<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
-----
Exchange Act of 1934 for the quarterly period ended September 30, 1996.
Transition report pursuant to Section 13 or 15(d) of the Securities
-----
Exchange Act of 1934 for the transition period from ___ to ___.
Commission File Number O-8092
OXIS INTERNATIONAL, INC.
A Delaware corporation
I.R.S. Employer Identification No. 94-1620407
6040 N. Cutter Circle, Suite 317
Portland, OR 97217
Telephone: (503) 283-3911
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
At September 30, 1996, the issuer had outstanding the indicated number of
shares of common stock: 13,314,896
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
-------------------------- ----------------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 1,396,000 $ 1,024,000 $ 3,933,000 $ 4,164,000
Royalties and license fees 6,000 74,000 64,000 146,000
----------- ----------- ----------- -----------
Total revenues 1,402,000 1,098,000 3,997,000 4,310,000
Cost and expenses:
Cost of sales 967,000 735,000 2,544,000 2,593,000
Research and development 1,258,000 1,025,000 3,619,000 3,044,000
Selling, general and administrative 621,000 827,000 2,247,000 2,318,000
Purchased in-process
technology -- 3,329,000 -- 3,329,000
----------- ----------- ----------- -----------
Total costs and expenses 2,846,000 5,916,000 8,410,000 11,284,000
----------- ----------- ----------- -----------
Operating loss (1,444,000) (4,818,000) (4,413,000) (6,974,000)
Interest income 12,000 16,000 33,000 36,000
Interest expense (7,000) (29,000) (124,000) (112,000)
----------- ----------- ----------- -----------
Net loss $(1,439,000) $(4,831,000) $(4,504,000) $(7,050,000)
----------- ----------- ----------- -----------
Net loss per share $(.11) $(.41) $(.36) $(.68)
----------- ----------- ----------- -----------
Weighted average number of
shares used in computation 13,301,037 11,858,200 12,546,092 10,426,071
----------- ----------- ----------- -----------
</TABLE>
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 140,000 $ 727,000
Accounts receivable 1,039,000 823,000
Inventories 605,000 953,000
Prepaid and other 206,000 262,000
---------- ----------
Total current assets 1,990,000 2,765,000
Property and equipment, net 1,357,000 1,092,000
Assets under capital leases, net 445,000 1,198,000
Technology for developed products
and custom assays, net 3,961,000 4,498,000
Other assets 293,000 317,000
---------- ----------
Total assets $8,046,000 $9,870,000
---------- ----------
</TABLE>
3
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Notes payable $ 288,000 $ 1,616,000
Accounts payable 1,612,000 1,182,000
Customer deposits 256,000 250,000
Accrued liabilities 630,000 903,000
Current portion of capital lease obligations 151,000 283,000
------------ ------------
Total current liabilities 2,937,000 4,234,000
Capital lease obligations and other 9,000 77,000
8% convertible subordinated debentures -- 1,255,000
Shareholders' equity:
Preferred stock - $.01 par value; 15,000,000 shares
authorized:
Series B - 642,583 shares issued and outstanding
(liquidation preference of $1,500,000) 6,000 6,000
Series C - 1,697,157 shares issued and
outstanding 17,000 --
Series D - 2,000 shares issued and outstanding -- --
Common stock - $.50 par value; 40,000,000 shares
authorized; 13,314,896 shares issued and outstanding 6,658,000 6,062,000
Additional paid in capital 29,993,000 25,210,000
Accumulated deficit (31,534,000) (27,031,000)
Accumulated translation adjustments (40,000) 57,000
------------ ------------
Total shareholders' equity 5,100,000 4,304,000
------------ ------------
Total liabilities and shareholders' equity $ 8,046,000 $ 9,870,000
------------ ------------
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,504,000) $(7,050,000)
Adjustments to reconcile net loss to cash provided
by (used for) operating activities:
Depreciation and amortization 1,013,000 1,024,000
Purchased in-process technology -- 3,329,000
Changes in assets and liabilities:
Accounts receivable (216,000) (393,000)
Inventories 348,000 79,000
Other current assets 56,000 246,000
Accounts payable 430,000 (476,000)
Customer deposits 6,000 (866,000)
Accrued liabilities (141,000) 48,000
----------- -----------
Net cash used for operating activities (3,008,000) (4,059,000)
Cash flows from investing activities:
Redemption of certificates of deposit -- 496,000
Purchases of equipment (54,000) (45,000)
Acquisition and stock issuance costs -- (506,000)
Cash of business acquired -- 73,000
Other, net 55,000 (113,000)
----------- -----------
Net cash provided by investing activities 1,000 (95,000)
Cash flows from financing activities:
Proceeds from issuance of short-term notes 65,000 1,366,000
Proceeds from issuance of stock, net of related cost 3,181,000 3,538,000
Repayment of short-term borrowings (627,000) (340,000)
Repayment of long-term debt and capital lease obligations (199,000) (338,000)
----------- -----------
Net cash provided by financing activities 2,420,000 4,226,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (587,000) 72,000
Cash and cash equivalents - beginning of period 727,000 936,000
----------- -----------
Cash and cash equivalents - end of period $ 140,000 $ 1,008,000
----------- -----------
</TABLE>
5
<PAGE>
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS AND CONDENSED NOTES
The unaudited consolidated financial statements, which have been prepared in
accordance with the instructions to Form 10-Q, do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. All adjustments considered necessary by
management for a fair presentation have been included. Operating results for
interim periods are not necessarily indicative of the results that may be
expected for the full year.
