<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 AUGUST 31, 1999
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)
<TABLE>
<S> <C>
MICHIGAN 38-2394784
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
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 27, 1999: 6,035,597
<PAGE> 2
PART I FINANCIAL INFORMATION
SOMANETICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, November 30,
ASSETS 1999 1998
- ------ -------------- ----------------
CURRENT ASSETS: (Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents.......................................... $ 1,661,715 $ 1,976,829
Marketable securities.............................................. 1,372,376 4,916,942
Accounts receivable, net of allowance for doubtful accounts of
approximately $0 and $153,000 at August 31, 1999 and
November 30, 1998, respectively................................. 714,647 615,682
Inventory, net..................................................... 789,188 660,964
Prepaid expenses................................................... 117,870 92,050
--------------- ---------------
Total current assets............................................ 4,655,796 8,262,467
--------------- ---------------
PROPERTY AND EQUIPMENT (at cost):
Machinery and equipment............................................ 1,321,650 1,309,539
Furniture and fixtures............................................. 183,497 184,949
Leasehold improvements............................................. 165,642 166,770
--------------- ---------------
Total........................................................... 1,670,789 1,661,258
Less accumulated depreciation and amortization..................... (1,020,623) (957,083)
--------------- ---------------
Net property and equipment...................................... 650,166 704,175
--------------- ---------------
OTHER ASSETS:
Patents and trademarks, net........................................ 60,120 65,305
Other.............................................................. 15,000 15,000
--------------- ---------------
Total other assets.............................................. 75,120 80,305
--------------- ---------------
TOTAL ASSETS........................................................... $ 5,381,082 $ 9,046,947
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 337,455 $ 262,932
Accrued liabilities................................................ 152,208 366,222
--------------- ---------------
Total current liabilities....................................... 489,663 629,154
--------------- ---------------
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 shares at August 31, 1999 and
November 30, 1998, respectively................................. 60,356 60,356
Additional paid-in capital......................................... 50,290,067 50,290,067
Accumulated unrealized losses on investments....................... (137,630) (96,262)
Accumulated deficit................................................ (45,321,374) (41,836,368)
---------------- ---------------
Total shareholders' equity...................................... 4,891,419 8,417,793
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 5,381,082 $ 9,046,947
=============== ===============
</TABLE>
See notes to financial statements
2
<PAGE> 3
SOMANETICS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended August 31, Ended August 31,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES................................ $ 877,346 $ 523,222 $ 2,829,563 $ 1,837,273
COST OF SALES............................... 458,095 305,569 1,424,041 996,445
------------ ------------- ------------- -------------
GROSS MARGIN................................ 419,251 217,653 1,405,522 840,828
------------ ------------- ------------- -------------
OPERATING EXPENSES:
Research, development and engineering.... 145,340 172,207 431,821 500,832
Selling, general and administrative...... 1,366,573 1,718,389 4,689,806 4,689,477
------------ ------------- ------------- -------------
Total operating expenses............. 1,511,913 1,890,596 5,121,627 5,190,309
------------ ------------- ------------- -------------
OPERATING LOSS.............................. (1,092,662) (1,672,943) (3,716,105) (4,349,481)
------------ ------------- ------------- -------------
OTHER INCOME:
Interest income.......................... 57,571 120,444 231,099 257,222
Other.................................... - - - 8,100
------------ ------------- ------------- -------------
Total other income................... 57,571 120,444 231,099 265,322
------------ ------------- ------------- -------------
NET LOSS.................................... $ (1,035,091) $ (1,552,499) $ (3,485,006) $ (4,084,159)
------------ ------------- ------------- -------------
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED....................... $ (0.17) $ (0.26) $ (0.58) $ (0.78)
------------ ------------- ------------- -------------
WEIGHTED AVERAGE SHARES
OUTSTANDING............................. 6,035,597 6,035,597 6,035,597 5,217,942
============ ============= ============= =============
</TABLE>
See notes to financial statements
3
<PAGE> 4
SOMANETICS CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Month
Periods Ended August 31,
-------------------------------
1999 1998
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (3,485,006) $ (4,084,159)
