<PAGE> 1
RULE 424(B)(3)
FILE NO. 333-33262
PROSPECTUS SUPPLEMENT DATED APRIL 11, 2000 TO PROSPECTUS DATED MARCH 31, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended FEBRUARY 29, 2000
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 April 11, 2000: 6,035,597
<PAGE> 2
PART I FINANCIAL INFORMATION
SOMANETICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
February 29, November 30,
ASSETS 2000 1999
--------------- ---------------
CURRENT ASSETS: (Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents.......................................... $ 161,442 $ 1,423,423
Marketable securities.............................................. 824,985 833,736
Accounts receivable, net of allowance for doubtful accounts of
approximately $0 and $0 at February 29, 2000 and
November 30, 1999, respectively................................. 718,132 764,153
Inventory, net..................................................... 951,672 611,332
Prepaid expenses................................................... 74,280 89,702
--------------- ---------------
Total current assets............................................ 2,730,511 3,722,346
--------------- ---------------
PROPERTY AND EQUIPMENT (at cost):
Machinery and equipment............................................ 1,401,642 1,397,214
Furniture and fixtures............................................. 183,497 183,497
Leasehold improvements............................................. 165,642 165,642
--------------- ---------------
Total........................................................... 1,750,781 1,746,353
Less accumulated depreciation and amortization..................... (1,164,750) (1,097,695)
--------------- ---------------
Net property and equipment...................................... 586,031 648,658
--------------- ---------------
OTHER ASSETS:
Patents and trademarks, net........................................ 56,665 58,393
Other.............................................................. 15,000 15,000
--------------- ---------------
Total other assets.............................................. 71,665 73,393
--------------- ---------------
TOTAL ASSETS........................................................... $ 3,388,207 $ 4,444,397
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 391,455 $ 498,008
Accrued liabilities................................................ 208,937 263,895
--------------- ---------------
Total current liabilities....................................... 600,392 761,903
--------------- ---------------
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 February 29, 2000
and November 30, 1999, respectively............................. 60,356 60,356
Additional paid-in capital......................................... 50,290,067 50,290,067
Accumulated unrealized losses on investments....................... (175,021) (166,270)
Accumulated deficit................................................ (47,387,587) (46,501,659)
--------------- ---------------
Total shareholders' equity..................................... 2,787,815 3,682,494
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 3,388,207 $ 4,444,397
=============== ===============
</TABLE>
See notes to financial statements
2
<PAGE> 3
SOMANETICS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three-Month
Periods Ended
-------------------------------------
February 29, February 28,
2000 1999
------------- -------------
<S> <C> <C>
NET REVENUES .................................. $ 1,037,615 $ 910,739
COST OF SALES.................................. 493,358 447,089
------------- -------------
GROSS MARGIN................................... 544,256 463,650
------------- -------------
OPERATING EXPENSES:
Research, development and engineering.... 103,025 142,449
Selling, general and administrative...... 1,361,756 1,598,856
------------- -------------
Total operating expenses....... 1,464,781 1,741,305
------------- -------------
OPERATING LOSS................................. (920,525) (1,277,655)
------------- -------------
OTHER INCOME:
Interest income.......................... 34,597 93,327
------------- -------------
Total other income................... 34,597 93,327
------------- -------------
NET LOSS....................................... $ (885,928) $(1,184,328)
------------- -------------
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED........................... $ (.15) $ (.20)
------------ -------------
WEIGHTED AVERAGE SHARES
OUTSTANDING................................ 6,035,597 6,035,597
============= =============
</TABLE>
See notes to financial statements
3
<PAGE> 4
SOMANETICS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Month
Periods Ended
--------------------------------
February 29, February 28,
2000 1999
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (885,928) $ (1,184,328)
Adjustments to reconcile net loss to net cash used in
operations:
Depreciation and amortization........................... 81,019 68,479
Changes in assets and liabilities:
Accounts receivable decrease (increase)............. 46,021 (197,688)
Inventory (increase) decrease....................... (340,340) 49,746
Prepaid expenses decrease........................... 15,422 14,585
Accounts payable (decrease)......................... (106,553) (16,937)
Accrued liabilities (decrease)...................... (54,958) (107,735)
-------------- -------------
Net cash (used in) operations..................... (1,245,317) (1,373,878)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities................. - 1,013,242
Acquisition of property and equipment (net)................. (16,664) (43,721)
------------- ------------
Net cash provided by investing activities......... (16,664) 969,521
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash provided by financing activities......... - -
------------- ------------
NET (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................. (1,261,981) (404,357)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ................................................. 1,423,423 1,976,829
------------- ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD ................................................. $ 161,442 $ 1,572,472
============= ============
</TABLE>
See notes to financial statements
4
<PAGE> 5
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 29, 2000
1. ORGANIZATION AND OPERATIONS
We are a Michigan corporation that was formed in January 1982. We
develop, manufacture and market the INVOS(R) Cerebral Oximeter, the only
non-invasive patient monitoring system commercially available in the United
States that continuously measures changes in the blood oxygen level in the adult
brain. The Cerebral Oximeter is based on our proprietary In Vivo Optical
Spectroscopy, or INVOS, technology. INVOS analyzes various characteristics of
human blood and tissue by measuring and analyzing low-intensity visible and near
infrared light transmitted into portions of the body. We have incurred research,
product development and other expenses involved in designing, developing,
marketing and selling our products, as well as devoting efforts to raising
capital.
