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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, 2001
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
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Number of common shares outstanding at October 3, 2001: 8,075,081
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PART I FINANCIAL INFORMATION
SOMANETICS CORPORATION
BALANCE SHEETS
August 31, November 30,
ASSETS 2001 2000
----------------- -----------------
CURRENT ASSETS: (Unaudited) (Audited)
Cash and cash equivalents.......................................... $ 424,088 $ 122,299
Accounts receivable................................................ 651,942 1,349,726
Inventory.......................................................... 977,897 613,930
Prepaid expenses................................................... 57,398 83,100
--------------- ---------------
Total current assets............................................ 2,111,325 2,169,055
--------------- ---------------
PROPERTY AND EQUIPMENT (at cost):
Machinery and equipment............................................ 1,609,909 1,471,114
Furniture and fixtures............................................. 183,497 183,497
Leasehold improvements............................................. 165,642 165,642
--------------- ---------------
Total........................................................... 1,959,048 1,820,253
Less accumulated depreciation and amortization..................... (1,576,531) (1,384,000)
--------------- ---------------
Net property and equipment...................................... 382,517 436,253
--------------- ---------------
OTHER ASSETS:
Intangible assets, net............................................. 868,970 1,038,688
Other.............................................................. 15,000 15,000
--------------- ---------------
Total other assets.............................................. 883,970 1,053,688
--------------- ---------------
TOTAL ASSETS........................................................... $ 3,377,812 $ 3,658,996
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 408,984 $ 508,647
Accrued liabilities................................................ 124,495 267,184
--------------- ---------------
Total current liabilities....................................... 533,479 775,831
--------------- ---------------
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, 8,075,081 shares at August 31, 2001
and 6,637,087 shares at November 30, 2000....................... 80,751 66,371
Additional paid-in capital......................................... 55,268,735 52,940,540
Accumulated deficit................................................ (52,505,153) (50,123,746)
--------------- ---------------
Total shareholders' equity...................................... 2,844,333 2,883,165
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 3,377,812 $ 3,658,996
=============== ===============
See notes to financial statements
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SOMANETICS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended August 31, Ended August 31,
------------------------------ ------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
NET REVENUES ........................................... $ 1,110,721 $ 1,006,408 $ 3,809,727 $ 3,474,089
COST OF SALES .......................................... 390,615 421,479 1,408,453 1,633,306
----------- ----------- ----------- -----------
GROSS MARGIN ........................................... 720,106 584,929 2,401,274 1,840,783
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research, development and engineering ............... 221,010 110,594 623,114 326,119
Selling, general and administrative ................. 1,326,302 1,413,622 4,177,980 4,266,488
----------- ----------- ----------- -----------
Total operating expenses ........................ 1,547,312 1,524,216 4,801,094 4,592,607
----------- ----------- ----------- -----------
OPERATING LOSS ......................................... (827,206) (939,287) (2,399,820) (2,751,824)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Loss on sale of securities .......................... -- (78,120) -- (133,182)
Interest expense .................................... -- -- (2,701) --
Interest income ..................................... 6,731 22,220 21,114 81,006
----------- ----------- ----------- -----------
Total other income (expense) .................... 6,731 (55,900) 18,413 (52,176)
----------- ----------- ----------- -----------
NET LOSS ............................................... $ (820,475) $ (995,187) $(2,381,407) $(2,804,000)
----------- ----------- ----------- -----------
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED .................................. $ (0.10) $ (0.15) $ (0.32) $ (0.45)
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING ........................................ 8,075,081 6,487,871 7,450,030 6,227,996
=========== =========== =========== ===========
See notes to financial statements
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SOMANETICS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Month
Periods Ended August 31,
----------------------------------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................................... $(2,381,407) $(2,804,000)
Adjustments to reconcile net loss to net cash used in
operations:
Depreciation and amortization .................................................. 378,954 306,268
Changes in assets and liabilities:
Accounts receivable decrease ............................................... 697,784 91,304
Inventory (increase) ....................................................... (363,967) (404,181)
Prepaid expenses decrease .................................................. 25,702 16,882
Other assets (increase) .................................................... -- (46,789)
Accounts payable (decrease) ................................................ (99,663) (92,360)
Accrued liabilities (decrease) ............................................. (142,689) (167,885)
----------- -----------
Net cash (used in) operations ............................................ (1,885,286) (3,100,761)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities ........................................ -- 655,525
Acquisition of property and equipment (net) ........................................ (155,500) (90,101)
----------- -----------
Net cash (used in) provided by investing activities ...................... (155,500) 565,424
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares ............................................ 2,342,575 1,419,380
----------- -----------
Net cash provided by financing activities ................................ 2,342,575 1,419,380
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ........................................................................ 301,789 (1,115,957)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD .......................................................................... 122,299 1,423,423
----------- -----------
CASH AND CASH EQUIVALENTS, END
OF PERIOD .......................................................................... $ 424,088 $ 307,466
=========== ===========
Non cash investing activities:
Issuance of warrants and stock options in connection with
license acquisition (Note 3) ....................................................... $ 1,050,107
See notes to financial statements
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SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2001
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 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) patch for use in cardiac repair and reconstruction, including
heart surgeries called surgical anterior ventricular endocardial restoration, or
SAVER.
