<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended MAY 31, 1998
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from__________ to____________
Commission file number 0-19095
SOMANETICS CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2394784
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1653 EAST MAPLE ROAD,
TROY, MICHIGAN
48083-4208
(Address of principal executive offices)
(Zip Code)
(248) 689-3050
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
_____________ _______________
Number of common shares outstanding at June 30, 1998: 6,035,597
<PAGE> 2
PART I FINANCIAL INFORMATION
SOMANETICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, November 30,
ASSETS 1998 1997
- ------ ---------- ------------
CURRENT ASSETS: (Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents.......................................... $ 10,095,061 $ 2,132,376
Marketable securities, at cost..................................... - 2,470,780
Accounts receivable, net of allowance for doubtful accounts of
approximately $153,000 and $166,000 at May 31, 1998 and
November 30, 1997, respectively................................. 498,822 191,698
Inventory, net..................................................... 907,293 433,014
Prepaid expenses................................................... 51,408 71,581
--------------- ---------------
Total current assets............................................ 11,552,584 5,299,449
--------------- ---------------
PROPERTY AND EQUIPMENT (at cost):
Machinery and equipment............................................ 1,016,502 722,905
Furniture and fixtures............................................. 184,949 184,351
Leasehold improvements............................................. 166,770 166,770
--------------- ---------------
Total........................................................... 1,368,221 1,074,026
Less accumulated depreciation and amortization..................... (859,013) (784,860)
-------------- --------------
Net property and equipment...................................... 509,208 289,166
--------------- ---------------
OTHER ASSETS:
Patents and trademarks, net........................................ 68,761 72,217
Other.............................................................. 15,000 16,600
--------------- ---------------
Total other assets.............................................. 83,761 88,817
--------------- ---------------
TOTAL ASSETS........................................................... $ 12,145,553 $ 5,677,432
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 309,358 $ 390,494
Accrued liabilities................................................ 383,966 397,982
--------------- ---------------
Total current liabilities....................................... 693,324 788,476
--------------- ---------------
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, 6,035,597 and 4,285,334 shares at
May 31, 1998 and November 30, 1997, respectively................ 60,356 42,853
Additional paid-in capital......................................... 50,290,067 41,212,639
Accumulated deficit................................................ (38,898,194) (36,366,536)
--------------- ---------------
Total shareholders' equity...................................... 11,452,229 4,888,956
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 12,145,553 $ 5,677,432
=============== ===============
</TABLE>
See notes to financial statements
2
<PAGE> 3
SOMANETICS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended May 31, Ended May 31,
------------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
NET REVENUES .................................... $ 510,687 $ 401,056 $ 1,314,052 $ 754,919
COST OF SALES ................................... 300,878 213,939 690,876 394,211
----------- ----------- ----------- -----------
GROSS MARGIN .................................... 209,809 187,117 623,176 360,708
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research, development and engineering ........ 163,837 239,973 328,625 404,185
Selling, general and administrative .......... 1,490,515 1,413,807 2,971,086 2,772,893
----------- ----------- ----------- -----------
Total operating expenses ................. 1,654,352 1,653,780 3,299,711 3,177,078
----------- ----------- ----------- -----------
OPERATING LOSS .................................. (1,444,543) (1,466,663) (2,676,535) (2,816,370)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income .............................. 85,985 14,064 136,777 47,259
Other ........................................ -- 8,100 8,100 16,200
----------- ----------- ----------- -----------
Total other income ....................... 85,985 22,164 144,877 63,459
----------- ----------- ----------- -----------
NET LOSS ........................................ $(1,358,558) $(1,444,499) $(2,531,658) $(2,752,911)
----------- ----------- ----------- -----------
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED ........................... $ (0.26) $ (0.63) $ (0.53) $ (1.20)
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING ................................. 5,312,620 2,285,342 4,804,621 2,285,347
=========== =========== =========== ===========
</TABLE>
See notes to financial statements
3
<PAGE> 4
SOMANETICS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Month
Periods Ended May 31,
---------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................$ (2,531,658) $ (2,752,911)
Adjustments to reconcile net loss to net cash used in
operations:
