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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 MAY 31, 2004
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 (I.R.S. Employer
incorporation or organization) 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 ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ( ) No (X)
Number of common shares outstanding at July 8, 2004: 10,123,017
PART I FINANCIAL INFORMATION
SOMANETICS CORPORATION
BALANCE SHEETS
May 31, November 30,
2004 2003
------------ ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 5,355,094 $ 2,239,192
Accounts receivable ............................................. 1,730,001 2,018,615
Inventory ....................................................... 860,817 1,090,261
Prepaid expenses ................................................ 115,468 123,203
------------ ------------
Total current assets ......................................... 8,061,380 5,471,271
------------ ------------
PROPERTY AND EQUIPMENT (at cost):
Machinery and equipment ......................................... 2,316,096 2,071,758
Furniture and fixtures .......................................... 252,971 248,657
Leasehold improvements .......................................... 171,882 171,882
------------ ------------
Total ........................................................ 2,740,949 2,492,297
Less accumulated depreciation and amortization .................. (1,826,806) (1,782,559)
------------ ------------
Net property and equipment ................................... 914,143 709,738
------------ ------------
OTHER ASSETS:
Intangible assets, net .......................................... 956,382 959,838
Other ........................................................... 15,000 15,000
------------ ------------
Total other assets ........................................... 971,382 974,838
------------ ------------
TOTAL ASSETS ........................................................ $ 9,946,905 $ 7,155,847
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................ $ 468,846 $ 641,232
Accrued liabilities ............................................. 298,798 349,547
------------ ------------
Total current liabilities .................................... 767,644 990,779
------------ ------------
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, 10,010,202 shares at May 31, 2004,
and 9,298,669 shares at November 30, 2003 .................... 100,102 92,987
Additional paid-in capital ...................................... 61,965,407 59,660,804
Accumulated deficit ............................................. (52,886,248) (53,588,723)
------------ ------------
Total shareholders' equity ................................... 9,179,261 6,165,068
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......................... $ 9,946,905 $ 7,155,847
============ ============
See notes to financial statements
2
SOMANETICS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended May 31, Ended May 31,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
NET REVENUES .............................. $ 3,032,976 $ 2,203,442 $ 5,703,241 $ 4,154,388
COST OF SALES ............................. 519,316 561,196 1,039,709 1,011,393
----------- ----------- ----------- -----------
GROSS MARGIN .............................. 2,513,660 1,642,246 4,663,532 3,142,995
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research, development and engineering 94,727 133,607 182,417 242,779
Selling, general and administrative .... 2,016,641 1,644,016 3,791,541 3,238,948
----------- ----------- ----------- -----------
Total operating expenses ........... 2,111,368 1,777,623 3,973,958 3,481,727
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) ................... 402,292 (135,377) 689,574 (338,732)
----------- ----------- ----------- -----------
OTHER INCOME:
Interest income ........................ 7,438 6,004 12,901 13,909
----------- ----------- ----------- -----------
Total other income ..................... 7,438 6,004 12,901 13,909
----------- ----------- ----------- -----------
NET INCOME (LOSS) ......................... $ 409,730 $ (129,373) $ 702,475 $ (324,823)
----------- ----------- ----------- -----------
NET INCOME (LOSS) PER COMMON
SHARE - BASIC ............................. $ 0.04 $ (0.01) $ 0.07 $ (0.04)
----------- ----------- ----------- -----------
NET INCOME (LOSS) PER COMMON
SHARE - DILUTED ........................... $ 0.04 $ (0.01) $ 0.06 $ (0.04)
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC .................... 9,577,454 9,080,363 9,443,765 9,079,140
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED .................. 11,588,715 9,080,363 11,264,434 9,079,140
=========== =========== =========== ===========
See notes to financial statements
3
SOMANETICS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Month
Periods Ended
--------------------------
May 31, May 31,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ 702,475 $ (324,823)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operations:
Depreciation and amortization ................................ 129,135 119,206
Compensation expense for non-employee stock options .......... - 2,492
Changes in assets and liabilities:
Accounts receivable (increase) decrease .................. 288,614 (26,476)
Inventory (increase) decrease ............................ 229,444 (131,072)
Prepaid expenses (increase) decrease ..................... 7,735 (30,566)
Accounts payable increase (decrease) ..................... (172,386) 100,318
Accrued liabilities (decrease) ........................... (50,749) (11,259)
----------- -----------
Net cash provided by (used in) operations .............. 1,134,268 (302,180)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (net) ...................... (330,085) (187,718)
----------- -----------
Net cash (used in) investing activities ................ (330,085) (187,718)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares due to exercise
of stock options and warrants .................................. 2,311,719 3,600
----------- -----------
Net cash provided by financing activities .............. 2,311,719 3,600
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ...................................................... 3,115,902 (486,298)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ........................................................ 2,239,192 2,381,808
----------- -----------
CASH AND CASH EQUIVALENTS, END
OF PERIOD ........................................................ $ 5,355,094 $ 1,895,510
=========== ===========
Supplemental Disclosure of Non cash investing activities:
Issuance of warrants in connection with
license acquisition (Note 2) ................................... $ 44,793
See notes to financial statements
4
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 2004
1. 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 notes 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
six-month period ended May 31, 2004 do not necessarily indicate the results that
you should expect for the year ending November 30, 2004. You should read the
unaudited interim financial statements together with the financial statements
and related notes for the year ended November 30, 2003 included in our Annual
Report on Form 10-K for the fiscal year ended November 30, 2003.
