,157 shares issued and outstanding
at December 31, 1996 17,000 --
Series D - 1,650 shares issued and outstanding
at December 31, 1996 -- --
Series E - 2,200 shares issued and outstanding
at December 31, 1996 -- --
Common stock - $.50 par value; 25,000,00040,000,000 shares
authorized; 12,124,42313,790,736 shares issued and outstanding 6,895,000 6,062,000 4,661,000
Additional paid in capital 30,706,000 25,210,000 20,230,000
Accumulated deficit (33,023,000) (27,031,000) (18,139,000)
Accumulated translation adjustments (76,000) 57,000
(53,000)
------------ -------------------------- --------------
Total shareholders' equity 4,525,000 4,304,000
6,699,000
------------ -------------------------- -------------
Total liabilities and shareholders' equity $ 7,997,000 $ 9,870,000
$ 11,194,000
============ ========================== =============
See accompanying notes.
2017
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 1994 AND 19931994
1996 1995 1994 1993
Revenues:
Sales $ 4,802,000 $ 4,982,000 $ 3,325,000 $ 2,315,000
Royalties and license fees 65,000 154,000 145,000
729,000
----------- ----------- ----------------------- ------------ -------------
Total revenues 4,867,000 5,136,000 3,470,000 3,044,000
Costs and expenses:
Cost of sales 3,009,000 2,939,000 2,074,000 1,330,000
Research and development 4,908,000 4,299,000 1,670,000 813,000
Sales, general and administrative 2,841,000 3,332,000 1,652,000 1,008,000
Purchased in-process technology (Note 3) -- 3,329,000 3,675,000
--
Control contest -- -- 1,531,000
----------- ----------- ----------------------- ------------ -------------
Total costs and expenses 10,758,000 13,899,000 9,071,000
4,682,000
----------- ----------- ----------------------- ------------ -------------
Operating loss (5,891,000) (8,763,000) (5,601,000)
(1,638,000)
Interest income 37,000 42,000 82,000
153,000
Interest expense (138,000) (171,000) (48,000)
--
----------- ----------------------- ------------ -----------
Net loss $(8,892,000)$ (5,992,000) $ (8,892,000) $(5,567,000)
$(1,485,000)
=========== ======================= ============ ===========
Net loss per share $(0.82) $(0.88) $(0.30)
=========== ===========$ (.47) $ (0.82) $ (0.88)
============ ============ ===========
Weighted average number of shares
used in computation 12,821,544 10,854,149 6,350,097
4,982,670
=========== ======================= ============ ===========
See accompanying notes.
2118
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 1994 AND 19931994
1996 1995 1994 1993
Cash flows from operating activities:ativities:
Net loss $(5,992,000) $(8,892,000) $(5,567,000) $(1,485,000)
Adjustments to reconcile net loss to cash provided
by (used for) operating activities:
Depreciation and amortization 1,381,000 1,369,000 551,000 53,000
Purchased in-process technology -- 3,329,000 3,675,000 --
Changes in assets and liabilities:
Accounts receivable (50,000) (70,000) 258,000
201,000
Inventories 355,000 (17,000) (186,000) (105,000)
Other current assets (2,000) 209,000 (19,000)
12,000
Accounts payable 220,000 (565,000) 562,000
(248,000)
Customer deposits (118,000) (866,000) 1,116,000
--
Accrued liabilities (69,000) 251,000 (8,000)
(7,000)
----------- ----------- -----------------------
Net cash provided by (used for)
operating activities (4,275,000) (5,252,000) 382,000 (1,579,000)
Cash flows from investing activities:
Redemption of certificates of deposit -- 496,000 884,000 2,098,000
Purchase of equipment (58,000) (99,000) (40,000) (69,000)
Acquisition and stock issuance costs (Note 3) -- -- (1,361,000) --
Cash of businesses acquired (Note 3) -- 143,000 273,000
Additions to patent and deferred financing costs (350,000) -- --
Other (1,000) (136,000) 19,000
--
----------- ----------- -----------------------
Net cash provided by (used for)
investing activities (409,000) 404,000 (225,000) 2,029,000
Cash flows from financing activities:
Short-term borrowing 1,061,000 1,366,000 296,000 --
Proceeds from issuance of long-term debt -- 1,255,000 -- --
Costs in connection with isssuanceissuance of long-term debt -- (152,000) -- --
Proceeds from issuance of stock, net of related cost 4,305,000 3,077,000 -- --
Repayment of short-term notes (690,000) (340,000) -- --
Repayment of capital lease obligations and
other liabilities (294,000) (573,000) (275,000)
--
----------- ----------- -----------------------
Net cash provided by financing activities 4,382,000 4,633,000 21,000 --
Effect of exchange rate changes on cash (3,000) 6,000 -- --
----------- ----------- -----------------------
Net increase (decrease) in cash and cash equivalents (305,000) (209,000) 178,000 450,000
Cash and cash equivalents - beginning of year 727,000 936,000 758,000
308,000
----------- ----------- -----------------------
Cash and cash equivalents - end of year $ 422,000 $ 727,000 $ 936,000
$ 758,000
----------- ----------- -----------=========== =========== ============
See accompanying notes.
19
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
Supplemental schedule of noncash operating and
financing activities:
Inventory purchase with deferred payment terms $ 250,000 -- $250,000 --
Common stock issued as incentive to purchase notes -- $156,000 --
Issuance of Series C Preferred Stock in exchange
for cancellation of notes $ 156,000844,000 -- --
Conversion of 8% Convertible Subordinated Debentures
into Common Stock $1,312,000 -- --
Conversion of Series C and D Preferred Stock into
Common Stock $ 515,000 -- --
See accompanying notes.
