GT Biopharma, Inc. - Annual Report: 2011 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
Commission File Number: 000-08092
OXIS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
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Delaware
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94-1620407
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(State of incorporation or organization)
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(I.R.S. Employer Identification No.)
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468 No. Camden Drive
Beverly Hills, California 90210
(Address of principal executive offices) (Zip code)
(310) 860-5184
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to section 12(g) of the Act:
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Title of Securities
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Exchanges on which Registered
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Common Stock, $.001 Par Value
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None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No x
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x
The aggregate market value of the registrant’s common stock, $0.001 par value per share, of the registrant on June 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $18.9 million. As of March 31, 2012, 300,299,838 shares of the registrant’s common stock, $.001 par value, were issued and outstanding.
Table of Contents
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Report, including any documents which may be incorporated by reference into this Report, contains “Forward-Looking Statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are “Forward-Looking Statements” for purposes of these provisions, including our plans of operation, any projections of revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. All Forward-Looking Statements included in this document are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any Forward-Looking Statement. In some cases, Forward-Looking Statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “potential,” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the Forward-Looking Statements contained herein are reasonable, there can be no assurance that such expectations or any of the Forward-Looking Statements will prove to be correct, and actual results could differ materially from those projected or assumed in the Forward-Looking Statements. Future financial condition and results of operations, as well as any Forward-Looking Statements are subject to inherent risks and uncertainties, including any other factors referred to in our press releases and reports filed with the Securities and Exchange Commission. All subsequent Forward-Looking Statements attributable to the company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Additional factors that may have a direct bearing on our operating results are described under “Risk Factors” and elsewhere in this report.
Introductory Comment
Throughout this Annual Report on Form 10-K, the terms “OXIS,” “we,” “us,” “our,” “the company” and “our company” refer to OXIS International, Inc., a Delaware corporation formerly known as DDI Pharmaceuticals, Inc. and Diagnostic Data, Inc, together with our subsidiaries.
ITEM 1. BUSINESS
OXIS International, Inc. is engaged in the research, development and sale of products that counteract the harmful effects of “oxidative stress” and inflammation. Oxidative stress refers to the situations in which the body’s antioxidant and other defensive abilities to combat free radicals (a.k.a. highly reactive species of oxygen and nitrogen) are overwhelmed and normal healthy balance is lost. Our current finished product and finished product candidates include therapeutic nutraceutical products, cosmeceutical products, functional foods and functional beverages. The Company also possesses intellectual property covering a number of proprietary compounds and formulations that may be out-licensed to biotech and pharmaceutical companies as drug candidates.
Our primary focus currently is on products that incorporate the unique amino acid naturally occurring compound, L-Ergothioneine (“ERGO”), as a key component. ERGO is produced only by microorganisms in soil and is not synthesized by humans, animals or plants. We have spent approximately $75 million in researching and developing ERGO, and now own a patented process to synthesize commercial quantities of ERGO in a highly stable form that is highly soluble and tasteless, making it suitable for use in combination with other nutraceuticals and botanicals in a wide variety of dietary supplements, functional foods and beverages, and topical anti-aging products including lotions and creams. We refer to the ERGO that is produced and synthesized by means of our patented process as “EGT™”.
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Commencing in 2009, a strategic decision was made to aggressively pursue the commercial exploitation of the unique benefits of ERGO and engage in the business of developing and marketing nutraceutical products in the field of oxidative stress reduction, with a focus on products that include EGT™ as the differentiating component. As a result, beginning in 2009, our focus has been on continuing the redirection of our business plan, obtaining financing to fund our revised business plan, building a new management team, establishing relationships with manufacturers and marketers in a variety of distribution channels, and implementing our new business strategy. In 2011, we introduced our first EGT™ product, “ErgoFlex™, a dietary supplement for the treatment of joint pain and restricted mobility, in a direct-to-consumer beta test. Based on the results of that test, we have entered into a sales and marketing joint venture with a prominent on-line marketing and advertising company to market and sell that product and other products that we intend to introduce. We also plan to market and sell a number of other EGT™ based products through that joint venture. Because we were primarily engaged in re-positioning our business and developing products in 2010 and most of 2011, we conducted virtually no sales and marketing operations and generated minimal revenues in 2010 and 2011.
Corporate History
We filed our original Articles of Incorporation with the Secretary of State of the State of California in 1965, under the name Diagnostic Data, Inc., and in 1972 filed a Certificate of Conversion with the Secretary of State of the State of Delaware to change the state of our incorporation to Delaware. In 1985, we changed our name to DDI Pharmaceuticals, Inc. In 1994, DDI Pharmaceuticals merged with International BioClinical, Inc. and Bioxytech S.A. and changed its name to OXIS International, Inc.
Business--Overview
OXIS’ focus is on the development and sale/licensing of products and/or proprietary formulations that can be classified generally into four main business sectors:
1. Dietary supplements, functional foods and functional beverages;
2. Personal care products, including skin care and cosmetic products;
3. Veterinary products for companion animals, livestock and performance animals such as race horses; and
4. Proprietary compounds that may be out-licensed to biotechnology and/or pharmaceutical companies.
Of late, our commercial operations have been focused on developing a line of dietary supplements containing EGT™. A limited release of a joint health product named “ErgoFlex™” in December 2010, by means of a long-form direct mail program, produced a very favorable response rate. In support of ErgoFlex™, we carried out a pilot human trial examining the effect of the product in reducing mild to moderate chronic joint pain and in improving compromised range of motion. The results of the trial were highly favorable and produced statistically significant improvements in both measures in one week. We currently intend to commercially release a number of additional EGT™ based products commencing in 2012, including, but not limited to, skin care products.
We are working on establishing several marketing channels to commercialize our planned products. Our primary marketing initiative consists of an on-line global sales program to be effected through a joint venture with engage:BDR, as described in further detail below in “Marketing, Sales and Distribution.” Other marketing channels may include non-traditional, direct to consumer channel (i.e. multi-level-marketing (MLM), infomercials, and direct-mail) as well as traditional channels of mass retail and specialty retail. We plan to develop products internally and seek complementary acquisitions that may provide additional products, expand our customer base and/or add to our distribution capabilities.
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Science Background/Rationale
The following key points summarize the science background and rationale for our L-Ergothioneine (“ERGO”) focused business.
Internally and externally generated free radicals and oxidative stress have been proven to contribute to disease and the deleterious effects of aging.
Free radicals (a.k.a. highly reactive species of oxygen and nitrogen) can damage the body when they exceed the body’s natural defenses to counteract them. This condition is commonly referred to as “oxidative stress.” These unstable molecules are produced continuously in the body as a result of oxygen metabolism and inflammatory reactions. Inflammation contributes to many disorders including most of the “itis” diseases and, most notably, arthritis. The body also encounters free radicals when exposed to sunlight, air pollution, pharmaceutical drugs, tobacco smoke, and following strenuous exercise. Free radicals can react with key organic substances such as lipids (fats), proteins and DNA in a process called “oxidation.” Oxidative damage disturbs the function of biological molecules causing disease and a wide variety of physiological changes associated with premature aging and disease. By way of example, free radical damage to DNA has been associated with cancer, damage to lipids with atherosclerosis, damage to proteins with premature aging, and neurodegenerative diseases, such as Alzheimer’s disease. All of the body’s organ systems are susceptible to oxidative stress; the lungs, the brain, the eyes, the cardiovascular system, the skin, and the reproductive systems are especially vulnerable.
Antioxidants and other systems in the human body work to counteract the effects of oxidative stress.
The human body has a special intrinsic group of “defensive” antioxidant enzymes including superoxide dismutase, catalase and glutathione peroxidase that can act synergistically to neutralize oxidative stress. Antioxidants that are ingested either as components of the foods or as ingredients in dietary supplements also play an important role in reducing oxidative stress. These include well-known and widely consumed vitamins such as Vitamin C and Vitamin E. Other dietary antioxidants include beta-carotene (converted in the body to Vitamin A and found in red, orange, yellow and dark green vegetables, squash, carrots, sweet potatoes and pumpkins) and fruits, such as apricots and cantaloupes. In addition, certain dietary substances such as proanthocyanins, anthocyanins, polyphenols, flavonoids, and metal chelators can also reduce oxidative stress. These natural compounds exist in a variety of food products such as grains, fruits, vegetables, herbs, spices, teas, red wine and soybeans. For example, tomatoes are a particularly good source of lycopene, which is also believed to be an antioxidant.
The key concern is that the protective antioxidant systems of the body can be overwhelmed as a result of the stresses of aging, disease, exposure to environmental toxins and the day-to-day stresses of modern life. The consequence is a reduction in overall health and wellbeing, the development of disease and/or accelerated aging.
Our business focuses on this major health challenge with the goal of identifying and developing a number of naturally occurring substances that can be used by humans and animals as supplements to protect them from the harmful effects of oxidative stress. These supplements would bolster the effects produced by the body’s own intrinsic defense mechanisms and amplify the helpful impact of the dietary intake of antioxidants and other helpful nutrients.
We believe that there is a rationale for focusing our efforts on naturally occurring protective substances since they are more likely to be both safe and efficacious. Many of these naturally occurring compounds promoting better health are contained in foods. In most cases, however, these foods cannot be consumed in sufficient quantities to obtain the health benefits of these naturally occurring substances. Thus, a key component of our business plan is providing these specific helpful compounds in sufficient quantities in the form of dietary supplements or “functional” foods that contain these compounds.
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Our first group of products incorporates the amino acid L-Ergothioneine, and in particular our EGT™, as a key component.
ERGO is a naturally occurring, water soluble, amino acid antioxidant produced by microbes in the soil, where it is taken up by and most commonly found in (but not produced by) various species of mushrooms and grapes. It is also found in meats and dairy products as a result of the animal’s consumption of ergothioneine-containing foods. Humans and most animals typically have low levels of ERGO since the amount of ERGO in the diet is typically very small.
Our intellectual property includes three patents and two patent pending applications that cover the synthesis of 99% pure L-Ergothioneine, EGT™, and the protective effect of ERGO on mitochondria and other critical body structures and functions. A significant number of peer-reviewed scientific papers published since the discovery of ERGO in 1909 indicate that ERGO is one of the most potent, multifaceted biological compounds with both appreciable antioxidant and other protective properties. ERGO acts by itself, or in concert with other natural compounds, to improve the body’s own innate defenses against oxidative stress. Accordingly, Oxis focuses its efforts on developing products that deliver the benefits of ERGO taken by itself and in combination with other elements that support the body’s health protective systems.
Our patented and proprietary manufacturing method produces ERGO in commercial quantities that are indistinguishable from its form found in and utilized by humans. ERGO exists in certain types of mushrooms, grapes, meats and dairy products. However, it is not commercially practical to extract ERGO from these natural sources and it is essentially impossible to ingest a diet that provides enough ERGO to take full advantage of its potential health benefits.
ERGO has a number of special properties that decrease oxidative stress and may be beneficial for reducing the risk of developing certain diseases, including age-related diseases, and for contributing to healthy aging.
ERGO has been known to science since the early 20th century and the efficacy of ERGO as a multi-faceted antioxidant is supported by extensive published peer-review scientific research. In particular, ERGO provides fundamental anti-inflammatory benefits, along with other potentially beneficial effects, as evidenced by its ability to inhibit multiple mechanisms that contribute to inflammation and oxidative stress. Some specific examples include the ability of ERGO to: (1) inhibit NF-B activation (a central mechanism for implementing inflammatory responses), (2) abolish the transcriptional activation of interleukin-8 (a pro-inflammatory cytokine chemical that attracts white blood cells into sites of inflammation, for example an arthritic joint), (3) reduce apoptosis (a mechanism by which cells self-terminate, which may be important in controlling inflammation and aging), (4) suppress the formation of peroxynitrite (a reactive nitrogen species that has many harmful effects, especially the damaging nitration of proteins seen in neurodegenerative and vascular disorders), and (5) decrease hydrogen peroxide formation and its many effects on pro-inflammatory signaling mechanisms. These multiple scientific observations support the multifaceted actions of ERGO and suggest the potential importance of having this broad reaching agent in optimal levels to achieve full health and combat aging and disease. Several leading scientific authorities have opined that ERGO may well be an unrecognized essential nutrient.
A good example of the protective effect of ERGO has been demonstrated in studies of amyloid beta (A) which is the major component of senile plaques - the brain lesion that commonly occurs and is considered to play a causal role in the development and progression of Alzheimer’s disease.
The exact cause of the injury due to this amyloid molecule is of current interest in neurodegenerative disease research. A key finding is that ERGO may reduce this injury process that appears to involve oxidative stress damage to important brain constituents. Moreover, peer-reviewed, published scientific research shows that reactions involving -amyloid peptides are associated with important neurotransmitter signaling deficits in the brains of patients with Alzheimer’s disease. The conclusion that can be drawn is that ERGO protects the neurons of the brain against injury by reducing the damage caused by neurotoxins. We intend to continue to pursue the practical value of these and other observations about the potential wide ranging benefits of ERGO by conducting a basic and applied research strategy and collaborating with experts in academic institutions.
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It is also significant that ERGO has been shown to possess properties that may be beneficial in maintaining overall health and reducing the risk of disease.
Some of these additional benefits of ERGO include its ability to:
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Conserve the levels of and enhance the effectiveness of other antioxidants such as Vitamin E, Vitamin C and glutathione;
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Increase respiration and the oxidation of fat (possibly contributing to increased energy and exercise capacity);
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Protect mitochondria DNA from damage;
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Protect against environmental ultraviolet radiation (likely to be important in protecting the eyes against cataract producing oxidative injury and the skin against pre-cancerous inflammation-related pathologies); and
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Neutralize increased oxidative stress by providing an ROS (radical oxygen species) and RNS (radical nitrogen species) scavenging capacity that protects key molecules in the body.
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The recent identification of an ERGO transporter-designated OCTN1 or ETT (a facilitator for moving ERGO into cells and maximizing its activities) suggests the physiological relevance of ERGO as a potential protective and possibly therapeutic agent. Although more needs to be learned about this intrinsic mechanism for localizing and using ERGO, the presence of a genetically-directed system dedicated to ERGO further suggests the potential importance of ERGO. Moreover, the ERGO transporter system has been suggested as potentially being of specific importance in considering possible therapeutic agent applications for chronic inflammatory diseases, such as Crohn’s disease, ulcerative colitis, rheumatoid arthritis and Type I diabetes, as well as aging and other significant health processes.
Products
In December 2010, we commercially introduced a new, improved patent-pending joint health formula known as “ErgoFlex™.” We intend to market this product, as well as the other EGT™ based products we expect to introduce commencing in 2012, through our new on-line marketing joint venture with engage:BDR, as described in further detail below under “Marketing, Sales and Distribution.”
Our initial focus is to develop and sell products to the consumer products sector. We have sold small amounts of EGT™ as a component to selected commercial customers in the cosmetics industry for use in skin care products. We currently are developing certain skin care products that we expect to release later in 2012. In order to assist us in developing a line of skin care products, in March 2012 we entered into a consulting agreement with Dr. Tony Nakhla. Dr. Nakhla is a Board Certified Dermatologist, Dermatologic Surgeon, Medical Director of OC Skin Institute, and author of “The Skin Commandments: 10 Rules to Healthy, Beautiful Skin.” We have engaged Dr. Nakhla to, among other things, (i) assist us in the development of new line of skin care products that incorporate EGT™, (ii) assist us in developing a marketing strategy for our new skin care products, (iii) act as a principal spokesperson for our skin care products and as the exclusive medical spokesperson for skin care products, and (iv) in general raise public awareness about EGT™ and its health benefits. It is our goal to jointly develop a line of skin care products with Dr. Nakhla, which skin care products contain ERGO and that are either branded with Dr. Nakhla's name or that are otherwise endorsed by him. We have agreed to give Dr. Nakhla a percentage of net profits, if any, that we generate from skin care products that we develop through his services and that bear his name in the label, or contain an endorsement from him on the product, on its packaging, or in any of the marketing materials. In addition, as a further incentive, we also have agreed to grant Dr. Nakhla warrants to purchase up to 4,000,000 shares of our common stock. The warrant will have an exercise price of $0.02, and a term of ten years. The warrant will vest over a period of 36 months (as to 111,111 shares on the last day of each calendar month, and as to 111,115 on the last day of the 36th month) commencing with March 2012, provided that Dr. Nakhla is still providing services to us under the consulting agreement at the end of each such calendar month.
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We have also provided EGT™ to a customer for use as a value-added preservative for sperm in the animal husbandry sector, and may provide EGT™ for other veterinary purposes.
We are in the process of developing a broader line of dietary supplements containing ERGO, and plan in the future to develop, by ourselves or through third party alliances, functional foods and beverages and cosmeceutical products. Our product/market strategy is based on the rapid development of innovative products for these consumer markets. Product development will be achieved by a team comprised of our executive leadership, our Scientific Advisory Board and outside firms that specialize in these fields.
Markets
The products that Oxis is developing and plans to sell address very large, but fragmented markets with a wide variety of products, producers and marketing channels. According to Nutrition Business Journal, the total retail natural products market amounted to approximately $101.8 billion in retail sales in calendar 2008.
Oxis competes in: (1) the dietary supplements market with 2008 estimated retail sales of $25.2 billion (vitamins, minerals and other supplements), (2) the functional foods market with 2008 estimated retail sales of $36.8 billion, and, (3) the personal care market with $10.1 billion in estimated retail sales in 2008. Oxis also competes in the global anti-aging market, estimated at $120 billion in 2010.
We also may enter the market for veterinary products, including both products for companion animal (such as dietary supplements and topical products) and products based on our prior experience with companies in reproductive science for horses, pigs and other livestock.
We may also enter the health care segment of the companion animal products segment, which is a very large target segment accounting for over $6.8 billion in global sales, with the United States being the dominant market. The total global market for animal health products is estimated to be $17.4 billion.
Finally, we believe that there are opportunities for us to out-license proprietary compounds to biotech and pharmaceutical companies as drug candidates. Oxis owns several patents that could cover viable drug candidates at this time and expects to add to its IP portfolio as it builds relationships with various researchers around the globe, especially those focusing on therapeutics employing ERGO. Oxis believes that several of its patents may be related to the potential use of ERGO in compounds having therapeutic value in the preservation of organs for transplantation and as a treatment to address the significant oxidation stress occurring after both stroke and heart attack.
Oxis owns one approved pharmaceutical product (trademarked as Palosein) for veterinary use and is evaluating the re-launch of this product. This drug would compete with several prescription drugs for veterinary use such as Adequan (Polysulfated Glycosaminoglycan - PSGAG Solution) and Rimadyl.
Marketing, Sales and Distribution
Our strategy is to develop and maximize products designed for consumer use and to utilize the most effective and profitable distribution channels to: (1) attract new customers, (2) develop “relationships” with them, and (3) build and maintain sales with them. Essentially all of our products are “consumables” that can generate a stream of repeat sales with the same customers over an extended period of time, thus providing significant lifetime value for each customer.
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On-line Marketing
In March 2011, we agreed to form a joint venture with engage:BDR, Inc., an on-line marketing company that offers both premium and placement-specific display marketing solutions and the ability to distribute campaigns through its own display platforms and channels. engage:BDR partners with most of comScore's top 1000 websites (globally) for the most advanced display marketing capabilities. Under the joint venture agreement, engage:BDR will provide a full range of online marketing services to the joint venture, including developing brand strategy, the design of all digital media and interfaces, online media planning and buying, leveraging and integrating social media, and customer analysis.
In March 2012 we signed a term sheet with engage:BDR that further evidences our arrangement and that permits both parties to commence operations under the arrangement. The parties contemplate that the existing binding arrangement will be evidenced by a formal limited liability company agreement that the parties are preparing. The following is a summary of the principal provisions of our joint venture arrangement (the “Joint Venture”) with engage:BDR, Inc.:
A. We have agreed to grant the Joint Venture an exclusive license for the on-line marketing of products containing EGT™. The first product to be marketed and sold through the Joint Venture shall be Oxis’ ErgoFlex™ product, which product was successfully test marketed in mail offering in late 2010 and early 2011. Additional Oxis products designated by us will be offered by the Joint Venture. If both parties agree, third party products may also be offered through the Joint Venture. However, nothing in the Joint Venture is intended to prohibit us from marketing, distributing and selling ErgoFlex™ or any of our other current or future products by means other than through online sales.
B. Oxis and engage:BDR have agreed to make the following contributions to the Joint Venture:
(a) Oxis will contribute up to $240,000 during the first year following the formation of the Joint Venture. These funds will be provided if, when and as needed by the Joint Venture. Our cash capital contribution will be used (i) to purchase ErgoFlex and other products from Oxis, at our cost, without any markup, (ii) to purchase website media inventory from engage:BDR, at engage:BDR’s cost, plus a 15% administrative mark-up, and (iii) to fund the Joint Venture’s other operating costs. engage:BDR has agreed to waive the 15% administrative mark-up through December 31, 2012.
(b) In addition to the cash, our contribution to the Joint Venture includes the exclusive license for the on-line marketing of any products created by Oxis which utilize its proprietary EGT™.
(c). engage:BDR , at its own cost and expense, is designing, developing and providing to the Joint Venture, on a turnkey basis, all online product offering systems and technologies, including website layouts, landing pages, graphic designs, display advertising, rich media, in-banner and in-stream video development. During the initial start-up phase of the Joint Venture, engage:BDR will, at its own cost and expense, also manage all day-to-day online activities of the Joint Venture.
Cash from operations in excess of the amounts needed for its operations and for reasonable reserves, shall be distributed by the Joint Venture in the following order:
(a) First, to Oxis on a cumulative basis, an amount equal to the cash that we contributed to the Joint Venture, and
(b) Thereafter, all excess net operating cash will be distributed 50.1% to Oxis and 49.9% to engage:BDR.
C. The administrative affairs of the Joint Venture shall be managed by a committee consisting of one representative of each Joint Venture member.
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As additional consideration for engage:BDR entering into the Joint Venture and for contributing its services in designing, developing and implementing the advertising platform, at the time that the Joint Venture operating agreement is signed, we will grant engage:BDR a two-year option to purchase Oxis securities. The option shall entitle engage:BDR to purchase the type of securities sold by us in a future $6,000,000 or more financing, on the same terms and conditions, and at the same price, as such securities are sold to third party investors in such financing. The number of such securities that engage:BDR may purchase upon the exercise of the option (determined by assuming all convertible securities are converted and all exercisable securities are exercised) shall be equal to 4.99% of our common stock issued and outstanding on the date the Joint Venture agreement is signed. If we have not raised $6,000,000 by December 31, 2012, commencing on that date, engage:BDR will have a two-year right to purchase Oxis’ common stock at a price equal to $.03. We have also agreed to issue to engage:BDR a warrant to purchase up to 5,000,000 shares of our common stock if the Joint Venture, through engage:BDR efforts, attains certain revenue and profits targets. The warrant will have an exercise price of $.03 per share.
Celebrity Endorsements
Our goal is to develop and release in 2012 a line of skin care products that contain EGT™. In order to assist us in developing that line of skin care products, in March 2012 we entered into a consulting agreement with Dr. Tony Nakhla, a prominent Board Certified Dermatologist, Dermatologic Surgeon, Medical Director of OC Skin Institute, and author of “The Skin Commandments: 10 Rules to Healthy, Beautiful Skin.” Under our agreement with Dr. Nakhla, we intend to develop EGT™ based skin care products that are branded with Dr. Nakhla’s name. In addition, Dr. Nakhla has agreed to promote EGT™ and our future line of branded skin care products at skin care trade shows and conferences in general, and ERGO related conferences in particular.
North American Marketing
Our immediate marketing and sales plan emphasizes close and direct contact with the consumer. This strategy stresses building a significant and enduring customer base and maximizing profits by eliminating one or more layers in certain distribution channels. This approach compares favorably with a traditional retail distribution strategy where the consumer relationship is with the retailer and manufacturer profits are lower in terms of both sales and profits.
Examples of methods to build direct consumer relationships include multi-level marketing, long and short-form television infomercials, long and short-form radio infomercials and direct mail programs. We plan to further evaluate all of these approaches for the distribution of our consumer products and utilize the approaches which best build and maintain consumer relationships and maximize our profits. In December 2010 we initiated a direct mail marketing program for ErgoFlex™. We believe that the initial phase of this program was successful and that we achieved an acceptable response rate. Even more encouraging, to date, most customers who ordered ErgoFlex™ have continued to remain customers and have made follow-on purchases. We intend to further explore this type of direct mail sales program.
Foreign Marketing
Our distribution partner, engage: BDR markets on-line and in addition to the USA, targets certain European and Asian countries. We anticipate sales from all three of these areas in 2012. Other than these possible on-line sales to foreign customers, we do not currently engage in any foreign marketing or sales activities.
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Research and Development.
Ergo ARDS, LLC. We believe that EGT™ may have additional health benefits. Accordingly, in order to investigate such other health benefits and to develop other potential products, on June 29, 2011 we entered into a Joint Venture Agreement (“Joint Venture Agreement”) with John E. Repine, M.D. (“Dr. Repine”), a member of our advisory board. Under the terms of the Joint Venture Agreement, we formed a Delaware limited liability company, Ergo ARDS, LLC (the “ARDS Venture”), in which we hold a 60% membership interest and Dr. Repine holds a 40% membership interest. The ARDS Venture was formed to develop, acquire and market dietary supplements, cosmeceutical products, nutraceutical products, medical foods and pharmaceuticals using EGT™ for treating, diagnosing and preventing acute respiratory distress syndrome and other lung disorders (collectively “ARDS”).
Concurrently with the execution of the Joint Venture Agreement, Dr. Repine assigned his interest in the patent applications relating to the use of ERGO in treating ARDS (the “Assigned IP”) to the ARDS Venture. In consideration for the Assigned Interest, Dr. Repine was issued a 40% membership interest in the ARDS Venture.
Oxis will be responsible for supplying EGT™ to the ARDS Venture at no cost in connection with the ARDS Venture’s animal studies. Oxis will also pay all patent prosecution and maintenance costs relating to the Assigned IP. The ARDS Venture is required to make payments to Dr. Repine upon the achievement of certain milestones by the ARDS Venture. Any future payments to Dr. Repine shall be made based on the achievement of following milestones with respect to products to be commercialized using the Assigned IP:
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The ARDS Venture shall pay the following cash amounts to Dr. Repine upon the attainment of the following milestones:
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(i) Licensing the Assigned IP to a pharmaceutical company -- $1,000,000;
(ii) Completion of Phase I Clinical Trial -- $250,000;
(iii) Completion of Phase II Clinical Trial -- $1,000,000;
(iv) Completion of pivotal Phase III Clinical Trial -- $1,500,000; and
(v) Receipt of FDA Marketing approval -- $3,000,000
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The ARDS Venture shall pay the following cash amounts to Dr. Repine upon the attainment of the following milestones:
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(i) Licensing the Assigned IP to, or entering into a distribution agreement with, a nutraceutical or similar company -- $100,000; and
(ii) Gross sales of products utilizing EGT™ in the field – 5% of annual gross sales by the ARDS Venture or any licensee or distributor (including Oxis).
