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 FEBRUARY 28, 2002
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number 0-19095
SOMANETICS CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2394784
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1653 EAST MAPLE ROAD,
TROY, MICHIGAN
48083-4208
(Address of principal executive offices)
(Zip Code)
(248) 689-3050
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
------ ------
Number of common shares outstanding at March 28, 2002: 9,077,863
PART I FINANCIAL INFORMATION
SOMANETICS CORPORATION
BALANCE SHEETS
February 28, November 30,
ASSETS 2002 2001
----------------- ----------------
CURRENT ASSETS: (Unaudited) (Audited)
Cash and cash equivalents ................................................. $ 3,651,166 $ 167,873
Accounts receivable ....................................................... 941,524 1,263,039
Inventory ................................................................. 965,970 793,757
Prepaid expenses .......................................................... 193,351 74,255
------------ ------------
Total current assets ................................................... 5,752,011 2,298,924
------------ ------------
PROPERTY AND EQUIPMENT (at cost):
Machinery and equipment ................................................... 1,656,904 1,615,009
Furniture and fixtures .................................................... 178,168 183,497
Leasehold improvements .................................................... 165,642 165,642
------------ ------------
Total .................................................................. 2,000,714 1,964,148
Less accumulated depreciation and amortization ............................ (1,671,797) (1,631,907)
------------ ------------
Net property and equipment ............................................. 328,917 332,241
------------ ------------
OTHER ASSETS:
Intangible assets, net .................................................... 927,141 928,870
Other ..................................................................... 15,000 27,078
------------ ------------
Total other assets ..................................................... 942,141 955,948
------------ ------------
TOTAL ASSETS .................................................................. $ 7,023,069 $ 3,587,113
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 508,911 $ 482,137
Accrued liabilities ....................................................... 165,160 92,429
------------ ------------
Total current liabilities .............................................. 674,071 574,566
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred shares; authorized, 1,000,000 shares of $.01 par value;
no shares issued or outstanding ........................................ - -
Common shares; authorized, 20,000,000 shares of $.01 par value;
issued and outstanding, 9,077,863 shares at February 28, 2002,
and 8,075,055 at November 30, 2001 ..................................... 90,779 80,751
Additional paid-in capital ................................................ 59,067,384 55,386,453
Accumulated deficit ....................................................... (52,809,165) (52,454,657)
------------ ------------
Total shareholders' equity ............................................. 6,348,998 3,012,547
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................................... $ 7,023,069 $ 3,587,113
============ ============
See notes to financial statements
2
SOMANETICS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three-Month
Periods Ended
-----------------------------------
February 28, February 28,
2002 2001
------------- -------------
NET REVENUES ...................................... $ 1,591,820 $ 1,437,492
COST OF SALES ..................................... 493,390 600,159
----------- -----------
GROSS MARGIN ...................................... 1,098,430 837,333
----------- -----------
OPERATING EXPENSES:
Research, development and engineering ....... 179,604 207,288
Selling, general and administrative ......... 1,278,321 1,346,658
----------- -----------
Total operating expenses .......... 1,457,925 1,553,946
----------- -----------
OPERATING LOSS .................................... (359,495) (716,613)
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ............................ (794) (242)
Interest income ............................. 5,781 5,699
----------- -----------
Total other income - net ................ 4,987 5,457
----------- -----------
NET LOSS .......................................... $ (354,508) $ (711,156)
----------- -----------
NET LOSS PER COMMON SHARE-
BASIC AND DILUTED ............................... $ (.04) $ (.11)
----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING-BASIC AND DILUTED ................... 8,564,443 6,746,315
=========== ===========
See notes to financial statements
3
SOMANETICS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Month
Periods Ended
--------------------------------
February 28, February 28,
2002 2001
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................... $ (354,508) $ (711,156)
Adjustments to reconcile net loss to net cash used in
operations:
Depreciation and amortization ...................................... 54,521 129,831
Compensation expense for non-employee stock options ................ 1,858 --
Changes in assets and liabilities:
Accounts receivable decrease ................................... 321,515 267,442
Inventory (increase) ........................................... (172,213) (225,719)
Prepaid expenses (increase) .................................... (119,096) (9,898)
Other assets (increase) decrease ............................... 12,078 (22,142)
Accounts payable increase ...................................... 26,774 294,600
Accrued liabilities increase (decrease) ........................ 72,731 (121,319)
----------- -----------
Net cash (used in) operations ................................ (156,340) (398,361)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (net) ............................ (49,468) (23,318)
----------- -----------
Net cash (used in) investing activities ...................... (49,468) (23,318)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares ................................ 3,689,101 187,000
Increase in notes payable - bank line of credit ........................ -- 134,727
----------- -----------
Net cash provided by financing activities .................... 3,689,101 321,727
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................................ 3,483,293 (99,952)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD .............................................................. 167,873 122,299
----------- -----------
CASH AND CASH EQUIVALENTS, END
OF PERIOD .............................................................. $ 3,651,166 $ 22,347
=========== ===========
See notes to financial statements
4
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 28, 2002
1. ORGANIZATION AND OPERATIONS
We are a Michigan corporation that was formed in January 1982. We
develop, manufacture and market the INVOS(R) Cerebral Oximeter, the only
non-invasive patient monitoring system commercially available in the United
States that continuously measures changes in the blood oxygen level in the
brain. The principal markets for our products are the United States, Europe, and
Japan. The Cerebral Oximeter is based on our proprietary In Vivo Optical
Spectroscopy, or INVOS, technology. INVOS analyzes various characteristics of
human blood and tissue by measuring and analyzing low-intensity visible and near
infrared light transmitted into portions of the body.
We are also developing the CorRestore(TM) System for use in cardiac
repair and reconstruction, including heart surgeries called surgical ventricular
restoration, or SVR. We entered into a License Agreement as of June 2, 2000 with
the inventors and their Company, CorRestore LLC. The license grants us
worldwide, royalty-bearing licenses to specified rights relating to the
CorRestore System and related products and accessories for SVR, subject to the
terms and conditions of the license agreement. In November 2001 we received
clearance from the FDA to market the CorRestore patch in the United States.
2. FINANCIAL STATEMENT PRESENTATION
We prepared our unaudited interim financial statements pursuant to the
Securities and Exchange Commission's rules. Accordingly, they do not include all
of the information and footnotes normally included in our annual financial
statements prepared in accordance with generally accepted accounting principles.
We believe, however, that the disclosures are adequate to make the information
presented not misleading.
The unaudited interim financial statements in this report reflect all
adjustments which are, in our opinion, necessary to a fair statement of the
results for the interim periods presented. All of these adjustments that are
material are of a normal recurring nature. Our operating results for the
three-month period ended February 28, 2002 do not necessarily indicate the
results that you should expect for the year ending November 30, 2002. You should
read the unaudited interim financial statements together with the financial
statements and related footnotes for the year ended November 30, 2001 included
in our Annual Report on Form 10-K for the fiscal year ended November 30, 2001.
We have incurred an accumulated deficit of $52,809,165 through February
28, 2002. We had working capital of $5,077,940, cash and cash equivalents of
$3,651,166, total current liabilities of $674,071 and shareholders' equity of
$6,348,998 as of February 28, 2002.
We believe that markets exist for the products we have developed and
are developing; however, whether our products will be successful is uncertain.
The following factors could impact the likelihood of our success: our limited
resources and current financial condition, the problems and expenses frequently
encountered by companies forming a new business, our ability to develop, apply
and market new technology, and our industry and competitive environment.
We believe that the cash and cash equivalents on hand at February 28,
2002, together with the estimated net borrowings available under the Crestmark
Bank Loan and Security Agreement ($700,552 as of February 28, 2002), will be
adequate to satisfy our operating and capital requirements for more than the
next twelve months.