Depreciation and amortization ........................................ 47,952 26,522
Changes in assets and liabilities:
Accounts receivable (increase) ................................... (307,124) (311,852)
Inventory (increase) decrease .................................... (474,279) 86,291
Prepaid expenses decrease ........................................ 20,173 28,235
Other assets (increase) decrease ................................. 1,600 (188,217)
Accounts payable increase (decrease) ............................. (81,136) 270,918
Accrued liabilities (decrease) ................................... (14,016) (11,194)
------------ ------------
Net cash (used in) operations .................................. (3,338,488) (2,852,208)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities .............................. 2,470,780 --
Acquisition of property and equipment (net) .............................. (264,538) (18,876)
------------ ------------
Net cash provided by (used in) investing activities ............ 2,206,242 (18,876)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Shares .................................. 9,094,931 11,390
------------ ------------
Net cash provided by financing activities ..................... 9,094,931 11,390
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .............................................................. 7,962,685 (2,859,694)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ................................................................ 2,132,376 3,291,911
------------ ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD ................................................................$ 10,095,061 $ 432,217
============ ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest for the six-month period ended May 31, 1998 and 1997 was
$0 and $0, respectively.
See notes to financial statements
4
<PAGE> 5
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1998
1. ORGANIZATION AND OPERATIONS
Somanetics Corporation (the "Company"), a Michigan corporation formed
in January 1982, develops, manufactures and markets the INVOS 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 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.
The Company was in the development stage at May 31, 1997; during the
year ended November 30, 1997, the Company completed its development activities
and commenced its planned principal operations.
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 not material to the Company's
financial condition or results of operations. Operating results for the
six-month period ended May 31, 1998, are not necessarily indicative of the
results that may be expected for the year ending November 30, 1998, 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, 1997 included in the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1997.
The Company has not achieved sales necessary to support operations. The
Company has incurred an accumulated deficit of $38,898,194 through May 31, 1998.
The Company had working capital of $10,859,260, cash and cash equivalents of
$10,095,061, total current liabilities of $693,324 and shareholders' equity of
$11,452,229 as of May 31, 1998.
Management believes that markets exist for the product the Company has
developed; however, there is an inherent uncertainty associated with the success
of such 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.
5
<PAGE> 6
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1998
On April 8, 1998, the Company completed the public offering of
1,750,000 newly-issued Common Shares, at a price of $5.75 per share, for gross
proceeds of $10,062,500, 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 $9,100,000. The
net proceeds from the public offerings of Common Shares in June 1997 and April
1998 were sufficient to fund the Company's working capital requirements for the
six months ended May 31, 1998. Current sales are not sufficient to fund
operations.
The Company believes that the cash and cash equivalents on hand at May
31, 1998 will be sufficient to sustain the Company's operations at budgeted
levels and its needs for liquidity into the fourth quarter of fiscal 1999. 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 and cash equivalents 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.
The Company does not believe that product sales will be sufficient to
fund the Company's operations in fiscal 1998.
As of May 31, 1998, 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 June 24, 1998. In addition, the placement agents and their
transferees hold warrants to purchase 64,394 Common Shares exercisable at $12.50
per share and 15,000 warrants exercisable at $14.40 per share. Also, the
underwriter of the June 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 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, 1997
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.
6
<PAGE> 7
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1998
3. COMMON SHARES AND STOCK OPTIONS
On January 15, 1998, the Company's Board of Directors approved an
amendment and restatement of the Company's Restated Articles of Incorporation to
(i) increase the Company's authorized Common Shares from 6,000,000 to 20,000,000
shares, and (ii) remove provisions referring to the reverse stock split
effective April 10, 1997, all subject to shareholder approval at the 1998 Annual
Meeting of Shareholders. The Company's shareholders approved such amendment and
restatement at the 1998 Annual Meeting of Shareholders on March 17, 1998.