Following the successful completion of the animal studies, Oxis and Dr. Repine will make a joint decision to commence human clinical trials. If the parties do not agree to proceed, the Joint Venture Agreement will terminate and the intellectual property belonging to the ARDS Venture will be assigned to the party that elected to proceed. In the event both parties agree to not proceed, the ARDS Venture will continue to hold the intellectual property. If the parties agree to proceed, Oxis will use its best efforts to raise $3 million for the ARDS Venture. Once the $3 million in funds have been successfully raised by Oxis, Oxis will no longer be responsible for paying the ARDS Venture’s operating costs, including costs related to the ARDS Venture’s intellectual property.
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The ARDS Venture will be managed by Dr. Repine as Manager, who will also serve as the ARDS Venture’s Chief Executive Officer and Treasurer. The ARDS Venture will also have a board of five members, consisting of Dr. Repine and a designee of Dr. Repine, and three designees of Oxis.
Research and Development Expenditures. Research and development expenditures for the year December 31, 2011 were $17,000, compared to $179,000 in 2010. These expenditures were incurred in connection with the testing and obtaining certification for ERGO related to the release of ErgoFlex™.
Manufacturing
We have outsourced the manufacturing of ERGO and are working to reduce the cost of producing ERGO. We have had a multi-year relationship with our primary manufacturing source that manufactures ERGO according to our patented, proprietary process.
Our ErgoFlex™ consumer product is manufactured, produced and provided to us by Gemini Pharmaceuticals, Inc. On October 18, 2010, we obtained a credit facility of up to $750,000 from Gemini Pharmaceuticals, Inc. to be used for product and inventory purchases by us from Gemini. Gemini Pharmaceuticals is a private label manufacturer of over-the-counter drugs, dietary supplements and nutraceuticals.
We plan to outsource the manufacture of all of our future products that we plan to sell through various channels into the marketplace. We believe there are a wide variety of companies that can efficiently and cost-effectively manufacture our products.
Patents and Trademarks
OXIS Patent Portfolio
Below is a list of patents and patent applications that serve as a base for new product development and are particularly relevant to our planned businesses. These patents and patent applications address the protective effect of ERGO on mitochondria, the ERGO manufacturing process, and the neuroprotectant methods and compositions of ERGO. Certain patents cover potential therapeutic drug candidates that we may out-license to biotech and pharmaceutical companies. In addition, we own certain other patents not directly related to our planned nutraceutical and cosmeceutical business that are not listed.
OXIS Ergothioneine Patents
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U.S. Patent 5,438,151 issued August 1, 1995 entitled “Process for the Preparation of Ergothioneine” will expire on February 8, 2014.
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U.S. Patent 6,103,746 issued August 8, 2000 entitled “Methods and Compositions for the Protection of Mitochondria” will expire on February 19, 2018.
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Mexican Patent 211035 issued October 25, 2002 entitled “Methods and Compositions for the Protection of Mitochondria” will expire on February 19, 2018.
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OXIS Ergothioneine Pending Applications
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U.S. Application 12/595,506 filed October 9, 2009 entitled “Ergothioneine and/or its Derivatives as a Cell Preservative”.
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Canadian Application (Number not yet assigned) filed October 9, 2009 entitled “Ergothioneine and/or its Derivatives as a Cell Preservative”.
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We have previously marketed the antioxidant ERGO to industry leaders in the cosmetics industry. One of these cosmetics industry leaders, The Estée Lauder Companies, challenged our patent rights. Last year we reached a settlement of the patent dispute with The Estée Lauder Companies, which settlement provided us with full title to two important ergothioneine method of use patents.
Selected Licensed BXT-51072 Patents – Potential Drug Candidates and Related Patents
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U.S. Patent 5,968,920 issued October 19, 1999 entitled “Novel Compounds having a Benzoisoelen-Azoline and -Azine Structure, Method for Preparing Same and Therapeutic Uses Thereof” will expire on April 7, 2015.
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U.S. Patent 6,093,532 issued July 25, 2000 entitled “Method for Storing a Biological Organ Transplant Graft Using a Benzisoelen-Azoline or -Azine Compound” will expire on April 7, 2015.
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U.S. Patent 5,973,009 issued October 26, 1999 entitled “Aromatic Diselenides and Selenosulfides, their Preparation and their Uses, more Particularly their Therapeutic Use” will expire on December 23, 2017.
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U.S. Patent 6,525,040 issued February 25, 2003 entitled “Cyclic Organoselenium Compounds, their Preparation and their Uses” will expire on December 23, 2017.
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The foregoing patents can expire earlier if they are abandoned or are not adequately maintained. No assurance can be given that patents will be issued from any of the pending patent applications or that the scope of the coverage claimed in our patent applications will not be significantly reduced prior to any patent being issued.
Trademarks
We have a number of trademarks available for its use including: ErgoFlex™ Ergo-Plex™, ERGOLD™, Ergo-Max™, Ergo-Pur™, V[eye]tamin™, Immortal Energy™. We also own the non-EGT™ related trademark Palosein®.
Competition
The pharmaceutical, nutraceutical and the consumer products industries are highly competitive and require an ongoing, extensive search for technological innovation. They also require, among other things, the ability to effectively discover, develop, test and obtain regulatory approvals for products, as well as the ability to effectively commercialize, market and promote approved products, including communicating the effectiveness, safety and value of products to actual and prospective customers. Numerous companies are engaged in the development, manufacture and marketing of health care and personal care products competitive with those that we manufacture, develop and market. Many of our competitors have greater resources than we have. This enables them to, among other things, make greater research and development investments and spread their research and development costs, as well as their marketing and promotion costs, over a broader revenue base. Our competitors may also have comparable experience and expertise in obtaining marketing approvals from the FDA and other regulatory authorities. In addition to product development, testing, approval and promotion, other competitive factors in the pharmaceutical industry include industry consolidation, product quality and price, product technology, reputation, customer service and access to technical information.
Our primary initial target markets are: (1) dietary supplements and functional foods and beverages, and (2) personal care product. The markets for our products are highly competitive. Our competitors include manufacturers and marketers of personal care and nutritional products, pharmaceutical companies and other direct selling organizations, many of which have a longer operating history and higher visibility, name recognition and financial resources than we do.
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The leading dietary supplement companies are NBTY, Pharmavite, Amway Nutrilite, NuSkin/Pharmanex, USANA, and Herbalife. Some successful smaller companies include New Chapter and Nature’s Way.
The leading functional foods and beverages companies are Monavie, Hain-Celestial, Pom, Wonderful, Hanson, Red Bull and Silk. Some apparently successful smaller companies include Lifeway and Honest Teas
The leading cosmetics companies are L’Oreal, Estee Lauder, NuSkin and Mary Kay. Some apparently successful smaller companies include Nature’s Gate and Dermalogica.
Our products in these segments will initially compete based on the potential health benefits of ERGO. However, we will also attempt to compete in these markets on the basis of quality, clinical data, and effective marketing campaigns, including direct-to-consumer advertising.
Government Regulation
The manufacturing, packaging, labeling, advertising, distribution and sale of our proposed nutraceutical and cosmeceutical products will be subject to extensive governmental regulation by numerous domestic and foreign governmental agencies and authorities, including the U.S. Food and Drug Administration (“FDA”), the Federal Trade Commission (“FTC”), the Consumer Product Safety Commission, the Department of Agriculture, State Attorneys General and other state regulatory agencies in the United States, and similar government agencies in each market in which we operate.
Our personal care products may be subject to various laws and regulations that regulate cosmetic products and set forth regulations for determining whether a product can be marketed as a “cosmetic” or requires further approval as an over-the-counter drug. In the United States, regulation of cosmetics is under the jurisdiction of the FDA. The Food, Drug and Cosmetic Act defines cosmetics by their intended use, as “articles intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the human body for cleansing, beautifying, promoting attractiveness, or altering the appearance.” Among the products included in this definition are skin moisturizers, perfumes, lipsticks, fingernail polishes, eye and facial makeup preparations, shampoos, permanent waves, hair colors, toothpastes and deodorants, as well as any material intended for use as a component of a cosmetic product. Conversely, a product will not be considered a cosmetic, but may be considered a drug if it is intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease, or is intended to affect the structure or any function of the body. A product’s intended use can be inferred from marketing or product claims.
Our nutraceutical business (dietary supplements and functional foods and beverages products) may be subject to various regulations promulgated by government agencies in the markets in which we operate. We plan to market our nutritional products as conventional foods or dietary supplements. The FDA has jurisdiction over this regulatory area. Because these products are regulated under the Dietary Supplement and Health Education Act, we are generally not required to obtain regulatory approval prior to introducing a product into the United States market. None of this infringes, however, upon the FDA’s power to remove from the market any product it determines to be unsafe or an unapproved drug. Additionally, due to negative publicity associated with some supplements in the dietary supplements industry, there has been an increased movement in the United States and other markets to expand the regulation of dietary supplements, which could impose additional restrictions or requirements in the future. In general, the regulatory environment is becoming more complex with increasingly strict regulations each year.
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Effective June 2008, the FDA established regulations to require current good manufacturing practices (cGMP) for dietary supplements. The regulations ensure that dietary supplements are produced in a quality manner, do not contain contaminants or impurities, and are accurately labeled. We may be subject to such regulations, which include requirements for establishing quality control procedures, designing and constructing manufacturing plants, and testing ingredients and finished products. The regulations also include requirements for record keeping and handling consumer product complaints. If dietary supplements contain contaminants or do not contain the type or quantity of dietary ingredient they are represented to contain, the FDA would consider those products to be adulterated or misbranded. Our business may also be subject to additional FDA regulations, such as those implementing an adverse event reporting system effective December 2007, which will require us to document and track adverse events and report serious adverse events, which are events involving hospitalization or death, associated with consumers’ use of our products. Compliance with these regulations is costly and may directly and indirectly increase the cost of manufacturing and selling our products.
Advertising and product claims regarding the efficacy of products are also regulated. Accordingly, these regulations can limit our ability to inform consumers of the full benefits of our products. For example, we will not be able to claim that any of our nutritional supplements will diagnose, cure, mitigate, treat or prevent any disease or health-related condition. The Dietary Supplement Health and Education Act permits substantiated, truthful and non-misleading statements of nutritional support to be made in labeling, such as statements describing general well-being resulting from consumption of a dietary ingredient or the role of a nutrient or dietary ingredient in affecting or maintaining a structure or a function of the body.
We do not anticipate that we will be directly involved in any regulation regarding our therapeutic compounds since we will be out-licensing these compounds to biotech and pharmaceutical companies that will be responsible for this aspect of our therapeutic business.
Employees
As of December 31, 2011, we had one employee, the chief executive officer of the company. Many of our activities are out-sourced to consultants who provide services to us on a project basis. As business activities require and capital resources permit, we will hire additional employees to fulfill our company’s needs.
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ITEM 1A. RISK FACTORS
The risks described below may not be the only ones relating to our company. Additional risks that we currently believe are immaterial may also impair our business operations. Our business, financial conditions and future prospects and the trading price of our common stock could be harmed as a result of any of these risks. Investors should also refer to the other information contained or incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 2011, including our financial statements and related notes, and our other filings from time to time with the Securities and Exchange Commission
Risks Related To Our Business
We have operated at a loss and it is uncertain when, if ever, we will become profitable.
We have operated at a loss since our inception. We incurred net losses of $3,700,000 and $3,018,000 for the years ended December 31, 2011 and 2010, respectively. We had an accumulated stockholders' deficit as of December 31, 2011 of approximately $5,101,000 and a working capital deficit of approximately $5,126,000. We are likely to continue to incur losses unless and until we are able to successfully commercialize one or more of our products. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. In December 2010 we test marketed the first of a series of nutraceuticals that we expect to release in 2012 and thereafter. We anticipate that the commercial release of this product, ErgoFlex™, will generate revenues in 2012, particularly since it will be the first product marketed through our new on-line marketing joint venture with engage:BDR. We also intend to offer additional ERGO based nutraceuticals and skin care products through the marketing joint venture commencing in 2011, which products are expected generate revenues. Although the consumer response to ErgoFlex™ in our December 2010 test market was favorable, no assurance can be given that the product will ultimately achieve a high level of acceptance by a larger consumer market. In addition, even if ErgoFlex™ is successfully marketed and sold through our engage:BDR joint venture, we will only receive 50.1% of the net revenues of that joint venture (engage:BDR will receive the other 49.5% of the net revenues). Accordingly, we are unable to predict the amount of revenues that we may generate in 2012 and beyond, and when we may become profitable, if at all. If we do not become profitable or are unable to maintain future profitability, our ability to survive as a viable company may be in doubt, and the market value of our common stock will be adversely affected.
We will need additional capital in order to successfully implement our business plan, without which we may not be able to successfully implement our business plan, which may cause us to have to curtail or cease operations.
We currently do not have sufficient cash on hand to fund our administrative expenses for more than the next few months. Our business plan, however, calls for us to incur significant additional expenses in connection with marketing and commercializing our future products and in developing and expanding our business and operations. In particular, we anticipate that we will have to incur significant expenses in developing, testing, packaging, manufacturing and marketing our proposed new line of skin care products that we intend to develop with Dr. Nakhla. Although we have obtained a commitment from two investors to fund (up to an additional $500,000) the initial roll-out of certain products through our engage:BDR on-line joint venture, no assurance can be given that those funds will be sufficient, or that the engage:BDR joint venture will generate significant revenues. In addition, we anticipate that we will need additional financing to fund our future working capital requirements, our future development costs, and the costs of commercially releasing any of our proposed products. These projected cost exceed the amount of cash that we currently have and exceed the amount of cash from operations that our near term operating activities may generate. Accordingly, even if our future operations will generate operating revenues (initially through our engage:BDR on-line venture, but thereafter through other sales activities), in order to expand our operations in the manner contemplated by our business plan, or to continue to operate our company in the longer term, we will have to either (i) obtain additional debt or equity financing, or (ii) enter into a strategic alliance with a synergistic company to acquire funding.
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Other than the agreement by two of our principal investors to provide us with $500,000 of additional funding to pay for the roll out of our new engage:BDR on-line venture, we do not have commitments from any third parties at this time to provide us with any additional financing. Thus, there can be no assurance that sufficient funding will be available to us on acceptable terms or at all. Certain potential investors may be unwilling to invest in our securities since we are traded on the OTC Bulletin Board and not on a national securities exchange. Any additional funding that we obtain in a financing is likely to reduce the percentage ownership of the company held by our existing securityholders. The amount of this dilution may be substantially increased if the trading price of our common stock has declined at the time of any financing from its current levels. If we are unable to obtain sufficient financing on a timely basis, the introduction of new products could be delayed, our marketing plans may have to be scaled back, and we could be forced to reduce the scope of our operations, or otherwise limit or terminate our operations altogether.
We have no direct operating history in the nutraceutical and cosmeceutical business, which makes it difficult to evaluate our financial position and our business plan.
Until the end of 2008, we were engaged in the sale of research diagnostic reagents and assays to medical research laboratories, and in the production of enzyme immunoassay diagnostic kits for domestic and international clinical laboratories. Since 2008, we no longer are engaged in those businesses, and have restructured our operations. However, since we have only recently commenced our new operations and have not yet generated significant revenues from our business operations, we have no operating history in our current line of business on which a decision to invest in our company can be based. The future of our company currently is dependent upon our ability to implement our new business plan of producing, marketing and selling nutraceutical and other products based on our EGT™ technology. While we believe that our business plan, if implemented as contemplated, will make our company successful, we have no operating history against which we can test our plans and assumptions, and therefore cannot evaluate the likelihood of success.
We plan to outsource and rely on third parties for the development and manufacture and marketing of our products.
Our business model calls for the outsourcing of the development, manufacturing and marketing of our products in order to reduce our capital and infrastructure costs as a means of potentially improving the company’s profitability of these products for us. As a result, we are subject to all of the risks associated with having to rely on third parties to develop, manufacture and market our products to our standards, at the projected costs and on a timely basis. These risks include the willingness of manufacturers to make the product, or lack of availability of manufacturing capacity, each of which would have an adverse impact on the availability of our products and on our ability sell our products. Manufacturing difficulties will harm our ability to compete and adversely affect our results of operations and financial condition, and may hinder our ability to grow. There is no assurance that our outside manufacturers will reliably supply products to us at the level of quality we require. In the event any of our third-party manufacturers were to become unable or unwilling to continue to provide our products, we would be required to identify and obtain acceptable replacement manufacturing sources. There is no assurance that we will be able to obtain alternative manufacturing sources on a timely basis. An extended interruption in the supply of our products, particularly EGT™, would result in loss of sales. In addition, any actual or perceived degradation of product quality as a result of our reliance on third party manufacturers may have an adverse effect on sales.
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Our future product sales will be heavily dependent upon the success of our on-line marketing joint venture with engage:BDR.
In March 2011, we agreed to form a joint venture with engage:BDR, Inc., an on-line marketing company, to market and sell our nutraceutical products on-line over the Internet. We have now commenced operating under that joint venture arrangement, and we expect to launch our on-line sales of ErgoFlex through the engage:BFR joint venture by the end of April 2012. Although we expect to continue to market our products through other means, such as direct mail campaigns, the on-line marketing to be conducted through our joint venture with engage:BDR is anticipated to be our largest marketing and sales effort in 2012. Under the joint venture agreement, engage:BDR will be responsible for the full range of online marketing services, including developing brand strategy, the design of all digital media and interfaces, online media planning and buying, leveraging and integrating social media, and customer analysis. Accordingly, the success of our nutraceutical products will be heavily dependent upon the efforts and success of engage:BDR. Since the joint venture with engage:BDR, Inc. represents our principal marketing initiative in 2012, the failure of the joint venture would materially and detrimentally affect the amount of revenues we anticipate we will receive in 2012 from sales of our products.
Our products will be subject to government regulation, both in the United States and abroad, which could significantly increase our costs and otherwise limit or prevent the sale of our products.
The manufacture, packaging, labeling, advertising, promotion, distribution, and sale of any products that we may release in the future will be subject to regulation by numerous national and local governmental agencies in the United States and other countries. The primary regulatory bodies in the United States are the FDA and FTC. Failure to comply with these regulatory requirements may result in various types of penalties or fines. These include injunctions, product withdrawals, recalls, product seizures, fines, and criminal prosecutions. Individual states also regulate nutritional supplements. A state may interpret claims or products presumptively valid under federal law as illegal under that particular state’s regulations. In markets outside the United States, we may have to obtain approvals, licenses, or certifications from a country’s ministry of health or comparable agency, as well as labeling and packaging regulations, all of which vary from country to country. Approvals or licensing may be conditioned on reformulation of products or may be unavailable with respect to certain products or product ingredients. Any of these government agencies, as well as legislative bodies, can change existing regulations, or impose new ones, or could take aggressive measures, causing or contributing to a variety of negative consequences, including:
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requirements for the reformulation of certain or all products to meet new standards,
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the recall or discontinuance of certain or all products,
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additional record keeping,
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expanded documentation of the properties of certain or all products,
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expanded or different labeling,
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adverse event tracking and reporting, and
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additional scientific substantiation.
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Any or all of these requirements could have a material adverse effect on us. There can be no assurance that the regulatory environment in which we operate will not change or that such regulatory environment, or any specific action taken against us, will not result in a material adverse effect on us.
Our success may be linked to the size and growth rate of the vitamin, mineral and supplement market and an adverse change in the size or growth rate of that market could have a material adverse effect on us.
Some manufacturers in our industry have experienced a slow-down in sales of nutritional supplements. An adverse change in size or growth rate of the vitamin, mineral and supplement market could have a material adverse effect on us. Underlying market conditions are subject to change based on economic conditions, consumer preferences and other factors that are beyond our control, including media attention and scientific research.
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We are highly dependent upon consumers’ perception of the safety and quality of our products, including how they compare against similar products distributed by other companies in our industry. Adverse publicity and negative public perception regarding particular ingredients, products or our industry may affect the consumers’ decisions to purchase our products, which could limit our ability to increase revenue and grow our business. This negative public perception may include publicity regarding the efficacy or quality of our ingredients, including in particular ERGO in general, and EGT™ in particular. Negative public perception may also arise from regulatory investigations, regardless of whether those investigations involve us. We are highly dependent upon consumers’ perception of the safety and quality of our products as well as similar products distributed by other companies. Thus, the mere publication of reports asserting that such products may be harmful could have a material adverse effect on us, regardless of whether these reports are scientifically supported. Publicity related to nutritional supplements may also result in increased regulatory scrutiny of our industry and/or the healthy foods channel. Adverse publicity may have a material adverse effect on our business, financial condition, and results of operations. There can be no assurance of future favorable scientific results and media attention or of the absence of unfavorable or inconsistent findings.
We face intense competition from competitors that are larger, more established and that possess greater resources than we do, and if we are unable to compete effectively, we may be unable to maintain sufficient market share to sustain profitability.
Numerous manufacturers and retailers compete actively for consumers, and there can be no assurance that we will be able to compete with already established manufacturers and retailers. In addition, nutraceutical and cosmeceuticals can be purchased from a wide variety of channels of distribution, including mass market retail stores and the Internet. Because these markets generally have low barriers to entry, additional competitors could enter the market at any time. Private label products of our customers also provide competition to our products. Additional national or international companies may, in the future, seek to enter or to increase their presence in the nutraceutical and cosmeceutical or the vitamin, mineral supplement market. Increased competition in either or both could have a material adverse effect on us.
The nutritional supplement industry increasingly relies on intellectual property rights and, although we seek to ensure that we do not infringe the intellectual property rights of others, there can be no assurance that third parties will not assert intellectual property infringement claims against us, which claims may result in substantial costs and diversion of management and other resources and could have a material adverse effect on our business, financial condition, and operating results. Recently it has become more and more common for suppliers and competitors to apply for patents or develop proprietary technologies and processes. We seek to ensure that we do not infringe the intellectual property rights of others, but there can be no assurance that third parties will not assert intellectual property infringement claims against us. These developments could prevent us from offering or supplying competitive products or ingredients in the marketplace. They could also result in litigation or threatened litigation against us related to alleged or actual infringement of third-party rights. If an infringement claim is asserted or litigation is pursued, we may be required to obtain a license of rights, pay royalties on a retrospective or prospective basis, or terminate the manufacturing and marketing of our products that are alleged to have infringed. Litigation with respect to such matters could result in substantial costs and diversion of management and other resources and could have a material adverse effect on our business, financial condition, and operating results.
Our patents may not protect the proprietorship of our products.
Our ability to compete successfully will depend to a significant extent, on our patents and on our ability to defend our patents. Most of the initial products that we plan to release are based on the benefits of EGT™. Our patents and patent applications address the ability to make EGT™ and the protective effect of EGT™ on mitochondria and its neuroprotectant properties. We believe these patents thus provide us with a competitive advantage in our market. We have previously initiated legal proceedings to enforce our patent protection rights for manufacture and use of EGT™ in cosmeceuticals. For example, in 2010, we settled a patent dispute with The Estée Lauder Companies, which provided us with title to two important EGT™ method of use patents. However, the failure to defend our patents in the future could have an adverse effect on our planned business operations and product sales.
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Even though we have obtained patent protection for certain effects and preparation processes related to Ergothioneine, there is no guarantee that the coverage of these patents will be sufficiently broad to protect us from competitors or that we will be able to enforce our patents against potential infringement by third parties or protect us against our infringement of the proprietary rights of third parties. Patent litigation is expensive, and we may not be able to afford the costs.
Ergothioneine has been previously marketed by various other companies in cosmeceutical and nutraceutical purposes. This may make it more difficult for us to enforce our patent coverage for our proposed products and easier for third parties to compete against us.
Product liability claims could hurt our business.
Our products consist of ingredients that are classified as foods or dietary supplements and are not subject to pre-market regulatory approval in the United States. As a marketer of dietary and nutritional supplements and other products that are ingested by consumers or applied to their bodies, we may be subjected to various product liability claims, including that: (i) our products contain contaminants; (ii) our products include inadequate instructions as to their uses; or (iii) our products include inadequate warnings concerning side effects and interactions with other substances. It is possible that product liability claims and the resulting adverse publicity could negatively affect our business; that our product liability insurance may fail to cover future product liability claims so we could be required to pay substantial monetary damages which could harm our business.
Product Claims, Advertising And Distributor Activities.
Our failure to comply with FTC or state regulations that cover our product claims and advertising, including direct claims and advertising by us, as well as claims and advertising by our marketing joint venture, may result in enforcement actions and imposition of penalties or otherwise materially and adversely affect the distribution and sale of our products.
Risks Related to Our Securities
Our securities are quoted on the OTC Bulletin Board, which may limit the liquidity and price of our securities more than if our securities were quoted or listed on or a national securities exchange.
Our securities are currently quoted on the OTC Bulletin Board, a NASD-sponsored and operated inter-dealer automated quotation system for equity securities not listed on a national securities exchange. Quotation of our securities on the OTC Bulletin Board may limit the liquidity and price of our securities more than if our securities were quoted or listed on a national securities exchange. Some investors may perceive our securities to be less attractive because they are traded in the over-the-counter market. In addition, as an OTC Bulletin Board listed company, we do not attract the extensive analyst coverage that accompanies companies listed on a national securities exchange. Further, institutional and other investors may have investment guidelines that restrict or prohibit investing in securities traded in the over-the-counter market. These factors may have an adverse impact on the trading and price of our securities.
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You may have difficulty selling our shares because they are deemed “penny stocks.”
Our common stock is not listed on a national securities exchange, and the trading price of our common stock has consistently remained below $5.00 per share for the past ten years. Trading in our common stock is subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a “penny stock” (generally, any non-national securities exchange equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and “accredited investors” (generally defined as an investor with a net worth in excess of $1,000,000 or annual income exceeding $200,000 individually or $300,000 together with a spouse). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. The broker-dealer also must disclose the commissions payable to the broker-dealer, current bid and offer quotations for the penny stock and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Such information must be provided to the customer orally or in writing before or with the written confirmation of trade sent to the customer. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The additional burdens imposed upon broker-dealers by such requirements could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of the common stock and the ability of holders of the common stock to sell their shares.
Our existing stockholders are subject to significant additional dilution if the currently outstanding options, warrants and convertible promissory notes are exercised. The sale of these additional shares could also cause our common stock price to fall.
As of March 31, 2012, a total of 300,299,838 shares of our common stock were issued and outstanding. However, we currently have outstanding options, warrants and convertible promissory notes that could result in the issuance of a total of 417,841,204 additional shares of common stock. If all shares issuable under the foregoing options, warrants, convertible promissory notes and other agreements were issued, our current shareholders would own only 28% of the then outstanding shares of common stock. Accordingly, the stockholdings of current stockholders will be substantially diluted if and when these convertible securities are converted or when the options and warrants are exercised. If many of these shares are actually issued, the voting power of the currently outstanding shares would substantially decrease. Furthermore, the re-sale of these newly issued shares, or even the possibility that substantial amounts of our common stock may be sold in the public market, could adversely affect prevailing market prices for our common stock.
