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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, 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 Identification No.)
incorporation or organization)
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 October 7, 2004: 10,134,782
PART I FINANCIAL INFORMATION
SOMANETICS CORPORATION
BALANCE SHEETS
August 31, November 30,
2004 2003
------------ ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................ $ 6,341,338 $ 2,239,192
Accounts receivable .............................................. 1,750,359 2,018,615
Inventory ........................................................ 776,816 1,090,261
Prepaid expenses ................................................. 105,583 123,203
------------ ------------
Total current assets ........................................ 8,974,096 5,471,271
------------ ------------
PROPERTY AND EQUIPMENT (at cost):
Machinery and equipment .......................................... 2,457,129 2,071,758
Furniture and fixtures ........................................... 252,971 248,657
Leasehold improvements ........................................... 171,882 171,882
------------ ------------
Total ....................................................... 2,881,982 2,492,297
Less accumulated depreciation and amortization ................... (1,868,431) (1,782,559)
------------ ------------
Net property and equipment .................................. 1,013,551 709,738
------------ ------------
OTHER ASSETS:
Intangible assets, net ........................................... 954,654 959,838
Other ............................................................ 15,000 15,000
------------ ------------
Total other assets .......................................... 969,654 974,838
------------ ------------
TOTAL ASSETS ........................................................... $ 10,957,301 $ 7,155,847
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................. $ 515,486 $ 641,232
Accrued liabilities .............................................. 368,528 349,547
------------ ------------
Total current liabilities ................................... 884,014 990,779
------------ ------------
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, 10,134,782 shares at August 31, 2004,
and 9,298,669 shares at November 30, 2003 ................... 101,348 92,987
Additional paid-in capital ....................................... 62,318,465 59,660,804
Accumulated deficit .............................................. (52,346,526) (53,588,723)
------------ ------------
Total shareholders' equity .................................. 10,073,287 6,165,068
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................. $ 10,957,301 $ 7,155,847
============ ============
See notes to financial statements
2
SOMANETICS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended August 31, Ended August 31,
------------------------ -------------------------
2004 2003 2004 2003
----------- ---------- ----------- -----------
NET REVENUES .................................. $ 3,076,373 $2,303,880 $ 8,779,614 $ 6,458,268
COST OF SALES ................................. 443,837 519,545 1,483,546 1,530,937
----------- ---------- ----------- -----------
GROSS MARGIN .................................. 2,632,536 1,784,335 7,296,068 4,927,331
----------- ---------- ----------- -----------
OPERATING EXPENSES:
Research, development and engineering ... 87,001 85,435 269,418 328,214
Selling, general and administrative ..... 2,019,128 1,628,322 5,810,669 4,867,270
----------- ---------- ----------- -----------
Total operating expenses ......... 2,106,129 1,713,757 6,080,087 5,195,484
----------- ---------- ----------- -----------
OPERATING INCOME (LOSS) ....................... 526,407 70,578 1,215,981 (268,153)
----------- ---------- ----------- -----------
OTHER INCOME:
Interest income ......................... 13,315 4,876 26,216 18,785
----------- ---------- ----------- -----------
Total other income ...................... 13,315 4,876 26,216 18,785
----------- ---------- ----------- -----------
NET INCOME (LOSS) ............................. $ 539,722 $ 75,454 $ 1,242,197 $ (249,368)
----------- ---------- ----------- -----------
NET INCOME (LOSS) PER COMMON
SHARE - BASIC ................................. $ 0.05 $ 0.01 $ 0.13 $ (0.03)
----------- ---------- ----------- -----------
NET INCOME (LOSS) PER COMMON
SHARE - DILUTED ............................... $ 0.05 $ 0.01 $ 0.11 $ (0.03)
----------- ---------- ----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC ..................... 10,098,237 9,101,397 9,662,716 9,086,613
=========== ========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED ................... 11,913,495 9,700,387 11,353,955 9,086,613
=========== ========== =========== ===========
See notes to financial statements
3
SOMANETICS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Month
Periods Ended
--------------------------
August 31, August 31,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ 1,242,197 $ (249,368)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operations:
Depreciation and amortization ................................. 199,317 176,619
Compensation expense for non-employee stock options ........... -- 7,224
Changes in assets and liabilities:
Accounts receivable (increase) decrease .................... 268,256 (172,333)
Inventory (increase) decrease .............................. 313,445 (168,116)
