<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 SEPTEMBER 30, 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. [X] Yes [ ] No
As of September 30, 1996, the Registrant had 8,317,661 shares of Stock
outstanding.
<PAGE>
INDEX
OPTICAL SENSORS INCORPORATED
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets - September 30, 1996 and December 31, 1995
Statements of Operations - Three months ended September 30, 1996
and 1995;
Nine months ended September 30, 1996
and 1995
Statements of Cash Flows - Nine months ended September 30, 1996
and 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
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
----------------------------------
1996 1995
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 32,877,877 $ 5,394,721
Prepaid expenses and other current asset 817,432 436,503
----------------------------------
Total current assets 33,695,309 5,831,224
Property and equipment:
Research and development equipment 252,369 375,124
Manufacturing equipment 165,710 ---
Leasehold improvements 195,551 174,673
Furniture and equipment 52,190 35,796
----------------------------------
665,820 585,593
Less accumulated depreciation (440,911) (373,237)
----------------------------------
224,909 212,356
Other assets:
Patents 318,244 230,549
Other assets 87,414 93,002
----------------------------------
405,658 323,551
----------------------------------
Total assets $ 34,325,876 $ 6,367,131
==================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 601,229 $ 116,609
Employee compensation 416,650 468,952
Other liabilities and accrued expenses 2,194 3,753
----------------------------------
Total current liabilities 1,020,073 589,314
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--8,317,661
and 1995--610,443
83,177 6,105
Additional paid-in capital 66,949,112 32,975,897
Deficit accumulated during the development
stage (32,777,849) (25,830,090)
Deferred compensation (703,637) (1,171,226)
Note receivable from officer (245,000) (245,000)
----------------------------------
Total shareholders' equity 33,305,803 5,777,817
----------------------------------
Total liabilities and shareholders' equity $ 34,325,876 $ 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
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
Three Months Ended Nine Months Ended May 23, 1989
September 30 September 30 (inception) to
-------------------------------------------------------------- September 30,
1996 1995 1996 1995 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 51,330 $ --- $ 98,251 $ --- $ 98,251
Costs and expenses:
Cost of product sold and manufacturing
development cost 335,663 --- 991,913 --- 991,913
Research and development 1,288,373 1,816,019 4,422,422 4,436,681 23,812,830
Selling, general and administrative expenses 1,152,491 1,073,877 2,759,593 1,707,215 9,678,405
-------------------------------------------------------------------------------
Operating loss (2,725,197) (2,889,896) (8,075,677) (6,143,896) (34,384,897)
Interest expense --- (11,031) --- (17,969) (141,385)
Interest income 449,438 44,532 1,131,962 79,683 1,752,477
-------------------------------------------------------------------------------
Net loss $ (2,275,759) $ (2,856,395) $ (6,943,715) $ (6,082,182) $ (32,773,805)
===============================================================================
Net loss per common share $ (.27) $ (.93) $ (1.02) $ (2.02)
===============================================================
Shares used in calculation of net loss per share 8,307,346 3,080,465 6,827,056 3,018,202
===============================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
Nine Months Ended May 23, 1989
September 30 (inception) to
-------------------------- September 30,
1996 1995 1996
-------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $(6,943,715) $(6,082,182) $(32,773,805)
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 -- 135,201 135,201
Depreciation and amortization 80,436 80,467 590,888
Amortization of deferred loss on sale leaseback -- -- 11,196
Deferred compensation amortization 467,587 804,279 1,476,054
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 -- 6,150 55,690
Changes in operating assets and liabilities:
Prepaid expenses and other assets (475,798) (176,598) (1,225,794)
Accounts payable and accrued expenses 430,761 (11,018) 1,020,075
-------------------------------------------
Net cash used in operating activities (6,437,713) (5,243,701) (30,261,359)
Investing activities
Proceeds from disposal of equipment -- -- 46,947
Purchases of property and equipment (80,227) (19,482) (1,288,672)
-------------------------------------------
Net cash used in investing activities (80,227) (19,482) (1,241,725)
Financing activities
Proceeds from sale leaseback -- -- 283,030
Net proceeds from issuance of Common Stock 34,001,096 6,921,519 35,030,244
Net proceeds from issuance of Preferred Stock -- -- 27,290,155
Reimbursement to founder and shareholder -- -- (3,500)
Payments on long-term debt -- 1,053,663 (1,396,894)
Proceeds from notes payable -- (1,142,415) 3,177,926
-------------------------------------------
Net cash provided by financing activities 34,001,096 6,832,767 64,380,961
-------------------------------------------
Increase in cash and cash equivalents 27,483,156 1,569,584 32,877,877
Cash and cash equivalents at beginning of period 5,394,721 2,851,095 --
-------------------------------------------
Cash and cash equivalents at end of period $32,877,877 $4,420,679 $32,877,877
===========================================
</TABLE>
See accompanying notes.
