<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, 1999
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 May 3, 1999, the Registrant had 8,841,123 shares of Common Stock
outstanding.
<PAGE>
Index
OPTICAL SENSORS INCORPORATED
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 1999 and December 31, 1998
Statements of Operations - Quarters ended March 31, 1999 and
March 31, 1998
Statements of Cash Flows - Quarters ended March 31, 1999 and
March 31, 1998
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
Balance Sheets
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $5,418,313 $ 8,079,871
Accounts receivable 41,349 162,858
Inventory 1,706,410 1,846,294
Prepaid expenses and other current assets 103,721 99,610
---------- ------------
Total current assets 7,269,793 10,188,633
Property and equipment:
Leased Equipment 1,073,438 1,017,953
Research and development equipment 740,444 740,444
Leasehold improvements 351,079 339,614
Furniture and equipment 158,450 148,621
Marketing equipment 1,004,840 1,004,840
Production equipment 461,077 460,118
---------- ------------
3,789,328 3,711,590
Less accumulated depreciation (2,116,896) (1,866,074)
---------- ------------
1,672,432 1,845,516
Other assets:
Patents 521,829 513,547
Other assets 16,278 16,833
---------- ------------
538,107 530,380
========== ============
Total assets $9,480,332 $12,564,529
========== ============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 208,880 $ 353,563
Employee compensation 465,200 441,917
Other liabilities and accrued expenses 3,912 29,714
Obligations under capital lease, current portion 274,670 260,319
---------- ------------
Total current liabilities 952,662 1,085,513
Obligations under capital lease, less current portion 470,113 494,909
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 1999--8,841,123 and
1998--8,829,401 88,411 88,294
Additional paid-in capital 69,332,400 69,317,467
Accumulated deficit (61,330,660) (58,366,050)
Deferred compensation (32,594) (55,604)
---------- ------------
Total shareholders' equity 8,057,557 10,984,107
========== ============
Total liabilities and shareholders' equity $9,480,332 $12,564,529
========== ============
</TABLE>
Note: The balance sheet at December 31, 1998 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
March 31, March 31,
1999 1998
------------ ------------
<S> <C> <C>
Net Sales $ 59,960 $ 165,373
Cost of goods sold 745,088 557,371
------------ ------------
Gross Margin (685,128) (391,998)
Operating Expenses:
Research and development expenses 968,775 974,515
Selling, general and administrative expenses 1,362,131 1,508,351
------------ ------------
Operating loss (3,016,034) (2,874,864)
Interest expense (23,665) (22,628)
Interest income 74,425 228,271
Other income 664 257
------------ ------------
51,424 205,900
------------ ------------
Net loss $(2,964,610) $(2,668,964)
============ ============
Net loss per common share:
Basic and diluted $ (.34) $ (.31)
============ ============
Shares used in calculation of net loss per share 8,837,932 8,718,090
============ ============
</TABLE>
See accompanying notes.
3
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Optical Sensors Incorporated
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
----------- ----------
<S> <C> <C>
Operating activities
Net loss $(2,964,610) $(2,668,964)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 294,860 210,813
Deferred compensation amortization 23,010 41,547
Amortization of warrants in connection with debt and lease
financings 2,775 4,321
Changes in operating assets and liabilities:
Receivables 121,509 (65,765)
Inventories 110,826 (192,293)
Prepaid expenses and other assets (26,818) (160,562)
Accounts payable and accrued expenses (147,202) 90,769
----------- ----------
Net cash used in operating activities (2,585,650) (2,740,134)
Investing activities
Purchases of property and equipment (22,253) (139,222)
----------- ----------
Net cash used in investing activities (22,523) (139,222)
Financing activities
Net proceeds from issuance of Common Stock 12,275 2,218,534
Proceeds (payments) on long-term debt and lease obligations (65,930) (42,181)
----------- ----------
Net cash provided by (used in) financing activities (53,655) 2,176,353
----------- ----------
(Decrease) in cash and cash equivalents (2,661,558) (703,003)
Cash and cash equivalents at beginning of period 8,079,871 17,101,130
=========== ==========
Cash and cash equivalents at end of period $ 5,418,313 $16,398,127
=========== ==========
</TABLE>
Supplementary Disclosure of Non-Cash Transactions: During the three months ended
March 31,1999 and March 31,1998, the Company acquired property and equipment of
$55,485 and $95,509, respectively, under capital lease obligations.