2. FINANCIAL STATEMENT PRESENTATION
We prepared our unaudited interim financial statements pursuant to the
Securities and Exchange Commission's rules. Accordingly, they do not include all
of the information and footnotes normally included in our annual financial
statements prepared in accordance with generally accepted accounting principles.
We believe, however, that the disclosures are adequate to make the information
presented not misleading.
The unaudited interim financial statements in this report reflect all
adjustments which are, in our opinion, necessary to a fair statement of the
results for the interim periods presented. All of these adjustments that are
material are of a normal recurring nature. Our operating results for the
nine-month period ended August 31, 2001 do not necessarily indicate the results
that you should expect for the year ending November 30, 2001. You should read
the unaudited interim financial statements together with the financial
statements and related footnotes for the year ended November 30, 2000 included
in our Annual Report on Form 10-K for the fiscal year ended November 30, 2000.
We have incurred an accumulated deficit of $52,505,153 through August
31, 2001. We had working capital of $1,577,846, cash and cash equivalents of
$424,088, total current liabilities of $533,479 and shareholders' equity of
$2,844,333 as of August 31, 2001.
We believe that markets exist for the products we have developed and
are developing; however, whether our products will be successful is uncertain.
You should consider the following factors in evaluating the likelihood of our
success: our limited resources and current financial condition, the problems and
expenses frequently encountered by companies developing a new business, our
ability to raise new funds, our ability to develop, apply and market new
technology, and our industry and competitive environment.
For further discussion of our financial condition, including recent
sales of securities, our working capital, our liquidity resources, requirements
and plans, and our ability to continue as a going concern, please refer to
"Liquidity and Capital Resources" in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2001
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventory is stated at the lower of cost or market on a first-in,
first-out (FIFO) basis. Inventory consists of:
August 31, 2001 November 30, 2000
--------------- -----------------
Finished goods................... $ 57,941 $ 36,374
Work in process.................. 219,949 124,127
Purchased components............. 700,007 453,429
----------- ----------
Total....................... $ 977,897 $ 613,930
=========== ==========
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 exclusive, worldwide, royalty-bearing licenses
to specified rights relating to the CorRestore(TM) patch and related products
and accessories.
We entered into a License Agreement as of June 2, 2000 with the
inventors and their company, CorRestore LLC. The license grants us exclusive,
worldwide, royalty-bearing licenses to specified rights relating to the
CorRestore(TM) patch and related products and accessories for SAVER, subject to
the terms and conditions of the license agreement. Pursuant to the license
agreement, CorRestore LLC has agreed to provide various consulting services to
us. We have agreed to pay all of the expenses of such consultation, of clinical
testing of the CorRestore(TM) patch, training doctors in SAVER and training our
personnel and customers in the use of the CorRestore(TM) patch.
In exchange for the licenses and consulting services, we agreed to the
following compensation for CorRestore LLC and its agent, Wolfe & Company: (1) a
royalty of 10% of our "net sales" of products subject to the licenses, (2)
five-year warrants to purchase up to 400,000 Common Shares at $3.00 a share,
exercisable to purchase 300,000 shares immediately and to purchase an additional
50,000 shares upon our receipt of clearance or approval from the FDA to market
the CorRestore(TM) patch in the United States and another 50,000 shares upon our
receipt of CE certification for the CorRestore(TM) patch, (3) additional
five-year warrants to purchase up to 2,100,000 common shares at $3.00 a share,
to be granted when we receive clearance or approval from the FDA to market the
CorRestore(TM) patch in the United States, exercisable based on our cumulative
net sales of the CorRestore(TM) patch products, and (4) a consulting fee of
$25,000 a year to each of the inventors until we sell 1,000 CorRestore(TM)
patches.