The voting rights of the preferred stock held by Theorem Group, LLC gives that stockholder the ability to control the voting shares of this company and to prevent other stockholders from influencing significant corporate decisions.
Theorem Group, LLC, an affiliate of Mr. Dube (one of our directors), owns all of the issued and outstanding shares of our Series H Convertible Preferred Stock. As the holder of all of the Series H Convertible Preferred Stock, Theorem Group, LLC is entitled to a number of votes equal to (A) the number of shares of Common Stock that such shares of preferred stock could, at such time, be converted into (B) multiplied by 100. Since the Series H Convertible Preferred Stock is currently convertible into 2,500,000 shares of our common stock, Theorem Group has the voting power of 250,000,000 shares, or approximately 45.4% of our voting shares. As a result, Theorem Group is able to direct the outcome of matters, including the election of our directors and other corporate actions such as:
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our merger with or into another company;
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a sale of substantially all of our assets; and
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amendments to our certificate of incorporation.
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The decisions of Theorem Group may conflict with our interests or those of our other stockholders.
The market price of our stock may be adversely affected by market volatility.
The market price of our common stock is likely to be volatile and could fluctuate widely in response to many factors, including:
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announcements by us of new product releases, or the delay in releasing new products;
|
|
|
·
|
developments with respect to our patents or proprietary rights;
|
|
|
·
|
announcements of new products or new contracts by our competitors;
|
|
|
·
|
actual or anticipated variations in our operating results;
|
|
|
·
|
changes in financial estimates by securities analysts and whether our earnings meet or exceed such estimates;
|
|
|
·
|
conditions and trends in the nutraceutical, cosmeceutical and other industries;
|
|
|
·
|
new accounting standards;
|
|
|
·
|
general economic, political and market conditions and other factors; and
|
|
|
·
|
the occurrence of any of the risks described in this report.
|
20
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our principal executive office is located at 468 N. Camden Drive, 2nd Fl., Beverly Hills, California 90210. We also currently sublease office space and other facilities from Theorem Capital, LLC at 10880 Wilshire Boulevard, Suite 950, Los Angeles, California 90024 on a month-to-month basis for $5,000 per month. See, “Item 13. Certain Relationships and Related Transactions, and Director Independence,” below.
ITEM 3. LEGAL PROCEEDINGS
We may occasionally become subject to legal proceedings and claims that arise in the ordinary course of our business. It is impossible for us to predict with any certainty the outcome of pending disputes, and we cannot predict whether any liability arising from pending claims and litigation will be material in relation to our consolidated financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
None.
21
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Until May 2009, our common stock was traded on the OTC Bulletin Board (“OTCBB”) under the symbol “OXIS.” From May 20, 2009 until March 11, 2010, our common stock was traded on Pink OTC Markets Inc. trading platform under the symbol “OXIS.” Since March 11, 2010, our common stock is again quoted on the OTCBB under the “OXIS” trading symbol.
Trading in our common stock has fluctuated greatly during the past year. Accordingly, the prices for our common stock quoted on the OTCBB or Pink OTC Markets Inc. may not necessarily be reliable indicators of the value of our common stock. The following table sets forth the high and low bid prices for shares of our common stock for the quarters noted, as reported on the OTCBB and the Pink OTC Markets Inc. The following price information reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
|
YEAR
|
PERIOD
|
HIGH
|
LOW
|
||||||
|
Fiscal Year 2010
|
First Quarter
|
$ | 0.25 | $ | 0.16 | ||||
|
Second Quarter
|
0.19 | 0.10 | |||||||
|
Third Quarter
|
0.13 | 0.10 | |||||||
|
Fourth Quarter
|
0.19 | 0.08 | |||||||
|
Fiscal Year 2011
|
First Quarter
|
0.15 | 0.08 | ||||||
|
Second Quarter
|
0.14 | 0.08 | |||||||
|
Third Quarter
|
0.10 | 0.03 | |||||||
|
Fourth Quarter
|
0.06 | 0.03 | |||||||
Our common stock is also quoted on several European based exchanges including Berlin (OXI.BE), Frankfurt (OXI.DE), the Euronext (OXI.NX) and Paris, (OXI.PA). The foregoing trading prices exclude trading on these foreign stock markets.
Stockholders
As of March 31, 2012, there were 1,097 stockholders of record, which total does not include stockholders who hold their shares in “street name.” The transfer agent for our common stock is ComputerShare, whose address is 350 Indiana Street, Golden, CO 80401.
Dividends
We have not paid any dividends on our common stock to date and do not anticipate that we will pay dividends in the foreseeable future. Any payment of cash dividends on our common stock in the future will be dependent upon the amount of funds legally available, our earnings, if any, our financial condition, our anticipated capital requirements and other factors that the Board of Directors may think are relevant. However, we currently intend for the foreseeable future to follow a policy of retaining all of our earnings, if any, to finance the development and expansion of our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable future.
22
Equity Compensation Plan Information
The information included under the heading “Equity Compensation Plan Information” in Item 12 of Part III of this report, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” is hereby incorporated by reference into this Item 5 of this report.
Recent Issuances of Unregistered Securities
In November, 2011, we sold $275,000 of 8% Convertible Debentures and warrants to purchase 5,500,000 of shares of our common stock to eight accredited investors (the “November 2011 Investors”). The 8% Convertible Debentures are convertible into shares of our common stock at a conversion price equal to $0.05 per share and mature in October 2012. The warrants to purchase 5,500,000 shares consist of Class A Warrants and Class B Warrants that are exercisable for up to two years from the date of issue at a per share exercise price equal to $0.0625 and $0.075 for the Class A Warrants and the Class B Warrants, respectively, on a cash or cashless basis.
Except as set forth above, we did not issue any unregistered securities during the fiscal quarter ended December 31, 2011 that were not previously reported in a Current Report on Form 8-K.
Repurchase of Shares
We did not repurchase any shares during the fourth quarter of the fiscal year covered by this report.
ITEM 6. SELECTED FINANCIAL DATA
This company qualifies as a “smaller reporting company” as defined in 17 C.F.R. §229.10(f)(1), and is not required to provide information by this Item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Until the end of 2008, we were engaged in the business of developing and selling clinical and research assay products and out-licensing certain therapeutic compounds addressing conditions and diseases associated with oxidative stress. During 2008, we lost our majority-owned subsidiary, BioCheck, Inc., which was engaged in the production of enzyme immunoassay diagnostic kits for clinical laboratories, and in December 2008 we sold substantially all of the assets of our research assay product line to Percipio Biosciences, Inc. Commencing in 2009, our focus shifted from the clinical and research assay business to developing and marketing nutraceutical products in the field of oxidative stress reduction, with a focus on products that include EGT™ as a component. As a result, since the beginning of 2009 we have been primarily involved in re-directing our business plan, on obtaining financing to fund our revised business plan, building a new management team, developing new products, establishing new manufacturing relationships, and otherwise implementing our new business strategy. We conducted limited operations, and had limited revenues in 2010 and in 2011.
As shown in the accompanying consolidated financial statements, we have incurred an accumulated deficit of $83,795,000 through December 31, 2011. Our cash holdings at December 31, 2011 were $92,000, and we had a working capital deficit of $5,126,000. Because our lack of funds, we will have to raise additional capital in order to fund our selling, general and administrative, and research and development expenses. There are no assurances that we will be able to raise the funds necessary to maintain our operations or to implement our business plan. The consolidated financial statements included in this Annual Report do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event we cannot continue our operations.
23
Bristol Debt Financing
From October 8, 2008 to June 25, 2009, we issued a series of convertible demand notes to Bristol Investment Fund, Ltd. (“Bristol”) for an aggregate principal amount of $261,040 (the “Bristol Notes”). The Bristol Notes are convertible at the option of the holder at any time into shares of common, at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the twenty (20) trading days preceding the date that Bristol notifies we that it elects to effectuate a conversion.
Standstill and Forbearance Agreement with Bristol
In October 2009, we raised $2,000,000 from the sale of Convertible Debentures. At that time, we were in default of our indebtedness under our outstanding debentures and the Bristol Notes. In connection with the October 2009 financing, we entered into that certain Standstill and Forbearance Agreement with Bristol, pursuant to which Bristol agreed to forbear from exercising its rights and remedies under the October 2006 Debentures and the Bristol Notes until the date when the outstanding principal balance of the Convertible Debentures falls below $500,000, or at such time as Theorem Group, LLC permits Bristol to call the amounts outstanding under the October 2006 debentures and the Bristol Notes. Once the outstanding principal balance of the Convertible Debentures falls below $500,000, Bristol may declare the October 2006 Debentures and the Bristol Notes due and payable at any time. The outstanding balance of the Bristol Notes as of December 31, 2011 was $995,059.
Recent Developments
In November, 2011 we sold $275,000 of 8% Convertible Debentures and warrants to purchase 5,500,000 of shares of our common stock to eight accredited investors (the “November 2011 Investors”). The 8% Convertible Debentures were issued as part of a $1,000,000 funding commitment, are convertible into shares of our common stock at a conversion price equal to $0.05 per share, and mature in October 2012. As of March 31, 2012, we have received a total of $495,000 under this $1,000,000 funding commitment. These funds are to be used for working capital to support the marketing and sale of our new skin care products, which products are scheduled to be released in April 2012. If the full amount of the $1,000,000 is funded, the investors who funded the 8% Convertible Debentures will receive warrants to purchase a total of 20,000,000 shares of our common stock, which warrants are exercisable as to 10,000,000 shares at $0.0625 per share, and $0.075 per share as to 10,000,000 shares. As of March 31, 2012, warrants to purchase a total of 9,900,000 shares have been issued.
In March 2012 we signed a term sheet with engage:BDR that further evidences our on-line joint venture marketing arrangement and that permits both parties to commence operations under the arrangement. We currently anticipate that we will release our first product for sale through the joint venture’s on-line marketing platform by the end of April 2012.
On March 1, 2012, David Saloff was named Chairman of the Board.
In addition, Mr. Saloff was granted an option to acquire shares equal to 9.9% of the outstanding amount of common shares as of March 1, 2012 (26,334,193 shares), with an exercise price of $0.04. One third of the options vest immediately and the balance vest over 36 months.
Beginning in January 2012, members of the Board of Directors are to receive $3,000 per quarter either in cash or registered shares, plus an option to purchase 25,000 shares at the market price at the end of each quarter. The options will vest equally over a one year period.
Results of Operations
Revenues
In December 2010, we initiated a direct mail test market for ErgoFlex™, which generated $26,000 and $11,000 of revenues in fiscal 2011 (mostly in the first quarter of 2011) and 2010, respectively. Following the test marketing of ErgoFlex™, we decided to market that product, and other products containing ERGO through an on-line marketing joint venture. Although we reached an agreement to establish that on-line marketing joint venture with engage:BDR in March 2011, we did not have the funds in 2011 to launch that sales effort and, as a result, did not have any further sales in 2011. The following table presents the changes in revenues from fiscal 2010 to fiscal 2011:
24
|
Increase from 2010
|
||||||||||||||||
|
2011
|
2010
|
Amount
|
%
|
|||||||||||||
|
Product revenues
|
$ | 26,000 | $ | 11,000 | $ | 15,000 | 136 | % | ||||||||
Because we did not actively market any products in either fiscal 2010 or fiscal 2011, we do not believe that the revenue data for such years is meaningful or an indication of our future operations. Assuming that we are able to raise the capital needed, we plan to actively market our products in 2012 and to release at least one additional consumer product. Therefore, if we are adequately capitalized, revenues for 2012 are expected to significantly increase in 2011 compared to the prior year.
Cost of product revenues
The following table presents the changes in cost of product revenues from fiscal 2010 to fiscal 2011:
|
Decrease from 2010
|
||||||||||||||||
|
2011
|
2010
|
Amount
|
%
|
|||||||||||||
|
Cost of product revenues
|
$ | 48,000 | $ | 65,000 | $ | 17,000 | 26.2 | % | ||||||||
During fiscal 2010, we purchased our ErgoFlex™ products for the direct market test campaign that we initiated in December 2010 and that continued into 2011. The products that we purchased in 2010 and 2011 were produced in smaller quantities on a custom order basis for the test marketing purposes and, accordingly, the cost of those products does not reflect the cost of the products that we anticipate once we initiate the commercial release of products. In addition, since the direct market test campaign was effected through the mail, the cost of products included the cost of printing and mailing the product offering literature. Future sales of ErgoFlex are expected to be effected primarily through on-line sales, thereby eliminating the printing and mailing costs. Our gross margins for future product sales will vary depending on the product produced, but, based on the quotes that we have received from our manufacturers and on the estimate retail price of our products, we anticipate that gross margins of commercial quantities of our future products will exceed 50%.
Research and development expenses
Research and development expenditures for the year December 31, 2011 were $17,000, compared to $179,000 for the year ended December 31, 2010. These expenditures were incurred in connection with the testing and obtaining certification for EGT™ related to the release of ErgoFlex™.
Selling, general and administrative expenses
Our selling, general and administrative expenses increased in fiscal 2011 by $1,205,000 to $3,469,000 compared to $2,264,000 in fiscal 2010 primarily as a result of approximately $2.4 million of non-cash stock compensation (including options and warrants) paid to our executives in lieu of cash compensation. At the end of 2011, we only had one full-time officer/employee. However since we expect to more actively engage in operating activities in 2012, and since we expect to hire additional consultants and advisors in connection with the development and marketing of additional ERGO products, we anticipate that our selling, general and administrative expenses during the 2012 fiscal year will increase compared to fiscal 2011.
25
Change in value of warrant and derivative liabilities
The change in the value of warrant and derivative liabilities relates to the change in fair value of these liabilities recorded by us as a result of the convertible debentures issued in October 2006. When we entered into the convertible debentures with the warrants on October 25, 2006, the beneficial conversion feature was valued at $690,000 and the warrants were valued at $2,334,000. We recognized an increase in income of $784,000 and $15,000 for the years ended December 31, 2011 and 2010, respectively, as a result in the change in the value of the warrants.
Interest Expense
Interest expense was $556,000 compared to $513,000 for the year ended December 31, 2011 and 2010, respectively. The increase is due to the interest on the additional convertible debentures in 2011.
Liquidity and Capital Resources
As of December 31, 2011, we had cash and cash equivalents of $92,000, total current assets of $104,000, and a working capital deficit of $5,126,000. Cash used in operating activities was $963,000 during the year ended December 31, 2011. Our cash holdings as December 31, 2011, and our cash position as of the date of this Annual Report, are only sufficient to fund our administrative expenses for a few months. Our lack of revenues, our current liabilities of over $5,343,000 million, and our current lack of cash raise substantial doubt about our ability to continue as a going concern, absent any new sources of significant cash flows or outside financing. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that we cannot continue in existence.
In November 2011, we received $275,000 from the sale of a total of $1,000,000 of 8% convertible debentures, which funds were used to position ourselves for the commercial release of a line of products. As of March 31, 2012, we have received an additional $220,000 of funding from under this $1,000,000 commitment. Accordingly, our investors have agreed to purchase approximately $505,000 of additional convertible debentures. The funds, and the commitment for the remaining $505,000, were provided to us on the condition that these funds be used primarily for the commercial release and on-line sales of skin care products. The commercial release of our products through the engage:BDR joint venture is expected to commence by the end of April 2012. As a result of the commitment to fund the remaining $505,000 balance of the $1,000,000 commitment for these on-line activities, we expect that we will have sufficient funds to roll out one or more product lines. However, after the remaining $505,000 is funded, our future liquidity and capital needs will thereafter depend on the revenues and profits, if any, that we receive from these new products and upon any additional funding that we may have to raise. Although we anticipate that we will generate significant revenues the 2012 fiscal year from the on-line sales of our products through engage:BDR, we are unable to predict the amount and timing of such sales. No assurance can be given that the revenues and profits generated through the engage:BDR joint venture will be significant or will be sufficient to fund our future working capital and other financial needs.
The 8% Convertible Debentures that we are issuing as part of the $1,000,000 funding commitment includes the issuance of warrants to purchase a total of 20,000,000 shares of our common stock if the commitment is fully funded. As of March 31, 2012, we have received $495,000 of the funding commitment, and have issued warrants to purchase a total of 9,900,000 shares. The 8% Convertible Debentures are convertible into shares of our common stock at a conversion price equal to $0.05 per share and mature in October 2012. The warrants consist of Class A Warrants and Class B Warrants that are exercisable for up to two years from the date of issue at a per share exercise price equal to $0.0625 and $0.075 for the Class A Warrants and the Class B Warrants, respectively, on a cash or cashless basis.
26
In order to fund our purchases of product inventory, on October 13, 2010 we obtained a revolving line of credit of up to $750,000 from Gemini Pharmaceuticals, Inc. (“Gemini”), which credit facility can only be used for nutraceutical product and inventory purchases from Gemini. The amount of advances available to us under the credit facility is tiered, starting at $250,000, and upon us meeting certain milestones, will be increased to $500,000, and then $750,000. Advances will be made to us so long as the representations and warranties we made remain true at the time that we request an advance. All advances under this credit facility will bear interest equal to the prime rate plus two percent per annum, calculated based on 360-day year. This credit facility initially expired on October 13, 2011, but has been extended by Gemini. However, the credit facility currently may be terminated by Gemini at any time in its sole discretion. In consideration for this credit facility, we issued to Gemini a five-year warrant to 300,000 shares of our common stock at an exercise price of $0.12 per share, of which 150,000 shares are vested. An additional 75,000 shares will vest under the warrant if and when the credit line is increased to $500,000, and the remaining 75,000 will vest when the credit line is increased to $750,000. The warrants contain a cashless exercise provision.
We expect to commence on-line sales of ErgoFlex™, our first EGT™ product, by the end of April 2012. Based on internally prepared estimates, we believe that the on-line sales will generate certain operating revenues for us. However, the amount and timing of such revenues is unknown. In addition to funding the engage:BDR joint venture’s initial capital requirements, we also will be incurring other costs, including the costs of developing, producing and marketing a new line of skin care products. Because our revenues from the sale of ErgoFlex and other products that we may release through the engage:BDR joint venture are uncertain, we may need additional capital in order to continue operations until, if ever, we are able to achieve positive operating cash flow. In addition, we will need capital in order to expand our operations and fund the increases in our administrative expenses that we expect will occur in 2012 if our business expands as anticipated. However, other than the Gemini inventory credit facility, we presently have no bank financing or other external sources of liquidity. There is no assurance that we will be successful in obtaining additional funding if, and when, we need such additional funding. We expect that we will try to obtain additional funding through the sale of debt or equity securities, or possibly through joint ventures or strategic relationships with unaffiliated third parties, or other financing approaches. No assurance can be given that we will be able to obtain sufficient capital to meet our requirements. The downturn in the equity and debt markets for small-cap public companies is expected to make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek additional financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will not be able to fund our planned level of operations and product releases, and we may have to curtail our operations or possibly even abandon our business plan.
Critical Accounting Policies
We consider the following accounting policies to be critical given they involve estimates and judgments made by management and are important for our investors’ understanding of our operating results and financial condition.
Basis of Consolidation
The consolidated financial statements contained in this report include the accounts of OXIS International, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated.
27
Revenue Recognition
Product Revenue
The Company manufactures, or has manufactured on a contract basis, fine chemicals and nutraceutical products, which are its primary products to be sold to customers. Revenue from the sale of its products, including shipping fees, will be recognized when title to the products is transferred to the customer which usually occurs upon shipment or delivery, depending upon the terms of the sales order and when collectability is reasonably assured. Revenue from sales to distributors of its products will be recognized, net of allowances, upon delivery of product to the distributors. According to the terms of individual distributor contracts, a distributor may return product up to a maximum amount and under certain conditions contained in its contract. Allowances are calculated based upon historical data, current economic conditions and the underlying contractual terms.
License Revenue
License arrangements may consist of non-refundable upfront license fees and various performance or sales milestones and future product royalty payments. Some of these arrangements are multiple element arrangements. Non-refundable, up-front fees that are not contingent on any future performance by us, and require no consequential continuing involvement on our part, are recognized as revenue when the license term commences and the licensed data, technology and/or compound is delivered. We defer recognition of non-refundable upfront fees if we have continuing performance obligations without which the technology, right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee that is separate and independent of our performance under the other elements of the arrangement. In addition, if we have continuing involvement through research and development services that are required because our know-how and expertise related to the technology is proprietary to us, or can only be performed by us, then such up-front fees are deferred and recognized over the period of continuing involvement.
Long-Lived Assets
Our long-lived assets include property, plant and equipment, capitalized costs of filing patent applications and goodwill and other assets. We evaluate our long-lived assets for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Estimates of future cash flows and timing of events for evaluating long-lived assets for impairment are based upon management’s judgment. If any of our intangible or long-lived assets are considered to be impaired, the amount of impairment to be recognized is the excess of the carrying amount of the assets over its fair value.
Applicable long-lived assets are amortized or depreciated over the shorter of their estimated useful lives, the estimated period that the assets will generate revenue, or the statutory or contractual term in the case of patents. Estimates of useful lives and periods of expected revenue generation are reviewed periodically for appropriateness and are based upon management’s judgment. Goodwill and other assets are not amortized.
Certain Expenses and Liabilities
On an ongoing basis, management evaluates its estimates related to certain expenses and accrued liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
28
Derivative Financial Instruments
During the normal course of business, from time to time, we issue warrants as part of a debt or equity financing. We do not enter into any derivative contracts for speculative purposes. We recognize all derivatives as assets or liabilities measured at fair value with changes in fair value of derivatives reflected as current period income or loss unless the derivatives qualify for hedge accounting and are accounted for as such. During the years ended December 31, 2011 and 2010, we issued warrants to purchase 33,010,000 and 3,300,000 shares of common stock, respectively, in connection with an equity transaction. In accordance with ASC Topic 815-40, “Derivatives and Hedging — Contracts in Entity’s Own Stock” (“ASC 815-40”), the value of these warrants is required to be recorded as a liability, as the holders have an option to put the warrants back to us in certain events, as defined.
Inflation
We believe that inflation has not had a material adverse impact on our business or operating results during the periods presented.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements as of December 31, 2011.
This company qualifies as a smaller reporting company, as defined in 17 C.F.R. §229.10(f) (1) and is not required to provide information by this Item.
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
Please see the financial statements beginning on page F-1 located elsewhere in this annual report and incorporated herein by reference.
None.
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer evaluated the effectiveness of our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the United States Securities Exchange Act of 1934, as amended), as of December 31, 2011. Based on that evaluation we have concluded that our disclosure controls and procedures were not effective as of December 31, 2011.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
29
|
|
·
|
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
|
|
|
·
|
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
|
|
|
·
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
|
All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
As of December 31, 2011, management of the company conducted an assessment of the effectiveness of the company’s internal control over financial reporting. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. In the course of the assessment, material weaknesses were identified in the company’s internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management determined that fundamental elements of an effective control environment were missing or inadequate as of December 31, 2011. The most significant issues identified were: 1) lack of segregation of duties due to very small staff and significant reliance on outside consultants, and 2) risks of executive override also due to lack of established policies, and small employee staff. Based on the material weaknesses identified above, management has concluded that internal control over financial reporting was not effective as of December 31, 2011. As the company’s operations increase, the company intends to hire additional employees in its accounting department.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
Other than as described above, no changes in our internal control over financial reporting were made during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
|
ITEM 9B.
|
OTHER INFORMATION
|
None.
30
PART III
|
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The following table sets forth the name, age and position held by each of our executive officers and directors as of March 31, 2012. Directors are elected for a period of one year and thereafter serve until the next annual meeting at which their successors are duly elected by the stockholders.
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Name
|
Age
|
Position
|
|||
|
David Saloff
|
59
|
Chief Executive Officer and acting Chief Financial Officer
|
|||
|
Anshuman “Andy” Dube (1) (2) (3)
|
35
|
Director
|
|||
|
Kenneth Eaton(1)
|
53
|
Director
|
|||
|
Thomas W. Hoog (1) (2) (3)
|
72
|
Director
|
|
(1)
|
Member of our Audit Committee.
|
|
(2)
|
Member of our Compensation Committee
|
|
(3)
|
Member of our Nominating and Corporate Governance Committee
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David Saloff was appointed Chief Executive Officer on August 29, 2011. Since the resignation of the former Chief Financial Officer in October 2011, Mr. Saloff also has been the acting Chief Financial Officer, a position he intends to relinquish as soon as a new Chief Financial Officer is recruited. Mr. Saloff is also currently the Chief Executive Officer of Age Reversal, Inc., a position he has held since September 2010. Since January 2004, Mr. Saloff has been the managing partner of Palisades Partners, LLC, a firm that provides consulting services to the medical technical field. Additionally, Mr. Saloff has served as the Chief Business Development Officer of Ivivi Technologies Inc. from August 2008 to February 12, 2010, and as the Executive Vice President of Sales and Marketing since August 2008. Mr. Saloff also served as Chief Executive Officer of Ivivi Technologies Inc. from July 2004 to October 2006, President from July 2004 to August 2008 and as its Co-Chief Executive Officer from October 2006 to August 2008. He served as the President of LifeWaves International from November 1999 to September 2003. He served as President of Palisades Partners from September 2003 to December 2003. In 1992, Mr. Saloff founded Electropharmacology, Inc., and was responsible for the design, development and subsequent FDA clearance of the SofPulse device. He served as Vice President of Electropharmacology, Inc. Prior to starting EPI, he served as Consultant of DH Blair, Inc. Mr. Saloff served as Chief Operating Officer of Xsirius since 1991 and also served as an Executive Vice President of Advanced Photonix, Inc. (API). In 1982, Mr. Saloff joined Akros Manufacturing as President and Co-owner. He served as an Executive Director of Ivivi Technologies Inc. from July 2004 to February 12, 2010. He served as a Director of ADM Tronics Unlimited Inc. since March 18, 2002. He served as a Director of Advanced Photonix, Inc., since 1991. Mr. Saloff earned his Bachelor of Science degree in Business from Adelphi University.
Anshuman “Andy” Dube was appointed to our Board of Directors on March 5, 2010. Mr. Dube co-founded and is the managing director of Theorem Capital, LLC, a Los Angeles based private equity firm specializing in consumer brands, a position which he has held since its inception in early 2005. Mr. Dube was an active angel investor in various companies including PayPal (sold to eBay), WebEx (NASD: WEBX), and Dollar Networks (sold to Centerpoint). Mr. Dube holds a B.S. degree in Computer Engineering from the University of Southern California.
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Kenneth Eaton was appointed to our Board of Directors on June 27, 2011. Mr. Eaton has over 25 years of experience in operational and merchandising in big box retail organizations, and is the Co-Founder and Executive Director of Silverlink Holdings, a position he has held since September 2007. Silverlink Holdings operates a consumer products company with distribution in North America and Asia. Prior to founding Silverlink in 2007, Mr. Eaton served in various capacities at Wal-Mart, including VP Divisional Merchandising Manager and SR VP General Merchandising Manager since 1987. In 2001, Mr. Eaton was appointed to lead the formation of Wal-Mart’s global procurement division.