See accompanying notes.
4
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Optical Sensors Incorporated
Notes to Financial Statements
(Unaudited)
March 31, 1999
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, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the financial
statements and footnotes thereto included in the Optical Sensors Incorporated
Annual Report on Form 10-K for the year ended December 31, 1998. Certain
reclassifications of 1998 amounts have been made to conform with the 1999
presentation.
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 quarters ended March 31, 1999 and 1998, 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
Since October 1998, Optical Sensors Incorporated (the "Company"), has been
focussing its resources on development and commercialization of the CapnoProbe,
which is a handheld device with a carbon dioxide ("CO2") probe that is slipped
under the tongue like a thermometer. It non-invasively measures the tissue CO2
of the mucous membrane in the mouth - a sensitive measure that can indicate
early clinical shock, even when traditional vital signs may still appear
relatively normal, as in compensated shock cases. Generalized inadequacy of
tissue perfusion is the hallmark of clinical shock. Diagnosis of shock may be
difficult in its early stages when the signs and symptoms are masked by the
body's natural compensatory mechanisms that preserve blood supply to vital
organs by reducing blood flow to other organs. If treatment is delayed to the
point that the body's compensatory systems can no longer maintain adequate
circulation and vital tissue perfusion, the consequences can be disastrous for
the patient. To date, there has been no rapid, low-cost, noninvasive method to
objectively determine when a patient has inadequate tissue perfusion and is in
early shock.
In December 1998, the Company filed a 510(k) application for FDA clearance of
the CapnoProbe as a Class II medical device. Prototype versions of the
CapnoProbe system are currently being evaluated at clinical sites in the United
States. The Company has completed set up of one manufacturing pod for manual
assembly of the prototype probes and finished preliminary plans for automated
probe assembly. The Company currently estimates that the CapnoProbe product will
be available for commercialization in the first quarter of 2000.
Prior to January 1999, the Company had also been actively marketing its
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,
carbon dioxide and acid-base in a sample of blood taken from a patient's artery.
Because of the Company's need to conserve resources, in January 1999, the
Company significantly reduced its workforce, suspended direct sales activities
and product cost reduction programs for the SensiCath System and reduced
associated expenses. The Company recognized approximately $300,000 in employee
severance costs for the first quarter of 1999 related to the workforce
reduction. The Company also exercised its right to convert Instrumentation
Laboratory Company ("IL") to a non-exclusive distributor of the SensiCath System
in January 1999, and is currently pursuing termination of the IL distribution
agreement. Since that time, IL has not placed any material orders for the
SensiCath, and the only sales of the SensiCath have been to existing customers
who have continued to order SensiCath sensors. Accordingly, the Company does not
expect meaningful sales of the SensiCath System in the future. The Company
currently has approximately 30 employees.
6
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In January 1999, the Company also announced that it had engaged Volpe Brown
Whelan & Company, LLC, to serve as financial advisor to the Company. The Company
is working with Volpe Brown Whelan to explore strategic alternatives. Currently,
the Company is actively pursuing a sale of the Company as a whole, as well as
the separate sale of its two product lines and its intellectual property
portfolio.
Results of Operations
Net sales in the first quarter of 1999 decreased $105,413 or 64% from $165,373
in the first quarter in 1998 to $59,960 in the first quarter of 1999. The
decrease in sales is the result of OSI's suspension of direct sales and support
activities of the SensiCath System in January 1999. Sales for the quarter
consisted of SensiCath disposable products ordered by existing customers. No new
customer sales were made nor were any OpticalCAM instruments sold during the
quarter. The Company did not receive any material orders from IL in the quarter
and does not expect meaningful sales of the SensiCath System in the future.
Costs of products sold in the first quarter of 1999 increased $187,717 to
$745,088 or 34% from $557,371 in the first quarter in 1998. The increased cost
of products sold was directly related to decreased cost absorption into
inventories, costs for suspension of production activities and layoffs of
personnel. Manufacturing personnel levels were reduced by 62% during the first
quarter of 1999. Remaining fixed overhead costs and costs of personnel that
remain in support of CapnoProbe activities and maintenance of SensiCath
technologies are expected to average approximately $500,000 per quarter for the
foreseeable future.