2. FINANCIAL STATEMENT PRESENTATION
We prepared our unaudited interim financial statements pursuant to the
Securities and Exchange Commission's rules. Accordingly, they do not include all
of the information and footnotes normally included in our annual financial
statements prepared in accordance with generally accepted accounting principles.
We believe, however, that the disclosures are adequate to make the information
presented not misleading.
The unaudited interim financial statements in this report reflect all
adjustments which are, in our opinion, necessary to a fair statement of the
results for the interim periods presented. All of these adjustments are of a
normal recurring nature, except those not material to our financial condition or
results of operations. Our operating results for the three-month period ended
February 29, 2000, do not necessarily indicate the results that you should
expect for the year ending November 30, 2000, although we expect to continue to
incur operating losses for the foreseeable future. You should read the unaudited
interim financial statements together with the financial statements and related
footnotes for the year ended November 30, 1999 included in our Annual Report on
Form 10-K for the fiscal year ended November 30, 1999.
Our sales are not sufficient to support our operations. We have
incurred an accumulated deficit of $47,387,587 through February 29, 2000. We had
working capital of $2,130,119, cash, cash equivalents, and marketable securities
of $986,427, total current liabilities of $600,392 and shareholders' equity of
$2,787,815 as of February 29, 2000.
We believe that markets exist for the products we have developed and
are developing; however, whether our products will be successful is inherently
uncertain. You should consider the following factors in evaluating the
likelihood of our success: our limited resources and current financial
condition, the problems and expenses frequently encountered by companies forming
a new business, our ability to raise new funds, our abiliy to develop, apply and
market new technology, and our industry and competitive environment.
5
<PAGE> 6
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 29, 2000
The net proceeds from our public offering of common shares in April
1998 were sufficient to fund our working capital requirements for the three
months ended February 29, 2000. Our current sales are not sufficient to fund
operations.
We believe that the cash, cash equivalents, and marketable securities
on hand at February 29, 2000, together with the estimated net proceeds from
sales of 1,000,000 common shares over time to Kingsbridge Capital Limited
pursuant to the Private Equity Line Agreement described below based on current
market prices, will be adequate to satisfy our operating and capital
requirements through April 2001. By that time we will be required to raise
additional cash either through additional sales of our products, through sales
of securities, by incurring indebtedness or by some combination of these
alternatives. If we are unable to raise additional cash by that time, we will be
required to reduce or discontinue our operations.
The estimated length of time current cash, cash equivalents, and
marketable securities will sustain our operations is based on estimates and
assumptions we have made. These estimates and assumptions are subject to change
as a result of actual experience. Changes in the market price or trading volume
of our common shares could reduce the proceeds we receive for selling those
common shares under the Private Equity Line Agreement, decrease the number of
shares we can sell in a particular period or both. Actual capital requirements
necessary to market the Cerebral Oximeter and SomaSensor, to develop
product-line extensions of the Cerebral Oximeter for use on newborns, other
non-brain tissue applications, and enhancements to the Cerebral Oximeter and
SomaSensor, and for working capital might be substantially greater than current
estimates.
We do not believe that product sales will be sufficient to fund our
operations in fiscal 2000.
