UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended February 28, 2010
 OR
 o
    
    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
  Michigan
(State or other jurisdiction of incorporation or organization)
    
    38-2394784
(I.R.S. Employer Identification No.)
 2600 Troy Center Drive
Troy, Michigan
48084-4771    (248) 244-1400    N/A
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller-reporting company o
 o þ
 11,949,384




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PART I FINANCIAL INFORMATION

SOMANETICS CORPORATION
 ITEM 1. FINANCIAL STATEMENTS
 BALANCE SHEETS
 February 28,
    
    
    November 30,2010
    
    
    2009(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    24,660,515
    
    
    $
    28,964,273Marketable securities
    
    
    8,381,289
    
    
    
    24,763,854Accounts receivable
    
    
    7,374,943
    
    
    
    8,878,942Inventory
    
    
    3,336,832
    
    
    
    3,622,531Prepaid expenses
    
    
    545,819
    
    
    
    1,087,450Accrued interest receivable
    
    
    94,483
    
    
    
    138,099Deferred tax asset  current
    
    
    51,060
    
    
    
    51,060Total current assets
    
    
    44,444,941
    
    
    
    67,506,209PROPERTY AND EQUIPMENT (at cost):Demonstration and no capital cost sales equipment at customers
    
    
    4,407,883
    
    
    
    4,285,163Machinery and equipment
    
    
    2,058,911
    
    
    
    1,886,582Furniture and fixtures
    
    
    990,817
    
    
    
    545,796Leasehold improvements
    
    
    454,423
    
    
    
    197,450Total
    
    
    7,912,034
    
    
    
    6,914,991Less accumulated depreciation and amortization
    
    
    (3,787,422
    )
    
    
    (3,966,645
    )Net property and equipment
    
    
    4,124,612
    
    
    
    2,948,346OTHER ASSETS:Long-term investments
    
    
    43,792,506
    
    
    
    26,004,995Deferred tax asset  non-current
    
    
    2,961,381
    
    
    
    2,795,963Intangible assets, net
    
    
    230,924
    
    
    
    234,003Goodwill
    
    
    1,783,712
    
    
    
    1,783,712Other
    
    
    15,000
    
    
    
    15,000Total other assets
    
    
    48,783,523
    
    
    
    30,833,673TOTAL ASSETS
    
    $
    97,353,076
    
    
    $
    101,288,228LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    1,301,686
    
    
    $
    1,466,497Accrued liabilities
    
    
    703,021
    
    
    
    1,788,552Total current liabilities
    
    
    2,004,707
    
    
    
    3,255,049OTHER LIABILITIES:Deferred rent
    
    
    102,153
    
    
    
    Total other liabilities
    
    
    102,153
    
    
    
    TOTAL LIABILITIES
    
    
    2,106,860
    
    
    
    3,255,049COMMITMENTS
AND CONTINGENCIESSHAREHOLDERS 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, 11,909,200 shares at February 28, 2010,
and 12,104,462 shares at November 30, 2009
    
    
    119,092
    
    
    
    121,045Additional paid-in capital
    
    
    92,864,993
    
    
    
    97,696,229Retained Earnings
    
    
    2,262,131
    
    
    
    215,905Total shareholders equity
    
    
    95,246,216
    
    
    
    98,033,179TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    97,353,076
    
    
    $
    101,288,228
  2




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##### 



SOMANETICS CORPORATION
 STATEMENTS OF OPERATIONS
(Unaudited)
 For the Three-MonthPeriods EndedFebruary 28,
    
    
    February 28,2010
    
    
    2009NET REVENUES
    
    $
    13,139,684
    
    
    $
    11,155,354COST OF SALES
    
    
    1,745,454
    
    
    
    1,580,481Gross Margin
    
    
    11,394,230
    
    
    
    9,574,873OPERATING EXPENSES:Research, development and engineering
    
    
    613,153
    
    
    
