e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended November 30, 2005 or
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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)
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MICHIGAN
(State or other jurisdiction of
incorporation or organization)
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38-2394784
(I.R.S. Employer
Identification No.) |
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1653 East Maple Road, Troy, Michigan
(Address of principal executive offices)
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48083-4208
(Zip Code) |
Registrant’s telephone number, including area code: (248) 689-3050
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, par value $.01 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ.
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ.
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ.
The aggregate market value of the common shares held by non-affiliates of the registrant as of
May 31, 2005 (the last business day of the registrant’s most recently completed second fiscal
quarter), computed by reference to the closing sale price as reported by Nasdaq on such date, was
approximately $176,700,000.
The number of the registrant’s common shares outstanding as of January 30, 2006 was 10,715,885.
Documents Incorporated by Reference
None.
SOMANETICS CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2005
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
Overview
We develop, manufacture and market the INVOS System, a non-invasive patient monitoring system
that continuously measures changes in the blood oxygen levels in the brain. The brain is the organ
least tolerant of oxygen deprivation. Without sufficient oxygen, brain damage may occur within
minutes, which can result in paralysis, other disabilities or death. Brain oxygen information,
therefore, is important, especially in surgical procedures requiring general anesthesia and in
other critical care situations with a high risk of the brain getting less oxygen than it needs.
The INVOS System consists of a portable monitoring system, including proprietary software, which is
used with multiple single-use disposable sensors, called SomaSensors. During our fiscal year ended
November 30, 2005, net revenues from SomaSensors comprised approximately 75 percent of our net
revenues. As of November 30, 2005, we had an installed base of approximately 1,100 INVOS System
monitors in the United States in approximately 500 hospitals, and during fiscal 2005 we sold
approximately 213,000 disposable sensors worldwide.
Clinical studies have shown that when the INVOS System is used to monitor and provide
information to help manage the regional brain blood oxygen saturation of patients, the occurrence
of adverse clinical outcomes can be reduced, which can significantly improve patient outcomes and
reduce hospital costs. During fiscal 2004, the results of the first prospective, randomized,
blinded intervention trial were presented. The study showed that when the INVOS System was used to
monitor and provide information to help manage the regional brain blood oxygen saturation of
coronary artery bypass surgery patients, the occurrence of adverse clinical outcomes was reduced
from 12.5 percent to two percent. Additionally, in 2004, the results of a large retrospective
review showed a statistically significant greater than 50 percent reduction (2.01 percent versus
0.97 percent) in the incidence of permanent stroke when information from the INVOS System was used
to help manage brain blood oxygen saturation of cardiac surgery patients. The results also showed
a reduced length of hospital stay and reduced incidence of prolonged ventilation when the INVOS
System was used.
Our INVOS System has U.S. Food and Drug Administration, or FDA, clearance in the United States
for use on adults, children and infants. We target the sale of the INVOS System for use in
surgical procedures and other critical care situations with a high risk of oxygen imbalances. We
initially focused our marketing efforts primarily on adult and pediatric cardiac surgeries and
carotid artery surgeries. In the first quarter of fiscal 2005, we initiated selling and marketing
efforts for the INVOS System in the pediatric ICU. We plan to launch the product into the neonatal
ICU in late 2006, after completing development of a smaller SomaSensor. Some of our potential future markets
may include major surgeries involving diabetic and elderly patients. While our initial focus has
been commercializing the INVOS System to measure blood oxygen saturation changes in the brain, we
believe that there are opportunities to use the INVOS System in regions of the body other than the
brain. In November 2005, we received 510(k) clearance from the FDA to market our INVOS System to
monitor changes in blood oxygen saturation elsewhere in the body in somatic, or skeletal muscle,
tissue in patients with or at risk for restricted blood flow. Our next generation INVOS System
monitor, which we expect to launch in the first half of 2006, can display information from four
SomaSensors, which will allow for the simultaneous monitoring of changes in blood oxygen saturation in
the brain and, in patients with or at risk for restricted blood flow, in somatic tissue.
We are currently sponsoring a prospective, randomized, blinded clinical trial involving
diabetic patients over age 50 who are undergoing major general surgery. The study group will
consist of patients whose surgeries are managed based on information provided by the INVOS System,
and the control group will consist of similarly situated patients whose surgeries are not managed
based on information provided by the INVOS System. The two groups will be compared across measures
of patient outcomes and hospital costs, including length of hospital stay. Diabetics are at
particular risk of oxygen imbalances because of a higher incidence of vascular disease. If results
of this trial are positive, we intend to target more actively the sale of the INVOS System for use
in diabetic patients undergoing major general surgeries, consistent with FDA requirements. We
expect to begin this marketing in 2008. We are also evaluating sponsorship of other clinical
trials which may allow us to more actively target the sale of the INVOS System for use in other
patient populations. There are also numerous other independent clinical studies evaluating the use
of the INVOS System.
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We sell the INVOS System through a direct sales team in the United States, consisting of
salespersons and clinical specialists, the size of which has increased from 17 persons at the end
of fiscal 2004 to 26 persons at the end of fiscal 2005, and 10 independent sales representative
firms. Outside the United States, we market the INVOS System through independent distributors,
including Tyco Healthcare in Europe, Canada, the Middle East and Africa, and Edwards Lifesciences
Ltd. in Japan. We expect to increase significantly the size of our U.S. direct sales team in
fiscal 2006 and are evaluating placing direct salespersons and clinical specialists in Europe to
support Tyco Healthcare. Our net revenues have increased from $9.4 million in the fiscal year
ended November 2003 to $20.5 million in fiscal 2005, representing a compounded annual growth rate
of 47.6 percent. As a percentage of net revenues, our gross margin improved from 77 percent in
fiscal 2003 to 87 percent in fiscal 2005.
Our Corporate Information
We were incorporated under the laws of the State of Michigan in 1982. Our principal executive
offices are located at 1653 East Maple Road, Troy, Michigan 48083-4208, and our telephone number
is (248) 689-3050. Our website address is www.somanetics.com. The information on, or that can be
accessed through, our website is not a part of this report. Unless the context indicates
otherwise, as used in this report, the terms “Somanetics,” “Somanetics Corporation,” the “Company,”
“we,” “us” and “our” refer to Somanetics Corporation, a Michigan corporation.
Somanetics®, INVOS®, SomaSensor®, Window to the
Brain® and CorRestore® are our registered trademarks. Each of the other
trademarks, trade names or service marks appearing in this report belongs to its respective holder.
Industry
Market Opportunity
We believe that in the United States in 2006 there will be approximately five million
surgeries involving elderly patients who, due to the type of surgery, age of the patient or other
factors, have a higher risk of developing post-operative complications. Such surgeries include
cardiac surgeries, carotid surgeries and other major general surgeries involving elderly patients.
In addition, we believe that there are other patient populations, such as non-elderly adult,
pediatric and neonatal patients, undergoing major surgeries and patients undergoing ICU treatment
or in other critical care situations that face a high risk of brain oxygen imbalances.
Hospitals in the United States have economic incentives to control health care costs. They
often receive a fixed fee from Medicare, managed care organizations and private insurers based on
the disease diagnosed, rather than on the services actually performed. Therefore, hospitals are
increasingly focused on avoiding unexpected costs, such as those associated with increased hospital
stays of patients with brain or other organ damage or other adverse outcomes following surgery or
ICU treatment. The costs to the health care system associated with adverse surgical and ICU
outcomes and lengthened hospital stays can be significant. In addition, lack of immediate
knowledge about blood oxygen levels in areas such as the brain or somatic tissue can result in
unnecessary medical treatments and associated costs. With the increasing focus by hospitals on
avoiding unexpected costs, especially in the operating room, ICU and other critical care areas, we
believe that there are significant incentives to evaluate and adopt new monitoring technologies
which could provide information to improve patient care and reduce costs.
Brain Oxygen Imbalances and Its Effects
Oxygen is carried to the brain by hemoglobin in the blood. Hemoglobin passes through the
lungs, bonds with oxygen and is pumped by the heart through arteries and capillaries to the brain.
Brain cells extract oxygen and the blood carries away carbon dioxide through the capillaries and
veins back to the lungs.
The brain is the human organ least tolerant of oxygen deprivation. Without sufficient oxygen,
brain damage may occur within minutes, which can result in paralysis, severe and complex
disabilities, or death. Undetected brain hypoxia, which is a condition in which there is a
decrease of oxygen supply to the brain even though there is adequate blood flow, and ischemia, a
condition in which blood flow, and thus oxygen, is restricted to
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a part of the body, are common causes of brain damage and death during and after many surgical
procedures and in other critical care situations.
Brain oxygen imbalances can be caused by several factors, including changes in arterial blood
oxygen saturation, which is the percentage of oxygenated hemoglobin contained in a given amount of
blood which carries oxygen in the arteries to the tissues of the body, blood flow to the brain,
hemoglobin concentration and oxygen consumption by the brain.
Brain oxygen information is important in surgical procedures requiring general anesthesia, in
other critical care situations with a high risk of brain oxygen imbalances, as well as in the
treatment of patients with head injuries or strokes. Once alerted to these imbalances, medical
professionals can use this and other information to take corrective action through the introduction
of medications, anesthetic agents or mechanical intervention, potentially improving patient
outcomes and reducing the costs of care. Immediate and continuous information about changes in
brain oxygen levels also provides immediate feedback regarding the adequacy of the selected
therapy. Equally important, without information about brain oxygen levels, therapy that may not be
necessary might be initiated in an attempt to ensure adequate brain oxygen levels and may have an
adverse impact on patient safety and increase hospital costs.
Limitations of Traditional Monitoring Technologies
We believe that it is uncommon for patients undergoing surgery to receive any sort of direct
neuromonitoring of brain blood oxygen saturation, in part due to some of the shortcomings of the
traditional technologies. When patients are monitored directly, several different methods are used
to detect one or more of the factors affecting brain oxygen levels or the effects of brain oxygen
imbalances. These methods include invasive jugular bulb catheter monitoring, transcranial Doppler,
electroencephalograms, or EEGs, intracranial pressure monitoring, and neurological examination.
These methods have not been widely adopted to monitor brain oxygen levels in critical care
situations for a variety of reasons. The use of these methods is limited because they are either
expensive, difficult or impractical to use, invasive, not reliable under some circumstances, not
organ specific, not able to measure more than one factor affecting oxygen imbalances in the brain,
or not able to provide continuous information.
Our Solution
Our INVOS System is a non-invasive patient monitoring system that provides continuous
information about changes in blood oxygen saturation levels. We believe that our INVOS System
addresses the market’s need for a solution that is non-invasive, continuous, immediate, effective and easy to
use. The INVOS System, which is predominantly used in hospital critical care areas such as
operating rooms and ICUs, consists of a portable monitoring system, including proprietary software,
which is used with multiple single-use disposable SomaSensors. For multi-channel cerebral
monitoring, SomaSensors are placed on both sides of a patient’s forehead and are connected to the
monitor. The INVOS System uses our proprietary software to analyze information received from the
SomaSensors and provides a continuous digital and trend display of an index of the blood oxygen
saturation in the area of the body under the SomaSensors. Our next generation INVOS System
monitor, which we expect to launch in the first half of 2006, can display information from four
SomaSensors, which will allow for simultaneously monitoring of changes in blood oxygen saturation
in the brain and, in patients with or at risk for restricted blood flow, in somatic tissue.
Surgeons, anesthesiologists and other medical professionals can use the information provided
by the INVOS System, in conjunction with other available information, to identify brain oxygen
imbalances and take necessary corrective action, potentially improving patient outcomes and
reducing the costs of care. Once the cause of a cerebral oxygen imbalance is identified and
therapy is initiated, the INVOS System provides immediate feedback regarding the adequacy of the
selected therapy. It can also provide medical professionals with an additional level of assurance
when they make decisions regarding the need for therapy.
Unlike some existing monitoring methods, the INVOS System functions even when the patient is
unconscious, lacks a strong peripheral pulse or has suppressed neural activity. The measurement
made by the INVOS System is dominated by information from the blood in the veins, where the balance
of oxygen supply and
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demand can be more effectively assessed. Therefore, it responds to the changes in factors
that affect the balance between cerebral oxygen supply and demand, including changes in arterial
oxygen saturation, cerebral blood flow, hemoglobin concentration and cerebral oxygen consumption.
The INVOS System responds to global changes in brain oxygen levels and to events that affect brain
oxygen levels in the region beneath the SomaSensor.
The following table summarizes some of the principal features and related benefits of the
INVOS System:
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Benefits |
Non-invasive
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Reduced risk to patients and medical professionals |
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Consistent with market trend toward less invasive medical procedures |
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Continuous Information
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Immediate information regarding brain oxygen imbalances
to help guide therapeutic interventions |
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Trend information, rather than at a single point in time |
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Cost-Effective
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Low cost relative to traditional brain monitoring
methods |
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Small portion of the total cost of the procedures in
which it is used |
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Information can potentially improve patient outcomes
and reduce the overall cost of care |
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Easy to Use
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Does not require a dedicated technician to operate or
interpret |
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Automatic SomaSensor calibration |
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Simple user interface and controls |
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Effective in Difficult
Circumstances
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Provides information when the patient is unconscious,
lacks a strong peripheral pulse or has suppressed neural
activity, specifically during cardiac arrest,
hypothermia, hypertension, hypotension and hypovolemia |
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Portable/Compatible
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Placed at patient’s bedside |
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Lightweight |
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Can be integrated or interfaced with existing
multi-modality systems |
The CorRestore System
In addition to the INVOS System, we also develop and market the CorRestore System, which
includes a cardiac implant, which we call the CorRestore Patch, for use in cardiac repair and
reconstruction, including heart surgeries called surgical ventricular restoration, or SVR. During
SVR, the surgeon restores an enlarged, poorly functioning left ventricle to more normal size and
function by inserting an implant, in most instances, or closing the defect directly. Sales of
CorRestore Systems represented two percent of our fiscal 2005 net revenues.
Business Strategy
Our objective is to establish the INVOS System as a standard of care in surgical procedures
requiring general anesthesia and in other critical care situations. Key elements of our strategy
include to:
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Target Surgical Procedures and Other Critical Care Situations with a High Risk of
Oxygen Imbalances. We target surgical procedures and other critical care situations with a
high risk of oxygen imbalances. Some of our current and potential future markets include
cardiac surgeries, carotid artery surgeries, pediatric and neonatal ICU applications and
other major surgeries involving diabetic or elderly patients. We believe that the medical
professionals involved in these surgeries and ICU treatments are most aware of the risks of
brain and other damage resulting from oxygen imbalances. Therefore, we believe that it
will be easier to demonstrate the clinical importance of the information provided by the
INVOS System to these professionals and potentially gain market acceptance for our products
in connection with these surgeries and ICU treatments. |
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Sponsor Clinical Studies to Promote Expanded Acceptance of the INVOS System. We believe
that our INVOS System has been evaluated in over 400 presentations, study abstracts and published papers. During the second quarter of fiscal 2004, results of both the first prospective,
randomized clinical trial and a larger retrospective review evaluating the INVOS System
were presented, which we believe have contributed to the INVOS System gaining further
market penetration. We plan to sponsor clinical studies using the INVOS System to
demonstrate its benefits. We are currently sponsoring a prospective, randomized, blinded
clinical trial involving diabetic patients over age 50 who are undergoing major general
surgery. The study group will consist of patients whose surgeries are managed based on
information provided by the INVOS System, and the control group will consist of similarly
situated patients whose surgeries are not managed based on information provided by the
INVOS System. The two groups will be compared across measures of patient outcomes and
hospital costs, including length of hospital stay. Diabetics are at particular risk of
oxygen imbalances because of a higher incidence of vascular disease. If results of this
trial are positive, we intend to target more actively the sale of the INVOS System for use
in diabetic patients undergoing major general surgeries, consistent with FDA requirements.
