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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 quarterly period ended AUGUST 31, 2002
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 0-19095
SOMANETICS CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2394784
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1653 EAST MAPLE ROAD,
TROY, MICHIGAN
48083-4208
(Address of principal executive offices)
(Zip Code)
(248) 689-3050
(Registrant's telephone number, including area code)
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.
Yes X No
-------------------------------- ----------------------------
Number of common shares outstanding at October 1, 2002: 9,077,863
PART I FINANCIAL INFORMATION
SOMANETICS CORPORATION
BALANCE SHEETS
August 31, November 30,
ASSETS 2002 2001
---------------- ----------------
CURRENT ASSETS: (Unaudited) (Audited)
Cash and cash equivalents.......................................... $ 2,707,305 $ 167,873
Accounts receivable................................................ 729,210 1,263,039
Inventory.......................................................... 1,207,892 793,757
Prepaid expenses................................................... 116,541 74,255
--------------- ---------------
Total current assets............................................ 4,760,948 2,298,924
--------------- ---------------
PROPERTY AND EQUIPMENT (at cost):
Machinery and equipment............................................ 1,707,736 1,615,009
Furniture and fixtures............................................. 241,295 183,497
Leasehold improvements............................................. 171,882 165,642
--------------- ---------------
Total........................................................... 2,120,913 1,964,148
Less accumulated depreciation and amortization..................... (1,703,275) (1,631,907)
--------------- ---------------
Net property and equipment...................................... 417,638 332,241
--------------- ---------------
OTHER ASSETS:
Intangible assets, net............................................. 923,684 928,870
Other.............................................................. 15,000 27,078
--------------- ---------------
Total other assets.............................................. 938,684 955,948
--------------- ---------------
TOTAL ASSETS........................................................... $ 6,117,270 $ 3,587,113
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 410,960 $ 482,137
Accrued liabilities................................................ 121,115 92,429
--------------- ---------------
Total current liabilities....................................... 532,075 574,566
--------------- ---------------
COMMITMENTS AND CONTINGENCIES..........................................
SHAREHOLDERS' EQUITY:
Preferred shares; authorized, 1,000,000 shares of $.01 par value;
no shares issued or outstanding................................. - -
Common shares; authorized, 20,000,000 shares of $.01 par value;
issued and outstanding, 9,077,863 shares at August 31, 2002,
and 8,075,055 at November 30, 2001.............................. 90,779 80,751
Additional paid-in capital......................................... 59,069,876 55,386,453
Accumulated deficit................................................ (53,575,460) (52,454,657)
--------------- ---------------
Total shareholders' equity...................................... 5,585,195 3,012,547
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 6,117,270 $ 3,587,113
=============== ===============
See notes to financial statements
2
SOMANETICS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended August 31, Ended August 31,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------ ------------ ------------
NET REVENUES................................ $ 1,432,826 $ 1,110,721 $ 4,684,252 $ 3,809,727
COST OF SALES............................... 409,076 390,615 1,445,082 1,408,453
------------- ------------ ------------ ------------
GROSS MARGIN................................ 1,023,750 720,106 3,239,170 2,401,274
------------- ------------ ------------ ------------
OPERATING EXPENSES:
Research, development and engineering.... 147,902 221,010 431,344 623,114
Selling, general and administrative...... 1,267,691 1,326,302 3,968,698 4,177,980
------------- ------------ ------------ ------------
Total operating expenses............. 1,415,593 1,547,312 4,400,042 4,801,094
------------- ------------ ------------ ------------
OPERATING LOSS.............................. (391,843) (827,206) (1,160,872) (2,399,820)
------------- ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense......................... -- -- (794) (2,701)
Interest income.......................... 14,801 6,731 40,863 21,114
------------- ------------ ------------ ------------
Total other income................... 14,801 6,731 40,069 18,413
------------- ------------ ------------ ------------
NET LOSS.................................... $ (377,042) $ (820,475) $ (1,120,803) $ (2,381,407)
------------- ------------ ------------ ------------
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED........................ $ (0.04) $ (0.10) $ (0.13) $ (0.32)
------------- ------------ ------------ ------------
WEIGHTED AVERAGE SHARES
OUTSTANDING-BASIC AND DILUTED............ 9,077,863 8,075,081 8,909,221 7,450,030