As of February 29, 2000, we had 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 our 1995 and 1996 Regulation S securities offerings. The
conditions permitting us to redeem these warrants have not been met as of April
5, 2000. 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. In addition, Kingsbridge Capital Limited received warrants to purchase
200,000 common shares exercisable at $4.36 per share until September 3, 2005
pursuant to the Private Equity Line Agreement. It is unlikely that these
warrants will be exercised if the exercise price exceeds the market price of the
common shares.
We entered into a Private Equity Line Agreement with Kingsbridge
Capital Limited on March 6, 2000. The equity line requires Kingsbridge to
purchase up to $15 million of newly-issued common shares from us at times and in
amounts we select over a period of up to two years, subject to specific
restrictions and conditions set forth in the Private Equity Line Agreement. One
of the conditions to our ability to begin drawing on the facility was to file
and have declared effective a registration statement under the Securities Act of
1933 to permit Kingsbridge to resell to the public any shares that we sell to it
under this agreement. The registration statement became effective on March 31,
2000. The decision to draw on any funds and the timing and amount of any such
draw are at our sole discretion, subject to specified conditions. Individual
purchases must be at least 15 trading days apart and are limited to $10,000 to
$1,000,000 depending on the then current average market price and daily trading
volume for our common shares.
The purchase price for the common shares is 86% to 90% of an average
market price for the common shares. The actual percentage will depend on an
average market price of the common shares. In addition, we
6
<PAGE> 7
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 29, 2000
must pay Brean Murray & Co., Inc. a 3.5% commission in connection with these
sales. We are not permitted to sell more than 19.9% of our outstanding common
shares pursuant to this arrangement unless we first obtain shareholder approval
under The Nasdaq SmallCap Market rules. In addition, the number of shares we
sell to Kingsbridge, together with any shares then held by Kingsbridge, must not
exceed 9.9% of the common shares that would be outstanding upon completion of
the sale. No shares may be sold unless the average trading volume of our common
shares on The Nasdaq SmallCap Market is at least 30,000 shares a day. This
description does not constitute an offer of any securities for sale, and any
such public offering will be made only by means of a prospectus. During the
two-year term of the agreement, we are obligated to sell a minimum of $7,500,000
of our common shares to Kingsbridge or pay Kingsbridge the discount on the
unsold shares.
In consideration for Kingsbridge's commitment under the Private Equity Line
Agreement, we issued a warrant to Kingsbridge to purchase 200,000 common shares
at an exercise price of $4.36 per share. The warrant is exercisable until
September 3, 2005. The warrant contains provisions that protect the holder
against dilution by adjustment of the exercise price and the number of shares
issuable pursuant to the warrant if specified events occur.
We have no loan commitments.
Even if we receive additional capital, we might not be able to achieve
the level of sales necessary to sustain our operations. We might not be able to
obtain any funds on terms acceptable to us and at times required by us through
sales of our products, sales of securities or loans in sufficient quantities.
Our Independent Auditors' report in our Annual Report on Form 10-K for the
fiscal year ended November 30, 1999 contains an explanatory paragraph relating
to the uncertainty concerning our ability to continue as a going concern.
These factors, among others, raise substantial doubt about our 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
if we are unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Marketable Securities consist of lower rated, fixed income securities,
classified as available for sale, maturing approximately six months to one year
from the date of acquisition and are stated at the fair market value.
Inventory is stated at the lower of cost or market on a first-in,
first-out (FIFO) basis. Inventory consists of:
<TABLE>
<CAPTION>
February 29, 2000 November 30, 1999
----------------- -----------------
<S> <C> <C>
Finished goods................... $ 263,617 $ 107,820
Work in process.................. 81,692 38,682
Purchased components............. 636,363 464,830
----------- ----------
Sub-total................... 981,672 611,332
Less reserve for obsolete
and excess inventory.......... (30,000) ( - )
----------- ----------
Total....................... $ 951,672 $ 611,332
=========== ==========
</TABLE>
7
<PAGE> 8
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 29, 2000
Patents and Trademarks are recorded at cost and are being amortized on
the straight-line method over 17 years. Accumulated amortization was $55,068 and
$53,340 at February 29, 2000 and November 30, 1999, 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 February 29, 2000
and February 28, 1999, we had outstanding 1,634,981 and 1,396,151, respectively,
of warrants and options to purchase common shares.