We expect to begin this marketing in 2008. We are also evaluating sponsorship of other
clinical trials which may allow us to more actively target the sale of the INVOS System for
use in other patient populations. We use the results of clinical studies to help convince
the medical community of the clinical importance of the information provided by the INVOS
System. We also sponsor peer-to-peer educational opportunities and promote use of the
INVOS System in regional centers of influence that we believe will influence its adoption
by others. |
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Invest in Sales and Marketing Activities. We continue to increase our investment in our
distribution network consisting of our direct sales employees, independent sales
representative firms and distributors. We sell the INVOS System through a direct sales
team in the United States, the size of which has increased from 17 persons at the end of
fiscal 2004 to 26 persons at the end of fiscal 2005, and 10 independent sales
representative firms. We expect to increase significantly the size of our U.S. direct
sales team in fiscal 2006 and are evaluating placing direct salespersons and clinical
specialists in Europe to support Tyco Healthcare. We also have a co-promotion relationship
with Fresenius Medical Care Cardiovascular Resources, Inc.’s North American Extracorporeal
Alliance. We participate in trade shows and medical conferences, ongoing peer-to-peer
educational programs and targeted public relations opportunities. |
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Interface and Integrate Our Technology into Other Manufacturers’ Multi-Modality Systems.
There are many existing monitoring systems in the operating room and the ICU. We would
like to interface with these monitors. We have interfaced the INVOS System with the
Philips Medical Systems’ VueLink System to provide data, alarm events and status messages
from the INVOS System on any monitor that accepts the VueLink module, a multi-parameter
monitor. This enables oximetry data from our INVOS System to be displayed on the VueLink
screen and integrated with other vital patient information. We plan to support the
interface and integration of our INVOS System technology with other medical device
manufacturers to expand the installed base of INVOS System monitors and increase the demand
for SomaSensors. We expect that such arrangements will provide another distribution
channel for our INVOS System. |
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Develop Additional Applications and Markets for the INVOS System. We are developing a
smaller SomaSensor for use with newborns, developing a product-line extension of the INVOS
System for monitoring non-brain tissues and making other advances to the design and
performance features of the INVOS System, including the SomaSensor. We are also evaluating
additional potential market segments for our INVOS System, such as use in other major
surgeries, in the adult ICU, in the emergency room, in ambulances, in the catheterization
laboratory, for blood transfusions, for muscle ischemia, for cosmetic surgery, for
non-surgical neurology or cardiology applications, for psychiatric applications, and for
sleep disorders. Pursuit of some of these potential market segments may require additional
FDA clearance. We believe that these natural extensions of our technology will increase
our market potential without the more significant risks and costs associated with
developing entirely new products. |
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The INVOS System
Components of the INVOS System
The INVOS System consists of a portable monitoring system, including proprietary software,
which is used with multiple single-use disposable SomaSensors.
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Monitor and Software. Our oximeter is a portable monitor that uses our proprietary
software to analyze information received from the SomaSensors. It provides a continuous
digital and trend display of an index of the oxygen saturation in the region of the body
under the SomaSensors. The monitor includes menus for users to set high and low audible
alarms, customize the display and retrieve data. Single-function keys allow users to
silence alarms, mark important events, store data for up to 28 surgical procedures, and
retrieve data by disk or through a USB link to a computer. The monitor measures
approximately 9 inches wide, 8 inches high, and 8 inches deep and weighs approximately 14
pounds. Our next generation INVOS System monitor, which we expect to launch in the first
half of 2006, measures approximately 11 inches wide, 9 inches high, and 6 inches deep and
weighs approximately 11 pounds. We provide a one-year warranty on the monitor, and we
offer service for the monitor for a fee after the warranty expires. As of November 30,
2005, we had an installed base of approximately 1,100 INVOS System monitors in the United
States in approximately 500 hospitals. |
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SomaSensors. Each single-use SomaSensor contains a light source and two light
detectors. For multi-channel cerebral monitoring, SomaSensors are placed on both sides of
a patient’s forehead and are connected to the monitor, which allows for monitoring both
sides of the brain. Our next generation INVOS System, which we expect to launch in the
first half of 2006, can display information from four SomaSensors, which will allow for
the simultaneous monitoring of changes in blood oxygen saturation in the brain and, in patients
with or at risk for restricted blood flow, in somatic tissue. The number of sensors used
will depend on the application. We expect that the INVOS System will be used to monitor
simultaneously the brain and somatic tissue initially for patients in the pediatric and
neonatal ICU, and will later also be used on adults and for monitoring somatic tissue
alone. The SomaSensors contain information that is processed by the INVOS System allowing
it to automatically calibrate each sensor. During our fiscal year ended November 30, 2005,
net revenues from SomaSensors comprised approximately 75 percent of our net revenues.
During fiscal 2005 we sold approximately 213,000 SomaSensors worldwide. |
Overview of INVOS Technology
Our proprietary In Vivo Optical Spectroscopy, or INVOS, technology is based primarily on the
physics of optical spectroscopy. Optical spectroscopy is the interpretation of the interaction
between matter and light. Spectrometers and spectrophotometers function primarily by shining light
through matter and measuring the extent to which the light is transmitted through, scattered by or
absorbed by the matter. Physicians and scientists can use spectrophotometers to examine human
blood and tissue. Although most human tissue is opaque to ordinary light, some wavelengths
penetrate tissue more easily than others. Therefore, by shining appropriate wavelengths of light
into the body and measuring its transmission, scattering and absorption, or a combination of each,
physicians can obtain information about the matter under analysis. Optical spectroscopy generates
no ionizing radiation and produces no known hazardous effects.
By identifying the hemoglobin and the oxygenated hemoglobin and measuring the relative amounts
of each, oxygen saturation of hemoglobin can be measured. However, traditional optical
spectroscopy was generally not useful when the substances to be measured were surrounded by, were
behind or were near bone, muscle or other tissue, because they produce extraneous data that
interferes with analysis of the data from the area being examined.
We have developed a method of reducing extraneous spectroscopic data caused by surrounding
bone, muscle and other tissue. This method, which is embedded in our INVOS System, allows us to
gather information about portions of the body that previously could not be analyzed using
traditional optical spectroscopy. The INVOS System measurement is made by our SomaSensors
transmitting low-intensity visible and near-infrared light through
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a portion of the body and detecting the manner in which the molecules of the exposed substance
interact with light at specific wavelengths.
Each single-use SomaSensor contains a light source and two light detectors. The dual detector
design of the SomaSensor enables us to measure scattered light intensities from the intermediate
tissues of skin, muscle and bone in a separate process. While both detectors receive similar
information about the tissue between the sensor and the area under examination, the detector
further from the light source detects light that has penetrated deeper into the body, and,
therefore, receives more information specific to the brain or skeletal muscle tissue under
examination than does the detector closer to the light source. By comparing the two measurements,
our INVOS technology is able to suppress the influence of the tissues between the sensor and the
brain or somatic tissue under examination to provide a measurement of changes in brain or skeletal
muscle tissue blood oxygen saturation.
Applications and Market Segments
We target the sale of the INVOS System for use in surgical procedures and other critical care
situations with a high risk of oxygen imbalances. We believe that our INVOS System has
applications for cerebral and somatic monitoring in the following key market segments:
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Cardiac and Carotid Artery Surgery. Until the first quarter of fiscal 2005, we focused
our marketing efforts primarily on cardiac and carotid artery surgeries. We believed it
would be easier to demonstrate clinical importance of the information provided by the INVOS
System and potentially gain market acceptance for our products in connection with these
surgeries. Moreover, much of the earliest clinical data regarding the use of the INVOS
System involved these surgeries. In September 2000, we received 510(k) clearance from the
FDA to market the model 5100 INVOS System in the United States.
Unlike earlier models, the model 5100 INVOS
System has the added capability of being able to monitor pediatric patients. After
receiving this clearance, we expanded our marketing efforts to include pediatric cardiac
surgeries. |
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Pediatric and Neonatal ICU. We are not aware of any other FDA-cleared cerebral oximeter
commercially available in the United States that is cleared for monitoring non-adult
patients. In the first quarter of fiscal 2005, we initiated selling and marketing efforts
for the INVOS System in the pediatric ICU. We plan to launch the product into the neonatal
ICU in late 2006, after completing development of a smaller SomaSensor. Our next
generation INVOS System monitor, which we expect to launch in the first half of 2006, can
display information from four SomaSensors, which will allow for the simultaneous monitoring of
changes in blood oxygen saturation in the brain and, in patients with or at risk for
restricted blood flow, in somatic tissue. We expect that initially the INVOS System will
be used to monitor simultaneously the brain and somatic tissue initially for patients in
the pediatric and neonatal ICU. |
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Diabetic Patient Major Surgeries. We are currently sponsoring a prospective,
randomized, blinded clinical trial involving diabetic patients over age 50 who are
undergoing major general surgery. The study group will consist of patients whose surgeries
are managed based on information provided by the INVOS System, and the control group will
consist of similarly situated patients whose surgeries are not managed based on information
provided by the INVOS System. The two groups will be compared across measures of patient
outcomes and hospital costs, including length of hospital stay. Diabetics are at
particular risk of oxygen imbalances because of a higher incidence of vascular disease. If
results of this trial are positive, we intend to target more actively the sale of the INVOS
System for use in diabetic patients undergoing major general surgeries, consistent with FDA
requirements. We expect to begin this marketing in 2008. |
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Other Applications. We are also evaluating sponsorship of other clinical trials which
may allow us to more actively target the sale of the INVOS System for use in other patient
populations. If the results of these trials are positive, following completion of these
trials and publication of the results, we intend to target the sale of the INVOS System for
use on elderly patients undergoing major surgeries. We are also evaluating additional
potential market segments for our INVOS System, such as use in other major surgeries, in
the adult ICU, in the emergency room, in ambulances, in the catheterization laboratory, for
blood transfusions, for muscle ischemia, for cosmetic surgery, for non-surgical neurology
or cardiology applications, for |
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psychiatric applications and for sleep disorders. Pursuit of some of these potential market
segments may require additional FDA clearance. |
Clinical Development
We believe that favorable peer-reviewed publication is a key element to the INVOS System’s
success. Accordingly, we support clinical research programs with third-party clinicians and
researchers intended to demonstrate the need for the INVOS System and the clinical importance of
the information it provides with the specific objective of publishing the results in peer-reviewed
journals. The research includes studies comparing patients managed based on information provided
by the INVOS System with other patients, based on measures of patient outcome and hospital costs,
including patient length of stay, length of time on the ventilator, cognitive dysfunction and
incidence of stroke. In addition to the studies described below, we
believe that our INVOS System has been evaluated in over 400
presentations, study abstracts and published papers. During the
second quarter of fiscal 2004, results of the studies described below were presented, which we
believe have contributed to the INVOS System gaining further market penetration.
Murkin Study
In the second quarter of 2004, the results of the first prospective, randomized, blinded
intervention study using the INVOS System were presented. The study showed a statistically
significant reduction in the overall number of adverse clinical outcomes when the INVOS System was
used to provide information to help manage regional brain blood oxygen saturation in coronary
artery bypass surgery patients. The 200-patient study was conducted by John Murkin, M.D.,
professor of anesthesiology at the University of Western Ontario, and was presented at Outcomes
2004: Neurobehavioral Assessment, Physiological Monitoring and Cerebral Protective Strategies held
in Key West, Florida. The data and results of the intervention study reported on by Dr. Murkin at
Outcomes 2004 have not been published in a peer-reviewed publication. We believe that Dr. Murkin
is preparing an article for presentation to a peer-reviewed publication.
Patients undergoing coronary artery bypass surgery were randomly assigned to the control or
intervention group. Patients in both groups were monitored with the INVOS System during their
operations, but the monitor display in the control group (99 patients) was covered and patients’
treatments were managed routinely. In the intervention group (101 patients) the patients’
treatments were managed using information from the INVOS System, and the patients received a
pre-determined series of interventions to maintain the INVOS System’s index of regional cerebral
blood oxygen saturation within 75 percent of baseline values taken at the beginning of the
operation.
Independent observers assessed all of the patients for adverse clinical outcomes. The
complication criteria were those reported by cardiac surgeons to the Society of Thoracic Surgeons
National Database. These complications consist of common adverse outcomes following cardiac
surgery, such as stroke, respiratory failure, renal failure and other major morbidities.
Dr. Murkin found that regional brain oxygen desaturations were quite common and are related to
adverse outcomes. The intervention group experienced statistically significantly fewer adverse
clinical outcomes than the control group: two patients in the intervention group experienced
adverse clinical outcomes, compared to 12 patients in the control group. With respect to stroke
specifically, one patient in the intervention group experienced a stroke, compared to four patients
in the control group. The difference was not statistically significant.
A financial analysis of Dr. Murkin’s data was conducted by Leaden Hickman, Ph.D., assistant
professor, health sciences and administration at the University of Michigan, and Dr. Murkin. This
analysis was presented at Outcomes 2005: Neurobehavioral Assessment, Physiological Monitoring and
Cerebral Protective Strategies held in Key West, Florida in May 2005. The analysis showed
measurable cost differences between the intervention and control groups. Total cost per patient
was lower in the intervention group than in the control group ($14,921 vs. $15,619). This
difference was not statistically significant. The potential complication avoidance results in a
total savings of $231,540, or a savings of $1,158 per patient averaged over the entire study group.
The data and results of the financial analysis conducted by Leaden Hickman, Ph.D., and presented
at Outcomes 2005, have not been published in a peer-reviewed publication.
9
Goldman Study
In the second quarter of 2004, the results of a retrospective, blinded intervention study
using the INVOS System were presented. The study showed a statistically significant reduction in
permanent stroke when information from the INVOS System was used to help manage regional brain
blood oxygen saturation in cardiac surgery patients. The principal investigator in the
2,279-patient study was Scott Goldman, M.D., chairman of the department of surgery at
Pennsylvania-based Main Line Health Center, Lankenau Hospital. Findings from the study were
presented at the Cardiothoracic Techniques and Technologies Annual Meeting in March 2004 and were
published as Scott Goldman, M.D., et al., Optimizing Intraoperative Cerebral Oxygen Delivery Using
Noninvasive Cerebral Oximetry Decreases the Incidence of Stroke for Cardiac Surgical Patients, in
The Heart Surgery Forum #2004-1062 (September 2004).