    423,161Selling, general and administrative
    
    
    7,976,276
    
    
    
    7,314,699Total operating expenses
    
    
    8,589,429
    
    
    
    7,737,860OPERATING INCOME
    
    
    2,804,801
    
    
    
    1,837,013OTHER INCOME:Interest income
    
    
    252,468
    
    
    
    271,386Total other income
    
    
    252,468
    
    
    
    271,386INCOME BEFORE INCOME TAXES
    
    
    3,057,269
    
    
    
    2,108,399INCOME TAX EXPENSE
    
    
    (1,011,044
    )
    
    
    (806,220
    )NET INCOME
    
    $
    2,046,225
    
    
    $
    1,302,179NET INCOME PER COMMON SHARE  BASIC
    
    $
    .17
    
    
    $
    .11NET INCOME PER COMMON SHARE  DILUTED
    
    $
    .16
    
    
    $
    .10WEIGHTED AVERAGE SHARES OUTSTANDING  BASIC
    
    
    12,029,231
    
    
    
    12,038,368WEIGHTED AVERAGE SHARES OUTSTANDING  DILUTED
    
    
    12,907,776
    
    
    
    12,898,920
  3




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##### 



SOMANETICS CORPORATION
 STATEMENTS OF CASH FLOWS
(Unaudited)
 For the Three-MonthPeriods EndedFebruary 28,
    
    
    February 28,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    2,046,225
    
    
    $
    1,302,179Adjustments to reconcile net income to net cash provided by operations:Income tax expense
    
    
    876,650
    
    
    
    737,516Depreciation and amortization
    
    
    280,228
    
    
    
    254,714Stock compensation expense
    
    
    418,150
    
    
    
    384,430Excess tax benefits from stock option exercises
    
    
    (1,039,471
    )
    
    
    Changes in assets and liabilities:Accounts receivable decrease
    
    
    1,503,999
    
    
    
    674,461Accrued interest income decrease (increase)
    
    
    43,616
    
    
    
    (75,969
    )Inventory decrease (increase)
    
    
    140,910
    
    
    
    (391,424
    )Deferred income tax benefit (increase)
    
    
    (2,597
    )
    
    
    Prepaid expenses decrease
    
    
    541,631
    
    
    
    67,968Accounts payable (decrease)
    
    
    (164,811
    )
    
    
    (200,288
    )Accrued liabilities (decrease)
    
    
    (1,085,531
    )
    
    
    (1,028,800
    )Deferred rent increase
    
    
    102,154
    
    
    
    Accrued income tax expense (increase)
    
    
    
    
    
    
    (20,659
    )Net cash provided by operating activities
    
    
    3,661,153
    
    
    
    1,704,128CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of marketable securities and long-term investments
    
    
    (34,553,268
    )
    
    
    (15,023,401
    )Proceeds from maturities of marketable securities and
long-term investments
    
    
    33,148,321
    
    
    
    203,846Acquisition of property and equipment
    
    
    (1,308,625
    )
    
    
    (103,914
    )Net cash (used in) investing activities
    
    
    (2,713,572
    )
    
    
    (14,923,469
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repurchase of common shares
    
    
    (6,449,210
    )
    
    
    Excess tax benefits from stock option exercises
    
    
    1,039,471
    
    
    
    Proceeds from issuance of common shares due to exercise of stock options
    
    
    158,400
    
    
    
    Net cash (used in) financing activities
    
    
    (5,251,339
    )
    
    
    NET (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (4,303,758
    )
    
    
    (13,219,341
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    28,964,273
    
    
    
    37,166,141CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    24,660,515
    
    
    $
    23,946,800Supplemental Disclosure of Non cash investing activities:Demonstration and no capital cost sales equipment capitalized
from inventory (Note 2)
    
    $
    144,789
    
    
    $
    151,493Supplemental Disclosure of Taxes paid:Federal and state income taxes (Note 3)
    
    $
    55,264
    
    
    $
    68,704
  4




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##### 



SOMANETICS CORPORATION
 Notes to Financial Statements
(Unaudited)
 February 28, 2010
 1.
    