Thomas W. Hoog was appointed as this company’s Board of Directors effective July 1, 2010. Mr. Hoog has served as special counsel to the global chairman of Hill & Knowlton., a public relations firm since 2005. Mr. Hoog previously served as President and CEO of Hill & Knowlton, from 1996 through 2001. His responsibilities included managing the firm’s 13 US offices, leading its acquisition strategy, developing client strategies, overseeing the firm’s profit-and-loss centers, and redefining the US Company’s corporate culture. Before he became President and CEO of Hill & Knowlton, Mr. Hoog served as Chairman of its Public Affairs practice and as General Manager of its New York and Washington offices. Prior to joining Hill & Knowlton, he founded and served as President of Hoog and Associates, Inc., a Colorado-based governmental affairs firm with offices in Washington, D.C. and Orange County, California.
Our Board of Directors believes that Messrs. Dube, Eaton and Hoog are suitable members of the Board of Directors based on the following experience, qualifications and skills of these persons:
Anshuman “Andy” Dube – Mr. Dube’s experience as the founder and principal of a private equity fund that specializes in consumer brands provides our Board with experience and market knowledge in both the financial industry and consumer brands market. These skills will be valuable in the development of our consumer products and our attempts to raise capital in the future.
Thomas W. Hoog – Mr. Hoog has experience in the public relations and public affairs industries, and provides the Board insight to help and position the Company for marketing strategies.
Kenneth Eaton – Mr. Eaton’s expertise in merchandising with major retailers and in worldwide marketing will provide support in developing and executing our long term growth strategy.
Key Consultants
Bernard Landes acted as this company’s President from March 1, 2010 to August, 2011. Since then Mr. Landes has been a consultant, providing this company with advice and services related to our nutraceutical product development and commercialization. Mr. Landes has over 33 years of experience in the nutraceutical and functional foods industry. Since January 2000, Mr. Landes has been the President of the Nutritional Products Consulting Group, a company that provided consulting services to a global client base in the areas of scientific, regulatory, product commercialization, and mergers and acquisitions. Among his lead clients was, MonaVie LLC, a large developer and marketer of scientifically formulated anti-oxidant nutritional beverages. Mr. Landes currently serves as the President of MonaVie’s Science Advisory Board, a position which he has held since its formation in September 2008. Mr. Landes was the CEO of Paracelsian, Inc., an herbal nutritional supplements company, from January 1998 to December 1999. Prior to that, he was a General Manager at Alacer Corporation, a nutritional supplement and functional water company. Prior to his services at Alacer Corporation, Mr. Landes served for 10 years as director of Marketing, Strategic Planning, Product Development, Nutritional Science and Regulatory Affairs for Health Valley Foods. Mr. Landes also served as General Manager of Zila Nutraceuticals where he managed the Ester-C brand of enhanced Vitamin C from January 2006 until November 2006 when the Company was sold to NBTY.
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Committees of the Board of Directors
Our Board has a standing Audit Committee, Nominating and Governance Committee, and Compensation Committee.
Audit Committee. The Audit Committee operates pursuant to a written charter. Among other things, the Audit Committee is responsible for:
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reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures;
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hiring our independent registered public accounting firm, and coordinating the oversight and review of the adequacy of our internal control over financial reporting with both management and the independent registered public accounting firm; and
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reviewing and, if appropriate, approving all transactions between our company or its subsidiaries and any related party.
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As of March 31, 2012, Anshuman “Andy” Dube, Thomas Hoog and Kenneth Eaton constitute the members of the Audit Committee. Each of Messrs. Dube, Hoog and Eaton is a non-employee director and independent as defined under The Nasdaq Stock Market’s listing standards. Mr. Dube has significant knowledge of financial matters, and our Board has designated him as the “audit committee financial expert” of the Audit Committee.
Nominating and Governance Committee. The Nominating and Governance Committee recommends candidates to be nominated for election as directors at our annual meeting, consistent with criteria approved by the Board; develops and regularly reviews corporate governance principles and related policies for approval by the Board; oversees the organization of the Board to discharge the Board’s duties and responsibilities properly and efficiently; and sees that proper attention is given and effective responses are made to stockholder concerns regarding corporate governance. The Nominating and Governance Committee also reviews proposed changes to our Certificate of Incorporation, Bylaws and Board committee charters and conducts ongoing reviews of potential related party transactions and conflicts of interest, including the review and approval of all “related person transactions” as defined under SEC rules.
Usually, nominees for election to our Board are proposed by our existing directors. In identifying and evaluating individuals qualified to become Board members, our current directors will consider such factors as they deem appropriate to assist in developing a board of directors and committees thereof that are diverse in nature and comprised of experienced and seasoned advisors. Our Board of Directors has not adopted a formal policy with regard to the consideration of diversity when evaluating candidates for election to the Board. However, our Board believes that membership should reflect diversity in its broadest sense, but should not be chosen nor excluded based on race, color, gender, national origin or sexual orientation. In this context, the Board does consider a candidate’s experience, education, industry knowledge and, history with the Company, and differences of viewpoint when evaluating his or her qualifications for election the Board. In evaluating such candidates, the Board seeks to achieve a balance of knowledge, experience and capability in its composition. In connection with this evaluation, the Board determines whether to interview the prospective nominee, and if warranted, one or more directors interview prospective nominees in person or by telephone.
As of the date of this Annual Report, Anshuman “Andy” Dube and Thomas Hoog constitute the members of the Nominating and Governance Committee.
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Compensation Committee. The Compensation Committee is responsible for the compensation of our executives and directors; reviews and approves any reports required by the SEC for inclusion in the annual proxy statement; provides general oversight of our compensation structure; and, if deemed necessary, retains and approves the terms of the retention of compensation consultants and other compensation experts. Other specific duties and responsibilities of the Compensation Committee include reviewing senior management selection and overseeing succession planning; reviewing and approving objectives relevant to executive officer compensation, evaluating performance and determining the compensation of executive officers in accordance with those objectives; approving severance arrangements and other applicable agreements for executive officers; overseeing our equity-based and incentive compensation; and establishing compensation policies and practices for service on the Board and its committees and for the Chairman of the Board.
As of the date of this Annual Report, Anshuman “Andy” Dube and Thomas Hoog constitute the members of the Compensation Committee.
Scientific Advisory Board
We have established a Scientific Advisory Board currently consisting of Dr. John Repine, Dr. Okezie Aruoma, Rajan Shah and L. Stephen Coles to assist our management in the areas of expertise of the members of our Scientific Advisory Board. We entered into two-year services agreements with each member of the Scientific Advisory Board upon their appointment. With the exception of Dr. Repine, who receives $12,000 per quarter for his services, each member receives an advisory fee of $9,000 per quarter. All members of the Scientific Advisory Board also received a grant of options to purchase up to 250,000 shares of our common stock, which options vest in four equal quarterly installments. A second option to purchase 500,000 shares of our common stock will be granted upon the one-year anniversary of each of member’s respective appointments to the Scientific Advisory Board.
John E. Repine, MD joined our Scientific Advisory Board in March 2010. He previously was a director of this company from March 2006 to June 2008 and was also a consultant to this company from October 2006 to October 2009. Dr. Repine is the James J. Waring Professor of Medicine, Pediatrics and Surgery, the Director of the Webb-Waring Center and the Associate Dean for Student Advocacy at the University of Colorado Denver. Dr. Repine is a respected international authority in inflammation, oxidative stress and vascular injury with more than 300 original publications and 12 patent applications. Dr. Repine has won many awards for his research and teaching including an Established Investigator Award from the American Heart Association, the Bonfils-Stanton Foundation Award for Outstanding Contributions to Science and Medicine, the Alton-Ochsner Award for Smoking Related Research, Ellision Medical Foundation Senior Scholar in Aging Award and the University of Colorado Presidential Teaching Award. Dr. Repine is an elected member of many prestigious medical societies including the American Society for Clinical Investigation and Association of American Physicians. Dr. Repine graduated with BS degree (Chemistry) from the University of Wisconsin, Madison and an MD degree from the University of Minnesota, Minneapolis where he was awarded the Borden Prize for Research and recently a Distinguished Alumni Award for Outstanding Contributions to Medicine. Dr. Repine also completed clinical training in internal medicine and then obtained subspecialty training in pulmonary and critical care medicine at the University of Minnesota in Minneapolis.
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Okezie I. Aruoma joined our Scientific Advisory Board in March 2010. Dr. Aruoma is Professor of Pharmaceutical and Biomedical Sciences at the Touro College of Pharmacy, New York. Prior to his current position, Dr. Aruoma was an Adjunct Research Professor at the University of Mauritius, a Visiting Professor at Seoul National University in Korea, and a Senior Research Fellow at London South Bank University. Dr. Aruoma previously held senior research positions at Imperial College in London and King’s College London. Dr. Aruoma has authored numerous books including Molecular Biology of Free Radical in Human Diseases, DNA & Free Radicals: Techniques, Mechanisms and Applications and Free Radicals in Tropical Diseases and has had more than 130 papers published in high ranking scientific journals. Dr. Aruoma has over 21 years of experience in biomedical research focused on food biofactors, oxidative stress mechanisms, antioxidant pharmacology and the pharmaceutical indications of food biofactors as prophylactic agents. Dr. Aruoma’s expertise is directed at developing promising portfolio of biomarkers, drug delivery based on stem cell biology and nutraceutical agents which have the potential to provide early diagnosis and preventative treatment for acute and chronic diseases with overt inflammation. Dr. Aruoma holds an MBA from the University of Warwick Business School, a Doctor of Science in Medical Biochemistry from the University of London and a PhD from King’s College London. Dr. Aruoma holds a Master’s Degree in Biopharmacy from Chelsea College London (now part of King’s College London) and a Bachelor’s of Science Degree in Biochemistry from the University of Sussex. Dr. Aruoma is a Fellow of the Royal Society of Chemistry, a Chartered Scientist (CSci) of the Science Council, UK and Fellow of the American College of Nutrition. Dr. Aruoma is Chair of the Pharmacogenomics Focus Group of the American Association of Pharmaceutical Scientists. Dr. Aruoma is a member of the UK’s Institute of Directors.
L. Stephen Coles joined the Scientific Advisory Board in March 2010. Dr. Coles, 60, is currently a lecturer in the Department of Chemistry and Biochemistry at the University of California, Los Angeles and the UCLA Molecular Biology Institute. Dr. Coles has served as Co-Principal Investigator in the Department of Surgery at the UCLA School of Medicine, and has served as Vice President for Medical Education and Internet Content at The Kronos Group, an integrated health care delivery network that provides medical products and health care services for the healthy living and aging industry. Dr. Coles is also the co-founder of the Image Date Corporation, and has served as its Chief Scientist. Dr. Coles has also served as Chief Technical Officer of Rcommunity.com, Inc.
Rajan Shah joined the Scientific Advisory Board in July 2010. Mr. Shah is a chemical engineer and is the President of Biospecialties International, an Australian based company that focuses on the production of the advanced, all natural biological antioxidant precursor, GGC. Mr. Shah earned his master’s degree in engineering from MIT.
Advisory Board
We have also established an Advisory Board to advise us on matters related to our research and development of new products and technologies, also with respect to creation, maintenance, licensing and exploitation of intellectual properties. The Advisory Board will also advise us with respect to strategic planning, marketing, acquisitions, divestitures, and other related areas. We entered into a two-year Advisory Board Services Agreement with Sandep Rahi on July 15, 2010. Mr. Rahi receives an advisory fee for $9,000 per quarter. Upon entering into the agreement, we granted Mr. Rahi an initial option to purchase 250,000 shares of our common stock under our 2003 Stock Incentive Plan. The options vested and became exercisable in four equal quarterly installments beginning October 15, 2010. Pursuant to the terms of the agreement, a second option to purchase 500,000 shares of our common stock under our 2003 Stock Incentive Plan was granted on July 15, 2011.
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Sandep Rahi joined the Advisory Board in July 2010. From December 2008 to September 2010, Mr. Rahi was the Senior Vice President, Group Creative Director, for Dentsu America - Los Angeles, a full-service advertising agency with offices in New York, San Francisco and Los Angeles. As Senior Vice President at Dentsu America, Mr. Rahi has led teams in the development of cross-media branding & advertising campaigns for clients including Chandon, Chapman University, Famima!!, Hass Avocado Board, Kissui Vodka, Major League Soccer, Nissin Foods, Sutter Home Wines and Union Bank. From February 2006 to December 2008, Mr. Rahi was a Senior Vice President Creative Director at Dentsu America. Since September 2010, Mr. Rahi has been Head of the Content Strategy and Development for Dentsu Network West, the parent company of Dentsu America. Mr. Rahi has taught at SCI-Arc, Cal Poly Pomona and at the Carnegie Mellon’s Heinz School of Entertainment Industry. Mr. Rahi is an Emmy award winning Creative Director, seasoned in both the entertainment and advertising industries.
Code of Ethics
The Board of Directors has adopted a Code of Ethics and Business Conduct to provide guidance to its directors, officers and employees regarding standards for conduct of our business, which code has been delivered to all of our directors, officers and employees. The full text of our Code of Ethics and Business Conduct is available on our website at www.oxis.com. A copy of our Code of Ethics will be furnished without charge to any person upon written request. Requests should be sent to David Saloff, Secretary, Oxis International, Inc., 468 N. Camden Drive, 2nd Fl., Beverly Hills, California 90210.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and persons who own more than 10% of a registered class of the company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”). Executive officers, directors and greater than 10% stockholders are required by SEC regulations to furnish the company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of reporting forms received by the company, the company believes that the following Forms 3 and 4 for transactions effected in 2011 were filed later than is required under Section 16(a) of the Securities Exchange Act of 1934:
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Anshuman “Andy” Dube was late in filing one Form 4 in connection with the partial conversion of an underlying debenture on December 23, 2010. The Form 3 was filed on January 19, 2011.
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Theorem Group, LLC was late in filing one Form 4 in connection with its partial conversion of an underlying debenture on December 23, 2010. The Form 3 was filed on January 19, 2011.
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Anthony Cataldo did not file a Form 4 in connection with a grant of 5,700,000 million shares of our common stock on November 2, 2011.
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Bernard Landes did not file a Form 4 in connection with a grant of 165,773 options to purchase our common stock on October 1, 2011.
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ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE
The following table set forth certain information concerning the annual and long-term compensation for services rendered to us in all capacities for the fiscal years ended December 31, 2011 and 2010 of all persons who served as our principal executive officers and as our principal financial officer during the fiscal year ended December 31, 2011. No other executive officers received total annual compensation during the fiscal year ended December 31, 2011 in excess of $100,000. The principal executive officer and the other named officers are collectively referred to as the “Named Executive Officers.”
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Name and Principal Position
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Year
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Salary
($)
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Bonus
($)
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Stock
Awards
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Option Awards(1)
($)
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Non-Equity Incentive Plan Compensation Earnings
($)
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Nonqualified Deferred Compensation Earnings
($)
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All Other Compensation
($)
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Total
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Anthony J. Cataldo,
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2011
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$ | 128,000 | ––– | $ | 255,000 | $ | ––– | $ | ––– | $ | ––– | $ | ––– | $ | 383,000 | |||||||||||||||||
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Chairman, Chief Executive Officer (Principal Executive Officer)(2)
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2010
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$ | 180,000 | ––– | ––– | $ | 51,391 | ––– | ––– | ––– | $ | 231,391 | |||||||||||||||||||||
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Michael Handelman,
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2011
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$ | 77,000 | $ | ––– | $ | ––– | $ | ––– | $ | ––– | $ | ––– | $ | ––– | $ | 77,000 | ||||||||||||||||
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Chief Financial Officer (Principal Financial Officer) (3)
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2010
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$ | 54,000 | $ | ––– | $ | ––– | $ | 5,749 | $ | ––– | $ | ––– | $ | ––– | $ | 59,749 | ||||||||||||||||
| David Saloff, |
2011
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$ | 40,800 | $ | ––– | $ |
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$ | 98,723 | $ | ––– | $ | ––– | $ | ––– | $ | 139,523 | ||||||||||||||||
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Chief Executive Officer(4)
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(1)
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This column represents option awards computed in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures related to service-based vesting conditions. For additional information on the valuation assumptions with respect to the option grants, refer to Note 1 of our financial statements in this Annual Report. These amounts do not correspond to the actual value that will be recognized by the named executives from these awards.
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(2)
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Mr. Cataldo served as our Chief Executive Officer from March 2009 to August 2011.
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(3)
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Mr. Handelman resigned his position as Chief Financial Officer on October 25, 2011.
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(4)
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Mr. Saloff was appointed Chief Executive Officer on August 29, 2011.
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Employment and Consulting Agreements
Employment Agreement with David Saloff
On August 29, 2011, David Saloff was appointed by the Board of Directors to serve as this Company’s Chief Executive Officer through March 31, 2012. Mr. Saloff is also a director of the Company. Since March 31, 2012, Mr. Saloff has continued to serve as our Chief Executive Officer, and will continue to do so until the employment is terminated by either the Company or Mr. Saloff upon 60 days’ notice. Mr. Saloff currently receives a base salary of $15,000 per month. However, if we obtain debt or equity financing of at least $2 million in the aggregate after the date of his appointment (the “Funding”), the term of Mr. Saloff’s employment will be extended for an additional three years, and Mr. Saloff will receive a bonus of $90,000 upon the completion of the Funding. In connection with this employment, Mr. Saloff was granted an option to purchase up to 538,713 shares of the Company’s common stock which vests quarterly over a period of one year following the date of grant, at an exercise price of $0.0535 per share, the last trading price on the date of grant. The option expires after ten years.
If the Funding is obtained, commencing on the date of the Funding, the Original Term will be extended for an additional three years, and Mr. Saloff’s base salary will increase to $18,000 per month. Upon achieving certain milestones to be established by the Company’s Board of Directors, Mr. Saloff may receive a year-end bonus up to 100% of his annual base salary, $216,000. In addition, if the Funding is obtained, the Company will grant Mr. Saloff an additional option to purchase the number of shares of Common Stock equal to 7.5% of the total shares of Common Stock outstanding immediately prior to the Funding. The option will have an exercise price equal to the closing trading price on the date of the Funding. This option will vest over a period of three years following the date of the grant and will have a ten year term.
Stock Option Grant
The following table sets forth information as of December 31, 2011, concerning unexercised options, unvested stock and equity incentive plan awards for the executive officers named in the Summary Compensation Table.
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OUTSTANDING EQUITY AWARDS AT YEAR ENDED DECEMBER 31, 2011
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Option Awards
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Stock Awards
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Name
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Number of Securities Underlying Unexercised Options
(#) Exercisable
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Number of Securities Underlying Unexercised Options
(#) Unexercisable
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Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
(#)
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Option Exercise Price
($)
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Option Expiration Date
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Number of Shares or Units of Stock That Have Not Vested
(#)
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Market Value of Shares or Units of Stock That Have Not Vested
($)
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Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
(#)
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Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
($)
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Anthony Cataldo
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3,910,692 | 2,793,389 | (1) | ––– | $ | 0.17 |
3/1/2020
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Michael Handelman
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250,000 | ––– | ––– | $ | 0.17 |
3/1/2020
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David Saloff
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388,889 | 388,889 | (2) | ––– | $ | 0.09 |
6/30/2021
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David Saloff
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134,678 | 404,035 | (3) | ––– | $ | 0.0535 |
8/31/2021
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(1)
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Vested quarterly for a term of 3 years following grant on March 1, 2010. Unvested shares were forfeited January 25, 2012 following Mr. Cataldo’s resignation in October 2011.
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(2) Vests quarterly beginning September 30, 2011.
(3) Vests quarterly beginning November 30, 2011.
Director Compensation
Mr. Eaton, appointed a director on June 27, 2011, receives a quarterly payment of $4,500 for his services on the Board of Directors of the Company. Employee directors (currently only Mr. Saloff) do not receive compensation as directors. Mr. Dube (an affiliate of Theorem Group, LLC, a significant investor in the Company) also does not receive compensation for serving on the Board.
Effective July, 1, 2011 the Board of Directors adopted a new compensation plan pursuant to which it agreed to pay each member of its Board of Directors an annual base fee of $30,000 for serving as a director, plus $1,250 per month for serving on as the chairperson of any committee of the Board, plus $500 per month for serving as a member of any committee of the Board. The annual base fee is paid in equal quarterly installments. In addition, as part of the Board’s new compensation package, Messrs. Eaton and Saloff shall also receive a non-qualified stock option to purchase $70,000 worth ($70,000 divided by the stock price on the date of grant) of shares of Common Stock.
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The following table sets forth information concerning the compensation paid to each of our non-employee directors during fiscal 2011 for their services rendered as directors.
DIRECTOR COMPENSATION FOR FISCAL YEAR 2011
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Name
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Fees Earned or Paid in Cash
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Stock Awards
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Option Awards(1)
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Non-Equity Incentive Plan Compensation
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Nonqualified Deferred Compensation Earnings
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All Other Compensation
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Total
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Thomas Hoog
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$ | 24,000 | $ | 24,000 | ||||||||||||
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Kenneth Eaton
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$ | 15,000 | $ | 19,980 | $ | 34,980 | ||||||||||
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Total
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$ | 39,000 | $ | 19,980 | $ | 58,980 | ||||||||||
(1) This column represents the aggregate grant date of option awards computed in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures related to service-based vesting conditions. For additional information on the valuation assumptions with respect to the option grants, refer to Note 9 of our financial statements in this Annual Report. These amounts do not correspond to the actual value that will be recognized by the named directors from these awards.
2003 Stock Incentive Plan
We have adopted an equity incentive plan, the 2003 Stock Incentive Plan (the “2003 Plan”), pursuant to which we are authorized to grant options to purchase up to 3,000,000 shares of common stock to our employees, officers, directors and consultants. The number of shares of common stock issuable under the 2003 Plan increases by 300,000 every year on January 1, commencing in 2005. In 2006, with the approval of shareholders, the 2003 Plan was amended to increase the number of shares reserved for issuance from 3,600,000 shares to 5,600,000 shares. As a result, the number of shares of common stock that may be awarded under the 2003 Plan has increased from 3,000,000 to 7,100,000 as of January 1, 2011. Additionally, any options to purchase shares of common stock that are unexercised at the end of their respective terms or otherwise forfeited, become available under the 2003 Plan. Awards under the 2003 Plan may consist of both non-qualified options and options intended to qualify as “Incentive Stock Options” under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).
The 2003 Plan is administered by our Board of Directors or a committee appointed by the Board (the “Committee”). If appointed by the Board, the committee would consist of at least two members of the Board whose members shall, from time to time, be appointed by the Board. The Committee has the authority to determine the persons to whom awards will be granted, the type of award to be granted, the number of awards to be granted, and the terms and provisions of stock options granted pursuant to the 2003 Plan. The 2003 Plan may be amended by our Board of Directors at any time.
The number of shares of common stock exercisable in any single year with respect to the options granted under the 2003 Plan cannot exceed 500,000. The 2003 Plan provides that the purchase price of each share of common stock subject to an incentive stock option may not be less than 100% of the fair market value (as such term is defined in the 2003 Plan) of a share of our common stock on the date of grant. No incentive stock option shall be exercisable later than the tenth anniversary of its grant. With respect to non-qualified stock options, the Committee shall determine the purchase price of each share of common, provided however, that the purchase price shall not be less than 85% of the fair market value of the common stock on the date of grant.
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The 2003 Plan also provides for automatic nonqualified stock option grants for 30,000 shares of common stock to each outside director (as such term is defined in the 2003 Plan) upon his or her appointment to our Board of Directors. For each subsequent calendar year immediately after the year that such director was appointed to our Board of Director, the director receives additional nonqualified stock options to purchase 5,000 shares of common stock upon the conclusion of each regular annual meeting of stockholders. All such options granted to the outside directors terminate upon the earlier of the 10th anniversary of the date of grant, six months after the outside director is no longer a member of the Board of Directors for any reason other than death or disability or 12 months after the outside director is no longer a member of the Board of Directors by reason of death or disability.
The 2003 Plan also provides us with the ability to grant shares of common stock that are subject to certain transferability, forfeiture or other restrictions. The recipient of restricted stock grants, the type of restriction, the number of shares of restricted stock granted and other such provisions shall be determined by the Committee. The Board, in good faith and in its sole discretion, shall determine the fair market value with regards to awards of restricted stock.
The 2003 Plan provides that in the event of a merger or change of control, the outstanding stock options and stock awards will be subject to any such merger or reorganization agreement, which will provide for either: the continuation of the outstanding stock options and stock awards at the time, the assumption of the outstanding stock options and stock awards by the surviving company, the substitution of the outstanding stock options and stock awards under the 2003 Plan to those of the surviving company, the full acceleration of the outstanding stock options and stock awards to allow for exercise or settlement of the full value of the outstanding stock options and stock awards.
The Board may, at any time, alter, amend, suspend, discontinue, or terminate the 2003 Plan, and only to the extent required by applicable laws, regulations or rules will the Board seek stockholder approval
2010 Stock Incentive Plan
On October 29, 2010, our Board adopted the Oxis International, Inc. 2010 Equity Incentive Plan (the “2010 Plan”), and recommended that the adoption of the 2010 Plan be submitted for approval by our stockholders. Until the stockholders approve the 2010 Plan, we may make awards under the 2010 Plan, as long as the effectiveness of the awards is conditioned upon obtaining such stockholder approval. If stockholders do not approval this proposal, we will not implement the 2010 Plan, and any currently outstanding awards under the 2010 Plan will terminate and be of no further force or effect. A summary of the 2010 Plan is set forth below.
General. The 2010 Plan provides for awards of incentive stock options, non-statutory stock options, rights to acquire restricted stock, and stock appreciation rights, or SARs. Incentive stock options granted under the 2010 Plan are intended to qualify as “incentive stock options” within the meaning of Section 422 of the Code. Non-statutory stock options granted under the 2010 Plan are not intended to qualify as incentive stock options under the Code. See “Federal Income Tax Consequences” below for a discussion of the principal federal income tax consequences of awards under the 2010 Plan.
Purpose. Our Board adopted the 2010 Plan to provide a means by which employees, directors and consultants of the Company and its affiliates may be given an opportunity to benefit from increases in the value of our Common Stock, to assist in attracting and retaining the services of such persons, to bind the interests of eligible recipients more closely to the Company’s interests by offering them opportunities to acquire shares of our Common Stock and to afford such persons stock-based compensation opportunities that are competitive with those afforded by similar businesses. All of our employees, directors and consultants are eligible to participate in the 2010 Plan.