Reclassifications - Certain reclassifications have been made to the
financial statements for 1999 to conform to the 2000 presentation.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
February 29, 2000 November 30, 1999
----------------- -----------------
<S> <C> <C>
Professional Fees....................... $ 70,250 $ 88,250
Accrued Incentive....................... 62,100 -
Accrued Sales Commissions............... 38,732 133,863
Accrued Insurance....................... 30,155 20,082
Accrued Warranty........................ 7,700 11,700
Other................................... - 10,000
-------- ---------
Total............................... $208,937 $263,895
======== =========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
We may become subject to products liability claims by patients or
physicians, and may become a defendant in products liability or malpractice
litigation. We have obtained products liability insurance and an umbrella
policy. We might not be able to maintain such insurance or such insurance might
not be sufficient to protect us against products liability.
6. STOCK OPTIONS
On February 16, 2000, our Board of Directors approved an amendment to
the Somanetics Corporation 1997 Stock Option Plan to increase the number of
common shares reserved for issuance pursuant to the exercise of options granted
under the 1997 Plan by 295,000 shares, from 1,040,000 to 1,335,000 shares,
subject to shareholder approval at the 2000 Annual Meeting of Shareholders.
Effective February 16, 2000, we granted 10-year options under the 1997
Stock Option Plan to purchase 126,000 common shares to nine of our key employees
(including officers) and one of our consultants at an exercise price of $2.88
per share (the closing sale price of the common shares as of the date of grant).
8
<PAGE> 9
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 29, 2000
7. SUBSEQUENT EVENTS
As discussed in Note 2, on March 6, 2000, we entered into the Private
Equity Line Agreement with Kingsbridge Capital Limited. Pursuant to the Equity
Line Agreement we may issue and sell, from time to time, common shares for cash
consideration up to an aggregate of $15 million.
9
<PAGE> 10
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 29, 2000
Some of the statements in this report are forward-looking statements.
These forward-looking statements include statements relating to our performance
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations. In addition, we may make forward-looking statements in future
filings with the Securities and Exchange Commission and in written material,
press releases and oral statements issued by us or on our behalf.
Forward-looking statements include statements regarding the intent, belief or
current expectations of us or our officers, including statements preceded by,
followed by or including forward-looking terminology such as "may," "will,"
"should," "believe," "expect," "anticipate," "estimate," "continue," "predict"
or similar expressions, with respect to various matters.
It is important to note that our actual results could differ materially
from those anticipated from the forward-looking statements depending on various
important factors. These important factors include our history of losses and
ability to continue as a going concern, our current dependence on the Cerebral
Oximeter and SomaSensor, the challenges associated with developing new products,
the uncertainty of acceptance of our products by the medical community, the
lengthy sales cycle for our products, competition in our markets, our need for
additional financing, our dependence on our distributors, and the other factors
discussed under the caption "Risk Factors" and elsewhere in our Registration
Statement on Form S-1 (file no. 333-33262) effective March 31, 2000 and
elsewhere in this report.
All forward-looking statements in this report are based on information
available to us on the date of this report. We do not undertake to update any
forward-looking statements that may be made by us or on our behalf in this
report or otherwise. In addition, please note that matters set forth under the
caption "Risk Factors" in our registration statement constitute cautionary
statements identifying important factors with respect to the forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward-looking statements.
RESULTS OF OPERATIONS
OVERVIEW
We develop, manufacture and market the INVOS Cerebral Oximeter, the
only non-invasive patient monitoring system commercially available in the United
States that continuously measures changes in the blood oxygen level in the adult
brain. In June 1996, we received clearance from the FDA to market the Cerebral
Oximeter and the related disposable SomaSensor in the United States. In October
1997, we obtained FDA clearance for new advances in our INVOS technology that
are incorporated in our model 4100 Cerebral Oximeter. The model 4100 Cerebral
Oximeter was introduced in October 1997 and we began shipping the model 4100 in
the first quarter of fiscal 1998. During the third quarter of fiscal 1999, we
introduced our new model 5100 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, we also submitted our 510(k)
application to the FDA for the model 5100 Cerebral Oximeter, and we are awaiting
FDA clearance to market the model 5100 in the United States.
During fiscal 1999 and the first quarter of fiscal 2000, our primary
activities consisted of sales and marketing of the model 4100 Cerebral Oximeter
and the related disposable SomaSensor. We had an accumulated deficit of
$47,387,587 through February 29, 2000. We believe that our accumulated deficit
will continue to increase for the foreseeable future.