4
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements
(Unaudited)
September 30, 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 and nine month periods ended September
30, 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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Optical Sensors Incorporated (the Company or OSI) is a development stage
enterprise, engaged in the design, development, manufacturing, marketing and
selling of point-of-care arterial blood gas (ABG) monitoring systems. The
Company's product, the SensiCath( R) system, is a patient-attached, on-demand,
ABG monitoring system, consisting of a disposable fiber optic sensor assembly
developed by the Company, called the SensiCath Sensor, and a module developed
by Marquette Electronics, Inc. (Marquette), called the OnlineABG Module, that
plugs into Marquette's critical care bedside monitors. 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,
Marquette completed development of the OnlineABG Module and released the module
from its research and development department to manufacturing for commercial
production and sale. Both companies began marketing the SensiCath system in May
1996.
Shortly after Marquette announced that the OnlineABG Module would be available
for use with its new "Solar" patient monitoring system and its existing
installed base of "Tramscope" monitoring systems, Marquette experienced two
delays. The first delay involved completion of the Solar software necessary to
accommodate several new Marquette products and performance features, including
the OnlineABG Module and the SensiCath system. The second delay involved the
scale-up of commercial production of the OnlineABG Module. These software
development and module production delays have significantly limited the
Company's ability to generate sales of the SensiCath Sensor in the near-term.
Marquette completed production scale-up of the OnlineABG Module in the third
quarter of 1996. The Solar software was released on September 23, 1996 for beta
testing. While Marquette initially expected to complete beta testing by mid
October 1996, several deficiencies were found requiring modifications to the
software prior to full commercial release, which is now projected by Marquette
to occur by the end of November 1996. Due to the delays in release of the Solar
software, OSI has implemented a marketing program involving the purchase by OSI
of OnlineABG monitors and the short-term rental of portable Solar monitors,
which OSI will provide to its customers under various marketing and rental
programs.
In July 1996, OSI began testing prototypes of a "Stand-Alone Critical-Blood-
Analyte Monitor" (OpticalCAM(TM) Monitor). The OpticalCAM Monitor will be
supplied by a third party and sold to hospitals for use where Marquette patient
monitoring systems are not available. OSI completed all testing and filed a
510(k) application with the FDA in the third quarter of 1996. In addition to
being able to operate in a stand alone mode, the monitor is also able to
communicate with a primary bedside monitor through a standard or customized
communication port. Currently, the OpticalCAM monitor is configured to
communicate with Hewlett-Packard and SpaceLabs patient monitoring systems. When
released for commercial sale, the OpticalCAM Monitor, used with Hewlett-Packard
and SpaceLabs patient monitoring systems, and the OnlineABG Module, used with
the Marquette patient monitoring system, gives OSI access to over 80% of the
monitored critical care beds in the United States. A prototype of the
OpticalCAM monitor was recently displayed at several major medical conferences.
During the second quarter of 1996, the Company completed the acquisition of
ownership of all of the technology in the SensiCath system, pursuant to a
previously disclosed agreement with Marquette. Marquette transferred the
documentation for the technology related to the SensiCath system, and the
Company paid Marquette $500,000. The Company has control of all of the
SensiCath technology, subject to certain rights retained by Marquette to use
the technology that it developed in non-competing
6
<PAGE>
products it manufactures. The balance of $1,000,000 owed under the agreement is
payable in two installments of $500,000 each conditioned upon Marquette selling
certain minimum quantities of OnlineABG Modules. 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 September 30, 1996, had an accumulated deficit of $32.8 million. 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 $1,000,000
to Marquette, which are expected to be made in late 1996 or early 1997, and
planned development of new products and alternative cost saving configurations
of its existing product. Except for the historical information contained herein,
the disclosures in this report are forward looking statements which could be
affected by certain risks and uncertainties, including: market acceptance of the
SensiCath system; the ability of the Company and Marquette to effectively ramp-
up commercial production of the SensiCath Sensor and the OnlineABG Module,
respectively; the completion by Marquette of software for its Solar system;
generating sales of the SensiCath system to Marquette's installed base of
Tramscope systems; successful development and introduction of the OpticalCAM
monitor and additional new configurations of and enhancements to 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. Net sales for the three and nine month periods
ended September 30, 1996 were $51,330 and $98,251, respectively. Approximately
86% of sales have been made to Marquette for Solar system demonstration purposes
and for Marquette clinical marketing studies, and approximately 14% of sales
have been commercial sales to customers, which began in the third quarter of
1996.
Costs of products sold to date are related primarily to the establishment of
commercial manufacturing operations and manufacturing of sensors for clinical
studies and other testing purposes. Costs of products sold in the three and nine
month periods ended September 30, 1996 were $335,663 and $991,913, respectively.
Comparable expenses incurred in the three and nine month periods ended September
30, 1995 were $249,529 and $707,620, respectively. In 1995, production costs
were recorded as research and development expenses because the Company had no
sales in that period. The increase in 1996 is the result of increased activities
to scale-up manufacturing to meet anticipated future sales demand.
