<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, 1998
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 29, 1998, THE REGISTRANT HAD 8,848,764 SHARES OF COMMON STOCK
OUTSTANDING.
<PAGE>
INDEX
OPTICAL SENSORS INCORPORATED
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets - March 31, 1998 and December 31, 1997
Statements of Operations - Quarters ended March 31, 1998 and March 31,
1997
Statements of Cash Flows - Quarters ended March 31, 1998 and March 31,
1997
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, 1998 DECEMBER 31, 1997
----------------------------------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $16,398,127 $17,101,130
Accounts receivable 92,865 27,100
Inventory 2,209,790 2,017,497
Prepaid expenses and other current assets 159,526 70,491
----------------------------------------
Total current assets 18,860,308 19,216,218
Property and equipment:
Leased Equipment 775,401 679,892
Research and development equipment 632,680 594,542
Leasehold improvements 259,172 259,172
Furniture and equipment 111,580 109,214
Marketing equipment 1,057,153 986,483
Production equipment 287,412 259,363
----------------------------------------
3,123,398 2,888,666
Less accumulated depreciation (1,173,059) (974,887)
----------------------------------------
1,950,339 1,913,779
Other assets:
Patents 496,629 434,752
Other assets 57,793 60,785
----------------------------------------
554,422 495,537
----------------------------------------
Total assets $21,365,069 $21,625,534
========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 566,145 $ 437,039
Employee compensation 366,209 404,513
Other liabilities and accrued expenses 2,121 2,154
Obligations under capital lease, current portion 173,846 152,756
----------------------------------------
Total current liabilities 1,108,321 996,462
Obligations under capital lease, less current portion 504,444 472,206
SHAREHOLDERS' EQUITY
Convertible Preferred Stock, par value $.01
per share:
Authorized shares--5,000,000
Common Stock, par value $.01 per share:
Authorized shares--30,000,000
Issued and outstanding shares 1998--8,848,764 and
1997--8,400,554 88,488 84,006
Additional paid-in capital 69,306,743 67,088,370
Deficit accumulated during the development stage (49,217,684) (46,548,720)
Deferred compensation (180,243) (221,790)
Note receivable from officer (245,000) (245,000)
------------------------------------------
Total shareholders' equity 19,752,304 20,156,866
------------------------------------------
Total liabilities and shareholders' equity $ 21,365,069 $ 21,625,534
==========================================
</TABLE>
Note: The balance sheet at December 31, 1997 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
MAY 23, 1989
THREE MONTHS ENDED (INCEPTION) TO
MARCH 31, MARCH 31, MARCH 31,
1998 1997 1998
-------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 165,373 $ 52,770 $ 469,377
Cost of goods sold 557,371 434,533 4,122,306
-------------------------------------------------------------
Gross Margin (391,998) (381,763) (3,652,929)
Operating Expenses:
Research and development expenses 974,515 1,216,911 30,972,418
Selling, general and administrative expenses 1,508,351 1,472,690 18,026,082
-------------------------------------------------------------
Operating loss (2,874,864) (3,071,364) (52,651,429)
Interest expense (22,628) --- (185,156)
Interest income 228,271 370,479 3,672,077
Other income (expense) 257 --- (53,176)
-------------------------------------------------------------
205,900 370,479 3,433,745
-------------------------------------------------------------
Net loss $(2,668,964) $(2,700,885) $(49,217,684)
=============================================================
Net loss per common share:
Basic and diluted $(.31) $(.32) $(12.07)
=============================================================
Shares used in calculation of net loss per share 8,718,090 8,348,368 4,079,000
=============================================================
</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,
1998 1997 1998
-----------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,668,964) $(2,700,885) $(49,217,684)
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 210,814 93,644 1,356,255
Amortization of deferred loss on sale leaseback 11,196
Deferred compensation amortization 41,547 81,494 1,999,450
License fee financed with long-term debt 193,700
Issuance of Common Stock for services 37,091
Writedown of inventory 445,706
Issuance of Common Stock in lieu of interest payments on
notes payable 35,412
Amortization of warrants in connection with debt and lease
financings 4,321 4,525 85,351
Issuance of options in connection with consulting services 55,690
Changes in operating assets and liabilities:
Receivables (65,765) 19,847 (92,865)
Inventories (192,293) (105,662) (2,655,496)
Prepaid expenses (89,035) (235,877) (195,449)
Accounts payable and accrued expenses 90,769 (493,635) 934,475
-----------------------------------------------------------
Net cash used in operating activities (2,668,606) (3,336,549) (46,738,048)
INVESTING ACTIVITIES
Proceeds from disposal of equipment 46,947
Purchases of property and equipment (234,732) (511,938) (3,746,250)
Other (71,528) (27,512) (554,422)
-----------------------------------------------------------
Net cash used in investing activities (306,260) (539,450) (4,253,725)
FINANCING ACTIVITIES
Proceeds from sale leaseback 283,030
Net proceeds from issuance of Common Stock 2,218,535 19,885 37,360,895
Net proceeds from issuance of Preferred Stock 27,290,155
Reimbursement to founder and shareholder (3,500)
Proceeds (payments) on long-term debt and lease obligations 53,328 (718,606)
Proceeds from notes payable 3,177,926
-----------------------------------------------------------
Net cash provided by financing activities 2,271,863 19,885 67,389,900
-----------------------------------------------------------
Increase (decrease) in cash and cash equivalents (703,003) (3,856,114) 16,398,127
Cash and cash equivalents at beginning of period 17,101,130 30,134,800 ---
-----------------------------------------------------------
Cash and cash equivalents at end of period $16,398,127 $26,278,686 $ 16,398,127
===========================================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
OPTICAL SENSORS INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
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 periods ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the financial
statements and footnotes thereto included in the Optical Sensors Incorporated
1997 Annual Report to Shareholders incorporated by reference into the Annual
Report on Form 10-K for the year ended December 31, 1997.
