<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, 1997
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 July 15, 1997, the Registrant had 8,379,892 shares of
Common Stock outstanding.
<PAGE>
Index
OPTICAL SENSORS INCORPORATED
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 1997 and December 31, 1996
Statements of Operations - Three months ended June 30, 1997 and 1996
Six months ended June 30, 1997 and 1996
Statements of Cash Flows - Six months ended June 30, 1997 and June
30, 1996
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
1
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------------------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $23,485,576 $30,134,800
Accounts receivable 60,624 91,040
Inventories 1,788,414 931,917
Prepaid expenses and other
current assets 117,113 200,731
----------------------------------
Total current assets 25,451,727 31,358,488
Property and equipment:
Leased equipment 214,037 ---
Research and development equipment 370,445 292,488
Leasehold improvements 202,655 199,211
Furniture and equipment 98,519 77,895
Marketing equipment 773,436 344,448
Production equipment 206,442 167,635
----------------------------------
1,865,534 1,081,677
Less accumulated depreciation (675,581) (488,043)
----------------------------------
1,189,953 593,634
Other assets:
Patents 386,330 328,630
Other assets 79,334 88,445
----------------------------------
465,664 417,075
----------------------------------
Total assets $27,107,344 $32,369,197
==================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 1,086,664 $ 740,804
Employee compensation 475,954 577,228
Other liabilities and accrued
expenses 3,737 1,541
Current portion of long term debt 55,360 ---
----------------------------------
Total current liabilities 1,621,715 1,319,573
Long-term debt, net current maturities 158,678 ---
Commitments
Shareholders' equity
Convertible Preferred Stock,
par value $.01 per share:
Authorized shares--5,000,000
Issued and outstanding shares-- 0 --- ---
Common Stock, par value $.01 per share:
Authorized shares--30,000,000
Issued and outstanding shares
1997--8,379,892 and 1996--8,341,497 83,799 83,415
Additional paid-in capital 67,036,347 66,974,345
Deficit accumulated during the
development stage (41,163,411) (35,215,362)
Deferred compensation (384,784) (547,774)
Note receivable from officer (245,000) (245,000)
----------------------------------
Total shareholders' equity 25,326,951 31,049,624
----------------------------------
Total liabilities and shareholders'
equity $27,107,344 $32,369,197
==================================
</TABLE>
Note: The balance sheet at December 31, 1996 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 Six Months Ended May 23, 1989
June 30 June 30 (inception) to
------------------------------------------------------- June 30,
1997 1996 1997 1996 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 27,796 $ 32,016 $ 80,566 $ 46,921 $ 243,634
Cost of good sold 487,089 334,536 921,622 656,250 2,290,843
------------------------------------------------------------------------
Gross margin (459,293) (302,520) (841,056) (609,329) (2,047,209)
Operating expenses:
Research and development 1,740,267 1,868,266 2,859,181 3,134,049 27,980,044
Selling, general and administrative 1,386,491 918,505 2,957,178 1,607,102 13,880,140
------------------------------------------------------------------------
Operating loss (3,586,051) (3,089,291) (6,657,415) (5,350,480) (43,907,393)
Interest expense --- --- --- --- (141,385)
Interest income 338,887 488,029 709,364 682,524 2,885,367
------------------------------------------------------------------------
Net loss $(3,247,164) $(2,601,262) $(5,948,051) $(4,667,956) $(41,163,411)
========================================================================
Net loss per common share $(.39) $(.31) $(.71) $(.77)
==========================================================
Shares used in calculation of net loss
per share 8,374,632 8,265,021 8,362,507 6,090,307
==========================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
May 23, 1989
Six Months Ended (inception) to
June 30, June 30, June 30,
1997 1996 1997
--------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $(5,948,051) $(4,667,956) $(41,163,411)
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 195,543 49,201 830,447
Amortization of deferred loss on sale leaseback 11,196
Deferred compensation amortization 162,992 311,725 1,794,909
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 9,048 3,016 73,145
Issuance of options in connection with consulting services 55,690
Changes in operating assets and liabilities:
Account Receivables 30,416 (39,098) (60,624)
Inventories (856,497) (313,022) (1,788,414)
Prepaid expenses and other assets 27,024 311,631 (590,370)
Accounts payable and accrued expenses 302,142 140,072 1,621,715
-------------------------------------------
Net cash used in operating activities (6,077,383) (4,204,431) (38,680,394)
Investing activities
Proceeds from disposal of equipment 46,947
Purchases of property and equipment (783,857) (14,337) (2,488,386)
--------------------------------------------
Net cash used in investing activities (783,857) (14,337) (2,441,439)
Financing activities
Proceeds from sale leaseback 283,030
Net proceeds from issuance of Common Stock 53,338 33,953,220 35,098,014
Net proceeds from issuance of Preferred Stock 27,290,155
Reimbursement to founder and shareholder (3,500)
Payments on long-term debt (55,360) (1,452,254)
Proceeds from notes payable 214,038 3,391,964
--------------------------------------------
Net cash provided by financing activities 212,016 33,953,220 64,607,409
--------------------------------------------
Increase (decrease) in cash and cash equivalents (6,649,224) 29,743,452 23,485,576
Cash and cash equivalents at beginning of period 30,134,800 5,394,721 ---
--------------------------------------------
Cash and cash equivalents at end of period $23,485,576 $35,129,173 $ 23,485,576
============================================
</TABLE>
See accompanying notes.