2220
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 1994 AND 19931994
Preferred Stock Common Stock Additional
Accumulated Total
---------------- ------------------------------------- ------------ paid-in Accumulated translation shareholders'
Shares Amount Shares Amount capital
deficit adjustments equity
Balances,
January 1, 19931994 4,982,670 $2,491,000$ 2,491,000 $12,863,000 $(11,087,000) $ 4,267,000
Net loss (1,485,000) (1,485,000)
--------- ---------- ----------- ------------ -----------
Balances,
December 31, 1993 4,982,670 2,491,000 12,863,000 (12,572,000) 2,782,000
Series A preferred and
common shares issued in
connection with 1994
business combinations
(Note 3) 40,000 $ -- 4,340,092 2,170,000 7,367,000
9,537,000
Accumulated
translation adjustments
$(53,000) (53,000)
Net loss
(5,567,000) (5,567,000)
------ ------ --------- ---------- ----------- ------------ --------------- ---------- ---------- ----------
Balances,
December 31, 1994 40,000 -- 9,322,762 4,661,000 20,230,000 (18,139,000) (53,000) 6,699,000
Shares issued in
connection with short-
term notes 93,300 47,000 109,000
156,000
Sale of common shares 1,227,625 614,000 1,089,000 1,703,000
Conversion of Series A
preferred shares to
common (40,000) -- 40,000 20,000 (20,000)
--
Shares issued in
connection with 1995
business combination
(Note 3) 1,440,736 720,000 2,633,000
3,353,000
Series B preferred shares
issued (Note 3) 642,583 6,000 1,169,000
Accumulated translation
adjustments
Net loss
---------- ------- ---------- ---------- ----------
Balances,
December 31, 1995 642,583 6,000 12,124,423 6,062,000 25,210,000
Sale of Series C preferred
shares for cash 1,125,590 11,000 1,225,000
Series C preferred shares
issued in exchange for
cancellation of notes 648,490 7,000 837,000
Sale of Series D
preferred shares 2,000 -- 1,939,000
Accumulated Total
Accumulated translation shareholders'
deficit adjustments equity
------- ----------- ------
Balances,
January 1, 1994 $(12,572,000) $ 2,782,000
Series A preferred and
common shares issued in
connection with 1994
business combinations
(Note 3) 9,537,000
Accumulated translation
adjustments $(53,000) (53,000)
Net loss (5,567,000) (5,567,000)
----------- ------- ----------
Balances,
December 31, 1994 (18,139,000) (53,000) 6,699,000
Shares issued in
connection with short-
term notes 156,000
Sale of common shares 1,703,000
Conversion of Series A
preferred shares to
common --
Shares issued in
connection with 1995
business combination
(Note 3) 3,353,000
Series B preferred shares
issued (Note 3) 1,175,000
Accumulated translation
adjustments 110,000 110,000
Net loss (8,892,000) (8,892,000)
----------- ------- ------ ---------- ---------- ----------- ------------ -------- -----------
Balances,
December 31, 1995 642,583 $6,000 12,124,423 $6,062,000 $25,210,000 $(27,031,000) $(27,031,000) 57,000 $ 4,304,000
Sale of Series C preferred
shares for cash 1,236,000
Series C preferred shares
issued in exchange for
cancellation of notes 844,000
Sale of Series D
preferred shares 1,939,000
21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Preferred Stock Common Stock
--------------- ------------
Shares Amount Shares Amount
Common shares issued
upon conversion of
debentures 1,050,217 525,000
Conversion of Series C
preferred shares to
common stock (126,923) (1,000) 136,924 69,000
Conversion of Series D
preferred shares to
common stock (350) -- 360,839 180,000
Sale of Series E preferred
and common shares for
cash 2,200 -- 55,000 27,000
Other issuances of common
shares 63,333 32,000
Accumulated translation
adjustments
Net Loss
--------- ------- ---------- ----------
Balances,
December 31, 1996 2,293,590 $23,000 13,790,736 $6,895,000
========= ======= ====== ========== ==========
Additional Accumulated Total
paid-in Accumulated translation shareholders'
capital deficit adjustments equity
Common shares issued
upon conversion of
debentures 787,000 1,312,000
Conversion of Series C
preferred shares to
common stock (68,000) --
Conversion of Series D
preferred shares to
common stock (180,000) --
Sale of Series E preferred
and common shares for
cash 923,000 950,000
Other issuances of common
shares 33,000 65,000
Accumulated translation
adjustments (133,000) (133,000)
Net Loss (5,992,000) (5,992,000)
----------- ------------ --------- ----------
Balances,
December 31, 1996 $30,706,000 $(33,023,000) $ (76,000) $4,525,000
=========== ============ =========== ==================== ==========
See accompanying notes.
2322
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 1994 AND 19931994
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
OXIS International, Inc. (the "Company") develops, manufactures and markets
selected therapeutic and diagnostic products. The Company's research and
development efforts are concentrated principally in the development of
products to diagnose, treat and prevent diseases associated with free
radicals and reactive oxygen species. HeadquarteredThe Company is headquartered in
Portland, Oregon the Companyand operates a research and development facilities in Malvern,
Pennsylvania, andfacility near
Paris, France.
The Company has historically licensed and sold pharmaceutical forms of
superoxide dismutase (SOD) for human and veterinary use. In 1994, with the
acquisitions of businesses as described in Note 3, the Company began
selling therapeutic drug monitoring assays and research assays to measure
markers of oxidative stress, and began performing custom assay development.stress.
Therapeutic drug monitoring assays are manufactured by the Company in the
United States and are sold to hospital clinical laboratories and reference
laboratories by an in-house sales force and a network of distributors both
within and outside the United States. Assays to measure markers of
oxidative stress are manufactured by the Company in the United States (in
France prior to July, 1996) and are sold directly to researchers and to
distributors for resale to researchers, primarily in Europe, the United
States and Japan.
These financial statementstatements have been prepared on a going concern basis
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has incurred
losses in each of the last three years, and at December 31, 1995,1996, the
Company's current liabilities exceeded its current assets by $1,469,000.$1,405,000.
These factors, among others, may indicate that the Company may be unable to
continue as a going concern for a reasonable period of time. These
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that may be necessary should the Company
be unable to continue as a going concern. The Company's continuation as a
going concern is contingent upon its ability to obtain additional
financing, and to generate revenue and cash flow to meet its obligations on
a timely basis.
During the first quarter of 1996, the Company is seeking additional capitalraised approximately $5,300,000 cash through a private placement of up to $4,000,000the
sale of its Series C, Preferred
Stock. On March 4, 1996, the Company had closed the sale of 587,053 shares
of Series CD and Series E Preferred Stock for $763,000. If theand common
stock, and convertible term notes. The Company is able to sell
the entire $4,000,000 of Series C Preferred Stock, it still expects that additional
capital will be required during 19961997 to continue operating in accordance
with its current plans. The Company has engaged an agent to assist on a
best-efforts basis to complete a private placement of its common stock. In
addition, the Company has engaged a French investment banker to act as its
underwriter for a planned public offering of its common stock on the newly
opened French stock market, Le Nouveau
23
Marche, subject to obtaining appropriate authorization from the French
stock market regulatory authorities. If the Company is unable to raise
additional capital it intends to curtail its operations through the
reduction of personnel and facility costs and by reducing its research
24
and
development efforts. If the Company were to be unable to sufficiently
curtail its costs in such a situation, it might be forced to seek
protection of the courts through reorganization, bankruptcy or insolvency
proceedings.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying balance sheets include the
accounts of the Company as well as its subsidiaries. The results of
operations of the Company's French subsidiary since its purchase by the
Company on September 7, 1994, are included in the accompanying statements
of operations and cash flows. The functional currency of the Company's
French subsidiary is the French franc. The French subsidiary's assets and
liabilities are translated at the exchange rate at the end of the year, and
its statement of operations is translated at the average exchange rates
during the period for which its revenues and expenses are included in the
consolidated statement of operations. Gains or losses resulting from
foreign currency translation are accumulated as a separate component of
shareholders' equity. All significant intercompany balances and
transactions are eliminated in consolidation.