    FINANCIAL STATEMENT PRESENTATION
   2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Marketable Securities and Long-Term Investments
 Inventory
 February 28,
    
    
    November 30,2010
    
    
    2009Purchased components
    
    $
    2,185,773
    
    
    $
    2,358,037Finished goods
    
    
    885,982
    
    
    
    1,042,205Work in process
    
    
    265,077
    
    
    
    222,289Total
    
    $
    3,336,832
    
    
    $
    3,622,531
 Property and Equipment
 Intangible Assets and Goodwill
 5




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##### 



SOMANETICS CORPORATION
 Notes to Financial Statements- Continued
(Unaudited)
 February 28, 2010
 February 28,
    
    
    November 30,2010
    
    
    2009Technology acquisition costs
    
    $
    246,318
    
    
    $
    246,318Less: accumulated amortization
    
    
    (15,394
    )
    
    
    (12,315
    )Total
    
    $
    230,924
    
    
    $
    234,003
  Stock Compensation
   6




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##### 



SOMANETICS CORPORATION
 Notes to Financial Statements- Continued
(Unaudited)
 February 28, 2010
   Net Income Per Common Share  basic and diluted
 Three months ended
    
    
    Three months endedFebruary 28, 2010
    
    
    February 28, 2009Weighted average shares  basic
    
    
    12,029,231
    
    
    
    12,038,368Add: effect of dilutive common
shares
    
    
    878,545
    
    
    
    860,552Weighted average shares  diluted
    
    
    12,907,776
    
    
    
    12,898,920
  Common Share Repurchase Program
 3.
    
    INCOME TAXES
    7




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##### 



SOMANETICS CORPORATION
 Notes to Financial Statements- Continued
(Unaudited)
 February 28, 2010
   4.
    
    ACCRUED LIABILITIES
  February 28,
    
    
    November 30,2010
    
    
    2009Incentive Compensation
    
    $
    362,339
    
    
    $
    1,185,225Professional Fees
    
    
    168,500
    
    
    
    159,458Sales Commissions
    
    
    152,332
    
    
    
    425,969Warranty
    
    
    19,850
    
    
    
    17,900Total
    
    $
    703,021
    
    
    $
    1,788,552
 5.
    
    COMMITMENTS AND CONTINGENCIES
  6.
    
    SEGMENT INFORMATION
  7.
    
    SUBSEQUENT EVENTS
  8




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##### 



SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS
 February 28, 2010
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Forward-Looking Statements
 You should read the following discussion and analysis of our financial condition and results
of operations together with our financial statements and the related notes and other financial data
included elsewhere in this report. Some of the information contained in this discussion and
analysis or set forth elsewhere in this report, including information with respect to our plans and
strategy for our business, includes forward-looking statements that involve risks and
uncertainties. You should review the Risk Factors section of our Annual Report on Form 10-K for
a discussion of important factors that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements contained in the following
discussion and analysis. See also Forward-Looking Statements in Item 1A of our Annual Report on
Form 10-K.
 Overview
   Net Revenues and Cost of Sales
  9




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##### 



SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS
 February 28, 2010
   Operating Expenses
  
    
    salaries, wages and related expenses of our employees and consultants;
    
    sales and marketing expenses, such as employee sales commissions, commissions to
independent sales representatives, travel, entertainment, advertising, education and
training expenses, depreciation of demonstration monitors and attendance at selected
medical conferences;
    
    clinical research expenses, such as costs of supporting clinical trials; and
    
    general and administrative expenses, such as the cost of corporate operations,
professional services, stock compensation, insurance, warranty and royalty expenses,
investor relations, depreciation and amortization, facilities expenses and other general
operating expenses.
   