4
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements
(Unaudited)
June 30, 1997
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,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997. For further information, refer to the financial
statements and footnotes thereto included in the Optical Sensors Incorporated
1996 Annual Report to Shareholders incorporated by reference into the Annual
Report on Form 10-K for the year ended December 31, 1996.
Note B - Net Loss Per Share
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. Common equivalent shares from stock
options and warrants are excluded from the computation as their effect is
antidilutive. In February 1997, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 128, "Earnings Per Share." This Statement replaces
the presentation of primary earnings per share (EPS) with basic EPS and also
requires dual presentation of basic and diluted EPS for entities with complex
capital structures. This Statement is effective for the fiscal year ended
December 31, 1997. For the three and the six month periods ended June 30, 1997,
there is no difference between basic earnings per share under Statement No. 128
and net loss per share as reported.
5
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Optical Sensors Incorporated (the "Company") has developed the SensiCath System,
a patient-attached, on-demand arterial blood gas ("ABG") monitoring system,
which provides precise and accurate ABG results within 60 seconds without
exposure to potentially infectious blood or depleting the patient's blood supply
(the "SensiCath System"). The SensiCath System utilizes a disposable,
fiberoptic sensor device ("the SensiCath Sensor") connected to a small modular
instrument that can be configured to integrate with bedside monitoring systems
or to serve as a stand-alone monitor.
The SensiCath System is currently available in two configurations. The first
configuration of the SensiCath System combines the SensiCath Sensor with a
module (the "OnlineABG Module") that plugs into bedside monitors manufactured by
Marquette Medical Systems, Inc. ("Marquette"). The second configuration of the
SensiCath System consists of the SensiCath Sensor, the OnlineABG Module and the
Company's OpticalCAM ABG monitor ("the OpticalCAM ") that can be used as a
stand-alone monitoring device or can interface with bedside monitors supplied by
other manufacturers of patient monitoring equipment. Currently, the OpticalCAM
is able to interface with patient monitoring systems sold by Hewlett-Packard
Company and SpaceLabs Medical, Inc. The two configurations of the SensiCath
System give the Company access to over 80 percent of the monitored critical care
beds in the United States.
The Company completed product development of the initial configuration of the
SensiCath System in June 1995 and received 510(k) clearance to market the
SensiCath System from the FDA in January 1996. The Company completed
development of the OpticalCAM in September 1996 and received 510(k) clearance to
market the OpticalCAM from the FDA in January 1997. In April 1997, the Company
received 510(k) clearance to market from the FDA for the expanded use of the
SensiCath Sensor from 72 to 144 hours and from 100 to 200 ABG measurements. The
extended use of the SensiCath Sensor enables the Company's customers the ability
to realize additional cost savings for their high acuity patients.
In May of 1997, the Company voluntarily initiated an action to recover all
customer inventory of SensiCath Sensors due to unanticipated interference with
pH readings in certain patient applications. The interfering agent, called
bilirubin, is elevated in patients that have underdeveloped or failing livers.
At the same time, the Company notified the FDA of its action to recover all
customer inventory of sensors. In July 1997, the FDA notified the Company that
this voluntary action was classified as a product recall. The Company has
complied with all requirements of the FDA recall action and retrieved all
sensors from customers. In addition, the Company has developed a modified pH
sensor which will reduce bilirubin interference to a clinically acceptable level
and which the Company believes will be compatible with its existing
manufacturing equipment and processes. Laboratory tests of the modified pH
sensor indicate that it will meet the Company's performance specifications. The
Company plans to conduct patient attached evaluations of the modified sensor at
customer reference sites and validate manufacturing
6
<PAGE>
processes for the modified sensor in the third quarter of 1997. The Company
expects to re-launch the SensiCath Sensor in fourth quarter 1997.