CASH EQUIVALENTS consist of money market accounts with commercial banks.
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 December 31, 19951996 and 1994,1995, consisted of the
following:
1996 1995 1994
Raw materials $148,000 $173,000 $179,000
Work in process 200,000 354,000 357,000
Finished goods 243,000 426,000 137,000
-------- --------
Total $591,000 $953,000 $673,000
======== ========
PROPERTY AND EQUIPMENT is stated at cost, or, in the case of property and
equipment acquired in transactions accounted for by the purchase method, at
the estimated fair market value at the date of the acquisition (which is
then considered to be the Company's cost). Depreciation of equipment is
computed using the straight-line method over estimated useful lives of
three to ten years. Leasehold improvements are amortized over the shorter
of five years or the remaining lease term. Assets acquired under capital
leases are being amortized over estimated useful lives of four to ten
years.
2524
Property and equipment at December 31, 19951996 and 1994,1995, consisted of the
following:
1995 1994
Furniture and office equipment $ 346,000 $ 319,000
Laboratory and manufacturing
equipment 707,000 649,000
Automobile 15,000 15,000
Leasehold improvements 806,000 710,000
---------- ----------
Property and equipment, at cost 1,874,000 1,693,000
Accumulated depreciation and
amortization (782,000) (395,000)
---------- ----------
Property and equipment, net $1,092,000 $1,298,000
==========1996 1995
Furniture and office equipment $ 369,000 $ 346,000
Laboratory and manufacturing
equipment 2,495,000 707,000
Automobile 15,000 15,000
Leasehold improvements 766,000 806,000
----------- ----------
Property and equipment, at cost 3,645,000 1,874,000
Accumulated depreciation and
amortization (2,318,000) (782,000)
----------- -----------
Property and equipment, net $ 1,327,000 $1,092,000
=========== ==========
During 1996 certain equipment under capital lease was purchased, and the
cost and accumulated amortization of that equipment was reclassified to
property and equipment.
TECHNOLOGY - Technology for developed products and custom assays, which was
acquired in the 1994 business combinations described in Note 3, is being
amortized over estimated useful lives of seven to ten years. Accumulated
amortization of technology for developed products and custom assays was
$1,682,000 as of December 31, 1996 and $973,000 as of December 31, 1995 and $239,000 as of December 31, 1994.1995.
The Company periodically reviews net cash flows from sales of products and
projections of net cash flows from sales of products on an undiscounted
basis to assess recovery of intangible assets.
STOCK OPTIONS - The Company applies the intrinsic value based method
described in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", in accounting for its stock incentive plan.
REVENUE RECOGNITION - The Company normally recognizes product sales upon shipment of
the product to the customer.
Product sales may be recorded on
the scheduled shipment date if the customer has delayed shipment, but has
agreed to accept title to the product and has paid for the product. Sales
from custom assay development contracts is recognized as the work is
performed. Revenue derived from royalties pursuant to license agreements is
recognized after sales information is reported by licensees.
INCOME TAXES - The Company accounts forDeferred income taxes, under statementreflecting the net tax effects of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires deferred income taxes be provided to reflect
temporary differences between financial and tax basesthe carrying amount of assets and liabilities
using presently
enactedrecognized for financial reporting purposes and the amounts recognized for
income tax rates and laws.purposes, are based on tax laws currently enacted. A valuation
allowance is established when necessary to reduce deferred tax assets to
the amount expected to be realized.
NET LOSS PER SHARE - Net loss per share is computed based upon the average
number of common shares outstanding and, if dilutive, the incremental
shares issuable upon the assumed exercise of stock options or warrants and
the assumed conversion of convertible debentures and preferred stock.
2625
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requirerequires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of sales and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount reported in the
balance sheet for cash and cash equivalents, certificates of deposit,
accounts receivable, notes
payable, customer deposits and accrued liabilities approximates fair value
due to the short-term nature of the accounts. The carrying amount reported
in the balance sheet for secured convertible term notes and 8% convertible
subordinated debentures approximates fair value because the terms of the
notes and debentures were determined and the notes and debentures were sold
shortly before the enddates of 1995.the balance sheets in which they appear.
3. BUSINESS COMBINATIONS
On September 7, 1994, the Company acquired Bioxytech S.A., a French
company, and International BioClinical, Inc. ("IBC"), an Oregon
corporation. The name of Bioxytech S.A. was subsequently changed to OXIS
International S.A. ("OXIS S.A."). OXIS S.A. was acquired through an
exchange of shares that resulted in the Company owning in excess of 99% of
the outstanding stock of OXIS S.A., which thus became a subsidiary of the
Company. IBC was acquired through a merger with and into the Company, which
(1) terminated the separate existence of IBC by merging it into the
Company, and (2) resulted in the conversion of the outstanding stock of IBC
into stock of the Company. Two of the Company's directors were also
directors and major shareholders of IBC.
In exchange for the Bioxytech S.A. shares, the Company issued a total of
2,341,599 shares of the Company's common stock and 40,000 shares of the
Company's non-voting preferred stock (which have subsequently been
converted into 40,000 shares of common stock). In addition, the Bioxytech
S.A. shareholders may receive up to 107,670 shares of the Company's capital
stock if they meet certain participation levels in a contemplated private
placement of equity securities of the Company.
The merger of IBC with and into the Company resulted in the conversion of
IBC's common stock into 1,998,493 shares of the Company's common stock.
The acquisitions of OXIS S.A. and IBC have been accounted for as purchases
and, accordingly, the acquired assets and liabilities were recorded at
their estimated fair market values as of the date of acquisition. The
aggregate purchase price of $9,811,000 (4,380,092 shares issued times the
average per share closing price of the Company's common stock for the five
days ended September 8, 1994, discounted 30% for certain trading
restrictions and less costs of $274,000 directly attributable to issuance
of stock in connection with the acquisitions) plus direct costs for the
acquisitions of $881,000 have been allocated to the
2726
assets and liabilities acquired. The Company also issued options to
purchase 214,700 shares of the Company's common stock in connection with
the acquisitions. No value was assigned to these options because the
exercise price of the options was in excess of the market value of the
common stock.
The total cost of the acquisitions of Bioxytech and IBC has been allocated
to the assets acquired and liabilities assumed as follows:
OXIS S.A. IBC Total
------------ ------------ --------------------- --- -----
Cash $ 150,000 $ 123,000 $ 273,000
Other assets 369,000 611,000 980,000
Property, equipment and capitalized
leases 2,434,000 294,000 2,728,000
Technology for developed products and
custom assay development capabilities 1,503,000 3,995,000 5,498,000
Technology for in-process products 3,368,000 307,000 3,675,000
Less liabilities assumed (2,011,000) (451,000) (2,462,000)
----------- --------------------- -----------
Total acquisition cost $ 5,813,000 $4,879,000$ 4,879,000 $10,692,000
=========== ===================== ===========
The Company's consolidated results of operations include the operating
results of the acquired companies since the acquisitions.