------------- ------------ ------------ ------------
See notes to financial statements
3
SOMANETICS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Month
Periods Ended August 31,
--------------------------------
2002 2001
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (1,120,803) $ (2,381,407)
Adjustments to reconcile net loss to net cash used in
operations:
Depreciation and amortization........................... 166,295 378,954
Compensation expense for non-employee stock options..... 4,352 1,995
Changes in assets and liabilities:
Accounts receivable decrease........................ 533,829 697,784
Inventory (increase)................................ (414,135) (363,967)
Prepaid expenses (increase) decrease................ (42,286) 25,702
Other assets decrease............................... 12,078 --
Accounts payable (decrease)......................... (71,177) (99,663)
Accrued liabilities increase (decrease)............. 28,686 (142,689)
------------ ------------
Net cash (used in) operations..................... (903,161) (1,883,291)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (net)................. (246,508) (157,495)
------------ ------------
Net cash (used in) investing activities........... (246,508) (157,495)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares..................... 3,689,101 2,342,575
------------ ------------
Net cash provided by financing activities......... 3,689,101 2,342,575
------------ ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS................................................. 2,539,432 301,789
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD................................................... 167,873 122,299
------------ ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD................................................... $ 2,707,305 $ 424,088
============ ============
See notes to financial statements
4
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2002
1. ORGANIZATION AND OPERATIONS
We are a Michigan corporation that was formed in January 1982. We
develop, manufacture and market the INVOS(R) Cerebral Oximeter, the only
non-invasive patient monitoring system commercially available in the United
States that continuously measures changes in the blood oxygen level in the
brain. The principal markets for our products are the United States, Europe, and
Japan. The Cerebral Oximeter is based on our proprietary In Vivo Optical
Spectroscopy, or INVOS, technology. INVOS analyzes various characteristics of
human blood and tissue by measuring and analyzing low-intensity visible and near
infrared light transmitted into portions of the body.
We also develop and market the CorRestore(TM) System for use in cardiac
repair and reconstruction, including heart surgeries called surgical ventricular
restoration, or SVR. We entered into a License Agreement as of June 2, 2000 with
the inventors and their Company, CorRestore LLC. The license grants us
exclusive, worldwide, royalty-bearing licenses to specified rights relating to
the CorRestore System and related products and accessories for SVR, subject to
the terms and conditions of the license agreement. In November 2001 we received
clearance from the FDA to market the CorRestore patch in the United States.
2. FINANCIAL STATEMENT PRESENTATION
We prepared our unaudited interim financial statements pursuant to the
Securities and Exchange Commission's rules. Accordingly, they do not include all
of the information and footnotes normally included in our annual financial
statements prepared in accordance with generally accepted accounting principles.
We believe, however, that the disclosures are adequate to make the information
presented not misleading.
The unaudited interim financial statements in this report reflect all
adjustments which are, in our opinion, necessary to a fair statement of the
results for the interim periods presented. All of these adjustments that are
material are of a normal recurring nature. Our operating results for the
nine-month period ended August 31, 2002 do not necessarily indicate the results
that you should expect for the year ending November 30, 2002. You should read
the unaudited interim financial statements together with the financial
statements and related footnotes for the year ended November 30, 2001 included
in our Annual Report on Form 10-K for the fiscal year ended November 30, 2001.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventory is stated at the lower of cost or market on a first-in,
first-out (FIFO) basis. Inventory consists of:
August 31, 2002 November 30, 2001
--------------- -----------------
Finished goods................... $ 443,432 $ 50,314
Work in process.................. 164,239 215,313
Purchased components............. 600,221 528,130
---------- ----------
Total....................... $1,207,892 $ 793,757
========== ==========
5
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2002
Intangible Assets consist of patents and trademarks, and license
acquisition costs. Patents and trademarks are recorded at cost and are being
amortized on the straight-line method over 17 years. The carrying amount and
accumulated amortization of these patents and trademarks is as follows:
August 31, 2002 November 30, 2001
--------------- -----------------
Patents and trademarks........... 111,733 111,733
Less accumulated amortization.. (72,349) (67,163)
------------- -------------