5
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 28, 2002
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 capital requirements necessary to market the Cerebral
Oximeter and SomaSensor, to develop and market the CorRestore System, to
undertake other product development activities, and for working capital might be
substantially greater than current estimates.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventory is stated at the lower of cost or market on a first-in,
first-out (FIFO) basis. Inventory consists of:
February 28, 2002 November 30, 2001
----------------- -----------------
Finished goods................... $ 78,917 $ 50,314
Work in process.................. 148,326 215,313
Purchased components............. 738,727 528,130
----------- ----------
Total....................... $ 965,970 $ 793,757
=========== ==========
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. License acquisition costs
are related to our acquisition of worldwide, royalty-bearing licenses to
specified rights relating to the CorRestore(TM) System, and related products and
accessories.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets." This statement establishes accounting and reporting standards for
goodwill and other intangible assets. We have adopted this statement for our
first quarter of fiscal 2002. The effect of adopting this statement has been to
discontinue amortizing our license acquisition costs related to our acquisition
of 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. Intangible assets consist of:
February 28, 2002 November 30, 2001
----------------- -----------------
License acquisition costs ............... $ 1,213,370 $ 1,213,370
Patents and trademarks .................. 111,733 111,733
----------- -----------
Sub-total .......................... 1,325,103 1,325,103
Less accumulated amortization ........... (397,962) (396,233)
----------- -----------
Total .............................. $ 927,141 $ 928,870
=========== ===========
Amortization expense for the three months ended February 28, 2002 was
approximately $1,700, and for the three months ended February 28, 2001 was
approximately $56,600. Net loss for the three months ended February 28, 2001,
excluding the effect of amortizing our license acquisition costs, would have
been approximately $656,000, or $(.10) per common share. Amortization expense
for each of the next five fiscal years is expected to be approximately $6,900
per year.
Intangible assets are reviewed periodically for impairment whenever
events or changes in circumstances indicate that the carrying value of the asset
may not be recovered.
Revenue Recognition occurs when there is persuasive evidence of an
arrangement with the customer, the product has been delivered, the sales price
is fixed or determinable, and collectibility is reasonably assured. The product
is considered delivered to the customer once we have shipped it, as this is when
title and risk of loss are transferred.
6
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 28, 2002
Loss Per Common Share - basic and diluted, is computed using the
weighted average number of common shares outstanding during each period. Common
shares issuable under stock options and warrants have not been included in the
computation of the net loss per common share - diluted, because such inclusion
would be antidilutive. As of February 28, 2002 and February 28, 2001, we had
outstanding 4,876,217 and 2,452,051, respectively, of warrants and options to
purchase common shares.
Accounting Pronouncements As described above, effective December 1,
2001, we adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets."
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement is effective for
fiscal years beginning after December 15, 2001, and replaces Statement No. 121
and provisions of APB Opinion No. 30 for the disposal of segments of a business.
The statement creates one accounting model, based on the framework established
in Statement No. 121, to be applied to all long-lived assets including
discontinued operations. This statement is effective for our financial
statements for the fiscal year ending November 30, 2003. We have not yet
determined the impact of this statement on our financial statements.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
February 28, 2002 November 30, 2001
----------------- -----------------
Accrued insurance ........................... $ 70,186 $ 24,570
Accrued sales commissions ................... 65,185 60,109
Accrued incentive ........................... 17,494 --
Accrued royalty ............................. 5,095 --
Accrued warranty ............................ 7,200 7,750
-------- --------
Total .............................. $165,160 $ 92,429
======== ========
5. COMMITMENTS AND CONTINGENCIES
We may become subject to products liability claims by patients or
physicians, and may become a defendant in products liability or malpractice
litigation. We have obtained products liability insurance and an umbrella
policy. We might not be able to maintain such insurance or such insurance might
not be sufficient to protect us against products liability.