Approximately $3,675,000 ($.58 per share) of the total purchase price
represented technology relating to research and development projects that
were in process by the acquired companies that had no alternative future
use other than the completion of these projects. In accordance with
generally accepted accounting principles, these costs have been charged to
operations immediately upon completion of the acquisitions.
The following table summarizes the unaudited pro forma combined results of
operations for the yearsyear ended December 31, 1994 and 1993 as if the acquisitions had
occurred at the beginning of the years presented:
1994 1993
Total revenues $ 5,809,000 $ 6,736,000
Net loss $(4,742,000) $(5,207,000)
Net loss per share (based on 9,322,762
shares outstanding) $ (.51) $ (.56)
28year:
1994
Total revenues $ 5,809,000
Net loss $(4,742,000)
Net loss per share (based on 9,322,762
shares outstanding) $ (.51)
27
The above table includes, on an unaudited pro forma basis, the Company's
financial information for the yearsyear ended December 31, 1994, and 1993, combined with
the financial information of OXIS S.A. and IBC for the same twelve-month
periods.period. The above table excludes the one-time $3,675,000 charge for
purchased in-process technology arising from the acquisitions.
Pro forma results for the year ended December 31, 1993 include non-
recurring costs of $1,531,000 in connection with a control contest.
The unaudited pro forma combined results of operations are presented for
illustrative purposes only and are not necessarily indicative of the
operating results that would have occurred had the acquisitions been
consummated at the beginning of the periodsperiod presented, nor are they
necessarily indicative of future operating results.
On July 19, 1995, the Company consummated the acquisition of Therox
Pharmaceuticals, Inc. ("Therox") pursuant to a transaction wherein Therox
was merged with and into a wholly-owned subsidiary of the Company. Therox
was a Philadelphia-based start-up company focused on the development of
therapeutics to treat diseases associated with damage from free radicals.
The Company issued 1,440,736 shares of its common stock to Therox
stockholders in exchange for all of the Therox capital stock. In addition,
the acquisition agreement provides for payment of up to $2,000,000 by the
Company to the Therox stockholders based on the successful
commercialization of the Therox technologies.
The acquisition of Therox has been recorded as a purchase and, accordingly,
the acquired assets and liabilities were recorded at their estimated fair
values as of the date of acquisition. The aggregate purchase price of
$3,353,000 (1,440,736 shares issued times the average per share closing
price of the Company's common stock for the five days ended July 20, 1995,
discounted 30% for certain trading restrictions) has been allocated to the
assets and liabilities acquired.
The cost of the acquisition of Therox has been allocated to the assets
acquired and liabilities assumed as follows:
Cash $ 143,000
Equipment 16,000
Technology for in-process products 3,329,000
Other assets 23,000
Less liabilities assumed (158,000)
----------
Acquisition cost $3,353,000
==========
The Company's consolidated results of operations include the operating
results of the acquired company since the acquisition.
29
Approximately $3,329,000 of the purchase price represented technology
related to research and development projects that are in process and that
has no alternative future use other than the completion of these projects.
Accordingly, these costs have been charged to operations immediately upon
completion of the acquisition.
28
The following table presents the unaudited pro forma combined results of
operations for the years ended December 31, 1995 and 1994 as if the
acquisition had occurred at the beginning of the periods presented:
1995 1994
------------ ------------
1995 1994
---- ----
Total revenues $ 5,136,000 $ 3,470,000
Net loss $(5,990,000) $(6,088,000)
Net loss per share (based
on 12,124,423 shares outstanding) $ (.49) $ (.50)
The above table includes, on an unaudited pro forma basis, the Company's
financial information for the years ended December 31, 1995 and 1994,
combined with the financial information of Therox for the same periods. The
above table excludes the one-time $3,329,000 charge for purchased
in-process technology arising from the 1995 acquisition, but includes
non-recurring costs of $3,675,000 for purchased in-process technology from
the Company's September 1994 business acquisitions.
The unaudited pro forma combined results of operations are presented for
illustrative purposes only and are not necessarily indicative of the
operating results that would have occurred had the acquisition been
consummated at the beginning of the periods presented, nor are they
necessarily indicative of future operating results.
Simultaneously with the Therox acquisition, a Series B Preferred Stock
Purchase Agreement was entered into between the Company and two venture
capital firms (S.R. One, Limited and Brantley Venture Partners II, L.P.)
which were major stockholders of Therox. Pursuant to this agreement, the
Company sold 642,583 shares of its Series B Preferred Stock for an
aggregate price of $1,500,000.
Costs of approximately $325,000 directly attributable to the issuance of
the Series B Preferred Stock and the common stock issued in the Therox
acquisition have been recorded as a reduction in the proceeds from the
issuance of the shares.
3029
4. NOTES PAYABLE
Notes payable at December 31, 1996 and 1995 consisted of the following:
1996 1995
Secured convertible term notes $1,000,000 $ --
8% notes payable to certain shareholders who are former
Bioxytech S.A. shareholders, due February 5, 1996, secured
by assets relating to certain of the Company's diagnostic
products -- 766,000
Note payable to Sanofi S.A., due May 4, 1996, interest at prime
plus 2% (10-1/2% as of December 31, 1995), secured by all of
the Company's assets -- 600,000
Liability, without interest, under inventory purchase agreement,
due May 1997 or earlier if 75% of the related inventory
is sold 200,000 250,000
Other 21,000 --
---------- ----------
$1,221,000 $1,616,000
========== ==========
In October 1996, the Company sold $1,000,000 of secured convertible term
notes with warrants to two of the Company's current shareholders. The notes
bear interest at 10% per annum, are due in June 1997, and are initially
convertible into common stock at a price of $1.4125 per share. The warrants
issued entitle the holders to purchase up to 300,000 shares of common
stock, initially at an exercise price of $1.58 per share. The conversion
rate of the convertible term notes and the exercise price of the warrants
are subject to change under certain circumstances. The due date of the
notes can be extended at the option of the Company for 120 days upon
issuance of additional warrants to the holders. The convertible term notes
are secured by assets relating to certain of the Company's clinical diagnostic
products $766,000products.
As described in Note payable to Sanofi S.A., due7, in May 4, 1996, interest
at prime plus 2% (10-1/2% as of December 31, 1995), secured
by all of the Company's assets 600,000
Liability, without interest, under inventory purchase
agreement, due May 1997 or earlier if 75% of the related
inventory is sold 250,000
----------
$1,616,000
==========
The shareholders who hold the 8% notes have commitments to invest an amount
at least equal to the note balancespayable were canceled in
stockexchange for issuance of the Company. During March
1996 the Company is negotiating with these shareholders terms for converting
these notes to stock of the Company.Series C
Preferred Stock.