Total....................... $ 39,384 $ 44,570
============= =============
License acquisition costs are related to our acquisition of exclusive,
worldwide, royalty-bearing licenses to specified rights relating to the
CorRestore(TM) System, and related products and accessories. In June 2001, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets." This statement
establishes accounting and reporting standards for goodwill and other intangible
assets. We adopted this statement in the first quarter of fiscal 2002. The
effect of adopting this statement has been to discontinue amortizing our license
acquisition costs related to our acquisition of exclusive, worldwide,
royalty-bearing licenses to specified rights relating to the CorRestore System
and related products and accessories described above because we believe these
licenses have an indefinite life. The carrying amount and accumulated
amortization of these license acquisition costs is as follows:
August 31, 2002 November 30, 2001
--------------- -----------------
License acquisition costs........ $ 1,213,370 $ 1,213,370
Less accumulated amortization.. (329,070) (329,070)
------------ ------------
Total....................... $ 884,300 $ 884,300
============ ============
Amortization expense for the three months ended August 31, 2002 was
approximately $1,700, and for the three months ended August 31, 2001 was
approximately $56,600. Amortization expense for the nine months ended August 31,
2002 was approximately $5,200, and for the nine months ended August 31, 2001 was
approximately $169,700. Net loss for the three months ended August 31, 2001,
excluding the effect of amortizing our license acquisition costs, would have
been approximately $766,000, or $(.09) per common share. Net loss for the nine
months ended August 31, 2001, excluding the effect of amortizing our license
acquisition costs, would have been approximately $2,217,000, or $(.30) per
common share. Amortization expense for each of the next five fiscal years is
expected to be approximately $6,900 per year.
Intangible assets are reviewed periodically for impairment whenever
events or changes in circumstances indicate that the carrying value of the asset
may not be recovered.
Loss Per Common Share - basic and diluted, is computed using the
weighted average number of common shares outstanding during each period. Common
shares issuable under stock options and warrants have not been included in the
computation of the net loss per common share - diluted, because such inclusion
would be antidilutive. As of August 31, 2002 and August 31, 2001, we had
outstanding 5,163,050 and 2,683,328, respectively, of warrants and options to
purchase common shares.
6
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2002
Accounting Pronouncements As described above, effective December 1,
2001, we adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets."
During the third quarter of fiscal 2002, we adopted Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective December 1, 2001. This statement
replaces Statement No. 121 and provisions of APB Opinion No. 30 for the disposal
of segments of a business. The statement creates one accounting model, based on
the framework established in Statement No. 121, to be applied to all long-lived
assets including discontinued operations. The adoption of this statement had no
impact on our financial statements.
Reclassifications - Certain reclassifications have been made to the
financial statements for 2001 to conform to the 2002 presentation.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
August 31, 2002 November 30, 2001
--------------- -----------------
Accrued incentive....................... $ 52,481 $ --
Accrued sales commissions............... 49,648 60,109
Accrued insurance....................... 9,053 24,570
Accrued royalty......................... 5,133 --
Accrued warranty........................ 4,800 7,750
--------- ------------
Total............................... $ 121,115 $ 92,429
========= ============
5. COMMITMENTS AND CONTINGENCIES
We may become subject to products liability claims by patients or
physicians, and may become a defendant in products liability or malpractice
litigation. We have obtained products liability insurance and an umbrella
policy. We might not be able to maintain such insurance or such insurance might
not be sufficient to protect us against products liability.
6. COMMON STOCK
On January 16, 2002, we completed a public offering of 1,000,000
newly-issued common shares at a price of $4.25 per share, for gross proceeds of
$4,250,000. Our net proceeds, after deducting the placement agent's commission
and the expenses of the offering, were approximately $3,680,000. Brean Murray &
Co., Inc. was our exclusive placement agent for the offering and received for
its services (1) $340,000 as a placement agent fee, and (2) warrants to purchase
100,000 common shares at $5.10 per share exercisable during the four-year period
beginning January 11, 2003. A. Brean Murray, one of our directors, and his wife
control Brean Murray & Co., Inc. As a result of this offering, Kingsbridge
Capital Limited's warrant has been adjusted, and Kingsbridge is now entitled to
purchase 205,097 common shares at a purchase price of $4.25 per share.
In February 2002, one of our former employees exercised stock options
to purchase 2,833 newly-issued common shares.