2. 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:
May 31, 2004 November 30, 2003
------------ -----------------
Finished goods ....... $472,985 $ 354,024
Work in process ...... 57,179 173,193
Purchased components.. 330,653 563,044
-------- ----------
Total ........... $860,817 $1,090,261
======== ==========
Property and Equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets, which range from two to five years. We offer to our United States
customers a no-cap sales program whereby we ship the Cerebral Oximeter to the
customer at no charge, in exchange for the customer agreeing to purchase
SomaSensors. The Cerebral Oximeters that are shipped to our customers are
classified as property and equipment and are depreciated over five years. During
the first two quarters of fiscal 2004, we capitalized approximately $265,000 in
costs for Cerebral Oximeters being used as demonstration and no-cap units, and
during the first two quarters of fiscal 2003 we capitalized approximately
$148,000 in costs for Cerebral Oximeters being used as demonstration and no-cap
units. Property and equipment are reviewed for impairment whenever events or
changes in circumstances indicate that the net book value of the asset may not
be recovered.
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:
May 31, 2004 November 30, 2003
------------ -----------------
Patents and trademarks ............... 111,733 111,733
Less accumulated amortization ...... (84,444) (80,988)
--------- ---------
Total ........................... $ 27,289 $ 30,745
========= =========
5
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 2004
Amortization expense for the six months ended May 31, 2004 and May 31,
2003 was approximately $3,500. Amortization expense for each of the next four
fiscal years is expected to be approximately $6,900 per year, and approximately
$3,100 in fiscal 2008.
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. The total carrying
amount of these license acquisition costs is as follows:
May 31, 2004 November 30, 2003
------------ -----------------
License acquisition costs........ $ 929,093 $ 929,093
License acquisition costs are intangible assets with indefinite lives that
are reviewed annually for impairment and whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recovered.
Stock Options 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. However, we have also adopted the
enhanced disclosure provisions as defined by Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." During the first two
quarters of fiscal 2004, we granted 40,000 stock options to our employees and
directors, and we issued 259,961 newly-issued common shares as a result of stock
option exercises. During the first two quarters of fiscal 2003, we granted
39,000 stock options to our employees and directors, and we issued 2,500
newly-issued common shares as a result of stock option exercises.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MAY 31, 2004 MAY 31, 2003 MAY 31, 2004 MAY 31, 2003
------------ ------------ ------------ ------------
Net income (loss) ..................... $ 409,730 $(129,373) $ 702,475 $(324,823)
Add: Stock-based employee
compensation included in actual
net income (loss) ................... $ 0 $ 521 $ 0 $ 2,492
Deduct: Total stock-based
employee compensation expense,
had fair value method been applied.. $(191,183) $(146,435) $(369,392) $(291,796)
--------- --------- --------- ---------
Pro-forma net income (loss) ........... $ 218,547 $(275,287) $ 333,083 $(614,127)
========= ========= ========= =========
Net income (loss) per common
share - diluted ..................... $ .04 $ (.01) $ .06 $ (.04)
Pro forma net income (loss) per
common share - diluted .............. $ .02 $ (.03) $ .03 $ (.07)
6
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 2004
Net Income (Loss) Per Common Share - basic and diluted is computed using
the weighted average number of common shares outstanding during each period.
