<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, 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 July 28, 1998, THE REGISTRANT HAD 8,853,509 SHARES OF
COMMON STOCK OUTSTANDING.
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INDEX
OPTICAL SENSORS INCORPORATED
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets - June 30, 1998 and December 31, 1997
Statements of Operations - Quarters ended June 30, 1998 and
June 30, 1997
Statements of Cash Flows - Quarters ended June 30, 1998 and
June 30, 1997
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 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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Optical Sensors Incorporated
Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,422,730 $ 17,101,130
Accounts receivable 306,904 27,100
Inventory 1,838,916 2,017,497
Prepaid expenses and other current assets 129,819 70,491
------------ ------------
Total current assets 15,698,369 19,216,218
Property and equipment:
Leased equipment 927,297 679,892
Research and development equipment 695,791 594,542
Leasehold improvements 274,171 259,172
Furniture and equipment 124,351 109,214
Marketing equipment 1,141,479 986,483
Production equipment 375,324 259,363
------------ ------------
3,538,413 2,888,666
Less accumulated depreciation (1,402,318) (974,887)
------------ ------------
2,136,095 1,913,779
Other assets:
Patents 490,143 434,752
Other assets 33,574 60,785
------------ ------------
523,717 495,537
------------ ------------
Total assets $ 18,358,181 $ 21,625,534
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 298,965 $ 437,039
Employee compensation 566,059 404,513
Other liabilities and accrued expenses 4,706 2,154
Obligations under capital lease, current portion 213,133 152,756
------------ ------------
Total current liabilities 1,082,863 996,462
Obligations under capital lease, less current portion 567,227 472,206
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--8,853,509 and
1997--8,400,554 88,535 84,006
Additional paid-in capital 69,321,371 67,088,370
Deficit accumulated (52,318,116) (46,548,720)
Deferred compensation (138,699) (221,790)
Note receivable from officer (245,000) (245,000)
------------ ------------
Total shareholders' equity 16,708,091 20,156,866
------------ ------------
Total liabilities and shareholders' equity $ 18,358,181 $ 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
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Optical Sensors Incorporated
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 313,820 $ 27,796 $ 479,193 $ 80,566
Cost of goods sold 911,549 487,089 1,468,920 921,622
----------- ----------- ----------- -----------
Gross margin (597,729) (459,293) (989,727) (841,056)
Operating expenses:
Research and development expenses 1,070,980 1,740,267 2,045,495 2,957,178
Selling, general and administrative expenses 1,595,321 1,374,283 3,103,672 2,823,199
Operating loss (3,264,030) (3,573,843) (6,138,894) (6,621,433)
Interest expense (23,873) -- (46,501) --
Interest income 205,478 338,887 433,749 709,364
Other income (expense) (18,007) (12,208) (17,750) (35,982)
----------- ----------- ----------- -----------
Net loss $(3,100,432) $(3,247,164) $(5,769,396) $(5,948,051)
Net loss per common share:
Basic and diluted $ (.35) $ (.39) $ (.66) $ (.71)
Shares used in calculation of net loss per share 8,851,514 8,374,632 8,797,353 8,362,507
</TABLE>
SEE ACCOMPANYING NOTES.
3
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Optical Sensors Incorporated
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,769,396) $ (5,948,051)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 479,054 195,543
Deferred compensation amortization 83,091 162,992
Amortization of warrants in connection with debt and lease
financings 8,572 9,048
Changes in operating assets and liabilities:
Receivables (279,804) 30,416
Inventories 152,754 (856,497)
Prepaid expenses (59,328) (56,593)
Accounts payable and accrued expenses 26,024 302,142
------------ ------------
Net cash used in operating activities (5,359,033) (6,161,000)
INVESTING ACTIVITIES
Purchases of property and equipment (649,747) (783,857)
Other (53,976) 83,617
------------ ------------
Net cash used in investing activities (703,723) (700,240)
FINANCING ACTIVITIES
Net proceeds from issuance of Common Stock 2,228,958 53,338
Proceeds (payments) on long-term debt and lease obligations 155,398 158,678
------------ ------------
Net cash provided by financing activities 2,384,356 212,016
------------ ------------
Increase (decrease) in cash and cash equivalents (3,678,400) (6,649,224)
Cash and cash equivalents at beginning of period 17,101,130 30,134,800
------------ ------------
Cash and cash equivalents at end of period $ 13,422,730 $ 23,485,576
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
4
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OPTICAL SENSORS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 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 six month period ended June 30, 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 June 30, 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.
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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. 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.
In July, 1998 the Company entered into an agreement with the Institute for
Critical Care Medicine ("ICCM") providing the Company with the rights to
commercialize a new application of its sensor technology for the non-invasive
measurement of carbon dioxide in the tissue of ill or injured patients to aid in
the diagnosis and monitoring of shock. The Company expects to begin clinical
evaluations of prototype products before the end of 1998.
RESULTS OF OPERATIONS
Net sales in the second quarter of 1998 increased $286,024 or 1,029% from
$27,796 in the second quarter in 1997 to $313,820 in the second quarter of 1998.
Net sales for the six month period ended June 30, 1998 increased $398,627 or
495% from $80,566 for the six month period ended June 30, 1997. 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 22% of the total sales for the
second quarter of 1998 while OpticalCAM instrumentation accounted for the
balance. This compares to the first quarter of 1998 in which sales of SensiCath
Sensors accounted for approximately 45% of the total sales for the quarter, and
the
6
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placement of OpticalCAM instrumentation accounted for approximately 55% of total
sales. The Company anticipates that, for the remainder of 1998, a greater
percentage of sales will be for OpticalCAM instruments. For the second quarter
of 1998, approximately 13% of Sensor sales and 74% of the OpticalCAM
instrumentation sales were made to IL to further equip their sales force with
demonstration units.