7
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2002
On April 17, 2002, our shareholders approved an amendment to the
Somanetics Corporation 1997 Stock Option Plan to increase the number of common
shares reserved for issuance pursuant to the exercise of options granted under
the 1997 Plan by 450,000 shares, from 1,660,000 to 2,110,000 shares.
Effective May 10, 2002, we granted 10-year options under the 1997 Stock
Option Plan to purchase 388,500 common shares, to 17 of our key employees
(including officers) at an exercise price of $2.95 per share (the closing sale
price of the common shares as of the date of grant). In addition, effective May
10, 2002, we granted to six of our directors, who are not officers or employees,
10-year options under the 1997 Stock Option Plan to purchase an aggregate of
21,000 common shares at an exercise price of $2.95 per share (the closing sale
price of the common shares as of the date of grant).
Effective August 1, 2002, we granted 10-year non-plan options to
purchase 100,000 common shares to a new executive officer at an exercise price
of $2.30 per share (the closing sale price of the common shares as of the date
of grant) as an inducement essential to his entering into an employment
agreement with us.
7. SEGMENT INFORMATION
We operate our business in one reportable segment, the development,
manufacture and marketing of medical devices. Each of our two product lines have
similar characteristics, customers, distribution and marketing strategies, and
are subject to similar regulatory requirements. In addition, in making operating
and strategic decisions, our management evaluates net revenues based on the
worldwide net revenues of each major product line, and profitability on an
enterprise-wide basis due to shared costs. Approximately 97% of our net revenues
in the first nine months of fiscal 2002 were derived from our INVOS Cerebral
Oximeter product line, compared to 100% of our net revenues in the first nine
months of fiscal 2001.
8
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2002
Some of the statements in this report are forward-looking statements.
These forward-looking statements include statements relating to our performance
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations. In addition, we may make forward-looking statements in future
filings with the Securities and Exchange Commission and in written material,
press releases and oral statements issued by us or on our behalf.
Forward-looking statements include statements regarding the intent, belief or
current expectations of us or our officers, including statements preceded by,
followed by or including forward-looking terminology such as "may," "will,"
"should," "believe," "expect," "anticipate," "estimate," "continue," "predict"
or similar expressions, with respect to various matters.
It is important to note that our actual results could differ materially
from those anticipated from the forward-looking statements depending on various
important factors. These important factors include our history of losses and
ability to continue as a going concern, our current dependence on the Cerebral
Oximeter and SomaSensor, the challenges associated with developing new products,
the uncertainty of acceptance of our products by the medical community, the
lengthy sales cycle for our products, competition in our markets, our dependence
on our distributors, and the other factors discussed under the caption "Risk
Factors" and elsewhere in our Registration Statement on Form S-1 (file no.
333-74788) effective January 11, 2002 and elsewhere in this report.
All forward-looking statements in this report are based on information
available to us on the date of this report. We do not undertake to update any
forward-looking statements that may be made by us or on our behalf in this
report or otherwise. In addition, please note that matters set forth under the
caption "Risk Factors" in our registration statement constitute cautionary
statements identifying important factors with respect to the forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward-looking statements.
RESULTS OF OPERATIONS
OVERVIEW
We develop, manufacture and market the INVOS Cerebral Oximeter, the
only non-invasive patient monitoring system commercially available in the United
States that continuously measures changes in the blood oxygen level in the
brain. We also develop and market the CorRestore System for use in cardiac
repair and reconstruction, including heart surgeries called surgical ventricular
restoration, or SVR. In November 2001 we received clearance from the FDA to
market the CorRestore patch in the United States.
During fiscal 2001 and the first quarter of fiscal 2002, our primary
activities consisted of sales and marketing of the Cerebral Oximeter and related
disposable SomaSensor, and developing the CorRestore System. During the second
and third quarters of fiscal 2002, our primary activities consisted of sales and
marketing of the Cerebral Oximeter, the disposable SomaSensor, and the
CorRestore System. We had an accumulated deficit of $53,575,460 through August
31, 2002.
9
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2002
We derive our revenues from sales of Cerebral Oximeters, SomaSensors,
and CorRestore Systems to our distributors and to hospitals in the United States
through our direct sales employees and independent sales representatives.