In addition, on January 15, 1998, the Company's Board of Directors
approved an amendment to the Somanetics Corporation 1997 Stock Option Plan to
increase the number of Common Shares reserved for issuance pursuant to the
exercise of options granted under the 1997 Plan by 450,000, from 295,000 to
745,000 shares, subject to shareholder approval at the 1998 Annual Meeting of
Shareholders. The Company's shareholders approved such amendment at the 1998
Annual Meeting of Shareholders on March 17, 1998.
Effective January 22, 1998, the Company's Board of Directors granted
10-year stock options under the 1997 Stock Option Plan to purchase an aggregate
of 20,000 Common Shares at $4.75 per share (the closing sale price of the Common
Shares on the date of grant) to four executive officers of the Company. In
addition, effective March 17, 1998, the Company replaced options to purchase
18,522 Common Shares granted under the 1991 Incentive Stock Option Plan or the
1993 Director Stock Option Plan to the three directors of the Company who are
not officers or employees of the Company, with ten-year options granted under
the 1997 Stock Option Plan to purchase the same number of Common Shares at an
exercise price of $5.875 per share (the closing sale price of the Common Shares
on the date of grant). Also effective March 17, 1998, the Company granted such
directors ten-year options under the 1997 Stock Option Plan to purchase an
aggregate of 6,000 Common Shares at an exercise price of $5.875 per share. In
addition, effective April 2, 1998, the Company granted 10-year options under the
1997 Stock Option Plan to purchase 430,000 Common Shares to 22 employees and one
consultant of the Company at an exercise price of $5.875 per share (the closing
sale price of the Common Shares as of the date of grant).
On April 8, 1998, the Company completed the public offering of
1,750,000 newly-issued Common Shares, at a price of $5.75 per share, for gross
proceeds of $10,062,500, 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 $9,100,000.
7
<PAGE> 8
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1998
4. 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:
<TABLE>
<CAPTION>
May 31, 1998 November 30, 1997
------------ -----------------
<S> <C> <C>
Finished goods................... $195,418 $100,224
Work in process.................. 316,400 174,363
Purchased components............. 585,793 514,725
----------- ----------
Sub-total................... 1,097,611 789,312
Less reserve for obsolete
and excess inventory.......... (190,317) (356,298)
----------- ----------
Total....................... $907,293 $433,014
=========== ==========
</TABLE>
Patents and Trademarks are recorded at cost and are being amortized on
the straight-line method over 17 years. Accumulated amortization was $42,972 and
$39,516 at May 31, 1998 and November 30, 1997, respectively.
Loss Per Common Share - basic and diluted, is computed using the
weighted average number of common shares outstanding during each period. During
the first quarter of fiscal 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The adoption of
SFAS No. 128 had no impact on the reported loss per share for all periods
presented. Common Shares issuable under stock options and warrants have been
considered in the computation of the net loss per Common Share - diluted, but
have not been included because such inclusion would be antidilutive. As of May
31, 1998 and May 31,1997, the Company had outstanding 1,404,781 and 751,931,
respectively, of warrants and options to purchase Common Shares.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
May 31, 1998 November 30, 1997
------------ -----------------
<S> <C> <C>
Professional Fees....................... $41,357 $120,726
Clinical Research....................... 39,165 43,330
Product Upgrades........................ 21,350 25,842
Warranty................................ 70,435 31,166
Accrued Insurance....................... 13,567 29,768
Accrued Incentive....................... 125,064 50,500
Other................................... 73,028 96,650
-------- --------
Total $383,966 $397,982
======== ========
</TABLE>
8
<PAGE> 9
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1998
6. COMMITMENTS AND CONTINGENCIES
The Company may become subject to product liability claims by patients
or physicians, 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.
