<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, 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 April 28, 1997, the Registrant had 8,369,279 shares of Common Stock
outstanding.
<PAGE>
Index
OPTICAL SENSORS INCORPORATED
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 1997 and December 31, 1996
Statements of Operations - Quarters ended March 31, 1997 and
March 31, 1996
Statements of Cash Flows - Quarters ended March 31, 1997 and
March 31, 1996
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, 1997 December 31, 1996
------------------------------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 26,278,686 $ 30,134,800
Accounts receivable 71,193 91,040
Inventory 1,037,579 931,917
Prepaid expenses and other current assets 436,608 200,731
------------------------------------
Total current assets 27,824,066 31,358,488
Property and equipment:
Research and development equipment 340,131 292,488
Leasehold improvements 201,200 199,211
Furniture and equipment 96,192 77,895
Marketing equipment 767,863 344,448
Production equipment 188,229 167,635
------------------------------------
1,593,615 1,081,677
Less accumulated depreciation (578,846) (488,043)
------------------------------------
1,014,769 593,634
Other assets:
Patents 359,354 328,630
Other assets 82,393 88,445
------------------------------------
441,747 417,075
------------------------------------
Total assets $ 29,280,582 $ 32,369,197
====================================
Liabilities and shareholders equity
Current liabilities:
Accounts payable $ 503,513 $ 740,804
Employee compensation 320,722 577,228
Other liabilities and accrued expenses 1,703 1,541
------------------------------------
Total current liabilities 825,938 1,319,573
Commitments
Shareholders equity
Convertible Preferred Stock, par value $.01
per share:
Authorized shares--5,000,000
Issued and outstanding shares 1997--0 and
1996--0 --- ---
Common Stock, par value $.01 per share:
Authorized shares--30,000,000
Issued and outstanding shares 1997--8,369,279 and
1996--8,341,497 83,693 83,415
Additional paid-in capital 66,998,478 66,974,345
Deficit accumulated during the development stage (37,916,247) (35,215,362)
Deferred compensation (466,280) (547,774)
Note receivable from officer (245,000) (245,000)
------------------------------------
Total shareholders equity 28,454,644 31,049,624
------------------------------------
Total liabilities and shareholders equity $ 29,280,582 $ 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
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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,
1997 1996 1997
--------------------------------------------
<S> <C> <C> <C>
Net Sales $ 52,770 $ 14,905 $ 215,838
Cost of goods sold 434,533 321,714 1,803,754
--------------------------------------------
Gross Margin (381,763) (306,809) (1,587,916)
Operating Expenses:
Research and development expenses 1,216,911 1,265,783 26,239,777
Selling, general and administrative
expenses 1,472,690 688,597 12,493,649
--------------------------------------------
Operating loss (3,071,364) (2,261,189) (40,321,342)
Interest expense --- --- (141,385)
Interest income 370,479 194,495 2,546,480
--------------------------------------------
Net loss $(2,700,885) $(2,066,694) $(37,916,247)
============================================
Net loss per common share $(.32) $(.53)
===========================
Shares used in calculation of net loss
per share 8,348,368 3,915,594
===========================
</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,
1997 1996 1997
--------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss
Adjustments to reconcile net loss to net cash used in $(2,700,885) $(2,066,694) $(37,916,247)
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 93,644 24,663 728,548
Amortization of deferred loss on sale leaseback 11,196
Deferred compensation amortization 81,494 155,863 1,713,413
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 35,412
notes payable
Issuance of warrants in connection with debt and lease 4,525 3,016 68,622
financings
Issuance of options in connection with consulting services 55,690
Changes in operating assets and liabilities:
Receivables 19,847 (15,329) (71,193)
Inventories (105,662) (196,484) (1,037,579)
Prepaid expenses and other assets (263,389) 309,379 (880,783)
Accounts payable and accrued expenses (493,635) 228,533 825,938
--------------------------------------------
Net cash used in operating activities (3,364,061) (1,557,053) (35,967,072)
Investing activities
Proceeds from disposal of equipment 46,947
Purchases of property and equipment (511,938) (995) (2,216,467)
--------------------------------------------
Net cash used in investing activities (511,938) (995) (2,169,520)
Financing activities
Proceeds from sale leaseback 283,030
Net proceeds from issuance of Common Stock 19,885 33,953,315 35,064,561
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 3,177,926
--------------------------------------------
Net cash provided by financing activities 19,885 33,953,315 64,415,278
--------------------------------------------
Increase (decrease) in cash and cash equivalents (3,856,114) 32,395,267 26,278,686
Cash and cash equivalents at beginning of period 30,134,800 5,394,721 ---
--------------------------------------------
Cash and cash equivalents at end of period $26,278,686 $37,789,988 $ 26,278,686
============================================
</TABLE>
See accompanying notes.
