<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
<TABLE>
<S> <C>
(x) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended AUGUST 31, 1997
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
--------------- --------------------------
</TABLE>
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 (I.R.S. Employer
or organization) Identification No.)
1653 EAST MAPLE ROAD,
TROY, MICHIGAN
48083-4208
(Address of principal executive offices)
(Zip Code)
(248) 689-3050
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Number of common shares outstanding at September 30, 1997: 4,285,334
<PAGE> 2
PART I FINANCIAL INFORMATION
SOMANETICS CORPORATION
(A development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, November 30,
1997 1996
ASSETS ----------- ------------
CURRENT ASSETS: (Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents ....................................................... $ 3,205,482 $ 3,291,911
Marketable Securities, at cost .................................................. 2,929,960 -
Accounts receivable, net of allowance for doubtful accounts of
approximately $64,000 and $46,000 at August 31, 1997 and
November 30, 1996, respectively ............................................... 452,753 191,436
Inventory, net .................................................................. 646,532 931,135
Prepaid expenses ................................................................ 80,302 65,435
---------------- ----------
Total current assets ......................................................... 7,315,029 4,479,917
---------------- ----------
PROPERTY AND EQUIPMENT (at cost):
Machinery and equipment ......................................................... 505,528 479,757
Furniture and fixtures .......................................................... 198,776 193,343
Leasehold improvements .......................................................... 166,770 166,770
---------------- ----------
Total ........................................................................ 871,074 839,870
Less accumulated depreciation and amortization .................................. (775,723) (743,775)
---------------- ----------
Net property and equipment ................................................... 95,351 96,095
---------------- ----------
OTHER ASSETS:
Patents and trademarks, net ..................................................... 73,944 79,129
Other ........................................................................... 16,600 16,600
---------------- ----------
Total other assets .......................................................... 90,544 95,729
---------------- ----------
TOTAL ASSETS ..................................................................... $ 7,500,924 $4,671,741
================ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................... $ 246,196 $ 364,032
Accrued liabilities ............................................................ 322,818 254,110
----------------- ----------
Total current liabilities .................................................... 569,014 618,142
----------------- ----------
COMMITMENTS AND CONTINGENCIES .................................................... -- --
SHAREHOLDERS' EQUITY:
Preferred shares; authorized, 1,000,000 shares of $.01 par value;
no shares issued or outstanding ............................................. -- --
Common shares; authorized, 6,000,000 shares of $.01 par value;
issued and outstanding, 4,285,334 and 2,285,351 shares at
August 31, 1997 and November 30, 1996, respectively .......................... 42,853 22,854
Additional paid-in capital ..................................................... 41,212,639 34,241,798
Deficit accumulated during the development stage ............................... (34,323,582) (30,211,053)
-------------- --------------
Total shareholders' equity ................................................... 6,931,910 4,053,599
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....................................... $ 7,500,924 $ 4,671,741
================ ==============
</TABLE>
See notes to financial statements
2
<PAGE> 3
SOMANETICS CORPORATION
(A development stage company)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
for the Period
January 15, 1982
Three Months Nine Months (Date of Inception)
Ended August 31, Ended August 31, to August 31,
---------------------- ------------------------
1997 1996 1997 1996 1997
---------- --------- ----------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net sales ............................. $ 261,506 $ 99,541 $ 1,016,424 $ 699,006 $ 6,745,356
Research and development activities.... -- -- -- -- 122,500
----------- --------- ----------- ----------- -------------
Total revenues ................... 261,506 99,541 1,016,424 699,006 6,867,856
COST OF SALES ........................... 129,415 67,700 523,625 327,151 3,150,876
----------- --------- ----------- ----------- -------------
GROSS MARGIN ............................ 132,091 31,841 492,799 371,855 3,716,980
----------- --------- ----------- ----------- -------------
OPERATING EXPENSES:
Research, development and engineering.. 254,532 44,685 658,717 147,353 $ 8,663,628
Selling, general and administrative.... 1,329,834 678,766 4,102,726 1,878,482 30,292,448
----------- --------- ----------- ----------- -------------
Total operating expenses .......... 1,584,366 723,451 4,761,443 2,025,835 38,956,076
----------- --------- ----------- ----------- -------------
OPERATING LOSS........................... (1,452,275) (691,610) (4,268,644) (1,653,980) (35,239,097)
----------- --------- ----------- ----------- -------------
OTHER INCOME (EXPENSE):
Interest income........................ 84,557 19,569 131,797 51,980 $ 1,252,945
Interest expense....................... -- -- -- -- (231,674)
Other 8,100 8,099 24,318 19,272 (85,915)
----------- --------- ----------- ----------- -------------
Total other income................... 92,657 27,668 156,115 71,252 935,356
----------- --------- ----------- ----------- -------------
NET LOSS................................. $(1,359,618) $(663,942) $(4,112,529) $(1,582,728) $ (34,303,740)
----------- --------- ----------- ----------- -------------
NET LOSS PER COMMON SHARE................ $ (0.32) $ (0.35) $ (1.40) $ (0.86) $ (39.35)
----------- --------- ----------- ----------- -------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING................ 4,220,117 1,910,929 2,934,978 1,836,548 871,741
=========== ========= =========== =========== =============
</TABLE>
See notes to financial statements