7
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 28, 2002
6. COMMON STOCK
On January 16, 2002, we completed a public offering of 1,000,000
newly-issued common shares at a price of $4.25 per share, for gross proceeds of
$4,250,000. Our net proceeds, after deducting the placement agent's commission
and the expenses of the offering, were approximately $3,680,000. Brean Murray &
Co., Inc. was our exclusive placement agent for the offering and received for
its services (1) $340,000 as a placement agent fee, and (2) warrants to purchase
100,000 common shares at $5.10 per share exercisable during the four-year period
beginning January 11, 2003. A. Brean Murray, one of our directors, and his wife
control Brean Murray & Co., Inc. As a result of this offering, Kingsbridge
Capital Limited's warrant has been adjusted, and Kingsbridge is now entitled to
purchase 205,097 common shares at a purchase price of $4.25 per share.
In February 2002, one of our former employees exercised stock options
to purchase 2,833 newly-issued common shares.
On February 21, 2002, our Board of Directors approved an amendment to
the Somanetics Corporation 1997 Stock Option Plan to increase the number of
common shares reserved for issuance pursuant to the exercise of options granted
under the 1997 Plan by 450,000 shares, from 1,660,000 to 2,110,000 shares,
subject to shareholder approval at the 2002 Annual Meeting of Shareholders.
7. SEGMENT INFORMATION
We operate our business in one reportable segment, the development,
manufacture and marketing of medical devices. Each of our two product lines have
similar characteristics, customers, distribution and marketing strategies, and
are subject to similar regulatory requirements. In addition, in making operating
and strategic decisions, our management evaluates net revenues based on the
worldwide net revenues of each major product line, and profitability on an
enterprise-wide basis due to shared costs. Approximately 97% of our net revenues
in the first quarter of fiscal 2002 were derived from our INVOS Cerebral
Oximeter product line, compared to 100% of our net revenues in the first quarter
of fiscal 2001.
8
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 28, 2002
Some of the statements in this report are forward-looking statements.
These forward-looking statements include statements relating to our performance
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations. In addition, we may make forward-looking statements in future
filings with the Securities and Exchange Commission and in written material,
press releases and oral statements issued by us or on our behalf.
Forward-looking statements include statements regarding the intent, belief or
current expectations of us or our officers, including statements preceded by,
followed by or including forward-looking terminology such as "may," "will,"
"should," "believe," "expect," "anticipate," "estimate," "continue," "predict"
or similar expressions, with respect to various matters.
It is important to note that our actual results could differ materially
from those anticipated from the forward-looking statements depending on various
important factors. These important factors include our history of losses and
ability to continue as a going concern, our current dependence on the Cerebral
Oximeter and SomaSensor, the challenges associated with developing new products,
the uncertainty of acceptance of our products by the medical community, the
lengthy sales cycle for our products, competition in our markets, our dependence
on our distributors, and the other factors discussed under the caption "Risk
Factors" and elsewhere in our Registration Statement on Form S-1 (file no.
333-74788) effective January 11, 2002 and elsewhere in this report.
All forward-looking statements in this report are based on information
available to us on the date of this report. We do not undertake to update any
forward-looking statements that may be made by us or on our behalf in this
report or otherwise. In addition, please note that matters set forth under the
caption "Risk Factors" in our registration statement constitute cautionary
statements identifying important factors with respect to the forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward-looking statements.
RESULTS OF OPERATIONS
OVERVIEW
We develop, manufacture and market the INVOS Cerebral Oximeter, the
only non-invasive patient monitoring system commercially available in the United
States that continuously measures changes in the blood oxygen level in the
brain. We are also developing the CorRestore System for use in cardiac repair
and reconstruction, including heart surgeries called surgical ventricular
restoration, or SVR. In November 2001 we received clearance from the FDA to
market the CorRestore patch in the United States.