5. CAPITALIZED LEASES
The Company's French subsidiary leases certain equipment, furniture and
fixtures under capital leases. The futureAs of December 31, 1996, remaining minimum
lease payments on these capital leases as of December 31, 1995, were as follows:
Year ending December 31:
1996 $309,000
1997 47,000
--------
Total minimum capital lease obligations 356,000
Less amounts representing interest 26,000
--------
Present value of net minimum obligation 330,000
Less amount due within one year 283,000
--------
Long term obligation under capital leases $ 47,000
========
approximately $48,000, all due
in 1997.
30
Leased assets, which consist principally of laboratory and office
equipment, are reported in the December 31, 1995,1996, balance sheet at $1,418,000$622,000
less accumulated amortization of $220,000.
31
$313,000.
6. 8% CONVERTIBLE SUBORDINATED DEBENTURES
In November and December 1995, the Company completed a private placement
pursuant to which $1,255,000 of its 8% Convertible Subordinated Debentures
were issued. The debentures arewere unsecured and arewere subordinated to other
obligations of the Company up to an aggregate of $3,000,000.
The Debentures
are due December 31, 1997; interest is payable semiannually on June 30 and
December 31.
The debentures arewere convertible into shares of the Company's common stock
at the option of the holders. Any time after six months following closing
of the private placement, the Company mayhad the right to require conversion
of the debentures. The
debentures are convertible at a conversion priceIn June 1996, $1,255,000 principal plus accrued interest
of $1.25 per common share.
However, the conversion price shall be reduced to $.65 per share if the
closing price of$57,000 on the Company's common stock is less than $.65 for fifteen
consecutive trading days. In such case, the debentures could be8% Convertible Subordinated Debentures were
converted into a maximum of 1,930,7691,050,217 shares of common stock.
7. SHAREHOLDERS' EQUITY
PREFERRED STOCK - Terms of the preferred stock are to be fixed by the Board
of Directors at such time as the preferred stock is issued. The 40,000
shares of Series A Preferred Stock issued during 1994 were nonvoting and
were converted to common stock on a one share for one share basis during
1995. The 642,583 shares of Series B Preferred Stock are convertible into
common stock on a one-for-one basis and have the same voting rights as the
common stock. The Series B Preferred Stock has certain preferential rights
with respect to liquidation and dividends.
In February and MarchDuring the first six months of 1996, the Company has issued 587,0531,125,590 shares of
its Series C Preferred Stock for net cash proceeds of $1,236,000. In
addition, in May 1996, the Company issued 648,490 shares of its Series C
Preferred stock in exchange for the cancellation of $766,000 principal plus
accrued interest of $78,000 on 8% notes payable to former shareholders of
the Company's French subsidiary. The shares of Series C Preferred Stock. Each share of Series C Preferred Stock is initiallyare
convertible into one shareshares of the Company's common stock at the option of the
holderholders at any time. After six months followingThe conversion ratio is based on the average closing
bid price of the salescommon stock for the fifteen consecutive trading days
ending on the date immediately preceding the date notice of conversion is
given, but cannot be less than one nor more than 1.4444 common shares for
each Series C preferred Stock, thePreferred share. The conversion ratio may be adjusted under
certain circumstances, and after eight months following the closing, the Company may
havehas the right to automatically
convert the Series C Preferred Stock into common stock under certain
circumstances. The Series C Preferred Stock has
the same voting rights as the Company's common stock based on the numberEach share of
shares into which the Series C Preferred Stock is convertible,entitled to the
number of votes equal to 1.30 divided by the average closing bid price of
the Company's common stock during the fifteen consecutive trading days
immediately prior to the date such shares of Series C Preferred Stock were
purchased.
31
In May 1996, the Company issued 2,000 shares of its Series D Preferred
Stock and warrants to purchase 810,126 shares of common stock for net cash
proceeds of $1,939,000. The Series D Preferred Stock entitles the holder
thereof to convert its shares into a number of shares of common stock
determined by dividing the stated value of the Series D Preferred Stock
(i.e., $1,000 per share), plus a premium in the amount of 8% per annum of
the stated value from the date of issuance, by a conversion price equal to
the lesser of (i) $2.30 and (ii) 75% of the average of the closing bid
prices for shares of common stock for the five trading days immediately
prior to conversion, but limited to a maximum of 2,424,884 shares of common
stock. The holders of Series D Preferred Stock have no voting power, except
as specifically provided by Delaware General Corporation Law.
In December 1996, the Company issued 2,200 shares of its Series E Preferred
Stock and 55,000 shares of common stock for net cash proceeds of $950,000.
The Series E Preferred Stock entitles the holder thereof, after the earlier
of (i) April 9, 1997 or (ii) 30 days following the closing of a public
offering by the Company, to receive in exchange for its shares of Series E
Preferred Stock, a number of shares of common stock determined by dividing
the stated value of the Series E Preferred Stock (i.e., $500 per share)
("Series E Stated Value"), by a conversion price equal to the lesser of (i)
$2.00 and (ii) 75% of the average of the closing bid prices for shares of
common stock for the five consecutive trading days ending one trading day
prior to conversion, subject to adjustment upon the occurrence of certain
dilutive events. However, the maximum number of shares of common stock
issuable upon conversion of the Series E Preferred Stock plus the number of
shares of common stock issued in connection with the sale of the Series E
Preferred Stock is 2,733,799 shares (subject to adjustment upon the
occurrence of certain circumstances.dilutive events).
Pursuant to the terms of the Series E Preferred Stock, each holder thereof
can only acquire shares of common stock upon conversion of the Series E
Preferred Stock to the extent that the number of shares of common stock
thereby issuable, together with a number of shares of common stock then
held by such holder and its affiliates (not including shares of common
stock underlying converted shares of Series E Preferred Stock) would not
exceed 4.9% of the then outstanding common stock.
The Series E Preferred Stock has no voting power except as provided under
the Delaware General Corporation Law.
STOCK WARRANTS - In prior years, the Company issued warrants to purchase
shares of common stock to certain officers and key employees (none of whom
any longer hold a position with the Company) and to former directors. These
warrants are exercisable at $2.875 per share and expire through 1999. At
December 31, 19951996 and 1994,1995, warrants to purchase 1,012,500 shares were
outstanding and exercisable. No warrants were exercised during the years ended 1993, 1994, 1995
or 1995.
32
1996.
In connection with the issuance of common stock, in May 1995,8% Convertible
Subordinated Debentures, and Series B, C and E Preferred Stock, the Company
has issued to its placement agent a warrantagents
32
warrants to purchase 122,763614,573 shares of common stock at $2.89prices ranging from
$1.375 to $3.25 per share. ThisThe warrants all remained outstanding and were
exercisable at December 31, 1996.
A warrant to purchase 810,126 common shares at $3.09 per share was issued
to the purchaser of the Company's Series D Preferred Stock. The warrant was
immediately exercisable upon
issuance and remained outstanding atas of December 31, 1995.1996.
Warrants to purchase 200,800300,000 common shares at $2.00$1.58 per share were issued
to the purchasers of the Company's 8% Convertible Subordinated Debentures and
remained outstanding at December 31, 1995.secured convertible term notes in October 1996.