9
<PAGE> 10
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1998
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 the caption "Risk Factors" and elsewhere in the Company's
Registration Statement on Form S-1 (file no. 333-47225) effective April 2, 1998
and elsewhere in this Report, 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
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 June 1996, the Company received clearance from the FDA to market the Cerebral
Oximeter and the related disposable SomaSensor in the United States. In October
1997, the Company obtained FDA clearance for new advances in its INVOS
technology that are incorporated in its next generation INVOS 4100 Cerebral
Oximeter. The next generation Cerebral Oximeter was introduced in October 1997
and became available in the first quarter of fiscal 1998.
During fiscal 1997, the Company's primary activities consisted of
research and development of the INVOS technology, the Cerebral Oximeter and the
related disposable SomaSensor. During the first two quarters of fiscal 1998, the
Company's primary activities consisted of sales and marketing related to the new
model 4100 Cerebral Oximeter. The Company recently emerged from the development
stage and had an accumulated deficit of $38,898,194 through May 31, 1998. 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 in the United States 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 and
research, development and engineering, which are generally expensed as incurred.
Since May 1994, the Company has exchanged model 3100A Cerebral Oximeters for its
model 3100 Cerebral Oximeters. Until the model 4100 Cerebral Oximeter became
available in the first quarter of fiscal 1998, the Company refurbished the model
3100 Cerebral Oximeters it received and sold them approximately at cost in
countries that do not require compliance with the standards met by the model
3100A. In the first and second quarters of 1998, the Company offered to exchange
model 4100 Cerebral Oximeters for model 3100A Cerebral Oximeters and cash equal
to the difference in sales prices of the two models. Such sales reduce the
Company's average unit sales price and overall gross margin.
10
<PAGE> 11
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1998
THREE MONTHS ENDED MAY 31, 1998 COMPARED TO THREE MONTHS ENDED MAY 31, 1997
Net revenues increased by approximately $110,000, or 27%, from $401,056
in the three-month period ended May 31, 1997 to $510,687 in the three-month
period ended May 31, 1998. The increase in revenues was primarily attributable
to an increase in United States sales of approximately $150,000, from
approximately $131,000 in the second quarter of fiscal 1997 to approximately
$281,000 in the second quarter of fiscal 1998, partially offset by a decrease in
international sales of approximately $40,000, from approximately $270,000 in the
second quarter of fiscal 1997 to approximately $230,000 in the second quarter of
fiscal 1998. The increase in net revenues is primarily attributable to sales of
the model 4100 Cerebral Oximeter and SomaSensor which became available in the
first quarter of fiscal 1998, stocking orders for the model 4100 Cerebral
Oximeter from new international distributors, purchases of the model 4100 by
customers in the United States, and a 37% increase in the average selling price
of Cerebral Oximeters due to (i) a change in the mix between sales directly to
hospitals and sales through distributors and (ii) the higher price of the new
model 4100 Cerebral Oximeter, partially offset by exchanges of model 4100
Cerebral Oximeters for model 3100A Cerebral Oximeters with existing customers.
The sales increase for the second quarter of fiscal 1998 as compared to the
second quarter of fiscal 1997 was also partially offset by approximately
$135,000 of reduced shipments to Baxter Limited in Japan, which is delaying
purchases until shipment of the model 4100 Cerebral Oximeter is permitted in
Japan pursuant to Japanese Ministry of Health and Welfare approval. There can be
no assurance that the application for such permission will be approved before
the fourth quarter of fiscal 1998.
Sales of model 4100 Cerebral Oximeters, model 4100 exchanges and
refurbished model 3100 Cerebral Oximeters, model 3100A Cerebral Oximeters, and
SomaSensors comprised approximately 60%, 8%, 0%, and 32%, respectively, of the
Company's net revenues in the second quarter of fiscal 1998 and 0%, 12%, 64%,
and 24%, respectively, of the Company's net revenues in the second quarter of
fiscal 1997. Approximately 45% of the Company's net revenues in the second
quarter of fiscal 1998 were export sales, compared to 67% of the Company's net
revenues in the second quarter of fiscal 1997. One United States distributor and
two international distributors accounted for approximately 18%, 11%, and 10%,
respectively, of net revenues for the three months ended May 31, 1998, and three
international distributors accounted for approximately 37%, 15% and 11%,
respectively, of total net revenues for the three months ended May 31, 1997.