During fiscal 2001 and the first quarter of fiscal 2002, our primary
activities consisted of sales and marketing of the Cerebral Oximeter and related
disposable SomaSensor, and developing the CorRestore System. We had an
accumulated deficit of $52,809,165 through February 28, 2002.
9
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 28, 2002
We derive our revenues from sales of Cerebral Oximeters, SomaSensors,
and CorRestore Systems to our distributors and to hospitals in the United States
through our direct sales employees and independent sales representatives.
Payment terms are generally net 30 days for United States sales and net 60 days
or longer for international sales. Our primary expenses, excluding the cost of
our products, are selling, general and administrative and research, development
and engineering.
THREE MONTHS ENDED FEBRUARY 28, 2002 COMPARED TO THREE MONTHS ENDED FEBRUARY 28,
2001
Our net revenues increased approximately $154,000, or 11%, from
$1,437,492 in the three-month period ended February 28, 2001 to $1,591,820 in
the three-month period ended February 28, 2002. The increase in net revenues is
primarily attributable to:
- an increase in United States sales of approximately $422,000,
from approximately $795,000 in the first quarter of fiscal
2001 to approximately $1,217,000 in the first quarter of
fiscal 2002. This increase is primarily due to a 60% increase
in sales of the disposable SomaSensor and approximately
$51,000 in CorRestore System revenues in fiscal 2002, and
- a 25% increase in the average selling price of SomaSensors
primarily due to the 25% increase in the suggested retail
price of the SomaSensor effective September 1, 2001, and a
change in the sales mix between sales in the United States,
which have higher average selling prices, and sales to
international distributors.
The increase in net revenues was achieved despite a decrease in international
sales of approximately $267,000, from approximately $642,000 in the first
quarter of fiscal 2001 to approximately $375,000 in the first quarter of fiscal
2002. This decrease is primarily attributable to decreased purchases by Baxter
Limited in Japan due to a change in their product focus.
Approximately 24% of our net revenues in the first quarter of fiscal
2002 were export sales, compared to approximately 45% of our net revenues in the
first quarter of fiscal 2001. Sales of our products as a percentage of net
revenues were as follows:
PERCENT OF NET REVENUE
FIRST QUARTER OF FISCAL
PRODUCT 2002 2001
------- ----------------- -----------------
SomaSensors........................ 66% 52%
Model 4100 Cerebral Oximeters...... 16% 44%
Model 5100 Cerebral Oximeters...... 15% 4%
CorRestore Systems................. 3% 0%
----------------- -----------------
Total.......................... 100% 100%
================= =================
10
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 28, 2002
One international distributor accounted for approximately 18% of net
revenues for the three months ended February 28, 2002, and two international
distributors accounted for approximately 25% and 14%, respectively, of net
revenues for the three months ended February 28, 2001.
Gross margin as a percentage of net revenues was approximately 69% for
the quarter ended February 28, 2002 and approximately 58% for the quarter ended
February 28, 2001. The increase in gross margin as a percentage of net revenues
is primarily attributable to the increase in the average selling price of
SomaSensors described above, and sales of our latest model SomaSensor, launched
in May 2001, which is less costly to manufacture than the prior model SomaSensor
sold in the first quarter of fiscal 2001.
Our research, development and engineering expenses decreased
approximately $28,000, or 13%, from $207,288 for the three months ended February
28, 2001 to $179,604 for the three months ended February 28, 2002. The decrease
is primarily attributable to an $18,000 decrease in engineering salaries as a
result of one less engineer.