An annual report (Form 10-K) has been filed with the Securities and Exchange
Commission ("Commission") for the year ended December 31, 1995. That report
contains, among other information, a description of the business of OXIS
International, Inc. ("OXIS" or the "Company"), audited financial statements,
notes to the financial statements, the report of the independent auditors and
management's discussion and analysis of results of operations and financial
condition. Readers of this report are presumed to be familiar with that
annual report.
The functional currency of OXIS International S.A. ("OXIS S.A"), the Company's
foreign subsidiary, is the French franc. OXIS S.A.'s assets and liabilities
are translated using the exchange rate at the end of the period. Its
statement of operations is translated at the average exchange rate during the
period. Gains or losses resulting from foreign currency translation are
accumulated as a separate component of shareholders' equity.
2. BASIS OF PRESENTATION
These financial statements 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 for the nine months ended September 30, 1996. As of
September 30, 1996, the Company's current liabilities exceeded its current
assets by $947,000. These and other factors indicate that the Company may 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.
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.
6
<PAGE>
The Company is currently seeking additional capital through another private
placement of equity securities. If the Company is unable to raise additional
capital during the remainder of 1996, it intends to curtail its operations
through the reduction of personnel and facility costs and by slowing its
research and development efforts. If the Company were 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.
3. INVENTORIES
Inventories are stated at the lower of cost or market. Cost has been
determined by using the first-in, first-out and specific identification
methods. Inventories at September 30, 1996 and December 31, 1995, consisted
of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Raw materials $171,000 $173,000
Work in process 202,000 354,000
Finished goods 232,000 426,000
-------- --------
Total $605,000 $953,000
-------- --------
</TABLE>
4. SHAREHOLDERS' EQUITY
During the first six months of 1996, the Company issued 1,125,590 shares of
its Series C Preferred Stock for cash of $1,463,000. 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
$77,000 on 8% notes payable to former shareholders of the Company's French
subsidiary. Each share of Series C Preferred Stock is initially convertible
into one share of the Company's common stock at the option of the holder at
any time. After six months following the closing of the sales of Series C
Preferred Stock, the conversion ratio may be adjusted under certain
circumstances, and after eight months following the closing, the Company has
the right to automatically convert the Series C Preferred Stock into common
stock under certain circumstances. Each share of Series C Preferred Stock is
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.
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 cash of
$2,000,000. 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
7
<PAGE>
the date of issuance, by a conversion price equal to the lesser of (i) $2.30
and (ii) a percentage (ranging from 100% on or before June 24, 1996 to 75%
after August 3, 1996) 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.
In June 1996, $1,255,000 principal plus accrued interest of $58,000 on the
Company's 8% convertible subordinated debentures were converted into 1,050,217
shares of common stock.
5. STOCK OPTIONS
The Company has a stock incentive plan under which 2,200,000 shares of the
Company's common stock are reserved for 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.
During the nine months ended September 30, 1996, options to purchase 642,500
shares at exercise prices of $1.56 - $2.28125 have been issued under the plan.