3
<PAGE> 4
SOMANETICS CORPORATION
(A development stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
(1 OF 2)
<TABLE>
<CAPTION>
TOTAL
PRICE ADDITIONAL ACCUM- SHAREHOLDERS'
PER SHARE PAID-IN ULATED EQUITY
DATE SHARE SHARES VALUE CAPITAL DEFICIT (DEFICIENCY)
---- ------ ------ ----- ---------- ------- -------------
ISSUANCE OF COMMON SHARES:
<S> <C> <C> <C> <C> <C> <C> <C>
For shareholders' contributions of test equipment .. January, 1982 $ 0.32 83,037 $ 830 $ 25,670 $ - $ 26,500
For cash ........................................... July, 1982 13.08 7,835 79 101,921 102,000
Net loss from January 15, 1982 (date of inception)
to November 30, 1982 ............................. (107,083) (107,083)
------- ------ ---------- --------- ---------
Balance at November 30, 1982 ......................... 90,872 909 127,591 (107,083) 21,417
For cash ........................................... December, 1982 13.08 3,917 39 50,961 51,000
For services........................................ January, 1983 13.08 1,567 16 20,484 20,500
For cash, less issuance costs of $5,863............. July, 1983 26.17 11,624 116 298,185 298,301
For services ....................................... November, 1983 26.17 784 8 20,492 20,500
Net loss for the year ended November 30, 1983 ...... (291,986) (291,986)
------- ------ ---------- --------- ---------
Balance at November 30, 1983 ......................... 108,764 1,088 517,713 (399,069) 119,732
For cash, less issuance costs December, 1983-
of $7,735 April, 1984 26.17 19,421 194 500,252 500,446
For patents February, 1984 26.17 4,895 49 128,020 128,069
For cash November, 1984 35.10 3,730 37 130,899 130,936
Net loss for the year ended November 30, 1984 ...... (700,380) (700,380)
------- ------ ---------- --------- ---------
Balance at November 30, 1984 ......................... 136,810 1,368 1,276,884 (1,099,449) 178,803
For cash, less issuance costs December, 1984-
of $3,726 June, 1985 35.10 13,029 130 453,485 453,615
For cash November, 1985 70.20 14,484 145 1,016,655 1,016,800
Net loss for the year ended November 30, 1985 ...... (559,871) (559,871)
------- ------ ---------- --------- ---------
Balance at November 30, 1985 ......................... 164,323 1,643 2,747,024 (1,659,320) 1,089,347
Exercise of stock options for cash ................. December, 1985 35.10 783 8 27,492 27,500
For cash ........................................... January, 1986 70.20 10,444 104 733,097 733,201
Net loss for the year ended November 30, 1986 ...... (1,222,772) (1,222,772)
------- ------ ---------- --------- ---------
Balance at November 30, 1986 ......................... 175,550 1,755 3,507,613 (2,882,092) 627,276
For cash, less issuance costs March, 1987-
of $9,500 September, 1987 51.06 10,359 104 519,296 519,400
Net loss for the year ended November 30, 1987 ...... (1,143,081) (1,143,081)
------- ------ ---------- --------- ---------
Balance at November 30, 1987 ......................... 185,909 1,859 4,026,909 (4,025,173) 3,595
For cash, less issuance costs February, 1988-
of $10,500 April, 1988 51.06 3,291 33 157,467 157,500
Net loss for the year ended November 30, 1988 ...... (352,311) (352,311)
------- ------ ---------- --------- ---------
Balance at November 30, 1988 ......................... 189,200 1,892 4,184,376 (4,377,484) (191,216)
For cash and the exchange of debt January, 1989-
due a shareholder .............................. July, 1989 51.06 4,524 45 230,955 231,000
Net loss for the year ended November 30, 1989 ...... (446,642) (446,642)
------- ------ ---------- --------- ---------
Balance at November 30, 1989 ......................... 193,724 1,937 4,415,331 (4,824,126) (406,858)
For services ....................................... August, 1990 51.06 4,701 47 239,953 240,000
Net loss for the year ended November 30, 1990 ...... (1,328,518) (1,328,518)
------- ------ ---------- ---------- ----------
Balance at November 30, 1990 ......................... 198,425 1,984 4,655,284 (6,152,644) (1,495,376)
For cash, less issuance costs of $1,630,241......... March, 1991 20.00 360,000 3,600 5,566,159 5,569,759
Unit Purchase Option ............................... March, 1991 120 120
Redeemable Convertible Preferred Stock dividend .... April, 1991 (19,843) (19,843)
For cash, less issuance costs of $126,900 .......... April, 1991 20.00 54,000 540 952,560 953,100
Net loss for the year ended November 30, 1991 ...... (2,058,493) (2,058,493)
------- ------ ---------- ---------- ---------
Balance at November 30, 1991 ......................... 612,425 $6,124 $11,174,123 $(8,230,980) $2,949,267
</TABLE>
See notes to financial statements
4
<PAGE> 5
SOMANETICS CORPORATION
(A development stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
(2 OF 2)
<TABLE>
<CAPTION>
PRICE
PER SHARE
DATE SHARE SHARES VALUE
--------------- ------ ------- ------
<S> <C> <C> <C> <C>
Balance at November 30, 1991 ............................. 612,425 $ 6,124
Exercise of Class A Warrants for cash, December, 1991-
less issuance costs of $702,917 ...................... May, 1992 30.00 413,900 4,139
February, 1992-
Exercise of Class B Warrants for cash .................. November, 1992 40.00 3,406 34
July, 1992- 20.00-
Exercise of stock options for cash ..................... November, 1992 21.90 3,010 30
Net loss for year ended November 30, 1992 ..............
--------- -------
Balance at November 30, 1992 ............................. 1,032,741 10,327
December, 1992-
Exercise of Class B Warrants for cash .................. October, 1993 40.00 2,976 30
March, 1993-
Exercise of Class M Warrants for cash .................. October, 1993 10.00 60,018 601
March, 1993- 20.00-
Exercise of stock options for cash ..................... September, 1993 43.80 310 3
Exercise of Unit Purchase Options and May, 1993- 30.00-
underlying Class A Warrants for cash ................. October, 1993 33.00 1,000 10
Net loss for the year ended November 30, 1993 ..........
--------- -------
Balance at November 30, 1993 ............................. 1,097,045 10,971
For cash, less issuance costs of $490,790 .............. August, 1994 8.00 529,700 5,297
Exercise of stock options for cash ..................... November, 1994 16.25-
35.90 10 --
Net loss for the year ended November 30, 1994 ..........
--------- -------
Balance at November 30, 1994 ............................. 1,626,755 16,268
Exercise of stock options for cash ..................... February, 1995 8.40 100 1
For cash, less issuance costs of $282,475 .............. July, 1995 12.50 150,000 1,500
Net loss for the year ended November 30, 1995 .........