The study included all patients who underwent cardiac surgery for any reason at the Lankenau
Hospital and Institute for Medical Research from July 1, 2000 to June 30, 2003. The control group
consisted of 1,245 patients who underwent surgery in the 18 months before cerebral oximetry
monitoring with the INVOS System was introduced at the hospital on January 1, 2002. The study
group consisted of 1,034 patients who underwent surgery during the following 18 months and were
monitored with the INVOS System. Operative techniques were modified in the study group to maintain
cerebral oximetry values at or near the pre-operative baseline throughout the surgery. The study
group included a significantly sicker population of patients than the control group, as determined
by pre-operative New York Heart Association, or NYHA, classification and co-morbidities.
The incidence of permanent stroke in the study group (0.97 percent) was statistically
significantly less than in the control group (2.01 percent), despite a sicker population according
to the higher NYHA class of the study group. Although the incidence of permanent stroke was lower
in the study group, the incidence of all neurologic dysfunction, including stroke and transient
ischemic attach, was similar in the two groups. The proportion of patients requiring prolonged
ventilation also was statistically significantly smaller in the study group, 6.8 percent, compared
to 10.6 percent in the control group. Total ventilator time was statistically significantly
shorter in the study group (four hours) than the control group (five hours). The length of
hospital stay was similar overall in the two groups, but was statistically significantly shorter in
the study group when examined by pre-operative NYHA classifications of patients.
Dr. Goldman’s later analysis of these data concluded that the difference in incidence of
cerebrovascular accidents, or CVA, between the two groups translated into a potential avoidance of
12 CVAs in the study group and approximately $254,214 in direct costs and more than $425,000 in
total costs.
Diabetic Patients Studies
In the second quarter of 2005, Dr. Murkin presented the results of a 56-patient sub-study of
his prospective, randomized, blinded intervention study using the INVOS System described above
under “Murkin Study.” The sub-study showed that avoidance of cerebral oxygen desaturations in
actively managed diabetic coronary artery bypass graft patients was associated with improved
clinical outcomes. The sub-study was presented at the Society of Cardiovascular Anesthesiologists
27th Annual Meeting in Baltimore. The data and results of the intervention study
presented by Dr. Murkin in Baltimore have not been published in a peer-reviewed publication. We
believe that Dr. Murkin is preparing an article for presentation to a peer-reviewed publication.
Diabetic patients have impaired cerebral autoregulation and oxygenation during cardiopulmonary
bypass surgery. This sub-study analyzed outcomes of two coronary artery bypass graft patient
groups: an intervention group of diabetic and non-diabetic patients who were monitored with the
INVOS System and received a pre-determined series of interventions to maintain the INVOS System’s
index of regional cerebral blood oxygen saturation within 75 percent of baseline values taken at
the beginning of the operation and a control group of diabetic and non-diabetic patients who were
monitored with the INVOS System, but the display was covered and the patients were managed
routinely. Diabetic patients in the intervention group required shorter ventilation (nine hours
versus 30 hours), shorter stays in the ICU (30 hours versus 69 hours) and shorter hospital stays
(5.5 days versus 8.4 days) than diabetic patients in the control group. All of these differences
were statistically significant. There were no statistically significant differences between the
regional cerebral oxygen saturation levels of the diabetic patients in the intervention group and
the levels of the non-diabetic patients in the intervention group.
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We are currently sponsoring a prospective, randomized, blinded clinical trial involving
diabetic patients over age 50 who are undergoing major general surgery. The study group will
consist of patients whose surgeries are managed based on information provided by the INVOS System,
and the control group will consist of similarly situated patients whose surgeries are not managed
based on information provided by the INVOS System. The two groups will be compared across measures
of patient outcomes and hospital costs, including length of hospital stay. The initial phase of
this trial is being conducted at Duke University Medical Center and the neighboring Veteran’s
Administration Hospital. In the initial phase, which began in 2006, the investigators will
determine the number of patients to study in each of the intervention and control groups so that
the results are expected to be statistically significant. If results of this trial are positive,
we intend to target more actively the sale of the INVOS System for use in diabetic patients
undergoing major general surgeries, consistent with FDA requirements. We expect to begin this
marketing in 2008.
Other Future Studies
We are evaluating sponsoring other clinical trials which may allow us to more actively target
the sale of the INVOS System for use in other patient populations.
The CorRestore System
We develop and market the CorRestore System for use in cardiac repair and reconstruction,
including heart surgeries called surgical ventricular restoration, or SVR. During SVR, the surgeon
restores an enlarged, poorly functioning left ventricle to more normal size and function by
inserting an implant, in most instances, or closing the defect directly. Before the availability
of the CorRestore System, SVR was generally performed using a patch formed by the surgeon from
medical grade fabrics or bovine pericardium tissue. These hand-formed patches take time for the
surgeon to make, can be difficult to insert, and can leak around the edges.
As a result of these problems, two heart surgeons and their company developed and patented the
CorRestore System with the intent to make SVR easier for the surgeon, to standardize the operation
and to provide a better seal on the edges of the patch to minimize leaking. The CorRestore System
consists of a non-circular bovine pericardium, or cow heart-sac, tissue patch with an integrated
pericardial suture ring, as well as accessories for aiding the implantation of the patch.
Our initial target market is SVR surgeries on Class III and IV congestive heart failure
patients with dilated ischemic cardiomyopathy due to a previous myocardial infarction in the
anterior wall of the left ventricle. Dilated ischemic cardiomyopathy is a damaged heart muscle
caused by the obstruction of the inflow of blood from the arteries and resulting in an enlarged
ventricle. Myocardial infarction is death of an area of the middle muscle layer in the heart wall.
We promote SVR by sponsoring education programs teaching the concepts of ventricular geometry, the
benefits of SVR and the operative technique of SVR with the CorRestore System to cardiac surgeons
and cardiologists.
In October 2004, the results of a multi-center, 1,198-patient study evaluating the safety and
effectiveness of the SVR surgical technique, not using the CorRestore Patch, were reported. SVR
was performed on all patients. Surgeries performed concurrently included coronary artery bypass
grafting (95 percent), mitral valve repair (22 percent) and mitral valve replacement (one percent).
Patients experienced a statistically significant improvement in ejection fraction and ventricular
volume. Thirty-day mortality after SVR was 5.3 percent, and the overall five-year survival rate
was 68.3 percent. In addition, the re-hospitalization rate in this high-risk population was low,
as 78 percent of the patients were not readmitted to the hospital for congestive heart failure
during the five years after their SVR surgery. Pre-operatively, 67 percent of the patients in the
study had severe New York Hospital Association functional Class III and Class IV symptoms. For
those patients whose New York Hospital Association Class was reported at last follow-up, 85 percent
were functionally Class I or Class II, with lower or no symptoms of congestive heart failure than
Class III or Class IV. Findings from the study were published as Constantine L. Athanasuleas, M.D.
and Gerald D. Buckberg, M.D., et al., Surgical Ventricular Restoration in the Treatment of
Congestive Heart Failure Due to Post-Infarction Ventricular Dilation, in the Journal of the
American College of Cardiology, Volume 44, No. 7 (2004).
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The retail price of the CorRestore System is approximately $4,000. Sales of CorRestore
Systems represented two percent of our fiscal 2005 net revenues. We expect that as sales of our
INVOS System increase, the CorRestore System will become an even less significant component of our
business. In November 2005, we wrote off the remaining CorRestore license acquisition cost
intangible asset and recorded an impairment expense of $929,093. We wrote this off based on the
cash flow impairment analysis that was performed, the declining sales of CorRestore products and
the uncertainty regarding future prospective, randomized clinical data.
License Agreement
In 2000, we entered into a license agreement with the inventors of the CorRestore System and
their company, CorRestore LLC, granting us exclusive, worldwide, royalty-bearing licenses to
specified rights relating to the CorRestore System and related products and accessories for SVR.
Transfer and sublicensing of our licenses are restricted by the license agreement.
In exchange for the licenses and consulting services, we agreed to the following compensation
for CorRestore LLC and its agent, Joe B. Wolfe: (1) a royalty of 10 percent in the aggregate of
our net sales of products subject to the licenses, for the term of the patent relating to the
CorRestore System, (2) five-year warrants to purchase an aggregate of 400,000 common shares at
$3.00 per share, which were exercised in full in 2004 and 2005, (3) five-year warrants to purchase an
aggregate of 2,100,000 common shares at $3.00 per share, exercisable based on our cumulative net
sales of the CorRestore System products (we do not expect the sales requirements for exercise of
these warrants to be met before the November 2006 expiration date of these warrants), and (4) a
consulting fee of $25,000 a year to each of the two inventors until we sell 1,000 CorRestore
Patches
CorRestore LLC and the inventors may terminate the licenses (1) if we materially breach
specified covenants in the license agreement, (2) if our common shares are delisted from the Nasdaq
Stock Market, and (3) in connection with specified bankruptcy and insolvency events. CorRestore
LLC and the inventors may exclude specified countries from the geographic scope of the license to
the extent we did not begin marketing the CorRestore System products or begin the process of
obtaining necessary regulatory approval to sell CorRestore System products in that country by May
15, 2002. Countries may be excluded from the license only if we fail to cure the breach of this
provision within 90 days after CorRestore LLC notifies us of the breach. We have not received any
such notice.
We may terminate the licenses (1) in our sole discretion, within 120 days after we sign a
definitive agreement for specified types of business combination transactions with another entity,
if we pay a total of $1,000,000 to CorRestore LLC and the inventors, or (2) if CorRestore LLC or
either of the inventors materially breaches specified covenants in the license agreement.
Marketing, Sales and Distribution
Marketing
We market the INVOS System primarily to cardiac and vascular surgeons, anesthesiologists and
other medical professionals. We believe that these specialists are the medical professionals most
aware of the risks of brain and other damage resulting from oxygen imbalances.
We believe that favorable peer-reviewed publication is a key element to the INVOS System’s
success. Accordingly, we support clinical research programs with third-party clinicians and
researchers intended to demonstrate the need for the INVOS System and the clinical importance of
the information it provides with the specific objective of publishing the results in peer-reviewed
journals. The research includes studies comparing patients managed based on information provided
by the INVOS System with similarly situated patients not managed based on information provided by
the INVOS System, based on measures of patient outcomes and hospital costs, including patient
length of stay, length of time on the ventilator, cognitive dysfunction and incidence of stroke.
We attend trade shows and medical conferences to promote the INVOS System and to meet medical
professionals with an interest in performing research and reporting their results in peer-reviewed
medical journals and at major international medical conferences. We also sponsor peer-to-peer
educational opportunities, promote
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use of the INVOS System in regional centers of influence that we believe will influence its
adoption by others, and participate in targeted public relations opportunities.
Sales and Distribution
We sell the INVOS System through a direct sales team in the United States, the size of which
has increased from 17 persons at the end of fiscal 2004 to 26 persons at the end of fiscal 2005,
and 10 independent sales representative firms. We expect to increase significantly the size of our
U.S. direct sales team in fiscal 2006. We believe the selling cycle for the INVOS System is
typically approximately six to nine months.
We also have a co-promotion relationship with Fresenius Medical Care Cardiovascular Resources,
Inc.’s North American Extracorporeal Alliance where Fresenius provides INVOS Systems to its
cardiovascular perfusion customers. Fresenius provides extracorporeal therapies and provides
contract perfusion services, which are services to operate the heart-lung machine in cardiac
procedures. In exchange for profits on SomaSensor sales, Fresenius assists us in placing our INVOS
Systems in hospitals for which it provides contract perfusion services and facilitates the use of
INVOS technology during cardiac surgery by supplying hospitals with SomaSensors.
Outside the United States, we have distribution agreements with independent distributors
covering 56 countries for the INVOS System. Our distributors for the INVOS System include Tyco
Healthcare, part of Tyco International Ltd., in Europe, the Middle East, Africa and Canada, and
Edwards Lifesciences Ltd., formerly Baxter Limited, in Japan. We are evaluating placing direct
salespersons and clinical specialists in Europe to support Tyco Healthcare We also have one
international sales consultant. For fiscal 2005, approximately 16 percent of our net revenues were
represented by international sales.
We offer a no capital cost sales program in the United States whereby we ship the INVOS System
monitor to the customer at no charge. It has been our experience that hospitals in the United
States prefer to use this method to acquire INVOS System monitors.
We did not have any backlog of firm orders as of January 10, 2006 or as of January 10, 2005.
We generally do not have a backlog of firm orders because we generally ship product upon receipt of
a customer order.
For a description of sales to major customers, see Note 9 of Notes to Financial Statements
included in Item 8 of this report. Tyco Healthcare was our largest customer in fiscal 2005 and
2003, and Edwards Lifesciences was our largest customer in fiscal 2004. We are dependent on our
sales to Tyco Healthcare and Edwards Lifesciences, and the loss of either of them as a customer
would have an adverse effect on our business, financial condition and results of operations in the
near-term, until such time as they could be replaced as our distributor in the respective market.
Our international sales were $3,303,692 for the fiscal year ended November 30, 2005,
$2,091,602 for the fiscal year ended November 30, 2004 and $1,944,513 for the fiscal year ended
November 30, 2003, including approximately $2,202,000 in fiscal 2005, $944,000 in fiscal 2004 and
$1,166,000 in fiscal 2003 to Tyco Healthcare, our distributor in Europe, the Middle East, Africa
and Canada, and approximately $707,000 in fiscal 2005, $970,000 in fiscal 2004 and $616,000 in
fiscal 2003 to Edwards Lifesciences Ltd., our distributor in Japan. See Note 9 of Notes to
Financial Statements. For a description of the breakdown of sales
between INVOS System monitors, SomaSensors
and CorRestore Systems, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Results of Operations” in Item 7 of this report.
We sell the CorRestore System through our 26 direct salespersons and nine independent sales
representative firms in the United States. In September 2004, the European Economic Community
changed its regulations, limiting approval authority for animal tissue implant products sold in
Europe to some independent registration agencies that do not include our registrar.
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Research and Development
Our research and development activities are conducted internally by a staff consisting of five
employees. We are developing a smaller SomaSensor for use with newborns, developing a product-line
extension of the INVOS System for monitoring non-brain tissues and making other advances to the
design and performance features of the INVOS System, including the SomaSensor. We are also working
to interface our INVOS System with multi-functional monitors provided by other manufacturers. Our
research, development and engineering expenditures were $525,679 during fiscal 2005, $369,106
during fiscal 2004, and $412,953 during fiscal 2003. We expect our research and development
expenditures to increase as we add additional research and development staff in fiscal 2006.