The number of common shares which
may be purchased pursuant to these warrants may be increased in the event
that the number of common shares into which the related debentures may be
converted is increased. The maximum number of common shares to which these
warrants might entitle the holders is 386,154.
Also in connection with the issuance of its 8% Convertible Subordinated
Debentures, the Company issued to its placement agent warrants to purchase
100,400 shares of common stock at $1.375 per share. These warrants were immediately exercisable upon issuance and remained outstanding atas of
December 31, 1995.1996.
STOCK OPTIONS - In September 1994, the Company's shareholders approved the
1994 Stock Incentive Plan and the reservation of 400,000The Company has a stock incentive plan under which
2,200,000 shares of the Company's common stock for issuance thereunder. In August 1995, the
shareholders approved an amendment to the plan increasing the sharesare reserved for issuance thereunder to 1,200,000.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. Options granted pursuant to the Plan
have a maximum term of ten years; vesting is determined by the Company's
Compensation Committee. Options granted through 1996 have had vesting
requirements of up to three years. Options granted and outstanding under
the plan are summarized as follows:
1996 1995 1994
-------------------------- ----------------------------- ---- ----
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares Priceprice Shares Price
------ ----- ------ -----price Shares price
Outstanding at
beginning of year 382,900 $2.93 90,000 $3.13 - $3.50$3.44 -- --
Granted 1,090,000 $1.57 317,900 $2.25 - $3.50$2.73 90,000 $3.13 - $3.50$3.44
Exercised (3,333) $1.69 -- -- -- --
Forfeitures (49,067) $2.17 (25,000) $2.25 -- --
--------- ----- ------- ----- ------ -----
Outstanding at end
of year 1,420,500 $1.92 382,900 $2.25 - $3.50$2.93 90,000 $3.13 - $3.50$3.44
========= ======= ======
Exercisable at end
of year 619,331 $2.29 219,294 $2.25 - $3.50$3.18 75,000 $3.50
======= ======= ======
The number of shares under option, weighted average exercise price and
weighted average remaining contractual life of all options outstanding as
of December 31, 1996, by range of exercise price was as follows:
33
Weighted Weighted
Range of average average
exercise exercise remaining
price Shares price life
$1.31 - $1.69 1,050,000 $1.55 9.5 years
$2.25 - $2.28 125,500 $2.26 7.7 years
$3.00 - $3.50 245,000 $3.31 8.1 years
The number of shares under option and weighted average exercise price of
options exercisable as of December 31, 1996, by range of exercise price was
as follows:
Weighted
Range of average
exercise exercise
price Shares price
$1.31 - $1.69 293,999 $1.48
$2.25 - $2.28 93,666 $2.26
$3.00 - $3.50 231,666 $3.33
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", in accounting for its stock incentive plan.
Accordingly, since the exercise price of all options issued under the plan
has been less than or equal to the fair market value of the stock at the
date of issue of the options, no compensation cost has been recognized for
options granted under the plan. Had compensation cost for options granted
under the plan been determined based on the fair value at the grant dates
in a manner consistent with the method determined under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the net loss and net loss per share for 1996 and 1995 would
have been increased to the pro forma amounts indicated below:
1996 1995
Net loss:
As reported $(5,992,000) $(8,892,000)
Pro forma $(6,389,000) $(9,210,000)
Net loss per share:
As reported $ (.47) $ (.82)
Pro forma $ (.50) $ (.85)
For the purpose of computing the pro forma expense, the fair value of each
option is estimated on the grant date using the Black-Scholes option
pricing model with the following assumptions used for grants in both 1996
and 1995: a dividend yield of zero percent;
34
expected volatility of 75%; risk-free interest rate of 6%; and expected
lives of three years. The weighted average fair value as of the option date
was computed to be $.83 per share for options issued during 1996 and $1.53
per share for options issued during 1995.
8. INCOME TAXES
INCOME TAX PROVISION - Income tax provisions were not necessary in 1996,
1995 1994
and 19931994 due to net losses.
33
DEFERRED TAXES - Deferred taxes reflect the net tax effects of (a)
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes, and (b) operating losses and tax credit carryforwards.
The tax effects of significant items comprising the Company's deferred
taxes as of December 31 were as follows:
United States taxes: 1996 1995 1994
Deferred tax assets:
Federal net operating loss carryforward
and capitalized research and development
expenses $ 4,829,000 $ 2,110,000$5,194,000 $4,829,000
Federal R&D tax credit carryforward 522,000 495,000 465,000
State net operating loss carryforward and capitalized
research and development expenses 211,000 125,000 372,000
Deferred tax liabilities - book basis in excess
of noncurrent assets acquired in the
acquisition of IBC (1,102,000) (1,338,000)
(1,575,000)
----------- ---------------------
Net deferred tax assets 4,825,000 4,111,000 1,372,000
Valuation allowance (4,825,000) (4,111,000)
(1,372,000)
----------- ---------------------
Net deferred taxes $ -- $ --
=========== =====================
French taxes: 1996 1995 1994
Deferred tax assets:
Net operating loss carryforward $ 5,721,000 $ 5,286,000$5,426,000 $5,721,000
Impact of temporary differences (211,000) (225,000)
453,000
----------------------- -----------
Total 5,215,000 5,496,000 5,739,000
Valuation allowance (5,215,000) (5,496,000)
(5,739,000)
----------- ----------------------- ----------
Net deferred taxes $ -- $ --
======================= ===========
Temporary differences for French taxes result primarily from leases treated
as operating leases for French tax reporting and as capital leases in the
consolidated financial statements.
35
The tax benefits ($5,136,000) of the net operating losses of $15,410,000
which existed at the date of acquisition (September 7, 1994) of the French
subsidiary will be recorded as a reduction of the net unamortized balance
of property, equipment, capitalized lease assets and intangible assets of
$3,147,000$2,421,000 when and if realized, and the remaining benefit will be recorded
as a reduction of income tax expense.
Statement of Financial Accounting Standards No. 109 requires that the tax
benefit of net operating losses, temporary differences and credit
carryforwards be recorded as an asset to the extent that management
assesses that realization is "more likely than not." Realization of 34
the
future tax benefits is dependent on the Company's ability to generate
sufficient taxable income within the carryforward period. Because of the
Company's recent history of operating losses, management has provided a
valuation allowance for its net deferred tax assets.