As of September 30, 1996, the Company had options outstanding to purchase
973,000 shares of the Company's common stock under this plan. As of September
30, 1996, options to purchase 637,826 shares of the Company's common stock at
exercise prices of $1.56 - $3.50 per share were exercisable.
6. CONVERTIBLE TERM NOTES
Subsequent to September 30, 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 $1.58125 per share.
The conversion rate of the convertible term notes and the exercise price of
the warrants are subject to change under certain circumstances.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position has improved during the first nine
months of 1996. At December 31, 1995, the Company had a working capital
deficit of $1,469,000. As of September 30, 1996, the Company's working capital
deficit had been reduced to $947,000. The improvement in working capital
during the nine-month period resulted primarily from the issuance of stock for
cash (net proceeds of $3,181,000) and redemption of short-term notes and
accrued interest of $843,000 in exchange for Series C Preferred Stock, offset
by the net loss for the nine months ($3,491,000, excluding depreciation and
amortization).
The Company's cash and cash equivalents decreased during the nine-month period
- from $727,000 as of December 31, 1995 to $140,000 as of September 30, 1996.
The Company expects to continue to report losses in the near term as the level
of expenses is expected to continue to exceed revenues. The Company must raise
additional capital during the remainder of 1996. Although the Company has
continued to raise additional funds through private placements (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.
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 2 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, in part, upon the Company's success in developing business alliances
with biotechnology and/or pharmaceutical companies that have the required
resources to develop and market certain of these products. There is no
assurance that the Company's effort to develop such business alliances will be
successful.
During the first nine months of 1996, the Company has raised approximately
$3,200,000 cash through the sale of its Series C and Series D Preferred Stock.
In addition, in October 1996, the Company raised an additional $1,000,000
through the sale of convertible term notes with warrants. The Company expects
that additional capital will be required during 1996 to continue operating in
accordance with its current plans. However, no assurances can be given that
the Company will successfully raise the needed capital, or that if it is able
to raise the needed capital, it will do so on favorable terms and conditions.
If the Company is unable to raise additional capital during the remainder of
1996, 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.
9
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH
THREE MONTHS ENDED SEPTEMBER 30, 1995
REVENUES
The Company's product sales for the quarter ended September 30, 1996 were
$1,396,000, a 36% increase over sales of $1,024,000 for the third quarter of
1995. The increase in sales resulted from an increase in the quantity of bulk
bSOD sold in the third quarter of 1996 as compared to the third quarter of 1995
(an increase of $418,000).
COSTS AND EXPENSES
Cost of sales as a percentage of sales decreased from 72% for the quarter ended
September 30, 1995 to 69% for the quarter ended September 30, 1996. The
decrease in cost of sales as a percentage of sales resulted primarily from the
increase in bulk bSOD sales which generally have a lower cost than the
Company's other products.
Research and development expenses increased by $233,000, from $1,025,000 in the
third quarter of 1995 to $1,258,000 in the third quarter of 1996. This
increase in research and development expenses is the result of increased
expenditures relating to preclinical development work on the Company's lead
therapeutics program (glutathione peroxidase mimics) of approximately $353,000,
offset by a cost reduction of approximately $160,000 from the closure of the
Company's Mountain View, California facility in the fourth quarter of 1995.
Selling, general and administrative expenses decreased by $206,000, from
$827,000 in the third quarter of 1995 to $621,000 in the third quarter of 1996.
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
$124,000 in the third quarter of 1996 as compared to the third quarter of 1995.
Other reductions in the third quarter of 1996 as compared to the third quarter
of 1995 included a $37,000 decrease in legal fees, a reduction of $39,000 in
amortization of deferred financing costs relating to the Company's 8%
convertible subordinated debentures which were converted to common stock in
June 1996, and costs relating to the Company's annual shareholder meeting and
solicitation of proxies (approximately $25,000) incurred in the third quarter
of 1995, but incurred in the second quarter of 1996.
10
<PAGE>
NET LOSS
The Company's net loss decreased by $3,392,000, from $4,831,000 ($.41 per
share) for the third quarter of 1995 to $1,439,000 ($.11 per share) for the
third quarter of 1996. The net loss for the third quarter of 1995 includes a
charge of $3,329,000 for the effect of purchased in-process technology relating
to the acquisition of Therox Pharmaceuticals, Inc. ("Therox") in July 1995.