Manufacturing
We assemble the INVOS System in our facilities in Troy, Michigan, from components purchased
from outside suppliers. We assemble the INVOS System to control its quality and costs and to
permit us to make changes to the INVOS System faster than we could if third parties assembled it.
Although we believe that most components are generally available from several potential suppliers,
we depend on one supplier for one of our components. We are not aware of any validated alternative
supplier for this component, although we are currently in the process of validating in accordance
with FDA requirements a second source of supply and are carrying approximately a six-month supply
of this component. Moreover, we typically use one supplier for custom-designed components,
including the unit enclosure, the printed circuit boards, other mechanical components and the
SomaSensor. We are currently dependent on one manufacturer of the SomaSensor and another component
of the INVOS System, and we believe that it would require approximately four to five months to
change SomaSensor suppliers. We do not currently intend to manufacture on a commercial scale the
disposable SomaSensor or the components of the INVOS System.
We received ISO 13485 certification and met the requirements under the European Medical Device
Directive to use the CE Mark, thereby allowing us to continue to market our INVOS System and
SomaSensor in the European Economic Community. Our most recent ISO 13485 compliance surveillance
audit occurred in August 2005.
Competition
We believe that the markets for cerebral and somatic oximetry products may become highly
competitive. In the United States, we believe there is currently only one other company with FDA
clearance to sell a cerebral oximeter. In December 2005, CAS Medical Systems, Inc. announced that
it received 510(k) clearance to market a cerebral oximeter for the adult market, with plans to
launch the product in late 2006. Outside the United States, several Japanese manufacturers offer
competitive products for sale in that country and primarily for research in other parts of the
world, but, to our knowledge, as of yet, none has pursued FDA clearance to market its product in
the United States. We are aware that several companies and individuals are engaged in the research
and development of non-invasive cerebral oximeters, and we believe that there are several other
potential entrants into the market. Other companies have FDA clearance to market somatic oximeters
in the United States. Competition might cause our sales cycle to lengthen to the extent that
customers take longer to make purchasing decisions. Competition might also reduce our gross
margins and market share and prevent us from achieving further market penetration. Competitors
might be more successful than we are in obtaining FDA clearance with broader claims in their
labeling or more successful than we are in manufacturing and marketing their products and may be
able to take advantage of the significant time and effort we have invested to gain medical
acceptance of cerebral oximetry.
We also compete with numerous medical equipment companies for the portions of hospital budgets
allocated to capital equipment and for the limited amount of forehead space on patients to place
sensors for all types of monitoring. The medical products industry is characterized by extensive
research and development and intense competition in an increasingly cost-conscious environment.
Some of these potential competitors have well-established reputations, customer relationships and
marketing, distribution and service networks. Some of them have substantially longer histories in
the medical products industry, larger product lines and greater financial, technical,
manufacturing, research and development and management resources than we do. Many of these
potential competitors have long-term product supply relationships with our potential customers.
These potential
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competitors might be able to use their resources, reputations and ability to leverage existing
customer relationships to give them a competitive advantage over us, including in securing
forehead sensor space for their products and dollars from hospital capital equipment budgets to
purchase their products. They might also succeed in developing products that are at least as
reliable and effective as our products, that make additional measurements, that are less costly
than our products or that provide alternatives to our products. Competitors might be more
successful than we are in manufacturing and marketing their products and may be able to take
advantage of the significant time and effort we have invested to gain medical acceptance of
cerebral oximetry.
The CorRestore System competes against existing patches. Although we believe the CorRestore
System has important advantages over hand-formed patches, hand-formed patches are significantly
less expensive. At least one study using medical grade fabric patches indicates that they are
effective. We also compete against alternative methods of treating congestive heart failure. SVR
is in the early stages of its development and will likely require significant clinical studies
before it is widely accepted. There are many larger companies in this industry that have
significantly larger research and development budgets than ours. Competitors may be able to
develop additional or better treatments for congestive heart failure and may be able to take
advantage of the significant time and effort we have invested to gain medical acceptance of SVR
surgeries.
We believe that a manufacturer’s reputation for producing accurate, reliable, effective,
sterile, patented and technically advanced products, clinical literature associated with leaders in
the field, references from users, features (speed, safety, ease of use, patient and surgeon
convenience and range of applicability), product effectiveness and price are the principal
competitive factors in the medical products industry.
Proprietary Rights Information
We have 12 United States patents and three patents in various foreign countries. These patents
expire on various dates from February 2006 to October 2019. We currently have two patent
applications pending in the United States, including one reissuance application, and have patent
applications in various foreign countries with respect to aspects of our technology relating to the
interaction of light with tissue.
In September 2003, we were issued a new patent by the United States Patent and Trademark
Office covering the application of
non-invasive, near-infrared spectroscopy to measure continuously and substantially concurrently a
blood metabolite (such as oxygen saturation) in at least two separate internal regions of the
brain. This patent is now the subject of a reissue proceeding in the United States Patent and
Trademark Office. We requested the reissuance of this patent because we believe that we are
entitled to broader claims than those that were originally issued. However, the outcome of the
reissue proceeding cannot be predicted, and the claims which ultimately issue may be broader in
scope than the original claims, they may be narrower in scope than the original claims, or they may
be rejected. The corresponding Australian patent for “Multi-Channel, Noninvasive, Tissue Oximeter”
issued in December 2003, will expire in October 2019. This patent is pending in other markets
outside the United States. We believe the design concepts covered in this patent are important to
providing a clinically viable cerebral oximeter.
Our other patents cover methods and apparatuses for introducing light into a body part and
receiving, measuring and analyzing the transmitted light and its interaction with tissue. These
methods also involve receiving, measuring and analyzing the light transmissivity of various body
parts of a single subject, as well as of body parts of different subjects, which provides a
standard against which a single subject can be compared. Eleven of the issued patents expressly
refer to examination of the brain or developments involving the INVOS System.
Many other patents have previously been issued to third parties involving optical spectroscopy
and the interaction of light with tissue, some of which relate to the use of optical spectroscopy
in the area of brain metabolism monitoring, the primary use of the INVOS System. We are not aware
of any infringement by our products of the claims of any issued patents, and no charge of patent
infringement has been asserted against us.
In addition to our patent rights, we have obtained United States Trademark registrations for
our trademarks “SOMANETICS,” “INVOS,” “SOMASENSOR” and “WINDOW TO THE BRAIN.” A United States
service mark application for “Enlightening Medicine,” and a United States Trademark application for
“Reflecting the Color of
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Life,” are pending. We have also obtained registrations of our basic mark, “SOMANETICS,” in
eleven foreign countries.
We also rely on trade secret, copyright and other laws and on confidentiality agreements to
protect our technology, but we believe that neither our patents nor our other legal rights will
necessarily prevent third parties from developing or using a similar or a related technology to
compete against our products. Moreover, our technology primarily represents improvements or
adaptations of known optical spectroscopy technology, which might be duplicated or discovered
through our patents, reverse engineering or both.
The inventors of the CorRestore System and their company filed for a patent with respect to
their patch, which was issued in the United States in February 2000 and expires in May 2018. The
claims allowed relate primarily to the product design of a soft suture ring integrated with a
patch. Subsequently five other United States patents have been issued to the inventors, also
relating primarily to the product design of a soft suture ring integrated with a patch. Two of
those issued patents also expire in May 2018 and the third one expires in July 2018. In addition,
other United States and foreign patent applications are pending. We have also obtained United
States Trademark registration for the trademark “CorRestore.”
Government Regulation
Our products are medical devices subject to extensive regulation by the U.S. Food and Drug
Administration, or FDA, under the Federal Food, Drug, and Cosmetic Act, or FDCA. FDA regulations
govern, among other things, the following activities that we will perform:
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Medical devices to be commercially distributed in the U.S. must receive either 510(k)
clearance or PMA approval prior to marketing from the FDA pursuant to the FDCA. Devices deemed to
pose relatively less risk are placed in either class I or II, which requires the manufacturer to
submit a premarket notification requesting permission for commercial distribution; this is known as
510(k) clearance. Some low risk devices are exempted from this requirement. Devices deemed by the
FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or
devices deemed not substantially equivalent to a previously 510(k) cleared device or a preamendment
class III device for which PMA applications have not been called, are
placed in class III requiring
PMA approval.
510(k) Clearance Pathway. To obtain 510(k) clearance, a manufacturer must submit a premarket
notification demonstrating that the proposed device is substantially equivalent in intended use and
in safety and effectiveness to a previously 510(k) cleared device or a device that was in
commercial distribution before May 28, 1976 for which the FDA has not yet called for submission of
PMA applications. The FDA’s 510(k) clearance pathway usually takes from three to six months, but
it can last longer.
After a device receives 510(k) clearance, any modification that could significantly affect its
safety or effectiveness, or that would constitute a major change in its intended use, requires a
new 510(k) clearance or could require a PMA approval. The FDA requires each manufacturer to make
this determination in the first instance, but the FDA can review any such decision. If the FDA
disagrees with a manufacturer’s decision not to seek a new 510(k) clearance, the agency may
retroactively require the manufacturer to seek 510(k) clearance or PMA approval. The FDA also can
require the manufacturer to cease marketing and/or recall the modified device until 510(k)
clearance or PMA approval is obtained.
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PMA Approval Pathway. A product not eligible for 510(k) clearance must follow the PMA
approval pathway, which requires proof of the safety and effectiveness of the device to the FDA’s
satisfaction. The PMA approval pathway is much more costly, lengthy and uncertain. It generally
takes from one to three years or even longer. A PMA application must provide extensive preclinical
and clinical trial data and also information about the device and its components regarding, among
other things, device design, manufacturing and labeling. As part of the PMA review, the FDA will
typically inspect the manufacturer’s facilities for compliance with Quality System Regulation, or
QSR, requirements, which impose elaborate testing, control, documentation and other quality
assurance procedures. The PMA can include postapproval conditions that the FDA believes necessary
to ensure the safety and effectiveness of the device including, among other things, restrictions on
labeling, promotion, sale and distribution. Failure to comply with the conditions of approval can
result in material adverse enforcement action, including the loss or withdrawal of the approval.
Even after approval of a PMA, a new PMA or PMA supplement is required in the event of a
modification to the device, its labeling or its manufacturing process. Supplements to a PMA often
require the submission of the same type of information required for an original PMA, except that
the supplement is generally limited to that information needed to support the proposed change from
the product covered by the original PMA.
Clinical Trials. A clinical trial is almost always required to support a PMA application and
is sometimes required for a premarket notification. All clinical studies of investigational
devices must be conducted in compliance with FDA’s requirements. If an investigational device
could pose a significant risk to patients (as defined in the regulations), the FDA must approve an
Investigational Device Exemption, or IDE, application prior to initiation of investigational use.
An IDE application must be supported by appropriate data, such as animal and laboratory test
results, showing that it is safe to test the device in humans and that the testing protocol is
scientifically sound. FDA typically grants IDE approval for a specified number of patients to be
treated at specified study centers. A nonsignificant risk device does not require FDA approval of
an IDE. Both significant risk and nonsignificant risk investigational devices require approval
from institutional review boards, or IRBs, at the study centers where the device will be used.
During the study, the sponsor must comply with the FDA’s IDE requirements for investigator
selection, trial monitoring, reporting, and record keeping. The investigators must obtain patient
informed consent, rigorously follow the investigational plan and study protocol, control the
disposition of investigational devices, and comply with all reporting and record keeping
requirements. The IDE requirements apply to all investigational devices, whether considered
significant or nonsignificant risk. Prior to granting PMA approval, the FDA typically inspects the
records relating to the conduct of the study and the clinical data supporting the PMA application
for compliance with IDE requirements.
Postmarket. After a device is placed on the market, numerous regulatory requirements apply.
These include: the QSR, labeling regulations, the FDA’s general prohibition against promoting
products for unapproved or “off-label” uses, the Medical Device Reporting regulation (which
requires that manufacturers report to the FDA if their device may have caused or contributed to a
death or serious injury or malfunctioned in a way that would likely cause or contribute to a death
or serious injury if it were to recur), and the Reports of Corrections and Removals regulation
(which requires manufacturers to report recalls and field actions to the FDA if initiated to reduce
a risk to health posed by the device or to remedy a violation of the FDCA).
FDA enforces these requirements by inspection and market surveillance. If the FDA finds a
violation, it can institute a wide variety of enforcement actions, ranging from a public warning
letter to more severe sanctions such as:
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fines, injunctions, and civil penalties; |
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recall or seizure of products; |
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operating restrictions, partial suspension or total shutdown of production; |
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refusing requests for 510(k) clearance or PMA approval of new products; |
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withdrawing 510(k) clearance or PMA approvals already granted; and |
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criminal prosecution. |
17
In October 1997, we obtained FDA clearance for an earlier generation INVOS System
incorporating advances in our INVOS technology. In September 2000, we received 510(k) clearance
from the FDA to market the model 5100 INVOS System in the United
States. Unlike earlier models, the model 5100 INVOS
System has the added capability of being able to monitor pediatric patients. In November 2005, we
received 510(k) clearance from the FDA to market our INVOS System to monitor changes in somatic
tissue blood oxygen saturation in regions of the body other than the brain in patients with or at
risk for restricted blood flow. In November 2001, we received clearance from the FDA to market the
CorRestore Patch in the United States. Our most recent FDA QSR inspection occurred in June 2004.
If any of our current or future FDA clearances or approvals are rescinded or denied, sales of
our applicable products in the United States would be prohibited during the period we do not have
such clearances or approvals. In such cases we would consider shipping the product internationally
and/or assembling it overseas if permissible and if we determine such product to be ready for
commercial shipment. The FDA’s current policy is that a medical device that is not in commercial
distribution in the United States, but which needs 510(k) clearance to be commercially distributed
in the United States, can be exported without submitting an export request and prior FDA clearance
under certain conditions.
Congress has enacted the Medical Device User Fee Modernization Act of 2002. Among other
things, this law has provisions which permit the assessment of user fees for product approvals and
clearances. Given the recent enactment of this law, the effect of the law as it relates to us and
our products is still unknown, other than that we will have to pay the FDA to review our 510(k)
submissions. We do not currently have any 510(k) submissions pending.
We are also subject to numerous federal, state and local laws relating to such matters as safe
working conditions, manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances.
Seasonality
Our business is seasonal. Our fourth quarter has typically been our strongest quarter due to
a larger number of patients undergoing procedures using the INVOS System, including SomaSensors,
and higher INVOS System monitor revenues associated with hospital budgeting cycles.
Employees
As of January 23, 2006, we had 49 full-time employees, including 29 in sales and marketing,
five in research and development, six in general and administration and nine in manufacturing,
quality and service. We also employed two part-time individuals in general and administration. In
addition, we use three contract manufacturing employees, and we use one consultant. We believe
that our future success is dependent, in large part, on our ability to attract and retain highly
qualified managerial, sales, marketing and technical personnel. We expect to add additional sales
and marketing and research and development employees in fiscal 2006. Our employees are not
represented by a union or subject to a collective bargaining agreement. We believe that our
relations with our employees are good.