    
    salaries, wages and related expenses of our research and development personnel and
consultants;
    
    costs of various development projects; and
    
    costs of preparing and processing applications for FDA clearance of new products.
  10




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##### 



SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS
 February 28, 2010
 Results of Operations
 Three Months Ended February 28, 2010 Compared to Three Months Ended February 28, 2009
 Net Revenues.
 
    
    an increase in U.S. sales of $1,717,633, or 20%, from $8,744,219 in the first quarter of
fiscal 2009 to $10,461,852 in the first quarter of fiscal 2010. The increase in U.S. sales
was primarily due to an increase in sales of disposable sensors of $1,028,750, or 13%,
primarily as a result of a 12% increase in sensor unit sales. In addition, sales of the
INVOS System monitor increased by $393,863 or 43%, primarily as a result of increased
purchases by hospitals and $320,000 of monitors sold in connection with the compartment
syndrome study and sales of the Vital Sync System increased by $295,020, primarily as a
result of monitors sold in connection with the compartment syndrome study; and
    
    an increase in international sales of $266,697, or 11%, from $2,411,135 in the first
quarter of fiscal 2009 to $2,677,832 in the first quarter of fiscal 2010. The increase in
international sales was primarily due to increased sales of our disposable sensor of
$226,204, or 19%, primarily as a result of increased purchases by Edwards Lifesciences in
Japan. In addition, we recognized increased purchases of our INVOS System monitor by
Edwards of approximately $405,000. Edwards Lifesciences made stocking orders of product
manufactured in our previous facility in the first quarter of fiscal 2010 while they await
the required Japanese regulatory approval to purchase product from our new facility. We
expect sales to Edwards to decrease in the second quarter as a result of these stocking
orders in the first quarter. These increased purchases by Edwards Lifesciences in Japan
were partially offset by decreased purchases of our INVOS System monitor by Covidien in
Europe of approximately $304,000 in the first quarter. For the three months ended February
28, 2010, international sales represented 20% of our net revenues, compared to 22% of our
net revenues in the first quarter of fiscal 2009. Purchases by Covidien accounted for 11%
of net revenues in the first quarter of fiscal 2010 compared to 15% in the first quarter of
fiscal 2009.
   Three Months EndedProduct
    
    February 28, 2010
    
    
    February 28, 2009Sensors
    
    
    78
    %
    
    
    81
    %INVOS System Monitors
    
    
    20
    %
    
    
    19
    %Vital Sync System
    
    
    2
    %
    
    
    Total
    
    
    100
    %
    
    
    100
    %
  11




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##### 



SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS
 February 28, 2010
 Gross Margin.
 Research, Development and Engineering Expenses.
 Selling, General and Administrative Expenses.
 
    
    a $673,266 increase in salaries, wages, commissions and related expenses, primarily as a
result of an increase in the number of employees, principally in sales and marketing (from
an average of 115 employees for the three months ended February 28, 2009 to an average of
135 employees for the three months ended February 28, 2010) and an increase in employee
insurance premiums and salaries of existing employees;
    
    a $309,681 increase in legal costs associated with the patent infringement action that
we have filed against CAS Medical Systems, Inc. in 2009; and
    
    a $239,582 increase in facility expenses, primarily due to the expenses associated with
the lease agreement that we have entered into for our new corporate headquarters and
assembly and storage facility.
   Other Income.
 Income Taxes.
 12




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SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS
 February 28, 2010
  Liquidity and Capital Resources
 General
    Cash Flows From Operating Activities
  