Research and development costs for the first quarter of 1999 decreased $5,740 to
$968,775 or 1% from $974,515 in the first quarter of 1998. Research and
development efforts during the quarter were directed towards product development
and regulatory activities for the CapnoProbe. Research and development staffing
was reduced by approximately 25% in the first quarter of 1999. However, outside
CapnoProbe development costs are expected to offset personnel savings until the
fourth quarter of 1999. Accordingly, research and development expenses are
expected to remain at approximately the same levels for the next several
quarters as CapnoProbe development efforts are completed. The Company
anticipates that research and development expenses will decline by the fourth
quarter of 1999 by approximately an additional 15%, primarily due to a reduction
in personnel. Under the July 1998 license agreement with ICCM, the Company
expects to pay $300,000 in minimum royalties in 1999. The minimum royalty
payments will be recorded as research and development expenses because no
CapnoProbe sales are anticipated in 1999. The Company is obligated to pay ICCM a
customary royalty equal to a percentage of sales, which varies depending on the
selling price to the customer of the CapnoProbe. However, the Company does not
currently expect to have any commercial sales of the CapnoProbe in 1999.
7
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Selling, general and administrative expenses in the first quarter of 1999
decreased $146,220 or 10% to $1,362,131 from $1,508,351 in the first quarter of
1998. Substantially all sales and marketing activities related to the SensiCath
product line were suspended during the first quarter of 1999. Accordingly, the
Company expects selling, general and administrative expenses to decrease by up
to 50% for the balance of 1999, not including expenses which might result from
its activities in securing a corporate merger, distribution partner or sale of a
portion or all of the Company. Selling, general and administrative expenses
consist primarily of the cost of CapnoProbe marketing clinical activities,
ongoing administrative activities and costs of maintaining the Company's public
status.
Net interest income in the first quarter of 1999 decreased $154,883 to $50,760
from $205,643 in the first quarter of 1998. The decrease in net interest income
in the first quarter of 1999 is due to declining cash balances. 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 $2,964,610 for the quarter ended March 31,
1999, compared to a net loss of $2,668,964 for the quarter ended March 31, 1998.
As of March 31, 1999, the Company had an accumulated deficit of $61,330,660. The
Company anticipates that its operating losses will continue for the foreseeable
future. 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. 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 (which is equal to the closing market price on the
date before signing of the agreement) for a total price of $2,206,015. The
proceeds from the sales of stock have been used to fund costs of producing
products and for the operating expenses described above and capital expenditures
described below. The Company's Common Stock is quoted on the Nasdaq National
Market under the symbol "OPSI."
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
8
<PAGE>
rights. IL and its affiliates are also subject to certain standstill provisions
for a period of five years that prohibit 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 $5,418,313 and $8,079,871 at March
31, 1999 and December 31, 1998, respectively. The decrease in the Company's cash
balance is due to the operating losses described above. The Company incurred
cash expenditures for the three months ended March 31, 1999 of $2,585,650 for
operations and $22,253 for capital expenditures. A substantial portion of the
inventory level at March 31, 1999 consisted of key components, OpticalCAM
monitors and ABG Modules for which the Company relies on sole suppliers.
The Company has contracts to purchase minimum quantities of instrumentation and
other sole source inventory items with an outstanding aggregate commitment of
approximately $900,000 in 1999 and 2000. The Company also has a potential
$500,000 obligation payable to Marquette Medical Systems, Inc. under a
previously disclosed technology purchase agreement. As of March 31, 1998, the
Company had no material commitments outstanding for tooling and equipment.
The Company believes that sufficient liquidity is available to satisfy its
operating needs through 1999. However, the Company anticipates that additional
funding will be necessary to continue operations past 1999. No assurances can be
made that the Company would be able to secure such funding.
SensiCath(R) and OpticalCAM(TM) are trademarks of Optical Sensors Incorporated.
9
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Year 2000 Software Performance Exposure
The Company has determined that the software embedded in the ABG Modules is
Year 2000 compliant and that its major internal information technology systems
are Year 2000 compliant. The Company has ancillary software programs which may
not be Year 2000 compliant. Should any of these programs require replacement,
the Company anticipates that the total cost will not exceed $50,000. The Company
does not believe this amount nor any impact on ongoing information technology
projects will have any material affect on its ongoing operations. The Company
has initiated discussions with its significant suppliers, large customers and
financial institutions to ensure that those parties have appropriate plans to
remediate Year 2000 issues where their systems interface with the Company's
systems or otherwise impact its operations. The Company is assessing the extent
to which its operations are vulnerable should those organizations fail to
properly remediate their computer systems. For those vendors that have not yet
certified year 2000 compliance and which are sole suppliers of critical product
components, the Company plans to have sufficient inventories on hand at the end
of 1999 to support its needs for at least six months. For the Company's
distributor, the Company has the ability to ship product directly to the end
customer and to invoice and collect receivables should it be necessary to do so.