41
Administration. Unless it delegates administration to a committee as described below, our Board will administer the 2010 Plan. Subject to the provisions of the 2010 Plan, the Board has the power to construe and interpret the 2010 Plan, and to determine: (i) the fair value of Common Stock subject to awards issued under the 2010 Plan; (ii) the persons to whom and the dates on which awards will be granted; (iii) what types or combinations of types of awards will be granted; (iv) the number of shares of Common Stock to be subject to each award; (v) the time or times during the term of each award within which all or a portion of such award may be exercised; (vi) the exercise price or purchase price of each award; and (vii) the types of consideration permitted to exercise or purchase each award and other terms of the awards.
The Board has the power to delegate administration of the 2010 Plan to a committee composed of one or more directors. In the discretion of the Board, a committee may consist solely of “outside directors” or “non-employee directors” (as such terms are defined in the 2010 Plan).
Stock Subject to the 2010 Plan. Subject to the provisions of Sections 6.1.1 and 7.2 of the 2010 Plan relating to adjustments upon changes in our Common Stock, an aggregate of 22,500,000 shares of common stock have been reserved for issuance under the 2010 Plan.
If shares of Common Stock subject to an option or SAR granted under the 2010 Plan expire or otherwise terminate without being exercised (or exercised in full), such shares shall become available again for grants under the 2010 Plan. If shares of restricted stock awarded under the 2010 Plan are forfeited to the Company or repurchased by the Company, the number of shares forfeited or repurchased shall again be available under the 2010 Plan. Where the exercise price of an option granted under the 2010 Plan is paid by means of the optionee’s surrender of previously owned shares of common stock, or the Company’s withholding of shares otherwise issuable upon exercise of the option as may be permitted under the 2010 Plan, only the net number of shares issued and which remain outstanding in connection with such exercise shall be deemed “issued” and no longer available for issuance under the 2010 Plan.
Eligibility. Incentive stock options may be granted under the 2010 Plan only to employees of the Company and its affiliates. Employees, directors and consultants of the Company and its affiliates are eligible to receive all other types of awards under the 2010 Plan.
No incentive stock option may be granted under the 2010 Plan to any person who, at the time of the grant, owns (or is deemed to own) stock possessing more than 10% of the total combined voting power of the Company or any affiliate of the Company, unless the exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant and the term of the option does not exceed five years from the date of grant. In addition, no employee may be granted options under the 2010 Plan exercisable for more than 3,000,000 shares of common stock during any twelve-month period.
Terms of Options and SARs. Options and SARs may be granted under the 2010 Plan pursuant to stock option agreements and stock appreciation rights agreements, respectively. The following is a description of the permissible terms of options and SARs under the 2010 Plan. Individual grants of options and SARs may be more restrictive as to any or all of the permissible terms described below.
The exercise price of incentive stock options may not be less than the fair market value of the common stock subject to the option on the date of the grant and, in some cases (see “Eligibility” above), may not be less than 110% of such fair market value. The exercise price of nonstatutory options also may not be less than the fair market value of the common stock on the date of grant. The base value of a SAR may not be less than the fair market value of the common stock on the date of grant. The exercise price of options granted under the 2010 Plan must be paid either in cash at the time the option is exercised or, at the discretion of the Board, (i) by delivery of already-owned shares of our Common Stock, (ii) pursuant to a deferred payment arrangement, (iii) pursuant to a net exercise arrangement, or (iv) pursuant to a cashless exercise as permitted under applicable rules and regulations of the Securities and Exchange Commission.
42
In addition, the holder of a SAR is entitled to receive upon exercise of such SAR only shares of our Common Stock at a fair market value equal to the benefit to be received by the exercise.
Options granted under the 2010 Plan may be exercisable in cumulative increments, or “vest,” as determined by the Board. Our Board has the power to accelerate the time as of which an option may vest or be exercised.
To the extent provided by the terms of an option or SAR, a participant may satisfy any federal, state or local tax withholding obligation relating to the exercise of such option or SAR by a cash payment upon exercise, or in the discretion of our Board, by authorizing the Company to withhold a portion of the stock otherwise issuable to the participant, by delivering already-owned shares of our Common Stock or by a combination of these means.
The maximum term of options and SARs under the 2010 Plan is ten years, except that in certain cases (see “Eligibility” above) the maximum term is five years. Options and SARs awarded under the 2010 Plan generally will terminate three months after termination of the participant’s service; however, pursuant to the terms of the 2010 Plan, an a grantee’s employment shall not be deemed to terminate by reason of such grantee’s transfer from the Company to an affiliate of the Company, or vice versa, or sick leave, military leave or other leave of absence approved by our Board, if the period of any such leave does not exceed ninety (90) days or, if longer, if the grantee’s right to reemployment by the Company or any of its affiliate is guaranteed either contractually or by statute.
A recipient may not transfer an incentive stock option otherwise than by will or by the laws of descent and distribution. During the lifetime of the recipient, only the recipient may exercise an option or SAR. The Board may grant nonstatutory stock options and SARs that are transferable to the extent provided in the applicable written agreement.
Terms of Restricted Stock Awards. Restricted stock awards may be granted under the 2010 Plan pursuant to restricted stock purchase or grant agreements. No awards of restricted stock may be granted under the 2010 Plan after ten (10) years from the Board’s adoption of the 2010 Plan.
Our Board may issue shares of restricted stock under the 2010 Plan as a grant or for such consideration, including services, and, subject to the Sarbanes-Oxley Act of 2002, promissory notes, as determined in its sole discretion. If restricted stock under the 2010 Plan is issued pursuant to a purchase agreement, the purchase price must be paid either in cash at the time of purchase or, at the discretion of our Board, pursuant to any other form of legal consideration acceptable to the Board.
Shares of restricted stock acquired under a restricted stock purchase or grant agreement may, but need not, be subject to forfeiture to the Company or other restrictions that will lapse in accordance with a vesting schedule to be determined by our Board. In the event a recipient’s employment or service with the Company terminates, any or all of the shares of Common Stock held by such recipient that have not vested as of the date of termination under the terms of the restricted stock agreement may be forfeited to the Company in accordance with such restricted stock agreement.
Our Board may require any recipient of restricted stock to pay to the Company in cash upon demand amounts necessary to satisfy any applicable federal, state or local tax withholding requirements. If the recipient fails to pay the amount demanded, our Board may withhold that amount from other amounts payable by the Company to the recipient, including salary, subject to applicable law. With the consent of our Board in its sole discretion, a recipient may deliver shares of our common stock to the Company to satisfy this withholding obligation.
Rights to acquire shares of common stock under the restricted stock purchase or grant agreement shall be transferable by the recipient only upon such terms and conditions as are set forth in the restricted stock agreement, as the Board shall determine in its discretion, so long as shares of Common Stock awarded under the restricted stock agreement remains subject to the terms of the such agreement.
43
Adjustment Provisions. f any change is made to our outstanding shares of Common Stock without the Company’s receipt of consideration (whether through reorganization, stock dividend or stock split, or other specified change in the capital structure of the Company), appropriate adjustments may be made in the class and maximum number of shares of Common Stock subject to the 2010 Plan and outstanding awards. In that event, the 2010 Plan will be appropriately adjusted in the class and maximum number of shares of Common Stock subject to the 2010 Plan, and outstanding awards may be adjusted in the class, number of shares and price per share of Common Stock subject to such awards.
Effect of Certain Corporate Events. In the event of (i) a liquidation or dissolution of the Company, (ii) a merger or consolidation of the Company with or into another corporation or entity (other than a merger with a wholly-owned subsidiary), or (iii) a sale of all or substantially all of the assets of the Company, any surviving or acquiring corporation may assume awards outstanding under the 2010 Plan or may substitute similar awards. Unless the stock award agreement otherwise provides, in the event any surviving or acquiring corporation does not assume such awards or substitute similar awards, then the awards will terminate if not exercised at or prior to such event.
Duration, Amendment and Termination. The Board may suspend or terminate the 2010 Plan without stockholder approval or ratification at any time or from time to time. Unless sooner terminated, the 2010 Plan will terminate ten years from the date of its adoption by the Board, i.e., in October 2020.
The Board may also amend the 2010 Plan at any time, and from time to time. However, except as provided in Section 6.1.1 and 7.2 relating to adjustments upon changes in common stock, no amendment will be effective unless approved by our stockholders to the extent stockholder approval is necessary to preserve incentive stock option treatment for federal income tax purposes. Our Board may submit any other amendment to the 2010 Plan for stockholder approval if it concludes that stockholder approval is otherwise advisable.
Federal Income Tax Consequences of Plans
The following is a summary of the principal United States federal income tax consequences to the recipient and the Company with respect to participation in the 2003 Plan and 2010 Plan. This summary is not intended to be exhaustive, and does not discuss the income tax laws of any city, state or foreign jurisdiction in which a participant may reside.
Incentive Stock Options
There will be no federal income tax consequences to either us or the recipient upon the grant of an incentive stock option. Upon exercise of the option, the excess of the fair market value of the stock over the exercise price, or the “spread,” will be added to the alternative minimum tax base of the recipient unless a disqualifying disposition is made in the year of exercise. A disqualifying disposition is the sale of the stock prior to the expiration of two years from the date of grant and one year from the date of exercise. If the shares of common stock are disposed of in a disqualifying disposition, the recipient will realize taxable ordinary income in an amount equal to the spread at the time of exercise, and we will be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax reporting obligation) to a federal income tax deduction equal to such amount. If the recipient sells the shares of common stock after the specified periods, the gain or loss on the sale of the shares will be long-term capital gain or loss and we will not be entitled to a federal income tax deduction.
Non-statutory Stock Options and Restricted Stock Awards
Non-statutory stock options granted under the 2003 Plan and 2010 Plan and restricted stock awards granted under the 2010 Plan generally have the following federal income tax consequences.
44
There are no tax consequences to the participant or us by reason of the grant. Upon acquisition of the stock, the recipient will recognize taxable ordinary income equal to the excess, if any, of the stock’s fair market value on the acquisition date over the purchase price. However, to the extent the stock is subject to “a substantial risk of forfeiture” (as defined in Section 83 of the Code), the taxable event will be delayed until the forfeiture provision lapses unless the recipient elects to be taxed on receipt of the stock by making a Section 83(b) election within 30 days of receipt of the stock. If such election is not made, the recipient generally will recognize income as and when the forfeiture provision lapses, and the income recognized will be based on the fair market value of the stock on such future date. On that date, the recipient’s holding period for purposes of determining the long-term or short-term nature of any capital gain or loss recognized on a subsequent disposition of the stock will begin. If a recipient makes a Section 83(b) election, the recipient will recognize ordinary income equal to the difference between the stock’s fair market value and the purchase price, if any, as of the date of receipt and the holding period for purposes of characterizing as long-term or short-term any subsequent gain or loss will begin at the date of receipt.
With respect to employees, we are generally required to withhold from regular wages or supplemental wage payments an amount based on the ordinary income recognized. Subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax reporting obligation, we will generally be entitled to a business expense deduction equal to the taxable ordinary income realized by the participant.
Upon disposition of the stock, the recipient will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income with respect to the stock. Such gain or loss will be long-term or short-term depending on whether the stock has been held for more than one year.
Stock Appreciation Rights or SARs granted under the 2010 Plan
A recipient receiving a stock appreciation right will not recognize income, and we will not be allowed a tax deduction, at the time the award is granted. When a recipient exercises the stock appreciation right, the fair market value of any shares of common stock received will be ordinary income to the recipient and will be allowed as a deduction to us for federal income tax purposes.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial ownership of our common stock as of March 31, 2012 (a) by each person known by us to own beneficially 5% or more of any class of our common stock, (b) by each of our Named Executive Officers, (c) by each of our directors and (d) by all of our current executive officers and directors as a group. As of March 31, 2012 there were 300,299,838 shares of our common stock issued and outstanding. Shares of common stock subject to stock options and warrants that are currently exercisable or exercisable within 60 days of March 31, 2012 are deemed to be outstanding for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Except as otherwise indicated, the address of each stockholder is c/o Oxis International, Inc. at 468 N. Camden Drive, 2nd Fl., Beverly Hills, California 90210.
45
|
Name and Address of Beneficial Owner
|
Number of Shares of Common Stock Beneficially Owned
|
Percent of Shares of Outstanding Common Stock
|
||||||
|
Security Ownership of Certain Beneficial Owners:
|
||||||||
|
Theorem Group, LLC (1)
10880 Wilshire Blvd., Suite 950
Los Angeles, CA 90024
|
5,400,000 | 1.8 | %(1) | |||||
|
Security Ownership of Management:
|
||||||||
|
Anshuman Dube(2)
10880 Wilshire Blvd., Suite 950
Los Angeles, CA 90024
|
0 | * | ||||||
|
Kenneth Eaton (3)
|
187,500 | * | ||||||
|
Thomas W. Hoog (4)
|
250,000 | * | ||||||
|
David Saloff (5)
|
852,691 | * | ||||||
|
Executive officers and directors as a group — 4 persons (6)
|
1,290,191 | * | ||||||
_______________________________________
* Less than 1%.
|
(1)
|
Represents shares issuable upon: (i) the conversion of 25,000 outstanding shares of Series H Convertible Preferred Stock and a 0% Convertible Debenture that is due October 1, 2011, and (ii) the exercise of Series A Warrant to purchase up to 900,000 shares of Common Stock and Series B Warrant to purchase up to 900,000 shares of Common Stock. The foregoing shares of Series H Convertible Preferred Stock, the 0% Convertible Debenture and the Series A Warrant and Series B Warrant limit the ability of the holder thereof to convert such securities if, following such conversion, the holder and its affiliates would beneficially own more than 4.99% of the Company’s then issued and outstanding shares of Common Stock. The Series H Convertible Preferred Stock entitles the holder thereof to a number of votes, without the foregoing 4.99% limitation, equal to (A) the number of shares of Common Stock that such share of preferred stock could, at such time, be converted into (B) multiplied by 100 (or, a voting power of 250,000,000 shares). The foregoing table includes the 2,500,000 shares the Series H Convertible Preferred Stock is convertible into, but does not include the effect of these 250,000,000 votes. Anshuman Dube, managing director of Theorem Group, LLC, has voting and investment control over the securities held by Theorem Group, LLC. Mr. Dube disclaims beneficial ownership of these securities.
|
|
(2)
|
Does not include any shares owned by Theorem Group, LLC described in the table. Mr. Dube is the Managing Member of Theorem Group, LLC.
|
|
(3)
|
The holdings of Kenneth Eaton include 187,500 shares issuable upon exercise of options that are exercisable currently or within 60 days of March 31, 2012.
|
|
(4)
|
The holdings of Thomas W. Hoog include 250,000 shares issuable upon exercise of options that are exercisable currently or within 60 days of March 31, 2012.
|
|
(5)
|
The holdings of David Saloff include 852,691 shares issuable upon exercise of options that are exercisable currently or within 60 days of March 31, 2012.
|
|
(6)
|
The holdings of the executive officers and directors as a group include 1,290,191 shares issuable upon exercise of options that are exercisable currently or within 60 days of March 31, 2012.
|
46
Equity Compensation Plan Information
The following is a summary of our equity compensation plans at December 31, 2011:
|
Plan Category
|
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
(a)
|
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
(b)
|
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
(c)
|
|||||||||
|
Equity compensation plans approved by security holders (1)
|
15,578,979 | $ | 0.16 | 12,844,933 | ||||||||
|
Equity compensation plans not approved by security holders (2)
|
500,000 | $ | 0.29 | ––– | ||||||||
|
Total
|
16,078,979 | 12,844,933 | ||||||||||
|
|
(1)
|
As of December 31, 2011, we had options issued and outstanding to purchase 3,597,947 shares of common stock under our 2003 Stock Incentive Plan and 122,500 shares of common stock under the 1994 Stock Incentive Plan. Our 1994 Stock Incentive Plan terminated on April 30, 2004 and no additional grants may be made under that plan. As approved by stockholders, we may grant additional options to purchase up to 2,203,465 shares of common stock under our 2003 Stock Incentive Plan as of December 31, 2011. The number of shares reserved for issuance pursuant to options under the 2003 Stock Incentive Plan was increased by 300,000 shares on January 1, 2011 pursuant to an evergreen provision in the stock option plan. On August 25, 2011, stockholders approved the 2010 Stock Incentive Plan. As of December 31, 2011, we had options issued and outstanding for the purchase of 11,858,532 shares of our common stock under the 2010 Plan. We may grant additional options to purchase up to 10,641,468 shares of common stock under our 2003 Stock Incentive Plan as of December 31, 2011.
|
|
|
(2)
|
We have reserved 500,000 shares of common stock for issuance outside of our stock incentive plans. At December 31, 2011, options to purchase 500,000 shares of common stock are outstanding outside of our stock incentive plans.
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
We currently rent office space and administrative facilities from Theorem Capital, LLC, an affiliate of one of our major stockholders, Theorem Group, LLC. Theorem Group, LLC currently beneficially owns in excess of 45.4% of this company’s voting capital stock. The facilities have been rented on a month-to-month basis since October 2009 at a monthly rate of $5,000 per month. Mr. Dube, a member of our board of directors, is the managing director of Theorem Group, LLC and Theorem Capital, LLC. We paid Theorem Capital, LLC a total of $60,000 under this arrangement during the fiscal year ended December 31, 2011.
47
On October 13, 2009, Theorem Group, LLC acquired all of the outstanding shares of our Series G Preferred Stock from Bristol Investment Fund, Ltd. The Series G Preferred Stock Certificate Designation contained an error in the voting rights that were granted to the holder of the Series G Preferred Stock. Following the purchase by Theorem Group, LLC of the Series G Preferred Stock from Bristol Investment Fund, Ltd., we discovered certain other inaccuracies in the terms of the Series G Preferred Stock and inconsistencies with the disclosures made by us regarding such terms. Accordingly, rather than amending the Certificate of Designation of the Series G Preferred Stock to correct the voting rights provisions and to otherwise confirm the rights of the Series G Preferred Stock, we created a new series of preferred stock designated as “Series H Convertible Preferred Stock” and entered into that certain Exchange Agreement, dated February 10, 2010, with Theorem Group, LLC, pursuant to which agreement Theorem Group exchanged all its shares of Series G Preferred Stock for an equal number of Series H Preferred Stock. In the Exchange Agreement, Theorem Group also released us from any liabilities related to the incorrect terms of the Series G Preferred Stock. Mr. Dube, who was appointed to our board of directors, effective March 5, 2010, is the managing director of Theorem Group, LLC.
Director Independence
We believe that Messrs. Eaton, Hoog and Dube qualify as “independent directors” as defined by Item 407 of Regulation S-K.
Our common stock is traded on the OTC Bulletin Board under the symbol “OXIS.” The OTC Bulletin Board electronic trading platform does not maintain any standards regarding the “independence” of the directors on our company’s Board of Directors, and we are not otherwise subject to the requirements of any national securities exchange or an inter-dealer quotation system with respect to the need to have a majority of our directors be independent.
In the absence of such requirements, we have elected to use the definition for “director independence” under the Nasdaq Stock Market’s listing standards, which defines an “independent director” as “a person other than an officer or employee of us or its subsidiaries or any other individual having a relationship, which in the opinion of our Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.” The definition further provides that, among others, employment of a director by us (or any parent or subsidiary of ours) at any time during the past three years is considered a bar to independence regardless of the determination of our Board of Directors.
Our Board of Directors has determined that Messrs. Eaton and Hoog are independent directors because they are non-employee directors and have no other affiliation with the company. Although Mr. Dube, a member of our board of directors, is the managing director of Theorem Group, LLC and Theorem Capital, LLC, the Board does not believe that the $5,000 monthly rent payment made by this company to Theorem Capital, LLC pursuant to the month-to-month lease of the company’s executive offices interferes with Mr. Dube’s exercise of independent judgment in carrying out his responsibilities of a director.
48
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Seligson & Giannattasio, LLP was our independent registered public accounting firm for the fiscal years ending December 31, 2010 and 2011. The Audit Committee has appointed Seligson & Giannattasio, LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2012. The following table shows the fees that were paid or accrued by us for audit and other services provided by Seligson & Giannattasio, LLP for the 2010 and 2011 fiscal years.
|
2010
|
2011
|
|||||||
|
Audit Fees (1)
|
$ | 50,500 | $ | 50,500 | ||||
|
Audit-Related Fees (2)
|
— | |||||||
|
Tax Fees (3)
|
— | — | ||||||
|
All Other Fees
|
— | — | ||||||
|
Total
|
$ | 50,500 | $ | 50,500 | ||||
|
(1)
|
Audit fees represent fees for professional services provided in connection with the audit of our annual financial statements and the review of our financial statements included in our Form 10-Q quarterly reports and services that are normally provided in connection with statutory or regulatory filings for the 2010 and 2011 fiscal years.
|
|
(2)
|
Audit-related fees represent fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and not reported above under “Audit Fees.”
|
|
(3)
|
Tax fees represent fees for professional services related to tax compliance, tax advice and tax planning.
|
All audit related services, tax services and other services rendered by Seligson & Giannattasio, LLP were pre-approved by our Board of Directors or Audit Committee. The Audit Committee has adopted a pre-approval policy that provides for the pre-approval of all services performed for us by Seligson & Giannattasio, LLP. The policy authorizes the Audit Committee to delegate to one or more of its members pre-approval authority with respect to permitted services. Pursuant to this policy, the Board delegated such authority to the Chairman of the Audit Committee. All pre-approval decisions must be reported to the Audit Committee at its next meeting. The Audit Committee has concluded that the provision of the non-audit services listed above is compatible with maintaining the independence Seligson & Giannattasio, LLP.
49
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The Company’s financial statements and related notes thereto are listed and included in this Annual Report beginning on page F-1. The following documents are furnished as exhibits to this Annual Report on Form 10-K.
EXHIBIT INDEX
|
Incorporated by Reference
|
||||||||||
|
Exhibit
Number
|
Exhibit Description
|
Form
|
Date
|
Number
|
Filed Herewith
|
|||||
|
3.1
|
|
Restated Certificate of Incorporation as filed in Delaware September 10, 1996 and as thereafter amended through March 1, 2002
|
|
10-KSB
|
|
04/01/02
|
3.A
|
|
||
|
3.2
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Oxis International, Inc.
|
10-K
|
03/31/11
|
3.2
|
||||||
|
3.3
|
Certificate of Designation of Preferences, Rights and Limitations of Series H Convertible Preferred Stock of Oxis International, Inc., dated February 5, 2010
|
8-K
|
2/16/10
|
3.1
|
||||||
|
3.4
|
Certificate of Designation of Preferences, Rights and Limitations of Series I Convertible Preferred Stock of Oxis International, Inc., dated March 18, 2011.
|
10-K
|
03/31/11
|
3.4
|
||||||
|
|
|
|
|
|
||||||
|
3.5
|
|
Bylaws, as restated effective September 7, 1994 and as amended through April 29, 2003
|
|
10-QSB
|
|
08/13/03
|
3
|
|
||
|
4.1
|
Convertible Demand Promissory Note dated April 7, 2009
|
8-K
|
4/13/09
|
4.1
|
||||||
|
4.2
|
Form of Warrant to Purchase Common Stock dated April 7, 2009
|
8-K
|
4/13/09
|
4.2
|
||||||
|
4.3
|
Oxis International, Inc. 2003 Stock Incentive Plan
|
DEF 14A
|
5/8/2003
|
Appendix B
|
||||||
|
4.4
|
Form of Convertible Debenture dated October 1, 2009
|
8-K
|
10/09/09
|
4.2
|
||||||
|
4.5
|
Form of Series A Common Stock Purchase Warrant dated October 1, 2009
|
8-K
|
10/09/09
|
4.3
|
||||||
|
4.6
|
Form of Series B Common Stock Purchase Warrant dated October 1, 2009
|
8-K
|
10/09/09
|
4.4
|
||||||
|
4.7
|
Oxis International, Inc. 2010 Equity Incentive Plan
|
10-K
|
03/31/11
|
4.7
|
||||||
|
4.8
|
John E. Repine Consulting Agreement, dated June 28, 2011
|
S-8
|
06/29/11
|
4.1
|
||||||
50
|
Incorporated by Reference
|
||||||||||
|
Exhibit
Number
|
Exhibit Description
|
Form
|
Date
|
Number
|
Filed Herewith
|
|||||
|
10.1
|
|
Form of Indemnification Agreement between OXIS International, Inc. and its Officers and Directors
|
|
SB-2
|
|
02/25/05
|
10.P
|
|||
|
10.2
|
|
Common Stock Purchase Warrant dated June 2, 2006.
|
|
8-K
|
|
7/26/06
|
10.2
|
|
||
|
|
|
|
|
|
||||||
|
10.3
|
|
Amendment #2 to Exclusive License and Supply Agreement dated July 19, 2006.
|
|
8-K
|
|
7/26/06
|
10.3
|
|
||
|
|
|
|
|
|
||||||
|
10.4
|
|
Form of Secured Convertible Debenture dated October 25, 2006.
|
|
8-K
|
|
10/26/06
|
10.2
|
|
||
|
|
|
|
|
|
||||||
|
10.5
|
|
Form of Series A, B, C, D, E Common Stock Purchase Warrant dated October 25, 2006.
|
|
8-K
|
|
10/26/06
|
10.3
|
|
||
|
|
|
|
|
|
||||||
|
10.6
|
|
Secured Promissory Note from Percipio Biosciences, Inc. dated December 11, 2008
|
8-K
|
12/18/08
|
10.2
|
|
||||
|
10.7
|
Securities Purchase Agreement dated October 1, 2009
|
8-K
|
10/09/09
|
4.1
|
||||||
|
10.8
|
Waiver Agreement dated October 1, 2009
|
8-K
|
10/09/09
|
10.1
|
||||||
|
10.9
|
Standstill And Forbearance Agreement Dated October 1, 2009
|
8-K
|
10/09/09
|
10.2
|
||||||
|
10.10
|
Escrow Agreement dated as of October 2, 2009, by and among OXIS, Theorem Group, LLC, Theorem Capital, LLC and Law Offices of Jacques Chen.
|
10-K
|
3/30/10
|
10.14
|
||||||
|
10.11
|
Exchange Agreement dated February 10, 2010
|
8-K
|
02/16/10
|
10/1
|
||||||
|
10.12
|
Assignment and Assumption Agreement, dated April 7, 2009, between Oxis International, Inc. and Bristol Investment Fund, Ltd.
|
8-K
|
4/13/09
|
99.1
|
||||||
|
10.13
|
Employment Agreement by and between OXIS and Michael Handelman, dated March 11, 2010
|
10-K
|
3/30/10
|
10.14
|
||||||
51
|
Incorporated by Reference
|
||||||||||
|
Exhibit
Number
|
Exhibit Description
|
Form
|
Date
|
Number
|
Filed Herewith
|
|||||
|
10.14
|
Employment Agreement, dated March 26, 2010, between Oxis International, Inc. and Anthony J. Cataldo.
|
10-K
|
3/30/10
|
10.14
|
||||||
|
10.15
|
Employment Agreement by and between OXIS and Bernard Landes, dated March 11, 2010
|
10-K
|
3/30/10
|
10.14
|
||||||
|
10.16
|
Commitment Letter for Subordinated Bridge Revolving Line of Credit, dated October 13, 2010, by and between Gemini Pharmaceuticals, Inc. and OXIS International, Inc.
|
10-K
|
03/31/11
|
10.16
|
||||||
|
10.17
|
Series I Preferred Stock Purchase Agreement, dated November 10, 2010, by and between OXIS International, Inc. and Oasis Oxis Investment Group, LLC.
|
10-K
|
03/31/11
|
10.17
|
||||||
|
10.18
|
First Amendment to 0% Convertible Debenture dated as of December 23, 2010, by and among OXIS International, Inc., Theorem Group, LLC and Easter Advisors Capital, Ltd.
|
10-K
|
03/31/11
|
10.18
|
||||||
|
10.19
|
Joint Venture Agreement, dated June 29, 2011, by and among OXIS International, Inc., John E. Repine, M.D., and Ergo ARDS, LLC.
|
8-K
|
07/12/11
|
10.1
|
||||||
|
21.1
|
|
Subsidiaries of OXIS International, Inc.
|
10-K
|
3/30/10
|
21.1
|
|
||||
|
|
|
|
|
|
||||||
| 23.1 | Consent of Seligson and & Giannattasio, LLP | X | ||||||||
|
31.1
|
Certification of the Principal Executive Officer and the Principal Financial Officerpursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
X
|
||||||||
|
32.1
|
Certification of the Principal Executive Officer and the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
X
|
||||||||
52
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: April 16, 2012
|
OXIS International, Inc.