NOTE B - NET LOSS PER SHARE
Basic and diluted net loss per common share is computed using the weighted
average number of common shares outstanding during the period. Options and
warrants were outstanding during the quarter ended March 31, 1998 and 1997, but
were not included in the computation of diluted net loss per common share
because the effect would be antidilutive. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements.
5
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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-connected, 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"). ABG tests measure oxygen ("O2"), carbon dioxide
("CO2") and acid-base ("pH") in a sample of blood taken from a patient's artery.
These tests, which are among the most frequently ordered and most urgently
needed tests for critically ill and unstable patients, are the foremost
indicators of the body's ability to absorb and use oxygen. Results of ABG tests
provide a basis for medical treatment and intervention and are required to
accurately regulate the patient's respiratory support system. The Company
believes that the SensiCath System is the first ABG analyzer to be integrated
into both an arterial pressure monitoring line and a critical care patient
monitoring system. The SensiCath System utilizes a disposable, fiberoptic
sensor device (the "SensiCath Sensor") connected to a small modular instrument
(the "ABG Module") that is part of the Company's OpticalCAM instrumentation
("OpticalCAM"). The SensiCath System is able to either stand alone or interface
with various monitoring platforms, including monitoring systems produced and
installed by Marquette Medical Systems, Inc., SpaceLabs Medical, Inc., and the
Hewlett-Packard Company. These three producers account for approximately 80% of
the installed base of critical care monitoring instrumentation in the United
States.
In January 1998, the Company entered into an agreement with Instrumentation
Laboratory Company ("IL") for worldwide distribution of the Company's SensiCath
Sensors and OpticalCAM instrumentation. IL will market and distribute the
Company's products throughout the world under the names GEM(R) SensiCath(R) and
GEM(R) OpticalCAM(TM). The Company has agreed to supply IL with SensiCath
Sensors, on an exclusive basis, through 2004 and on a non-exclusive basis
through 2007. The Company has also agreed to supply IL with OpticalCAM
Instruments, on a semi-exclusive basis, through 2004. The Company retains the
right to sell OpticalCAM Instruments to manufacturers of physiological
monitoring, ventilator and anesthesia delivery systems. In January 1998, IL
also purchased 441,203 shares of Common Stock from the Company, which
represented 4.99% of the Company's outstanding Common Stock following completion
of the transaction, at a price of $5.00 per share for a total price of
$2,206,015. In April 1998, IL announced the U.S. introduction of the GEM
SensiCath and GEM OpticalCAM, new members of the IL GEM family of hospital
point-of-care diagnostic products.
6
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RESULTS OF OPERATIONS
Net sales in the first quarter of 1998 increased $112,603 or 213% from $52,770
in the first quarter in 1997 to $165,373 in the first quarter of 1998. The
increase in sales is the result of the Company's introduction in December 1997
of an enhanced version of its SensiCath Sensor that solved previous interference
problems with a certain portion of the critical care patient population. Sales
of SensiCath Sensors accounted for approximately 45% of the total sales for the
quarter, and the placement of OpticalCAM instrumentation accounted for
approximately 55% of total sales. As part of the market launch of the enhanced
SensiCath System, the Company is providing customers with OpticalCAM
instruments under a variety of promotional and short term rental programs,
allowing customer evaluations to proceed on a more timely basis. Accordingly,
the Company anticipates that, for the remainder of 1998, a greater percentage of
sales will be for OpticalCAM instruments as customers complete hospital purchase
approval processes for purchases of OpticalCAM instruments.
