<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 September 30, 2000
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 November 1, 2000, the Registrant had 8,982,461 shares of Common Stock
outstanding and 2,333,334 shares of Class A Preferred Stock outstanding
<PAGE>
Index
OPTICAL SENSORS INCORPORATED
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 2000 and December 31, 1999
Statements of Operations - Three and Nine month Periods ended
September 30, 2000 and September 30, 1999
Statements of Cash Flows - Nine month Periods ended September 30,
2000 and September 30, 1999
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
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Optical Sensors Incorporated
Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 276,049 $ 1,450,872
Accounts receivable 466 52,516
Inventory 1,284,090 1,305,065
Prepaid expenses and other current assets 22,455 29,418
------------------------------
Total current assets 1,583,060 2,837,871
Property and equipment:
Leased Equipment 1,157,989 1,157,989
Research and development equipment 745,387 742,971
Leasehold improvements 340,802 340,802
Furniture and equipment 181,381 161,048
Marketing equipment 1,004,840 1,004,840
Production equipment 479,931 478,919
------------------------------
3,910,330 3,886,569
Less accumulated depreciation (3,533,718) (2,975,140)
------------------------------
376,612 911,429
Other assets:
Patents 583,001 530,198
Other assets 16,278 16,278
------------------------------
599,279 546,476
------------------------------
Total assets $ 2,558,951 $ 4,295,776
==============================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 45,139 $ 110,595
Employee compensation 130,598 134,372
Other liabilities and accrued expenses 74,525 75,499
Convertible notes payable 1,400,000
Obligations under capital lease, current portion 207,525 516,487
------------------------------
Total current liabilities 1,857,787 836,953
Obligations under capital lease, less current portion 16,132 104,108
Shareholders' equity
Convertible preferred stock, par value $.01 per share:
Authorized shares--5,000,000
Issued and outstanding shares 2000--1,000,000 10,000
Common stock, par value $.01 per share:
Authorized shares--30,000,000
Issued and outstanding shares 2000--8,982,461; and
1999--8,935,304 89,825 89,353
Additional paid-in capital 71,414,859 69,416,688
Accumulated deficit (70,829,652) (66,151,326)
------------------------------
Total shareholders' equity 685,032 3,354,715
------------------------------
Total liabilities and shareholders' equity $ 2,558,951 $ 4,295,776
==============================
</TABLE>
Note: The balance sheet at December 31,1999 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
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Optical Sensors Incorporated
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30 September 30
2000 1999 2000 1999
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 0 $ 28,889 $ 0 $ 90,456
Cost of goods sold 0 298,042 0 1,351,707
--------------------------------------------------------
Gross margin 0 (269,153) 0 (1,261,251)
Operating expenses:
Research and development expenses 686,285 800,843 2,230,259 2,610,786
Selling, general and administrative expenses 263,127 482,567 851,214 2,382,507
--------------------------------------------------------
Operating loss (949,412) (1,552,563) (3,081,473) (6,254,544)
Interest expense (15,734) (20,037) (1,466,173) (65,803)
Interest income 5,366 38,189 31,206 161,536
Other (expense) income 38,859 1,068 (161,886) 950
--------------------------------------------------------
28,491 19,220 (1,596,853) 96,683
--------------------------------------------------------
Net loss $ (920,921) $(1,533,343) $(4,678,326) $(6,157,861)
========================================================
Net loss per common share:
Basic and diluted $ (.10) $ (.17) $ (.52) $ (.70)
========================================================
Shares used in calculation of net loss per share 8,982,461 8,869,177 8,972,488 8,843,889
========================================================
</TABLE>
See accompanying notes.