Payment terms are generally net 30 days for United States sales and net 60 days
or longer for international sales. Our primary expenses, excluding the cost of
our products, are selling, general and administrative and research, development
and engineering.
THREE MONTHS ENDED AUGUST 31, 2002 COMPARED TO THREE MONTHS ENDED AUGUST 31,
2001
Our net revenues increased approximately $322,000, or 29%, from
$1,110,721 in the three-month period ended August 31, 2001 to $1,432,826 in the
three-month period ended August 31, 2002. The increase in net revenues is
primarily attributable to
- an increase in United States sales of approximately $287,000, from
approximately $972,000 in the third quarter of fiscal 2001 to
approximately $1,259,000 in the third quarter of fiscal 2002. This
increase is primarily due to a 39% increase in sales of the
disposable SomaSensor, and approximately $51,000 in CorRestore
System revenues, partially offset by a 35% decrease in sales of
the Cerebral Oximeter primarily as a result of approximately
$30,000 in stocking orders to independent representatives in the
third quarter of fiscal 2001. Based on CorRestore System revenues
to date, we believe that CorRestore System revenues for fiscal
2002 will be significantly less than previously expected,
- a 12% increase in the average selling price of SomaSensors,
primarily due to the 25% increase in the suggested retail price of
the SomaSensor in the United States effective September 1, 2001,
and
- an increase in international sales of approximately $35,000, from
approximately $139,000 in the third quarter of fiscal 2001 to
approximately $174,000 in the third quarter of fiscal 2002. This
increase is primarily due to increased purchases by Tyco
Healthcare.
Sales of our products as a percentage of net revenues were as follows:
PERCENT OF NET REVENUE
THIRD QUARTER OF FISCAL
PRODUCT 2002 2001
------- ------------ ------------
SomaSensors........................ 82% 79%
Model 5100 Cerebral Oximeters...... 8% 8%
Model 4100 Cerebral Oximeters...... 6% 13%
CorRestore Systems................. 4% 0%
------------ ------------
Total.......................... 100% 100%
============ ============
Approximately 12% of our net revenues in the third quarter of
fiscal 2002 were export sales, compared to approximately 13% of our net revenues
in the third quarter of fiscal 2001.
10
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2002
Gross margin as a percentage of net revenues was approximately 71% for
the quarter ended August 31, 2002 and approximately 65% for the quarter ended
August 31, 2001. The increase in gross margin as a percentage of net revenues is
primarily attributable to the increase in the average selling price of
SomaSensors described above, and increased sales of our latest model SomaSensor,
which is less costly to manufacture. We expect our gross margin percentage to
decrease if international revenues increase in the fourth quarter of fiscal
2002.
Our research, development and engineering expenses decreased
approximately $73,000, or 33%, from $221,010 for the three months ended August
31, 2001 to $147,902 for the three months ended August 31, 2002. The decrease is
primarily attributable to approximately $104,000 in decreased costs associated
with the development of the CorRestore System, partially offset by approximately
$38,000 in increased costs associated with the development of our next
generation Cerebral Oximeter.
Selling, general and administrative expenses decreased approximately
$59,000, or 4%, from $1,326,302 for the three months ended August 31, 2001 to
$1,267,691 for the three months ended August 31, 2002. The decrease in selling,
general and administrative expense is primarily attributable to
- a $55,000 decrease in intangible amortization expense related to
license acquisition costs as a result of our adoption of Statement
of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." Upon adopting this statement, we have
discontinued amortizing our license acquisition costs related to
our acquisition of exclusive, worldwide, royalty-bearing licenses
to specified rights relating to the CorRestore System and related
products and accessories because we believe these licenses have an
indefinite life, and
- a $31,000 decrease in salaries, wages, commissions and related
expenses, primarily as a result of reduced sales commissions in
the third quarter of fiscal 2002.
These decreases were partially offset by approximately $62,000 in customer
education expenses for the CorRestore System.
For the three-month period ended August 31, 2002, we realized a 54%
decrease in our net loss over the same period in fiscal 2001. The decrease is
primarily attributable to
- a 29% increase in net revenues,
- a 6% increase in gross margin percentage, and
- a 9% decrease in operating expenses.