Gross margin as a percentage of net revenues for the quarters ended May
31, 1998 and May 31, 1997 was approximately 41% and 47%, respectively. Gross
margin as a percentage of net revenues decreased in the second quarter ended May
31, 1998 from the second quarter of fiscal 1997 primarily because of the higher
cost to the Company of the SomaSensor in the second quarter of fiscal 1998, the
decrease in the average selling price realized by the Company for SomaSensors in
the second quarter of fiscal 1998, and the higher percentage of total revenues
derived from SomaSensor sales in the second quarter of fiscal 1998. The decrease
was partially offset by the higher average selling price realized by the Company
for the new model 4100 Cerebral Oximeters and the smaller percentage of net
revenues that consisted of sales, approximately at cost, in connection with
model 4100 exchanges in fiscal 1998 and refurbished model 3100 sales in fiscal
1997.
The Company's research, development and engineering expenses decreased
approximately $76,000, or 32%, from $239,973 for the three months ended May 31,
1997 to $163,837 for the three months ended May 31, 1998. The decrease is
primarily attributable to decreased consulting fees and costs of development
materials in fiscal 1998 in connection with the model 4100 Cerebral Oximeter.
11
<PAGE> 12
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1998
Selling, general and administrative expenses increased approximately
$77,000, or 5%, from $1,413,807 for the three months ended May 31, 1997 to
$1,490,515 for the three months ended May 31, 1998. The increase in selling,
general and administrative expense is primarily attributable to a $94,000
increase in salaries, wages, commissions, and related expenses as a result of
the additional employees hired since May 31, 1997 (from an average of 40
employees in the second quarter of fiscal 1997 to 44 employees in the second
quarter of fiscal 1998), a $71,000 increase in selling-related expenses
attributable to employee travel, industry trade shows, marketing and
advertising, and a $26,000 increase in employee and office related expenses,
partially offset by a $117,000 decrease in professional service fees and
regulatory certification fees. The Company expects that selling, general and
administrative expenses will increase primarily due to the planned expansion of
the direct sales force within several domestic territories and the addition of
marketing and administrative support personnel.
For the three-month period ended May 31, 1998, the Company realized a
6% decrease in its net loss over the same period in fiscal 1997. The decrease is
primarily attributable to a 27% increase in net revenues and increased interest
income, partially offset by lower gross margins as a percentage of net revenues.
SIX MONTHS ENDED MAY 31, 1998 COMPARED TO SIX MONTHS ENDED MAY 31, 1997
Net revenues increased by approximately $559,000, or 74%, from $754,919
in the six-month period ended May 31, 1997 to $1,314,052 in the six-month period
ended May 31, 1998. This increase in net revenues was primarily attributable to
approximately $673,000 of sales in the United States in the first two quarters
of fiscal 1998, compared to $266,000 in the first two quarters of fiscal 1997,
and approximately $641,000 of sales internationally in the first two quarters of
fiscal 1998, compared to $489,000 in the first two quarters of fiscal 1997. The
increase in net revenues is primarily attributable to sales of the model 4100
Cerebral Oximeter and SomaSensor which became available in the first quarter of
fiscal 1998, stocking orders for the model 4100 Cerebral Oximeter from both
existing distributors and new international distributors, purchases of the model
4100 by customers in the United States, and a 26% increase in the average
selling price of Cerebral Oximeters due to (i) a change in the mix between sales
directly to hospitals and sales through distributors and (ii) the higher price
of the new model 4100 Cerebral Oximeter, partially offset by exchanges of model
4100 Cerebral Oximeters for model 3100A Cerebral Oximeters with existing
customers. The sales increase for the first two quarters of fiscal 1998 as
compared to the first two quarters of fiscal 1997 was also partially offset by
approximately $234,000 of reduced shipments to Baxter Limited in Japan, which is
delaying purchases until shipment of the model 4100 Cerebral Oximeter is
permitted in Japan pursuant to Japanese Ministry of Health and Welfare approval.