Costs of products sold in the second quarter of 1998 increased $424,460 or 87%
to $911,549 from $487,089 in the second quarter in 1997. Costs of products sold
for the six months ended June 30, 1998 increased $547,298 or 59% to $1,468,920
from $921,622 for the six months ended June 30, 1997. The increase for the
quarter and the six months ended June 30, 1998 is due primarily to the increased
sales levels. The 87% increase in cost of sales in the second quarter compares
favorably to the 1,029% 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. Because instrument sales
are sold at amounts close to cost, gross margins in future periods will be
affected by the mix of sensor and instrumentation sales. The Company expects an
improving relationship between sales and cost of product sold once sales volumes
for sensors begin to increase. 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 second quarter of 1998 declined $669,287
or 38% to $1,070,980 from $1,740,267 in the second quarter of 1997. Research and
development costs for the six months ended June 30, 1998 declined $911,683 or
31% to $2,045,495 from $2,957,178 for the six months ended June 30, 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. In the
second quarter of 1997, research and development expenses included a $500,000
payment to Marquette Medical Systems, Inc. under a previously disclosed
technology purchase agreement. These expenses, which did not recur in 1998,
accounted for the majority of the decrease. 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.
Selling, general and administrative expenses in the second quarter of 1998
increased $221,038 or 16% to $1,595,321 from $1,374,283 in the second quarter of
1997. Selling, general and administrative expenses for the six months ended June
30, 1998 increased $280,473 or 10% to $3,103,672 from $2,823,199 for the six
months ended June 30, 1997. Selling expenses increased moderately in the second
half of 1998 as compared to the second half of 1997 due to a higher level of
selling activity. The majority of selling activities for the quarter continued
to be directed towards the market launch of the enhanced SensiCath Sensor and
distributor infrastructure
7
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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 second quarter of 1998 decreased $157,282 to $181,605
from $338,887 in the second quarter of 1997. Net interest income for the six
month period ended June 30, 1998 decreased $322,116 to $387,248 from $709,364
for the six month period ended 1997. The decrease in net interest income in the
second quarter and the six month period ending June 30, 1998 is due primarily to
declining cash balances of proceeds from the Company's initial public offering,
which was completed in the second 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 $3,100,432 for the quarter ended June 30,
1998, compared to a net loss of $3,247,164 for the quarter ended June 30, 1997.
As of June 30, 1998, the Company had an accumulated deficit of $52,318,116. 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 second 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. 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's Common Stock is quoted on the Nasdaq National Market under the symbol
"OPSI."
The Company's cash and cash equivalents were $13,422,730 and $17,101,130 at June
30, 1998 and December 31, 1997, respectively. The Company incurred cash
expenditures for the six months ended June 30, 1998 of $5,359,033 for operations
and $649,747 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
June 30, 1998 consisted of key components, OpticalCAM monitors and ABG Modules
for which the Company relies on sole suppliers.
As of June 30, 1998, the Company had no material commitments outstanding for
tooling and equipment. The Company has contracts for minimum purchase quantities
of OpticalCAM monitors and ABG Modules and other sole source inventory items.
8
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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.
* 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
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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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 7, 1998, 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 1999 Annual Meeting
of Stockholders:
Director Votes For Votes Withheld
-------- --------- --------------
Sam B. Humphries 6,702,542 102,689
Richard B. Egen 6,687,154 118,077
Richard J. Meelia 6,685,154 120,077
Demetre M. Nicoloff, M.D. 6,705,954 99,277
Gary A. Peterson 6,706,217 99,014
(b) The selection of Ernst & Young, LLP as the Company's independent auditors
for the year ending December 31, 1998 was ratified with 6,752,137 shares
voting in favor, 25,426 shares voting against, 27,668 shares abstaining and
zero broker non-votes.
ITEM 5. OTHER INFORMATION
Stockholder Proposals at 1999 Annual Stockholders' Meeting. Pursuant to recent
amendments to the proxy rules under the Securities Exchange Act of 1934 (17 CFR
ss 240.14a), the Company's stockholders are notified that the deadline for
giving the Company timely notice of any stockholder proposal to be submitted
outside the Rule 14a-8 process for consideration at the Company's 1999 Annual
Meeting of Stockholders in February 16, 1999.
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
10
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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 July 29, 1998 /s/ Sam B. Humphries
----------------------------------------------
Sam B. Humphries
President and Chief Executive Officer
(Principal Executive Officer)
Date July 29, 1998 /s/ Wesley G. Peterson
----------------------------------------------
Wesley G. Peterson
Chief Financial Officer, Vice President of
Finance and Administration and Secretary
(Principal Financial and Accounting Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 334,469
<SECURITIES> 13,088,261
<RECEIVABLES> 306,904
<ALLOWANCES> 0
<INVENTORY> 1,838,916
<CURRENT-ASSETS> 15,698,369
<PP&E> 3,538,413
<DEPRECIATION> 1,402,318
<TOTAL-ASSETS> 18,358,181
<CURRENT-LIABILITIES> 1,082,863
<BONDS> 0
0
0
<COMMON> 88,535
<OTHER-SE> 16,619,556
<TOTAL-LIABILITY-AND-EQUITY> 18,358,181
<SALES> 479,193
<TOTAL-REVENUES> 479,193
<CGS> 1,468,920
<TOTAL-COSTS> 1,468,920
<OTHER-EXPENSES> 5,149,167
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,501
<INCOME-PRETAX> (5,769,396)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,769,396)
<EPS-PRIMARY> (.66)
<EPS-DILUTED> 0
</TABLE>