Weighted average shares outstanding - diluted, for the three and six months
ended May 31, 2004, includes the potential dilution that could occur for common
stock issuable under stock options or warrants. For the three and six months
ended May 31, 2004, the difference between weighted average shares - diluted and
weighted average shares - basic is calculated as follows:
Three Months Six Months
------------ ----------
Weighted average shares - basic 9,557,454 9,443,765
Add: effect of dilutive common
shares and warrant 2,011,261 1,820,669
---------- ----------
Weighted average shares - diluted 11,588,715 11,264,434
Common shares issuable under stock options and warrants have not been included
in the computation of net loss per common share - diluted for the three and six
months ended May 31, 2003, because such inclusion would be antidilutive. For the
three and six months ended May 31, 2004, there were approximately 1,500 stock
options outstanding that were excluded from the computation of net income per
common share - diluted, as the exercise price of these options exceeded the
average price per share of our common shares, and there were approximately
1,633,000 warrants outstanding that were excluded from the computation, as the
warrants are contingent on achieving specified future sales targets. As of May
31, 2004 and May 31, 2003, we had outstanding warrants and options to purchase
common shares of 4,590,794 and 5,186,833, respectively.
3. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
May 31, 2004 November 30, 2003
------------ -----------------
Incentive compensation ........................... $ 95,108 $166,360
Independent sales representative termination ..... 80,000 -
Sales commissions ................................ 68,786 123,356
Insurance ........................................ 36,050 29,836
Royalty .......................................... 11,254 13,645
Warranty ......................................... 7,600 5,850
Professional fees ................................ - 10,500
-------- --------
Total ........................................ $298,798 $349,547
-------- --------
4. 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.
7
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 2004
5. COMMON STOCK
Effective December 12, 2003, we granted 10-year options under the 1997
Stock Option Plan to purchase 10,000 common shares to one of our employees at an
exercise price of $6.35 per share (the closing sale price of the common shares
as of the date of grant). Effective January 28, 2004, we granted 10-year options
under the 1997 Stock Option Plan to purchase 10,000 common shares to one of our
employees at an exercise price of $9.25 per share (the closing sale price of the
common shares as of the date of grant). Effective March 30, 2004, we granted
10-year options under the 1997 Stock Option Plan to purchase 15,500 common
shares to four of our directors and one of our employees at an exercise price of
$12.00 per share (the closing sale price of the common shares as of the date of
grant). Effective March 31, 2004, we granted 10-year options under the 1997
Stock Option Plan to purchase 3,000 common shares to one of our employees at an
exercise price of $12.93 per share (the closing sale price of the common shares
as of the date of grant). Effective April 12, 2004, we granted 10-year options
under the 1997 Stock Option Plan to purchase 1,500 common shares to one of our
employees at an exercise price of $13.19 per share (the closing sale price of
the common shares as of the date of grant).
During the six months ended May 31, 2004, we issued 259,961 common shares
as a result of stock option exercises, for proceeds of approximately $1,172,000.
In March 2004, Kingsbridge Capital Limited purchased 40,000 common shares
under its warrants by a cashless exercise. As a result of this cashless
exercise, we issued 24,097 common shares to Kingsbridge, retaining 15,903 common
shares in payment of the exercise price, and Kingsbridge's warrants entitled it
to purchase 65,097 more common shares. In May 2004, Kingsbridge Capital Limited
purchased the remaining 65,097 common shares under its warrants by a cashless
exercise. As a result of this cashless exercise, we issued 47,475 common shares
to Kingsbridge, retaining 17,622 common shares in payment of the exercise price.
Kingsbridge now has no warrants remaining to purchase common shares.
In April 2004, CorRestore LLC exercised its warrant to purchase 380,000 of
our newly-issued common shares, at $3.00 per share, for proceeds of $1,140,000.
6. 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 94% of our net revenues
in the first two quarters of fiscal 2004 were derived from our INVOS Cerebral
Oximeter product line, compared to 89% of our net revenues in the first two
quarters of fiscal 2003.
8
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 2004
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.