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SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2001
License acquisition costs consist of professional service fees recorded
at cost, our estimate of the fair value of the ten-year vested stock options to
purchase 50,000 common shares at $3.00 a share 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 300,000 common share vested portion of
the five-year warrants to purchase up to 400,000 common shares at $3.00 a share
issued in the transaction. We estimated the value of the stock options to
purchase 50,000 common shares using the Black-Scholes valuation model with the
following assumptions: expected volatility (the measure by which the stock price
has fluctuated or is expected to fluctuate during the period) 111.16%, risk-free
interest rate of 7.5%, expected life of 4 years and dividend yield of 0%. We
estimated the value of the warrants to purchase 300,000 common shares using the
Black-Scholes valuation model with the following assumptions: expected
volatility (the measure by which the stock price has fluctuated or is expected
to fluctuate during the period) 111.16%, risk-free interest rate of 7.5%,
expected life of 5 years and dividend yield of 0%.
These costs are being amortized on the straight-line method over 5 years.
Intangible assets consist of:
August 31, 2001 November 30, 2000
--------------- -----------------
License acquisition costs........ $ 1,096,898 $ 1,096,898
Patents and trademarks........... 111,733 111,733
------------ -----------
Sub-total................... 1,208,631 1,208,631
Less accumulated amortization.... (339,661) (169,943)
------------ -----------
Total....................... $ 868,970 $ 1,038,688
============ ===========
Intangible assets are reviewed periodically for impairment whenever
events or changes in circumstances indicate that the carrying value of the asset
may not be recovered.
Loss Per Common Share - basic and diluted, is computed using the
weighted average number of common shares outstanding during each period. Common
shares issuable under stock options and warrants have not been included in the
computation of the net loss per Common Share - diluted, because such inclusion
would be antidilutive. As of August 31, 2001 and August 31, 2000, we had
outstanding 2,683,328 and 2,262,081, respectively, of warrants and options to
purchase common shares.
Accounting Pronouncements Effective December 1, 2000, we adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement had no impact on our
financial statements. Effective July 1, 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets." This Statement is effective for fiscal years beginning
after December 15, 2001, and establishes accounting and reporting standards for
goodwill and other intangible assets. 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.
Reclassifications - Certain reclassifications have been made to the
financial statements for 2000 to conform to the 2001 presentation.
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SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2001
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
August 31, 2001 November 30, 2000
--------------- -----------------
Accrued sales commissions ............. $ 77,000 $117,045
Accrued incentive ..................... 35,995 17,500
Accrued warranty ...................... 9,500 7,000
Professional fees ..................... 2,000 94,000
Accrued insurance ..................... -- 24,361
Other ................................. -- 7,278
-------- --------
Total ........................... $124,495 $267,184
======== ========
5. COMMITMENTS AND CONTINGENCIES
We may become subject to products liability claims by patients or
physicians, and may become a defendant in products liability or malpractice
litigation. We have obtained products liability insurance and an umbrella
policy. We might not be able to maintain such insurance or such insurance might
not be sufficient to protect us against products liability.
6. COMMON STOCK
On December 4, 2000, we completed the sale of 112,994 common shares to
Kingsbridge, at a price of $1.77 per share, for gross proceeds of $200,000.
Effective December 4, 2000, we granted 10-year options under the 1991
Stock Option Plan to purchase 14,667 common shares, and we granted 10-year
options under the 1997 Stock Option Plan to purchase 180,333 common shares, to
27 of our key employees (including officers) and one of our consultants at an
exercise price of $1.97 per share (the closing sale price of the common shares
as of the date of grant). Effective March 5, 2001, we granted 10-year options
under the 1997 Stock Option Plan to purchase 322,800 common shares to seven of
our key employees (including officers) at an exercise price of $2.00 per share
(the closing sale price of the common shares as of the date of grant). Stock
Options issued to non-employees are valued at the date of grant using the Black
Scholes valuation model, and are expensed as compensation expense over the
vesting period of the stock option.