We expect our fiscal 2002 net loss will be approximately $1,000,000 to
$1,250,000.
11
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2002
NINE MONTHS ENDED AUGUST 31, 2002 COMPARED TO NINE MONTHS ENDED AUGUST 31, 2001
Our net revenues increased approximately $875,000, or 23%, from
$3,809,727 in the nine-month period ended August 31, 2001 to $4,684,252 in the
nine-month period ended August 31, 2002. The increase in net revenues is
primarily attributable to
- an increase in United States sales of approximately $819,000, from
approximately $2,953,000 in the first three quarters of fiscal
2001 to approximately $3,772,000 in the first three quarters of
fiscal 2002. This increase is primarily attributable to a 50%
increase in sales of the disposable SomaSensor, and approximately
$147,000 in CorRestore System revenues, partially offset by a 42%
decrease in sales of the Cerebral Oximeter primarily as a result
of approximately $210,000 in stocking orders to independent
representatives in fiscal 2001,
- a 12% increase in the average selling price of SomaSensors,
primarily due to the 25% increase in the suggested retail price of
the SomaSensor in the United States effective September 1, 2001,
and
- an increase in international sales of approximately $55,000, from
approximately $857,000 in the first three quarters of fiscal 2001
to approximately $912,000 in the first three quarters of fiscal
2002.
Sales of our products as a percentage of net revenues were as follows:
PERCENT OF NET REVENUE
FIRST THREE QUARTERS OF FISCAL
PRODUCT 2002 2001
------- ---------- ----------
SomaSensors........................ 74% 62%
Model 4100 Cerebral Oximeters...... 12% 26%
Model 5100 Cerebral Oximeters...... 11% 12%
CorRestore Systems................. 3% 0%
---------- ----------
Total.......................... 100% 100%
========== ==========
Approximately 19% of our net revenues in the first three quarters of
fiscal 2002 were export sales, compared to approximately 22% of our net revenues
in the first three quarters of fiscal 2001. One international distributor
accounted for approximately 11% of net revenues for both the nine months ended
August 31, 2002 and the nine months ended August 31, 2001.
Gross margin as a percentage of net revenues was approximately 69% for
the nine months ended August 31, 2002 and approximately 63% for the nine months
ended August 31, 2001. The increase in gross margin as a percentage of net
revenues is primarily attributable to
- the increase in the average selling price of SomaSensors described
above,
- increased sales of our latest model SomaSensor, which is less
costly to manufacture, and
- sales of the CorRestore System which began in fiscal 2002.
12
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2002
Our research, development and engineering expenses decreased
approximately $192,000, or 31%, from $623,114 for the nine months ended August
31, 2001 to $431,344 for the nine months ended August 31, 2002. The decrease is
primarily attributable to approximately $199,000 in decreased costs associated
with the development of the CorRestore System, and a $35,000 decrease in
engineering salaries as a result of one less engineer, partially offset by
approximately $48,000 in increased costs associated with the development of our
next generation Cerebral Oximeter.
Selling, general and administrative expenses decreased approximately
$209,000, or 5%, from $4,177,980 for the nine months ended August 31, 2001 to
$3,968,698 for the nine months ended August 31, 2002. The decrease in selling,
general and administrative expense is primarily attributable to
- a $209,000 decrease in salaries, wages, commissions and related
expenses, primarily as a result of a reduction in the number of
employees, principally sales and marketing (from an average of 33
employees for the nine months ended August 31, 2001 to an average
of 29 employees for the nine months ended August 31, 2002) and
reduced sales commissions,
- a $200,000 termination fee paid in fiscal 2001 related to the
Kingsbridge Capital Limited Private Equity Line,
- a $165,000 decrease in intangible amortization expense as a result
of discontinued amortization of license acquisition costs, as
described above, and
- $45,000 paid in fiscal 2001 in connection with the Loan and
Security Agreement with Crestmark Bank.
These decreases were partially offset by
- a $226,000 increase in commissions paid to our independent sales
representatives,
- $130,000 in customer education expenses for the CorRestore System,
- a $56,000 increase in insurance expense, primarily due to
increased products liability insurance coverage since we began
marketing the CorRestore System, and
- a $54,000 increase in professional service fees, primarily due to
the timing of auditing and tax service expenses.