Adjustments to reconcile net loss to net cash used in
operations:
Depreciation and amortization........................... 102,391 71,905
Changes in assets and liabilities:
Accounts receivable (increase)...................... (98,965) (441,119)
Inventory (increase)................................ (128,224) (400,000)
Prepaid expenses (increase) decrease ............... (25,820) 13,260
Other assets decrease............................... - 1,600
Accounts payable increase (decrease)................ 74,523 (218,539)
Accrued liabilities (decrease)...................... (214,014) (23,532)
------------- ------------
Net cash (used in) operations..................... (3,775,115) (5,080,584)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities.......................... - (4,936,981)
Proceeds from sale of marketable securities................. 3,503,198 2,470,780
Acquisition of property and equipment (net)................. (43,197) (347,804)
------------- ------------
Net cash provided by (used in) investing activities 3,460,001 (2,814,005)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Shares..................... - 9,094,931
------------- ------------
Net cash provided by financing activities......... - 9,094,931
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................. (315,114) 1,200,342
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ................................................. 1,976,829 2,132,376
------------- ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD................................................... 1,661,715 $ 3,332,718
============= ============
</TABLE>
See notes to financial statements
4
<PAGE> 5
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1999
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.
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
nine-month period ended August 31, 1999, are not necessarily indicative of the
results that may be expected for the year ending November 30, 1999, 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, 1998 included in the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1998.
The Company has not achieved sales necessary to support operations. The
Company has incurred an accumulated deficit of $45,321,374 through August 31,
1999. The Company had working capital of $4,166,133, cash, cash equivalents and
marketable securities of $3,034,091, total current liabilities of $489,663 and
shareholders' equity of $4,891,419 as of August 31, 1999.
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)
AUGUST 31, 1999
The net proceeds from the public offering of Common Shares in April
1998 were sufficient to fund the Company's working capital requirements for the
nine months ended August 31, 1999. Current sales are not sufficient to fund
operations.
The Company believes that the cash, cash equivalents, and marketable
securities on hand at August 31, 1999 will be sufficient to sustain the
Company's operations at budgeted levels and its needs for liquidity into the
second quarter of fiscal 2000. 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.
The Company does not believe that product sales will be sufficient to
fund the Company's operations in fiscal 1999.
As of August 31, 1999, 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 9, 1999. In addition, the placement
agents and their transferees hold warrants to purchase 11,424 Common Shares
exercisable at $12.50 per share until April 1, 2001, and 15,000 warrants
exercisable at $14.40 per share until July 13, 2000. Also, the underwriter of
the June 1997 public offering received warrants to purchase 200,000 Common
Shares exercisable at $4.80 per share until May 29, 2002. It is unlikely that
these warrants will be exercised if the exercise price exceeds the market price
of the Common Shares.
On April 1, 1999, the Company renewed its $2,000,000 Revolving Note and
a Pledge Agreement with Fifth Third Bank of Northwestern Ohio, N.A. The
principal amount outstanding under the note bears interest, payable monthly, at
the bank's prime rate (8.25% as of September 9, 1999), is collateralized by all
property of the Company held at the bank and, upon drawing against the line of
credit, by any securities account of the Company up to the value of the loan,
and is intended to be used for general corporate purposes, if necessary. The
Company has not borrowed any money under the line of credit. The line of credit
expires March 31, 2000. Before that date, the bank may, but is not obligated to,
lend the Company such amounts as may from time to time be requested by the
Company, up to $2,000,000 if no Event of Default shall exist. Events of default
include failure to furnish satisfactory additional security on demand or the
bank deeming itself insecure. The Company has no other loan commitments.
6
<PAGE> 7
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1999
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, 1998
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.
3. STOCK OPTIONS
On January 21, 1999, 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 295,000, from 745,000 to 1,040,000
shares, subject to shareholder approval at the 1999 Annual Meeting of
Shareholders. The Company's shareholders approved such amendment at the 1999
Annual Meeting of Shareholders on April 13, 1999.