Excluding the charge for purchased in-process technology, the net loss for the
third quarter of 1995 would have been $1,502,000 ($.13 per share).
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1995
REVENUES
The Company's product sales for the first nine months of 1996 were $3,933,000 ,
compared to $4,164,000 for the corresponding period in 1995, a decrease of
$231,000. The decrease is composed of decreases in sales of Palosein ($93,000)
and other products ($335,000), offset by increases in sales of bulk bSOD
($153,000) and research assays ( $48,000).
Bulk bSOD sales in 1995 included a $948,000 sale to Sanofi Winthrop Inc. No
further sales of bSOD to Sanofi Winthrop Inc. are expected. Sales of bSOD to
the Company's Spanish distributor increased during the first nine months of
1996 as compared to the 1995 levels.
The decrease in Palosein sales is attributable primarily to a reduction in the
volume of Palosein export sales and a reduction of purchases by domestic
distributors in the first half of 1996 caused by an increase in purchases by
those distributors during a promotional campaign in the fourth quarter of 1995.
The reduction in sales of other products is due primarily to the completion of
a contract in early 1996.
COSTS AND EXPENSES
Cost of sales as a percent of product sales increased from 62% in the first
nine months of 1995 to 65% in the first nine months of 1996. Cost of sales in
both the first nine months of 1995 and 1996 include $552,000 in amortization of
purchase adjustments relating to 1994 business acquisitions. Excluding such
amortization, cost of sales would have been 51% of product sales for the first
nine months of 1995 and 49% for the first nine months of 1996.
Research and development expenses increased by $575,000, from $3,044,000 for
the first nine months of 1995 to $3,619,000 for the first nine months of 1996.
Increases in research and development expenses included increased expenses
relating to preclinical development work and a Phase I clinical trial on the
Company's lead therapeutics program ($789,000)
11
<PAGE>
and costs of the former Therox operations ($295,000). In May 1996, the Company
closed the laboratory in Malvern, Pennsylvania formerly occupied by Therox.
Increases in research and development expenses were offset by a reduction in
costs of approximately $598,000 resulting from the closure of the Company's
Mountain View, California facility in the fourth quarter of 1995.
Selling, general and administrative expenses decreased from $2,318,000 for the
first nine months of 1995 to $2,247,000 for the first nine months of 1996, a
decrease of $71,000. This decrease is primarily due to the reduction in
administrative costs of the French subsidiary in the third quarter.
NET LOSS
The Company's loss for the first nine months of 1996 was $4,504,000 ($.36 per
share) compared to a loss of $7,050,000 ($.68 per share) for the first nine
months of 1995. The net loss for the first nine months of 1995 includes a
charge of $3,329,000 for the effect of purchased in-process technology relating
to the acquisition of Therox in July 1995. Excluding the charge for purchased
in-process technology, the net loss for the first nine months would have been
$3,721,000 ($.36 per share).
Excluding the charge for purchased in-process technology, the net loss
increased by $783,000 for the first nine months of 1996 as compared to the
first nine months of 1995. The major factors contributing to this increase
were a $182,000 reduction in profit margins on product sales and the increase
of $575,000 in research and development expenses.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - See Exhibit Index on page 14.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OXIS International, Inc.
November 11, 1996 By /s/ Anna D. Barker
------------------
Anna D. Barker
President and Chief Executive Officer
November 11, 1996 By /s/ Jon S. Pitcher
------------------
Jon S. Pitcher
Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Document Number
<S> <C> <C>
27(A) Financial data schedule _____
</TABLE>
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 140,000
<SECURITIES> 0
<RECEIVABLES> 1,039,000
<ALLOWANCES> 0
<INVENTORY> 605,000
<CURRENT-ASSETS> 1,990,000
<PP&E> 1,357,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,046,000
<CURRENT-LIABILITIES> 2,937,000
<BONDS> 0
0
23,000
<COMMON> 6,658,000
<OTHER-SE> (1,581,000)
<TOTAL-LIABILITY-AND-EQUITY> 8,046,000
<SALES> 3,933,000
<TOTAL-REVENUES> 3,997,000
<CGS> 2,544,000
<TOTAL-COSTS> 2,544,000
<OTHER-EXPENSES> 3,619,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124,000
<INCOME-PRETAX> (4,504,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,504,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,504,000)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> 0
</TABLE>