Prepaid expenses (increase) decrease ....................... 17,620 (8,090)
Accounts payable increase (decrease) ....................... (125,746) 82,219
Accrued liabilities increase (decrease) .................... 18,981 (4,126)
----------- -----------
Net cash provided by (used in) operations ................ 1,934,070 (335,971)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (net) ...................... (497,946) (307,620)
----------- -----------
Net cash (used in) investing activities .................. (497,946) (307,620)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares due to exercise
of stock options and warrants ................................... 2,666,022 167,724
----------- -----------
Net cash provided by financing activities ................ 2,666,022 167,724
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ....................................................... 4,102,146 (475,867)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ......................................................... 2,239,192 2,381,808
----------- -----------
CASH AND CASH EQUIVALENTS, END
OF PERIOD ......................................................... $ 6,341,338 $ 1,905,941
=========== ===========
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)
AUGUST 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
nine-month period ended August 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:
August 31, 2004 November 30, 2003
--------------- -----------------
Finished goods............. $ 403,191 $ 354,024
Work in process............ 26,680 173,193
Purchased components....... 346,945 563,044
---------- -----------
Total................... $ 776,816 $ 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 three quarters of fiscal 2004, we capitalized approximately $405,000
in costs for Cerebral Oximeters being used as demonstration and no-cap units,
and during the first three quarters of fiscal 2003 we capitalized approximately
$257,000 in costs for such 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 are as follows:
August 31, 2004 November 30, 2003
--------------- -----------------
Patents and trademarks............... 111,733 111,733
Less accumulated amortization...... (86,172) (80,988)
--------- ---------
Total........................ $ 25,561 $ 30,745
========= =========
5
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2004
Amortization expense for the nine months ended August 31, 2004 and August
31, 2003 was approximately $5,200. 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:
August 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 three
quarters of fiscal 2004 and fiscal 2003, we granted 50,500 and 471,000 stock
options, respectively, to our employees and directors, and we issued 318,276 and
74,171 newly-issued common shares, respectively, as a result of stock option
exercises.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
---------- --------- ----------- ---------
2004 2003 2004 2003
---------- --------- ----------- ---------
Net income (loss) .......................... $ 539,722 $ 75,454 $ 1,242,197 $(249,368)
Add: Stock-based employee compensation
included in actual net income (loss)...... $ 0 $ 4,732 $ 0 $ 7,224
Deduct: Total stock-based employee
compensation expense, had fair value
method been applied ...................... $(197,198) $(243,487) $ (566,590) $(535,284)
--------- --------- ----------- ---------
Pro-forma net income (loss) ................ $ 342,524 $(163,301) $ 675,607 $(777,428)
========= ========= =========== =========
Net income (loss) per common share -
diluted .................................. $ .05 $ .01 $ .11 $ (.03)
Pro forma net income (loss) per common
share - diluted .......................... $ .03 $ (.02) $ .06 $ (.09)
6
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 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 nine months
ended August 31, 2004, includes the potential dilution that could occur for
common stock issuable under stock options or warrants. For the three and nine
months ended August 31, 2004, the difference between weighted average shares -
diluted and weighted average shares - basic is calculated as follows:
Three Months Nine Months
------------ -----------
Weighted average shares - basic 10,098,237 9,662,716
Add: effect of dilutive common
shares and warrants 1,815,258 1,691,239
---------- ----------
Weighted average shares - diluted 11,913,495 11,353,955
For the three months ended August 31, 2003, the difference between weighted
average shares - diluted and weighted average shares - basic is calculated as
follows:
Three Months
------------
Weighted average shares - basic 9,101,397
Add: effect of dilutive common
shares and warrants 598,990
---------
Weighted average shares - diluted 9,700,387
Common shares issuable under stock options and warrants have not been included
in the computation of net loss per common share - diluted for the nine months
ended August 31, 2003, because such inclusion would be antidilutive. For the
three and nine months ended August 31, 2004, there were approximately 22,000
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. In addition, there were
approximately 1,866,000 warrants outstanding that were excluded from the
computation, as the warrants are contingent on achieving specified future sales
targets. As of August 31, 2004 and August 31, 2003, we had outstanding warrants
and options to purchase common shares of 4,439,915 and 5,509,502, respectively.
3. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
August 31, 2004 November 30, 2003
--------------- -----------------
Incentive compensation .......................... $178,373 $166,360
Sales commissions ............................... 87,370 123,356
Independent sales representative termination .... 80,000 --
Royalty ......................................... 13,635 13,645
Warranty ........................................ 9,150 5,850
Insurance ....................................... -- 29,836
Professional fees ............................... -- 10,500
-------- --------
Total .......................................... $368,528 $349,547
======== ========
7
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2004
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.
5. COMMON STOCK
During fiscal 2004, we have granted the following 10-year stock options to
our employees, with the exercise price being equal to the closing sale price of
our common shares on the date of grant:
NUMBER OF EXERCISE NUMBER OF
DATE OPTIONS PRICE EMPLOYEES
---- --------- -------- ---------
12/12/2003 10,000 $ 6.35 1
1/28/2004 10,000 $ 9.25 1
3/30/2004 1,500 $12.00 1
3/31/2004 3,000 $12.93 1
4/12/2004 1,500 $13.19 1
8/9/2004 7,500 $10.70 3
8/16/2004 3,000 $11.05 1
In addition, on March 30, 2004, we granted 10-year options under the 1997
Stock Option Plan to purchase 14,000 common shares to four of our directors at
an exercise price of $12.00 per share (the closing sale price of the common
shares as of the date of grant).
During the nine months ended August 31, 2004, we issued 318,276 common
shares as a result of stock option exercises, for proceeds of approximately
$1,526,000.
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.
In June 2004, Brean Murray & Co., Inc. purchased 100,000 common shares
under its warrants by a cashless exercise. As a result of this cashless
exercise, we issued 66,265 common shares to Brean Murray & Co., Inc., retaining
33,735 common shares in payment of the exercise price. Brean Murray & Co., Inc.
now has no warrants remaining to purchase common shares.
8
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2004
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 95% of our net revenues
in the first three quarters of fiscal 2004 were derived from our INVOS Cerebral
Oximeter product line, compared to 91% of our net revenues in the first three
quarters of fiscal 2003.
9
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 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 three 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.
10
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2004
As described in more detail below, we achieved net income for the quarter
and nine months ended August 31, 2004 of approximately $540,000 and $1,242,000,
or $0.05 and $0.11 per diluted common share, respectively. Our net income for
the nine months was primarily a result of our 36% increase in net revenues, and
a seven 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. Our
increase in gross margin percentage was also primarily attributable to the
increase in average selling prices for our disposable SomaSensors, as well as
the reduction in the cost of our disposable SomaSensor by approximately 40%,
effective May 2004, as a result of changes in our manufacturing process. Our
operating expenses increased approximately 17% for the nine month period
primarily due to increased commissions paid to our independent sales
representative firms and direct sales employees as a result of increased sales,
and increased salaries as a result of our hiring additional direct sales
personnel in the first nine months of 2004. In the fourth quarter of 2004, we
expect to increase expenses associated with the sales and marketing of our
products. We had approximately $1,934,000 of cash provided by operations in the
first three quarters of fiscal 2004, and a net increase in cash and cash
equivalents of approximately $4,102,000, 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
$4,300,000 to $4,800,000. We project an increase in net revenues for fiscal 2004
of 31% to 37%, with fourth quarter 2004 revenues expected to be in the range of
$3,500,000 to $4,000,000. We also project net income per diluted common share of
$0.15 to $0.17 for fiscal 2004.