Effective April 13, 1999, the Company granted to four directors of the
Company who are not officers or employees of the Company ten-year options under
the 1997 Stock Option Plan to purchase an aggregate of 8,000 Common Shares at an
exercise price of $1.88 per share (the closing sale price of the Common Shares
as of the date of grant). In addition, effective May 20, 1999, the Company
granted 10-year options under the 1997 Stock Option Plan to purchase 217,400
Common Shares to 24 employees and one consultant of the Company at an exercise
price of $3.56 per share (the closing sale price of the Common Shares as of the
date of grant). Effective July 13, 1999, the Company granted to one director of
the Company who is not an officer or employee of the Company ten-year options
under the 1997 Stock Option Plan to purchase an aggregate of 2,000 Common Shares
at an exercise price of $4.13 per share (the closing sale price of the Common
Shares as of the date of grant).
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Marketable Securities consist thirty-five percent of AAA rated
corporate bonds and sixty-five percent of lower rated, fixed income securities,
classified as available for sale, maturing six months to one year from the date
of acquisition and are stated at the lower of cost or fair market value.
7
<PAGE> 8
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1999
Inventory is stated at the lower of cost or market on a first-in,
first-out (FIFO) basis. Inventory consists of:
<TABLE>
<CAPTION>
August 31, 1999 November 30, 1998
--------------- -----------------
<S> <C> <C>
Finished goods................... $ 162,409 $ 224,313
Work in process.................. 216,236 226,554
Purchased components............. 501,474 348,321
---------- ----------
Sub-total................... 880,119 799,188
Less reserve for obsolete
and excess inventory.......... (90,931) (138,224)
---------- ----------
Total $ 789,188 $ 660,964
========== ==========
</TABLE>
Patents and Trademarks are recorded at cost and are being amortized on
the straight-line method over 17 years. Accumulated amortization was $51,612 and
$46,428 at August 31, 1999 and November 30, 1998, respectively.
Loss Per Common Share - basic and diluted, is computed using the
weighted average number of common shares outstanding during each period. Common
Shares issuable under stock options and warrants have 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 August 31, 1999 and
August 31, 1998, the Company had outstanding 1,557,481 and 1,396,341,
respectively, of warrants and options to purchase Common Shares.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
August 31, 1999 November 30, 1998
--------------- -----------------
<S> <C> <C>
Professional Fees....................... $ 20,000 $112,902
Clinical Research....................... - 19,165
Product Upgrades........................ - 21,297
Warranty................................ 11,550 37,487
Accrued Insurance....................... - 42,204
Accrued Incentive....................... 26,715 34,000
Accrued Sales Commissions............... 93,943 99,167
-------- --------
Total................................ $152,208 $366,222
======== ========
</TABLE>
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.
8
<PAGE> 9
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1999
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 model 4100 Cerebral Oximeter. The model
4100 Cerebral Oximeter was introduced in October 1997 and shipments began in the
first quarter of fiscal 1998. During the third quarter of fiscal 1999, the
Company introduced its new model 5100 pediatric Cerebral Oximeter at an
international trade show, and began international shipments of the model 5100 in
August 1999. During the third quarter of fiscal 1999, the Company also submitted
its 510(k) application to the FDA for the model 5100 Cerebral Oximeter, and is
awaiting FDA clearance to market the model 5100 in the United States.
During fiscal 1998 and the first three quarters of fiscal 1999, the
Company's primary activities consisted of sales and marketing of the model 4100
Cerebral Oximeter and the related disposable SomaSensor. The Company had an
accumulated deficit of $45,321,374 through August 31, 1999. 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.
During fiscal 1998, the Company offered to exchange model 4100 Cerebral
Oximeters for model 3100A Cerebral Oximeters (which the Company scraps) and cash
equal to the difference in sales prices of the two models. During the third
quarter of fiscal 1999, the Company agreed to a similar exchange program with
Baxter Limited in Japan, as a result of Japanese Ministry of Health and Welfare
approval in the first quarter of fiscal 1999 to market the model 4100 in Japan.