Research and development expenses increased $307,055, or 20%, and $693,361, or
19%, in the three and nine month periods ended September 30, 1996 from the same
periods in the prior year (after adjusting for reclassifications to cost of
products sold as described above). The increase in 1996 is primarily
attributable to the $500,000 Marquette payment described above, and development
expenses incurred for the Company's OpticalCAM Monitor.
Selling, general and administrative expenses were $1,152,491 and $1,707,215, for
the three and nine month periods ended September 30, 1996, respectively and
$1,073,877 and $1,707,215 for the three and nine month periods ended September
30, 1995, respectively. Selling, general and administrative
7
<PAGE>
expenses included amortization of deferred compensation expenses for options
granted in 1995. Amortization in the three and nine month periods ended
September 30, 1996 was $155,000 and $467,000 respectively. Comparable
amortization in 1995 was $805,000, all of which was recognized in the third
quarter of 1995. Selling, general and administrative expenses (after adjusting
for compensation expenses described above) increased $731,083 or 273%, and
$1,393,350 or 155%, in the three and nine month periods ended September 30, 1996
from the same periods in the prior year. The increase is primarily attributable
to expansion of the Company's sales and marketing staff, product positioning and
market research activities. During 1996, the Company added six sales and
marketing professionals for a current total of nine. Administrative expenses
have not changed materially from 1995.
Interest income increased $404,906 and $1,052,279 in the three and nine month
periods ended September 30, 1996, respectively. The increases in both periods is
due to interest earned on the proceeds from the Company's initial public
offering, which was completed in the first quarter of 1996.
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 over
allotment 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 $32,877,877 and $5,394,721 at
September 30, 1996 and December 31, 1995, respectively. The company incurred
cash expenditures of $6,437,714 for operations and $80,227 for capital
expenditures in the nine month period ended September 30, 1996.
For the nine months ended September 30, 1996, the Company leased $510,000 and
purchased $60,000 of tooling and equipment, primarily for commercial launch of
the Company's products and for research and development purposes. As of
September 30, 1996, the Company did not have any commitments for material
capital equipment acquisitions. However, in the fourth quarter of 1996, the
Company plans to purchase an additional $300,000 of capital equipment,
consisting primarily of manufacturing tooling. In addition, in anticipation of
receiving clearance to market the OpticalCAM monitor from the FDA, the Company
plans to invest approximately $1.5 million over the next three to six months in
OpticalCAM and related inventory items.
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.
SensiCath(R) is a trademark of the Company. OnlineABG,(TM) Tramscope(TM) and
Solar(TM) are trademarks of Marquette Electronics, Inc.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
(11) Statement Re: Computation of Per Share Loss
8
<PAGE>
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
9
<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 November 6, 1996
--------------------------------------------
Sam B. Humphries
President and Chief Executive Officer
(Principal Executive Officer)
Date November 6, 1996
--------------------------------------------
Wesley G. Peterson
Chief Financial Officer, Vice President of
Finance and Administration and Secretary
(Principal Financial and Accounting Officer)
10
<PAGE>
Optical Sensors Incorporated
Exhibit 11 - Statement Re: Computation of Per Share Loss
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
Primary: 1996 1995 1996 1995
------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 8,307,346 384,040 6,827,056 321,777
Dilutive stock options - based on the treasury
stock method using the initial public offering
price (1)
--- 2,696,425 --- 2,696,425
------------------------------------------------------
Total 8,307,346 3,080,465 6,827,056 3,018,202
======================================================
Net loss $(2,275,759) $(2,856,395) $(6,943,715) $(6,082,182)
======================================================
Per share amount $(.27) $(.93) $(1.02) $(2.02)
======================================================
Fully Diluted:
Weighted average shares outstanding 8,307,346 384,040 6,827,056 321,777
Dilutive stock options - based on the treasury
stock method using the initial public offering
price (1) --- 2,696,425 --- 2,696,425
Convertible preferred stock - using the
if-converted method --- 4,766,974 882,773 4,766,974
------------------------------------------------------
Total 8,307,346 7,847,439 7,709,829 7,785,176
======================================================
Net loss $(2,275,759) $(2,856,395) $(6,943,715) $(6,082,182)
======================================================
Per share amount $(.27) $(.36) $(.90) $(.78)
======================================================
(1) In accordance with SAB No. 83.
</TABLE>
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 572,660
<SECURITIES> 32,305,217
<RECEIVABLES> 69,017
<ALLOWANCES> 0
<INVENTORY> 598,294
<CURRENT-ASSETS> 33,695,309
<PP&E> 665,820
<DEPRECIATION> 440,911
<TOTAL-ASSETS> 34,325,876
<CURRENT-LIABILITIES> 1,020,073
<BONDS> 0
<COMMON> 83,177
0
0
<OTHER-SE> 33,222,626
<TOTAL-LIABILITY-AND-EQUITY> 34,325,876
<SALES> 98,251
<TOTAL-REVENUES> 98,251
<CGS> 991,913
<TOTAL-COSTS> 991,913
<OTHER-EXPENSES> 7,182,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,943,715)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,943,715)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,943,715)
<EPS-PRIMARY> (1.02)
<EPS-DILUTED> (.90)
</TABLE>