For the nine-month period ended August 31, 2002, we realized a 53%
decrease in our net loss over the same period in fiscal 2001. The decrease is
primarily attributable to
- a 23% increase in net revenues,
- a 6% increase in gross margin percentage, and
- an 8% decrease in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the nine-month period ended August
31, 2002 was approximately $903,000. Cash was used primarily to
- fund our net loss, primarily selling, general and administrative
expenses and research, development and engineering expenses,
totaling approximately $955,000, before depreciation and
amortization expense,
- increase inventories by approximately $414,000, primarily due to
purchases of CorRestore System inventory,
13
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2002
- decrease accounts payable by approximately $71,000, primarily due
to more timely payments to vendors, and
- increase prepaid expenses by approximately $42,000, primarily due
to advance payments made for trade show reservations.
These uses of cash were partially offset by
- a decrease in accounts receivable of approximately $534,000,
primarily due to lower third quarter 2002 sales than fourth
quarter 2001 sales, and
- an increase in accrued liabilities of approximately $29,000,
primarily due to accrued incentive compensation.
We expect our working capital requirements to increase if sales
increase.
Capital expenditures in the first nine months of fiscal 2002 were
approximately $247,000. These expenditures were primarily
- approximately $88,000 for model 4100 and model 5100 Cerebral
Oximeters being used as demonstration units and rental units,
- approximately $64,000 for a display booth and exhibit to be used
at industry trade shows,
- approximately $50,000 in computer hardware and software, and
- approximately $35,000 in tooling costs associated with the
CorRestore System.
We expect capital expenditures for fiscal 2002 will be approximately
$300,000.
On January 16, 2002, we completed the public offering of 1,000,000
newly-issued common shares at a price of $4.25 per share, for gross proceeds of
$4,250,000. Our net proceeds, after deducting the placement agent's commission
and the expenses of the offering, were approximately $3,680,000. Brean Murray &
Co., Inc. was our exclusive placement agent for the offering and received for
its services (1) $340,000 as a placement agent fee, and (2) warrants to purchase
100,000 common shares at $5.10 per share exercisable during the four-year period
beginning January 11, 2003. A. Brean Murray, one of our directors, and his wife
control Brean Murray & Co., Inc.
We have a Loan and Security Agreement with Crestmark Bank for a working
capital line of credit for up to $750,000, collateralized by all of our assets.
Under the agreement, Crestmark Bank may, but is not obligated to, lend us
amounts we request from time to time, up to $750,000, if no default exists. The
loans are limited by a borrowing base based on qualifying accounts receivable
and lender reserves. The loan is payable on demand, and our collections of our
receivables are directed to Crestmark Bank in payment of any outstanding balance
of the loan. The principal amount outstanding bears interest, payable monthly,
at the prime rate (4.75% as of September 24, 2002) plus 2% plus a 2.4% service
fee. As of September 24, 2002, we had no outstanding principal loan balance and
$570,766 was available for borrowing, at Crestmark's discretion, under the
facility.
As of August 31, 2002, we had working capital of $4,228,873, cash and
cash equivalents of $2,707,305, total current liabilities of $532,075 and
shareholders' equity of $5,585,195.
14
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2002
We believe that the cash and cash equivalents on hand at August 31,
2002, together with the estimated net borrowings available under the Crestmark
Bank Loan and Security Agreement, will be adequate to satisfy our operating and
capital requirements for more than the next twelve months.
The estimated length of time current cash, cash equivalents and
available borrowings will sustain our operations is based on estimates and
assumptions we have made. These estimates and assumptions are subject to change
as a result of actual experience. Actual capital requirements necessary to
market the Cerebral Oximeter and SomaSensor, to develop and market the
CorRestore System, to undertake other product development activities, and for
working capital might be substantially greater than current estimates.
CRITICAL ACCOUNTING POLICIES
We believe our most significant accounting policies relate to the
recording of an intangible asset for license acquisition costs related to our
acquisition of exclusive, worldwide, royalty-bearing licenses to specified
rights relating to the CorRestore System and related products and accessories,
and our accounting treatment of stock options issued to employees.