Such sales reduce the Company's average unit sales price and overall gross
margin. Also, during fiscal 1998, the Company began a no-cap sales program
whereby the Company ships the model 4100 Cerebral Oximeter to the customer at no
charge, in exchange for the customer agreeing to purchase a minimum quantity of
SomaSensors, on a monthly basis, at a premium for a stated period of time.
9
<PAGE> 10
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1999
THREE MONTHS ENDED AUGUST 31, 1999 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1998
Net revenues increased by approximately $354,000, or 68%, from $523,222
in the three-month period ended August 31, 1998 to $877,346 in the three-month
period ended August 31, 1999. The increase in revenues was primarily
attributable to an increase in United States sales of approximately $217,000,
from approximately $340,000 in the third quarter of fiscal 1998 to approximately
$557,000 in the third quarter of fiscal 1999, and an increase in international
sales of approximately $137,000, from approximately $183,000 in the third
quarter of fiscal 1998 to approximately $320,000 in the third quarter of fiscal
1999. The increase in net revenues is primarily attributable to increased
purchases of the disposable SomaSensor, purchases of the model 4100 Cerebral
Oximeter by Baxter Limited as a result of Japanese Ministry of Health and
Welfare approval in the first quarter of fiscal 1999 to market the model 4100 in
Japan, and international purchases of the model 5100 Cerebral Oximeter.
Effective March 1, 1999, the Company increased the retail price of the model
4100 Cerebral Oximeter and SomaSensor by 25% and 7%, respectively. The price
increase does not apply to sales quotations issued prior to March 1, 1999. The
Company's average selling price realized for the Cerebral Oximeter was
relatively constant for the third quarter of fiscal 1999 as compared to the
third quarter of fiscal 1998 primarily because the March 1, 1999 price increase
was offset by the model 4100 exchanges with Baxter Limited in Japan. The
Company's third quarter sales have typically been lower, compared to other
fiscal quarters, principally because the fiscal quarter coincides with the
summer vacation season, especially in Europe, the United States and Japan.
Sales of SomaSensors, model 4100 Cerebral Oximeters, model 4100
exchanges, and model 5100 Cerebral Oximeters comprised approximately 53%, 32%,
12%, and 3%, respectively, of the Company's net revenues in the third quarter of
fiscal 1999 and 28%, 61%, 11%, and 0%, respectively, of the Company's net
revenues in the third quarter of fiscal 1998. Approximately 37% of the Company's
net revenues in the third quarter of fiscal 1999 were export sales, compared to
35% of the Company's net revenues in the third quarter of fiscal 1998. One
international distributor accounted for approximately 25% of net revenues for
the three months ended August 31, 1999, and one international distributor
accounted for approximately 15% of net revenues for the three months ended
August 31, 1998.
Gross margin as a percentage of net revenues for the quarters ended
August 31, 1999 and August 31, 1998 was approximately 48% and 42%, respectively.
Gross margin as a percentage of net revenues increased in the third quarter
ended August 31, 1999 from the third quarter of fiscal 1998 primarily because of
increased shipments of the Company's new model SomaSensor which is less costly
to manufacture than old model SomaSensors, partially offset by the higher
percentage of the Company's net revenues derived from the sale of SomaSensors in
the third quarter of fiscal 1999, which still have lower margins than Cerebral
Oximeters.
The Company's research, development and engineering expenses decreased
approximately $27,000, or 16%, from $172,207 for the three months ended August
31, 1998 to $145,340 for the three months ended August 31, 1999. The decrease is
primarily attributable to approximately $15,000 in decreased costs associated
the Company's new sensor development projects, and approximately $12,000 in
decreased costs associated with enhancements to the model 4100 Cerebral
Oximeter.