We derive our revenues from sales of Cerebral Oximeters and SomaSensors
to our distributors and to hospitals in the United States through our direct
sales employees. We recognize revenues when we ship our products to our
distributors or to hospitals. Payment terms are generally net 30 days for United
States sales and net 60 days or
10
<PAGE> 11
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 29, 2000
longer for international sales. Our primary expenses, excluding the cost of our
products, are selling, general and administrative and research, development and
engineering, which we generally expense as incurred. During the third quarter of
fiscal 1999, we offered to Baxter Limited in Japan to exchange model 4100
Cerebral Oximeters for model 3100A Cerebral Oximeters (which we scrap) and cash
equal to the difference in sales prices of the two models, as a result of the
Japanese Ministry of Health and Welfare approval in the first quarter of fiscal
1999 to market the model 4100 in Japan. Such sales reduce our average unit sales
price and overall gross margin. Also, during fiscal 1998, we began a no-cap
sales program whereby we ship 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.
THREE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THREE MONTHS ENDED FEBRUARY 28,
1999
Our net revenues increased approximately $127,000, or 14%, from
$910,739 in the three-month period ended February 28, 1999 to $1,037,615 in the
three-month period ended February 29, 2000. The increase in net revenues is
primarily attributable to an increase in United States sales of approximately
$156,000, from approximately $430,000 in the first quarter of fiscal 1999 to
approximately $586,000 in the first quarter of fiscal 2000. This increase is
primarily due to increased purchases of the disposable SomaSensor.
The increase in net revenues was partially offset by
- a decrease in international sales of approximately $29,000, from
approximately $480,000 in the first quarter of fiscal 1999 to
approximately $451,000 in the first quarter of fiscal 2000, and
- a 10% decrease in the average selling price of Cerebral Oximeters
primarily as a result of the exchange program with Baxter Limited in
Japan.
Effective January 1, 2000, we increased the retail price of both the
Cerebral Oximeter and SomaSensor by 7%. This price increase does not apply to
any existing sales quotations issued before January 1, 2000.
Approximately 44% of our net revenues in the first quarter of fiscal
2000 were export sales, compared to approximately 53% of our net revenues in the
first quarter of fiscal 1999. Sales of SomaSensors, model 4100 Cerebral
Oximeters, model 4100 exchanges, and model 5100 Cerebral Oximeters as a
percentage of net revenues were as follows:
<TABLE>
<CAPTION>
PERCENT OF NET REVENUE
FIRST QUARTER OF FISCAL
PRODUCT 1999 1998
------- ----------------- -----------------
<S> <C> <C>
SomaSensors........................ 49% 36%
Model 4100 Cerebral Oximeters...... 36% 64%
Model 4100 Exchanges............... 8% 0%
Model 5100 Cerebral Oximeters...... 7% 0%
----------------- -----------------
Total.......................... 100% 100%
================= =================
</TABLE>
One international distributor accounted for approximately 21% of net revenues
for the three months ended February 29, 2000, and one international distributor
accounted for approximately 34% of net revenues for the three months ended
February 28, 1999.
11
<PAGE> 12
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 29, 2000
Gross margin as a percentage of net revenues was approximately 52% for
the quarter ended February 29, 2000 and approximately 51% for the quarter ended
February 28, 1999. Gross margin as a percentage of net revenues increased in the
first quarter ended February 29, 2000 from the first quarter of fiscal 1999
primarily due to shipments of our new model SomaSensor in fiscal 2000, which is
less costly to manufacture than the old model SomaSensors sold in the first
quarter of fiscal 1999.
The increase was partially offset by
- the higher percentage of our net revenues derived from the sale of
SomaSensors in the first quarter of fiscal 2000, which still have
lower margins than Cerebral Oximeters, and
- the higher percentage of model 4100 exchanges in the first quarter
of fiscal 2000.
Our research, development and engineering expenses decreased
approximately $39,000, or 28%, from $142,449 for the three months ended February
28, 1999 to $103,025 for the three months ended February 29, 2000. The decrease
is primarily attributable to a $33,000 decrease in consulting fees associated
with the termination of our consulting order with NeuroPhysics Corporation.
Selling, general and administrative expenses decreased approximately
$237,000, or 15%, from $1,598,856 for the three months ended February 28, 1999
to $1,361,756 for the three months ended February 29, 2000. The decrease in
selling, general and administrative expense is primarily attributable to
- a $276,000 decrease in salaries, wages, commissions and related
expenses, primarily as a result of a reduction in the number of
employees, principally sales and marketing, since March 1, 1999
(from 49 employees as of February 28, 1999 to 41 employees as of
February 29, 2000) and reduced sales commissions as a result of a
new commission plan for fiscal 2000, and
- a $31,000 decrease in travel and selling-related expenses, primarily
as a result of our national sales meeting held in the first quarter
of fiscal 1999.