--------- -------
Balance at November 30, 1995 ............................. 1,776,855 17,769
January, 1996- 8.40-
Exercise of stock options for cash ..................... June, 1996 14.70 7,717 77
For cash, less issuance costs of $143,587 .............. April, 1996 12.50 114,240 1,143
Exercise of warrants for cash, less issuance June, 1996-
costs of $16,350 ..................................... September, 1996 20.00 19,698 197
For cash, less issuance costs of $650,872 .............. November, 1996 11.50 366,841 3,668
Redemption of Class B Warrants November, 1996 .......... 0.50
Net loss for the year ended November 30, 1996 ..........
--------- -------
Balance at November 30, 1996 ............................. 2,285,351 22,854
Reduce issuance costs for November, 1996 offering.......
Redemption of fractional shares, April 11, 1997 ........ (17) (1)
For cash, less issuance costs of $1,020,550 ............ June, 1997 4.00 2,000,000 20,000
Net loss for the nine-month period ended
August 31, 1997 ......................................
--------- -------
Balance at August 31, 1997 ............................... 4,285,334 42,853
========= =======
<CAPTION>
TOTAL
ADDITIONAL ACCUM- SHAREHOLDERS'
PAID-IN ULATED EQUITY
CAPITAL DEFICIT (DEFICIENCY)
----------- ----------- -----------
<S> <C> <C>
Balance at November 30, 1991 ............................. $11,174,123 $(8,230,980) $2,949,267
Exercise of Class A Warrants for cash,
less issuance costs of $702,917 ...................... 11,709,944 11,714,083
Exercise of Class B Warrants for cash .................. 136,186 136,220
Exercise of stock options for cash ..................... 66,045 66,075
Net loss for year ended November 30, 1992 .............. (5,390,637) (5,390,637)
---------- ----------- ----------
Balance at November 30, 1992 ............................. 23,086,298 (13,621,617) 9,475,008
Exercise of Class B Warrants for cash .................. 119,034 119,064
Exercise of Class M Warrants for cash .................. 599,578 600,179
Exercise of stock options for cash ..................... 13,147 13,150
Exercise of Unit Purchase Options and
underlying Class A Warrants for cash ................. 31,496 31,506
Net loss for the year ended November 30, 1993 .......... (6,135,830) (6,135,830)
---------- ----------- ----------
Balance at November 30, 1993 ............................. 23,849,553 (19,757,447) 4,103,077
For cash, less issuance costs of $490,790 .............. 3,741,513 3,746,810
Exercise of stock options for cash .....................
202 202
Net loss for the year ended November 30, 1994 .......... (4,331,500) (4,331,500)
---------- ----------- ----------
Balance at November 30, 1994 ............................. 27,591,268 (24,088,947) 3,518,589
Exercise of stock options for cash ..................... 843 844
For cash, less issuance costs of $282,475 .............. 1,591,125 1,592,625
Net loss for the year ended November 30, 1995 ......... (2,818,403) (2,818,403)
---------- ----------- ----------
Balance at November 30, 1995 ............................. 29,183,236 (26,907,350) 2,293,655
Exercise of stock options for cash ..................... 75,030 75,107
For cash, less issuance costs of $143,587 .............. 1,283,270 1,284,413
Exercise of warrants for cash, less issuance
costs of $16,350 ..................................... 339,886 340,083
For cash, less issuance costs of $650,872 .............. 3,564,135 3,567,803
Redemption of Class B Warrants November, 1996 .......... (203,759) (203,759)
Net loss for the year ended November 30, 1996 .......... (3,303,703) (3,303,703)
---------- ----------- ----------
Balance at November 30, 1996 ............................. 34,241,798 (30,211,053) 4,053,599
Reduce issuance costs for November, 1996 offering....... 11,768 11,768
Redemption of fractional shares, April 11, 1997 ........ (377) (378)
For cash, less issuance costs of $1,020,550 ............ 6,959,450 6,979,450
Net loss for the nine-month period ended
August 31, 1997 ...................................... (4,112,529) (4,112,529)
----------- ------------- ----------
Balance at August 31, 1997 ............................... $41,212,639 $ (34,323,582) $6,931,910
=========== ============== ==========
</TABLE>
See notes to financial statements
5
<PAGE> 6
SOMANETICS CORPORATION
(A development stage company)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
for the Period
January 15, 1982
Nine Months (Date of Inception)
Ended August 31, to August 31,
------------------------------------
1997 1996 1997
-------------- ------------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $ (4,112,529) $ (1,582,728) $ (34,303,740)
Adjustments to reconcile net loss to net cash used in
operations:
Depreciation and amort................................ 31,948 47,530 861,157
Expenses paid through the issuance of common shares... -- -- 408,068
Loss on disposal of property.......................... -- -- 44,861
Changes in assets and liabilities:
Accounts receivable (increase) decrease............ (261,317) 129,726 (452,753)
Inventory (increase) decrease ..................... 284,603 (55,539) (646,532)
Prepaid expenses (increase) decrease............... (14,866) 28,809 (80,301)
Other assets (increase) decrease................... 5,184 (24,585) (122,148)
Accounts payable increase (decrease)............... (117,836) 130,742 246,196
Accrued liabilities increase (decrease)............ 68,707 (384,093) 322,817
---------- ---------- ------------
Net cash (used in) operations .................... (4,116,106) (1,710,138) (33,722,375)
---------- ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities ...................... (2,929,960) -- (15,096,500)
Proceeds from sale of marketable securities ............. -- -- 12,166,540
Acquisition of property and equipment (net) ............. (31,203) (40,722) (942,264)
Accrual for note receivable - related party -- (11,885) --
---------- ---------- ------------
Net cash (used in) investing activities .......... (2,961,163) (52,607) (3,872,224)
---------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Shares ................. 6,991,218 1,670,170 41,024,061
Redemption of Redeemable Convertible Preferred Shares.... -- (19,843) (19,843)
Redemption of Class B Warrants and Fractional Shares..... (378) -- (204,137)
Proceeds from issuance of notes payable and
long-term debt .......................................... -- -- 2,515,223
Repayments of notes payable and long-term debt .......... -- -- (2,515,223)
---------- ---------- ------------
Net cash provided by financing activities ........ 6,990,840 1,650,327 40,800,081
---------- ---------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ......................................... (86,429) (112,418) 3,205,482
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ........................................... 3,291,911 941,426 --
---------- ---------- ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD ........................................... $3,205,482 $ 829,008 $ 3,205,482
========== ========== ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
See Statements of Shareholders' Equity (Deficiency) for details of shares
issued in exchange for non-cash consideration.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest for the nine-month periods ended August 31, 1997
and 1996 approximated $0 and $0, respectively.