Insurance
Because the INVOS System and the CorRestore System are intended to be used in hospital
critical care units with patients who may be seriously ill or may be undergoing dangerous
procedures, we might be exposed to serious potential product liability claims. We have obtained
product liability insurance with a liability limit of $5,000,000. We also maintain coverage for
property damage or loss, general liability, business interruption, travel-accident, directors’ and
officers’ liability and workers’ compensation. We do not maintain key-man life insurance.
Where You Can Get Information We File With The SEC
We file annual, quarterly and special reports, proxy statements and other information with the
Securities and Exchange Commission. You can read and copy any materials we file with the
Securities and Exchange
18
Commission at the Securities and Exchange Commission’s Public Reference Room at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the Securities and Exchange
Commission at
1-800-SEC-0330. The
Securities and Exchange Commission also maintains an Internet site that contains reports, proxy and
information statements and other information regarding issuers, such as us, that file
electronically with the Securities and Exchange Commission. The address of the Securities and
Exchange Commission’s website is http://www.sec.gov.
We
also maintain a website at http://www.somanetics.com. We make available free of charge on
or through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission. We will voluntarily
provide electronic or paper copies of our filings free of charge upon request.
This report includes statistical data that were obtained from industry publications. These
industry publications generally indicate that the authors of these publications have obtained
information from sources believed to be reliable but do not guarantee the accuracy and completeness
of their information. While we believe these industry publications to be reliable, we have not
independently verified their data.
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ITEM 1A. RISK FACTORS
An investment in our common shares involves a high degree of risk. You should carefully
consider the specific factors described below, together with the cautionary statement under the
caption “Forward — Looking Statements” in Item 7 of this Report and the other information included
in this report, before purchasing our common shares. The risks described below are not the only
ones that we face. Additional risks that are not yet known to us or that we currently think are
immaterial could also impair our business, financial condition or results of operations. If any of
the following risks actually occurs, our business, financial condition or results of operations
could be adversely affected. In such case, the trading price of our common shares could decline,
and you may lose all or part of your investment.
Risks Relating to Our Business
Our future growth depends on increased market acceptance of our INVOS System in existing market
segments and market acceptance in new market segments.
Since sales of the INVOS System, including SomaSensors, currently account for substantially
all of our revenues, our future growth will depend on the degree to which our INVOS System is
accepted by hospitals and clinicians in our existing market segments and in new market segments,
such as the neonatal ICU, major surgeries involving diabetic and elderly patients and other
applications. There are numerous factors that could adversely impact market acceptance of our
INVOS System.
Part of our marketing strategy is to encourage and support clinical research programs. We
depend on favorable peer-reviewed publication and successful clinical use of our products for our
success. The INVOS System has not had extensive clinical use in the new market segments. We
cannot assure you that additional research papers will be published or that any such papers will
conclude that the INVOS System provides information that is clinically important. In addition,
researchers might publish results that do not support the clinical importance of the information
provided by the INVOS System or that conclude that another product provides better or more
important information. Performance problems or adverse research results could prevent acceptance
of the product in existing and new market segments, adversely affect our reputation in the medical
community, result in unexpected expense and adversely affect future sales.
In addition, we compete with numerous medical equipment companies for the portions of hospital
budgets allocated to capital equipment and for the limited amount of forehead space on patients to
place sensors for all types of monitoring.. Sales of our INVOS System might be limited or delayed
because of resistance to major capital equipment expenditures by hospital purchasing committees.
Even if we are successful in convincing physicians, other medical professionals and hospital
purchasing committees that the INVOS System provides valuable benefits, they might be unwilling or
unable to commit funds to the purchase of the INVOS System due to budgetary constraints. Moreover,
even if one or two units are sold to a hospital, we believe that it will take additional time and
experience with the INVOS System before additional medical professionals in the hospital might be
interested in using the INVOS System in other procedures or other areas of the hospital.
Sales of all of our products might be limited because hospitals might fear that the cost of a
new device or product will lower their profits because medical insurers generally fix reimbursement
amounts for the procedures in which our products might be used. Moreover, medical professionals
may be reluctant to use our INVOS System in some new market segments, particularly those involving
diagnostic applications, unless they receive reimbursement from medical insurers for using the
system. Our INVOS System is not currently cleared by the FDA for use in the diagnosis of disease
states. Additionally, the INVOS System is not currently approved for separate reimbursement, and
we might not be able to obtain reimbursement for these uses of our INVOS System.
If the INVOS System fails to achieve market acceptance in existing or new market segments or
if these market segments fail to develop as rapidly as expected, our business, financial condition
and results of operations could be adversely affected and our plan to increase our investments in
our direct sales team, additional clinical trials and our research and development team might not
produce favorable results.
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We are dependent on our distributors and our independent sales representative firms for a
substantial portion of our sales, and their failure to sell our products adequately would
adversely affect our business.
We are dependent on our distributors to generate all of our international sales, and on our
independent sales representative firms for a substantial portion of our sales in the United States.
Independent distributors or independent sales representative firms might fail to commit the
necessary resources to market and sell our products to the level of our expectations, especially as
significant customer education and long lead times are typically required to market and sell our
products successfully. If our distributors or independent sales representative firms fail to
market, promote and sell our products adequately, our business, financial condition and results of
operations would be adversely affected. We might not be able to engage additional distributors on
a timely basis, enter into other third-party marketing arrangements or retain or replace our
existing distributors, when required. If we are unable to engage, replace or retain distributors,
our ability to market and sell our products internationally could be adversely affected. In
addition, if any of our distributor arrangements is terminated or discontinued, we will likely be
faced with increased costs as we attempt to replace these arrangements. Even if we are able to
engage new distributors or retain existing ones, they might incur conflicting obligations to sell
other companies’ products or they might distribute other products that provide greater revenues to
them than are provided by our products.
Tyco Healthcare, part of Tyco International Ltd., our international distributor in Europe, the
Middle East, Africa and Canada for our INVOS System, accounted for 11 percent and 12 percent of our
net revenues for fiscal 2005 and for fiscal 2003, respectively. Edwards Lifesciences Ltd.,
formerly Baxter Limited, our international distributor in Japan for our INVOS System, was our
largest customer for fiscal 2004, although it accounted for less than 10 percent of our net
revenues for fiscal 2004. The loss of either of these distributors could have an adverse effect on
our business, financial condition and results of operations.
We plan to increase the number of our direct sales team personnel in the United States and
reduce our dependence on our independent sales representative firms. As a result, we might
terminate some of our existing independent sales representatives, which could result in claims by
terminated sales representative firms. If we are required to pay any significant amounts to
terminated sales representatives, our results of operations and financial condition would be
adversely affected.
We currently depend on single-source suppliers for key components of the INVOS System, and the
loss of any of these suppliers could harm our ability to manufacture and sell our products,
increase the cost of our components or delay our clinical trials.
We are dependent on various suppliers for manufacturing the components for our INVOS System.
Although we believe that most components are generally available from several potential suppliers,
we depend on one supplier for one of our components. We are not aware of any validated alternative
supplier for this component, although we are currently in the process of validating in accordance
with FDA requirements a second source of supply. Moreover, we typically use one supplier for
custom-designed components, including the unit enclosure, the printed circuit boards, other
mechanical components and the SomaSensor. SomaSensors represented 75 percent of our net revenues
in fiscal 2005. Engaging additional or replacing existing suppliers of custom-designed components
is costly and time consuming. We estimate that it would require approximately four to five months
to change SomaSensor suppliers. We do not intend to maintain significant inventories of
components, other than an approximate six-month supply of the one component for which we currently
have no alternative supplier. If we fail to obtain custom-designed components from our sole
suppliers, if we lose any of our present suppliers and cannot replace them on a timely basis when
necessary, if there is an interruption of production at one or more of our suppliers, or if any
supplier is otherwise unable or unwilling to meet our requirements at current prices or at all, our
ability to manufacture and sell our products would be impaired or we might have to pay higher
prices for our components or our clinical trials could be delayed. In addition, because we do not
have long-term agreements with our suppliers, we might be subject to unexpected price increases
which might adversely affect our profit margins.
In addition, we do not have direct control over the activities of our suppliers and are
dependent on them for quality control, capacity, processing technologies and, in required cases,
compliance with FDA Quality System Regulation requirements. If we are unsuccessful in managing our
suppliers, our business could be adversely affected.
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We may become subject to competition which may adversely affect us.
We believe that the markets for cerebral and somatic oximetry products may become highly
competitive. In the United States, we believe there is currently only one other company with FDA
clearance to sell a cerebral oximeter. In December 2005, CAS Medical Systems, Inc. announced that
it received 510(k) clearance to market a cerebral oximeter for the adult market, with plans to
launch the product in late 2006. Outside the United States, several Japanese manufacturers offer
competitive products for sale in that country and primarily for research in other parts of the
world, but, to our knowledge, as of yet, none has pursued FDA clearance to market its product in
the United States. We are aware that several companies and individuals are engaged in the research
and development of non-invasive cerebral oximeters, and we believe that there are several other
potential entrants into the market. Other companies have FDA clearance to market somatic oximeters
in the United States. Competition might cause our sales cycle to lengthen to the extent that
customers take longer to make purchasing decisions. Competition might also reduce our gross
margins and market share and prevent us from achieving further market penetration. Competitors
might be more successful than we are in obtaining FDA clearance with broader claims in their
labeling or more successful than we are in manufacturing and marketing their products and may be
able to take advantage of the significant time and effort we have invested to gain medical
acceptance of cerebral oximetry.
We also compete with companies that have longer operating histories, more established products
and greater resources than we do for, among other things, forehead monitoring space, limited
hospital capital budgets and alternative products.
The medical products industry is characterized by extensive research and development and
intense competition in an increasingly cost-conscious environment. Some of these potential
competitors have well-established reputations, customer relationships and marketing, distribution
and service networks. Some of them have substantially longer histories in the medical products
industry, larger product lines and greater financial, technical, manufacturing, research and
development and management resources than we do. Many of these potential competitors have
long-term product supply relationships with our potential customers. These potential competitors
might be able to use their resources, reputations and ability to leverage existing customer
relationships to give them a competitive advantage over us, including in securing forehead sensor
space for their products and dollars from hospital capital equipment budgets to purchase their
products. They might also succeed in developing products that are at least as reliable and
effective as our products, that make additional measurements, that are less costly than our
products or that provide alternatives to our products.
If we fail to manage our growth effectively, our business and operating results could be harmed.
If we experience growth in our business, our growth could place a significant strain on our
management, customer service, operations, sales and administrative personnel and other resources.
To serve the needs of our existing and future customers, we will be required to train, motivate and
manage qualified employees. We have incurred and will continue to incur significant costs to
retain qualified management, sales and marketing, engineering, production, manufacturing and
administrative personnel, as well as expenses for marketing and promotional activities. Our
ability to manage our planned growth depends upon our success in expanding our operating,
management and information and financial systems, which might significantly increase our operating
expenses.
We have invested substantial resources to develop the INVOS System. We expect to continue to
invest substantial resources to develop a smaller SomaSensor for use with newborns, product-line
extension of the INVOS System for monitoring non-brain tissues and other advances to the design and
performance features of the INVOS System, including the disposable SomaSensor. New products
require extensive testing and regulatory clearance before they can be marketed, and substantial
customer education concerning the product’s use, advantages and effectiveness. We might not be
able to develop commercially viable products. We might not be able to manage effectively our
future growth, and if we fail to do so, our business, financial condition and results of operations
would be adversely affected.
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Patients might assert product liability claims against us.
Because we test, market and sell a patient monitoring device and a heart patch, patients might
assert product liability claims against us. The INVOS System is used in operating rooms and other
critical care hospital units with patients who might be seriously ill or might be undergoing
dangerous procedures. The CorRestore Patch is used on seriously ill patients undergoing a
dangerous procedure. On occasion, patients on whom the INVOS System is being used, or in whom a
CorRestore Patch is implanted, may be injured or die as a result of their medical treatment or
condition. We might be sued because of such injury or death, and regardless of whether we are
ultimately determined to be liable or our products are determined to be defective and a
contributing factor in such injury or death, we might incur significant legal expenses not covered
by insurance. In addition, product liability litigation could damage our reputation and impair our
ability to market our products, regardless of the outcome. Litigation could also impair our
ability to retain product liability insurance or make our insurance more expensive. We have
product liability insurance with a liability limit of $5,000,000. This insurance is costly and
even though it has been obtained, we might not be able to retain it. Even if we are able to retain
this insurance, it might not be sufficient to protect us in the event of a major defect in the
INVOS System or the CorRestore Patch. If we are subject to an uninsured or inadequately insured
product liability claim based on the performance of the INVOS System or the CorRestore Patch, our
business, financial condition and results of operations could be adversely affected.
If we fail to obtain and maintain necessary U.S. Food and Drug Administration clearances for our
products and indications or if clearances for future products and indications are delayed or not
issued, our business would be harmed.
Our products are classified as medical devices and are subject to extensive regulation in the
United States by the FDA and other federal, state and local authorities. These regulations relate
to manufacturing, labeling, sale, promotion, distribution, importing and exporting and shipping of
our products. In the United States, before we can market a new medical device, or a new use of, or
claim for, an existing product such as the INVOS System, we must first receive either 510(k)
clearance or premarket approval from the FDA, unless an exemption applies. Both of these processes
can be expensive and lengthy. The FDA’s 510(k) clearance process usually takes from three to six
months, but it can last longer. The process of obtaining premarket approval is much more costly and
uncertain than the 510(k) clearance process. It generally takes from one to three years, or even
longer, from the time the premarket approval application is submitted to the FDA until an approval
is obtained.
In order to obtain premarket approval and, in some cases, a 510(k) clearance, a product
sponsor must conduct well-controlled clinical trials designed to test the safety and effectiveness
of the product. Conducting clinical trials generally entails a long, expensive and uncertain
process that is subject to delays and failure at any stage. The data obtained from clinical trials
may be inadequate to support approval or clearance of a submission. In addition, the occurrence of
unexpected findings in connection with clinical trials may prevent or delay obtaining approval or
clearance. If we conduct clinical trials, they may be delayed or halted, or be inadequate to
support approval or clearance.
Medical devices may be marketed only for the indications for which they are approved or
cleared. The FDA may fail to approve or clear indications that are necessary or desirable for
successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance or
premarket approval of new products, new intended uses or modifications to existing products. Our
clearances can be revoked if safety or effectiveness problems develop.
The
FDA might require us to obtain a new clearance to label or promote
more actively the INVOS System for
specific patient subgroups, such as diabetics; if we fail to obtain such clearances, our sales
and revenues may be adversely affected.