10
<PAGE> 11
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1999
Selling, general and administrative expenses decreased approximately
$352,000, or 20%, from $1,718,389 for the three months ended August 31, 1998 to
$1,366,573 for the three months ended August 31, 1999. The decrease in selling,
general and administrative expense is primarily attributable to a $125,000
decrease in salaries, wages, commissions, and related expenses as a result of
fewer employees, principally sales and marketing, since August 31, 1998 (from an
average of 48 employees in the third quarter of fiscal 1998 to 43 employees in
the third quarter of fiscal 1999), a $64,000 decrease in incentive compensation
expense, a $54,000 decrease in selling-related expenses attributable to employee
travel, industry trade shows, marketing and advertising, a $54,000 decrease in
bad debt expense (the Company terminated two United States distributor
relationships during the third quarter of fiscal 1998), and a $35,000 decrease
in warranty expense for sales of new products due to the Company's reduction of
warranty estimates based on product service experience.
For the three-month period ended August 31, 1999, the Company realized
a 33% decrease in its net loss over the same period in fiscal 1998. The decrease
is primarily attributable to a 68% increase in net revenues, higher gross
margins as a percentage of net revenues, and a 20% decrease in operating
expenses.
NINE MONTHS ENDED AUGUST 31, 1999 COMPARED TO NINE MONTHS ENDED AUGUST 31, 1998
Net revenues increased by approximately $992,000, or 54%, from
$1,837,273 in the nine-month period ended August 31, 1998 to $2,829,563 in the
nine-month period ended August 31, 1999. This increase in net revenues was
primarily attributable to an increase in United States sales of approximately
$580,000, from approximately $1,014,000 in the first three quarters of fiscal
1998 to approximately $1,594,000 in the first three quarters of fiscal 1999, and
an increase in international sales of approximately $412,000, from approximately
$823,000 in the first three quarters of fiscal 1998 to approximately $1,235,000
in the first three quarters of fiscal 1999. The increase in net revenues is
primarily attributable to increased purchases of the disposable SomaSensor,
purchases of the model 4100 Cerebral Oximeter by Baxter Limited as a result of
Japanese Ministry of Health and Welfare approval in the first quarter of fiscal
1999 to market the model 4100 in Japan, a 19% increase in the average selling
price of the disposable SomaSensor due to the effects of no-cap sales and the
March 1, 1999 increase in SomaSensor prices on average SomaSensor prices, and a
15% increase in the average selling price of Cerebral Oximeters primarily due to
the March 1, 1999 increase in the price of the Cerebral Oximeter.
Sales of model 4100 Cerebral Oximeters, SomaSensors, model 4100
exchanges, model 5100 Cerebral Oximeters, and model 3100A Cerebral Oximeters
comprised approximately 52%, 43%, 4%, 1%, and 0%, respectively, of the Company's
net revenues in the first three quarters of fiscal 1999 and 63%, 23%, 11%, 0%,
and 3%, respectively, of the Company's net revenues in the first three quarters
of fiscal 1998. Approximately 44% of the Company's net revenues in the first
three quarters of fiscal 1999 were export sales, compared to 45% of the
Company's net revenues for the same period in fiscal 1998. One international
distributor accounted for approximately 26% of net revenues for the nine months
ended August 31, 1999, and one United States distributor accounted for
approximately 14% of net revenues for the nine months ended August 31, 1998.
11
<PAGE> 12
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1999
Gross margin as a percentage of net revenues for the nine-month periods
ended August 31, 1999 and August 31, 1998 was approximately 50% and 46%,
respectively. Gross margin as a percentage of net revenues increased in the
nine-month period ended August 31, 1999 from the same period of fiscal 1998
primarily because of the higher average selling prices realized by the Company
for the model 4100 Cerebral Oximeter and the SomaSensor, increased shipments of
the Company's new model SomaSensor which is less costly to manufacture than old
model SomaSensors, and a smaller percentage of model 4100 exchanges in fiscal
1999, partially offset by the higher percentage of the Company's net revenues
derived from the sale of SomaSensors in the first three quarters of fiscal 1999,
which still have lower margins than Cerebral Oximeters.
The Company's research, development and engineering expenses decreased
approximately $69,000, or 14%, from $500,832 for the nine-month period ended
August 31, 1998 to $431,821 for the nine-month period ended August 31, 1999. The
decrease is primarily attributable to approximately $80,000 in decreased costs
associated with enhancements to the model 4100 cerebral oximeter.