These decreases were partially offset by
- a $40,000 increase in professional service fees, and
- a $35,000 increase in clinical research expenses, primarily related
to the pediatric Cerebral Oximeter.
For the three-month period ended February 29, 2000, we realized a 25%
decrease in our net loss over the same period in fiscal 1999. The decrease is
primarily attributable to
- a 14% increase in net revenues, and
- a 16% decrease in operating expenses.
These changes were partially offset by decreased interest income.
12
<PAGE> 13
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 29, 2000
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the three-month period ended
February 29, 2000 was approximately $1,245,000. Cash was used primarily to
- fund our net loss, primarily selling, general and administrative
expenses and research, development and engineering expenses,
totaling approximately $805,000, net of depreciation and
amortization expense,
- increase inventories by approximately $340,000, primarily due to our
newly-signed distribution agreement with Nellcor Puritan Bennett
Export, Inc., a wholly-owned subsidiary of Mallinckrodt, Inc.,
- decrease accounts payable by approximately $107,000, primarily
because we paid previously delayed payments to vendors, and
- decrease accrued liabilities by approximately $55,000 as a result of
payments made in fiscal 2000.
These uses of cash were partially offset by
- a decrease in accounts receivable of approximately $46,000,
primarily because of lower first quarter 2000 sales than fourth
quarter 1999 sales, and
- a decrease in prepaid expenses of approximately $15,000.
We expect our working capital requirements to increase if sales increase.
As of February 29, 2000, we had working capital of $2,130,119, cash,
cash equivalents and marketable securities of $986,427, total current
liabilities of $600,392 and shareholder's equity of $2,787,815.
We believe that the cash, cash equivalents and marketable securities on
hand at February 29, 2000, together with the estimated net proceeds from the
sales of 1,000,000 common shares over time to Kingsbridge Capital Limited
pursuant to the Private Equity Line Agreement described below based on current
market prices, will be adequate to satisfy our operating and capital
requirements through April 2001. By that time we will be required to raise
additional cash either through additional sales of our products, through sales
of securities, by incurring indebtedness or by some combination of these
alternatives. If we are unable to raise additional cash by that time, we will be
required to reduce or discontinue our operations.
The estimated length of time current cash, cash equivalents and
marketable securities will sustain our operations is based on estimates and
assumptions we have made. These estimates and assumptions are subject to change
as a result of actual experience. Changes in the market price or trading volume
of our common shares could reduce the proceeds we receive for selling those
common shares under the Private Equity Line Agreement, decrease the number of
shares we can sell in a particular period or both. Actual capital requirements
necessary to market the Cerebral Oximeter and SomaSensor, to develop
product-line extensions of the Cerebral Oximeter for use on newborns, other
non-brain tissue applications, and enhancements to the Cerebral Oximeter and
SomaSensor, and for working capital might not be substantially greater than
current estimates.
We do not believe that product sales will be sufficient to fund our
operations in fiscal 2000.
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<PAGE> 14
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 29, 2000
As of February 29, 2000, we had 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 our 1995 and 1996 Regulation S securities offerings. The
conditions permitting us to redeem these warrants have not been met as of April
5, 2000. 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. In addition, Kingsbridge Capital Limited received warrants to purchase
200,000 common shares exercisable at $4.36 per share until September 3, 2005
pursuant to the Private Equity Line Agreement. It is unlikely that these
warrants will be exercised if the exercise price exceeds the market price of the
common shares.
On March 6, 2000, we entered into the Private Equity Line Agreement
with Kingsbridge Capital Limited, a private institutional investor. Pursuant to
the Private Equity Line Agreement we may issue and sell, from time to time,
common shares for cash consideration up to an aggregate of $15 million. As
required by the Private Equity Line Agreement, we have filed a registration
statement to permit Kingsbridge to resell to the public any shares that we sell
to it pursuant to the Private Equity Line Agreement. Until March 31, 2002, we
may sell, or "put," common shares to Kingsbridge from time to time in amounts
and at times we select at our sole discretion, subject to specific restrictions
set forth in the Private Equity Line Agreement. The price for these sales is
between 86% and 90% of the then current average market price of our common
shares. The actual percentage will depend on an average market price of our
common shares. In addition, we must pay Brean Murray & Co., Inc. a 3.5%
commission in connection with these sales. We must also pay additional expenses
in connection with these sales. We are not permitted to sell more than 19.9% of
our outstanding common shares pursuant to this arrangement unless we first
obtain shareholder approval under The Nasdaq SmallCap Market rules.