Effective February 22, 2001, we granted to five of our directors, who
are not officers or employees, 10-year options under the 1997 Stock Option Plan
to purchase an aggregate of 10,000 common shares at an exercise price of $2.31
per share (the closing sale price of the common shares as of the date of grant).
On February 22, 2001, our shareholders approved the issuance of
warrants to purchase 2,100,000 common shares to CorRestore LLC under specified
circumstances pursuant to our CorRestore(TM) license agreement and to issue the
underlying shares upon exercise of those warrants.
On February 22, 2001, our shareholders approved an amendment to the
Somanetics Corporation 1997 Stock Option Plan to increase the number of common
shares reserved for issuance pursuant to the exercise of options granted under
the 1997 Plan by 325,000 shares, from 1,335,000 to 1,660,000 shares.
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SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2001
Effective March 5, 2001, we de-registered the remaining shares
originally registered for resale by Kingsbridge Capital Limited under the
Private Equity Line Agreement, because we no longer intend to sell any more
shares to Kingsbridge, except upon any exercise of its warrant, and Kingsbridge
is no longer publicly offering for resale the shares subject to the warrant we
granted to them. On April 10, 2001, we mutually agreed with Kingsbridge to
terminate the Private Equity Line Agreement, the related Registration Rights
Agreement, and Kingsbridge's right to the discount on any unsold shares, in
exchange for our payment of $200,000 to Kingsbridge.
On April 9, 2001, we completed the private placement of 1,325,000
newly-issued common shares at a price of $1.75 per share, for gross proceeds of
$2,318,750. Our estimated net proceeds, after deducting the placement agent's
commission and the expenses of the offering, were approximately $2,156,000.
Brean Murray & Co., Inc. was our exclusive placement agent for the offering and
received for its services (1) $104,362.50 as a placement agent fee, and (2)
warrants to purchase 25,000 common shares at $2.10 per share exercisable during
the four-year period beginning April 9, 2002. A. Brean Murray, one of our
directors, and his wife control Brean Murray & Co., Inc. In addition, the Brean
Murray & Co., Inc. Profit Sharing Plan purchased 32,285 common shares in the
offering, and Robert R. Henry, one of our directors, purchased 100,000 common
shares in the offering.
7. NOTES PAYABLE - BANK LINE OF CREDIT
On February 13, 2001, we entered into 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 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 (6% at September 25, 2001) plus 2% plus a 2.4% service fee, and
we paid a $45,000 commitment fee for the loan. Through August 31, 2001, we have
borrowed $920,050 under the agreement and repaid $920,050 in principal amount
through Crestmark's collection of our receivables and by using some of the
proceeds from our April 9, 2001 offering. As of August 31, 2001, $472,388 was
available for borrowing, at Crestmark's discretion, under the facility. We have
agreed to use the proceeds of the loans solely as working capital. The line of
credit requires us to maintain minimum tangible net worth of $500,000 and a
ratio of total liabilities to tangible net worth not to exceed 3:1. The line of
credit terminates upon Crestmark's demand.
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SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2001
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 need for
additional financing, our dependence on our distributors, and the other factors
discussed under the caption "Risk Factors" and elsewhere in our Registration
Statement on Form S-3 (file no. 333-59376) effective May 3, 2001 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(TM) patch for use in cardiac repair
and reconstruction, including heart surgeries called surgical anterior
ventricular endocardial restoration, or SAVER. The model 4100 Cerebral Oximeter
was introduced in October 1997 and we began shipping the model 4100 in the first
quarter of fiscal 1998. During the third quarter of fiscal 1999, we introduced
our new model 5100 Cerebral Oximeter at an international trade show, and began
international shipments of the model 5100 in August 1999. The model 5100
Cerebral Oximeter has the added capability of being able to monitor pediatric
patients. In September 2000, we received clearance from the FDA to market the
model 5100 Cerebral Oximeter in the United States. In June 2000, we entered into
a license agreement for the CorRestore patch, which requires testing and FDA
clearance or approval before we can sell it in the United States. During the
second quarter of fiscal 2001, we submitted our 510(k) application to the FDA
for the CorRestore patch, and are awaiting FDA clearance to market the
CorRestore patch in the United States.