Selling, general and administrative expenses incurred by the Company
for the nine-month periods ended August 31, 1999 and August 31, 1998 were
$4,689,806 and $4,689,477, respectively. Although the Company's total selling,
general, and administrative expenses remained relatively constant for the
nine-month periods ended August 31, 1999 and August 31, 1998, the Company
incurred approximately a $212,000 increase in salaries, wages, commissions and
related expenses primarily as a result of increased sales commissions paid to
its sales force during the nine months ended August 31, 1999, and a $50,000
increase in professional service and investor relations fees, partially offset
by a $108,000 decrease in incentive compensation expense, a $96,000 decrease in
selling-related expenses attributable to employee travel, industry trade shows,
marketing and advertising, and an $84,000 decrease in accrued warranty expense
for sales of new products.
For the nine-month period ended August 31, 1999, the Company realized a
15% decrease in its net loss over the same period in fiscal 1998. The decrease
is primarily attributable to an 54% increase in net revenues and higher gross
margins as a percentage of net revenues.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the nine-month period ended August
31, 1999 was approximately $3,775,000. 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 $3,383,000, net of
depreciation and amortization expense), (ii) decrease accrued liabilities
(approximately $214,000), (iii) increase inventories of the model 4100 and 5100
Cerebral Oximeters and their components (approximately $128,000), and (iv)
increase accounts receivable (approximately $99,000) primarily due to higher
sales in the third quarter of fiscal 1999 than in the fourth quarter of fiscal
1998. These uses of cash were partially offset by a $75,000 increase in accounts
payable. Management expects working capital requirements to increase if sales
increase. The Company capitalized approximately $110,000 of costs for model 4100
Cerebral Oximeters being used as demonstration units during the first three
quarters of fiscal 1999. The Company expects to depreciate these costs as a
marketing expense over three years.
12
<PAGE> 13
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1999
On April 1, 1999, the Company renewed its $2,000,000 Revolving Note and
a Pledge Agreement with Fifth Third Bank of Northwestern Ohio, N.A. The
principal amount outstanding under the note bears interest, payable monthly, at
the bank's prime rate (8.25% as of September 9, 1999), is collateralized by all
property of the Company held at the bank and, upon drawing against the line of
credit, by any securities account of the Company up to the value of the loan,
and is intended to be used for general corporate purposes, if necessary. The
Company has not borrowed any money under the line of credit. The line of credit
expires March 31, 2000. Before that date, the bank may, but is not obligated to,
lend the Company such amounts as may from time to time be requested by the
Company, up to $2,000,000 if no Event of Default shall exist. Events of default
include failure to furnish satisfactory additional security on demand or the
bank deeming itself insecure. The Company has no other loan commitments.
As of August 31, 1999 the Company had working capital of $4,166,133,
cash, cash equivalents and marketable securities of $3,034,091, total current
liabilities of $489,663 and shareholders' equity of $4,891,419.
The Company believes that the cash, cash equivalents, and marketable
securities on hand at August 31, 1999 will be sufficient to sustain the
Company's operations at budgeted levels and its needs for liquidity into the
second quarter of fiscal 2000. 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 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 1999.
As of August 31, 1999, 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 9, 1999. In addition, the placement
agents and their transferees hold warrants to purchase 11,424 Common Shares
exercisable at $12.50 per share until April 1, 2001, and 15,000 warrants
exercisable at $14.40 per share until July 13, 2000. Also, the underwriter of
the June 1997 public offering received warrants to purchase 200,000 Common
Shares exercisable at $4.80 per share until May 29, 2002. It is unlikely that
these warrants will be exercised if the exercise price exceeds the market price
of the Common Shares.
The Company's only current loan commitment is described above.
13
<PAGE> 14
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1999
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, 1998
contains an explanatory paragraph relating to an uncertainty concerning the
Company's ability to continue as a going concern.