See notes to financial statements
6
<PAGE> 7
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1997
1. ORGANIZATION AND OPERATIONS
Somanetics Corporation (the "Company"), a Michigan corporation formed in
January 1982, develops, manufactures, and markets the INVOS 3100A Cerebral
Oximeter (the "Cerebral Oximeter"), the only FDA-cleared, non-invasive patient
monitoring system that continuously measures changes in the blood oxygen level
in the adult brain. The Cerebral Oximeter is based on the Company's
proprietary In Vivo Optical Spectroscopy ("INVOS(R)") 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. The Company is in the development stage and has incurred
research, product development and other expenses involved in designing,
developing, marketing and selling its product, as well as devoting efforts to
raising capital.
2. FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited interim financial statements of Somanetics
Corporation have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, such financial statements do
not include all of the information and footnotes normally included in the
Company's annual financial statements prepared in accordance with generally
accepted accounting principles, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
The accompanying unaudited interim financial statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such
adjustments are of a normal recurring nature, except those described in Notes 3
and 4, and those not material to the Company's financial condition or results
of operations. Operating results for the nine-month period ended August 31,
1997, are not necessarily indicative of the results that may be expected for
the year ending November 30, 1997, although the Company expects to continue to
incur operating losses for the foreseeable future. The unaudited interim
financial statements should be read in conjunction with the financial
statements and footnotes thereto for the year ended November 30, 1996 included
in the Company's Annual Report on Form 10-K for the fiscal year ended November
30, 1996.
The Company is in the development stage and, accordingly, has not achieved
sales necessary to support operations. The Company has incurred an accumulated
deficit of $34,323,582 through August 31, 1997. The Company had working
capital of $6,746,015, cash and cash equivalents of $3,205,482, marketable
securities of $2,929,960, total current liabilities of $569,014 and
shareholders' equity of $6,931,910, as of August 31, 1997.
Management believes that markets exist for the product that the Company
has developed; however, there is an inherent uncertainty associated with the
success of such a new product. The likelihood of success of the Company must
be considered in view of the Company's limited resources and current financial
condition, the problems and expenses frequently encountered in connection with
formation of a new business, the ability to raise new funds, the development
and application of new technology, and the competitive environment in which the
Company operates.
On June 4, 1997, the Company completed the public offering of 2,000,000
newly-issued Common Shares, at a price of $4.00 per share, for gross proceeds
of $8,000,000, through an offering underwritten by Brean Murray & Co., Inc.
The net proceeds to the Company, after deducting the underwriting discount and
the estimated expenses of the offering, were approximately $6,980,000. The
Company also granted the underwriter warrants to purchase 200,000 Common Shares
at $4.80 per share exercisable during the four-year period beginning May 30,
1998. The net proceeds from the sale of Common Shares in the Regulation S
offering in November 1996 and the net proceeds from the public offering of
Common Shares in June 1997 were sufficient to fund the Company's working
capital requirements for the nine months ended August 31, 1997. Current sales
are not sufficient to fund operations.
7
<PAGE> 8
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1997
The Company believes that the cash, cash equivalents, and marketable
securities on hand at August 31, 1997 will be sufficient to sustain the
Company's operations at budgeted levels and its needs for liquidity into the
second half of fiscal 1998. By that time the Company will be required to raise
additional cash either through additional sales of its product, through sales
of securities, by incurring indebtedness or by some combination of the
foregoing. If the Company is unable to raise additional cash by that time, it
will be required to reduce or discontinue its operations.
The estimated length of time current cash, cash equivalents, and
marketable securities, will sustain the Company's operations is based on
certain estimates and assumptions made by the Company. Such estimates and
assumptions are subject to change as a result of actual experience. There can
be no assurance that actual capital requirements necessary to market the
Cerebral Oximeter and SomaSensor, to develop enhancements to, and product
extensions of, the Cerebral Oximeter, to conduct research and development
concerning additional potential applications of the Company's technology and
for working capital will not be substantially greater than current estimates.
Product Sales. The Company does not believe that product sales will be
sufficient to fund the Company's operations for the remainder of fiscal 1997.
Securities Sales. As of August 31, 1997, there were 60,400 redeemable
warrants outstanding, exercisable at $20.00 per share until July 13, 2000, and
55,120 redeemable warrants outstanding exercisable at $17.50 per share until
April 1, 2001. These warrants were issued in the Company's 1995 and 1996
Regulation S securities offerings. The conditions permitting the Company to
redeem these warrants have not been met as of September 22, 1997. In addition,
the placement agents and their transferees hold warrants to purchase 52,970
Common Shares exercisable at $12.50 per share, 15,000 warrants exercisable at
$14.40 per share, and 11,242 warrants exercisable at $12.50 per share. Also,
as described above, the underwriter of the 1997 public offering received
warrants to purchase 200,000 Common Shares exercisable at $4.80 per share. It
is unlikely that these warrants will be exercised if the exercise price exceeds
the market price of the Common Shares. The Company has the right to reduce the
exercise price of these warrants.
Indebtedness. The Company has no loan commitments.
There can be no assurance that even if the Company receives additional
capital, it will be able to achieve the level of sales necessary to sustain its
operations. There can be no assurance that the Company will be able to obtain
any funds on terms acceptable to the Company and at times required by the
Company through sales of the Company's product, sales of securities or loans in
sufficient quantities. The report of the Company's Independent Auditors in the
Company's Annual Report on Form 10-K for the fiscal year ended November 30,
1996 contains an explanatory paragraph relating to an uncertainty concerning
the Company's ability to continue as a going concern.