THREE MONTHS ENDED AUGUST 31, 2004 COMPARED TO THREE MONTHS ENDED AUGUST 31,
2003
Our net revenues increased $772,493, or 34%, from $2,303,880 in the
three-month period ended August 31, 2003 to $3,076,373 in the three-month period
ended August 31, 2004. The increase in net revenues is attributable to an
increase in United States sales of approximately $792,000, or 44%, from
approximately $1,808,000 in the third quarter of fiscal 2003 to approximately
$2,600,000 in the third quarter of fiscal 2004. This increase is primarily due
to an increase in sales of the disposable SomaSensor of approximately $748,000,
or 47%. In addition, we realized an increase in sales of the Cerebral Oximeter
of approximately $35,000, or 32%, and an increase in sales of the CorRestore
System of approximately $9,000, or 8%.
These increases were partially offset by a decrease in international sales of
approximately $19,000, or 4%, from approximately $495,000 in the third quarter
of fiscal 2003 to approximately $476,000 in the third quarter of fiscal 2004,
primarily due to the timing of purchases by Tyco Healthcare in Europe.
During the quarter, we achieved a 24% 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.
11
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2004
In addition, we had a 19% increase in SomaSensor unit sales in the United
States to 28,700 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 52 Cerebral Oximeters in the United States and 20
internationally in the third quarter of 2004, and our installed base of Cerebral
Oximeters in the United States is approximately 700 as of August 31, 2004.
Approximately 15% of our net revenues in the third quarter of fiscal 2004
were from export sales, compared to approximately 21% of our net revenues in the
third quarter of fiscal 2003. We expect international net revenues to represent
approximately 15% to 20% of total net revenues in 2004.
One international distributor accounted for approximately 10% of our net
revenues for the three months ended August 31, 2004, and one international
distributor accounted for approximately 17% of our net revenues for the three
months ended August 31, 2003.
Sales of our products as a percentage of net revenues were as follows:
PERCENT OF NET REVENUE
THIRD QUARTER OF FISCAL
PRODUCT 2004 2003
- ------- ---- ----
SomaSensors........................ 85% 73%
Cerebral Oximeters................. 11% 22%
CorRestore Systems................. 4% 5%
--- ---
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%.
Gross margin as a percentage of net revenues was approximately 86% for the
quarter ended August 31, 2004 and approximately 77% for the quarter ended August
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,
- a reduction in the cost of our SomaSensor by approximately
40%, in May 2004, as a result of changes in our manufacturing
process, and
- a change in the sales mix with increased sales in the United
States, which have higher gross margins than our international
sales to distributors.
We expect gross margins to remain constant in the fourth quarter of fiscal 2004,
subject to a potential offset by an increase in international sales, which have
lower gross margins than sales in the United States.
12
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2004
Our research, development and engineering expenses increased $1,566, from
$85,435 for the three months ended August 31, 2003 to $87,001 for the three
months ended August 31, 2004.
Selling, general and administrative expenses increased $390,806, or 24%,
from $1,628,322 for the three months ended August 31, 2003 to $2,019,128 for the
three months ended August 31, 2004. The increase in selling, general and
administrative expense is attributable to
- a $227,000 increase in salaries, wages, commissions and
related expenses, primarily as a result of increased
headcount, principally sales and marketing (from an average of
29 employees for the three months ended August 31, 2003 to an
average of 34 employees for the three months ended August 31,
2004), and increased sales commissions paid to our sales
employees,
- an $84,000 increase in commissions paid to our independent
sales representative firms as a result of increased sales, and
- a $72,000 increase in accrued incentive compensation expense
as a result of our fiscal 2004 year-to-date financial
performance, in accordance with our 2004 Incentive
Compensation Plan.
We expect our selling, general and administrative expenses to increase in the
fourth quarter primarily as a result of sales personnel added near the end of
the third quarter, increased commissions payable to our sales employees and to
independent sales representative firms, and increased sales and marketing
expenses.
For the three-month period ended August 31, 2004, we realized net income
of $.05 per diluted share, compared to net income of $.01 in the same period in
fiscal 2003. This is primarily attributable to
- a 34% increase in net revenues, and
- a 9% increase in gross margin percentage.
For the three months ended August 31, 2004, we experienced a 23% increase in our
operating expenses.