Our INVOS System 510(k) clearance states that the prospective clinical value of the INVOS
System has not been demonstrated in patients with specific disease states. If we wish to label or
promote more actively the INVOS System for specific types of patients, such as diabetics, the FDA may require us
to obtain a new 510(k) clearance and would likely carefully scrutinize the data support for any
such claim. The FDA may also determine that our current promotion of the INVOS System as suitable
for use in diabetics constitutes promotion for an unapproved use and
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may take regulatory action against us and require us to cease and desist from such promotion
until a new clearance or approval is obtained. We cannot assure you that the FDA would grant
additional 510(k) clearances in a timely fashion, or at all, or that the FDA would not require us
to undertake the more burdensome premarket approval process as a prerequisite for marketing the
INVOS System with this type of claim. Any of the above could delay our ability to market and sell
new products or to promote the INVOS System for specific patient subgroups such as diabetics and
would thereby have an adverse effect on our business, financial condition and results of
operations.
After clearance or approval of our products, we are subject to continuing regulation by the FDA,
and if we fail to comply with FDA regulations, our business could
suffer.
Even after clearance or approval of a product, we are subject to continuing regulation by the
FDA, including the requirements that our facility be registered and our devices listed with the
agency. We are subject to Medical Device Reporting regulations, which require us to report to the
FDA if our products may have caused or contributed to a death or serious injury or malfunction in a
way that would likely cause or contribute to a death or serious injury if the malfunction were to
recur. We must report corrections and removals to the FDA where the correction or removal was
initiated to reduce a risk to health posed by the device or to remedy a violation of the Federal
Food, Drug, and Cosmetic Act caused by the device that may present a risk to health, and maintain
records of other corrections or removals. The FDA closely regulates promotion and advertising, and
our promotional and advertising activities could come under scrutiny. If the FDA objects to our
promotional and advertising activities or finds that we failed to submit reports under the Medical
Device Reporting regulations, for example, the FDA may allege our activities resulted in
violations.
The FDA and state authorities have broad enforcement powers. Our failure to comply with
applicable regulatory requirements could result in enforcement action by the FDA or state agencies,
which may include any of the following sanctions:
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untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; |
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repair, replacement, refunds, recall or seizure of our products; |
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operating restrictions or partial suspension or total shutdown of production; |
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refusing or delaying our requests for 510(k) clearance or premarket approval of new
products or new intended uses; |
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withdrawing 510(k) clearance or premarket approvals that have already been granted; and |
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criminal prosecution. |
If any of these events were to occur, they could harm our business.
We have modified some of our products without FDA clearance. The FDA could retroactively
determine that the modifications were improper and require us to stop marketing and recall the
modified products.
Any modifications to one of our FDA-cleared devices that could significantly affect its safety
or effectiveness, or that would constitute a major change in its intended use, requires a new
510(k) clearance or a premarket approval. We may be required to submit extensive pre-clinical and
clinical data depending on the nature of the changes. We may not be able to obtain additional
510(k) clearances or premarket approvals for modifications to, or additional indications for, our
existing products in a timely fashion, or at all. Delays in obtaining future clearances or
approvals would adversely affect our ability to introduce new or enhanced products in a timely
manner, which in turn would harm our revenue and operating results. We have made modifications to
our devices in the past, such as changes to the SomaSensor, and may make additional modifications
in the future that we believe do not or will not require additional clearances or approvals. We
believe that these changes do not require the submission of a new 510(k) notice. If the FDA
disagrees, and requires new clearances or approvals for the modifications, we may be required to
recall and to stop marketing the modified devices, which could harm our operating results and
require us to redesign our products.
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If we fail to comply with the FDA’s Quality System Regulation, our manufacturing operations
could be halted, and our business would suffer.
We are currently required to demonstrate and maintain compliance with the FDA’s Quality System
Regulation, or QSR. The QSR is a complex regulatory scheme that covers the methods and
documentation of the design, testing, control, manufacturing, labeling, quality assurance,
packaging, storage and shipping of our products. The FDA enforces the QSR through periodic
unannounced inspections. We have been, and anticipate in the future being, subject to such
inspections. Our failure to comply with the QSR or to take satisfactory corrective action in
response to an adverse QSR inspection could result in enforcement actions, including a public
warning letter, a shutdown of or restrictions on our manufacturing operations, delays in approving
or clearing a product, refusal to permit the import or export of our products, a recall or seizure
of our products, fines, injunctions, civil or criminal penalties, or other sanctions, any of which
could cause our business and operating results to suffer.
Failure to obtain or maintain regulatory approval in foreign jurisdictions would prevent us from
marketing our products abroad.
We market our products through distributors in foreign markets. In order to market our
products in the European Community and many other foreign jurisdictions, we must obtain separate
regulatory approvals. We depend on our distributors to obtain and maintain certain of these
regulatory approvals. The approval procedure varies among countries and can involve additional
requirements and testing, and the time required to obtain approval may differ from that required to
obtain FDA clearance. The foreign regulatory approval process may include all of the risks
associated with obtaining FDA clearance in addition to other risks. Our distributors might not be
able to obtain or maintain foreign approvals on a timely basis or at all. Clearance by the FDA
does not ensure approval by regulatory authorities in other countries, and approval by one foreign
regulatory authority does not ensure approval by regulatory authorities in other foreign countries
or approval or clearance by the FDA. Failure to obtain or maintain regulatory approval in foreign
jurisdictions would prevent us from marketing our products abroad.
Federal regulatory reforms may adversely affect our ability to sell our products profitably.
From time to time, legislation is drafted and introduced in Congress that could significantly
change the statutory provisions governing clearance or approval, manufacture and marketing of a
device. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency
in ways that may significantly affect our business and our products. We cannot predict whether
legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and
what the impact of such changes, if any, may be.
Changes in our actual or estimated future taxable income could change the value of our deferred
tax asset, potentially resulting in a decrease in net income, which could adversely affect the
price of our common shares.
We have recognized deferred tax assets relating to the expected future benefits of our net
operating loss carryforwards. Our assessment of our deferred tax assets, and the reversal of part
of our valuation allowance relating to those assets in fiscal 2005 and 2004, included assuming that
our net revenues and pre-tax income will grow in future years consistent with the growth guidance
given for fiscal 2006 and making allowance for the uncertainties surrounding, among things, our
future rate of growth in net revenues, the rate of adoption of our products in the marketplace, and
the potential for competition to enter the marketplace. Given the assumptions inherent in our
financial plans, it is possible to calculate a different value for our deferred tax assets by
changing one or more of the variables in our assessment. In addition, changes in our actual or
estimated future taxable income could change the value of our deferred tax asset, potentially
resulting in a decrease in net income, which could adversely affect the price of our common shares.
New stock option accounting rules will increase our reported expenses, which could adversely
affect the price of our common shares.
Effective December 1, 2005, we became subject to new stock option accounting rules that
require that compensation costs related to share-based payment transactions, including stock
options, stock appreciation rights
25
and restricted stock, be recognized in our financial statements. Previously, we accounted for
stock-based compensation of employees using the intrinsic value method, which resulted in no
compensation expense charged against income for stock option grants to employees for fiscal 2005,
2004 or 2003. In addition, in November 2005, we accelerated the vesting of all unvested stock
options to eliminate compensation expense that we would otherwise have recognized in our results of
operations after the adoption of the new stock option accounting rules when those options would
have otherwise vested. Future grants of options, however, will require us to recognize
compensation expense in our income statement, increasing our reported expenses for the same
activities, which could adversely affect the price of our common shares.
The lengthy sales cycle for the INVOS System could cause variability in our operating results.
The decision-making process for our INVOS System customers is often complex and
time-consuming. We believe the period between initial discussions with a potential customer and a
sale of even one unit is typically approximately six to nine months. The process can be delayed as
a result of hospital capital budgeting procedures. These delays could have an adverse effect on
our business, financial condition and results of operations and cause variability in our operating
results from quarter to quarter, which could cause fluctuations in the trading price of our common
shares.
If we are unable to obtain or maintain intellectual property rights relating to our technology
and products, the commercial value of our technology and products will be adversely affected and
our competitive position could be harmed.
Our success and ability to compete depends in part upon our ability to obtain protection in
the United States and other countries for our products by establishing and maintaining intellectual
property rights relating to or incorporated into our technology and products. We own or license a
variety of patents and patent applications in the United States and corresponding patents and
patent applications in certain foreign jurisdictions. Pending and future patent applications owned
or licensed by us may not issue as patents or, if issued, may not issue in a form that will be
commercially advantageous to us. Even if issued, patents may be challenged, narrowed, invalidated
or circumvented, which could limit our ability to stop competitors from marketing similar products
or limit the length of term of patent protection we may have for our products. In addition,
already issued patents owned or licensed by us may not be valid or enforceable. Further, even if
valid and enforceable, these already issued patents may not be sufficiently broad to prevent others
from marketing competitive products, despite our patent rights. Changes in either patent laws or
in interpretations of patent laws in the United States and other countries may diminish the value
of our intellectual property or narrow the scope of our patent protection.
For example, one of our significant patents is the subject of a reissue proceeding in the U.S.
Patent and Trademark Office. Our reissue application was filed for the sole purpose of seeking to
broaden certain claims. We cannot predict the outcome of this proceeding, which may result in some
or all of the claims being broadened, narrowed or rejected. Another of our patents may be expired
for ultimately claiming priority to a patent that was filed more than 20 years ago. We believe
that this patent does not have a claim of priority that extends back for more than 20 years, and
that the patent is still extant and will expire on March 29, 2009. However, there is a risk that a
court might find that the earliest effective filing date for this patent is more than 20 years ago,
and rule that this patent is expired and unenforceable.
The validity of our patent claims depends, in part, on whether prior art references disclosed
or rendered obvious our inventions as of the filing date of our patent applications. We may not
have identified all prior art, such as U.S. and foreign patents or published applications or
published scientific literature, that could adversely affect the validity of our issued patents or
the patentability of our pending patent applications. For example, patent applications in the
United States are maintained in confidence for up to 18 months after their filing. In some cases,
however, patent applications remain confidential in the U.S. Patent and Trademark Office for the
entire time prior to issuance as a U.S. patent. Patent applications filed in countries outside the
United States are also not typically published until at least 18 months from their first filing
date. Similarly, publication of discoveries in the scientific or patent literature often lags
behind actual discoveries.
26
We may initiate litigation to enforce our patent rights, which may prompt our adversaries in
such litigation to challenge the validity, scope or enforceability of our patents. If a court
decides that our patents are not valid, not enforceable or of a limited scope, we will not have the
right to stop others from using our inventions.
The outcome of litigation to enforce our patent rights is subject to substantial
uncertainties, especially in medical device-related patent cases that may, for example, turn on the
interpretation of patent claim language by the court which may not be to our advantage, and also
the testimony of experts as to technical facts upon which experts may reasonably disagree. Our
involvement in such intellectual property litigation could result in significant expense.
We also cannot be certain that we were the first to invent, or the first to file patent
applications relating to, our cerebral oximeter technologies. In the event that a third party has
also filed a U.S. patent application covering our cerebral oximeter devices, the sensors used with
these devices, or a similar invention, we may have to participate in an adversarial proceeding
known as an interference, which is declared by the U.S. Patent and
Trademark Office to determine priority of
invention in the United States. It is possible that we may be unsuccessful in the interference,
resulting in a loss of some or all of our U.S. patent claims. We may also face similar proceedings
outside the United States, including oppositions, to determine priority of invention or
patentability. Even if we are successful in these proceedings, we may incur substantial costs, and
the time and attention of our management and scientific personnel will be diverted in pursuit of
these proceedings. Moreover, the laws of some foreign jurisdictions may not protect intellectual
property rights to the same extent as in the United States, and many companies have encountered
significant difficulties in protecting and defending such rights in foreign jurisdictions. If we
encounter such difficulties or we are otherwise precluded from effectively protecting our
intellectual property rights in foreign jurisdictions, we may incur substantial costs and our
business prospects could be substantially harmed.
We rely on trade secret and copyright protection to protect our interests in proprietary
information and know-how, and for processes for which patents are undesirable to obtain or are
difficult to obtain or enforce. We may not be able to protect our trade secrets or copyrights
adequately. For example, none of our copyrights have been registered with the U.S. Copyright
Office, which limits our ability to sue for and collect damages from third party infringers. In
addition, we rely on non-disclosure and confidentiality agreements with employees, consultants and
other parties to protect, in part, trade secrets and other proprietary technology. These
agreements may be breached, and we may not have adequate remedies for any breach. Moreover, others
may independently develop equivalent proprietary information, and third parties may otherwise gain
access to our trade secrets and proprietary knowledge. Any disclosure of confidential data into
the public domain or to third parties could allow our competitors to learn our trade secrets and
use the information in competition against us.
If we are found to infringe or are alleged to infringe any third party intellectual property
rights, then our business may be adversely affected.
There are numerous U.S. and foreign issued patents and pending patent applications owned by
third parties with patent claims in the field of tissue or organic matter oximetry, including
cerebral oximetry and areas that are the focus of our product development efforts. We are aware of
patents owned by third parties, to which we do not have licenses, that relate to, among other
things, optical spectroscopy and the interaction of light with tissue and optical spectroscopy in
the area of brain metabolism. For example, possible competitors own patents that are directed to
the non-invasive determination of blood oxygen saturation levels with a near infra-red
spectrophotometric sensor and to an apparatus for measuring oxygen saturation in blood using two
different wavelengths of light. There may be other patents in addition to those of which we are
aware that relate to aspects of our technology and that may materially and adversely affect our
business. Moreover, because patent applications can take many years to issue, there may be
currently pending applications, unknown to us, which may later result in issued patents that pose a
material risk to us.
We may pose a threat to companies who own or control patents relating to cerebral oximetry
systems or their components, or to the manufacture and use of such systems, and one or more third
parties may file a lawsuit asserting a patent infringement claim against the manufacture, use or
sale of the INVOS System based on one or more of these patents. We are not aware of any
infringement of the claims of any issued patents by our products, and no charge of patent
infringement has been asserted against us. However, potential competitors would have more
27
incentive to assert infringement claims or challenge our patents if a more significant market
for the INVOS System develops.
Whether the manufacture, sale or use of the INVOS System, or whether any products under
development would, upon commercialization, infringe any patent claim will not be known with
certainty unless and until a court interprets the patent claim in the context of litigation. If an
infringement allegation is made against us, we may seek to invalidate the asserted patent claim
and/or to allege non-infringement of the asserted patent claim. In order for us to invalidate a
U.S. patent claim, we would need to rebut the presumption of validity afforded to issued patents in
the United States with clear and convincing evidence of invalidity, which is a high burden of
proof.
The outcome of infringement litigation is subject to substantial uncertainties, especially in
medical device-related patent cases that may, for example, turn on the interpretation of patent
claim language by the court which may not be to our advantage, and also the testimony of experts as
to technical facts upon which experts may reasonably disagree. Our defense of an infringement
litigation lawsuit could result in significant expense. Regardless of the outcome, infringement
litigation could significantly disrupt our marketing, development and commercialization efforts,
divert our management’s attention and quickly consume our financial resources.