TAX CARRYFORWARDS - At December 31, 1995,1996, the Company had net operating
loss carryforwards of approximately $5,120,000$3,995,000 to reduce United States
federal taxable income in future years, and research and development tax
credit carryforwards of $495,000$522,000 to reduce United States federal taxes in
future years. In addition, the Company's French subsidiary had operating
loss carryforwards of $17,165,000 (84,183,000$14,801,000 (76,812,000 French francs) to reduce
French taxable income in future years. These carryforwards expire as
follows:
United States R&D tax French
net operating credit operating loss
Year of expiration loss carryforward carryforward carryforward
1996 $1,219,000 $ 1,655,000
1997 2,670,000 1,270,000
1998 208,000 1,312,000
1999 111,000 233,000
2000 -- -- --
2001-2010 912,000 $495,000 --
No expiration -- -- 12,695,000
---------- -------- -----------
$5,120,000 $495,000 $17,165,000United States R&D tax French
net operating credit operating loss
Year of expiration loss carryforward carryforward carryforward
1997 $2,670,000 $ 1,200,000
1998 208,000 1,240,000
1999 111,000 220,000
2000 -- 6,000
2001 23,000 $123,000 --
2002-2011 983,000 399,000 --
No expiration -- -- 12,135,000
---------- -------- -----------
$3,995,000 $522,000 $14,801,000
========== ======== ===========
Utilization of the United States tax carryforwards is subject to certain
restrictions in the event of a significant change (as defined in Internal
Revenue Service guidelines) in ownership of the Company.
36
9. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
One domestic customer and threeone foreign licenseeslicensee have each accounted for
significant portions of the Company's revenues during the past three years.
The percentages of total revenues derived from sales to, and royalties
from, these major customers are as follows:
1996 1995 1994 1993
Domestic customer -- 18% 35% 50%
Spanish licensee 39% 16% 18% 8%
German licensee 2% 9% 23%
Italian licensee -- 2% 7%
35
The Company's domestic customer to whom sales of bovine superoxide
dismutase ("bSOD") accounted for 18%, and 35% and 50% of the Company's revenues in
1995 1994 and 1993,1994, respectively, announced in the fourth quarter of 1995 that
the clinical trial in which it was using bSOD purchased from the Company
failed to show the desired results. Therefore,results, and sales of bSOD to this customer are
not expected to continue.have
ceased.
The Company limits its foreign exchange risk by buying and selling bulk
bSOD in a single currency, the Dutch guilder. The Company maintains a bank
account in The Netherlands for receipt and disbursement of Dutch guilders
and had the equivalent of $81,000$1,000 and $659,000$81,000 in that account at December
31, 19951996 and 1994,1995, respectively. Foreign currency transaction gains and
losses were not material.
10. GEOGRAPHIC AREA INFORMATION
The Company operates in a single industry segment: the development,
manufacture and marketing of therapeutic and diagnostic products. The
Company's foreign operations consist of research and development and
manufacturing facilities and certain marketing activities conducted by the
Company's subsidiary in France. Sales and costs associated with bSOD
manufactured in the Netherlands are considered to be United States
operations, since the contract to manufacture bSOD and all related sales
activities are administered in the United States. Similarly, royalties from
foreign customers that relate to bSOD-based products are considered to be
export sales from the United States, since the product was developed in the
United States.
Sales, operating income and identifiable assets, classified by the major
geographic areas in which the Company operates, are as follows:
37
1996 1995 1994 1993
Revenues from unaffiliated customers:
United States $ 1,303,000 $ 2,686,000 $ 2,053,000 $ 1,887,000
Export sales from the U.S. 3,185,000 1,878,000 1,257,000
1,157,000
France 379,000 572,000 160,000 --
----------- ----------- -----------
Total $ 4,867,000 $ 5,136,000 $ 3,470,000 $ 3,044,000
=========== =========== ===========
Operating income (loss):loss:
United States $(2,874,000) $(5,653,000) $(1,410,000)
$(1,638,000)
France (3,017,000) (3,110,000) (4,191,000) --
----------- ----------- -----------
Total $(5,891,000) $(8,763,000) $(5,601,000) $(1,638,000)
=========== =========== ===========
Identifiable assets:
United States $ 5,110,000 $ 7,824,000 $ 9,587,000
$ 3,124,000
France 2,942,000 3,866,000 2,570,000
--
Eliminations (55,000) (1,820,000) (963,000)
--
----------- --------------------- -----------
Total $ 7,997,000 $ 9,870,000 $11,194,000 $ 3,124,000
=========== =========== ===========
36
11. LEASE COMMITMENTS
The Company leases its facilities in Oregon under an operating lease that
expires in 1997, and leases its facilities in Pennsylvania and France under an operating
leaseslease that expireexpires in 1998. Future lease payments are scheduled as follows:
1996 $480,000
1997 436,000
1998 245,000
1997 $313,000
1998 217,000
Rental expense included in the accompanying statements of operations was
$519,000 in 1996, $492,000 in 1995 and $193,000 in 1994 and $75,000 in 1993.1994.
12. EUROPEAN REGULATORY DEVELOPMENTS
The European market for the Company's bovine bSOD was adversely impacted by a
series of regulatory developments in 1994.
The Italian Health Ministry withdrew the marketing authorization of all
pharmaceutical products composed of orgotein, including Oxinorm (produced
from the Company's product). As indicated in Note 9, the Company's revenues
from its Italian licensee have ceased, and the Company does not anticipate
additional sales or royalties from Oxinorm in Italy. During 1995, SmithKline
Beecham Farmaceutici S.p.A., the Company's licensee in Italy, sold its
remaining bulk Oxinorm inventory to the Company.
During 1994 the Company was also notified that the governments of Austria and
Germany had asked Grunenthal, the Company's licensee for those countries, to
withdraw its Peroxinorm brand of orgotein from the Austrian and German
markets. Grunenthal has also discontinued distributing Peroxinorm in several
other countries where sales were dependent upon the German registration. As a
result, the Company anticipates that royalties from Grunenthal for the
foreseeable future will be substantially less than in previous years.
Because of the action of regulatory authorities in other European countries,
the Company's licensee for Spain has had informal discussions with Spanish
regulatory authorities regarding the Company's bSOD product. Although no
action has been taken by those authorities with regard to the Company's
product, future sales in Spain may be affected by either regulatory action in
Spain, or safety concerns stemming from such actions in other countries.
37
13. CONTROL CONTEST EXPENSES
In 1993, the Company incurred expenses of $1,531,000 ($.31 per share) in
connection with a contest for management control of the Company. Costs
incurred by current officers and directors were advanced by IBC. The
President and the Chairman of the Company were major shareholders of IBC.
Reimbursement of IBC for such expenses was approved at the Company's 1993
annual shareholders' meeting.
14. 401(K) SAVINGS PLAN
The Company has a 401(k) saving plan (the "Plan") which covers all United
States employees who meet certain minimum age and service requirements. The
Company's matching contribution to the Plan for each year is 100% of the
first $1,000 of each employee's salary deferral and 33-1/3% of the next
$3,000 of salary deferral. The Company's contributions have not been
material.