3
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Optical Sensors Incorporated
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months Ended
September 30, September 30,
2000 1999
----------------------------
<S> <C> <C>
Operating activities
Net loss $(4,678,326) $(6,157,861)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash interest expense 1,400,000
Non-cash compensation expense 68,884
Depreciation and amortization 611,254 875,032
Deferred compensation amortization 55,606
Amortization of warrants in connection with debt and lease financings 3,989
Changes in operating assets and liabilities:
Receivables 52,050 127,698
Inventories 10,196 96,250
Prepaid expenses and other assets (87,732) (21,929)
Accounts payable and accrued expenses (70,204) (460,769)
----------------------------
Net cash used in operating activities (2,693,878) (5,481,986)
Investing activities
Purchases of property and equipment (23,766) (45,214)
----------------------------
Net cash used in investing activities (23,766) (45,214)
Financing activities
Proceeds from convertible notes payable 1,400,000
Net proceeds from issuance of common stock 539,759 46,792
Payments on long-term debt and lease obligations (396,938) (202,981)
----------------------------
Net cash provided by (used in) financing activities 1,542,821 (156,189)
----------------------------
(Decrease) increase in cash and cash equivalents (1,174,823) 52,050
Cash and cash equivalents at beginning of period $ 1,450,872 $ 8,079,871
----------------------------
Cash and cash equivalents at end of period $ 276,049 $ 2,396,482
============================
</TABLE>
See accompanying notes.
4
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Optical Sensors Incorporated
Notes to Financial Statements
(Unaudited)
September 30, 2000
Note A - Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended September
30, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. 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, 1999.
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 September 30, 2000 and 1999,
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.
Note C - Investment Agreement
In March 2000, the Company entered into an Investment Agreement with Circle F
Ventures, LLC and Special Situations Fund III, L.P., pursuant to which the
Company agreed to issue convertible promissory notes in the aggregate principal
amount of up to $3,000,000. These notes are convertible into units originally at
a conversion price equal to $50,000 per unit, each unit consisting of 50,000
shares of common stock and a five-year warrant to purchase 12,500 shares of
common stock at an exercise price of $1 per share. The exercise price of the
warrants issuable to Circle F Ventures is currently $.375 per share in
accordance with the Securities Purchase Agreement with Circle F Ventures LLC
described under Note D below. The conversion price per unit of the notes held by
Circle F Ventures is currently equal to 50,000 multiplied by $.375 the
Securities Purchase Agreement with Circle F Ventures LLC described under Note D
below. . The exercise price of the warrants and the conversion price of the
notes held by Circle F are subject to further adjustment in accordance with such
Securities Purchase Agreement. The Company received advances under these notes
in the aggregate amount of $1,400,000 on March 10, 2000. The Company had the
right to request additional advances up to the aggregate principal amount of
$1,600,000 at any time during the 60 day period beginning on the second day
after both of the
5
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following had occurred: (1) the Company executes a definitive distribution
agreement for the Company's CapnoProbe product with a major medical company, and
(2) the stockholders of the Company have approved the future conversion of any
additional advances to be made under the notes into units at the Company's 2000
Annual Meeting of Stockholders. The Company's stockholders approved the
conversion on May 4, 2000. The Company did not enter into a definitive
distribution agreement prior to June 15, 2000 and rights to request additional
advances expired. Accordingly, the Company is unable to convert the outstanding
indebtedness or request additional advances under the notes without the
investor's consent. The notes are due March 10, 2001.
Under FASB reporting rules the Company is required to recognize as interest
expense the "intrinsic value of a beneficial conversion feature embedded in a
convertible security", i.e. the difference between the market price and the
conversion price. The Company's share price as listed on the Nasdaq Stock Market
on March 10, 2000 was $3.53 and the conversion price in the Investment Agreement
was $1.00. The recognizable interest expense is limited to the proceeds of the
convertible security or $1,400,000. Accordingly the Company recognized
$1,400,000 as interest expense in the first quarter of 2000 with a corresponding
addition to additional paid in capital.