Costs of products sold in the first quarter of 1998 increased $122,838 to
$557,371 or 28% from $434,533 in the first quarter in 1997. The 28% increase
compares favorably to the 213% increase in sales for the same period. Under the
agreement between the Company and IL, the Company has agreed to sell OpticalCAM
instrumentation to IL at the lower of the Company's direct cost of manufacturing
or previously scheduled amounts. Accordingly, the Company does not expect to
generate any gross margin from the sale of OpticalCAM instrumentation in future
periods. The Company has reduced the cost of manufacturing the OpticalCAM
instrumentation to the anticipated approximate selling price and initiated
programs to reduce the cost of manufacturing sensors. The Company expects an
improving relationship between sales and cost of product sold for sensors once
sales volumes for sensors begin to increase. Gross margins in future periods
will also be affected by the mix of sensor sales and instrumentation sales in
future periods. The Company believes it has the capacity to increase production
levels to approximately 50,000 sensors per year without materially increasing
manufacturing infrastructure costs.
Research and development costs for the first quarter of 1998 decreased $242,396
to $974,515 or 20% from $1,216,911 in the first quarter of 1997. Research and
development expenses in the first quarter of 1997 included a final $200,000
payment for outside development work related to the OpticalCAM. These expenses
did not recur in the first quarter of 1998. The majority of research and
development activities in the first quarter of 1998 was directed toward
development of new sensors to measure additional blood analytes and further
product enhancements, including planned cost reduction programs. With the
exception of a $500,000 payment to Marquette Medical Systems, Inc. that the
Company may become obligated to make under a previously disclosed technology
purchase agreement, the Company expects to operate through the balance of 1998
with only a moderate increase in research and development expenses levels. The
increase is expected as the Company begins development of additional
applications for its current technology platform.
7
<PAGE>
Selling, general and administrative expenses in the first quarter of 1998
increased $35,661 or 2% to $1,508,351 from $1,472,690 in the first quarter of
1997. Selling expenses increased moderately in the first quarter of 1998 as
compared to the first quarter of 1997, offset largely by declines in general and
administrative expenses. The majority of selling activities for the quarter was
directed towards the market launch of the enhanced SensiCath Sensor and
distributor infrastructure development and training related to the agreement
with IL. The Company expects to operate through the balance of 1998 without
materially increasing its selling, general and administrative expenses from the
current level.
Net interest income in the first quarter of 1998 decreased $164,836 to $205,643
from $370,479 in the first quarter of 1997. The decrease in net interest income
in the first quarter of 1998 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 $2,668,964 for the quarter ended March 31,
1998, compared to a net loss of $2,700,885 for the quarter ended March 31, 1997.
As of March 31, 1998, the Company had an accumulated deficit of $49,217,684. 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. See "Certain Important Factors".
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through the sale of
equity securities. From inception through December 31, 1995, the Company raised
net proceeds of $30,400,000 from private equity financings and stock option
exercises. 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."
In January 1998, the Company sold 441,203 shares of Common Stock to IL, which
represented 4.99% of the Company's outstanding Common Stock following completion
of the transaction, at a price of $5.00 per share for a total price of
$2,206,015. The Company granted IL and its affiliates certain pre-emptive
rights to participate in future sales of equity securities by the Company, and
certain demand and incidental registration rights under a registration rights
agreement previously entered into by the Company and shareholders that purchased
shares of stock in private transactions prior to the Company's initial public
offering in February 1996. IL is prohibited from selling or otherwise
transferring its shares of Common Stock for a period of one year, except to an
affiliate or pursuant to the exercise of its registration rights. IL and its
affiliates are also subject to certain standstill provisions for a period of
five years that prohibit
8
<PAGE>
them from (a) acquiring more than 5.0% of the Company's outstanding Common
Stock, (b) entering into a voting agreement with respect to the shares IL
purchased from the Company, (c) participating in any proxy solicitation or
becoming a participant in an election contest, or (d) joining a group for the
purpose of acquiring, holding, voting or disposing of shares of Common Stock.
The Company's cash and cash equivalents were $16,398,127 and $17,101,130 at
March 31, 1998 and December 31, 1997, respectively. The Company incurred cash
expenditures for the three months ended March 31, 1998 of $2,668,606 for
operations and $234,732 for capital expenditures. The capital equipment
expenditures were principally for the acquisition of manufacturing, research and
development and marketing promotional equipment. A substantial portion of the
inventory level at March 31, 1998 consisted of key components, OpticalCAM
monitors and ABG Modules for which the Company relies on sole suppliers.
