<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER: 0-27600
OPTICAL SENSORS INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 41-1643592
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7615 GOLDEN TRIANGLE DRIVE, SUITE A, MINNEAPOLIS, MINNESOTA 55344-3733
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 944-5857
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
AS OF APRIL 30, 1996, THE REGISTRANT HAD 8,253,699 SHARES
OF COMMON STOCK OUTSTANDING.
<PAGE>
INDEX
OPTICAL SENSORS INCORPORATED
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets - March 31, 1996 and December 31, 1995
Statements of Operations - Quarters ended March 31, 1996 and March 31,
1995
Statements of Cash Flows - Quarters ended March 31, 1996 and March 31,
1995
Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1
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Optical Sensors Incorporated
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------------------------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 37,789,989 $ 5,394,721
Prepaid expenses and other current assets 307,329 436,503
--------------------------------
Total current assets 38,097,318 5,831,224
Property and equipment:
Research and development equipment 252,369 375,124
Manufacturing equipment 123,750 --
Leasehold improvements 174,673 174,673
Furniture and equipment 35,796 35,796
--------------------------------
586,588 585,593
Less accumulated depreciation (392,751) (373,237)
--------------------------------
193,837 212,356
Other assets:
Patents 259,806 230,549
Other assets 90,204 93,002
--------------------------------
350,010 323,551
--------------------------------
Total assets $ 38,641,165 $ 6,367,131
================================
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable $ 541,448 $ 116,609
Employee compensation 273,640 468,952
Other liabilities and accrued expenses 2,759 3,753
--------------------------------
Total current liabilities 817,847 589,314
Commitments
SHAREHOLDERS EQUITY
Convertible Preferred Stock, Series A
through E, par value $.01 per share:
Authorized shares--4,250,938
Issued and outstanding shares 1996--0
and 1995--4,213,069 -- 42,131
Common Stock, par value $.01 per share:
Authorized shares--30,000,000
Issued and outstanding shares 1996--
8,253,699 and 1995--610,443 82,537 6,105
Additional paid-in capital 66,901,972 32,975,897
Deficit accumulated during the
development stage (27,900,827) (25,830,090)
Deferred compensation (1,015,364) (1,171,226)
Note receivable from officer (245,000) (245,000)
--------------------------------
Total shareholders equity 37,823,318 5,777,817
--------------------------------
Total liabilities and shareholders equity $ 38,641,165 $ 6,367,131
================================
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See accompanying notes.
2
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Optical Sensors Incorporated
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
MAY 23, 1989
THREE MONTHS ENDED (INCEPTION) TO
MARCH 31, MARCH 31, MARCH 31,
1996 1995 1996
------------------------------------------
<S> <C> <C> <C>
Net Sales $ 14,905 $ --- $ 14,905
Costs and expenses:
Cost of product sold and
manufacturing development cost 321,714 --- 321,714
Research and development 1,265,783 1,273,881 20,656,191
Selling, general and
administrative expenses 688,597 376,133 7,607,409
------------------------------------------
Operating loss (2,261,189) (1,650,014) (28,570,409)
Interest expense --- (3,080) (141,385)
Interest income 194,495 25,150 815,010
------------------------------------------
Net loss $(2,066,694) $(1,627,944) $(27,896,784)
==========================================
Net loss per common share $(.53) $(.54)
=========================
Shares used in calculation of net loss
per share 3,915,594 2,987,067
=========================
</TABLE>
See accompanying notes.
3
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
MAY 23, 1989
THREE MONTHS ENDED (INCEPTION) TO
MARCH 31, MARCH 31, MARCH 31,
1996 1995 1996
------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,066,694) $(1,627,944) $(27,896,784)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Loss on write-off of
research and
development equipment 133,919
Loss on write-off of
prepaid royalties 135,201
Depreciation and
amortization 24,663 26,394 535,115
Amortization of
deferred loss on
sale leaseback 11,196
Deferred
compensation
amortization 155,863 --- 1,164,330
License fee
financed with
long-term debt 193,700
Issuance of Common
Stock for services 37,091
Issuance of Common
Stock in lieu of
interest payments
on notes payable 35,412
Issuance of warrants in
connection with debt and
lease financings 3,016 --- 49,014
Issuance of options in
connection with consulting
services --- 3,500 55,690
Changes in operating assets
and liabilities:
Prepaid expenses and
other assets 97,566 (46,182) (652,430)
Accounts payable and
accrued expenses 228,533 (67,596) 817,847
------------------------------------------
Net cash used in operating activities (1,557,053) (1,711,828) (25,380,699)
INVESTING ACTIVITIES
Proceeds from disposal of equipment 46,947
Purchases of property and equipment (995) (2,368) (1,209,440)
------------------------------------------
Net cash used in investing activities (995) (2,368) (1,162,493)
FINANCING ACTIVITIES
Proceds from sale leaseback 283,030
Net proceeds from issuance of Common
Stock 33,953,315 --- 34,982,463
Net proceeds from issuance of Preferred
Stock 27,290,155
Reimbursement to founder and shareholder (3,500)
Payments on long-term debt (1,396,894)
Proceeds from notes payable --- 85,776 3,177,926
------------------------------------------
Net cash provided by financing
activities 33,953,315 85,776 64,333,180
------------------------------------------
Increase (decrease) in cash and cash
equivalents 32,395,267 (1,628,420) 37,789,988
Cash and cash equivalents at beginning
of period 5,394,721 2,851,095 ---
------------------------------------------
Cash and cash equivalents at end of
period $37,789,988 $ 1,222,675 $ 37,789,988
==========================================
</TABLE>
See accompanying notes.