Note D - Securities Purchase Agreement
On August 10, 2000, the Company entered into the Securities Purchase Agreement
pursuant to which the Company agreed to issue, and Circle F agreed to purchase
upon request of the Company, up to 4,333,334 shares of the Company's newly
created class of preferred stock designated as Series A Preferred Stock for an
aggregate purchase price of $1,500,000. The Securities Purchase Agreement
provides for a per share price of shares of the Series A Preferred Stock of $.50
for the first $500,000 of purchase price, $.375 for the next $500,000 of
purchase price, and $.25 for the final $500,000 of purchase price. The Company
sold 1,000,000 shares of the Series A Preferred Stock to Circle F at $.50 per
share for a total of $500,000 on August 11, 2000 and 1,333,334 shares of the
Series A Preferred Stock to Circle F at $.375 per share for a total of $500,000
on October 3, 2000. Circle F has committed, upon request of the Company, to
purchase up to 2,000,000 additional shares of the Series A Preferred Stock for
an aggregate additional purchase price of $500,000. The sale of the shares of
Series A Preferred Stock under the Securities Purchase Agreement causes the
conversion price of the convertible promissory note held by Circle F Ventures
and the exercise price of the warrants issuable to Circle F to be changed to the
lowest per share price at which the Company sells common stock or common stock
equivalents after August 11, 2000. The terms of the Security Purchase Agreement
also provide for all options held by current employees and directors of the
Company to be re-priced at the same average price at which Circle F purchases
Series A Preferred Stock. Such re-pricing resulted in the option plan being
subject to variable accounting rules and $68,884 of compensation expense was
recorded in the third quarter. Additional compensation charges could be recorded
in future periods.
6
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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
focusing 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
reduced blood flow to non-vital organs. Reduced blood flow, or "hypoperfusion,"
can be an early manifestation of clinical shock, even when traditional vital
signs may still appear relatively normal. Diagnosis of inadequate tissue
perfusion 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. 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. Prototype versions of the CapnoProbe system are currently being
evaluated at clinical sites in the United States
In December 1998, the Company filed a 510(k) application for FDA clearance of
the CapnoProbe as a Class II medical device. At the FDA's request and as part of
that submission, the Company provided additional data to the FDA on March 20,
2000. In June of 2000 the FDA provided questions in regard to the additional
data provided by the Company on March 20, 2000. The Company held discussions
with the FDA and responded to the FDA questions on July 20, 2000. In October of
2000 the Company received a communication from the FDA stating that the FDA
recommended that the Company resubmit a new CapnoProbe 510k application,
requiring that the Company use a new reference method. The Company management
concluded that it was in disagreement with the FDA's conclusion and has
initiated an action under the FDA's proscribed appeals process. The Company is
currently unable to estimate a timeline for FDA CapnoProbe 510k approval.
Since January 1999, the Company has been exploring strategic alternatives,
including joint ventures, corporate strategic alliances, sale of the business or
product lines, or other business combinations. In January 2000, the Company
signed a non-binding letter of intent with a major supplier of medical products
and services to negotiate a definitive agreement for the Company's CapnoProbe
product and technology. On May 11, 2000 the Company announced that it had
discontinued negotiations with this company. The Company continues to discuss
with other parties potential transactions involving the CapnoProbe.
7
<PAGE>
Results of Operations
Net sales were zero in the third quarter of 2000 as compared to $28,889 in the
third quarter in 1999. Net sales were zero for the nine month period ended
September 30, 2000 as compared to $90,456 for the nine month period ended
September 30, 1999. The decrease in sales is the result of the Company's
suspension of direct sales and support activities of the SensiCath System in
January 1999. The Company does not expect meaningful sales of the SensiCath
System in the future.
Costs of products sold were zero in the third quarter of 2000 as compared to
$298,042 in the third quarter in 1999. Costs of product sold were zero for the
nine month period ended September 30, 2000 as compared to $1,351,707 for the
nine month period ended September 30, 1999. Personnel, equipment and facility
costs formerly utilized in the production of the SensiCath product have been
applied fully towards development of the CapnoProbe product. Accordingly,
beginning in year 2000 these costs are being reclassified as research and
development activities. The total amount reclassified for the third quarter of
2000 and for the nine month period ended September 30, 2000 was $53,164 and
$573,525 respectively.
Research and development costs for the third quarter of 2000 decreased $114,558
to $686,285 or 14% from $800,843 in the third quarter of 1999. Research and
Development costs for the nine month period ended September 30, 2000 decreased
$380,527 to $2,230,259 from $2,610,786 for the nine month period ended September
30, 1999. 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 second
quarter of 1999. These savings were offset partially by the reclassification to
research and development of former manufacturing resources and related costs
totaling $53,164 in the third quarter of 2000 and $573,525 for the nine month
period ended September 30, 2000. Under the July 1998 license agreement with
ICCM, the Company is obligated to pay $75,000 quarterly in minimum annual
royalties. The minimum royalty payments are being recorded as research and
development expenses as no significant CapnoProbe sales have occurred. Once
significant sales occur, CapnoProbe royalties will be recorded as an offset to
Net Sales. The Company is unable to project when significant sales will occur
until such time as it has completed its appeal process with the FDA and has
secured a distributor relationship for distribution of the CapnoProbe product.