As of March 31, 1998, the Company had commitments outstanding for approximately
$1,500,000 to purchase additional OpticalCAM monitors and ABG Modules. As of
March 31, 1998, the Company had no material commitments outstanding for tooling
and equipment.
SensiCath(R) and OpticalCAM(TM) are trademarks of Optical Sensors Incorporated.
GEM(R) is a trademark of Instrumentation Laboratory Company.
CERTAIN IMPORTANT FACTORS
There are several important factors that could cause the Company's actual
results to differ materially from those anticipated by the Company or which are
reflected in any forward-looking statement of the Company. These factors, and
their impact on the success of the Company's operations and its ability to
achieve its goals include the following:
* MARKET ACCEPTANCE OF THE SENSICATH SYSTEM. The Company's future revenues will
depend on market acceptance of the SensiCath System. The Company will need to
demonstrate to health care professionals, hospital administrators and third-
party payors the accuracy, reliability, ease of use, safety and cost
effectiveness of the SensiCath System. In order to use the SensiCath System,
hospitals need to acquire the OpticalCAM instrumentation, which may require
capital expenditure approvals by the hospital.
* SALES BY INSTRUMENTATION LABORATORY. The Company's future revenues will depend
almost exclusively on sales of the Company's products by IL. Although IL is
required to purchase sufficient quantities of products from the Company that
will result in pre-established annual minimum revenues to the Company in order
to maintain exclusivity, there can be no assurance that IL will achieve
sufficient sales for the Company to substantially increase revenues or achieve
profitability.
9
<PAGE>
* MANUFACTURING AND SUPPLY. The Company's future plans include planned
enhancements to the SensiCath Sensor that will reduce the Company's
manufacturing costs. Although the Company has established and validated
manufacturing processes, equipment and infrastructure to manufacture sensors
in volumes that will be necessary to achieve significant revenues, the Company
has limited experience in producing sensors at these volumes. A failure to
implement the planned cost reduction programs in a timely manner or to
successfully scale-up manufacturing of sensors could have a material adverse
effect on the Company. Currently, the Company has only one supplier for the
ABG Module, the OpticalCAM Monitor and certain other key components. Any
disruption or delay in the supply of key components or instrumentation could
have a material adverse effect on the Company.
* COMPETITION. Competition among companies attempting to provide ABG and other
critical blood analyte analysis at the point-of-care is intense and
increasing. There can be no assurance that the Company's competitors will not
succeed in developing or marketing technologies and products that are more
effective or less expensive than the Company's products or that would render
the Company's products obsolete or non-competitive.
* REGULATORY APPROVALS. The Company's ability to market its current products and
any products that it may develop in the future requires clearances or
approvals from the FDA and other governmental agencies, including, in some
instances, foreign and state agencies. The process for maintaining and
obtaining necessary regulatory clearances and approvals can be expensive and
time consuming. There can be no assurance that the Company will be able to
maintain or obtain necessary regulatory approvals and clearances in the
future.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the quarter ended March 31, 1998, the Company sold an aggregate of
441,203 shares of Common Stock at a price of $5.00 per share for a total price
of $2,206,015 to Instrumentation Laboratory Company in a transaction exempt from
the registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof.
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
The Company filed a Current Report on Form 8-K, dated January 7, 1998,
reporting under "Item 5. Other Events" the agreement with and equity investment
by Instrumentation Laboratory Company.
11
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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 May 6, 1998 /s/ Sam B. Humphries
---------------------------------------
Sam B. Humphries
President and Chief Executive Officer
(Principal Executive Officer)
Date May 6, 1998 /s/ Wesley G. Peterson
----------------------------------------
Wesley G. Peterson
Chief Financial Officer, Vice President
of Finance and Administration and
Secretary (Principal Financial and
Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,274
<SECURITIES> 16,392,853
<RECEIVABLES> 92,865
<ALLOWANCES> 0
<INVENTORY> 2,209,790
<CURRENT-ASSETS> 18,860,308
<PP&E> 3,123,398
<DEPRECIATION> 1,173,059
<TOTAL-ASSETS> 21,365,069
<CURRENT-LIABILITIES> 1,108,321
<BONDS> 0
0
0
<COMMON> 88,488
<OTHER-SE> 19,663,816
<TOTAL-LIABILITY-AND-EQUITY> 19,752,304
<SALES> 165,373
<TOTAL-REVENUES> 165,373
<CGS> 557,371
<TOTAL-COSTS> 557,371
<OTHER-EXPENSES> 2,482,866
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,628
<INCOME-PRETAX> (2,668,964)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,668,964)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> 0
</TABLE>