NINE MONTHS ENDED AUGUST 31, 2004 COMPARED TO NINE MONTHS ENDED AUGUST 31, 2003
Our net revenues increased $2,321,346, or 36%, from $6,458,268 in the
nine-month period ended August 31, 2003 to $8,779,614 in the nine-month period
ended August 31, 2004. The increase in net revenues is attributable to
- an increase in United States sales of approximately $2,118,000, or
40%, from approximately $5,272,000 in the first three quarters of
fiscal 2003 to approximately $7,390,000 in the first three quarters
of fiscal 2004. This increase is due to an increase in sales of the
disposable SomaSensor of approximately $2,085,000, or 48%, and an
increase in Cerebral Oximeter revenues of approximately $199,000, or
52%, due to purchases by pediatric hospitals. This increase was
partially offset by a decrease in sales of the CorRestore System of
approximately $166,000, or 29%, and
- an increase in international sales of approximately $203,000, or
17%, from approximately $1,186,000 in the first three quarters of
fiscal 2003 to approximately $1,389,000 in the first three quarters
of fiscal 2004, primarily attributable to increased purchases of the
Cerebral Oximeter by Edwards Lifesciences Ltd. in Japan.
13
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2004
During the nine months ended August 31, 2004, we had a 23% increase in the
average selling price of SomaSensors in the United States, as described above,
and a 20% increase in SomaSensor unit sales in the United States to 80,604
units. We placed 126 Cerebral Oximeters in the United States and 66
internationally in the first nine months of 2004.
Approximately 16% of our net revenues in the first three quarters of
fiscal 2004 were from export sales, compared to approximately 18% of our net
revenues in the first three quarters of fiscal 2003. One international
distributor accounted for approximately 13% of net revenues for the nine months
ended August 31, 2003.
Sales of our products as a percentage of net revenues were as follows:
PERCENT OF NET REVENUE
FIRST THREE QUARTERS OF FISCAL
PRODUCT 2004 2003
- ------- ---- ----
SomaSensors........................ 81% 74%
Cerebral Oximeters................. 14% 17%
CorRestore Systems................. 5% 9%
--- ---
Total.......................... 100% 100%
=== ===
Gross margin as a percentage of net revenues was approximately 83% for the
nine months ended August 31, 2004 and approximately 76% for the nine months
ended August 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 $58,796, or
18%, from $328,214 for the nine months ended August 31, 2003 to $269,418 for the
nine months ended August 31, 2004. The decrease is primarily attributable to
approximately $47,000 in decreased costs associated with the development of the
CorRestore System, and approximately $25,000 in decreased costs associated with
the Cerebral Oximeter.
Selling, general and administrative expenses increased $943,399, or 19%,
from $4,867,270 for the nine months ended August 31, 2003 to $5,810,669 for the
nine months ended August 31, 2004. The increase in selling, general and
administrative expense is attributable to
- a $436,000 increase in salaries, wages, commissions and related
expenses, primarily as a result of increased headcount, principally
sales and marketing (from an average of 29 employees for the nine
months ended August 31, 2003 to an average of 32 employees for the
nine months ended August 31, 2004), and increased sales commissions
paid to our sales employees,
- a $371,000 increase in commissions paid to our independent sales
representatives as a result of increased sales,
- $96,000 in costs associated with the termination of some of our
independent sales representative firms in the second quarter of
fiscal 2004,
- a $72,000 increase in accrued incentive compensation expense as a
result of our fiscal 2004 year-to-date financial performance, in
accordance with our 2004 Incentive Compensation Plan,
14
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2004
- a $40,000 increase in clinical research expense, primarily as a
result of Dr. Murkin's prospective, randomized study in cardiac
surgery, and
- a $40,000 increase in insurance expense, primarily as a result of a
products liability insurance premium refund received in fiscal 2003.
These increases were partially offset by a $176,000 decrease in customer
education expenses for the CorRestore System.
For the nine-month period ended August 31, 2004, we realized net income of
$.11 per diluted share, compared to a net loss of $.03 per share in fiscal 2003.
This is primarily attributable to
- a 36% increase in net revenues, and
- a 7% increase in gross margin percentage.