There can be no assurance that the application for such permission will be
approved before the fourth quarter of fiscal 1998.
Sales of model 4100 Cerebral Oximeters, model 4100 exchanges and
refurbished model 3100 Cerebral Oximeters, model 3100A Cerebral Oximeters, and
SomaSensors comprised approximately 62%, 11%, 4%, and 21%, respectively, of the
Company's net revenues in the first two quarters of fiscal 1998 and 0%, 9%, 68%,
and 23%, respectively, of the Company's net revenues in the first two quarters
of fiscal 1997. Approximately 49% of the Company's net revenues in the first two
quarters of fiscal 1998 were export sales, compared to 65% of the Company's net
revenues for the same period in fiscal 1997. One United States distributor and
two international distributors accounted for approximately 20%, 12%, and 10%,
respectively, of net revenues for the six months ended May 31, 1998, and three
international distributors and one United States distributor accounted for
approximately 39%, 12%, 10% and 11%, of total net sales for the same period
ended May 31, 1997.
12
<PAGE> 13
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1998
Gross margin as a percentage of net revenues for six-month periods
ended May 31, 1998 and May 31, 1997 was approximately 47% and 48%, respectively.
Gross margin as a percentage of net revenues decreased in the six-month period
ended May 31, 1998 from the same period of fiscal 1997 primarily because of (i)
the higher cost to the Company of the SomaSensor in the first two quarters of
fiscal 1998, (ii) the decrease in the average selling price realized by the
Company for SomaSensors in the first two quarters of fiscal 1998, and (iii) the
greater percentage of net revenues that consisted of sales, approximately at
cost, in connection with exchanges of model 4100 Cerebral Oximeters for model
3100A Cerebral Oximeters in fiscal 1998 and refurbished model 3100 sales in
fiscal 1997. The decrease was partially offset by the higher average selling
price realized by the Company for the new model 4100 Cerebral Oximeters.
The Company's research, development and engineering expenses decreased
approximately $76,000, or 19%, from $404,185 for the six-month period ended May
31, 1997 to $328,625 for the six-month period ended May 31, 1998. The decrease
is primarily attributable to decreased consulting fees and costs of development
materials in fiscal 1998 in connection with the model 4100 Cerebral Oximeter.
Selling, general and administrative expenses increased approximately
$198,000, or 7%, from $2,772,893 for the six-month period ended May 31, 1997 to
$2,971,086 for the six-month period ended May 31, 1998. The increase in selling,
general and administrative expense is primarily attributable to a $192,000
increase in salaries, wages, commissions and related expenses as a result of the
additional employees hired since May 31, 1997 (from an average of 38 employees
in the six-month period ended May 31, 1997 to 42 employees in the same period of
fiscal 1998), a $152,000 increase in selling-related expenses attributable to
employee travel, industry trade shows, marketing and advertising, and a $30,000
increase in accrued warranty expense for sales of new products, partially offset
by a $165,000 decrease in professional service fees and regulatory certification
fees.
For the six-month period ended May 31, 1998, the Company realized an 8%
decrease in its net loss over the same period in fiscal 1997. The decrease is
primarily attributable to a 74% increase in net revenues and increased interest
income, partially offset by a 4% increase in operating expenses and lower gross
margins as a percentage of net revenues.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the six-month period ended May 31,
1998 was approximately $3,338,000. Cash was used primarily to (i) fund the
Company's net loss, primarily selling, general and administrative expenses and
research, development and engineering expenses (approximately $2,484,000, net of
depreciation and amortization expense), (ii) increase inventories of the model
4100 Cerebral Oximeter and its components (approximately $474,000), (iii)
increase accounts receivable (approximately $307,000) primarily due to higher
sales in the second quarter of fiscal 1998 than in the fourth quarter of fiscal
1997, and (iv) decrease accounts payable and accrued liabilities (approximately
$95,000) resulting from the use of some of the proceeds from the public
offering. Management expects working capital requirements to increase if sales
increase. The Company capitalized approximately $252,000 of costs for model 4100
Cerebral Oximeters being used as demonstration units during the first two
quarters of fiscal 1998. The Company expects to depreciate these costs as a
marketing expense over three years.