    
    $2,581,782 of income before income taxes and non-cash depreciation, amortization, stock
compensation expense and excess tax benefits from stock option exercises;
    
    a $1,503,999 decrease in accounts receivable, primarily as a result of lower first
quarter sales in fiscal 2010 than in the fourth quarter of fiscal 2009, and the timing of
more of the sales in the fourth quarter of 2009 towards the end of the quarter than in the
first quarter of fiscal 2010;
    
    a $541,631 decrease in prepaid expenses, primarily as a result of property and equipment
and leasehold improvements associated with our new facility that were capitalized as
machinery and equipment, furniture and fixtures and leasehold improvements during the first
quarter of 2010;
    
    a $140,910 decrease in inventories, primarily due to higher than expected first quarter
2010 sales, partially offset by acquisitions of components due to anticipated sales;
inventories on our balance sheet decreased more because we capitalized INVOS System
monitors to property and equipment that are being used as demonstration units and no
capital cost sales equipment, as described below;
    
    a $102,154 increase in deferred rent associated with the new lease agreement for our new
facility; and
    
    a $43,616 decrease in accrued interest income, primarily due to decreased interest rates
on our marketable securities and long-term investments balances.
  
    
    a $1,085,531 decrease in accrued liabilities, primarily as a result of the payment of
year-end 2009 accruals, including incentive compensation and sales commissions, partially
offset by accruals in fiscal 2010 for incentive compensation and sales commissions; and
    
    a $164,811 decrease in accounts payable, primarily as a result of decreased inventory
purchases and more timely payments to vendors, partially offset by increased operating
expenses.
 13




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SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS
 February 28, 2010
   Cash Flows From Investing Activities
  Cash Flows From Financing Activities
  Contractual Obligations
  Off-Balance Sheet Arrangements
  Critical Accounting Policies
  Stock Compensation
  14




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SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS
 February 28, 2010
    Income Taxes
    No Capital Cost Sales Revenue Recognition
  15




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SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS
 February 28, 2010
  Technology Acquisition Costs Intangible Asset and Goodwill
    16




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ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  February 28, 2010Expected Maturity Dates By Fiscal Year2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    Thereafter
    
    
    Total
    
    
    Fair ValueInvestments:Marketable Securities and Long-term Investments:Fixed Rate ($)
    
    
    6,272,769
    
    
    
    22,423,574
    
    
    
    12,005,733
    
    
    
    11,471,719
    
    
    
    
    
    
    
    
    
    
    
    52,173,795
    
    
    
    52,600,932Average interest rate
    
    
    3.52
    %
    
    
    2.45
    %
    
    
    3.03
    %
    
    
    3.84
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    3.02
    %
  17




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##### 



ITEM 4.
    
    CONTROLS AND PROCEDURES
    18




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##### 



PART II OTHER INFORMATION
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  TotalNumber of
    
    
    ApproximateShares
    
    
    Dollar ValuePurchased
    
    
    of SharesTotal
    
    
    
    
    
    
    as Part of
    
    
    That May YetNumber of
    
    
    Average
    
    
    Publicly
    
    
    Be PurchasedShares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    Under the PlansPeriod
    
    Purchased
    
    
    Per Share
    
    
    or Programs
    
    
    or ProgramsDecember 1-31, 2009
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    13,550,580January 1-31, 2010
    
    
    121,017
    
    
    
    16.11
    
    
    
    121,017
    
    
    
    11,600,670February 1-28, 2010
    
    
    280,975
    
    
    
    16.01
    
    
    
    280,975
    
    
    
    7,101,370Total
    
    
    401,992
    
    
    
    16.04
    
    
    
    401,992
  19




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ITEM 6.
    
    EXHIBITS
 31.1
    
    Certifications of Chief Executive Officer Pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certifications of Chief Financial Officer Pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
 20




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SIGNATURES
  Somanetics Corporation
(Registrant)Date: March 29, 2010
    By:
    /s/ William M. IaconaWilliam M. IaconaVice President, Chief Financial Officer,
Controller and Treasurer (Duly Authorized and
Principal Financial Officer) 21




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EXHIBIT INDEX
 Exhibit
    
    Description31.1
    
    Certifications of Chief Executive Officer Pursuant to Rule 13a-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 22