<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 JUNE 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)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 41-1643592
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7615 GOLDEN TRIANGLE DRIVE, SUITE A, 55344-3733
MINNEAPOLIS, MINNESOTA
(Address of principal executive offices) (Zip Code)
</TABLE>
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 JUNE 30, 1996, THE REGISTRANT HAD 8,278,064 SHARES OF COMMON STOCK
OUTSTANDING.
<PAGE>
INDEX
OPTICAL SENSORS INCORPORATED
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets--June 30, 1996 and December 31, 1995
Statements of Operations--Three months ended June 30, 1996 and 1995;
Six months ended June 30, 1996 and 1995
Statements of Cash Flows--Six months ended June 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
1
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Optical Sensors Incorporated
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------------------------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35,129,173 $ 5,394,721
Prepaid expenses and other current
assets 418,544 436,503
----------------------------------
Total current assets 35,547,717 5,831,224
Property and equipment:
Research and development equipment 252,369 375,124
Manufacturing equipment 126,178 ---
Leasehold improvements 174,897 174,673
Furniture and equipment 46,486 35,796
----------------------------------
599,930 585,593
Less accumulated depreciation (412,931) (373,237)
----------------------------------
186,999 212,356
Other assets:
Patents 285,080 230,549
Other assets 87,413 93,002
----------------------------------
372,493 323,551
----------------------------------
Total assets $ 36,107,209 $ 6,367,131
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 296,033 $ 116,609
Employee compensation 429,701 468,952
Other liabilities and accrued expenses 3,651 3,753
----------------------------------
Total current liabilities 729,386 589,314
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--8,278,064 and
1995--610,443 82,780 6,105
Additional paid-in capital 66,901,634 32,975,897
Deficit accumulated during the
development stage (30,602,089) (25,830,090)
Deferred compensation (859,501) (1,171,226)
Note receivable from officer (245,000) (245,000)
----------------------------------
Total shareholders' equity 35,377,823 5,777,817
----------------------------------
Total liabilities and shareholders' $ 36,107,209 $ 6,367,131
equity ==================================
</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
THREE MONTHS ENDED SIX MONTHS ENDED MAY 23, 1989
JUNE 30 JUNE 30 (INCEPTION) TO
------------------------------------------------------- JUNE 30,
1996 1995 1996 1995 1996
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 32,016 $ --- $ 46,921 $ --- $ 46,921
Costs and expenses:
Cost of product sold and
manufacturing development cost 334,536 --- 656,250 --- 656,250
Research and development 1,868,266 1,346,781 3,134,049 2,620,662 22,524,457
Selling, general and administrative
expenses 918,505 257,205 1,607,102 633,338 8,525,914
------------------------------------------------------------------------
Operating loss (3,089,291) (1,603,986) (5,350,480) (3,254,000) (31,659,700)
Interest expense --- (3,858) --- (6,938) (141,385)
Interest income 488,029 10,001 682,524 35,151 1,303,039
------------------------------------------------------------------------
Net loss $(2,601,262) $ (1,597,843) $(4,667,956) $ (3,225,787) $(30,498,046)
========================================================================
Net loss per common share $(.31) $(.53) $(.77) $(1.08)
=========================================================
Shares used in calculation of net loss
per share 8,265,021 2,987,075 6,090,307 2,986,839
=========================================================
</TABLE>
See accompanying notes.