By: /s/ David Saloff
David Saloff
Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
Name
|
Position
|
Date
|
||
|
/s/ David Saloff
David Saloff
|
Chief Executive Officer (Principal Executive Officer) and acting Chief Financial Officer (the Principal Financial Officer)
|
April 16, 2012
|
||
|
/s/ Anshuman Dube
Anshuman Dube
|
Director
|
April 16, 2012
|
||
|
/s/ Kenneth Eaton
Kenneth Eaton
|
Director
|
April 16, 2012
|
||
|
/s/ Thomas W. Hoog
Thomas W. Hoog
|
Director
|
April 16, 2012
|
||
53
OXIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
Contents
|
Page
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
Seligson & Giannattasio, LLP
|
F-1
|
|
Consolidated Financial Statements
|
|
|
Balance Sheets as of December 31, 2011 and 2010
|
F-2
|
|
Statements of Operations For Years Ended December 31, 2011 and 2010
|
F-3
|
|
Statement of Stockholders’ Equity (Deficit) For Years Ended December 31, 2011 and 2010
|
F-4
|
|
Statements of Cash Flows For Years Ended December 31, 2011 and 2010
|
F-5
|
|
Notes To Consolidated Financial Statements
|
F-6
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Oxis International, Inc.
We have audited the accompanying consolidated balance sheets of Oxis International, Inc. (the "Company") and subsidiary as of December 31, 2011 and 2010 and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the two years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Oxis International, Inc. and subsidiary as of December 31, 2011 and 2010 and the consolidated results of their operations and their consolidated cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred significant recurring losses. The realization of a major portion of its assets is dependent upon its ability to meet its future financing needs and the success of its future operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from this uncertainty.
/s/ Seligson & Giannattasio, LLP
Seligson & Giannattasio, LLP
White Plains, New York
April 16, 2012
F-1
OXIS International, Inc. and Subsidiaries
December 31, 2011 and 2010
Consolidated Balance Sheets
|
December 31, 2011
|
December 31, 2010
|
|||||||
|
ASSETS
|
||||||||
|
Current Assets:
|
||||||||
|
Cash and cash equivalents
|
$
|
92,000
|
$
|
54,000
|
||||
|
Inventories
|
12,000
|
—
|
||||||
|
Prepaid expenses
|
—
|
83,000
|
||||||
|
Total Current Assets
|
104,000
|
137,000
|
||||||
|
Property, plant and equipment, net
|
—
|
—
|
||||||
|
Patents, net
|
25,000
|
48,000
|
||||||
|
Goodwill and other assets, net
|
—
|
—
|
||||||
|
Total Other Assets
|
25,000
|
48,000
|
||||||
|
TOTAL ASSETS
|
$
|
129,000
|
$
|
185,000
|
||||
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
||||||||
|
Current Liabilities:
|
||||||||
|
Accounts payable
|
$
|
806,000
|
$
|
625,000
|
||||
|
Accrued interest
|
1,598,000
|
1,439,000
|
||||||
|
Accrued expenses
|
607,000
|
414,000
|
||||||
|
Line of credit
|
25,000
|
|||||||
|
Warrant liability
|
158,000
|
1,012,000
|
||||||
|
Demand notes payable, net of discount of $54,000 and $0
|
266,000
|
205,000
|
||||||
|
Convertible debentures, net of discount of $0 and $250,000, current portion
|
775,000
|
415,000
|
||||||
|
Convertible debentures
|
995,000
|
1,544,000
|
||||||
|
Total Current Liabilities
|
5,230,000
|
5,654,000
|
||||||
|
Total Liabilities
|
5,230,000
|
5,654,000
|
||||||
|
Stockholders’ Deficit:
|
||||||||
|
Convertible preferred stock - $0.001 par value; 15,000,000 shares authorized:
|
||||||||
|
Series C - 96,230 and 96,230 shares issued and outstanding at December 31, 2011 and December 31, 2010, respectively
|
1,000
|
1,000
|
||||||
|
Series H – 25,000 and 25,000 shares issued and outstanding at December 31, 2011 and December 31, 2010, respectively
|
—
|
—
|
||||||
|
Series I – 1,666,667 shares issued and outstanding at December 31, 2011 and December 31, 2010, respectively
|
2,000
|
2,000
|
||||||
|
Common stock - $0.001 par value; 600,000,000 shares authorized; and 269,299,838 and 149,571,976 shares issued and outstanding at December 31, 2011 and December 31, 2010, respectively
|
269,000
|
149,000
|
||||||
|
Additional paid-in capital
|
78,422,000
|
74,474,000
|
||||||
|
Accumulated deficit
|
(83,795,000
|
)
|
(80,095,000
|
)
|
||||
|
Total Stockholders’ Deficit
|
(5,101,000
|
)
|
(5,469,000
|
)
|
||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
$
|
129,000
|
$
|
185,000
|
||||
|
The accompanying notes are an integral part of these consolidated financial statements.
|
||||||||
F-2
OXIS International, Inc. and Subsidiaries
December 31, 2011 and 2010
Statements of Operations
|
December 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Revenue:
|
||||||||
|
Product revenues
|
$ | 26,000 | $ | 11,000 | ||||
|
License revenues
|
— | — | ||||||
|
TOTAL REVENUE
|
26,000 | 11,000 | ||||||
|
Cost of Product Revenue
|
48,000 | 65,000 | ||||||
|
Gross profit (loss)
|
(22,000 | ) | (54,000 | ) | ||||
|
Operating Expenses:
|
||||||||
|
Research and development
|
17,000 | 179,000 | ||||||
|
Selling expenses
|
420,000 | — | ||||||
|
Selling, general and administrative
|
3,469,000 | 2,264,000 | ||||||
|
Total operating expenses
|
3,906,000 | 2,443,000 | ||||||
|
Loss from Operations
|
(3,928,000 | ) | (2,497,000 | ) | ||||
|
Change in value of warrant and derivative liabilities
|
784,000 | 15,000 | ||||||
|
Interest expense/income
|
(556,000 | ) | (513,000 | ) | ||||
|
Total Other Income (Expense)
|
228,000 | (498,000 | ) | |||||
|
Loss before provision for income taxes
|
(3,700,000 | ) | (2,995,000 | ) | ||||
|
Provision for income taxes
|
— | — | ||||||
|
Net loss
|
(3,700,000 | ) | (2,995,000 | ) | ||||
|
Deemed dividends
|
— | 23,000 | ||||||
|
Net loss attributable to common shareholders
|
$ | (3,700,000 | ) | $ | (3,018,000 | ) | ||
|
Loss Per Share – basic and diluted
|
$ | (0.02 | ) | $ | (0.03 | ) | ||
|
Weighted Average Shares Outstanding – basic and diluted
|
201,099,910 | 109,374,295 | ||||||
|
The accompanying notes are an integral part of these consolidated financial statements.
|
||||||||
F-3
OXIS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Deficit
For the Years Ended December 31, 2011 and 2010
|
Preferred Stock
|
Common Stock
|
Additional Paid-in
|
Accumulated
|
||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
||||||||||||
|
Balance, December 31, 2009
|
121,230
|
$
|
1,000
|
67,040,809
|
$
|
67,000
|
$
|
71,308,000
|
$
|
(77,100,000
|
)
|
||||||
|
Issuance of stock options
|
|
|
149,000
|
||||||||||||||
|
Issuance of Preferred stock Series I
|
1,666,667
|
2,000
|
248,000
|
||||||||||||||
|
Issuance of common stock for services
|
3,984,723
|
4,000
|
674,000
|
||||||||||||||
|
Conversion of debt
|
75,047,995
|
75,000
|
2,075,000
|
||||||||||||||
|
Exercise of warrants
|
3,398,449
|
3,000
|
23,000
|
||||||||||||||
|
Exercise of stock options
|
100,000
|
20,000
|
|||||||||||||||
|
Deemed dividend
|
(23,000
|
)
|
|||||||||||||||
|
Net loss
|
(2,995,000
|
)
|
|||||||||||||||
|
Balance, December 31, 2010
|
1,787,897
|
$
|
3,000
|
149,571,976
|
$
|
149,000
|
$
|
74,474,000
|
$
|
(80,095,000
|
)
|
||||||
|
Issuance of stock options
|
|
307,000
|
|||||||||||||||
|
Issuance of common stock for services
|
18,210,498
|
18,000
|
2,355,000
|
||||||||||||||
|
Conversion of debt
|
77,734,000
|
78,000
|
1,286,000
|
||||||||||||||
|
Exercise of warrants
|
23,783,364
|
24,000
|
|||||||||||||||
|
Net loss
|
(3,700,000
|
)
|
|||||||||||||||
|
Balance at December 31, 2011
|
1,787,897
|
$ |
3,000
|
269,299,838
|
$
|
269,000
|
$
|
78,422,000
|
$
|
(83,795,000
|
)
|
||||||
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
|
|||||||||||||||||
F-4
OXIS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2011 and 2010
|
|
||||||||
|
2011
|
2010
|
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net loss
|
$
|
(3,700,000
|
)
|
$
|
(2,995,000
|
)
|
||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
|
Amortization of intangible assets
|
23,000
|
31,000
|
||||||
|
Stock compensation expense for options and warrants issued to employees and non-employees
|
307,000
|
149,000
|
||||||
|
Issuance of shares for services
|
2,373,000
|
746,000
|
||||||
|
Amortization of debt discounts
|
284,000
|
441,000
|
||||||
|
Change in value of warrant and derivative liabilities
|
(854,000
|
)
|
15,000
|
|||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Inventory
|
(12,000
|
)
|
(76,000
|
)
|
||||
|
Other assets
|
83,000
|
—
|
||||||
|
Accounts payable and accrued liabilities
|
533,000
|
154,000
|
||||||
|
Net cash used in operating activities
|
(963,000
|
)
|
(1,535,000
|
)
|
||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Proceeds from sale of preferred stock
|
—
|
250,000
|
||||||
|
Proceeds from exercise of stock options and warrants
|
24,000
|
46,000
|
||||||
|
Proceeds from notes payable
|
977,000
|
—
|
||||||
|
Repayment of notes payable
|
—
|
—
|
||||||
|
Net cash flows from financing activities
|
1,001,000
|
296,000
|
||||||
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
38,000
|
(1,239,000
|
)
|
|||||
|
CASH AND CASH EQUIVALENTS - Beginning of period
|
54,000
|
1,293,000
|
||||||
|
CASH AND CASH EQUIVALENTS - End of period
|
$
|
92,000
|
$
|
54,000
|
||||
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
|
||||||||
F-5
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
1. The Company and Summary of Significant Accounting Policies
OXIS International, Inc. (collectively, “OXIS” or the “Company”) is engaged in the research, development and sale of products that counteract the harmful effects of “oxidative stress” and inflammation. Oxidative stress refers to the situations in which the body’s antioxidant and other defensive abilities to combat free radicals (a.k.a. highly reactive species of oxygen and nitrogen) are overwhelmed and normal healthy balance is lost. The Company’s current finished product and finished product candidates include therapeutic nutraceutical products, cosmeceutical products, functional foods and functional beverages. The Company also possesses intellectual property covering a number of proprietary compounds and formulations that may be out-licensed to biotech and pharmaceutical companies as drug candidates. The Company’s primary focus currently is on products that incorporate the unique amino acid naturally occurring compound, L-Ergothioneine (“ERGO”), as a key component. Ergothioneine is produced only by microorganisms in soil and is not synthesized by humans, animals or plants. The Company has spent approximately $75 million in researching and developing ERGO, and now owns a patented process to synthesize commercial quantities of ERGO in a highly stable form that is highly soluble and tasteless, making it suitable for use in combination with other nutraceuticals and botanicals in a wide variety of dietary supplements, functional foods and beverages, and topical anti-aging products including lotions and creams.
In 1965, the corporate predecessor of OXIS, Diagnostic Data, Inc. was incorporated in the State of California. Diagnostic Data changed its incorporation to the State of Delaware in 1972; and changed its name to DDI Pharmaceuticals, Inc. in 1985. In 1994, DDI Pharmaceuticals merged with International BioClinical, Inc. and Bioxytech S.A. and changed its name to OXIS International, Inc.
Going Concern
As shown in the accompanying consolidated financial statements, the Company has incurred an accumulated deficit of $83,795,000 through December 31, 2011. On a consolidated basis, the Company had cash and cash equivalents of $92,000 at December 31, 2011. The Company's plan is to raise additional capital until such time that the Company generates sufficient revenues to cover its cash flow needs and/or it achieves profitability. However, the Company cannot assure that it will accomplish this task and there are many factors that may prevent the Company from reaching its goal of profitability.
The current rate of cash usage raises substantial doubt about the Company’s ability to continue as a going concern, absent any sources of significant cash flows. In an effort to mitigate this near-term concern the Company intends to seek additional equity or debt financing to obtain sufficient funds to sustain operations. The Company plans to increase revenues by introducing new nutraceutical products primarily based on its ergothioneine assets. However, the Company cannot provide assurance that it will successfully obtain equity or debt or other financing, if any, sufficient to finance its goals or that the Company will generate future product related revenues. The Company’s financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that the Company cannot continue in existence.
Accounts receivable
The Company carries its accounts receivable at cost less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions.
F-6
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
Advertising and promotional fees
Advertising expenses consist primarily of costs incurred in the design, development, and printing of Company literature and marketing materials. The Company expenses all advertising expenditures as incurred. The Company's advertising expenses were $158,000 and $106,000 for the years ended December 31, 2011 and 2010, respectively.
Basis of Consolidation and Comprehensive Income
The accompanying consolidated financial statements include the accounts of OXIS International, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated. The Company's financial statements are prepared using the accrual method of accounting.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Concentrations of Credit Risk
The Company's cash and cash equivalents, marketable securities and accounts receivable are monitored for exposure to concentrations of credit risk. The Company maintains substantially all of its cash balances in a limited number of financial institutions. The balances are each insured by the Federal Deposit Insurance Corporation up to $250,000. Through December 31, 2012, all balances in U.S. non-interest bearing accounts are fully insured. The Company had no balances in excess of this limit at December 31, 2011, although at times during the year, the Company may have exceeded the insured limits. Management monitors the amount of credit exposure related to accounts receivable on an ongoing basis and generally requires no collateral from customers. The Company maintains allowances for estimated probable losses, when applicable.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, inventory, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments. The fair value of debt is based upon current interest rates for debt instruments with comparable maturities and characteristics and approximates the carrying amount.
Stock Based Compensation to Employees
The Company accounts for its stock-based compensation for employees in accordance with Accounting Standards Codification (“ASC”) 718. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees over the related vesting period.
The Company granted stock options to purchase 4,452,717 and 10,534,761 shares of the Company’s common stock to employees and directors during the year ended December 31, 2011 and 2010, respectively. The fair values of employee stock options are estimated for the calculation of the pro forma adjustments at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions during 2011: expected volatility of 12% to 14%; average risk-free interest rate of 1.76% to 2.28%; initial expected life of 5 years; no expected dividend yield; and amortized over the vesting period of typically one to four years. The Company reported an expense for share-based compensation for its employees and directors of $307,000 and $149,000 for the year ended December 31, 2011 and 2010, respectively.
F-7
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
Stock Based Compensation to Other than Employees
The Company granted stock options to purchase 500,000 and 1,000,000 shares of the Company’s common stock to non-employees during the year ended December 31, 2011 and 2010, respectively. The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 718. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. The Company recognized $4,000 and $48,000 in share-based compensation expense for non-employees for the year ended December 31, 2011 and 2010, respectively.
Inventories
The Company states its inventories at the lower of cost or market. Cost has been determined by using the first-in, first-out method. The physical count of inventory takes place at the end of the year, and the Company makes estimates of inventory at interim dates. The Company periodically reviews its reserves for slow moving and obsolete inventory and believes that such reserves are adequate at December 31, 2011. Below is a summary of inventory at December 31, 2011 and 2010, respectively.
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December 31, 2011
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December 31, 2010
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Raw materials
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$
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12,000
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$
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0
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Work in process
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0
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0
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Finished goods
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0
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0
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$
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12,000
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$
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0
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Impairment of Long Lived Assets
The Company's long-lived assets include capitalized patents, goodwill, property and equipment related to the Company's manufacturing facilities in California. The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If any of the Company's long-lived assets are considered to be impaired, the amount of impairment to be recognized is equal to the excess of the carrying amount of the assets over the fair value of the assets.
F-8
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
Income Taxes
The Company accounts for income taxes using the asset and liability approach, whereby deferred income tax assets and liabilities are recognized for the estimated future tax effects, based on current enacted tax laws, of temporary differences between financial and tax reporting for current and prior periods. Deferred tax assets are reduced, if necessary, by a valuation allowance if the corresponding future tax benefits may not be realized.
Net Income (Loss) per Share
Basic net income (loss) per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period, plus the potential dilutive effect of common shares issuable upon exercise or conversion of outstanding stock options and warrants during the period. The weighted average number of potentially dilutive common shares excluded from the calculation of net income (loss) per share totaled 225,840,307 in 2011 and 281,377,494 in 2010.
Patents
Acquired patents are capitalized at their acquisition cost or fair value. The legal costs, patent registration fees and models and drawings required for filing patent applications are capitalized if they relate to commercially viable technologies. Commercially viable technologies are those technologies that are projected to generate future positive cash flows in the near term. Legal costs associated with patent applications that are not determined to be commercially viable are expensed as incurred. All research and development costs incurred in developing the patentable idea are expensed as incurred. Legal fees from the costs incurred in successful defense to the extent of an evident increase in the value of the patents are capitalized.
Capitalized cost for pending patents are amortized on a straight-line basis over the remaining twenty year legal life of each patent after the costs have been incurred. Once each patent is issued, capitalized costs are amortized on a straight-line basis over the shorter of the patent's remaining statutory life, estimated economic life or ten years.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, which are 3 to 10 years for machinery and equipment and the shorter of the lease term or estimated economic life for leasehold improvements.
Fair Value
The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels are defined as follows:
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Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. The Company’s Level 1 assets include cash equivalents, primarily institutional money market funds, whose carrying value represents fair value because of their short-term maturities of the investments held by these funds.
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F-9
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
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Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. The Company’s Level 2 liabilities consist of two liabilities arising from the issuance of convertible securities and in accordance with EITF 00-19: a warrant liability for detachable warrants, as well as an accrued derivative liability for the beneficial conversion feature. These liabilities are remeasured on a quarterly basis. Fair value is determined using the Black-Scholes valuation model based on observable market inputs, such as share price data and a discount rate consistent with that of a government-issued security of a similar maturity.
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Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
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The following table represents the Company’s assets and liabilities by level measured at fair value on a recurring basis at December 31, 2011.
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Description
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Level 1
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Level 2
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Level 3
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Liabilities
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Warrant Liability
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$ | 158,000 | ||||
The Company has not applied the provisions of SFAS No. 157 to non-financial assets and liabilities that are of a nonrecurring nature in accordance with FASB Staff Position (FSP) Financial Accounting Standard 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2). FSP 157-2 delayed the effective date of application of SFAS 157 to non-financial assets and liabilities that are of a nonrecurring nature until January 1, 2009. FSP 157-2 will not have a material effect on the Company’s financial position, results of operations and cash flows.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the Company’s financial position or results of operations.
Research and Development
Research and development costs are expensed as incurred and reported as research and development expense.
Revenue Recognition
Product Revenue
The Company manufactures, or has manufactured on a contract basis, fine chemicals and nutraceutical products, which are its primary products to be sold to customers. Revenue from the sale of its products, including shipping fees, will be recognized when title to the products is transferred to the customer which usually occurs upon shipment or delivery, depending upon the terms of the sales order and when collectability is reasonably assured. Revenue from sales to distributors of its products will be recognized, net of allowances, upon delivery of product to the distributors. According to the terms of individual distributor contracts, a distributor may return product up to a maximum amount and under certain conditions contained in its contract. Allowances are calculated based upon historical data, current economic conditions and the underlying contractual terms.
F-10
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
License Revenue
License arrangements may consist of non-refundable upfront license fees, exclusive licensed rights to patented or patent pending technology, and various performance or sales milestones and future product royalty payments. Some of these arrangements are multiple element arrangements.
Non-refundable, up-front fees that are not contingent on any future performance by us, and require no consequential continuing involvement on our part, are recognized as revenue when the license term commences and the licensed data, technology and/or compound is delivered. We defer recognition of non-refundable upfront fees if we have continuing performance obligations without which the technology, right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee that is separate and independent of our performance under the other elements of the arrangement. In addition, if we have continuing involvement through research and development services that are required because our know-how and expertise related to the technology is proprietary to us, or can only be performed by us, then such up-front fees are deferred and recognized over the period of continuing involvement.
Payments related to substantive, performance-based milestones in a research and development arrangement are recognized as revenue upon the achievement of the milestones as specified in the underlying agreements when they represent the culmination of the earnings process.
Segment Reporting
The Company operates in one reportable segment.
Use of Estimates
The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America, and have been consistently applied in the preparation of the financial statements. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities revenues and expenses and disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
2. Patents
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December 31,
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2011
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2010
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Capitalized patent costs
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$ | 640,000 | $ | 640,000 | ||||
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Accumulated amortization
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(615,000 | ) | (592,000 | ) | ||||
| $ | 25,000 | $ | 48,000 | |||||
Periodically, the Company reviews its patent portfolio and has determined that certain patent applications no longer possessed commercial viability or were abandoned since they were inconsistent with the Company's business development strategy.
F-11
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
The following table presents expected future amortization of patent costs that may change according to the Company's amortization policy upon additional patents being issued or allowed:
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2012
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$ | 11,000 | ||
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2013
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4,000 | |||
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2014
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4,000 | |||
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2015
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4,000 | |||
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2016
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2,000 |
3. Debt
Convertible debentures
On October 25, 2006, the Company entered into a securities purchase agreement (“Purchase Agreement”) with four accredited investors (the “Purchasers”). In conjunction with the signing of the Purchase Agreement, the Company issued secured convertible debentures (“Debentures”) and Series A, B, C, D, and E common stock warrants (“Warrants”) to the Purchasers, and the parties also entered into a registration rights agreement and a security agreement (collectively, the “Transaction Documents”).
Pursuant to the terms of the Purchase Agreement, the Company issued the Debentures in an aggregate principal amount of $1,694,250 to the Purchasers. The Debentures are subject to an original issue discount of 20.318% resulting in proceeds to the Company of $1,350,000 from the transaction. The Debentures were due on October 25, 2008. The Debentures are convertible, at the option of the Purchasers, at any time, into shares of common stock at $0.35 per share, as adjusted pursuant to a full ratchet anti-dilution provision (the “Conversion Price”). Beginning on the first of the month beginning February 1, 2007, the Company was required to amortize the Debentures in equal installments on a monthly basis resulting in a complete repayment by the maturity date (the “Monthly Redemption Amounts”). The Monthly Redemption Amounts can be paid in cash or in shares, subject to certain restrictions. If the Company chooses to make any Monthly Redemption Amount payment in shares of common stock, the price per share is the lesser of the Conversion Price then in effect and 85% of the weighted average price for the 10 trading days prior to the due date of the Monthly Redemption Amount.
The Company has not made required monthly redemption payments beginning on February 1, 2007 to purchasers of debentures issued in October 2006. Pursuant to the provisions of the Secured Convertible Debentures, such non-payment is an event of default. Penalty interest accrues on any unpaid redemption balance at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted by applicable law until such amount is paid in full. Upon an event of default, each purchaser has the right to accelerate the cash repayment of at least 130% of the outstanding principal amount of the debenture plus accrued but unpaid liquidated damages and interest. If the Company continued to fail to make such payments in full, the purchasers have the right sell substantially all of the Company’s assets pursuant to their security interest to satisfy any such unpaid balance. The Purchasers have a right of first refusal to participate in up to 100% of any future financing undertaken by the Company until the later of the date that the Debentures are no longer outstanding and the one year anniversary of the effective date of the registration statement. The Company was restricted from issuing shares of common stock or instruments convertible into common stock for 90 days after the effective date of the registration statement with certain exceptions. The Company is also prohibited from effecting any subsequent financing involving a variable rate transaction until such time as no Purchaser holds any of the Debentures. In addition, until such time as any Purchaser holds any of the securities issued in the Debenture transaction, if the Company issues or sells any common stock or instruments convertible into common stock which a Purchaser reasonably believes is on terms more favorable to such investors than the terms pursuant to the Transaction Documents, the Company is obligated to amend the terms of the Transaction Documents to such Purchaser the benefit of such better terms.
F-12
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
On October 25, 2006, in conjunction with the signing of the Purchase Agreement, the Company issued to the Purchasers five year Series A Warrants to purchase an aggregate of 2,420,357 shares of common stock at an initial exercise price of $0.35 per share, one year Series B Warrants to purchase 2,420,357 shares of common stock at an initial exercise price of $0.385 per share, and two year Series C Warrants to purchase an aggregate of 4,840,714 shares of common stock at an initial exercise price of $0.35 per share. In addition, the Company issued to the Purchasers Series D and E Warrants which become exercisable on a pro-rata basis only upon the exercise of the Series C Warrants. The six year Series D Warrants to purchase 2,420,357 shares of common stock have an initial exercise price of $0.35 per share. The six year Series E Warrants to purchase 2,420,357 shares of common stock have an initial exercise price of $0.385 per share. The initial exercise prices for each warrant are adjustable pursuant to a full ratchet anti-dilution provision and upon the occurrence of a stock split or a related event.