Research and development costs are expected to continue at this level for the
foreseeable future.
Selling, general and administrative expenses in the third quarter of 2000
decreased $219,440 or 45% to $263,127 from $482,567 in the third quarter of
1999. Selling, general and administrative expenses for the nine months ended
September 30, 2000 decreased $1,531,293 or 64% to $851,214 from $2,382,507 for
the nine months ended September 30, 1999. Substantially all sales and marketing
activities related to the SensiCath product line were suspended during the
second quarter of 1999, accounting for the decreases in 2000. The Company
expects selling, general and administrative expenses to remain at the third
quarter levels for the balance of 2000, not including
8
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expenses which might result from its activities in securing a corporate merger,
distribution partner or sale of a portion or all of the Company's assets.
Selling, general and administrative expenses consist primarily of the cost of
ongoing administrative activities and costs of maintaining the Company's public
status. Selling, general and administrative expenses include non-cash
compensation expense of $68,884 recognized in the third quarter of 2000 relating
to variable accounting applicable to the Company's stock option plan.
Interest expense in the third quarter of 2000 decreased $4,303 to $15,734 from
$20,037 in the third quarter of 1999. Interest expense, prior to a $1,400,000
accounting charge described below under "Liquidity and Capital Resources," for
the nine month period ended September 30, 2000 increased $370 to $66,173 from
$65,803 for the nine month period ended September 30, 1999. The increase for the
nine month period ended September 30, 2000 is the result of previously reported
restructuring of certain capitalized leases, offset largely by lower interest
being recognized due to maturing capital leases.
Interest income in the third quarter of 2000 decreased $32,823 to $5,366 from
$38,189 in the third quarter of 1999. Interest income for the nine month period
ended September 30, 1999 decreased $130,330 to $31,206 from $161,536 for the
nine month period ended September 30,1999. The decrease in interest income in
the third quarter of 2000 is due to declining cash balances. The Company expects
interest income to continue to decline in future periods as it uses cash for
operations.
Other (expense) income for the nine months ended September 30, 2000 included a
$200,000 accrual in the first quarter of 2000 for a payment to settle an
arbitration proceeding offset partially by receipt of sales and use tax
recoveries of $37,581 in the third quarter of 2000. Except for the $200,000
charge and the sales tax recovery of $37,581, other expense and income items for
the nine month periods ended September 30, 1999 and ended September 30, 2000
were insignificant.
Since its inception, the Company has experienced significant operating losses.
The Company incurred a net loss of $920,921 for the quarter ended September 30,
2000, compared to a net loss of $1,533,343 for the quarter ended September 30,
1999. As of September 30, 2000, the Company had an accumulated deficit of
$70,829,652. 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".
9
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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 in a private 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.
In March 2000, the Company entered into an Investment Agreement with Circle F
Ventures, LLC and Special Situations Fund III, L.P., pursuant to which the
Company agreed to issue convertible promissory notes in the aggregate principal
amount of up to $3,000,000. These notes are convertible into units originally at
a conversion price equal to $50,000 per unit, each unit consisting of 50,000
shares of Common Stock and a five-year warrant to purchase 12,500 shares of
Common Stock at an exercise price of $1 per share. The exercise price of the
warrants held by Circle F Ventures, as amended by the Securities Purchase
Agreement, is, at any time, equal to the lowest price at which the Company sells
any shares of its capital stock (other than a sale pursuant to the exercise of
an option, right or warrant to subscribe for shares of Common Stock that are
outstanding on the date hereof or options granted under the Company's stock
option plan) after the first date on which Circle F purchases shares of the
Company's Series A Preferred Stock. The conversion price per unit of the notes
held by Circle F Ventures, as amended by the Securities Purchase Agreement is,
at any time, equal to 50,000 multiplied by the lowest price at which the Company
sells any shares of its capital stock (other than a sale pursuant to the
exercise of an option, right or warrant to subscribe for shares of Common Stock
that are outstanding on the date hereof or options granted under the Company's
stock option plan) after the first date on which Circle F purchases shares of
the Company's Series A Preferred Stock.