38
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
OXIS International, Inc.:
We have audited the accompanying consolidated balance sheets of OXIS
International, Inc. and subsidiaries as of December 31, 19951996 and 1994,1995, and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31,
1995.1996. These financial statements are the responsibility of the management
of OXIS International, Inc. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of OXIS International, Inc.
and subsidiaries at December 31, 19951996 and 1994,1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995,1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements for the year ended December 31, 1995,1996,
have been prepared assuming that the Company will continue as a going
concern. The Company is engaged in developing, manufacturing and marketing
selected therapeutic and diagnostic products. As discussed in Note 1 to the
financial statements, the Company has incurred losses in each of the last
three years, and at December 31, 1995,1996, the Company's
current liabilities exceeded its current assets by $1,469,000,$1,405,000, raising
substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
March 7, 19961997
Portland, Oregon
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated herein by reference
from the material contained under the caption "Proposal No. 1-Election of
Directors" in the Company's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A.
Forms 3 Initial Statement of Beneficial Ownership of Securities were not
timely filed upon the appointment of Mr. Lang and Mr. McCamant to the Board of
Directors in January 1996. Late filings of the Forms 3 have been made.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by
reference from the material contained under the caption "Compensation of
Executive Officers" in the Company's definitive proxy statement to be filed
with the Commission pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item is incorporated herein by
reference from the material contained under the caption "Proposal No.
1-Election of Directors" in the Company's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required under this item is incorporated herein by
reference from the material contained under the caption "Proposal No.
1-Election of Directors" in the Company's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A.
4140
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
See pages 1916 to 39.
2. FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because they are not applicable or the
required information is included in the financial statements and notes
thereto.
3. EXHIBITS
See Exhibit Index - page 44.43.
(b) Reports on Form 8-K.
The Company filed noTwo reports on Form 8-K were filed by the
Company during the fourth quarter of 1995.1996. The first, filed on
November 4, 1996, reported the issuance of $1,000,000 in secured
convertible term notes and the engagement of an investment banker
to act as underwriter for a public offering of common stock on a
French stock market. The second, filed December 30, 1996, reported
a private placement of Series E Preferred Stock and common stock
for an aggregate of $1,100,000.
(c) Exhibits specified by item 601 of Regulation S-K.
See Exhibit Index - page 44.43.
(d) Financial statement schedules required by Regulation S-K are omitted because
they are not applicable or the required information is included in the financial
statements and notes hereto.
4241
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 22, 199625, 1997
OXIS INTERNATIONAL, INC.
Registrant
By: /s/ Anna D. Barker
----------------------------------------------------------------------------
Anna D. Barker
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jon S. Pitcher
----------------------------------------------------------------------------
Jon S. Pitcher
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following directors on behalf of the Registrant.
s/ Anna D. Barker March 22, 1996 s/ Timothy G. Biro March 22, 1996
----------------- -------------- ------------------ ---------------
Anna D. Barker Date Timothy G. Biro Date
s/ Stuart S. Lang March 22, 1996 s/ Gerald D. Mayer March 22, 1996
----------------- -------------- ------------------ --------------
Stuart S. Lang Date Gerald D. Mayer Date
s/ James D. McCamant March 22, 1996 s/ David Needham March 22, 1996
-------------------- -------------- ---------------- --------------
James D. McCamant Date David Needham Date
s/ Ray R. Rogers March 22, 1996 s/ A.R. Sitaraman March 22, 1996
---------------- -------------- ----------------- --------------/s/ Anna D. Barker March 25, 1997 /s/ Timothy G. Biro March 25, 1997
- --------------------------------------- --------------------------------------
Anna D. Barker Date Timothy G. Biro Date
/s/ Stuart S. Lang March 25, 1997 /s/ Gerald D. Mayer March 25, 1997
- --------------------------------------- --------------------------------------
Stuart S. Lang. Date Gerald D. Mayer Date
/s/ James D. McCamant March 25, 1997 /s/ David Needham March 25, 1997
- --------------------------------------- --------------------------------------
James D. McCamant Date David Needham Date
/s/ Ray R. Rogers March 25, 1997 /s/ A.R. Sitaraman March 25, 1997
- --------------------------------------- --------------------------------------
Ray R. Rogers Date A.R. Sitaraman Date
4342
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
2 (a) Agreement and Plan of Reorganization and Merger between
OXIS International, Inc., OXIS Acquisition Corporation
and Therox Pharmaceuticals, Inc. Dated July 18, 1995 (1)
2 (b) Amendment No. 1 to Agreement and Plan for Reorganization
and Merger between OXIS International, Inc., OXIS Acquisition
Corporation and Therox Pharmaceuticals, Inc. 46(2)
3 (a) Second Restated Certificate of Incorporation as filed
February 16, 1995 (2)September 10, 1996 45
3 (b) Certificate of Designations, Preferences, and Rights of Series BE
Preferred Stock of the Company (3)
3 (c) Certificate of Amendment of Restated Certificate of Incorporation
of OXIS International, Inc. as filed January 29, 1996. 48
3 (d) Bylaws of the Company as amended on June 15, 1994 (4)
4 (a) Subscription andSecurities Purchase Agreement, 8% Convertible Subordinated
Debentures Due December 31, 1997 50Registration Rights Agreement
and Security Agreement (5)
10 (a) 1987 Stock Purchase Warrants (5)(6)
10 (b) 1988 Stock Purchase Warrants (6)(7)
10 (c) Lease agreement between Bioxytech S.A. and Sofibus (7)(8)
10 (d) Form of 8% Convertible Subordinated Debentures Due December 31,
1997 (8)
10 (e) Form of Warrant to Purchase Common Stock (9)
10 (f) OXIS International, Inc. Series B Preferred Stock Purchase Agreement
dated July 18, 1995 (10)(9)
10 (g) Security(e) Factoring (security) Agreement dated February 7, 1995September 6, 1996 between
Alta-Berkeley
L.P. II and Innolion S.A.Silicon Valley Financial Services and OXIS International, Inc., and five
related promissory notes (11)
44
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
10 (h) Term Loan Agreement dated as of May 2, 1995 between
OXIS International, Inc., Bioxytech, S.A. and related
Promissory Note in the principal amount of $600,000 (12) 77
21 (a) Subsidiaries of OXIS International, Inc. 7691
23 (a) Independent Auditors' Consent 7792
27 (a) Financial data schedule 7893
43
(1) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 19, 1995.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
19941995 - Exhibit 3(a)2 (b).
(3) Incorporated by reference to the Company's QuarterlyForm 8-K Current Report on Form 10-Q
for the quarter ended Septemberdated
December 30, 1995.1996.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994.
(5) Incorporated by reference to the Company's AnnualForm 8-K Current Report on Form 10-K
for 1992 - Exhibit 10(b).dated
November 4, 1996.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
1992 - Exhibit 10(c)10(b).
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
1994.1992 - Exhibit 10(c).
(8) Incorporated by reference to the Company's CurrentAnnual Report on Form 8-K
dated January 3, 1996.10-K for
1994.
(9) Incorporated by reference to the Company's Current Report on Form 8-K
dated January 3, 1996.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995.
4544