4
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements
(Unaudited)
March 31, 1996
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended March 31, 1996 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the financial
statements and footnotes thereto included in the Optical Sensors Incorporated
Prospectus dated February 14, 1996.
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Optical Sensors Incorporated (the Company) is a development stage enterprise.
Since its inception in 1989, the Company has been engaged in the design,
development, pre-commercial manufacturing and testing of point-of-care arterial
blood gas (ABG) monitoring systems. In late 1993, in conjunction with Marquette
Electronics, Inc. (MEI), the Company began developing a prototype, solid-state,
modular system that would plug into MEI's commercially available bedside
monitor. MEI began developing this module, designated "OnlineABG Module", while
the Company began developing a disposable sensor assembly, designated the
"SensiCath Sensor". The module and the sensor together comprise the "SensiCath
System". In early 1994, the Company began developing the current version of the
SensiCath System, based on a module that would use one of four slots in
Marquette's bedside monitor. The Company completed product development
activities in June 1995 and received 510(k) clearance to market the SensiCath
System from the FDA in January 1996. In April 1996, MEI completed development of
the ABG Module and released the module from its research and development
department to manufacturing for commercial production and sale. Both the
OnlineABG Module and the Sensicath Sensor are now available for commercial sale.
In September 1995, the Company entered into an agreement with MEI which gave the
Company control and sole ownership of all the technology incorporated in the
SensiCath System, subject to certain rights retained by MEI to use the
technology that it developed in non-competing products it manufactures. The
Company was required to pay MEI a total of up to $2,000,000, of which $500,000
was paid in 1995. An additional $500,000 is payable upon completion of
documenting manufacturing integration and transfer of the technology developed
by MEI to the Company. This documentation and transfer is expected to occur in
the second quarter of 1996. The balance of $1,000,000 is payable in two
installments of $500,000 each conditioned upon MEI selling certain minimum
quantities of OnlineABG Modules. In addition, the Company paid MEI $300,000 for
engineering support, $250,000 in 1995 and $50,000 in January 1996. All payments
made or to be made under this agreement have or will be recorded as research and
development expenses.
Since inception, the Company has experienced significant operating losses, and,
as of March 31, 1996, had an accumulated deficit of $27.9 million. To date, the
Company has had only nominal revenues. The Company expects MEI to begin
receiving orders for the OnlineABG Module in May 1996, which the Company expects
to lead to sales of the SensiCath Sensor. The Company plans to exhibit the
SensiCath System at a number of medical conferences in the next few months, at
which abstracts are expected to be presented and subsequent journal articles are
expected to be published. The Company anticipates that its operating losses
will continue for the foreseeable future because it plans to expend substantial
resources in funding sales and marketing activities, commercial manufacturing
and research and development. The Company expects that research and development
expenses will remain at relatively high levels for the foreseeable future due to
scheduled payments of $1,500,000 to MEI, which are expected to be made in 1996,
planned development of new products and alternative cost saving configurations
of its existing product. The foregoing forward looking statements could be
affected by certain risks and uncertainties, including: market acceptance of the
SensiCath System; the ability of the Company and MEI to effectively ramp-up
6
<PAGE>
commercial production of the SensiCath Sensor and the OnlineABG Module,
respectively; successful development and introduction of new configurations of
the SensiCath System or other products; actions relating to regulatory matters
and health care cost reimbursement; and results of additional clinical marketing
studies.
RESULTS OF OPERATIONS
The Company had no sales in 1995, and net sales in the first quarter of 1996
consisted primarily of demonstration units of the SensiCath Sensor sold to MEI.