For the nine months ended August 31, 2004, we experienced a 17% increase in our
operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations during the nine-month period ended August
31, 2004 was approximately $1,934,000. Cash was provided by
- our net income of approximately $1,242,000, and
depreciation and amortization expense of approximately
$199,000,
- a decrease in inventories of approximately $313,000,
primarily as a result of third quarter 2004 sales and
no-cap monitor placements, and our new lower cost
SomaSensor which we began shipping in May 2004, and
- a decrease in accounts receivable of approximately
$268,000, primarily because of the timing of sales in the
third quarter of 2004 as compared to the fourth quarter of
2003, and more timely collections in the third quarter of
fiscal 2004, partially offset by higher sales in the third
quarter of 2004 than the fourth quarter of 2003, and
- an increase in accrued liabilities of approximately
$19,000, primarily as a result of an accrual for costs
associated with the termination of some of our independent
sales representative firms in the second quarter of fiscal
2004 which was paid in September 2004, partially offset by
payments made in fiscal 2004 for 2003 accrued sales
commissions and insurance.
Cash provided by operations was partially offset by a decrease in accounts
payable of approximately $126,000, primarily as a result of lower inventory
levels and more timely payments made to vendors in the first three quarters of
fiscal 2004, partially offset by increased operating expenses such as sales
commissions payable to our independent representative firms.
Capital expenditures in the first nine months of fiscal 2004 were
approximately $498,000. These expenditures were primarily for Cerebral Oximeter
demonstration units and no-cap sales units.
During the first three quarters of fiscal 2004, we issued 318,276 common
shares as a result of stock option exercises, for proceeds of approximately
$1,526,000.
15
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 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.
In June 2004, Brean Murray & Co., Inc. purchased 100,000 common shares
under its warrants by a cashless exercise. As a result of this cashless
exercise, we issued 66,265 common shares to Brean Murray & Co., Inc., retaining
33,735 common shares in payment of the exercise price. Brean Murray & Co., Inc.
now has no warrants remaining to purchase common shares.
We expect our working capital requirements to increase as sales increase.
We expect capital expenditures in 2004 will be approximately $700,000, primarily
for new demonstration and no-cap equipment.
As of August 31, 2004, we had working capital of $8,090,082, cash and cash
equivalents of $6,341,338, total current liabilities of $884,014 and
shareholder's equity of $10,073,287. We had an accumulated deficit of
$52,346,526 through August 31, 2004.
We believe that the cash and cash equivalents on hand at August 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 approximately $6,500,000 to $7,000,000.
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.
16
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 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
three quarters of fiscal 2004, we granted 50,500 stock options to our employees,
and during the first three quarters of fiscal 2003, we granted 471,000 stock
options to our employees and directors.
Had we recognized compensation expense for stock options granted to
employees in the first three 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 $567,000, or $.05 per common share. Had we
recognized compensation expense for our stock options granted to employees in
the first three 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 $528,000, or $.06 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 Bulletin No. 104 and Emerging Issues Task
Force No. 00-21, "Revenue Arrangements with Multiple Deliverables."
17
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2004
CONTRACTUAL OBLIGATIONS
The following information is provided as of August 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................. $753,900 $128,700 $282,600 $293,000 $49,600
Purchase obligations........................ $948,400 $948,400 $ 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.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
19
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 August 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 August 31, 2004. There was no
change in our internal control over financial reporting identified in connection
with such evaluation that occurred during our third fiscal quarter ended August
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.
20
PART II OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 23, 2004, Brean Murray & Co., Inc. purchased 100,000 of our
newly-issued common shares, par value $0.01 per share, under its warrants by a
cashless exercise, at an exercise price of $5.10 a share. As a result of this
cashless exercise, we issued 66,265 common shares to Brean Murray & Co., Inc.,
retaining 33,735 common shares, valued at approximately $15.12 a share, in
payment of the exercise price. Brean Murray & Co., Inc. 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.
21
ITEM 6. EXHIBITS
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.
22
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 7, 2004 By:/s/ William M. Iacona
-----------------------
William M. Iacona
Vice President, Finance, Controller, and
Treasurer (Duly Authorized and Principal
Financial Officer)
23
EXHIBIT INDEX
Exhibit Description
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.
24