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SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2001
During fiscal 2000 and the first three quarters of fiscal 2001, our
primary activities consisted of sales and marketing of the Cerebral Oximeter and
the related disposable SomaSensor. We had an accumulated deficit of $52,505,153
through August 31, 2001. We believe that our accumulated deficit will continue
to increase for the foreseeable future.
We derive our revenues from sales of Cerebral Oximeters and SomaSensors
to our distributors and to hospitals in the United States through our direct
sales employees and our independent sales representatives. We recognize revenues
when we ship our products to our distributors or to hospitals. 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. During fiscal 1998, we began 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 at a premium a minimum monthly quantity of SomaSensors.
THREE MONTHS ENDED AUGUST 31, 2001 COMPARED TO THREE MONTHS ENDED AUGUST 31,
2000
Our net revenues increased approximately $104,000, or 10%, from
$1,006,408 in the three-month period ended August 31, 2000 to $1,110,721 in the
three-month period ended August 31, 2001. The increase in net revenues is
primarily attributable to
- An increase in United States sales of approximately $335,000,
or 52%, from approximately $637,000 in the third quarter of
fiscal 2000 to approximately $972,000 in the third quarter of
fiscal 2001. This increase is primarily attributable to a 61%
increase in sales of the disposable SomaSensor attributable to
the growing use of the Cerebral Oximeter in cardiac and
cardiovascular surgery programs in the United States.
- An 8% increase in the average selling price of SomaSensors,
primarily as a result of no-cap sensor sales.
The increase in net revenues was partially offset by
- a decrease in international sales of approximately $230,000,
from approximately $369,000 in the third quarter of fiscal
2000 to approximately $139,000 in the third quarter of fiscal
2001. This decrease is primarily due to the stocking order for
model 4100 and model 5100 Cerebral Oximeters and SomaSensors
by Tyco Healthcare AG, formerly Nellcor Puritan Bennett Export
Inc., in the third quarter of fiscal 2000, delays in marketing
the Cerebral Oximeter in 39 markets, including Europe, in
fiscal 2001, and reduced purchases by Baxter Limited in Japan
in the third quarter of fiscal 2001. We expect international
revenues to return to more normal levels by the fourth quarter
of fiscal 2001.
- A 12% decrease in the average selling price of Cerebral
Oximeters, primarily as a result of a change in the United
States sales mix between direct sales of the Cerebral Oximeter
and no-cap placements of the Cerebral Oximeter.
Approximately 13% of our net revenues in the third quarter of fiscal
2001 were export sales, compared to approximately 37% of our net revenues in the
third quarter of fiscal 2000. Sales of SomaSensors, model 4100 Cerebral
Oximeters, and model 5100 Cerebral Oximeters as a percentage of net revenues
were as follows:
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SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2001
PERCENT OF NET REVENUE
THIRD QUARTER OF FISCAL
PRODUCT 2001 2000
------- ----------------- -----------------
SomaSensors........................ 79% 59%
Model 4100 Cerebral Oximeters...... 13% 23%
Model 5100 Cerebral Oximeters...... 8% 18%
----------------- -----------------
Total.......................... 100% 100%
================= =================
One international distributor accounted for approximately 22% of net revenues
for the three months ended August 31, 2000.
Gross margin as a percentage of net revenues was approximately 65% for
the quarter ended August 31, 2001 and approximately 58% for the quarter ended
August 31, 2000. The increase in gross margin as a percentage of net revenues is
primarily attributable to
- an 8% increase in the average selling price of SomaSensors
described above, and
- increased shipments of our new model SomaSensor, which was
launched in the second quarter of 2001. This new model
SomaSensor is less costly to manufacture than the previous
model SomaSensor that was shipped in the third quarter of
fiscal 2000.
These increases were partially offset by a 12% decrease in the average selling
price of Cerebral Oximeters described above.
Our research, development and engineering expenses increased
approximately $110,000, or 100%, from $110,594 for the three months ended August
31, 2000 to $221,010 for the three months ended August 31, 2001. The increase is
primarily attributable to a $132,000 increase in costs associated with the
development of the CorRestore patch.