Selling, general and administrative expenses decreased approximately
$68,000, or 5%, from $1,346,658 for the three months ended February 28, 2001 to
$1,278,321 for the three months ended February 28, 2002. The decrease in
selling, general and administrative expense is primarily attributable to
- a $145,000 decrease in salaries, wages, commissions and
related expenses, primarily as a result of a reduction in the
number of employees, principally sales and marketing (from an
average of 37 employees for the first quarter of fiscal 2001
to an average of 27 employees for the first quarter of fiscal
2002),
- a $55,000 decrease in intangible amortization expense related
to license acquisition costs as a result of our adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets." Upon adopting this statement, we
have discontinued amortizing our license acquisition costs
related to our acquisition of worldwide, royalty-bearing
licenses to specified rights relating to the CorRestore System
and related products and accessories because we believe these
licenses have an indefinite life, and
- a $45,000 fee in the first quarter of fiscal 2001 in
connection with our signing the Loan and Security Agreement
with Crestmark Bank.
These decreases were partially offset by
- a $113,000 increase in commissions paid to our independent
sales representatives, and
- a $66,000 increase in professional services, primarily due to
the timing of auditing and tax service expenses.
For the three-month period ended February 28, 2002, we realized a 50%
decrease in our net loss over the same period in fiscal 2001. The decrease is
primarily attributable to
- an 11% increase in net revenues,
- an 11% increase in gross margin percentage, and
- a 6% decrease in operating expenses.
11
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 28, 2002
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the three-month period ended
February 28, 2002 was approximately $156,000. Cash was used primarily to
- fund our net loss, primarily selling, general and
administrative expenses and research, development and
engineering expenses, totaling approximately $300,000, before
depreciation and amortization expense,
- increase inventories by approximately $172,000, primarily as a
result of fourth quarter 2001 sales, and
- increase prepaid expenses by approximately $119,000, primarily
due to increased products liability insurance coverage since
we began marketing the CorRestore System.
These uses of cash were partially offset by
- a decrease in accounts receivable of approximately $322,000,
primarily because of lower first quarter 2002 sales than
fourth quarter 2001 sales,
- an increase in accrued liabilities of approximately $73,000,
and
- an increase in accounts payable of approximately $27,000.
We expect our working capital requirements to increase if sales
increase. Capital expenditures in the first three months of fiscal 2002 were
approximately $49,000. These expenditures were primarily for Cerebral Oximeter
demonstration units. We expect our capital requirements to increase as a result
of the costs of developing and marketing the CorRestore System.
On January 16, 2002, we completed the public offering of 1,000,000
newly-issued common shares at a price of $4.25 per share, for gross proceeds of
$4,250,000. Our net proceeds, after deducting the placement agent's commission
and the expenses of the offering, were approximately $3,680,000. Brean Murray &
Co., Inc. was our exclusive placement agent for the offering and received for
its services (1) $340,000 as a placement agent fee, and (2) warrants to purchase
100,000 common shares at $5.10 per share exercisable during the four-year period
beginning January 11, 2003. A. Brean Murray, one of our directors, and his wife
control Brean Murray & Co., Inc.
We have a Loan and Security Agreement with Crestmark Bank for a working
capital line of credit for up to $750,000, collateralized by all of our assets.
Under the agreement, Crestmark Bank may, but is not obligated to, lend us
amounts we request from time to time, up to $750,000, if no default exists. The
loans are limited by a borrowing base based on qualifying accounts receivable
and lender reserves. The loan is payable on demand, and our collections of our
receivables are directed to Crestmark Bank in payment of any outstanding balance
of the loan. The principal amount outstanding bears interest, payable monthly,
at the prime rate (4.75% as March 26, 2002) plus 2% plus a 2.4% service fee. As
of March 26, 2002, we had no outstanding principal loan balance and $733,108 was
available for borrowing, at Crestmark's discretion, under the facility.
As of February 28, 2002, we had working capital of $5,077,940, cash and
cash equivalents of $3,651,166, total current liabilities of $674,071 and
shareholder's equity of $6,348,998.
We believe that the cash and cash equivalents on hand at February 28,
2002, together with the estimated net borrowings available under the Crestmark
Bank Loan and Security Agreement, will be adequate to satisfy our operating and
capital requirements for more than the next twelve months.