Puts can be made every 15 trading days in amounts ranging from a
minimum of $10,000 to a maximum of $1,000,000. The amounts depend on the then
current trading volume and average market price of our common shares at the time
of each put. We are required to put at least $7,500,000 of our common shares to
Kingsbridge over the life of the Private Equity Line Agreement or pay
Kingsbridge the discount on the unsold shares. As of April 5, 2000, we have not
issued any common shares under the Private Equity Line Agreement. Under the
Private Equity Line Agreement, the average market price of our common shares for
purposes of calculating the purchase price to be paid by Kingsbridge is the
average of the lowest trade prices of the common shares as reported by Bloomberg
L.P. on each of five days on which The Nasdaq SmallCap Market is open for
trading. The five days are the two trading days before the day on which we
deliver notice to Kingsbridge that we are exercising a put, the trading day on
which we deliver the put notice, and the two trading days after the trading day
on which we deliver the put notice.
The Private Equity Line Agreement provides that we may not put our
common shares to Kingsbridge unless the following conditions are satisfied or
waived (none of which is within Kingsbridge's control):
- the registration statement must have been declared effective by the
SEC and must remain effective;
- the representations and warranties made by us in the Private Equity
Line Agreement must be accurate in all material respects as of the
date of each put and as of the date of the closing of the sale. One
of our representations is that since November 30, 1999 there has
been no material adverse change in our business, operations,
properties, prospects or financial condition, except as disclosed in
the registration statement or specified periodic reports filed with
the SEC pursuant to the Securities Exchange Act of 1934;
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<PAGE> 15
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 29, 2000
- we must have performed and complied with in all material respects
all obligations under the Private Equity Line Agreement, the warrant
and the Registration Rights Agreement entered into between us and
Kingsbridge in connection with the Private Equity Line Agreement
that are required to be performed as of the date of each put and as
of the date of the closing of the sale;
- no statute, rule, regulation, executive order, decree, ruling or
injunction may be in effect that prohibits or directly and adversely
affects any of the transactions contemplated by the Private Equity
Line Agreement;
- our common shares must not have been delisted from The Nasdaq
SmallCap Market nor suspended from trading;
- the issuance of the common shares must not violate the shareholder
approval requirements of The Nasdaq SmallCap Market;
- the number of shares to be put to Kingsbridge, together with any
shares then held by Kingsbridge, must not exceed 9.9% of our common
shares that would be outstanding upon completion of the put; and
- the average trading volume of our common shares for 26 of the 30
consecutive trading days immediately preceding a put must be at
least 30,000 shares a day. The two highest and the two lowest
trading volume days are excluded.
In consideration for Kingsbridge's commitment under the Private Equity
Line Agreement, we issued a warrant to Kingsbridge on March 6, 2000. The warrant
entitles the holder to purchase 200,000 common shares at a purchase price of
$4.36 per share. The warrant is exercisable at any time until September 3, 2005.
The warrant contains standard provisions that protect the holder against
dilution by adjustment of the exercise price and the number of shares issuable
pursuant to the warrant if any of the following occurs:
- stock split
- reverse stock split,
- stock dividend,
- reclassification,
- merger,
- statutory share exchange,
- similar transactions affecting our common shares, or
- specified issuances of common shares, convertible or exchangeable
securities, options and warrants at less than the market price of
the common shares, as defined in the Private Equity Line Agreement.
The warrant also provides for adjustments if we pay liquidating dividends. No
adjustments are required for instruments or benefits issued under any of our
stock option plans or in consideration or our acquisition of all or any part of
the assets of another person. The exercise price of the warrant is payable
either in cash or by a cashless exercise in which that number of common shares
underlying the warrant having an aggregate fair market value at the time of
exercise equal to the aggregate exercise price are cancelled as payment of the
exercise price.
We have no loan commitments.