3
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Optical Sensors Incorporated
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
SIX MONTHS ENDED MAY 23, 1989
JUNE 30 (INCEPTION) TO
--------------------------- JUNE 30,
1996 1995 1996
--------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,667,956) $(3,225,787) $(30,498,046)
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 49,201 53,126 559,653
Amortization of deferred loss on sale
leaseback --- --- 11,196
Deferred compensation amortization 311,725 --- 1,320,192
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 (40,489) (128,652) (790,485)
Accounts payable and accrued expenses 140,072 (7,549) 729,386
--------------------------------------------
Net cash used in operating activities (4,204,431) (3,170,161) (28,028,077)
INVESTING ACTIVITIES
Proceeds from disposal of equipment --- --- 46,947
Purchases of property and equipment (14,337) (9,099) (1,222,782)
--------------------------------------------
Net cash used in investing activities (14,337) (9,099) (1,175,835)
FINANCING ACTIVITIES
Proceeds from sale leaseback --- --- 283,030
Net proceeds from issuance of Common
Stock 33,953,220 --- 34,982,368
Net proceeds from issuance of Preferred
Stock --- --- 27,290,155
Reimbursement to founder and shareholder --- --- (3,500)
Payments on long-term debt --- (165,435) (1,396,894)
Proceeds from notes payable --- 1,057,890 3,177,926
Net cash provided by financing --------------------------------------------
activities 33,953,220 892,455 64,333,085
--------------------------------------------
Increase (decrease) in cash and cash
equivalents 29,734,450 (2,286,805) 35,129,173
Cash and cash equivalents at beginning
of period 5,394,721 2,851,095 ---
Cash and cash equivalents at end of --------------------------------------------
period $35,129,173 $ 564,290 $ 35,129,173
============================================
</TABLE>
See accompanying notes.
4
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements
(Unaudited)
June 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 six month periods ended June 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
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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 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 involves 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 involves 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 expects to complete the Solar software and production scale-up in the
second half of 1996, and the Company expects sales of SensiCath Sensors to
increase following completion by Marquette of these activities.
During the second quarter of 1996, the Company accomplished a number of its
business objectives. Over a ten-week period, the Company demonstrated the
SensiCath System to over 60 hospitals in the United States. The SensiCath sensor
and the OnlineABG Module was included in Marquette's recently announced multi-
year agreement with Columbia/HCA Healthcare Corporation, demonstrating further
the growing clinical acceptance of the SensiCath system. OSI is on schedule with
both scale-up of commercial manufacturing of the SensiCath sensor and further
miniaturization of the SensiCath Sensor, which will reduce the production cost
of the sensor. The Company plans to phase in the miniaturized sensor in early
1997. As of the end of the second quarter of 1996, the Company's clinical
marketing studies included approximately 150 patients and over 1,600 data
points. Results from 64 patients with approximately 800 data points were
presented as abstracts, along with exhibits of the SensiCath System, at several
major medical conferences during second quarter of 1996. Additional exhibitions
and abstract presentations will be made at the American Association of Clinical
Chemists, the American Society of Anesthesiologists, and the 9th European
Congress of Intensive Care Medicine.
As part of its continuing product development activities, the Company has
confirmed through extended clinical laboratory testing that the SensiCath Sensor
can be used for 144 hours without any compromise in performance. The extension
from 72 hours to 144 hours of use will enable customers to realize additional
cost savings for their high acuity patients and potentially expand its use to
less acute patients. In May 1996, OSI submitted a 510(k) application to the FDA
covering the 144-hour SensiCath Sensor. Subject to receipt of FDA clearance,
the Company plans to begin marketing the 144-hour sensor in the U.S. in early
1997. The Company introduced the 144-hour sensor to the European market for
clinical
6
<PAGE>
investigation at the 2nd World Congress of Pediatric Intensive Care,
held in Rotterdam, Netherlands, in June 1996.
In July 1996, OSI began testing prototypes of a "Stand-Alone-Critical-Blood-
Analyte Monitor" (CBA Monitor). The CBA Monitor will be supplied by a third
party and sold to hospitals for use where Marquette patient monitoring systems
are not available. OSI anticipates completion of all testing and filing of a
510(k) application with the FDA in the third quarter of 1996. OSI owns all of
the technology related to the CBA Monitor.
In June 1996, the Centers for Disease Control and Prevention (CDC) notified the
Company that the SensiCath system is not subject to regulation under the
Clinical Laboratory Improvements Act of 1988 (CLIA). Point of care
electrochemical analyzers currently marketed by the Company's competitors are
subject to CLIA; this requires that testing sites using products subject to CLIA
meet various requirements regarding personnel qualifications, administration,
participation in proficiency testing, patient test management, quality control,
quality assurance and inspections based on the level of "complexity" associated
with the test. Hospitals will not be subject to these additional requirements.