Results of Operations
Net sales in the second quarter of 1997 decreased $4,220 or 13% from $32,016 in
the second quarter in 1996. The majority of the sales in the second quarter of
1997 were for OpticalCAM monitors. Included in net sales for the second
quarter of 1997 were customer credits of $14,770 related to the Company's
retrieval from customers of SensiCath Sensors. Net sales for the six month
period ended June 30, 1997 increased $33,645 or 72% from $46,921 for the six
month period ended June 30, 1996. The Company does not anticipate generating
any significant revenues until after re-launching a modified version of the
sensor that performs to the Company's specifications with patients who have
elevated levels of bilirubin present in their blood. This re-launch is
currently expected to begin in the fourth quarter of 1997.
Costs of products sold in the second quarter of 1997 increased $152,553 or 46%
from the first quarter in 1996. Cost of products sold for the six month period
ended June 30, 1997 increased $265,372 or 40% from $656,250 for the six month
period ended June 30, 1996. The major component of cost of products sold for
both the second quarter and year to date is manufacturing infrastructure costs
necessary for anticipated future sales levels. The cost of manufacturing
infrastructure, which was established to its current level in the latter part of
1996, accounted for the majority of the increase in cost of product sold. The
Company has the capacity to increase production levels to approximately 50,000
sensors per year without materially increasing manufacturing infrastructure
costs. Accordingly, the Company expects an improving relationship between
sales and cost of product sold once sales volumes begin to increase.
Research and development costs for the second quarter of 1997 decreased $127,999
or 7% from the second quarter of 1996. Research and development costs for the
six month period ended June 30, 1997 decreased $274,868 or 9% from $3,134,049
for the six month period ended June 30, 1996. Decreased spending for both the
quarter and six month periods resulted from lowered clinical research activities
as the Sensicath System reached development maturity. During the second quarter
of 1997 Marquette Medical Systems completed the sale of OnlineABG modules to 20
hospital sites, resulting in a $500,000 payment to Marquette Medical Systems
under an agreement entered into in September 1995 pursuant to which the Company
acquired ownership of the technology used in the SensiCath System. Payments to
Marquette so far under this agreement are $553,250, $759,750 and $500,000, in
1995, 1996 and 1997, respectively. The Company is obligated to make one
additional payment of $500,000 subject to Marquette selling certain minimum
quantities of OnlineABG Modules. The Company currently expects to make this
final payment to Marquette in 1998. Excluding the $500,000 payment to Marquette
in the second quarter of 1997, the Company expects that the level of research
and development expenses during the remainder of 1997 will be comparable to the
first half of 1997. The majority of research and development activities in the
second quarter of 1997 were directed towards
7
<PAGE>
modification of the pH sensor as described above. The Company anticipates
returning its efforts to development of new sensors to measure additional blood
analytes and other product enhancements after validation of manufacturing
processes for the modified sensor are completed.
Selling, general and administrative expenses in the second quarter of 1997
increased $467,986 or 51% from the second quarter of 1996. Selling, general and
administrative expenses for the six month period ended June 30, 1997 increased
$1,350,076 or 84% from $1,607,102. The increase is attributable primarily to
organizational expansion of sales and marketing, product positioning and initial
product launch activities in the latter half of 1996. During late 1996, the
Company completed the initial hiring of its sales and marketing staff to support
product positioning and initial product launch activities. Salaries and
benefits for the expanded sales and marketing staff and travel expenses related
to sales and marketing activities accounted for a significant portion of the
increase in selling, general and administrative expenses in the second quarter
and the six months ended June 30, 1997 as compared to comparable time periods in
1996. Administrative expenses also increased primarily due to the higher level
of activity associated with initial commercialization of the Company's products
and additional costs associated with being a public company. The Company
expects to operate through the balance of 1997 without materially increasing its
selling, general and administrative expenses from the current level.
Interest income in the second quarter of 1997 decreased $149,142 from $488,029
in the second quarter of 1996. Interest income for the six month period ended
June 30,1997 increased $26,840 from $682,524 for the six month period ended June
30, 1996. The decrease in interest income in the second quarter of 1997 is due
to declining cash balances of proceeds from the Company's initial public
offering, which was completed in the first quarter of 1996. The Company
expects interest income to continue to decline in future periods as it uses cash
for operations.
Since its inception, the Company has experienced significant operating losses.
The Company incurred a net loss of $3,247,164 for the quarter ended June 30,
1997, compared to a net loss of $2,601,262 for the quarter ended June 30, 1996.