15
<PAGE> 16
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 29, 2000
Even if we receive additional capital, we might not be able able to
achieve the level of sales necessary to sustain our operations. We might not be
able to obtain any funds on terms acceptable to us and at times required by us
through sales of our products, sales of securities or loans in sufficient
quantities. Our Independent Auditors' report in our Annual Report on Form 10-K
for the fiscal year ended November 30, 1999 contains an explanatory paragraph
relating to an uncertainty concerning our ability to continue as a going
concern.
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<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about our 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. The actual cash flows of all instruments are
denominated in U.S. dollars. We invest our cash on hand not needed in current
operations in fixed income securities generally maturing within one year from
the date of acquisition.
FEBRUARY 29, 2000
EXPECTED MATURITY DATES
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MARKETABLE SECURITIES:
Short-term Debt:
Variable Rate ($).................. $1,000,006 - - - - - $1,000,006 $ 824,985
Average interest rate........... 9.09% N/A N/A N/A N/A N/A 9.09%
</TABLE>
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<PAGE> 18
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The following securities of ours were sold by us during fiscal 2000
without being registered under the Securities Act:
1. On March 6, 2000, we entered into the Private Equity
Line Agreement with Kingsbridge, pursuant to which we may issue and sell, from
time to time, common shares for cash consideration up to an aggregate of $15
million. Pursuant to the requirements of the Private Equity Line Agreement, we
have filed a registration statement under the Securities Act of 1933 in order to
permit Kingsbridge to resell to the public any shares that we sell to it
pursuant to the Private Equity Line Agreement. Beginning March 31, 2000 and
continuing through March 31, 2002, we may, from time to time, at our sole
discretion, and subject to specified restrictions set forth in the Private
Equity Line Agreement, sell, or put, common shares to Kingsbridge at a price
between 86% and 90% of the then current average market price of our common
shares, as determined under the Private Equity Line Agreement. Puts can be made
every 15 trading days in amounts ranging from a minimum of $10,000 to a maximum
of $1,000,000, depending on the trading volume and the market price of our
common shares at the time of each put. We are required to put at least
$7,500,000 worth or our common shares to Kingsbridge over the life of the
Private Equity Line Agreement or pay Kingsbridge the discount on the difference.
To date, no common shares have been issued under the Private Equity Line
Agreement. The common shares to be issued are expected to be issued in reliance
on the exemptions from registration contained in Sections 4(2) and 4(6) of the
Securities Act.
2. In connection with the Private Equity Line Agreement,
on March 6, 2000, we issued to Kingsbridge a warrant to purchase 200,000 of our
common shares at a price of $4.36 a share. The warrant is exercisable at any
time between September 3, 2000 and September 3, 2005. The warrant contains
provisions that protect against dilution by adjustment of the exercise price and
the number of shares issuable under the warrant upon the occurrence of specified
events, such as a merger, stock split, reverse stock split, stock dividend,
recapitalization, or issuance of common shares, options, warrants or convertible
or exchangeable securities at less than the then current market value of the
common shares. The exercise price of the warrant is payable either in cash, or
by a cashless exercise, in which that number of common shares underlying the
warrant having a fair market value at the time of exercise equal to the
aggregate exercise price are cancelled as payment of the exercise price. The
warrant was not registered, but was issued in reliance upon the exemptions from
registration contained in Sections 4(2) and 4(6) of the Securities Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Private Equity Line Agreement, dated as of March 6,
2000, between Somanetics Corporation and Kingsbridge
Capital Limited, incorporated by reference to Exhibit
10.42 to the Company's Registration Statement on Form
S-1 (file no. 333-33262) filed on March 24, 2000 and
effective March 31, 2000.
10.2 Warrant, dated as of March 6, 2000, from Somanetics
Corporation to Kingsbridge Capital Limited,
incorporated by reference to Exhibit 10.43 to the
Company's Registration Statement on Form S-1 (file
no. 333-33262) filed on March 24, 2000 and effective
March 31, 2000.
10.3 Registration Rights Agreement, dated as of March 6,
2000, between Somanetics Corporation and Kingsbridge
Capital Limited, incorporated by reference to Exhibit
10.44 to the Company's Registration Statement on Form
S-1 (file no. 333-33262) filed on March 24, 2000 and
effective March 31, 2000.
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<PAGE> 19
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by us during the quarter for
which this report is filed.
19
<PAGE> 20
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: April 11, 2000 By:/s/ Bruce J. Barrett
------------------ -----------------------
Bruce J. Barrett
President and Chief Executive Officer
(Duly Authorized and Principal
Financial Officer)
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