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 now 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 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 June 30, 1996, had an accumulated deficit of $30.6 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 1996, 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 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.
7
<PAGE>
RESULTS OF OPERATIONS
The Company had no sales in 1995. Net sales for the three and six month periods
ended June 30, 1996 were $32,016 and $46,921, respectively. To date, all sales
have been made to Marquette for Solar system demonstration purposes and for
Marquette clinical marketing studies.
Costs of products sold to date are related 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 six month
periods ended June 30, 1996 were $334,536 and $656,250, respectively. Comparable
expenses incurred in the three and six month periods ended June 30, 1995 were
$224,451 and $458,091 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 $745,936, or 66%, and $971,478, or
45%, in the three and six month periods ended June 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 planned CBA Monitor.
Selling, general and administrative expenses increased $661,300, or 257%, and
$973,764, or 154%, in the three and six month periods ended June 30, 1996 from
the same periods in the prior. Approximately $156,000 of the increase for the
quarter and approximately $312,000 of the increase for the six month period is
attributable to amortization of deferred compensation expense for options
granted in 1995. The remaining increase is primarily attributable to expansion
of the Company's sales and marketing staff, product positioning and market
research activities.
Interest income increased $478,028 and $647,373 in the three and six month
periods ended June 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.
8
<PAGE>
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 $35,129,173 and $5,394,721 at June
30, 1996 and December 31, 1995, respectively. The company incurred cash
expenditures of $4,204,431 for operations and $14,337 for capital equipment
expenditures in the six month period ended June 30, 1996.
As of June 30, 1996, the Company did not have any commitments for material
capital equipment acquisitions, although the Company does anticipate leasing
capital equipment 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.
SensiCath(TM) 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 exhibit is included herein:
(11) Statement Re: Computation of Per Share Loss
(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 July 29, 1996 /s/ Sam B. Humphries
-------------------------------------
Sam B. Humphries
President and Chief Executive Officer
(Principal Executive Officer)
Date July 29, 1996 /s/ Wesley G. Peterson
-------------------------------------
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 SIX MONTHS ENDED
JUNE 30 JUNE 30
1996 1995 1996 1995
-----------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average shares outstanding 8,265,021 290,650 6,090,307 290,414
Dilutive stock options--based on the
treasury stock method using the
initial public offering price(1) --- 2,696,425 --- 2,696,425
-----------------------------------------------------
Total 8,265,021 2,987,075 6,090,307 2,986,839
=====================================================
Net loss $(2,601,262) $(1,597,843) $(4,667,956) $(3,225,787)
=====================================================
Per share amount $ (.31) $ (.53) $ (.77) $ (1.08)
=====================================================
FULLY DILUTED:
Weighted average shares outstanding 8,265,021 290,650 6,090,307 290,414
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 1,324,159 4,766,974
-----------------------------------------------------
Total 8,265,021 7,754,049 7,414,466 7,753,813
=====================================================
Net loss $(2,601,262) $(1,597,843) $(4,667,956) $(3,255,787)
=====================================================
Per share amount $ (.31) $ (.21) $ (.63) $ (.42)
=====================================================
</TABLE>
(1) In accordance with SAB No. 83.
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 768,043
<SECURITIES> 34,361,130
<RECEIVABLES> 39,098
<ALLOWANCES> 0
<INVENTORY> 313,022
<CURRENT-ASSETS> 35,547,717
<PP&E> 599,930
<DEPRECIATION> 412,931
<TOTAL-ASSETS> 36,107,209
<CURRENT-LIABILITIES> 729,386
<BONDS> 0
<COMMON> 82,780
0
0
<OTHER-SE> 35,295,044
<TOTAL-LIABILITY-AND-EQUITY> 36,107,209
<SALES> 46,921
<TOTAL-REVENUES> 46,921
<CGS> 656,250
<TOTAL-COSTS> 656,250
<OTHER-EXPENSES> 4,741,151
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,667,956)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,667,956)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,667,956)
<EPS-PRIMARY> (.77)
<EPS-DILUTED> (.63)
</TABLE>