These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
8
<PAGE> 9
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1997
3. COMMON SHARES AND STOCK OPTIONS
On January 15, 1997, the Company's Board of Directors approved an
amendment and restatement of the Company's Restated Articles of Incorporation
to (i) effect a one-for-ten reverse stock split of the Company's Common Shares
while keeping 6,000,000 authorized Common Shares, at a par value of $0.01, and
(ii) remove provisions relating to the Convertible Preferred Shares redeemed
February 28, 1996, all subject to shareholder approval at the 1997 Annual
Meeting of Shareholders. The Company's shareholders approved such amendment
and restatement at the 1997 Annual Meeting of Shareholders on March 25, 1997,
and the reverse stock split became effective on April 10, 1997. All
information contained in this report gives retroactive effect to the 1-for-10
reverse stock split effected April 10, 1997.
In addition, on January 15, 1997, the Company's Board of Directors
approved the Somanetics Corporation 1997 Stock Option Plan, pursuant to which
295,000 Common Shares are reserved for issuance pursuant to options to be
granted to key employees, directors, consultants and advisors of the Company,
subject to shareholder approval at the 1997 Annual Meeting of Shareholders.
The Company's shareholders approved the 1997 Stock Option Plan at the 1997
Annual Meeting of Shareholders on March 25, 1997.
Also at its January 15, 1997 meeting, the Company's Board of Directors
granted ten-year stock options independent of the Company's stock option plans
to purchase an aggregate of 12,700 Common Shares at $13.10 per share (the then
current market price). Such options were granted to eight new employees of the
Company. Effective April 24, 1997, the Company granted ten-year options under
the 1997 Stock Option Plan to purchase 251,200 Common Shares to 47 employees
and consultants of the Company at an exercise price of $4.75 a share (the
closing sale price of the Common Shares on the date of grant), including
options to purchase 135,000 and 45,000 shares granted to Mr. Barrett and Mr.
Gunn, respectively. Also effective April 24, 1997, the Company replaced
options to purchase 36,150 Common Shares granted independent of the Company's
stock option plans to persons who were not directors or officers of the Company
(including the options granted January 15, 1997, described above), with new
ten-year options granted independent of the Company's stock option plans
exercisable at $4.75 a share. Effective July 22, 1997, the Company granted
ten-year options under the 1997 Stock Option Plan to purchase 3,500 Common
Shares to two employees of the Company at an exercise price of $4.00 a share
(the closing sale price of the Common Shares on the date of grant).
On March 27, 1997, the 4,500 Exchange Warrants expired unexercised.
On June 4, 1997, the Company completed the public offering of 2,000,000
newly-issued Common Shares, at a price of $4.00 per share, for gross proceeds
of $8,000,000, through an offering underwritten by Brean Murray & Co., Inc.
The net proceeds to the Company, after deducting the underwriting discount and
the estimated expenses of the offering, were approximately $6,980,000. The
Company also granted the underwriter warrants to purchase 200,000 Common Shares
at $4.80 per share exercisable during the four-year period beginning May 30,
1998.
9
<PAGE> 10
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1997
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Marketable Securities are stated at the lower of aggregate cost or market
value. These securities consisted of AAA rated corporate bonds, at cost
which approximated market value at August 31, 1997.
Inventory is stated at the lower of cost or market on a first-in,
first-out (FIFO) basis and consists of:
<TABLE>
<CAPTION>
August 31, 1997 November 30, 1996
--------------- -----------------
<S> <C> <C>
Finished goods ............. $341,883 $437,079
Work in process ............ $228,266 307,510
Purchased components ....... $373,341 386,996
----------- -----------
Sub-total ............... 943,490 1,131,585
Less reserve for obsolete
and excess inventory ...... (296,958) (200,450)
----------- -----------
Total ................... $646,532 $931,135
=========== ===========
</TABLE>
The Company expects its reserve for obsolete and excess inventory to
increase in the fourth quarter of fiscal 1997 as a result of the anticipated
introduction of the Company's next generation Cerebral Oximeter.
Patents and Trademarks are recorded at cost and are being amortized on the
straight-line method over 17 years. Accumulated amortization was $37,788 and
$32,604 at August 31, 1997 and November 30, 1996, respectively.
Loss Per Common Share 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 considered in the computation of the
net loss per Common Share because such inclusion would be antidilutive.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
AUGUST 31, 1997 November 30, 1996
---------------- -----------------
<S> <C> <C>
Professional Fees ..... $19,500 $101,697
Product Upgrades ...... 29,868 18,261
Warranty .............. 28,124 12,421
Accrued Insurance ..... 2,314 32,231
Accrued Incentive...... 130,705 --
Other.................. 112,308 89,500
-------- --------
Total.............. $322,819 $254,110
======== ========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company entered into a Second Addendum to the Lease of its facilities
dated September 10, 1991 with its landlord. The Second Addendum extends the
term of the Lease by two years commencing January 1, 1998 and terminating
December 31, 1999, and provides for an option to extend for a third additional
year under the same terms and conditions. The minimum monthly lease payment
for the extended two-year term is approximately $14,700, excluding other
occupancy costs.
10
<PAGE> 11
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1997
Effective April 24, 1997, the Company extended its employment agreements
with its President and Chief Executive Officer and with its Executive Vice
President and Chief Financial Officer through April 30, 2000 and increased the
President and Chief Executive Officer's annual salary to $204,750.
The Company may become subject to product liability claims by patients or
doctors, and may become a defendant in product liability or malpractice
litigation. The Company has obtained product liability insurance and an
umbrella policy. There can be no assurance that the Company will be able to
maintain such insurance or that such insurance would be sufficient to protect
the Company against such product liability.
7. SUBSEQUENT EVENTS
On April 25, 1994, a shareholder of the Company filed suit in the United
States District Court for the Eastern District of Michigan, individually and on
behalf of all others similarly situated, against the Company and Gary D. Lewis,
the Company's former Chairman of the Board, in an action captioned Benjamin
Langford v. Somanetics Corporation and Gary D. Lewis. The plaintiff alleged
that Company documents contained material misstatements and omissions in
violation of various securities laws. He generally sought unspecified
rescissionary damages, interest, punitive damages and attorneys' fees. The
Company settled a class action in 1996 raising similar issues, but
approximately 11 persons, including Benjamin Langford, opted out of that action
and the related settlement and, therefore, are not barred by the settlement
from pursuing their own claims against the Company. As a result, however, Mr.