Selling, general and administrative expenses decreased approximately
$87,000, or 6%, from $1,413,622 for the three months ended August 31, 2000 to
$1,326,302 for the three months ended August 31, 2001. The decrease in selling,
general and administrative expense is primarily attributable to
- a $125,000 decrease in salaries, wages, commissions and
related expenses, primarily as a result of a reduction in the
number of employees, principally sales and marketing, since
September 1, 2000 (from an average of 40 employees for the
quarter ended August 31, 2000 to an average of 30 employees
for the quarter ended August 31, 2001), and
- a $33,000 decrease in clinical research expenses, primarily
related to the model 5100 Cerebral Oximeter.
These increases were partially offset by approximately $76,000 in commissions
paid to our independent sales representatives in the third quarter of fiscal
2001. These representatives were engaged in fiscal 2001.
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13
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2001
For the three-month period ended August 31, 2001, we realized an 18%
decrease in our net loss over the same period in fiscal 2000. The decrease is
primarily attributable to
- a 10% increase in net revenue,
- a 7% increase in gross margin percentage, and
- a $78,000 decrease in realized losses on sales of securities
due to a realized loss on the sale of marketable securities in
the third quarter of fiscal 2000.
The decreased net loss was achieved despite a 2% increase in operating expenses.
NINE MONTHS ENDED AUGUST 31, 2001 COMPARED TO NINE MONTHS ENDED AUGUST 31, 2000
Our net revenues increased approximately $336,000, or 10%, from
$3,474,089 in the nine-month period ended August 31, 2000 to $3,809,727 in the
nine-month period ended August 31, 2001. The increase in net revenues is
primarily attributable to
- An increase in United States sales of approximately
$1,068,000, or 57%, from approximately $1,885,000 in the first
three quarters of fiscal 2000 to approximately $2,953,000 in
the first three quarters of fiscal 2001. This increase is
primarily attributable to increased sales of the disposable
SomaSensor, increased sales of the Cerebral Oximeter, and
initial purchases of demonstration equipment by independent
sales representatives.
- a 9% increase in the average selling price of SomaSensors, and
a 10% increase in the average selling price of Cerebral
Oximeters, primarily as a result of a change in the sales mix
between sales in the United States and sales to international
distributors, and a change in the United States sales mix
between direct sales of the Cerebral Oximeter and no-cap
placements of the Cerebral Oximeter.
The increase in net revenues was partially offset by a decrease in international
sales of approximately $732,000, from approximately $1,589,000 in the first
three quarters of fiscal 2000 to approximately $857,000 in the first three
quarters of fiscal 2001. This decrease is primarily due to the stocking orders
for model 4100 and model 5100 Cerebral Oximeters and SomaSensors by Tyco
Healthcare AG in the second and third quarters of fiscal 2000, delays in
marketing the Cerebral Oximeter in 39 markets, including Europe, in fiscal 2001,
and reduced purchases by Baxter Limited in Japan.
Approximately 22% of our net revenues in the first three quarters of
fiscal 2001 were export sales, compared to approximately 46% of our net revenues
in the first three quarters of fiscal 2000. Sales of SomaSensors, model 4100
Cerebral Oximeters, model 5100 Cerebral Oximeters, and model 4100 exchanges as a
percentage of net revenues were as follows:
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SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2001
PERCENT OF NET REVENUE
FIRST THREE QUARTERS OF FISCAL
PRODUCT 2001 2000
------- ----------------- -----------------
SomaSensors........................ 62% 51%
Model 4100 Cerebral Oximeters...... 26% 30%
Model 5100 Cerebral Oximeters...... 12% 17%
Model 4100 Exchanges............... 0% 2%
----------------- -----------------
Total.......................... 100% 100%
================= =================
One international distributor accounted for approximately 11% of net
revenues for the nine months ended August 31, 2001, and two international
distributors accounted for approximately 20% and 14%, respectively, of net
revenues for the nine months ended August 31, 2000.
Gross margin as a percentage of net revenues was approximately 63% for
the nine months ended August 31, 2001 and approximately 53% for the nine months
ended August 31, 2000. The increase in gross margin as a percentage of net
revenues is primarily attributable to a 9% increase in the average selling price
of SomaSensors and a 10% increase in the average selling price of Cerebral
Oximeters described above.
Our research, development and engineering expenses increased
approximately $297,000, or 91%, from $326,119 for the nine months ended August
31, 2000 to $623,114 for the nine months ended August 31, 2001. The increase is
primarily attributable to a $325,000 increase in costs associated with the
development of the CorRestore patch.