In the event that we are found to infringe any valid claim in a patent held by a third party,
we may, among other things, be required to:
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pay damages, including up to treble damages and the other party’s attorneys’ fees, which
may be substantial; |
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cease the development, manufacture, importation, use and sale of products that infringe
the patent rights of others, including our INVOS System, through a court-imposed sanction
called an injunction; |
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expend significant resources to redesign our technology so that it does not infringe
others’ patent rights, or to develop or acquire non-infringing intellectual property, which
may not be possible; |
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discontinue manufacturing or other processes incorporating infringing technology; and/or |
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obtain licenses to the infringed intellectual property, which may not be available to us
on acceptable terms, or at all. |
Any development or acquisition of non-infringing products or technology or licenses could
require the expenditure of substantial time and other resources and could have a material adverse
effect on our business and financial results. If we are required to, but cannot, obtain a license
to valid patent rights held by a third party, we would likely be prevented from commercializing the
relevant product, or from further manufacture, sale or use of the relevant product. If we need to
redesign products to avoid third-party patents, we may suffer significant regulatory delays
associated with conducting additional studies or submitting technical, manufacturing or other
information related to the redesigned product and, ultimately, in obtaining approval.
While our products are in clinical trials, and prior to commercialization, we believe our
activities in the United States related to the submission of data to the FDA fall within the scope
of the exemptions that cover activities related to developing information for submission to the FDA
and fall under general investigational use or similar laws in other countries. However, the U.S.
exemptions would not cover the manufacturing, sale or use of products which are no longer in
clinical trials, or other activities in the United States that support overseas clinical trials if
those activities are not also reasonably related to developing information for submission to the
FDA. In any event, the fact that no third party has asserted a patent infringement claim against
us to date should not be taken as an indication, or a level of comfort, that a patent infringement
claim will not be asserted against us prior to or upon commercialization.
Some of our agreements, including our distribution and sales representative agreements require
us to indemnify the other party in certain circumstances where our products have been found to
infringe a patent or other proprietary rights of others. An indemnification claim against us may
require us to pay substantial sums to the indemnified party, including its attorneys’ fees.
28
Our success depends on our ability to attract and retain key personnel.
Our future performance depends in significant part on the continued service of our senior
management, including Bruce J. Barrett, our President and Chief Executive Officer, and various
scientific, technical and manufacturing personnel. Our loss of any of these key personnel could
have an adverse effect on us. We do not maintain key-man life insurance on any of our key
personnel, and our employment agreement with Mr. Barrett currently expires April 30, 2006. In
addition, competition for qualified employees is intense, and if we are unable to attract, retain
and motivate additional, highly-skilled employees required for the expansion of our operations, our
business, financial condition and results of operations could be adversely affected. We cannot
assure you that we will be able to retain our existing personnel or attract additional, qualified
persons when required and on acceptable terms.
Any acquisitions that we make could disrupt our business and harm our financial condition.
From time to time, we evaluate potential strategic acquisitions of complementary businesses,
products or technologies, as well as consider joint ventures and other collaborative projects. We
may not be able to identify appropriate acquisition candidates or strategic partners, or
successfully negotiate, finance or integrate any businesses, products or technologies that we
acquire. We do not have any experience with acquiring companies or products, other than the
CorRestore System. Any acquisition we pursue could diminish our cash
otherwise available to us for other uses or be dilutive to our shareholders, and could divert management’s
time and resources from our core operations.
We have had limited success in marketing the CorRestore System, which could result in claims
against us.
Since we acquired rights in the CorRestore System in 2000, we have had limited success in
marketing the system. The CorRestore system competes against existing patches also used for
cardiac reconstruction and repair that are significantly less expensive and at least one study
indicates are effective. We also compete against alternative methods of treating congestive heart
failure. Surgical Ventricular Restoration, or SVR, is in the early stages of its development and
will likely require significant clinical studies before it is widely accepted. There are many
larger companies in this industry that have significantly larger research and development budgets
than ours. Competitors may be able to develop additional or better treatments for congestive heart
failure and may be able to take advantage of the significant time and effort we have invested to
gain medical acceptance of SVR surgeries.
We are dependent on a third party to manufacture the CorRestore System. Our license agreement
limits the parties that we may engage. The ultimate success of our CorRestore business is
dependent on our ability to manage the manufacturer of the CorRestore System. If we are
unsuccessful in managing the manufacturer of the CorRestore System, our business could be adversely
affected.
We entered into a license agreement with respect to the CorRestore System in 2002. Although
we believe we have complied with our obligations under the license agreement, our limited success
in marketing the CorRestore System could result in claims against us. As part of the compensation
for the acquisition of our CorRestore licenses, we issued five-year warrants to purchase an
aggregate of 2,100,000 common shares at $3.00 per share, exercisable based on our cumulative net
sales of the CorRestore System products. We do not expect the sales requirements for exercise of
these warrants to be met before the November 2006 expiration date of these warrants. Expiration of
these warrants before they become exercisable could cause the holders of these warrants to make
claims against us under the license agreement. If we are required to pay any significant amounts
to defend or as a result of any such claims, our results of operations would be adversely affected.
Risks Relating to Our Common Shares
If
we were to complete a public offering, we would have broad discretion
to determine how to allocate the net proceeds of that offering and may not use them effectively.
If
we were to complete a public offering of common shares, we would
intend to use the net proceeds of that offering primarily
to expand our direct sales team and other sales and marketing activities, sponsor additional
clinical trials and expand our
29
research and development efforts and for working capital and general corporate purposes. A
significant portion of the net proceeds of any such offering would be allocated to working capital and
general corporate purposes. We would be raising money for these purposes to strengthen our balance
sheet and provide us with greater flexibility in implementing our business plans and responding to
future business conditions and opportunities. We would retain broad discretion to
determine how to allocate the net proceeds of our proposed public offering of common shares and the
timing of the payments. If we fail to apply these funds effectively, the failure could result in
financial losses that could have a material adverse effect on our business and cause the price of
our common shares to decline. Pending the application of such potential proceeds, we intend to keep
sufficient net proceeds of sales of common shares in cash and bank accounts to avoid becoming an
inadvertent investment company subject to regulation under the Investment Company Act of 1940. The
remaining proceeds would be expected to be invested in short-term, U.S. government or other investment
grade, interest-bearing investments. These restrictions on our investments might limit the income
otherwise available from investing these funds, lowering our income and potentially decreasing our
earnings and the price of our common shares.
Provisions of our corporate charter documents and Michigan law may delay or prevent attempts by
our shareholders to change our management and hinder efforts to acquire a controlling interest
in us.
Our board of directors has the authority, without further approval of our shareholders, to
issue preferred shares having such rights, preferences and privileges as the board may determine.
Any such issuance of preferred shares could, under some circumstances, have the effect of delaying
or preventing a change in control of us and might adversely affect the rights of holders of common
shares. In addition, we are subject to Michigan statutes regulating business combinations,
takeovers and control share acquisitions, which might also hinder or delay a change in control of
our company. Anti-takeover provisions that could be included in the preferred shares when issued
and the Michigan statutes regulating business combinations, takeovers and control share
acquisitions can depress the market price of our securities and can limit the shareholders’ ability
to receive a premium on their shares by discouraging takeover and tender offer bids, even if such
events could be viewed as beneficial by our shareholders.
Our directors serve staggered three-year terms, and directors may be removed only for cause by
a vote of the holders of a majority of the shares entitled to vote at an election of directors.
Our Restated Articles of Incorporation also set the minimum number of directors constituting the
entire board at three and the maximum at fifteen, and they require approval of holders of 90
percent of our voting shares to amend these provisions. Our bylaws contain procedures, including
notice requirements, for nominating persons for election to our board of directors. These
provisions could have an anti-takeover effect by making it more difficult to acquire our company by
means of a tender offer, a proxy contest or otherwise or by removing incumbent officers and
directors. These provisions could delay, deter or prevent a tender offer or takeover attempt that
a shareholder might consider in his or her best interests, including those attempts that might
result in a premium over the market price for the common shares held by our shareholders.
The market price of our common shares has been volatile and may continue to remain so.
The market price of our common shares has been highly volatile. The following could cause the
market price of the common shares to continue to fluctuate substantially:
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changes in our quarterly financial condition or operating results; |
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changes in general conditions in the economy; |
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changes in the financial markets; |
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changes in the medical equipment industry; |
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changes in financial estimates by securities analysts or differences between those
estimates and our actual results; |
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the liquidity of the market for the common shares; |
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developments with respect to patents and proprietary rights; |
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publication of clinical research results regarding our products; |
30
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changes in health care policies in the United States or foreign countries; |
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grants or exercises of stock options or warrants; |
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news announcements; |
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litigation involving us; |
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actions by governmental agencies, including the FDA, or changes in regulations; and |
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other developments affecting us or our competitors. |
In particular, the stock market might experience significant price and volume fluctuations that
might affect the market price of the common shares for reasons that are unrelated to our operating
performance and that are beyond our control.
We have never paid cash dividends on our capital stock, and we do not anticipate paying any cash
dividends in the foreseeable future.
We have never paid cash dividends on our common shares and do not expect to pay dividends in
the foreseeable future. We currently intend to retain any future earnings for use in our business.
The payment of any future dividends will be determined by the board in light of the conditions
then existing, including our financial condition and requirements, future prospects, restrictions
in financing agreements, business conditions and other factors deemed relevant by the board. As a
result, capital appreciation, if any, of our common shares will be your sole source of gain for the
foreseeable future.
The market price of the common shares might be lower because of shares eligible for future sale
and shares reserved for future issuance upon the exercise of options and warrants we have
granted.
Future sales of substantial amounts of common shares in the public market or the perception
that such sales could occur could adversely affect the market price of the common shares. Any
substantial sale of common shares or even the possibility of such sales occurring may have an
adverse effect on the market price of the common shares. We have outstanding options and warrants
to purchase an aggregate of 4,014,232 common shares. We have also reserved up to an additional
505,785 common shares for issuance upon exercises of options or awards of restricted stock or
restricted stock units which have not yet been granted or awarded under our stock incentive plans.
We have effective registration statements for the shares underlying these options and stock awards.
Therefore, except for volume limitations imposed by Securities and Exchange Commission Rule 144, these shares are freely tradeable. The market price of our common shares could fall if
the holders of these shares sell them or are perceived by the market as intending to sell them.
Forward-Looking Statements
Some of the statements in this report are forward-looking statements. These forward-looking
statements include statements relating to our performance in the sections entitled “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
“Business” and elsewhere in this report. Forward-looking statements include statements regarding
the intent, belief or current expectations of us or our management, including statements preceded
by, followed by or including forward-looking terminology such as “may,” “will,” “should,”
“believe,” “expect,” “anticipate,” “plan,” “intend,” “propose,” “estimate,” “continue,” “predict”
or similar expressions, with respect to various matters.
These statements involve known and unknown risks, uncertainties and other factors which may
cause our actual results, performance time frames or achievements to be materially different from
any future results, performance, time frames or achievements expressed or implied by the
forward-looking statements. We discuss
31
many of these risks, uncertainties and other factors in this report in greater detail under
the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not
place undue reliance on these forward-looking statements. Also, these forward-looking statements
represent our estimates and assumptions only as of the date of this report. You should read this
report and the documents that we have filed as exhibits and incorporated by reference to this
report completely and with the understanding that our actual future results may be materially
different from what we expect. We hereby qualify all of our forward-looking statements by these
cautionary statements.
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.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our headquarters, manufacturing facility and warehouse space are located in a single building
in Troy, Michigan. We lease approximately 23,000 square feet, including approximately 12,000
square feet is office space for sales and marketing, engineering, accounting and other
administrative activities. Our lease expires on December 31, 2009. The minimum monthly lease
payment will be approximately $11,700 for fiscal 2006, $11,900 for fiscal 2007, $12,200 for fiscal
2008 and $12,400 for fiscal 2009, excluding other occupancy costs. We believe that this facility
is suitable and adequate for our needs now and for the foreseeable future and will allow for
substantial expansion of our business and number of employees.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal
year ended November 30, 2005.
33
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
Our current executive officers and the positions held by them are as follows:
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Executive |
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Officer Since |
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Age |
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Position |
Bruce J. Barrett
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6/94
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President and Chief Executive Officer |
William M. Iacona
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12/00
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Vice President and Chief Financial Officer, Controller, and Treasurer |
Richard S. Scheuing
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1/98
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Vice President, Research and Development |
Dominic J. Spadafore
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8/02
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Vice President, Sales and Marketing |
Mary Ann Victor
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1/98
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Vice President and Chief Administrative Officer and Secretary |
Ronald A. Widman
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1/98
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55 |
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Vice President, Medical Affairs |
Pamela A. Winters
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1/98
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Vice President, Operations |
Our officers serve at the discretion of the board of directors.
Biographical Information
Mr. Bruce J. Barrett has served as our President and Chief Executive Officer and as one of our
directors since June 1994. Earlier in his career, Mr. Barrett served as the Director, Hospital
Products Division, for Abbott Laboratories, Ltd., a health care equipment manufacturer and
distributor, and as the Director, Sales and Marketing, for Abbott Critical Care Systems, a division
of Abbott Laboratories, Inc., a health care equipment manufacturer and distributor. While at
Abbott Critical Care Systems, Mr. Barrett managed Abbott’s invasive oximetry products for
approximately four years. Prior to joining Abbott Laboratories, he served as the group product
manager of hemodynamic monitoring products of Baxter Edwards Critical Care, an affiliate of Baxter
International, Inc., another health care equipment manufacturer and distributor. Mr. Barrett
received a B.S. degree in marketing from Indiana State University and an M.B.A. degree from Arizona
State University. Mr. Barrett is a party to an employment agreement with us that requires us to
elect him to the offices he currently holds.
Mr. William M. Iacona has served as our Vice President and Chief Financial Officer since
January 2006, as our Treasurer since February 2000 and as our Controller since April 1997. From
December 2000 until January 2006, he served as our Vice President, Finance. Before joining us, he
was in the Finance Department of Ameritech Advertising Services, a telephone directory company and
a division of Ameritech Corporation (now SBC Communications), and was on the audit staff of
Deloitte & Touche LLP, independent auditors. He is a certified public accountant and received a
B.S. degree in accounting from the University of Detroit.
Mr. Richard S. Scheuing has served as our Vice President, Research and Development, since
January 1998 and prior to that was our Director of Research and Development and Director of
Mechanical Engineering. He is an inventor on five of our issued patents. Before joining us, he
was Director of Mechanical Engineering for Irwin Magnetic Systems, Inc. and was a Development
Engineer with the Sarns division of Minnesota Mining and Manufacturing Company, or 3M. He received
a B.S. degree in mechanical engineering from the University of Michigan.