The demonstration units were for use by MEI in promotion of its OnlineABG
Module.
Costs of products sold in the first quarter of 1996 consisted of costs related
to the establishment of commercial manufacturing operations. Beginning in the
first quarter of 1996, a significant portion of expenses related to establishing
commercial manufacturing that had been recorded as research and development
expenses in prior periods because the Company had no sales, were recorded as
cost of sales. A total of $233,640 of expenses incurred in the first quarter of
1995 which were recorded as research and development expenses would have been
recorded as cost of sales had the Company had sales in that period.
Research and development costs in the first quarter of 1996 increased $225,542
or 22% from the first quarter of 1995, after adjusting for reclassifications to
cost of products sold as described above. The increase is attributable
primarily to development expenses incurred for the Company's planned stand-alone
ABG monitoring system.
Selling, general and administrative expenses in the first quarter of 1996
increased $312,464 or 83% from the first quarter of 1995. Approximately
$156,000 of the increase is attributable to amortization of deferred
compensation expense for options granted in 1995. The remaining increase is
attributable primarily to organizational expansion of sales and marketing,
product positioning and market research activities.
Interest income in the first quarter of 1996 increased $169,345 from the first
quarter of 1995, due to interest earned on the proceeds from the Company's
initial public offering, which was completed in the first quarter of 1996.
7
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LIQUIDITY AND CAPITAL RESOURCES
In February 1996, the Company completed an initial public offering of 2,500,000
shares of common stock. In March 1996, the underwriter exercised its
overallotment option to purchase an additional 375,000 shares of common stock.
The net proceeds to the Company from the public offering was approximately
$33,953,000. The Company's common stock is quoted on NASDAQ under the symbol
"OPSI".
The Company's cash and cash equivalents were $37,789,989 and $5,394,721 at March
31, 1996 and December 31, 1995, respectively. The company incurred cash
expenditures of $1,557,053 for operations and $995 for equipment for the
quarter ended March 31, 1996.
As of March 31, 1996, the Company did not have any commitments for material
capital equipment acquisitions, although the Company does anticipate making
capital equipment acquisitions of approximately $1.0 million in 1996, primarily
for commercial manufacturing of the Company's products.
With the proceeds of the initial public offering, the Company believes that
sufficient liquidity is available to satisfy its working capital needs at least
through 1997.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herein:
(11) Statement Re: Computation of Per Share Loss
(b) Reports on Form 8-K
None
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTICAL SENSORS INCORPORATED
Date April 30, 1996 /s/ Sam B. Humphries
---------------------------------------------
Sam B. Humphries
President and Chief Executive Officer
(Principal Executive Officer)
Date April 30, 1996 /s/ Wesley G. Peterson
---------------------------------------------
Wesley G. Peterson
Chief Financial Officer, Vice President of
Finance and Administration and Secretary
(Principal Financial and Accounting Officer)
9
<PAGE>
Optical Sensors Incorporated
Exhibit 11 - Statement Re: Computation of Per Share Loss
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, March 31,
PRIMARY: 1996 1995
-------------------------
<S> <C> <C>
Weighted average shares outstanding 3,915,594 290,642
Dilutive stock options - based on the
treasury stock method using the
initial public offering price (1) --- 2,696,425
-------------------------
Total 3,915,594 2,987,067
=========================
Net loss $(2,066,694) $(1,627,944)
=========================
Per share amount $ (.53) $ (.54)
=========================
FULLY DILUTED:
Weighted average shares outstanding 3,915,594 290,642
Dilutive stock options - based on the
treasury stock method using the
initial public offering price (1) --- 2,696,425
Convertible preferred stock - using the
if-converted method 2,658,319 4,766,974
-------------------------
Total 6,573,913 7,754,041
=========================
Net loss $(2,066,694) $(1,627,944)
=========================
Per share amount $(.31) $(.21)
=========================
</TABLE>
(1) In accordance with SAB No. 83.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,894,900
<SECURITIES> 34,895,089
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,097,318
<PP&E> 586,588
<DEPRECIATION> 392,751
<TOTAL-ASSETS> 38,641,165
<CURRENT-LIABILITIES> 817,847
<BONDS> 0
<COMMON> 82,537
0
0
<OTHER-SE> 37,740,781
<TOTAL-LIABILITY-AND-EQUITY> 38,641,165
<SALES> 14,905
<TOTAL-REVENUES> 14,905
<CGS> 321,714
<TOTAL-COSTS> 321,714
<OTHER-EXPENSES> 1,954,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,066,694)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,066,694)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,066,694)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> (.31)
</TABLE>