Our actual results might differ materially from those projected in the
forward-looking statements depending on various important factors. These
important factors include economic conditions in general and in the healthcare
market, the demand for and market for our products in domestic and international
markets, our history of losses, our current dependence on the Cerebral Oximeter
and SomaSensor, the challenges associated with developing new products and
obtaining regulatory approvals if necessary, research and development
activities, the uncertainty of acceptance of our products by the medical
community, the lengthy sales cycle for our products, third party reimbursement,
competition in our markets, including the potential introduction of competitive
products by others, our dependence on our distributors, physician training,
enforceability and the costs of enforcement of our patents, potential
infringements of our patents 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 of which
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.
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.
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.
During fiscal 2003 and the first two quarters of fiscal 2004, our primary
activities consisted of sales and marketing of the Cerebral Oximeter, the
related disposable SomaSensor, and the CorRestore System.
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 representative firms.
We offer to our customers in the United States a no-cap sales program whereby we
ship the Cerebral Oximeter to the customer at no charge, in exchange for the
customer agreeing to purchase SomaSensors. 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.
9
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 2004
As described in more detail below, we achieved net income for the quarter
and six months ended May 31, 2004 of approximately $410,000 and $702,000, or
$0.04 and $0.06 per diluted common share, respectively. Our net income for the
six months was primarily a result of our 37% increase in net revenues, and a six
percentage point increase in gross margin percentage. Our increase in net
revenues was primarily a result of increased unit sales and increased average
selling prices for our disposable SomaSensor in the United States, and our
increase in gross margin percentage was also primarily attributable to the
increase in average selling prices for our disposable SomaSensors. In May 2004,
we reduced the cost of our disposable SomaSensor by approximately 40% as a
result of changes in our manufacturing process. We expect this to have a
positive impact on gross margins in the second half of 2004. Our operating
expenses increased approximately 19% for the six months primarily due to
increased commissions paid to our independent sales representative firms and
direct sales employees as a result of increased sales. In the second half of
2004, we expect to hire additional direct sales personnel and also to increase
expenses associated with the sales and marketing of our products. We had
approximately $1,134,000 of cash provided by operations in the first two
quarters of fiscal 2004, and a net increase in cash and cash equivalents of
approximately $3,116,000, primarily as a result of the exercise of stock options
and warrants, in addition to our net income. For 2004, we expect to realize a
net increase in cash and cash equivalents of approximately $4,000,000 to
$4,500,000. We project an increase in net revenues for fiscal 2004 of 30% to
40%. We also project net income per basic common share of $0.15 to $0.18, and
net income per diluted common share of $0.13 to $0.15 for fiscal 2004.
THREE MONTHS ENDED MAY 31, 2004 COMPARED TO THREE MONTHS ENDED MAY 31, 2003
Our net revenues increased $829,534, or 38%, from $2,203,442 in the
three-month period ended May 31, 2003 to $3,032,976 in the three-month period
ended May 31, 2004. The increase in net revenues is attributable to
- an increase in United States sales of approximately $694,000,
or 38%, from approximately $1,812,000 in the second quarter of
fiscal 2003 to approximately $2,506,000 in the second quarter
of fiscal 2004. This increase is primarily due to an increase
in sales of the disposable SomaSensor of approximately
$816,000, or 58%, partially offset by a decrease in sales of
the CorRestore System of approximately $120,000, or 52%, and
- an increase in international sales of approximately $135,000,
or 35%, from approximately $391,000 in the second quarter of
fiscal 2003 to approximately $526,000 in the second quarter of
fiscal 2004, primarily attributable to increased purchases of
the Cerebral Oximeter by Edwards Lifesciences Ltd. in Japan.
During the quarter, we had a 23% increase in the average selling price of
SomaSensors in the United States. The increase in the average selling price is
attributable to
- the addition of new customers at our higher suggested retail
prices, which were effective September 1, 2003,
- increased sales of our small adult SomaSensor that was
launched in the third quarter of fiscal 2003,
- increased sales of our pediatric SomaSensor, and
- the upgrade of certain customers to our most recent model
Cerebral Oximeter in exchange for the customer agreeing to pay
a higher price for the disposable SomaSensor.
10
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 2004
In addition, we had a 29% increase in SomaSensor unit sales in the United
States to 27,684 units. We expect the average selling price of SomaSensors in
the United States will increase by approximately 20% in 2004 compared to 2003,
as a result of the factors described above.
We placed 44 Cerebral Oximeters in the United States and 29
internationally in the second quarter of 2004, and our installed base of
Cerebral Oximeters in the United States is 644 as of May 31, 2004.