YEAR 2000 COMPLIANCE
The Company does not expect that the cost of converting its computer
systems to year 2000 compliance will be material to its financial condition or
results of operations. The Company, together with its independent network
consultant, has completed the evaluation of its hardware and software, and has
purchased the hardware and software necessary to replace what was determined to
be non-compliant. As of August 31, 1999, the Company had spent approximately
$80,000 towards the replacement of non-compliant hardware and software, and
estimates that the total costs associated with the implementation of the new
computer system, including hardware, software, and related consulting fees, will
approximate the $80,000 already incurred. The Company began implementation of
some new hardware and software during the fourth quarter of fiscal 1998, and
completed the implementation of the hardware and software during the first
quarter of fiscal 1999. The Company is currently using the newly implemented
hardware and software in a test environment, and expects a full conversion to
the new information system by October 1, 1999. Because the Company expects its
system to be Year 2000 compliant by October 1, 1999, and has also conducted Year
2000 compliance testing on its hardware and software, the Company has not
prepared a contingency plan and does not currently believe that a contingency
plan is necessary. The Company has considered the cost of upgrading its older
products to make them year 2000 compliant, and does not believe that such costs
will be material to the Company's financial condition or results of operations.
The Company has also corresponded with its major vendors, as well as a sampling
of both its United States and international customers, to determine their state
of readiness with respect to year 2000 compliance. Based on the responses from
the vendors and customers, the Company does not anticipate any material
disruption to its operations as a result of year 2000 compliance failure, and
does not expect any material effect to its financial condition or results of
operations. Many risks, however, such as the failure to perform by public
utilites, telecommunications providers and financial institutions, and the
impact of the Year 2000 issue on the economy as a whole, are outside the
Company's control and could adversely affect the Company and its ability to
conduct its business. While the Company believes its efforts will adequately
identify and address the Year 2000 issues that are within its reasonable
control, the Year 2000 issue might still have a material adverse impact on the
Company's business, financial condition, or results of operations.
14
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates, consisting of
investments in corporate bonds and other fixed income securities. For these
financial instruments, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates. Weighted average
variable rates are based on current rates. Weighted average fixed rates are
based on the contract rates. The actual cash flows of all instruments are
denominated in U.S. dollars. The Company invests its cash on hand not needed in
current operations in fixed income securities generally maturing within one year
from the date of acquisition.
<TABLE>
<CAPTION>
AUGUST 31, 1999
EXPECTED MATURITY DATES
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MARKETABLE SECURITIES:
- ----------------------
Short-term Debt:
Fixed Rate ($).............. $510,000 - - - - - $ 510,000 $ 510,000
Average interest rate.... 4.76% N/A N/A N/A N/A N/A 4.76%
Variable Rate ($)........... - $1,000,006 - - - - $1,000,006 $ 862,376
Average interest rate.... N/A 9.71% N/A N/A N/A N/A 9.71%
</TABLE>
15
<PAGE> 16
PART II OTHER INFORMATION
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: September 27, 1999 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 NINE MONTHS
ENDED, AUGUST 31, 1999 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-30-1999
<PERIOD-END> AUG-31-1999
<CASH> 1,661,715
<SECURITIES> 1,372,376
<RECEIVABLES> 714,647
<ALLOWANCES> 0
<INVENTORY> 789,188
<CURRENT-ASSETS> 4,655,796
<PP&E> 1,670,789
<DEPRECIATION> 1,020,623
<TOTAL-ASSETS> 5,381,082
<CURRENT-LIABILITIES> 489,663
<BONDS> 0
0
0
<COMMON> 60,356
<OTHER-SE> 4,831,063
<TOTAL-LIABILITY-AND-EQUITY> 5,381,082
<SALES> 2,829,563
<TOTAL-REVENUES> 2,829,563
<CGS> 1,424,041
<TOTAL-COSTS> 1,424,041
<OTHER-EXPENSES> 5,121,627
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,485,006)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,485,006)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,485,006)
<EPS-BASIC> (.58)
<EPS-DILUTED> (.58)
</TABLE>