Selling, general and administrative expenses decreased approximately
$89,000, or 2%, from $4,266,488 for the nine months ended August 31, 2000 to
$4,177,980 for the nine months ended August 31, 2001. The decrease in selling,
general and administrative expense is primarily attributable to
- a $280,000 decrease in salaries, wages, commissions and
related expenses, primarily as a result of a reduction in the
number of employees, principally sales and marketing, since
September 1, 2000 (from an average of 41 employees for the
nine months ended August 31, 2000 to an average of 33
employees for the nine months ended August 31, 2001),
- a $192,000 decrease in travel and selling-related expenses
primarily related to reduced trade show and travel expenses,
and reduced marketing expenses as a result of promotional
materials and training for Tyco Healthcare AG in fiscal 2000,
and
- an $84,000 decrease in clinical research expenses, primarily
related to the model 5100 Cerebral Oximeter.
These decreases were partially offset by
- a $200,000 termination fee related to the Kingsbridge Capital
Limited Private Equity Line,
- $157,000 in commissions paid to our independent sales
representatives engaged in fiscal 2001, and
- a $110,000 increase in intangible amortization expense related
to the amortization of license acquisition costs.
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15
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2001
For the nine-month period ended August 31, 2001, we realized a 15%
decrease in our net loss over the same period in fiscal 2000. The decrease is
primarily attributable to
- a 10% increase in net revenues,
- a 10% increase in gross margin percentage, and
- a $133,000 decrease in realized losses on sales of securities
due to a realized loss on the sale of marketable securities in
the first three quarters of fiscal 2000.
The decreased net loss was achieved despite
- a 5% increase in operating expenses, and
- an approximately $60,000 decrease in interest income,
primarily due to the absence of marketable securities for
fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the nine-month period ended August
31, 2001 was approximately $1,885,000. Cash was used primarily to
- fund our net loss, primarily selling, general and
administrative expenses and research, development and
engineering expenses, totaling approximately $2,002,000,
before depreciation and amortization expense,
- increase inventories by approximately $364,000, primarily due
to a depletion of inventory resulting from fourth quarter 2000
sales and the purchase of components related to our new
generation SomaSensor, and
- decrease accounts payable by approximately $100,000, and
accrued liabilities by approximately $143,000, primarily as a
result of payments made in fiscal 2001.
These uses of cash were partially offset by a decrease in accounts receivable of
approximately $698,000, primarily because of lower third quarter 2001 sales than
fourth quarter 2000 sales.
We expect our working capital requirements to increase if sales
increase. Capital expenditures in the first nine months of fiscal 2001 were
approximately $156,000. Approximately $106,000 of these expenditures were for
Cerebral Oximeter demonstration units and no-cap units, and approximately
$50,000 of these expenditures were for manufacturing tooling for our new
generation SomaSensor. We expect our capital requirements to increase as a
result of the costs of developing and testing the CorRestore patch.
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16
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2001
On December 4, 2000, we completed the sale of 112,994 common shares to
Kingsbridge Capital Limited, at a price of $1.77, for gross proceeds of
$200,000. Our net proceeds, after deducting the commissions and the estimated
expenses of the offering, were approximately $187,000. Effective March 5, 2001,
we de-registered the remaining shares originally registered for resale by
Kingsbridge under the Private Equity Line Agreement, because we no longer intend
to sell any more shares to Kingsbridge, except upon any exercise of its warrant,
and Kingsbridge is no longer publicly offering for resale the shares subject to
the warrant we granted to them. On April 10, 2001, we mutually agreed with
Kingsbridge to terminate the Private Equity Line Agreement, the related
Registration Rights Agreement, and Kingsbridge's right to the discount on any
unsold shares, in exchange for our payment of $200,000 to Kingsbridge.
On February 13, 2001, we entered into 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 (6% at September 25, 2001) plus 2% plus a 2.4% service fee, and
we paid a $45,000 commitment fee for the loan. Through August 31, 2001, we have
borrowed $920,050 under the agreement and repaid $920,050 in principal amount
through Crestmark's collection of our receivables and by using some of the
proceeds from our April 9, 2001 offering. As of August 31, 2001, $472,388 was
available for borrowing, at Crestmark's discretion, under the facility. We have
agreed to use the proceeds of the loans solely as working capital. The line of
credit requires us to maintain minimum tangible net worth of $500,000 and a
ratio of total liabilities to tangible net worth not to exceed 3:1. The line of
credit terminates upon Crestmark's demand.