Approximately 17% of our net revenues in the second quarter of fiscal 2004
were from export sales, compared to approximately 18% of our net revenues in the
second quarter of fiscal 2003. We expect international net revenues to represent
approximately 20% of total net revenues in 2004.
One international distributor accounted for approximately 10% of our net
revenues for the three months ended May 31, 2004, and one international
distributor accounted for approximately 15% of our net revenues for the three
months ended May 31, 2003.
Sales of our products as a percentage of net revenues were as follows:
PERCENT OF NET REVENUE
SECOND QUARTER OF FISCAL
PRODUCT 2004 2003
------- ---- ----
SomaSensors ............ 81% 72%
Cerebral Oximeters ..... 15% 17%
CorRestore Systems ..... 4% 11%
--- ---
Total .............. 100% 100%
=== ===
For 2004, we expect sales of SomaSensors to account for 75% to 80% of net
revenues, sales of Cerebral Oximeters 15% to 20%, and sales of CorRestore
Systems 5% to 10%.
Gross margin as a percentage of net revenues was approximately 83% for the
quarter ended May 31, 2004 and approximately 75% for the quarter ended May 31,
2003. The increase in gross margin as a percentage of net revenues is
attributable to
- a change in the sales mix with increased sales of the
disposable SomaSensor, which has a higher gross margin than
the Cerebral Oximeter or CorRestore System,
- the increase in the average selling price of SomaSensors
described above, and
- a reduction in the cost of our SomaSensor by approximately
40%, in May 2004, as a result of changes in our manufacturing
process.
We expect gross margins to continue to increase in the second half of fiscal
2004, primarily as a result of the reduced manufacturing cost of the disposable
SomaSensor. The expected increase in gross margins will be partially offset by
our expected increase in international sales, which have lower gross margins
than sales in the United States.
11
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 2004
Our research, development and engineering expenses decreased $38,880, or
29%, from $133,607 for the three months ended May 31, 2003 to $94,727 for the
three months ended May 31, 2004. The decrease is attributable to approximately
$41,000 in decreased development costs associated with the CorRestore System.
Selling, general and administrative expenses increased $372,625, or 23%,
from $1,644,016 for the three months ended May 31, 2003 to $2,016,641 for the
three months ended May 31, 2004. The increase in selling, general and
administrative expense is attributable to
- a $163,000 increase in salaries, wages, commissions and
related expenses, primarily as a result of increased sales
commissions paid to our sales employees and increased payroll
taxes associated with the exercise of stock options, and
- a $130,000 increase in commissions paid to our independent
sales representative firms as a result of increased sales,
- approximately $96,000 in costs associated with the termination
of some of our independent sales representative firms in the
second quarter of fiscal 2004, and
- a $40,000 increase in clinical research expense, primarily as
a result of Dr. Murkin's prospective, randomized study in
cardiac surgery.
These increases were partially offset by a $55,000 decrease in customer
education expenses for the CorRestore System. We expect our selling, general and
administrative expenses to increase primarily as a result of sales personnel
added near the end of the second quarter, hiring additional direct sales
personnel in the second half of 2004 and increased commissions payable to our
sales employees and to independent sales representative firms.
For the three-month period ended May 31, 2004, we realized net income of
$.04 per share, compared to a loss per share of $.01 in the same period in
fiscal 2003. This is primarily attributable to
- a 38% increase in net revenues, and
- an 8% increase in gross margin percentage.
For the three months ended May 31, 2004, we experienced a 19% increase in our
operating expenses.
SIX MONTHS ENDED MAY 31, 2004 COMPARED TO SIX MONTHS ENDED MAY 31, 2003
Our net revenues increased $1,548,853, or 37%, from $4,154,388 in the
six-month period ended May 31, 2003 to $5,703,241 in the six-month period ended
May 31, 2004. The increase in net revenues is attributable to
- an increase in United States sales of approximately
$1,326,000, or 38%, from approximately $3,464,000 in the first
two quarters of fiscal 2003 to approximately $4,790,000 in the
first two quarters of fiscal 2004. This increase is due to an
increase in sales of the disposable SomaSensor of
approximately $1,337,000, or 49%, and an increase in Cerebral
Oximeter revenues of approximately $164,000, or 60%, due to
purchases by pediatric hospitals. This increase was partially
offset by a decrease in sales of the CorRestore System of
approximately $175,000, or 39%, and
- an increase in international sales of approximately $223,000,
or 32%, from approximately $690,000 in the first two quarters
of fiscal 2003 to approximately $913,000 in the first two
quarters of fiscal 2004, primarily attributable to increased
purchases of the Cerebral Oximeter by Edwards Lifesciences
Ltd. in Japan.