Pursuant to the registration rights agreement, the Company was obligated to file a registration statement covering the public resale of the shares underlying the Series A, B, C, D and E Warrants and the Debentures within 45 days of the closing of the transaction and cause the registration to be declared effective within 120 days of the closing date. The registration statement was filed and declared effective within the 120 days of the closing date. Cash liquidated damages equal to 2% of the face value of the Debentures per month are payable to the purchasers for any failure to timely file or obtain an effective registration statement.
Pursuant to the Security Agreement, the Company agreed to grant the purchasers, pari passu, a security interest in substantially all of the Company’s assets. The Company also agreed to pledge its respective ownership interests in its wholly-owned subsidiaries, OXIS Therapeutics, OXIS Isle of Man, and its partial subsidiary, BioCheck, Inc. In addition, OXIS Therapeutics and OXIS Isle of Man each provided a subsidiary guarantee to the Purchasers in connection with the transaction.
On April 9, 2008 and April 28, 2008, the Company was sent demand letters from one of the Purchasers, Bristol Investment Fund, Ltd., stating that the Company was in default under the Debentures due to lack of payment of required monthly principal installment payments starting in February 1, 2007. At the time of the April 9, 2008 letter, the Company and Bristol were in active negotiations on a proposed financing transaction which would provide the Company an opportunity to resolve the existing default under the Debentures. The proposed financing transaction was not accepted by all Purchasers and therefore was not executed. In the April 28, 2008 letter, Bristol demanded that the Company provide them with a definitive plan of action to resolve the existing default within three business days. Bristol did not make any specific demands for other costs, expenses or liquidated damages to date. On May 30, Cranshire Capital, LP (“Cranshire”), another Purchaser, sent a letter to the Company stating that the Company was in default on the Debentures and that Cranshire intended to seek all potential remedies. In response to the default letters received from Bristol and Cranshire, the Company’s management had communicated its plan to pay all amounts due under the terms of the Debentures upon the sale of its 53% interest in BioCheck, Inc. and its research assay business prior to the maturity date of the Debentures on October 25, 2008 and referenced four non-binding letters of intent that it had received from potential purchasers. The indications of value contained in the letters of intent would provide, if closed, funds sufficient to pay off the Purchasers and additionally provide cash resources to support a business plan based on its neutraceutical and therapeutic assets. The Company was in active negotiations with the Purchasers aimed at resolving the existing default under the Debentures and avoiding the foreclosure sale.
On June 6, 2008, the Company received notification from Bristol that the collateral held under the Security Agreement would be sold to the highest qualified bidder on Thursday, June 19, 2008. On June 16, 2008, the Company requested that the debenture holders retract their Notice of Disposition of Collateral. Also on June 16, 2008, the Company issued a press release announcing that the Company’s four Purchasers had been notified that the sale of its majority interest in BioCheck Inc. and its diagnostic businesses were proceeding in a timely manner, and that the recently commenced foreclosure efforts would both jeopardize repayment efforts and harm shareholder value.
F-13
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
On June 19, 2008, the Company received a Notice of Disposition of Collateral from Bristol in which Bristol notified the Company that Bristol, acting as the agent for itself and the three other Purchasers, purchased certain assets held as collateral under the security agreement (referred to in this report as the “Security Agreement”). Bristol purchased 111,025 shares of common stock of BioCheck, Inc., the Company’s majority owned subsidiary, on a credit bid of $50,000, and Bristol also purchased 1,000 shares of the capital stock of OXIS Therapeutics, Inc., a wholly owned subsidiary of OXIS, for a credit bid of $10,000. In December 2005, OXIS purchased the 111,025 shares of common stock of BioCheck, Inc. for $3,060,000. After crediting the aggregate amount of $60,000 to the aggregate amount due under the Debentures, plus fees and charges due through June 19, 2008, Bristol notified the Company that the Company remains obligated to the Purchasers in a deficiency in an aggregate amount of $2,688,000 as of June 19, 2008. As a result of the disposition of the collateral, the Company recorded a net loss aggregating $2,978,000.
During 2009, Bristol converted $177,900 of the principal amount for 17,790,000 shares of the Company’s common stock.
During 2010, Bristol converted an additional $401,000 of the principal amount for 40,100,000 shares of the Company’s common stock.
During 2011investors converted an additional $605,000 of the principal amount for 60,500,000 shares of the Company’s common stock.
These convertible debentures do not meet the definition of a “conventional convertible debt instrument” since the debt is not convertible into a fixed number of shares. The Monthly Redemption Amounts can be paid with common stock at a conversion price that is a percentage of the market price; therefore the number of shares that could be required to be delivered upon “net-share settlement” is essentially indeterminate. Therefore, the convertible debenture is considered “non-conventional,” which means that the conversion feature must be bifurcated from the debt and shown as a separate derivative liability. This beneficial conversion liability has been calculated to be $690,000 on October 25, 2006. In addition, since the convertible debenture is convertible into an indeterminate number of shares of common stock, it is assumed that the Company could never have enough authorized and unissued shares to settle the conversion of the warrants issues in this transaction into common stock. Therefore, the warrants issued in connection with this transaction have a fair value of $2,334,000 at October 20, 2006. The value of the warrant was calculated using the Black-Scholes model using the following assumptions: Discount rate of 4.5%, volatility of 158% and expected term of 1 to 6 years. The fair value of the beneficial conversion feature and the warrant liability will be adjusted to fair value on each balance sheet date with the change being shown as a component of net loss.
The fair value of the beneficial conversion feature and the warrants at the inception of these convertible debentures were $690,000 and $2,334,000, respectively. The first $1,350,000 of these discounts has been shown as a discount to the convertible debentures which will be amortized over the term of the convertible debenture and the excess of $1,674,000 has been shown as financing costs in the accompanying statement of operations.
At December 31, 2011 and 2010, the Company determined the fair value of the warrants was $62,000 and $147,000, respectively.
On October 1, 2009, the Company entered into a financing arrangement with several accredited investors (the “October 2009 Investors”), pursuant to which it sold various securities in consideration of a maximum aggregate purchase price of $2,000,000 (the “October 2009 Financing”). In connection with the October 2009 Financing, the Company issued the following securities to the October 2009 Investors:
F-14
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
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0% Convertible Debentures in the principal amount of $2,000,000 due 24 months from the date of issuance (the “Debentures”), convertible into shares of the Company’s common stock at a per share conversion price equal to $0.05 per share;
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Series A warrant to purchase such number of shares of the Company’s common stock equal to 50% of the principal amount invested by each investor (the “Class A Warrants” ) resulting in the issuance of Class A Warrants to purchase 20,000,000 shares of common stock of the Company.
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Series B warrant to purchase such number of shares of the Company’s common stock equal to 50% of the principal amount invested by each investor (the “Class B Warrants”) resulting in the issuance of Class B Warrants to purchase 20,000,000 shares of common stock of the Company.
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The full principal amount of the Debentures is due upon default under the terms of the Debentures. The Class A Warrants and Class B Warrants (collectively, the “Warrants”) are exercisable for up to five years from the date of issue at a per share exercise price equal to $0.0625 and $0.075 for the Class A Warrants and the Class B Warrants, respectively, on a cash or cashless basis. The Debentures and the Warrants are collectively referred to herein as the “October 2009 Securities”.
The Company and the October 2009 Investors agreed to place the proceeds from the October 2009 Financing in escrow. On a monthly basis, the Company and the nominee for the October 2009 Investors will send a joint statement, subject to settlement with existing creditors, to the escrow agent for the release of funds.
In connection with the sale of the October 2009 Securities by the Company, the Company and Bristol entered a Standstill and Forbearance Agreement, pursuant to which Bristol agreed to refrain and forbear from exercising certain rights and remedies with respect to (i) certain convertible debentures (the “October 2006 Debentures”), issued pursuant to that certain Securities Purchase Agreement, dated October 25, 2006 and (ii) demand notes (the “Bridge Notes”) issued by the Company on October 8, 2008, March 19, 2009, April 7, 2009, April 28, 2009, May 21, 2009 and June 25, 2009. In connection with the sale of the October 2009 Securities by the Company, the Company and Bristol have also entered into a waiver agreement (the “Waiver Agreement”) pursuant to which Bristol waived certain rights with respect to the October 2006 Debentures and Bridge Notes.
The conversion price and the exercise price will be subject to full ratchet anti-dilution adjustment in the event that the Company issues, after the closing date, common stock or common stock equivalents at a price per share less than the conversion price associated with the Debentures or the exercise price associated with the Warrants and to other normal and customary anti-dilution adjustment upon certain other events.
From the date hereof until such time the Debentures are no longer outstanding, if the Company effects a subsequent financing, the October 2009 Investors may elect, in their sole discretion, to exchange all or some of the October 2009 Debentures (but not the Warrants) for any securities or units issued in a subsequent financing on a $1.00 for $1.00 basis or to have any particular provisions of the subsequent financing legal documents apply to the documents utilized for the October 2009 Financing.
If at any time after the closing date, the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others, then it shall include the shares of common stock underlying the Securities on such registration statement. The Company has also agreed to use its best efforts to take the most efficient actions (either by Proxy or Information Statement, if qualified) to ensure that the Company at all times after 30 days from closing will have reserved a sufficient number of authorized shares such that all of the shares of common stock issuable upon conversion or exercise of the Debentures and the Warrants can receive valid, authorized shares of common stock upon any conversion or exercise.
F-15
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
The October 2009 Investors have contractually agreed to restrict their ability to convert the Debentures and exercise the Warrants and receive shares of our common stock such that the number of shares of the Company common stock held by an October 2009 Investor and its affiliates after such conversion or exercise does not exceed 4.9% of the Company’s then issued and outstanding shares of common stock.
During 2010, Investors converted $1,335,000 of the principal amount for 26,700,000 shares of the Company’s common stock.
During 2011, Investors converted $610,000 of the principal amount for 12,200,000 shares of the Company’s common stock.
On June 1, 2011, the Company entered into a financing arrangement with several accredited investors (the “June 2011 Investors”), pursuant to which it sold various securities in consideration of a maximum aggregate purchase price of $500,000 (the “June 2011 Financing”). In connection with the June 2011 Financing, the Company issued the following securities to the June 2011 Investors:
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12% Convertible Debentures in the principal amount of $500,000 due April 15, 2012, convertible into shares of the Company’s common stock at a per share conversion price equal to $0.10 per share; and
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Warrants to purchase 5,000,000 of shares of the Company’s common stock. The warrants are exercisable, on a cash or cashless basis, for up to two years from the date of issue at a per share exercise price equal to $0.15.
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In November, 2011, the Company entered into a financing arrangement with several accredited investors (the “November 2011 Investors”), pursuant to which it sold various securities in consideration of a maximum aggregate purchase price of $275,000 (the “November 2011 Financing”). In connection with the November 2011 Financing, the Company issued the following securities to the November 2011 Investors:
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8% Convertible Debentures in the principal amount of $275,000 due October, 2013, convertible into shares of the Company’s common stock at a per share conversion price equal to $0.05 per share; and
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Warrants to purchase 5,500,000 of shares of the Company’s common stock. The Class A Warrants and Class B Warrants (collectively, the “Warrants”) are exercisable for up to two years from the date of issue at a per share exercise price equal to $0.0625 and $0.075 for the Class A Warrants and the Class B Warrants, respectively, on a cash or cashless basis.
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Demand Notes
On October 25, 2008, the Company entered into a demand note payable in the principal sum of $25,000. Interest shall accrue on the outstanding principal balance of this note from and after the date hereof at the rate of 10% per annum. Interest shall be calculated on the basis of a 360-day year, and shall be charged on the principal outstanding from time to time for the actual number of days elapsed. The Borrower shall pay the holder all accrued interest on the Maturity Date. At any time while this Note is outstanding, the holder may convert any portion of this Note that is outstanding, whether such portion represents principal or interest, into shares of common stock of the Company at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the twenty (20) trading days preceding the date that the Holder notifies the Company that it elects to effectuate a conversion. The Company must deliver the Conversion Shares to the holder no later than the third (3rd) business day after the Conversion Date Borrower shall pay the entire outstanding principal balance under this Note, together with all accrued and unpaid interest thereon , at anytime, in the Borrower’s sole discretion, on or before the maturity date without penalty.
Simultaneously with the issuance of this note, the Company issued to the holder a warrant to purchase such number of shares of common stock of the Company equal to the number of conversion shares issuable upon full conversion of the principal amount of this note at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the 20 trading days preceding the issue date of this note.
F-16
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
On March 19, 2009, the Company entered into a convertible demand promissory note with Bristol Investment Fund, Ltd., pursuant to which Bristol purchased an aggregate principal amount of $12,500 of convertible demand promissory notes for an aggregate purchase price of $10,000. The Bristol Note will be convertible at the option of the holder at any time into shares of common stock, at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the twenty (20) trading days preceding the date that Bristol notifies the Company that it elects to effectuate a conversion.
Simultaneously with the issuance of the Bristol Note, the Company issued Bristol a warrant to purchase such number of shares of common stock of the Company equal to the number of Conversion Shares issuable upon full conversion of the principal amount of the Bristol Note at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the 20 trading days preceding the issue date of the Bristol Note (the “Exercise Price”). Bristol may exercise the Warrant on a cashless basis if the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event Bristol exercises the Warrant on a cashless basis, we will not receive any proceeds.
On April 7, 2009, the Company entered into a convertible demand promissory note with Bristol Investment Fund, Ltd, pursuant to which Bristol purchased an aggregate principal amount of $156,875 of convertible demand promissory notes for an aggregate purchase price of $125,000. The Bristol Note will be convertible at the option of the holder at any time into shares of common stock, at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the twenty (20) trading days preceding the date that Bristol notifies the Company that it elects to effectuate a conversion.
Simultaneously with the issuance of the Bristol Note, the Company issued Bristol a warrant to purchase such number of shares of common stock of the Company equal to the number of Conversion Shares issuable upon full conversion of the principal amount of the Bristol Note at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the 20 trading days preceding the issue date of the Bristol Note (the “Exercise Price”). Bristol may exercise the Warrant on a cashless basis if the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event Bristol exercises the Warrant on a cashless basis, we will not receive any proceeds.
On April 28, 2009, the Company entered into a convertible demand promissory note with Bristol Investment Fund, Ltd. Pursuant to which Bristol purchased an aggregate principal amount of $28,865 of convertible demand promissory notes for an aggregate purchase price of $23,000. The Bristol Note will be convertible at the option of the holder at any time into shares of common, at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the twenty (20) trading days preceding the date that Bristol notifies the Company that it elects to effectuate a conversion.
Simultaneously with the issuance of the Bristol Note, the Company issued Bristol a warrant to purchase such number of shares of common stock of the Company equal to the number of Conversion Shares issuable upon full conversion of the principal amount of the Bristol Note at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the 20 trading days preceding the issue date of the Bristol Note (the “Exercise Price”). Bristol may exercise the Warrant on a cashless basis if the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event Bristol exercises the Warrant on a cashless basis, we will not receive any proceeds.
On May 15, 2009, the Company entered into a convertible demand promissory note with Bristol Capital, LLC for certain consulting services totaling $100,000. The note does not provide for any interest and is due upon demand by the holder. The Bristol Note will be convertible at the option of the holder at any time into shares of common stock, at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the twenty (20) trading days preceding the date that Bristol notifies the Company that it elects to effectuate a conversion.
F-17
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
On May 21, 2009, the Company entered into a convertible demand promissory note with Bristol Investment Fund, Ltd., pursuant to which Bristol purchased an aggregate principal amount of $31,375 of convertible demand promissory notes for an aggregate purchase price of $25,000. The Bristol Note will be convertible at the option of the holder at any time into shares of common stock, at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the twenty (20) trading days preceding the date that Bristol notifies the Company that it elects to effectuate a conversion.
Simultaneously with the issuance of the Bristol Note, the Company issued Bristol a warrant to purchase such number of shares of common stock of the Company equal to the number of Conversion Shares issuable upon full conversion of the principal amount of the Bristol Note at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the 20 trading days preceding the issue date of the Bristol Note (the “Exercise Price”). Bristol may exercise the Warrant on a cashless basis if the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event Bristol exercises the Warrant on a cashless basis, we will not receive any proceeds.
On June 22, 2009, the Company entered into a convertible demand promissory note with Theorem Group (“Theorem”) pursuant to which Theorem purchased an aggregate principal amount of $31,375 of convertible demand promissory notes for an aggregate purchase price of $25,000. The Theorem Note will be convertible at the option of the holder at any time into shares of common stock, at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the twenty (20) trading days preceding the date that Theorem notifies the Company that it elects to effectuate a conversion.
Simultaneously with the issuance of the Theorem Note, the Company issued Theorem a warrant to purchase such number of shares of common stock of the Company equal to the number of Conversion Shares issuable upon full conversion of the principal amount of the Theorem Note at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the 20 trading days preceding the issue date of the Theorem Note (the “Exercise Price”). Theorem may exercise the Warrant on a cashless basis if the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event Theorem exercises the Warrant on a cashless basis, we will not receive any proceeds.
On December 1, 2009, Theorem sold the note to NetCapital. In December 2009, NetCapital converted $24,000 of the principal for 2,400,000 shares of the Company’s common stock.
In January 2010, NetCapital converted the remainder $7,375 of principal amount for an additional 737,500 shares of the Company’s common stock.
On June 25, 2009, the Company entered into a convertible demand promissory note with Bristol Investment Fund, Ltd., pursuant to which Bristol purchased an aggregate principal amount of $31,375 of convertible demand promissory notes for an aggregate purchase price of $25,000. The Bristol Note will be convertible at the option of the holder at any time into shares of common stock, at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the twenty (20) trading days preceding the date that Bristol notifies the Company that it elects to effectuate a conversion.
Simultaneously with the issuance of the Bristol Note, the Company issued Bristol a warrant to purchase such number of shares of common stock of the Company equal to the number of Conversion Shares issuable upon full conversion of the principal amount of the Bristol Note at a price equal to the lesser of (i) $0.01 and (ii) 60% of the average of the three (3) lowest trading prices occurring at any time during the 20 trading days preceding the issue date of the Bristol Note (the “Exercise Price”). Bristol may exercise the Warrant on a cashless basis if the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event Bristol exercises the Warrant on a cashless basis, we will not receive any proceeds.
F-18
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
During 2010, Bristol converted $50,000 of the principal amounts for 5,000,000 shares of the Company’s common stock.
On February 7, 2011 the Company entered into a convertible demand promissory note with Bristol Investment Fund, Ltd., pursuant to which Bristol purchased an aggregate principal amount of $31,375 of convertible demand promissory notes for an aggregate purchase price of $25,000. The Bristol Note is convertible at the option of the holder at any time into shares of common stock, at a price equal to $0.05.
Simultaneously with the issuance of the Bristol Note, the Company issued Bristol a Series A Warrant to purchase 313,750 shares of the Company’s common stock at a per share exercise price of $0.0625, and a Series B Warrant to purchase 313,750 shares of the Company’s common stock at a per share exercise price of $0.075. The Series A Warrants and Series B Warrants are exercisable for up to seven years from the date of issue. Bristol may exercise the Warrants on a cashless basis if the shares of common stock underlying the Warrants are not then registered pursuant to an effective registration statement. In the event Bristol exercises the Warrants on a cashless basis, the Company will not receive any proceeds.
On February 7, 2011 the Company entered into a convertible demand promissory note with Net Capital Partners, Inc., pursuant to which Net Capital purchased an aggregate principal amount of $31,375 of convertible demand promissory notes for an aggregate purchase price of $25,000. The Net Capital Note is convertible at the option of the holder at any time into shares of common stock, at a price equal to $0.05.
Simultaneously with the issuance of the Net Capital Note, the Company issued Net Capital a Series A Warrant to purchase 313,750 shares of the Company’s common stock at a per share exercise price of $0.0625, and a Series B Warrant to purchase 313,750 shares of the Company’s common stock at a per share exercise price of $0.075. The Series A Warrants and Series B Warrants are exercisable for up to seven years from the date of issue. Net Capital may exercise the Warrants on a cashless basis if the shares of common stock underlying the Warrants are not then registered pursuant to an effective registration statement. In the event Net Capital exercises the Warrants on a cashless basis, the Company will not receive any proceeds.
On March 4, 2011 the Company entered into a convertible demand promissory note with Bristol Investment Fund, Ltd., pursuant to which Bristol purchased an aggregate principal amount of $31,375 of convertible demand promissory notes for an aggregate purchase price of $25,000. The Bristol Note is convertible at the option of the holder at any time into shares of common stock, at a price equal to $0.05.
Simultaneously with the issuance of the Bristol Note, the Company issued Bristol a Series A Warrant to purchase 313,750 shares of the Company’s common stock at a per share exercise price of $0.0625, and a Series B Warrant to purchase 313,750 shares of the Company’s common stock at a per share exercise price of $0.075. The Series A Warrants and Series B Warrants are exercisable for up to seven years from the date of issue. Bristol may exercise the Warrants on a cashless basis if the shares of common stock underlying the Warrants are not then registered pursuant to an effective registration statement. In the event Bristol exercises the Warrants on a cashless basis, the Company will not receive any proceeds.
On April 4, 2011 the Company entered into a convertible demand promissory note with Net Capital Partners, Inc., pursuant to which Net Capital purchased an aggregate principal amount of $31,375 of convertible demand promissory notes for an aggregate purchase price of $25,000. The Net Capital Note will be convertible at the option of the holder at any time into shares of common stock, at a price equal to $0.05.
Simultaneously with the issuance of the Net Capital Note, the Company issued Net Capital a Series A Warrant to purchase 313,750 shares of common stock of the Company at a per share exercise price of $0.0625, and a Series B Warrant to purchase 313,750 shares of common stock of the Company at a per share exercise price of $0.075. The Series A Warrants and Series B Warrants are exercisable for up to seven years from the date of issue. Net Capital may exercise the Warrants on a cashless basis if the shares of common stock underlying the Warrants are not then registered pursuant to an effective registration statement. In the event Net Capital exercises the Warrants on a cashless basis, we will not receive any proceeds.
F-19
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
During 2010, investors converted $204,165 of the principal amounts for 20,416,500 shares of the Company’s common stock.
On October 26, 2011 the Company entered into a convertible demand promissory note with Theorem Group LLC., pursuant to which Theorem purchased an aggregate principal amount of $200,000 of convertible demand promissory notes for an aggregate purchase price of $157,217. The Note will be convertible at the option of the holder at any time into shares of common stock, at a price equal to $0.05.
Simultaneously with the issuance of the Theorem Note, the Company issued Net Capital a Series A Warrant to purchase 10,000,000 shares of common stock of the Company at a per share exercise price of $0.0625, and a Series B Warrant to purchase 10,000,000 shares of common stock of the Company at a per share exercise price of $0.075. The Series A Warrants and Series B Warrants are exercisable for up to seven years from the date of issue. Theorem may exercise the Warrants on a cashless basis if the shares of common stock underlying the Warrants are not then registered pursuant to an effective registration statement. In the event Theorem exercises the Warrants on a cashless basis, we will not receive any proceeds.
All of the foregoing securities were issued in reliance upon an exemption from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Financing Agreement
On November 8, 2010, the Company entered into a financing arrangement with Gemini Pharmaceuticals, Inc., a product development and manufacturing partner of the Company, pursuant to which Gemini Pharmaceuticals made a $250,000 strategic equity investment in the Company and agreed to make a $750,000 purchase order line of credit facility available to the Company.
The aggregate amount of outstanding Advances available to the Company under the Line of Credit may not exceed $750,000.00 at any time. The credit amounts available to the Company will be tiered, starting at $250,000 and will ramp up to $500,000 and then $750,000 upon achievement of determined milestones. The Advances requested under the Line of Credit may only be used for purchases of products and inventory from Gemini Pharmaceuticals.
The outstanding principal of all Advances under the Line of Credit will bear interest at the rate of interest of prime plus 2 percent per annum.
In partial consideration of the commitment made by Gemini Pharmaceuticals under the Line of Credit, the Company has issued to Gemini, non-callable 5-year warrants to purchase 300,000 additional shares of Common Stock at a share price of $0.12. The warrants contain a cashless exercise provision. The warrants vest as follows: 50% immediately, 25% when the credit line is increased to $500,000, and the remaining 25% when the credit line is increased to $750,000.
Joint Ventures
In March 2011, the Company agreed to form a joint venture with engage:BDR, Inc., an on-line marketing company that offers both premium and placement-specific display marketing solutions and the ability to distribute campaigns through its own display platforms and channels. engage:BDR partners with most of comScore's top 1000 websites (globally) for the most advanced display marketing capabilities. Under the joint venture agreement, engage:BDR will provide a full range of online marketing services to the joint venture, including developing brand strategy, the design of all digital media and interfaces, online media planning and buying, leveraging and integrating social media, and customer analysis.
F-20
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
In March 2012 the Company signed a term sheet with engage:BDR that further evidences its arrangement and that permits both parties to commence operations under the arrangement. The parties contemplate that the existing binding arrangement will be evidenced by a formal limited liability company agreement that the parties are preparing. The following is a summary of the principal provisions of our joint venture arrangement (the “Joint Venture”) with engage:BDR, Inc.:
A. The Company has agreed to grant the Joint Venture an exclusive license for the on-line marketing of products containing EGT™. The first product to be marketed and sold through the Joint Venture shall be Oxis’ ErgoFlex™ product, which product was successfully test marketed in mail offering in late 2010 and early 2011. Additional Oxis products designated by the Company will be offered by the Joint Venture. If both parties agree, third party products may also be offered through the Joint Venture. However, nothing in the Joint Venture is intended to prohibit the Company from marketing, distributing and selling ErgoFlex™ or any of its other current or future products by means other than through online sales.
B. Oxis and engage:BDR have agreed to make the following contributions to the Joint Venture:
(a) Oxis will contribute up to $240,000 during the first year following the formation of the Joint Venture. These funds will be provided if, when and as needed by the Joint Venture. OXIS’ cash capital contribution will be used (i) to purchase ErgoFlex and other products from Oxis, at OXIS’ cost, without any markup, (ii) to purchase website media inventory from engage:BDR, at engage:BDR’s cost, plus a 15% administrative mark-up, and (iii) to fund the Joint Venture’s other operating costs. engage:BDR has agreed to waive the 15% administrative mark-up through December 31, 2012.
(b) In addition to the cash, OXIS’ contribution to the Joint Venture includes the exclusive license for the on-line marketing of any products created by Oxis which utilize its proprietary EGT™.
(c). engage:BDR , at its own cost and expense, is designing, developing and providing to the Joint Venture, on a turnkey basis, all online product offering systems and technologies, including website layouts, landing pages, graphic designs, display advertising, rich media, in-banner and in-stream video development. During the initial start-up phase of the Joint Venture, engage:BDR will, at its own cost and expense, also manage all day-to-day online activities of the Joint Venture.