The Company received advances under these notes in the aggregate amount of
$1,400,000 on March 10, 2000. The Company had the right to request additional
advances up to the aggregate principal amount of $1,600,000 at any time during
the 60 day period beginning on the second day after both of the following had
occurred: (1) the Company executes a definitive distribution agreement for the
Company's CapnoProbe product with a major medical company, and (2) the
stockholders of the Company have approved the future conversion of any
additional advances to be made under the notes into units at the Company's 2000
Annual Meeting of Stockholders. The Company's stockholders approved the
conversion on May 4, 2000. The Company did not enter into a definitive
distribution agreement prior to June 15, 2000 and rights to request additional
advances expired. Accordingly, the Company is unable to convert the outstanding
indebtedness or request additional advances under the notes without the
investor's consent.
Under FASB reporting rules the Company is required to recognize as interest
expense the "Intrinsic value of a beneficial conversion feature embedded in a
convertible security", i.e. the difference between the market price and the
conversion price. The Company's share price as listed
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on the Nasdaq Stock Market on March 10, 2000 was $3.53 and the conversion price
in the Investment Agreement was $1.00. The recognizable interest expense was
limited to the proceeds of the convertible security or $1,400,000. Accordingly
the Company has recognized $1,400,000 as interest expense in the first quarter
of 2000 with a corresponding addition to additional paid in capital.
On August 10, 2000, the Company entered into the Securities Purchase Agreement
pursuant to which the Company agreed to issue, and Circle F agreed to purchase
upon request of the Company, up to 4,333,334 shares of the Company's newly
created class of preferred stock designated as Series A Preferred Stock for an
aggregate purchase price of $1,500,000. The Securities Purchase Agreement
provides for a per share price of shares of the Series A Preferred Stock of $.50
for the first $500,000 of purchase price, $.375 for the next $500,000 of
purchase price, and $.25 for the final $500,000 of purchase price. The Company
sold 1,000,000 shares of the Series A Preferred Stock to Circle F at $.50 per
share for a total of $500,000 on August 11, 2000 and 1,333,334 shares of the
Series A Preferred Stock to Circle F at $.375 per share for a total of $500,000
on October 3, 2000. Circle F has committed, upon request of the Company, to
purchase up to 2,000,000 additional shares of the Series A Preferred Stock for
an aggregate additional purchase price of $500,000. The sale of the shares of
Series A Preferred Stock under the Securities Purchase Agreement causes the
conversion price of the convertible promissory note held by Circle F Ventures
and the exercise price of the warrants issuable to Circle F to be changed to the
lowest per share price at which the Company sells common stock or common stock
equivalents after August 11, 2000. The terms of the Security Purchase Agreement
also provide for all options held by current employees and directors of the
Company to be re-priced at the same average price at which Circle F purchases
Series A Preferred Stock. Such re-pricing resulted in the option plan being
subject to variable accounting rules and $68,884 of compensation expense was
recorded in the third quarter. Additional compensation charges could be recorded
in future periods.
The proceeds from the Investment Agreement and Securities Purchase Agreement are
being used to develop the CapnoProbe product, prepare and submit related FDA
filings and fund operating expenses described above.
The Company's Common Stock is quoted on the OTC Bulletin Board under the symbol
"OPSI."
The Company's cash and cash equivalents were $276,049 and $1,450,872 at
September 30, 2000 and December 31, 1999, respectively. The decrease in the
Company's cash balance is due to the operating losses described above offset
partially by $1,400,000 received upon issuance of convertible promissory and
$500,000 received upon sale of Class A Preferred Stock. The Company incurred
cash expenditures of $2,693,878 for operations and $23,766 for capital
expenditures in the first three quarters of 2000.
11
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The inventory at September 30, 2000 consisted primarily of OpticalCAM monitors
and ABG Modules for which the Company plans to use in conjunction with future
configurations of the CapnoProbe product and other research and commercial
applications.