12
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 2004
During the six months ended May 31, 2004, we had a 23% increase in the
average selling price of SomaSensors in the United States, as described above,
and a 21% increase in SomaSensor unit sales in the United States to 51,904
units. We placed 74 Cerebral Oximeters in the United States and 46
internationally in the first six months of 2004.
Approximately 16% of our net revenues in the first two quarters of fiscal
2004 were from export sales, compared to approximately 17% of our net revenues
in the first two quarters of fiscal 2003. One international distributor
accounted for approximately 11% of net revenues for the six months ended May 31,
2003.
Sales of our products as a percentage of net revenues were as follows:
PERCENT OF NET REVENUE
FIRST TWO QUARTERS OF FISCAL
PRODUCT 2004 2003
------- ---- ----
SomaSensors........................ 79% 74%
Cerebral Oximeters................. 15% 15%
CorRestore Systems................. 6% 11%
--- ---
Total.......................... 100% 100%
=== ===
Gross margin as a percentage of net revenues was approximately 82% for the
six months ended May 31, 2004 and approximately 76% for the six months ended May
31, 2003. 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 a change in the sales mix with increased sales
of the disposable SomaSensor, which have higher gross margins than the Cerebral
Oximeter or CorRestore System.
Our research, development and engineering expenses decreased $60,362, or
25%, from $242,779 for the six months ended May 31, 2003 to $182,417 for the six
months ended May 31, 2004. The decrease is primarily attributable to
approximately $47,000 in decreased costs associated with the development of the
CorRestore System.
Selling, general and administrative expenses increased $552,593, or 17%,
from $3,238,948 for the six months ended May 31, 2003 to $3,791,541 for the six
months ended May 31, 2004. The increase in selling, general and administrative
expense is attributable to
- a $287,000 increase in commissions paid to our independent sales
representatives as a result of increased sales,
- a $209,000 increase in salaries, wages, commissions and related
expenses, primarily as a result of increased sales commissions paid
to our sales employees and increased payroll taxes associated with
the exercise of stock options,
- approximately $96,000 in costs associated with the termination of
some of our independent sales representative firms in the second
quarter of fiscal 2004, and
- a $57,000 increase in clinical research expense, primarily as a
result of Dr. Murkin's prospective, randomized study in cardiac
surgery.
These increases were partially offset by a $152,000 decrease in customer
education expenses for the CorRestore System.
13
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 2004
For the six-month period ended May 31, 2004, we realized net income of
$.06 per diluted share, compared to a net loss of $.04 per share in fiscal 2003.
This is primarily attributable to
- a 37% increase in net revenues, and
- a 6% increase in gross margin percentage.
For the six months ended May 31, 2004, we experienced a 14% increase in our
operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations during the six-month period ended May 31,
2004 was approximately $1,134,000. Cash was provided by
- our net income of approximately $702,000, after depreciation
and amortization expense of approximately $129,000,
- a decrease in accounts receivable of approximately $289,000,
primarily because of the timing of sales in the second quarter
of 2004 as compared to the fourth quarter of 2003, and more
timely collections in the second quarter of fiscal 2004,
partially offset by higher sales in the second quarter of 2004
than the fourth quarter of 2003, and
- a decrease in inventories of approximately $229,000, primarily
as a result of second quarter 2004 sales, and our new lower
cost SomaSensor which we began shipping in May 2004.
Cash provided by operations was partially offset by
- a decrease in accounts payable of approximately $172,000,
primarily as a result of lower inventory levels and more
timely payments made to vendors in the first two quarters of
fiscal 2004, partially offset by increased sales commissions
payable to our independent representative firms, and
- a decrease in accrued liabilities of approximately $51,000,
primarily as a result of payments made in fiscal 2004 for 2003
accrued bonuses and sales commissions, partially offset by an
accrual for costs associated with the termination of some of
our independent sales representative firms in the second
quarter of fiscal 2004.