Cash from operations in excess of the amounts needed for its operations and for reasonable reserves, shall be distributed by the Joint Venture in the following order:
(a) First, to Oxis on a cumulative basis, an amount equal to the cash that OXIS contributed to the Joint Venture, and
(b) Thereafter, all excess net operating cash will be distributed 50.1% to Oxis and 49.9% to engage:BDR.
C. The administrative affairs of the Joint Venture shall be managed by a committee consisting of one representative of each Joint Venture member.
F-21
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
As additional consideration for engage:BDR entering into the Joint Venture and for contributing its services in designing, developing and implementing the advertising platform, at the time that the Joint Venture operating agreement is signed, OXIS will grant engage:BDR a two-year option to purchase Oxis securities. The option shall entitle engage:BDR to purchase the type of securities sold by us in a future $6,000,000 or more financing, on the same terms and conditions, and at the same price, as such securities are sold to third party investors in such financing. The number of such securities that engage:BDR may purchase upon the exercise of the option (determined by assuming all convertible securities are converted and all exercisable securities are exercised) shall be equal to 4.99% of the Company’s common stock issued and outstanding on the date the Joint Venture agreement is signed. If the Company has not raised $6,000,000 by December 31, 2012, commencing on that date, engage:BDR will have a two-year right to purchase Oxis’ common stock at a price equal to $.03. OXIS has also agreed to issue to engage:BDR a warrant to purchase up to 5,000,000 shares of its common stock if the Joint Venture, through engage:BDR efforts, attains certain revenue and profits targets. The warrant will have an exercise price of $.03 per share.
On June 29, 2011 the Company entered into a Joint Venture Agreement (“Joint Venture Agreement”) with John E. Repine, M.D. (“Dr. Repine”), a member of the Company’s advisory board. Under the terms of the Joint Venture Agreement, the Company formed a Delaware limited liability company, Ergo ARDS, LLC (the “ARDS Venture”), in which the Company holds a 60% membership interest and Dr. Repine holds a 40% membership interest. The ARDS Venture was formed to develop, acquire and market dietary supplements, cosmeceutical products, nutraceutical products, medical foods and pharmaceuticals using EGT™ for treating, diagnosing and preventing acute respiratory distress syndrome and other lung disorders (collectively “ARDS”).
Concurrently with the execution of the Joint Venture Agreement, Dr. Repine assigned his interest in the patent applications relating to the use of ERGO in treating ARDS (the “Assigned IP”) to the ARDS Venture. In consideration for the Assigned Interest, Dr. Repine was issued a 40% membership interest in the ARDS Venture.
Oxis will be responsible for supplying EGT™ to the ARDS Venture at no cost in connection with the ARDS Venture’s animal studies. Oxis will also pay all patent prosecution and maintenance costs relating to the Assigned IP. The ARDS Venture is required to make payments to Dr. Repine upon the achievement of certain milestones by the ARDS Venture. Any future payments to Dr. Repine shall be made based on the achievement of following milestones with respect to products to be commercialized using the Assigned IP:
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·
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The ARDS Venture shall pay the following cash amounts to Dr. Repine upon the attainment of the following milestones:
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(i) Licensing the Assigned IP to a pharmaceutical company -- $1,000,000;
(ii) Completion of Phase I Clinical Trial -- $250,000;
(iii) Completion of Phase II Clinical Trial -- $1,000,000;
(iv) Completion of pivotal Phase III Clinical Trial -- $1,500,000; and
(v) Receipt of FDA Marketing approval -- $3,000,000
F-22
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
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·
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The ARDS Venture shall pay the following cash amounts to Dr. Repine upon the attainment of the following milestones:
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(i) Licensing the Assigned IP to, or entering into a distribution agreement with, a nutraceutical or similar company -- $100,000; and
(ii) Gross sales of products utilizing EGT™ in the field – 5% of annual gross sales by the ARDS Venture or any licensee or distributor (including Oxis).
Following the successful completion of the animal studies, Oxis and Dr. Repine will make a joint decision to commence human clinical trials. If the parties do not agree to proceed, the Joint Venture Agreement will terminate and the intellectual property belonging to the ARDS Venture will be assigned to the party that elected to proceed. In the event both parties agree to not proceed, the ARDS Venture will continue to hold the intellectual property. If the parties agree to proceed, Oxis will use its best efforts to raise $3 million for the ARDS Venture. Once the $3 million in funds have been successfully raised by Oxis, Oxis will no longer be responsible for paying the ARDS Venture’s operating costs, including costs related to the ARDS Venture’s intellectual property.
The ARDS Venture will be managed by Dr. Repine as Manager, who will also serve as the ARDS Venture’s Chief Executive Officer and Treasurer. The ARDS Venture will also have a board of five members, consisting of Dr. Repine and a designee of Dr. Repine, and three designees of Oxis.
4. Stockholders' Equity
Common Stock
Under the Company's Second Amended and Restated Certificate of Incorporation, the Company was authorized to issue a total of 150,000,000 shares of Common Stock.
On January 5, 2011, the Company's Board of Directors approved an amendment to its Second Amended and Restated Certificate of Incorporation to increase the shares of Common Stock that are authorized for issuance by 450,000,000 shares, bringing the total number of common shares authorized for issuance to 600,000,000.
The approval of the Amendment required the consent of no less than at least a majority of the voting power of the Company. Theorem Group, LLC owns, in addition to other of our securities, 25,000 shares of Series H Convertible Preferred Stock. The Certificate of Designation of Preferences, Rights and Limitations of the Series H Convertible Preferred Stock provides that each outstanding share of Series H Convertible Preferred Stock entitles the holder thereof to a number of votes equal to (A) the number of shares of Common Stock that such share of preferred stock could, at such time, be converted into (B) multiplied by 100. The Series H Convertible Preferred Stock is currently convertible into 2,500,000 shares of Common Stock. Accordingly, Theorem Group, LLC has the voting power of 250,000,000 shares, which represents more than a majority of voting power of all of the Company's outstanding voting shares. Theorem Group, LLC approved the Amendment on January 5, 2011 by an action taken by written consent. The amendment was filed with the Delaware Secretary of State in February 2011.
Each share of common stock is entitled to one vote at the Company's annual meeting of stockholders.
During the year ended December 31, 2011 and 2010, the Company issued a total of 77,734,000 and 75,047,995 shares of common stock for debt conversion valued at $1,364,000 and $2,342,000, respectively.
During the year ended December 31, 2011and 2010, the Company issued a total of 18,210,498 and 3,984,723 shares of common stock for the payment of services valued at $2,373,000 and $534,000, respectively.
F-23
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
Preferred Stock
The 96,230 shares of Series C preferred stock are convertible into 27,800 shares of the Company's common stock at the option of the holders at any time. The conversion ratio is based on the average closing bid price of the common 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 .20 or more than .2889 common shares for each Series C preferred share. The conversion ratio may be adjusted under certain circumstances such as stock splits or stock dividends. The Company has the right to automatically convert the Series C preferred stock into common stock if the Company lists its shares of common stock on the Nasdaq National Market and the average closing bid price of the Company's common stock on the Nasdaq National Market for 15 consecutive trading days exceeds $13.00. Each share of Series C preferred stock is entitled to the number of votes equal to .26 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 the event of liquidation, the holders of the Series C preferred stock shall participate on an equal basis with the holders of the common stock (as if the Series C preferred stock had converted into common stock) in any distribution of any of the assets or surplus funds of the Company. The holders of Series C preferred stock are entitled to noncumulative dividends if and when declared by the Company's board of directors. No dividends to Series C preferred stockholders were issued or unpaid through December 31, 2010.
On December 4, 2008, the Company entered into and closed an Agreement (the “Bristol Agreement”) with Bristol Investment Fund, Ltd. pursuant to which Bristol agreed to cancel the debt payable by the Company to Bristol in the amount of approximately $20,000 in consideration of the Company issuing Bristol 25,000 shares of Series G Convertible Preferred Stock, which such shares carry a stated value equal to $1.00 per share (the “Series G Stock”).
The Series G Stock is convertible, at any time at the option of the holder, into common shares of the Company based on a conversion price equal to the lesser of $.01 or 60% of the average of the three lowest trading prices occurring at any time during the 20 trading days preceding the conversion. The Series G Stock, as amended, shall have voting rights on an as converted basis multiplied by 100.
In the event of any liquidation or winding up of the Company, the holders of Series G Stock will be entitled to receive, in preference to holders of common stock, an amount equal to the stated value plus interest of 15% per year.
The Series G Stock restricts the ability of the holder to convert the Series G Stock and receive shares of the Company’s common stock such that the number of shares of the Company common stock held by Bristol and its affiliates after such conversion does not exceed 4.9% of the Company’s then issued and outstanding shares of common stock.
The Series G Stock was previously referred to in an 8-K filed by the Company on December 10, 2008 in error as the “Series E Stock”. Further, the Series G Stock initially incorrectly provided that it voted on an as converted basis multiplied by 10. This incorrectly reflected the intent of the Company and the holder.
On October 13, 2009 the Company was informed by Theorem Group, LLC that it had purchased all of the outstanding Series G Preferred Stock and Theorem gave notice to the Company that it intended to exercise its ability to vote on all shareholder matters utilizing the super voting privileges provided by the Series G Stock.
Effective February 10, 2010, the Company issued 25,000 shares of its new Series H Convertible Preferred Stock (the “Series H Preferred”) to Theorem Group, LLC, a California limited liability company (the “Stockholder”), in exchange for the 25,000 shares of Series G Stock then owned by the Stockholder. The foregoing exchange was effected pursuant to that certain Exchange Agreement, dated February 10, 2010, between the Company and the Stockholder (the “Exchange Agreement”).
F-24
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
The Certificate of Designation of the Series H Preferred is based on, and substantially similar to the form and substance of the Certificate of Designation of the Series G Preferred. Some of the corrections, changes and differences between the Certificate of Designation of the Series G Preferred and the Certificate of Designation of the Series H Preferred include the following:
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As previously disclosed, the holder of the Series H Preferred is entitled to vote with the common stock, and is entitled to a number of votes equal to (i) the number of shares of common stock it can convert into (without any restrictions or limitations on such conversion), (ii) multiplied by 100.
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·
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The holder of the Series H Preferred cannot convert such preferred stock into shares of common stock if the holder and its affiliates after such conversion would own more than 9.9% of the Company’s then issued and outstanding shares of common stock.
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The Series G Preferred contained a limitation that the holder of the Series G Preferred could not convert such preferred shares into more than 19.999% of the issued and outstanding shares of common stock without the approval of the stockholders if the rules of the principal market on which the common stock is traded would prohibit such a conversion. Since the rules of the Company’s principal market did not require such a limitation, that provision has been deleted.
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On November 8, 2010, Gemini Pharmaceuticals purchased 1,666,667 shares of the Company’s Series I Preferred Stock, $.001 par value, at a price of $0.15 per share ($250,000).
As the holder of the Series I Preferred Stock, Gemini Pharmaceuticals will be entitled to receive, out of funds legally available, dividends in cash at the annual rate of 8.0% of the Preference Amount ($0.15), when, as, and if declared by the Board. No dividends or other distributions shall be made with respect to any shares of junior stock until dividends in the same amount per share on the Series I Preferred Stock shall have been declared and paid or set apart during that fiscal year. Dividends on the Series I Preferred Stock shall not be cumulative and no right shall accrue to the Series I Preferred Stock by reason of the fact that the Company may fail to declare or pay dividends on the Series I Preferred Stock in the amount of the Dividend Rate per share or in any amount in any previous fiscal year of the Company, whether or not the earnings of the Company in that previous fiscal year were sufficient to pay such dividends in whole or in part.
Each share of Series I Preferred Stock shall entitle the holder thereof to such number of votes per share as shall equal the number of shares of Common Stock (rounded to the nearest whole number) into which such share of Series I Preferred Stock is then convertible.
Upon any liquidation of the Company, subject to the rights of any series of Preferred Stock that may from time to time come into existence, before any distribution or payment shall be made to the holders of any Junior Stock, the holders of the shares of Series I Preferred Stock then outstanding shall be entitled to receive and be paid out of the assets of the Company legally available for distribution to its stockholders liquidating distributions in cash or property at its fair market value as determined by the Board in the amount of $0.15 per share (as adjusted for any stock dividends, combinations or splits with respect to such shares).
Shares of Series I Preferred Stock may, at the option of the holder thereof, be converted at any time or from time to time into fully paid and non-assessable shares of Common Stock. The number of shares of Common Stock which a holder of shares of Series I Preferred Stock shall be entitled to receive upon conversion of such shares shall be the product obtained by multiplying the Conversion Rate by the number of shares of Series I Preferred Stock being converted. Initially, the Series I Preferred Stock is convertible into 1,666,667 shares of common stock.
In the event that the per-share Market Price of the Common Stock over a period of 20 consecutive trading days is equal to at least 130% of the initial conversion price (130% of $0.15), all outstanding shares of Series I Preferred Stock shall be converted automatically into the number of shares of Common Stock into which such shares of Series I Preferred Stock are then convertible without any further action by the holders of such shares and whether or not the certificates representing such shares of Series I Preferred Stock are surrendered to the Company or its transfer agent.
F-25
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
Common Stock Warrants
Warrant transactions for the years ended December 31, 2011 and 2010 are as follows:
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Number of Warrants
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Weighted Average Exercise Price
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Outstanding, December 31, 2009
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93,256,118
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$
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0.17
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Granted
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3,300,000
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0.12
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Exercised
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3,637,500
|
0.01
|
|||
|
Expired
|
12,877,366
|
0.83
|
|||
|
Outstanding, December 31, 2010:
|
80,041,252
|
0.07
|
|||
|
Adjustment for warrants previously reported as unexercised
|
(400,000)
|
0.06
|
|||
|
Granted
|
33,010,000
|
0.04
|
|||
|
Exercised
|
3,983,364
|
0.06
|
|||
|
Expired
|
3,666,636
|
0.08
|
|||
|
Outstanding at December 31, 2011:
|
105,001,252
|
0.06
|
|||
|
Exercisable warrants:
|
|||||
|
December 31, 2010
|
79,891,252
|
0.07
|
|||
|
December 31, 2011
|
104,851,252
|
0.06
|
|||
Stock Options
The Company has reserved 22,500,000 shares of its common stock at December 31, 2011 for issuance under the 2010 Stock Incentive Plan (the “2010 Plan”). The 2010 Plan, approved by stockholders at the 2011 annual meeting, permits the Company to grant stock options to acquire shares of the Company's common stock, award stock bonuses of the Company's common stock, and grant stock appreciation rights. At December 31, 2011, 10,641,468 shares of common stock were available for grant and options to purchase 11,858,532 shares of common stock are outstanding under the 2010 Plan.
The Company has reserved 5,801,412 shares of its common stock at December 31, 2011 for issuance under the 2003 Stock Incentive Plan (the “2003 Plan”). The 2003 Plan, approved by stockholders at the 2003 annual meeting, permits the Company to grant stock options to acquire shares of the Company's common stock, award stock bonuses of the Company's common stock, and grant stock appreciation rights. At December 31, 2011, 2,203,465 shares of common stock were available for grant and options to purchase 3,597,947 shares of common stock are outstanding under the 2003 Plan.
The Company has reserved 122,500 shares of its common stock at December 31, 2011 for issuance pursuant to the future exercise of outstanding options granted under the 1994 Stock Incentive Plan (the “1994 Plan”). The 1994 Plan permitted the Company to grant stock options to acquire shares of the Company's common stock, award stock bonuses of the Company's common stock, and grant stock appreciation rights. This Plan expired on April 30, 2003 and no further issuances will occur. Options to purchase 122,500 shares of common stock are outstanding at December 31, 2010 under the 1994 Plan.
F-26
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
In addition, the Company has reserved 500,000 shares of its common stock for issuance outside of its stock incentive plans. At December 31, 2011, options to purchase 500,000 shares of common stock are outstanding outside of its stock incentive plans.
The following table summarizes stock option transactions for the years ended December 31, 2011 and 2010:
|
Number of Options
|
Weighted Average Exercise Price
|
|||||||
|
Outstanding, December 31, 2009
|
4,355,032 | $ | 0.33 | |||||
|
Granted
|
11,534,761 | 0.17 | ||||||
|
Exercised
|
(100,000 | ) | 0.23 | |||||
|
Expired
|
(1,855,142 | ) | 0.32 | |||||
|
Outstanding, December 31, 2010
|
13,934,651 | $ | 0.15 | |||||
|
Granted
|
4,952,717 | 0.07 | ||||||
|
Exercised
|
- | |||||||
|
Expired
|
(2,808,389 | ) | $ | 0.17 | ||||
|
Outstanding, December 31, 2011
|
16,078,979 | 0.19 | ||||||
|
Exercisable Options:
|
||||||||
|
December 31, 2010
|
7,601,477 | $ | 0.14 | |||||
|
December 31, 2011
|
12,274,829 | $ | 0.18 | |||||
The weighted-average fair value of options granted was $1,485,000 and $159,000 in 2011 and 2010, respectively.
The following table summarizes information about all outstanding and exercisable stock options at December 31, 2011:
|
Outstanding Options
|
Exercisable Options
|
|||||||||||||||
|
Range of
Exercise Prices
|
Number of
Options
|
Weighted-Average Remaining Contractual Life
|
Weighted-Average
Exercise Price
|
Number of
Options
|
Weighted-Average
Exercise Price
|
|||||||||||
|
$0.05 to $0.15
|
5,960,717
|
5.47
|
$0.08
|
2,156,567
|
$0.11
|
|||||||||||
|
$0.16 to $0.20
|
8,002,813
|
7.59
|
$0.17
|
8,002,813
|
$0.17
|
|||||||||||
|
$0.21 to $0.35
|
872,537
|
3.82
|
$0.27
|
872,537
|
$0.27
|
|||||||||||
|
$.36 to $.69
|
1,242,912
|
1.42
|
$0.39
|
1,242,912
|
$0.39
|
|||||||||||
|
16,078,979
|
12,274,829
|
|||||||||||||||
F-27
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
Stock Compensation
The fair values of stock options are estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions during 2011: expected volatility of 116%; average risk-free interest rate of 1.94% and 2.28%, respectively; initial expected life of 5 years, respectively; no expected dividend yield; and amortized over the vesting period.
Employment Agreements
In March 2010, the Company entered into one-year employment agreements with its then president and chief financial officer. The agreements renew automatically for up to four additional consecutive one year periods unless terminated by either party. Among other provisions, the agreements provide for base salaries of $100,000 and $54,000, respectively and provide for the granting of options to purchase up to 2,220,453 and 250,000 shares of common stock respectively.
In March 2010, the Company entered into a three-year employment agreement with its then chief executive officer. The agreement renews automatically for successive one year terms unless terminated by either party. Among other provisions, the agreements provides for a base salary of $180,000, provides for an annual bonus to be determined by the Board of Directors and provides for the granting of options to purchase 6,704,081 shares of the Company’s common stock, exercisable at $0.17 per share.
Advisory Agreements
In March 2010, the Company entered into a one year advisory agreement to a director in connection with his services as the corporate secretary and participation on the Company’s Board of Directors. The agreement renewed automatically for additional one year periods and terminated upon the resignation or disability of the director from the Board of Directors. The Company could terminate his services as corporate secretary at any time with 10 days written notice. Among other provisions, the agreement provided for an initial monthly advisory fee of $5,250 and options to purchase 1,110,227 shares of the company common stock at an exercise price $0.17 per share. The options vested in eight equal quarterly installments. The advisor was also entitled to an additional option to purchase 1,110,227 shares of the Company’s common stock after one year if the agreement had not been terminated. The advisor resigned from the Board of Directors on July 14, 2010.
The Company entered into a two-year Scientific Advisory Board Services Agreement with L. Stephen Coles on March 4, 2010. Mr. Coles receives an advisory fee for $9,000 per quarter. Upon entering into the agreement, the Company granted Mr. Coles an initial option to purchase 250,000 shares of the Company’s common stock under its 2003 Stock Incentive Plan. The options vest and become exercisable in four equal quarterly installments beginning June 4, 2010. Pursuant to the terms of the agreement, a second option to purchase 500,000 shares of the Company’s common stock under our 2003 Stock Incentive Plan was granted on March 4, 2011.
The Company entered into a two-year Scientific Advisory Board Services Agreement with Rajan Shah on July 15, 2010. Mr. Shah receives an advisory fee for $9,000 per quarter. Upon entering into the agreement, the Company granted Mr. Shah an initial option to purchase 250,000 shares of the Company’s common stock under its 2003 Stock Incentive Plan. The options vest and become exercisable in four equal quarterly installments beginning October 15, 2010. Pursuant to the terms of the agreement, a second option to purchase 500,000 shares of the Company’s common stock under its 2003 Stock Incentive Plan will be granted on July 15, 2011.
The Company entered into a two-year Advisory Board Services Agreement with Sandep Rahi on July 15, 2010. Mr. Raji receives an advisory fee for $9,000 per quarter. Upon entering into the agreement, the Company granted Mr. Rahi an initial option to purchase 250,000 shares of the Company’s common stock under its 2003 Stock Incentive Plan. The options vest and become exercisable in four equal quarterly installments beginning October 15, 2010. Pursuant to the terms of the agreement, a second option to purchase 500,000 shares of the Company’s common stock under its 2003 Stock Incentive Plan will be granted on July 15, 2011.
F-28
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
Consulting Agreements
On January 1, 2011, we entered into a consulting agreement with Bristol Capital, LLC whereby Bristol will assist us in general corporate activities including but not limited to strategic and financial planning, management and business operations, final projections and investor relation materials. As compensation for these services, we issued 5,000,000 shares of our common stock. The term of the agreement is for six months unless terminated or extended in accordance with subsequent agreements between the parties.
On January 1, 2011, the Company entered into a consulting agreement with Piter Korompis, whereby Mr. Korompis will assist the company in general corporate activities including but not limited to strategic and financial planning, management and business operations, final projections and investor relation materials. As compensation for these services, the Company will issue 5,000,000 shares of common stock of the Company. The term of the agreement is for six months unless terminated or extended in accordance with subsequent agreements between the parties.
In connection with a joint venture agreement, the Company entered into a consulting agreement with John E. Repine, M.D. on June 28, 2011, whereby Dr. Repine will provide advisory services to OXIS and Ergo ARDS and serve as Ergo ARDS’ Chief Executive Officer. OXIS’ payments to Dr. Repine under the consulting agreement will be made in shares of OXIS common stock. OXIS agreed to issue shares of Common Stock to Dr. Repine as follows:
|
·
|
On July 6, 2011 OXIS issued to Dr. Repine 2,777,778 shares of common stock (valued at $250,000) for various services relating to the terms of the consulting agreement;
|
|
·
|
OXIS agreed to issue to Dr. Repine additional shares of common stock valued at $50,000 upon completion of the first animal study and Dr. Repine’s delivery to Ergo ARDS of a summary presentation of the findings of the study; and
|
|
·
|
OXIS agreed to issue Dr. Repine additional shares of common stock valued at $100,000 upon the completion of such second animal study and Dr. Repine’s delivery to Ergo ARDS of a summary presentation of the findings of the study.
|
If the value of these shares decreases at the end of the 6-month period following the date of issuance of such shares, OXIS will be obligated to issue additional shares of common stock to Dr. Repine so that the market value of the shares previously issued to Dr. Repine on that date will equal to $250,000, $50,000 or $100,000, as the case may be.
F-29
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
5. Income Taxes
Deferred Taxes
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating losses and tax credit carryforwards. The significant components of net deferred income tax assets for the Company are:
|
December 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Deferred tax assets:
|
||||||||
|
Federal net operating loss carryforward
|
$ | 12,213,000 | $ | 11,972,000 | ||||
|
Other
|
687,000 | 618,962 | ||||||
|
Patent amortization
|
(13,000 | ) | (12,000 | ) | ||||
|
Deferred tax assets before valuation
|
12,887,000 | 12,578,962 | ||||||
|
Valuation allowance
|
(12,887,000 | ) | (12,578,962 | ) | ||||
|
Net deferred income tax assets
|
$ | — | $ | — | ||||
Generally accepted accounting principles 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 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 history of operating losses, management has provided a valuation allowance equal to its net deferred tax assets.
Tax Carryforward
At December 31, 2011, the Company had net operating loss carryforwards of approximately $28,430,000 to reduce United States federal taxable income in future years. These carryforwards expire through 2030.
6. Geographical Reporting
Revenues attributed to North America include shipments to customers in the United States, Canada and Mexico. Revenues attributed to EMEA include shipments to customers in Europe, Middle East and Africa. Revenues from shipments (including those included in discontinued operations) to customers by geographical region are as follows:
|
Year Ended December 31,
|
||||||||
|
2009
|
2010
|
|||||||
|
North America
|
$ | 26,000 | $ | 11,000 | ||||
|
EMEA
|
||||||||
|
Latin America
|
||||||||
|
Asia Pacific
|
||||||||
|
Other Countries
|
||||||||
|
Total
|
$ | 26,000 | $ | 11,000 | ||||
None of the Company's consolidated long-lived assets were located outside of the United States.
F-30
OXIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
7. Subsequent Events
In March 2012, the Company entered into a consulting agreement with Dr. Tony Nakhla. Dr. Nakhla is a Board Certified Dermatologist, Dermatologic Surgeon, Medical Director of OC Skin Institute, and author of “The Skin Commandments: 10 Rules to Healthy, Beautiful Skin.” The Company has engaged Dr. Nakhla to, among other things, (i) assist the Company in the development of new line of skin care products that incorporate EGT™, (ii) assist the Company in developing a marketing strategy for our new skin care products, (iii) act as a principal spokesperson for the Company’s skin care products and as the exclusive medical spokesperson for skin care products, and (iv) in general raise public awareness about EGT™ and its health benefits. It is the Company’s goal to jointly develop a line of skin care products with Dr. Nakhla, which skin care products contain ERGO and that are either branded with Dr. Nakhla or that are otherwise endorsed by him. The Company has agreed to give Dr. Nakhla a percentage of net profits, if any, that the Company generates from skin care products that the Company develops through his services and that bear his name in the label, or contain an endorsement from him on the product, on its packaging, or in any of the marketing materials. In addition, as a further incentive, the Company has also agreed to grant Dr. Nakhla warrants to purchase up to 4,000,000 shares of our common stock. The warrant will have an exercise price of $0.02, and a term of ten years. The warrant will vest over a period of 36 months (as to 111,111 shares on the last day of each calendar month, and as to 111,115 on the last day of the 36th month) commencing with March 2012, provided that Dr. Nakhla is still providing services to the Company under the consulting agreement at the end of each such calendar month.
On March 1, 2012, David Saloff was named Chairman of the Board.
In addition, Mr. Saloff was granted an option to acquire shares equal to 9.9% of the outstanding amount of common shares as of March 1, 2012 (26,334,193 shares), with an exercise price of $0.04. One third of the options vest immediately and the balance vest over 36 months.
Beginning in January 2012, members of the Board of Directors are to receive $3,000 per quarter either in cash or registered shares, plus an option to purchase 25,000 shares at the market price at the end of each quarter. The options will vest equally over a one year period.
F-31