4
<PAGE>
Optical Sensors Incorporated
(A Development Stage Company)
Notes to Financial Statements
(Unaudited)
March 31, 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 month period ended March 31, 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 quarter ended March 31, 1997, there is no difference
between basic earnings per share under Statement No. 128 and primary 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/TM/") 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 the 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.
6
<PAGE>
Results of Operations
Net sales in the first quarter of 1997 increased $37,865 from $14,905 in the
first quarter in 1996. Approximately 50% of the sales for the quarter were to
hospitals in the United States. The remainder were to U.S. and European
distributors and monitoring companies for demonstration and evaluation purposes.
First quarter sales for 1996 were all to monitoring companies for demonstration
and evaluation purposes.
Costs of products sold in the first quarter of 1997 increased $112,819 or 35%
from the first quarter in 1996. The major component of cost of products sold
for both quarters is manufacturing infrastructure costs necessary for
anticipated future sales levels. 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 in the first quarter of 1997 decreased $48,872 or
4% from the first quarter of 1996. Research and development expenses in the
first quarter of 1996 included a payment of $50,000 under an agreement with
Marquette Medical Systems, Inc. entered into in September 1995 pursuant to which
the Company acquired ownership of the technology used in the SensiCath System.
No payments were made under this agreement in the first quarter of 1997. Total
payments in 1995 and 1996 to Marquette were $553,250 and $759,750, respectively.
The Company is obligated to make two additional payments of $500,000 each
subject to Marquette selling certain minimum quantities of OnlineABG Modules.
The Company currently expects to make these payments to Marquette in 1997. The
Company's research and development activities during 1996 focused on development
of the OpticalCAM (which was released for commercial sale in the first quarter
of 1997), a further miniaturized sensor and new sensors to measure additional
blood analytes. Both the first quarter of 1996 and 1997 contained outside
development expenditures for the OpticalCAM of approximately $200,000. The
Company's planned development activities for the remainder of 1997 include those
initiated in 1996, as well as several product cost reduction projects. Excluding
anticipated payments to Marquette, the Company expects that the level of
research and development expenses during the remainder of 1997 will be
comparable to the first quarter of 1997.
Selling, general and administrative expenses in the first quarter of 1997
increased $784,093 or 114% from the first quarter of 1996. 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 first quarter of 1997 compared to the first quarter of 1996.
Administrative expenses also increased primarily due to the higher level of
activity associated
7
<PAGE>
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 first quarter of 1997 increased $175,984 from the first
quarter of 1996, due to interest earned on the proceeds from the Company's
initial public offering, which was completed in the first quarter of 1996.
Since its inception, the Company has experienced significant operating losses.
The Company incurred a net loss of $2,700,885 for the quarter ended March 31,
1997, compared to a net loss of $2,066,694 for the quarter ended March 31, 1996,
and as of March 31, 1997, the Company had an accumulated deficit of $37,916,247.
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: 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 which the Company relies on sole
suppliers. 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 $26,278,686 and $30,134,800 at
March 31, 1997 and December 31, 1996, respectively. The Company incurred cash
expenditures for the quarter ended March 31, 1997 of $3,364,061 for operations
and $511,938 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.
As of March 31, 1997 the Company had no material commitments outstanding for
tooling and equipment.
8
<PAGE>
The Company continued to increase its inventory during the first quarter of 1997
to support future product sales. The amount of the increase, however, was not
as significant as the increase in inventory in late 1996. A substantial portion
of the inventory level at March 31, 1997 consisted of key components and
OnlineABG Modules for which the Company relies on sole suppliers. In addition,
as of March 31, 1997, the Company had commitments outstanding for approximately
$2,100,000 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 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is included herein:
(11) Statement Re: Computation of Per Share Loss
(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 April 30, 1997
----------------------------------------------
Sam B. Humphries
President and Chief Executive Officer
(Principal Executive Officer)
Date April 30, 1997
----------------------------------------------
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
March 31, March 31,
Primary and Fully Diluted: 1997 1996
---------------------------
<S> <C> <C>
Weighted average shares outstanding 8,348,368 3,915,594
---------------------------
Total 8,348,368 3,915,594
===========================
Net loss $(2,700,885) $(2,066,694)
===========================
Per share amount $ (.32) $ (.53)
===========================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 395,660
<SECURITIES> 25,883,026
<RECEIVABLES> 71,193
<ALLOWANCES> 0
<INVENTORY> 1,037,579
<CURRENT-ASSETS> 27,824,066
<PP&E> 1,593,615
<DEPRECIATION> 578,846
<TOTAL-ASSETS> 29,280,582
<CURRENT-LIABILITIES> 825,938
<BONDS> 0
0
0
<COMMON> 83,693
<OTHER-SE> 28,370,951
<TOTAL-LIABILITY-AND-EQUITY> 29,280,582
<SALES> 52,770
<TOTAL-REVENUES> 52,770
<CGS> 434,533
<TOTAL-COSTS> 434,533
<OTHER-EXPENSES> 2,689,601
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,700,885)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,700,885)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> 0
</TABLE>