Capital expenditures in the first six months of fiscal 2004 were
approximately $330,000. These expenditures were primarily for Cerebral Oximeter
demonstration units and no-cap sales units.
During the first two quarters of fiscal 2004, we issued 259,961 common
shares as a result of stock option exercises, for proceeds of approximately
$1,172,000.
14
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 2004
In March 2004, Kingsbridge Capital Limited purchased 40,000 common shares
under its warrants by a cashless exercise. As a result of this cashless
exercise, we issued 24,097 common shares to Kingsbridge, retaining 15,903 common
shares in payment of the exercise price, and Kingsbridge's warrants entitled it
to purchase 65,097 more common shares. In May 2004, Kingsbridge Capital Limited
purchased the remaining 65,097 common shares under the warrants by a cashless
exercise. As a result of this cashless exercise, we issued 47,475 common shares
to Kingsbridge, retaining 17,622 common shares in payment of the exercise price.
Kingsbridge now has no warrants remaining to purchase common shares.
In April 2004, CorRestore LLC exercised its warrant to purchase 380,000 of
our newly-issued common shares, at $3.00 per share, for proceeds of $1,140,000.
We expect our working capital requirements to increase as sales increase.
We expect capital expenditures in 2004 will be approximately $600,000, primarily
for new demonstration and no-cap equipment.
As of May 31, 2004, we had working capital of $7,293,736, cash and cash
equivalents of $5,355,094, total current liabilities of $767,644 and
shareholder's equity of $9,179,261. We had an accumulated deficit of $52,886,248
through May 31, 2004.
We believe that the cash and cash equivalents on hand at May 31, 2004 will
be adequate to satisfy our operating and capital requirements for more than the
next twelve months. For 2004, we expect to realize positive cash flow from
operations, as well as a net increase in cash and cash equivalents, with
year-end cash on hand expected to be in the range of $6.0 million to $6.5
million.
The estimated length of time current cash and cash equivalents 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 funding requirements necessary to market the Cerebral
Oximeter, the disposable SomaSensor, and 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,
our accounting treatment of stock options issued to employees, and our revenue
recognition associated with our no-cap sales program.
In fiscal years 2000, 2001 and 2003, we 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 included 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.
15
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 2004
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 would have been 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 made at the time of valuation were also appropriate, and that the
reported results would not have been materially different had one or more of the
variables been different or had a different valuation model been used.
We have adopted 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. 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. Therefore, no amortization expense has been
recorded related to these license acquisition costs since December 1, 2001, the
date we adopted Statement No. 142. It is possible to determine a different life
for these licenses, and if they had a definite life, we would amortize the
intangible asset over the remaining useful life. However, we believe it is
appropriate to use an indefinite life for these licenses.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," was issued by the Financial
Accounting Standards Board. In addition, in December 2002, Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure," was issued by the Financial Accounting Standards
Board, and amends Statement No. 123. 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
two quarters of fiscal 2004, we granted 40,000 stock options to our employees,
and during the first two quarters of fiscal 2003, we granted 39,000 stock
options to our employees.
Had we recognized compensation expense for stock options granted to
employees in the first two quarters of fiscal 2004, using the fair value method
of accounting based on the fair value of the options on the grant date using the
Black-Scholes valuation model, our net income, on a pro forma basis, would have
decreased by approximately $369,000, or $.03 per common share. Had we recognized
compensation expense for our stock options granted to employees in the first two
quarters of fiscal 2003, using the fair value method of accounting 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
$289,000, or $.03 per common share.
We offer to our customers in the United States a no-cap sales program
whereby we ship the Cerebral Oximeter to the customer at no charge, in exchange
for the customer agreeing to purchase SomaSensors. We recognize revenue when we
receive purchase orders from the customer for the disposable SomaSensors and
ship the disposable SomaSensors to the customer. We do not recognize any revenue
upon the initial shipment of the Cerebral Oximeter to the customer at no charge.
We believe this is consistent with our stated revenue recognition policy, which
is compliant with Staff Accounting Bulleting No. 104 and Emerging Issues Task
Force No. 00-21, "Revenue Arrangements with Multiple Deliverables."