The Company has contracts to purchase minimum quantities of instrumentation and
other inventory items with an outstanding aggregate commitment of approximately
$1,400,000. Based on discussions with the parties to these obligations, the
Company does not believe that any future costs to the Company under these
agreements are likely. The Company is obligated to pay ICCM $300,000 annually
under the previously described license agreement. As of September 30, 2000, the
Company had no other material commitments outstanding for tooling, equipment or
outside development contracts.
The Company currently has cash balances, including the proceeds received on
October 3, 2000, to fund the Company's operations through November, 2000. If the
Company receives $500,000 from the sale of additional shares of the Series A
Preferred Stock under the Securities Purchase Agreement, it will have sufficient
funds to fund the Company's operations through December, 2000. Thereafter, the
Company will require additional capital to continue operations. If the Company
is unable to obtain additional financing, it will likely be forced to cease
operations.
SensiCath(R) and OpticalCAM(TM) are trademarks of Optical Sensors Incorporated.
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 Need for Additional Financing. The Company believes that its current
cash balances, including the proceeds received on August 10, 2000 and
October 3, 2000 from the sale of shares of its Series A Preferred
Stock under the Securities Purchase Agreement described above, will be
sufficient to fund the Company's operations through November, 2000. If
the Company is able to sell all of the additional shares of its Series
A Preferred Stock that the investor has agreed to purchase under
Securities Purchase Agreement, the Company will receive an additional
$500,000 from such sales, which will be sufficient to fund its
operations through December, 2000. Thereafter, the Company will
require additional capital to continue operations. Accordingly, the
report of the independent auditors on the Company's 1999 financial
statements contain an explanatory paragraph regarding the Company's
ability to continue as a going concern. If the Company is unable to
obtain additional financing when needed, it will likely be forced to
cease operations. Additionally, any additional equity financings may
be dilutive to the Company's existing
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stockholders, and debt financing, if available, may involve
restrictive covenants on the Company's business.
o Development and Commercialization of CapnoProbe. The Company's future
success will depend, in large 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 in 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 is re-evaluating the anticipated timing of
commercialization of the CapnoProbe. 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. Since
January 1999, the Company has been exploring strategic alternatives,
including joint ventures, corporate strategic alliances, sale of the
business or product lines, or other business combinations. In January
2000, the Company signed a non-binding letter of intent with a major
supplier of medical products and services to negotiate a definitive
agreement for the Company's CapnoProbe product. On May 11, 2000 the
Company announced that it had discontinued negotiations with this
company. The Company continues to discuss with other parties potential
transactions involving the CapnoProbe.
o OTC Bulletin Board. On May 12, 2000, the Company's common stock ceased
to be quoted on the Nasdaq National Market and was transferred to the
Over-The-Counter ("OTC") Bulletin Board because that Company failed to
meet the minimum requirements for maintaining listing on the Nasdaq
Market. Because the Company's common stock is traded on the OTC
Bulletin Board, trading is subject to "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. In
October of 2000 the Company received a communication from the FDA
stating that the FDA recommended that the Company resubmit a new
CapnoProbe 510k application, requiring that the Company use a new
reference method. the Company management concluded that it was in
disagreement with the FDA's
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conclusion as has initiated an action under the FDA's proscribed
appeals process. The Company is currently unable to estimate a
timeline for FDA CapnoProbe 510k approval.
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
On August 11, 2000, the Company sold 1,000,000 shares of its Series A Preferred
Stock, par value $.01 per share, to an accredited investor at $.50 per share,
for an aggregate offering price of $500,000. On October 3, 2000, the Company
sold 1,333,333 shares of its Series A Preferred Stock, par value $.01 per share,
to the same investor at $.375 per share, for an aggregate offering price of
$500,000. The sale of such shares were exempt from registration pursuant to Rule
506 promulgated under the Securities Act of 1933, as amended.
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
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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 November 13, 2000
--------------------------------------------
/s/ Paulita M. LaPlante
President and Chief Executive Officer
(Principal Executive Officer)
Date November 13, 2000
--------------------------------------------
/s/ Wesley G. Peterson
Chief Financial Officer, Vice President of
Finance and Administration and Secretary
(Principal Financial and Accounting Officer)
15