Langford's action was no longer a class action. The Company, the Company's
insurance company and Mr. Langford have agreed in principal to a settlement,
that requires the Company and its insurance company to make a cash payment to
Mr. Langford and requires the dismissal of the lawsuit with prejudice. Under
this agreement in principal, the Company's portion of the cash settlement will
be immaterial.
11
<PAGE> 12
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AUGUST 31, 1997
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations includes forward-looking statements with respect to
the Company's future financial performance. These forward-looking statements
are subject to various risks and uncertainties, including the factors described
under "Risk Factors" and elsewhere in the Company's Registration Statement on
Form S-1 (file no. 333-25275), that could cause actual results to differ
materially from historical results or those currently anticipated.
RESULTS OF OPERATIONS
OVERVIEW
Somanetics Corporation develops, manufactures and markets the INVOS 3100A
Cerebral Oximeter, the only FDA-cleared, non-invasive patient monitoring system
that continuously measures changes in the blood oxygen level in the adult
brain. In 1988, the Company began clinical studies of the Cerebral Oximeter on
human patients. In June 1992, the Company received 510(k) clearance from the
FDA to market the Cerebral Oximeter in the United States for use on adults.
The Company began commercial shipments of Cerebral Oximeters and SomaSensors in
May 1993. In November 1993, the FDA rescinded the Company's clearance to
market the Cerebral Oximeter and the related disposable SomaSensor in the
United States, and the Company suspended all commercial sales. In February
1994, the Company resumed marketing its product in several foreign countries,
and in June 1996 the Company received clearance from the FDA to market the
Cerebral Oximeter and the related disposable SomaSensor in the United States.
The Company is in the development stage and has accumulated losses of
$34,303,740 through August 31, 1997. From its inception in January 1982
through August 31, 1997, its primary activities have consisted of research and
development of the INVOS technology, a discontinued product, the Cerebral
Oximeter and the related disposable SomaSensor. The Company believes that its
accumulated deficit will continue to increase for the foreseeable future.
The Company derives its revenues from sales of Cerebral Oximeters and
SomaSensors to its distributors and, since the June 1996 FDA clearance, to
hospitals through its direct sales employees. The Company recognizes revenues
when it ships its product to its distributors or to hospitals. Payment terms
are generally net 30 days for United States sales and net 60 days or longer for
international sales. The Company's primary expenses, excluding the cost of its
product, are selling, general and administrative expenses and research,
development and engineering expenses, which are generally expensed as incurred.
The Company capitalizes its patent costs and amortizes them over 17 years.
Since May 1994, the Company has exchanged the new model 3100A Cerebral
Oximeters for its model 3100 Cerebral Oximeters. The Company refurbishes the
model 3100 Cerebral Oximeters it receives and sells them approximately at cost
in countries that do not require compliance with the standards met by the model
3100A. Such sales reduce the Company's overall gross margin percentage. When
the Company's next generation Cerebral Oximeter is introduced into the
marketplace, the Company expects to upgrade existing model 3100A Cerebral
Oximeters. The timing of the introduction of the next generation Cerebral
Oximeter depends on when and if the Food and Drug Administration approves the
Company's application for 510(k) clearance with respect to the improvements to
the device.
THREE MONTHS ENDED AUGUST 31, 1997 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1996
Net sales increased by approximately $162,000, or 163%, from $99,541 in the
three-month period ended August 31, 1996 to $261,506 in the three-month
period ended August 31, 1997. The increase in sales was primarily attributable
to approximately $157,000 of sales in the United States in the third quarter of
fiscal 1997, compared to approximately $31,000 in the third quarter of fiscal
1996, and a 27% increase in the average selling price of the Cerebral Oximeter
for the third quarter of fiscal 1997 compared to the same period for fiscal
1996 as a result of a change in the mix between sales directly to hospitals and
sales through distributors. The Company's fiscal third quarter sales are
lower, compared to other fiscal quarters, in part because the fiscal quarter
coincides with the summer vacation season, especially in Europe and the United
States. Sales of model 3100A Cerebral Oximeters, refurbished model 3100
Cerebral Oximeters, and SomaSensors comprised approximately 52%, 10% and 38%,
12
<PAGE> 13
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AUGUST 31, 1997
respectively, of the Company's sales in the third quarter of fiscal 1997, and
26%, 43% and 31%, respectively, of the Company's sales in the third quarter of
fiscal 1996. Approximately 40% of the Company's net sales in the third quarter
of fiscal 1997 were export sales, compared to 67% of the Company's net sales in
the third quarter of fiscal 1996. Two domestic distributors and one
international customer accounted for approximately 16%, 14%, and 10%,
respectively, of total net sales for the three months ended August 31, 1997,
and two international distributors accounted for approximately 49% and 25%
respectively, of total net sales for the three months ended August 31, 1996.
Fourth quarter fiscal 1997 sales are not expected to be materially different
from third quarter fiscal 1997 sales as a result of the anticipated
introduction of the Company's next generation Cerebral Oximeter into the
marketplace, which is causing some existing and prospective customers to defer
their decision about whether to purchase the current product.
Gross margin as a percentage of net sales for the quarters ended August
31, 1997 and August 31, 1996 was approximately 51% and 32%, respectively.
Gross margin as a percentage of net sales increased in the third quarter ended
August 31, 1997 from the third quarter of fiscal 1996 primarily because the
portion of net sales attributable to refurbished model 3100 Cerebral Oximeters
decreased and the average selling price of Cerebral Oximeters sold in the third
quarter of fiscal 1997 increased approximately 27%. This increase was
partially offset by the higher cost of the SomaSensor in the third quarter of
fiscal 1997 compared to the third quarter of fiscal 1996 and SomaSensors were a
larger portion of overall sales.