12
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 28, 2002
The estimated length of time current cash, cash equivalents and
available borrowings will sustain our operations is based on estimates and
assumptions we have made. These estimates and assumptions are subject to change
as a result of actual experience. Actual capital requirements necessary to
market the Cerebral Oximeter and SomaSensor, to develop and market the
CorRestore System, to undertake other product development activities, and for
working capital might be substantially greater than current estimates.
CRITICAL ACCOUNTING POLICIES
We believe our most significant accounting policies relate to revenue
recognition, the recording of an intangible asset for license acquisition costs
related to our acquisition of worldwide, royalty-bearing licenses to specified
rights relating to the CorRestore System and related products and accessories,
and our accounting treatment of stock options issued to employees.
We recognize revenue when there is persuasive evidence of an
arrangement with the customer, the product has been delivered, the sales price
is fixed or determinable, and collectibility is reasonably assured. The product
is considered delivered to the customer once we have shipped it, as this is when
title and risk of loss are transferred. Given the nature of the factors
mentioned above, we do not believe that there are different judgements or
assumptions that could be used in the application of this policy that would lead
to materially different reported results.
We have recorded an intangible asset related to our acquisition of
worldwide, royalty-bearing licenses to specified rights relating to the
CorRestore System and related products and accessories. License acquisition
costs include our estimate of the fair value of ten-year vested stock options to
purchase common shares granted to one of our directors in connection with
negotiating and assisting us in completing the transaction, and our estimate of
the fair value of the vested portion of five-year warrants to purchase common
shares issued in the transaction.
We estimated the value of the stock options to purchase common shares
and the warrants to purchase common shares using the Black-Scholes valuation
model. The Black-Scholes valuation model requires the following assumptions:
expected life period of the security, expected volatility of our stock price
during the period, risk-free interest rate, and dividend yield. Given the
assumptions inherent in the Black-Scholes valuation model, it is possible to
calculate a different value for our intangible asset by changing one or more of
the valuation model variables or by using a different valuation model. However,
we believe that the model is appropriate, that the judgements and assumptions
that we have made at the time of valuation were also appropriate, and that the
reported results would not be materially different had one or more of the
variables been different or had a different valuation model been used.
In addition, effective December 1, 2001, we adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
The effect of adopting this Statement has been to discontinue amortizing our
license acquisition costs related to our acquisition of worldwide,
royalty-bearing licenses to specified rights relating to the CorRestore System
and related products and accessories described above because we believe these
licenses have an indefinite life. For the first quarter of fiscal 2001, we
incurred amortization expense of approximately $55,000 associated with these
license acquisition costs.
13
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 28, 2002
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," was issued by the Financial
Accounting Standards Board. We have chosen to continue to account for
stock-based compensation of employees using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, compensation
costs for stock options granted to employees are measured as the excess, if any,
of the market price of our stock at the date of the grant over the amount an
employee must pay to acquire the stock. No compensation expense has been charged
against income for stock option grants to employees because our stock option
grants are priced at the market value as of the date of grant. There were no
stock option grants to employees in the first quarter of fiscal 2002. Had we
recognized compensation expense for our stock options granted to employees in
fiscal 2001, based on the fair value of the options on the grant date using the
Black-Scholes valuation model, our net loss on a pro forma basis would have
increased by approximately $752,000.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Fifth Amendment to Somanetics Corporation 1997 Stock
Option Plan.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by us during the quarter for
which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Somanetics Corporation
--------------------------
(Registrant)
Date: March 28, 2002 By:/s/ William M. Iacona
--------------- -----------------------------------------
William M. Iacona
Vice President, Finance, Controller, and
Treasurer (Duly Authorized and Principal
Financial Officer)
17
EXHIBIT INDEX
Exhibit Description
10.1 Fifth Amendment to Somanetics Corporation 1997 Stock Option Plan.
18