The Company's Year 2000 initiative is being managed by an internal staff. While
the Company believes its planning efforts are adequate to address its Year 2000
concerns, there can be no assurance that the systems of other companies which
may impact the Company's operations will be converted on a timely basis and will
not have a material effect on the Company. The cost of the Year 2000 initiatives
is not expected to be material to the Company's results of operations or
financial position.
Certain Important Factors
In addition to the factors identified above, 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
statements 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:
o Development and Commercialization of CapnoProbe. The Company's future
success will depend, in part, on successful development and
commercialization of the CapnoProbe product. The Company is in the later
stages of developing and testing prototypes and is currently engaged human
clinical trials of the CapnoProbe product. The Company has set up one
manufacturing pod for manual assembly of the prototype probes and finished
preliminary plans for automated probe assembly. The Company currently
projects that the product will be available for commercialization in the
first quarter of 2000. The Company has not yet established commercial
manufacturing for the CapnoProbe. Accordingly, there can be no assurance
that the Company will successfully develop a commercial CapnoProbe product.
o Completion of Corporate Alliance or Business Combination. In January 1999,
the Company announced that it had engaged Volpe Brown Whelan & Company,
LLC, to serve
10
<PAGE>
as financial advisor to the Company. The Company is working with Volpe
Brown Whelan to explore strategic alternatives, including joint ventures,
corporate strategic alliances, sale of the business or product lines, or
other business combinations. The Company's future success will depend on
its ability to complete such a strategic transaction, and there can be no
assurance that the Company will be able to complete such a transaction.
o Nasdaq Listing Requirements. The Company's Common Stock is currently quoted
on the Nasdaq National Market under the symbol "OPSI." In order to be
listed on the Nasdaq National Market, the Company must maintain total net
tangible assets of at least $4.0 million. As of March 31, 1999, the Company
had total net tangible assets of approximately $8.0 million. In addition,
the closing bid price for the Company's Common Stock cannot be less than
$1.00 per share for thirty consecutive days. If, in the future, the Company
had less than $4.0 million in total net tangible assets but more than $2.0
million in total net tangible assets, the Company's Common Stock would be
eligible for quotation on the Nasdaq Small Cap Market, provided that the
$1.00 minimum bid price requirement was met. If the Common Stock were not
eligible for either the Nasdaq National Market or the Nasdaq Small Cap
Market it would likely be quoted in the "over-the-counter" market and
eligible to trade on the OTC bulletin board. If the Company's Common Stock
traded on the OTC bulletin board, trading, if any, would be subject to the
"penny stock" rules under the Securities Exchange Act of 1934 as amended,
and the public trading market for the Company's Common Stock could be
adversely affected.
o Competition. Competition among medical device companies 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.
o 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.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
11
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(a) The following exhibit is included herein:
(27)Financial Data Schedule
(b) Reports on Form 8-K
None
12
<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 May 6, 1999
--------------------------------------------
/s/ Paulita M. LaPlante
President and Chief Executive Officer
(Principal Executive Officer)
Date May 6, 1999
--------------------------------------------
/s/ Wesley G. Peterson
Chief Financial Officer, Vice President of
Finance and Administration and Secretary
(Principal Financial and Accounting Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 179,485
<SECURITIES> 5,238,828
<RECEIVABLES> 41,349
<ALLOWANCES> 0
<INVENTORY> 1,706,410
<CURRENT-ASSETS> 7,269,793
<PP&E> 3,789,328
<DEPRECIATION> 2,116,896
<TOTAL-ASSETS> 9,480,332
<CURRENT-LIABILITIES> 952,662
<BONDS> 0
0
0
<COMMON> 88,411
<OTHER-SE> 7,969,146
<TOTAL-LIABILITY-AND-EQUITY> 9,480,332
<SALES> 59,960
<TOTAL-REVENUES> 59,960
<CGS> 745,088
<TOTAL-COSTS> 745,088
<OTHER-EXPENSES> 2,330,906
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,665
<INCOME-PRETAX> (2,964,610)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,964,610)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> 0
</TABLE>