The Company's research, development and engineering expenses increased
approximately $210,000, or 470%, from $44,685 for the three months ended August
31, 1996 to $254,532 for the three months ended August 31, 1997. The increase
is primarily attributable to increased costs of development materials and
consulting fees in fiscal 1997 in connection with new product development,
increased clinical testing, as well as an increase in research, development,
and engineering personnel to five employees at August 31, 1997 from two
employees at August 31, 1996.
Selling, general and administrative expenses increased approximately
$651,000, or 96%, from $678,766 for the three months ended August 31, 1996 to
$1,329,834 for the three months ended August 31, 1997. The increase in
selling, general and administrative expense is primarily attributable to a
$340,000 increase in salaries, wages and related expenses as a result of the
additional employees hired since August 31, 1996 (from 22 employees as of
August 31, 1996 to 39 at August 31, 1997), a $160,000 increase in miscellaneous
expense ($116,000 in additional inventory obsolescence and swap-out reserves
recorded for fiscal quarter ended August 31, 1997 compared to a net $44,000
reversal of an exchange and upgrade reserve which was included in the quarter
ended August 31, 1996 results), a $126,000 increase in selling-related expenses
primarily as a result of increased expenses for medical affairs, sales and
marketing demonstration equipment use and travel expenses, and a $70,000
increase in bad debts expense (the fiscal quarter ended August 31, 1996
included a $68,000 bad debt recovery), partially offset by an $82,000 decrease
in professional fees. The Company expects selling, general and administrative
expenses to increase in the fourth quarter of fiscal 1997 as a result of an
expected increase in the reserve for obsolete and excess inventory if the
Company's next generation Cerebral Oximeter is introduced in the fourth
quarter, the Company's participation in two major industry trade shows, and the
Company's scheduled national sales meeting.
For the three-month period ended August 31, 1997, the Company realized a
105% increase in its net loss over the same period in fiscal 1996. The
increase is primarily attributable to a 119% increase in operating expenses,
partially offset by a 163% increase in sales.
NINE MONTHS ENDED AUGUST 31, 1997 COMPARED TO NINE MONTHS ENDED AUGUST 31, 1996
Net sales increased by approximately $317,000, or 45%, from $699,006 in
the nine-month period ended August 31, 1996 to $1,016,424 in the nine-month
period ended August 31, 1997. This increase in sales was primarily
attributable to approximately $423,000 of sales in the United
States in the first three quarters of fiscal 1997, compared to $42,000 in the
first three quarters of fiscal 1996, partially offset by a decrease in
international sales of $64,000 in the first three quarters of fiscal 1997 as
compared to the first three quarters of fiscal 1996, primarily due
13
<PAGE> 14
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AUGUST 31, 1997
to reduced shipments to Baxter Limited in Japan, which purchased its
requirements for all of 1996 in the first quarter of fiscal 1996, and a 17%
decrease in the average selling price of Cerebral Oximeters in the first three
quarters of fiscal 1997 as compared to the first three quarters of fiscal 1996.
Sales of model 3100A Cerebral Oximeters, refurbished model 3100 Cerebral
Oximeters, and SomaSensors comprised approximately 65%, 9% and 26%,
respectively, of the Company's sales in the nine-month period ended August 31,
1997 and 70%, 12% and 18%, respectively, of the Company's sales for the same
period of fiscal 1996. Approximately 59% of the Company's net sales for the
nine-month period ended August 31, 1997 were export sales, compared to 95% of
the Company's net sales for the same period of fiscal 1996. Two international
distributors and one United States distributor accounted for approximately 32%,
12%, and 11%, respectively, of total net sales for the nine-month period
ended August 31, 1997, and two international distributors accounted for
approximately 68% and 14% of total net sales for the same period ended August
31, 1996.
Gross margin as a percentage of net sales for the nine-month period ended
August 31, 1997 was 48%, as compared with 53% for the same period ended August
31, 1996. Gross margin as a percentage of net sales decreased in the
nine-month period ended August 31, 1997 from the same period of fiscal 1996
primarily because the Company realized lower average selling prices for model
3100A Cerebral Oximeters in fiscal 1997, the cost to the Company of the
SomaSensor was higher in fiscal 1997, and SomaSensors were a larger portion of
overall sales. This decrease was partially offset by the decrease in the
portion of net sales attributable to refurbished model 3100 Cerebral Oximeters
in fiscal 1997.
The Company's research, development and engineering expenses increased
approximately $511,000, or 347%, from $147,353 for the nine-month period ended
August 31, 1996 to $658,717 for the nine-month period ended August 31, 1997.
The increase is primarily attributable to increased costs of development
materials and consulting fees in fiscal 1997 in connection with new product
development, increased clinical testing, an increase in research, development,
and engineering personnel from two employees at August 31, 1996 to five
employees at August 31, 1997, and increased obsolescence costs in the first
nine months of fiscal 1997.
Selling, general and administrative expenses increased approximately
$2,224,000, or 118%, from $1,878,482 for the nine-month period ended August 31,
1996 to $4,102,726 for the nine-month period ended August 31, 1997. The
increase in selling, general and administrative expense is primarily
attributable to a $1,308,000 increase in salaries, wages and related expenses
as a result of the additional personnel hired since August 31, 1996 (from 22
employees as of August 31, 1996 to 39 employees as of August 31, 1997, most of
whom were hired during the first quarter of 1997), a $444,000 increase in
selling-related expenses primarily as a result of increased expenses for
employee travel, medical affairs, marketing, and sales demonstration equipment
use, and industry trade shows and advertising, a $148,000 increase in incentive
compensation accrual, a $148,000 increase in personnel-related expenses,
including temporary services, indirect production expenses, and recruiting and
training, a $98,000 increase in miscellaneous expense primarily related to
inventory obsolescence and swap-out reserves recorded during the third quarter
of fiscal 1997, and a $78,000 increase in bad debt expense (the third quarter
of fiscal 1996 included a $68,000 bad debt recovery).