On April 9, 2001, we completed the private placement of 1,325,000
newly-issued common shares at a price of $1.75 per share, for gross proceeds of
$2,318,750. Our estimated net proceeds, after deducting the placement agent's
commission and the expenses of the offering, were approximately $2,156,000.
Brean Murray & Co., Inc. was our exclusive placement agent for the offering and
received for its services (1) $104,362.50 as a placement agent fee, and (2)
warrants to purchase 25,000 common shares at $2.10 per share exercisable during
the four-year period beginning April 9, 2002. A. Brean Murray, one of our
directors, and his wife control Brean Murray & Co., Inc. In addition, the Brean
Murray & Co., Inc. Profit Sharing Plan purchased 32,285 common shares in the
offering, and Robert R. Henry, one of our directors, purchased 100,000 common
shares in the offering.
As of August 31, 2001, we had working capital of $1,577,846, cash and
cash equivalents of $424,088, total current liabilities of $533,479 and
shareholder's equity of $2,844,333.
Assuming the FDA requires 510(k) clearance and not PMA approval for the
CorRestore patch, and human clinical trials are not required, we expect the
process of development, testing, application, clearance and preparing to
manufacture the product to take approximately one year and to cost us
approximately $750,000. If the 510(k) process requires human clinical trials, we
expect the process of development, testing, application, clearance and preparing
to manufacture the product to take approximately two years and to cost us
approximately $1,500,000.
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17
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 2001
We believe that the cash and cash equivalents on hand at August 31,
2001, 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 through the second quarter of fiscal 2002. By that time we
will be required to raise additional cash either through additional sales of our
products, through sales of securities, by incurring indebtedness or by some
combination of these alternatives. If we are unable to raise additional cash by
that time, we will be required to reduce or discontinue our operations.
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 test the CorRestore patch, to undertake
other product development activities, and for working capital might be
substantially greater than current estimates.
We do not believe that product sales will be sufficient to fund our
operations in fiscal 2001. Although we expect to incur an operating loss for
fiscal year 2001, we expect to achieve positive earnings before interest, taxes,
depreciation and amortization in the fourth quarter of fiscal 2001.
The underwriter of the June 1997 public offering received warrants to
purchase 200,000 common shares exercisable at $4.80 per share until May 29,
2002. In addition, Kingsbridge Capital Limited has warrants to purchase 203,108
common shares exercisable at $4.29 per share until September 3, 2005 pursuant to
the Private Equity Line Agreement. Also, CorRestore, LLC and its agent, Wolfe &
Company, received warrants to purchase 400,000 common shares exercisable at
$3.00 per share until June 2, 2005 pursuant to the CorRestore license agreement,
and when specified events occur we agreed to issue them five-year warrants to
purchase an additional 2,100,000 common shares exercisable at $3.00 per share
pursuant to the CorRestore license agreement. Also, as described above, the
placement agent in the April 9, 2001 private placement received warrants to
purchase 25,000 common shares exercisable at $2.10 per share until April 9,
2006. It is unlikely that these warrants will be exercised if the exercise price
exceeds the market price of the common shares.
We are a party to the Loan and Security Agreement with Crestmark Bank
described above. As of September 28, 2001, we had no outstanding principal loan
balance, and $574,390 was available for borrowing, at Crestmark's discretion,
under the facility. We do not have any other loan commitments.
Even if we receive additional capital, we might not be able to achieve
the level of sales necessary to sustain our operations, and we will incur the
costs of developing and testing the CorRestore patch before we realize any
revenues from the patch. We might not be able to obtain any funds on terms
acceptable to us and at times required by us through sales of our products,
sales of securities or loans in sufficient quantities. Our Independent Auditors'
report in our Annual Report on Form 10-K for the fiscal year ended November 30,
2000 contains an explanatory paragraph relating to an uncertainty concerning our
ability to continue as a going concern.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(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: October 3, 2001 By:/s/ William M. Iacona
------------------ --------------------------------------
William M. Iacona
Vice President, Finance, Controller, and
Treasurer (Duly Authorized and Principal
Financial Officer)
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