As of May 31, 1998 the Company has working capital of $10,859,620, cash
and cash equivalents of $10,095,061, total current liabilities of $693,324 and
shareholder's equity of $11,452,229. The Company has no loan commitments.
13
<PAGE> 14
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1998
On April 8, 1998, the Company completed the public offering of
1,750,000 newly-issued Common Shares, at a price of $5.75 per share, for gross
proceeds of $10,062,500, 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 $9,100,000.
The Company believes that the cash and cash equivalents on hand at May
31, 1998 will be sufficient to sustain the Company's operations at budgeted
levels and its needs for liquidity into the fourth quarter of fiscal 1999. 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 and cash equivalents 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 and 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.
The Company does not believe that product sales will be sufficient to
fund the Company's operations in fiscal 1998.
As of May 31, 1998, 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 April 1996 Regulation S
securities offerings. The conditions permitting the Company to redeem these
warrants have not been met as of June 24, 1998. In addition, the placement
agents and their transferees hold warrants to purchase 64,394 Common Shares
exercisable at $12.50 per share and 15,000 warrants exercisable at $14.40 per
share. Also, the underwriter of the June 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 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, 1997
contains an explanatory paragraph relating to an uncertainty concerning the
Company's ability to continue as a going concern.
14
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
15
<PAGE> 16
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on March 17,
1998. At the Annual Meeting, Bruce J. Barrett was elected as a Director of the
Company, and the terms of office of H. Raymond Wallace, Daniel S. Follis, and
Dr. James I. Ausman as Directors of the Company continued after the meeting.
3,806,237 votes were cast for Mr. Barrett's election and 96,484 votes were
withheld from Mr. Barrett's election. There were no abstentions or broker
non-votes in connection with the election of the Director at the Annual Meeting.
Also at the Annual Meeting of Shareholders, the shareholders approved
the proposed amendment and restatement of the Company's Restated Articles of
Incorporation to (i) increase the Company's authorized Common Shares from
6,000,000 to 20,000,000 shares, and (ii) remove provisions relating to the
reverse stock split effected April 10, 1997. 3,674,237 votes were cast in favor
of this proposal, 211,809 votes were cast against this proposal and 16,675 votes
abstained on this proposal.
In addition, at the Annual Meeting of Shareholders, the 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 450,000 shares, from 295,000
to 745,000 shares. 1,315,315 votes were cast in favor of this proposal, 364,821
votes were cast against this proposal, 25,824 votes abstained on this
proposal, and there were 2,196,761 broker non-votes in connection with this
proposal.
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.
16
<PAGE> 17
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: June 30, 1998 By:/s/ Raymond W. Gunn
------------------ -------------------
Raymond W. Gunn
Executive Vice President and Chief
Financial Officer (Duly Authorized
and Principal Financial Officer)
17
<PAGE> 18
EXHIBIT INDEX
-------------
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule.
18
<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 SIX MONTHS
ENDED, MAY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> MAY-31-1998
<CASH> 10,095,061
<SECURITIES> 0
<RECEIVABLES> 651,822
<ALLOWANCES> 153,000
<INVENTORY> 907,293
<CURRENT-ASSETS> 11,552,584
<PP&E> 1,368,221
<DEPRECIATION> 859,013
<TOTAL-ASSETS> 12,145,553
<CURRENT-LIABILITIES> 693,324
<BONDS> 0
0
0
<COMMON> 60,356
<OTHER-SE> 11,391,873
<TOTAL-LIABILITY-AND-EQUITY> 12,145,553
<SALES> 1,314,052
<TOTAL-REVENUES> 1,314,052
<CGS> 690,876
<TOTAL-COSTS> 690,876
<OTHER-EXPENSES> 3,299,711
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,531,658)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,531,658)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,531,658)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> (.53)
</TABLE>