16
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 2004
CONTRACTUAL OBLIGATIONS
The following information is provided as of May 31, 2004 with respect to
our known contractual obligations specified in the following table, aggregated
by type of contractual obligation:
Payments due by period
---------------------------------------------------
Less More
than 1 1-3 3-5 than 5
Contractual Obligations Total year years years years
- -------------------------------- -------- -------- -------- -------- -------
Long-term debt obligations ..... $ 0 $ 0 $ 0 $ 0 $ 0
Capital lease obligations ...... $ 0 $ 0 $ 0 $ 0 $ 0
Operating lease obligations .... $811,000 $150,600 $281,900 $291,600 $86,900
Purchase obligations ........... $734,500 $734,500 $ 0 $ 0 $ 0
Other long-term liabilities .... $ 0 $ 0 $ 0 $ 0 $ 0
Purchase obligations consist primarily of purchase orders executed for inventory
components. During the second quarter of fiscal 2004, we entered into an
amendment to our lease agreement, extending the term of the lease through
December 31, 2009 and lowering the monthly base rent beginning August 1, 2004.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
18
ITEM 4. CONTROLS AND PROCEDURES
Our management has evaluated, with the participation of our principal
executive and principal financial officers, the effectiveness of our disclosure
controls and procedures as of May 31, 2004, and, based on their evaluation, our
principal executive and principal financial officers have concluded that these
controls and procedures are effective as of May 31, 2004. There was no change in
our internal control over financial reporting identified in connection with such
evaluation that occurred during our second fiscal quarter ended May 31, 2004
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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 or submit under the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
19
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
On March 19, 2004, Kingsbridge Capital Limited purchased 40,000 of our
newly-issued common shares, par value $0.01 per share, under its warrants by a
cashless exercise, at an exercise price of $4.25 a share. As a result of this
cashless exercise, we issued 24,097 common shares to Kingsbridge, retaining
15,903 common shares, valued at approximately $10.69 a share, in payment of the
exercise price, and Kingsbridge's warrants entitled it to purchase 65,097 more
common shares. On May 26, 2004, Kingsbridge Capital Limited purchased the
remaining 65,097 of our newly-issued common shares under the warrants by a
cashless exercise. As a result of this cashless exercise, we issued 47,475
common shares to Kingsbridge, retaining 17,622 common shares, valued at
approximately $15.70 a share, in payment of the exercise price. Kingsbridge now
has no warrants remaining to purchase common shares. The common shares were not
registered, but were issued in reliance upon the exemptions from registration
contained in Sections 4(2) and 4(6) of the Securities Act of 1933.
On April 27, 2004, CorRestore LLC exercised its warrant to purchase
380,000 of our newly-issued common shares, at $3.00 per share, for proceeds of
$1,140,000. The common shares were not registered, but were issued in reliance
upon the exemptions from registration contained in Sections 4(2) and 4(6) of the
Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Shareholders was held on March 31, 2004. At the
Annual Meeting, Bruce J. Barrett was elected as a director and the terms of
office of Dr. James I. Ausman, Daniel S. Follis, Robert R. Henry and Joe B.
Wolfe as directors continued after the meeting. 8,174,497 votes were cast for
Mr. Barrett's election and 29,847 votes were withheld from Mr. Barrett's
election. There were no abstentions or broker non-votes in connection with the
election of the directors at the Annual Meeting.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Sixth Amendment, between Somanetics Corporation and First
Industrial Mortgage Partnership, L.P., dated April 21, 2004.
31.1 Certifications of Chief Executive Officer Pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certifications of Chief Financial Officer Pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer and 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
We filed a Current Report on Form 8-K on April 27, 2004, reporting
under Item 5 that on April 27, 2004, CorRestore LLC exercised its
warrant to purchase 380,000 of our newly-issued common shares, at
$3.00 per share, for proceeds of $1,140,000. No financial statements
were filed.
In addition, we furnished a Current Report on Form 8-K on March 16,
2004, reporting under Item 12 that on March 16, 2004, we announced
our financial results for our first quarter ended February 29, 2004
and certain other information. No financial statements were filed,
although we furnished the financial information included in the
press release furnished with the Form 8-K.
21
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: July 8, 2004 By:/s/ William M. Iacona
-----------------------------------
William M. Iacona
Vice President, Finance, Controller, and
Treasurer (Duly Authorized and Principal
Financial Officer)
22
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10.1 Sixth Amendment, between Somanetics Corporation and First Industrial Mortgage
Partnership, L.P., dated April 21, 2004.
31.1 Certifications of Chief Executive Officer Pursuant to Rule 13a-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer and 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