We have recorded an intangible asset related to our acquisition of
exclusive, worldwide, royalty-bearing licenses to specified rights relating to
the CorRestore System and related products and accessories. License acquisition
costs include our estimate of the fair value of ten-year vested stock options to
purchase common shares granted to one of our directors in connection with
negotiating and assisting us in completing the transaction, and our estimate of
the fair value of the vested portion of five-year warrants to purchase common
shares issued in the transaction.
We estimated the value of the stock options to purchase common shares
and the warrants to purchase common shares using the Black-Scholes valuation
model. The Black-Scholes valuation model requires the following assumptions:
expected life period of the security, expected volatility of our stock price
during the period, risk-free interest rate, and dividend yield. Given the
assumptions inherent in the Black-Scholes valuation model, it is possible to
calculate a different value for our intangible asset by changing one or more of
the valuation model variables or by using a different valuation model. However,
we believe that the model is appropriate, that the judgments and assumptions
that we have made at the time of valuation were also appropriate, and that the
reported results would not be materially different had one or more of the
variables been different or had a different valuation model been used.
In addition, effective December 1, 2001, we adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
The effect of adopting this Statement has been to discontinue amortizing our
license acquisition costs related to our acquisition of exclusive, worldwide,
royalty-bearing licenses to specified rights relating to the CorRestore System
and related products and accessories described above because we believe these
licenses have an indefinite life. For the first three quarters of fiscal 2001,
we incurred amortization expense of approximately $165,000 associated with these
license acquisition costs. Our net loss for the nine months ended August 31,
2001, excluding the effect of amortizing our license acquisition costs, would
have been approximately $2,217,000, or $(.30) per common share.
15
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2002
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," was issued by the Financial
Accounting Standards Board. We have chosen to continue to account for
stock-based compensation of employees using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, compensation
costs for stock options granted to employees are measured as the excess, if any,
of the market price of our stock at the date of the grant over the amount an
employee must pay to acquire the stock. No compensation expense has been charged
against income for stock option grants to employees because our stock option
grants are priced at the market value as of the date of grant. During the first
three quarters of fiscal 2002, we granted 488,500 stock options to our
employees. Had we recognized compensation expense for stock options granted to
employees in fiscal 2002, based on the fair value of the options on the grant
date using the Black-Scholes valuation model, our net loss for the nine months
ended August 31, 2002, on a pro forma basis, would have increased by
approximately $539,000, or $.06 per common share. Had we recognized compensation
expense for our stock options granted to employees in fiscal 2001, based on the
fair value of the options on the grant date using the Black-Scholes valuation
model, our net loss on a pro forma basis would have increased by approximately
$606,000, or $.08 per common share.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
17
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
18
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment No. 1 to License Agreement, dated as of
August 1, 2002, among Somanetics Corporation,
CorRestore LLC, Constantine L. Athanasuleas, M.D.,
and Gerald D. Buckberg, M.D.
10.2 Employment Agreement, dated as of August 1, 2002,
between Somanetics Corporation and Dominic Spadafore.
10.3 Stock Option Agreement, dated as of August 1, 2002,
between Somanetics Corporation and Dominic Spadafore.
99.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by us during the quarter for
which this report is filed.
19
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.
Somanetics Corporation
(Registrant)
Date: October 1, 2002 By: /s/ William M. Iacona
--------------- -------------------------------------
William M. Iacona
Vice President, Finance, Controller, and
Treasurer (Duly Authorized and Principal
Financial Officer)
20
CERTIFICATIONS
I, Bruce J. Barrett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Somanetics Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 1, 2002
/s/ Bruce J. Barrett
----------------------------------
Bruce J. Barrett, President and
Chief Executive Officer
21
CERTIFICATIONS
I, William M. Iacona, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Somanetics Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 1, 2002
/s/ William M. Iacona
----------------------------------
William M. Iacona, Vice
President, Finance, Controller,
and Treasurer
22
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10.1 Amendment No. 1 to License Agreement, dated as of August 1,
2002, among Somanetics Corporation, CorRestore LLC,
Constantine L. Athanasuleas, M.D., and Gerald D. Buckberg,
M.D.
10.2 Employment Agreement, dated as of August 1, 2002, between
Somanetics Corporation and Dominic Spadafore.
10.3 Stock Option Agreement, dated as of August 1, 2002, between
Somanetics Corporation and Dominic Spadafore.
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
23