For the nine-month period ended August 31, 1997, the Company realized a
160% increase in its net loss over the same period in fiscal 1996. The
increase is primarily attributable to a 135% increase in operating expenses,
partially offset by a 45% increase in net sales.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the nine-month period ended August 31,
1997 was approximately $4,116,000. Cash was used primarily to (i) fund the
Company's net loss, including selling, general and administrative expenses and
research, development and engineering expenses (approximately $4,081,000, net
of depreciation and amortization expense), (ii) increase accounts receivable
(approximately $261,000) primarily due to increased sales in the second and
third quarters of fiscal 1997, compared to the last two quarters of fiscal
1996, and (iii) decrease accounts payable to vendors (approximately $118,000)
resulting from the use of some of the proceeds
14
<PAGE> 15
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AUGUST 31, 1997
from the public offering to pay previously delayed balances due vendors. These
uses of cash were principally offset by a decrease in net inventory
(approximately $285,000) due to management's decision to lower inventory levels
of INVOS 3100A Cerebral Oximeters and its components to prepare for the
introduction of the next generation Cerebral Oximeter, and increased inventory
obsolescence recorded in the third quarter of fiscal 1997 in anticipation of
the new product launch. Management expects working capital requirements to
increase if sales increase.
On June 4, 1997, the Company completed the public offering of 2,000,000
newly-issued Common Shares, at a price of $4.00 per share, for gross proceeds
of $8,000,000, through an offering underwritten by Brean Murray & Co., Inc.
The net proceeds to the Company, after deducting the underwriting discount and
the expenses of the offering, were approximately $6,980,000. The Company also
granted the underwriter warrants to purchase 200,000 Common Shares at $4.80 per
share exercisable during the four-year period beginning May 30, 1998.
As of August 31, 1997 the Company had working capital of $6,746,015, cash
and cash equivalents of $3,205,482, marketable securities of $2,929,960, total
current liabilities of $569,014 and shareholders' equity of $6,931,910. The
Company has no loan commitments.
The Company believes that the cash, cash equivalents, and marketable
securities on hand at August 31, 1997 will be sufficient to sustain the
Company's operations at budgeted levels and its needs for liquidity into the
second half of fiscal 1998. By that time the Company will be required to raise
additional cash either through additional sales of its product, through sales
of securities, by incurring indebtedness or by some combination of the
foregoing. If the Company is unable to raise additional cash by that time, it
will be required to reduce or discontinue its operations.
The estimated length of time current cash, cash equivalents, and
marketable securities will sustain the Company's operations is based on certain
estimates and assumptions made by the Company. Such estimates and assumptions
are subject to change as a result of actual experience. There can be no
assurance that actual capital requirements necessary to market the Cerebral
Oximeter and SomaSensor, to develop enhancements to, and product extensions of,
the Cerebral Oximeter, to conduct research and development concerning
additional potential applications of the Company's technology and for working
capital will not be substantially greater than current estimates.
Product Sales. The Company does not believe that product sales will be
sufficient to fund the Company's operations for the remainder of fiscal 1997.
Securities Sales. As of August 31, 1997, there were 60,400 redeemable
warrants outstanding, exercisable at $20.00 per share until July 13, 2000, and
55,120 redeemable warrants outstanding exercisable at $17.50 per share until
April 1, 2001. These warrants were issued in the Company's 1995 and 1996
Regulation S securities offerings. The conditions permitting the Company to
redeem these warrants have not been met as of September 22, 1997. In addition,
the placement agents and their transferees hold warrants to purchase 52,970
Common Shares exercisable at $12.50 per share, 15,000 warrants exercisable at
$14.40 per share, and 11,242 warrants exercisable at $12.50 per share. Also, as
described above, the underwriter of the 1997 public offering received warrants
to purchase 200,000 Common Shares exercisable at $4.80 per share. It is
unlikely that these warrants will be exercised if the exercise price exceeds
the market price of the Common Shares. The Company has the right to reduce the
exercise price of these warrants.
Indebtedness. The Company has no loan commitments.
There can be no assurance that even if the Company receives additional
capital, it will be able to achieve the level of sales necessary to sustain its
operations. There can be no assurance that the Company will be able to obtain
any funds on terms acceptable to the Company and at times required by the
Company through sales of the Company's product, sales of securities or loans in
sufficient quantities. The report of the Company's Independent Auditors in the
15
<PAGE> 16
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AUGUST 31, 1997
Company's Annual Report on Form 10-K for the fiscal year ended November 30,
1996 contains an explanatory paragraph relating to an uncertainty concerning
the Company's ability to continue as a going concern.
16
<PAGE> 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings
For a description of the pending settlement of a suit filed by a
shareholder of the Company on April 25, 1994 in the United States District
Court for the Eastern District of Michigan, individually and on behalf of all
others similarly situated, against the Company and Gary D. Lewis, the Company's
former Chairman of the Board, in an action captioned Benjamin Langford v.
Somanetics Corporation and Gary D. Lewis, see Note 7 of Notes to Financial
Statements included in Part I of this Report, which description is incorporated
in this Item 1 by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter for which this report is filed.
17
<PAGE> 18
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, 1997 By: /s/ Raymond W. Gunn
--------------- ----------------------
Raymond W. Gunn
Executive Vice President and Chief
Financial Officer (Duly Authorized
and Principal Financial Officer)
18
<PAGE> 19
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOMANETICS CORPORATION AS OF, AND FOR THE NINE MONTHS
ENDED, AUGUST 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> AUG-31-1997
<CASH> 3,205,482
<SECURITIES> 2,929,960
<RECEIVABLES> 516,753
<ALLOWANCES> 64,000
<INVENTORY> 646,532
<CURRENT-ASSETS> 7,315,029
<PP&E> 871,074
<DEPRECIATION> 775,723
<TOTAL-ASSETS> 7,500,924
<CURRENT-LIABILITIES> 569,014
<BONDS> 0
0
0
<COMMON> 42,853
<OTHER-SE> 6,889,057
<TOTAL-LIABILITY-AND-EQUITY> 7,500,924
<SALES> 1,016,424
<TOTAL-REVENUES> 1,016,424
<CGS> 523,625
<TOTAL-COSTS> 523,625
<OTHER-EXPENSES> 4,761,443
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,112,529)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,112,529)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,112,529)
<EPS-PRIMARY> (1.40)
<EPS-DILUTED> (1.40)
</TABLE>