The Company incurred a net loss of $5,948,051 for the six months ended June 30,
1997, compared to a net loss of $4,667,956 for the six months ended June 30,
1996. As of June 30, 1997, the Company had an accumulated deficit of
$41,163,411. The increase in the net loss was primarily due to the increase in
operating expenses described above. 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. Except for historical information
contained herein, the disclosures in this report are forward looking statements
which could be affected by certain risks and uncertainties, including: the
Company's ability to validate the manufacturing processes of the SensiCath
Sensor to reduce bilirubin interference to clinically acceptable levels; market
acceptance of the SensiCath System; timely installation of the SensiCath System
at hospitals with Marquette patient monitoring systems; increasing sales to
Marquette's installed base of Tramscope and Solar patient monitoring systems;
actions taken and alternative products introduced or marketed by the Company's
competitors; actions related to future regulatory matters; and continued supply
of instrumentation and other key components for
8
<PAGE>
which the Company relies on sole suppliers. Certain of these risks are described
in more detail in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
Liquidity and Capital Resources
In the first quarter of 1996, the Company completed an initial public offering
of 2,875,000 shares of Common Stock. The net proceeds to the Company from the
public offering were approximately $33,916,000. The Company's Common Stock is
quoted on the Nasdaq National Market under the symbol "OPSI."
The Company's cash and cash equivalents were $23,485,576 and $30,134,800 at June
30, 1997, and December 31, 1996, respectively. The Company incurred cash
expenditures for the six months ended June 30, 1997 of $6,077,383 for operations
and $783,857 for capital expenditures. The capital equipment expenditures were
principally for the acquisition of OpticalCAM monitors and OnlineABG Modules for
demonstration purposes to support commercial launch of the Company's products
and for tooling for production of OpticalCAM monitors. As of June 30, 1997 the
Company had no material commitments outstanding for tooling and equipment.
The Company continued to increase its inventory during the second quarter of
1997 to support future product sales. All of the $750,000 increase between the
two quarters is related to procurement of Optical CAM monitors and Online ABG
modules. A substantial portion of the inventory level at June 30, 1997
consisted of key components and OnlineABG Modules for which the Company relies
on sole suppliers. In addition, as of June 30, 1997, the Company had commitments
outstanding for approximately $1,200,000 to purchase OpticalCAM monitors and
OnlineABG Modules for resale purposes.
SensiCath(R) and OpticalCAM(TM) are trademarks of the Company. OnlineABG(TM),
Tramscope(R) and Solar(TM) are trademarks of Marquette Medical Systems, Inc.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
On May 13, 1997, the Company held its annual meeting of Stockholders. The
following matters were voted on at the annual meeting:
(a) The following directors were elected to serve until the next annual meeting
of stockholders:
<TABLE>
<CAPTION>
Director Votes For Votes Withheld
-------- --------- --------------
<S> <C> <C>
Sam B. Humphries 7,382,166 19,971
Promod Haque, Ph.D. 7,364,911 37,226
Peter H. McNerney 7,366,361 35,776
John M. Nehra 7,366,361 35,776
Demetre M. Nicoloff, M.D. 7,383,561 18,576
Gary A. Peterson 7,363,661 38,476
</TABLE>
(b) The Company's Employee Stock Purchase Plan was approved with 7,044,444
shares voting in favor, 83,427 shares voting against, 81,922 shares
abstaining and 192,344 broker non-votes.
(c) The selection of Ernst & Young, LLP as the Company's independent auditors
for the year ending December 31, 1997 was ratified with 7,380,018 shares
voting in favor, 6,483 shares voting against, 15,636 shares abstaining and
zero broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is included herein:
(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 July 30, 1997
---------------------------------------------
Sam B. Humphries
President and Chief Executive Officer
(Principal Executive Officer)
Date July 30, 1997
---------------------------------------------
Wesley G. Peterson
Chief Financial Officer, Vice President of
Finance and Administration and Secretary
(Principal Financial and Accounting Officer)
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 768,534
<SECURITIES> 22,717,042
<RECEIVABLES> 60,624
<ALLOWANCES> 0
<INVENTORY> 1,788,414
<CURRENT-ASSETS> 25,451,727
<PP&E> 1,865,534
<DEPRECIATION> 675,581
<TOTAL-ASSETS> 27,107,344
<CURRENT-LIABILITIES> 1,621,715
<BONDS> 0
0
0
<COMMON> 83,799
<OTHER-SE> 25,243,152
<TOTAL-LIABILITY-AND-EQUITY> 27,107,344
<SALES> 80,566
<TOTAL-REVENUES> 80,566
<CGS> 921,622
<TOTAL-COSTS> 921,622
<OTHER-EXPENSES> 5,816,359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,948,051)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,948,051)
<EPS-PRIMARY> (.71)
<EPS-DILUTED> 0
</TABLE>