Mr. Dominic J. Spadafore has served as our Vice President, Sales and Marketing, since August
2002. Mr. Spadafore previously served, from July 2000 until July 2002, as National Sales and
Clinical Director of the Cardiac Assist Division of Datascope Corporation, a medical device company
that manufactures and markets healthcare products including medical devices used in high-risk
cardiac patients. In this position, Mr. Spadafore supervised approximately 50 sales and clinical
personnel and approximately $80 million in domestic revenues. From July 1997 until July 2000, he
served as Western Area Manager of the Patient Monitoring Division of Datascope Corporation, and
prior to that he held field sales representative and regional manager positions with progressive
responsibilities with Datascope Corporation. Earlier in his career Mr. Spadafore was a sales
representative with the Upjohn Company, a pharmaceutical manufacturer, and a sales representative
with White and White Incorporated, a medical
supply distributor. He received a BA degree in pre-medicine from Oakland University. Mr.
Spadafore is a party to an employment agreement with us that requires us to elect him to the office
he currently holds.
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Ms. Mary Ann Victor has served as our Vice President and Chief Administrative Officer since
January 2006 and as our Secretary since January 1998. From January 1998 until January 2006, she
served as our Vice President, Communications and Administration. Prior to that she was our
Director, Communications and Administration. Her prior experience includes various investor
relations and public relations positions with publicly-held companies. She also is an attorney and
practiced with the law firm Varnum Riddering Schmidt & Howlett. Ms. Victor received a B.S. in
political science from the University of Michigan and a J.D. from the University of Detroit.
Mr. Ronald A. Widman has served as our Vice President, Medical Affairs, since January 1998 and
prior to that was our Director of Medical Affairs and Marketing Manager. Prior to joining us in
1991, he was employed by Mennen Medical, Inc., a manufacturer and marketer of medical monitoring
and diagnostic devices, where he held various positions in domestic and international medical
product marketing. He is the author of several papers and articles related to medical care and
monitoring devices.
Ms. Pamela A. Winters has served as our Vice President, Operations, since January 1998 and
since joining Somanetics in 1991 has served as Director of Operations and Manager of Quality
Assurance. Ms. Winters received a B.S. degree in management from the University of Phoenix.
35
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common shares trade on The Nasdaq Capital Market under the trading symbol “SMTS.” The
following table sets forth, for the periods indicated, the range of high and low sales prices of
our common shares as reported by Nasdaq.
| |
|
|
|
|
|
|
|
|
| |
|
High |
|
|
Low |
|
Fiscal Year Ended November 30, 2004 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
10.00 |
|
|
$ |
6.00 |
|
Second Quarter |
|
|
15.86 |
|
|
|
8.77 |
|
Third Quarter |
|
|
16.70 |
|
|
|
9.23 |
|
Fourth Quarter |
|
|
14.98 |
|
|
|
10.65 |
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended November 30, 2005 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
16.00 |
|
|
$ |
13.00 |
|
Second Quarter |
|
|
18.85 |
|
|
|
12.50 |
|
Third Quarter |
|
|
25.74 |
|
|
|
17.66 |
|
Fourth Quarter |
|
|
36.95 |
|
|
|
21.51 |
|
As of January 26, 2006, we had 596 shareholders of record of our common shares.
We have never paid cash dividends on our common shares and do not expect to pay such dividends
in the foreseeable future. We currently intend to retain any future earnings for use in our
business. The payment of any future dividends will be determined by the board in light of the
conditions then existing, including our financial condition and requirements, future prospects,
restrictions in any financing agreements, business conditions and other factors deemed relevant by
the board.
36
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected financial data together with our financial statements
and related notes included in Item 8 of this report and with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” included in Item 7 of this report. We have
derived the statement of operations data for the years ended November 30, 2005, 2004 and 2003 and
the balance sheet data as of November 30, 2005 and 2004 from our audited financial statements,
which are included in Item 8 of this report. We have derived the statement of operations data for
the years ended November 30, 2002 and 2001 and the balance sheet data as of November 30, 2003, 2002
and 2001 from our audited financial statements, which are not included in this prospectus. Our
historical results for any prior period are not necessarily indicative of results to be expected
for any future period.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended November 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
| |
|
(in thousands, except per share data) |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
20,509 |
|
|
$ |
12,609 |
|
|
$ |
9,361 |
|
|
$ |
6,706 |
|
|
$ |
5,656 |
|
Cost of sales |
|
|
2,601 |
|
|
|
2,050 |
|
|
|
2,140 |
|
|
|
2,049 |
|
|
|
2,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
17,908 |
|
|
|
10,558 |
|
|
|
7,221 |
|
|
|
4,657 |
|
|
|
3,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research, development and engineering |
|
|
526 |
|
|
|
369 |
|
|
|
413 |
|
|
|
571 |
|
|
|
778 |
|
Selling, general and administrative (1) |
|
|
13,241 |
|
|
|
8,237 |
|
|
|
6,759 |
|
|
|
5,344 |
|
|
|
5,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
13,767 |
|
|
|
8,606 |
|
|
|
7,172 |
|
|
|
5,915 |
|
|
|
5,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
4,141 |
|
|
|
1,952 |
|
|
|
49 |
|
|
|
(1,258 |
) |
|
|
(2,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
310 |
|
|
|
55 |
|
|
|
23 |
|
|
|
52 |
|
|
|
22 |
|
Interest expense and other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
310 |
|
|
|
55 |
|
|
|
23 |
|
|
|
51 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
4,451 |
|
|
$ |
2,007 |
|
|
$ |
72 |
|
|
|
(1,207 |
) |
|
|
(2,331 |
) |
Income tax benefit (2) |
|
|
3,300 |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
7,751 |
|
|
$ |
8,707 |
|
|
$ |
72 |
|
|
$ |
(1,207 |
) |
|
$ |
(2,331 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share —
basic |
|
$ |
0.75 |
|
|
$ |
0.89 |
|
|
$ |
0.01 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share —
diluted |
|
$ |
0.66 |
|
|
$ |
0.77 |
|
|
$ |
0.01 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding — basic |
|
|
10,322 |
|
|
|
9,780 |
|
|
|
9,114 |
|
|
|
8,951 |
|
|
|
7,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding — diluted |
|
|
11,798 |
|
|
|
11,323 |
|
|
|
9,467 |
|
|
|
8,951 |
|
|
|
7,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of November 30, |
| |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
| |
|
(in thousands) |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
13,148 |
|
|
$ |
7,070 |
|
|
$ |
2,239 |
|
|
$ |
2,382 |
|
|
$ |
168 |
|
Working capital |
|
|
18,044 |
|
|
|
9,311 |
|
|
|
4,480 |
|
|
|
4,047 |
|
|
|
1,724 |
|
Total assets |
|
|
29,719 |
|
|
|
18,785 |
|
|
|
7,156 |
|
|
|
6,164 |
|
|
|
3,587 |
|
Total liabilities |
|
|
1,878 |
|
|
|
1,232 |
|
|
|
991 |
|
|
|
664 |
|
|
|
575 |
|
Accumulated deficit |
|
|
(37,131 |
) |
|
|
(44,882 |
) |
|
|
(53,589 |
) |
|
|
(53,661 |
) |
|
|
(52,445 |
) |
Total shareholders’ equity |
|
|
27,841 |
|
|
|
17,553 |
|
|
|
6,165 |
|
|
|
5,501 |
|
|
|
3,013 |
|
|
|
|
| (1) |
|
Includes an impairment expense of $929,093 in fiscal 2005 in connection with the write-off of
our intangible asset associated with the acquisition of the license for the CorRestore System. |
| |
| (2) |
|
Represents income recognized in fiscal 2005 and fiscal 2004 as a result of a reversal of a
portion of our income tax valuation allowance. |
37
ITEM 7. 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 this report 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 this report.
Overview
We develop, manufacture and market the INVOS System, a non-invasive patient monitoring system
that continuously measures changes in blood oxygen levels in the brain. We began commercializing
our current INVOS System, which we call the model 5100, internationally in the third quarter of
fiscal 1999 and in the United States in the fourth quarter of fiscal 2000. Unlike earlier models,
the model 5100 has the added capability of being able to monitor pediatric patients. From product
launch until the first quarter of fiscal 2005, we focused our marketing efforts primarily on adult
and pediatric cardiac surgeries and carotid artery surgeries. During the second quarter of fiscal
2004, results of both the first prospective, randomized clinical trial and a larger retrospective
review evaluating the INVOS System were presented, which we believe have contributed to the INVOS
System gaining further market penetration.
In the first quarter of fiscal 2005, we initiated selling and marketing efforts for the INVOS
System in the pediatric intensive care unit, or ICU. We plan to launch the product into the
neonatal ICU in late 2006, after completing development of a smaller SomaSensor. We are currently
sponsoring a clinical trial evaluating the use of the INVOS System on diabetic patients over age
50. Following completion of this trial and publication of the results, we intend to target the
sale of the INVOS System for use on diabetic patients undergoing major surgeries. We expect to
begin this marketing in 2008.
In November 2005, we received 510(k) clearance from the FDA to market our INVOS System to
monitor changes in somatic tissue blood oxygen saturation in regions of the body other than the
brain in patients with or at risk for restricted blood flow. Our next generation INVOS System
monitor, which we expect to launch in the first half of 2006, can display information from
four SomaSensors, which will allow for the simultaneous monitoring of changes in blood oxygen
saturation in the brain and, in patients with or at risk for restricted blood flow, in somatic
tissue.
We also develop and market the CorRestore System for use in cardiac repair and reconstruction.
In June 2000, we entered into a license agreement for the CorRestore System. In November 2001, we
received clearance from the FDA to market the CorRestore Patch in the United States, and in April
2003 we met the requirements under the European Medical Device Directive to use the CE Mark,
thereby allowing us to market the product in the European Economic Community. However, in
September 2004, the European Economic Community changed its regulations, limiting approval
authority for animal tissue implant products sold in Europe to some independent registration
agencies that do not include our registrar. Sales of CorRestore Systems represented two percent of
our fiscal 2005 net revenues. We expect that as sales of our INVOS System increase, the CorRestore
System will become an even less significant component of our business.
Net Revenues and Cost of Sales
We derive our revenues from sales of INVOS Systems and CorRestore Systems to hospitals in the
United States through our direct sales team and independent sales representative firms. Outside
the United States, we have
distribution agreements with independent distributors for the INVOS System, including Tyco
Healthcare in Europe,
38
Canada, the Middle East and Africa, and Edwards Lifesciences Ltd. in Japan.
Our cost of sales represent the cost of producing monitors and disposable SomaSensors. Revenues
from outside the United States contributed 16 percent to our fiscal 2005 net revenues. As a
percentage of revenues, the gross margins from our international sales are typically lower than
gross margins from our U.S. sales, reflecting the difference between the prices we receive from
distributors and from direct customers.
We recognize revenue when there is persuasive evidence of an arrangement with the customer,
the product has been delivered, the sales price is fixed or determinable, and collectibility is
reasonably assured. The product is considered delivered to the customer once we have shipped it,
as this is when title and risk of loss have transferred. Payment terms are generally net 30 days
for U.S. sales and net 60 days or longer for international sales.
Our INVOS System revenues are derived from the sale of monitors and our disposable
SomaSensors. We intend that disposables will form the basis of a recurring revenue stream. We
expect the percentage of revenue from disposables to increase over time as our installed base of
monitors grows.
We offer to our customers in the United States a no capital cost sales program whereby we ship
the INVOS System monitor to the customer at no charge. Under this program, we do not recognize any
revenue upon the shipment of the monitor. We recognize SomaSensor revenue when we receive purchase
orders and ship the product to the customer. At the time of shipment of the monitor, we capitalize
the monitor as an asset and depreciate this asset over five years, and this depreciation is
included in cost of goods sold.
Operating Expenses
Selling, general and administrative expenses generally consist of:
| |
• |
|
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, insurance, warranty and royalty expenses, investor relations,
depreciation and amortization, facilities expenses and other general operating expenses. |
We have increased the size of our direct sales team from 17 persons at the end of fiscal 2004
to 26 persons at the end of fiscal 2005. We expect to increase significantly the size of our U.S.
direct sales team in fiscal 2006 and are evaluating placing direct salespersons and clinical
specialists in Europe to support Tyco Healthcare. We also expect our clinical research expenses to
increase in fiscal 2006 as a result of sponsoring a clinical trial evaluating the use of the INVOS
System on diabetic patients over age 50. As a result, we expect selling, general and
administrative expenses to increase in fiscal 2006.
Research, development and engineering expenses consist of:
| |
• |
|
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. |
Deferred Tax Assets and Impairment Charges
As of November 30, 2004, we adjusted our deferred tax asset valuation allowance resulting in
the recognition of a deferred tax asset of $6,700,000 as a result of expected future tax benefits
related to our net operating loss carryforwards. Recognition of this deferred tax asset resulted
in a non-cash tax benefit on our statement of operations for fiscal 2004 of $6,700,000.
For the fiscal year ended November 30, 2005:
39
| |
• |
|
We recorded an impairment expense of $929,093 associated with the write-down of our
intangible asset associated with the acquisition of the license for the CorRestore System. |
| |
| |
• |
|
We further adjusted our deferred tax asset valuation allowance resulting in the
recognition of additional deferred tax assets due to expected future tax benefits related
to our net operating loss carryforwards. Recognition of this additional deferred tax asset
resulted in a non-cash tax benefit on our statement of operations for fiscal 2005 of
$3,300,000. |
Results of Operations
Fiscal Year Ended November 30, 2005 Compared to Fiscal Year Ended November 30, 2004
Net Revenues. Our net revenues increased $7,900,637, or 63 percent, from $12,608,615 in the
fiscal year ended November 30, 2004 to $20,509,252 in the fiscal year ended November 30, 2005. The
increase in net revenues is primarily attributable to:
| |
• |
|
an increase in U.S. sales of $6,688,546, or 64 percent, from $10,517,014 in fiscal 2004
to $17,205,560 in fiscal 2005. The increase in U.S. sales was primarily due to an increase
in sales of the disposable SomaSensor of $4,900,660, or 54 percent, as a result of a 38
percent increase in SomaSensor unit sales and a 12 percent increase in SomaSensor average
selling prices. This increase in our average selling prices is attributable to the
addition of new customers at our higher suggested retail prices and increased sales of our
pediatric SomaSensor which sells for a higher price than the adult SomaSensor. In
addition, sales of the INVOS System monitor in the United States increased $1,817,406, or
180 percent, primarily as a result of increased purchases by pediatric hospitals after the
launch of our products into the pediatric ICU in the first quarter of fiscal 2005; and |
| |
| |
• |
|
an increase in international sales of $1,212,090, or 58 percent, from $2,091,602 in
fiscal 2004 to $3,303,692 in fiscal 2005. The increase in international sales was
primarily due to increased purchases of the INVOS System monitor and disposable SomaSensor
by Tyco Healthcare in Europe, which was partially offset by decreased purchases by Edwards
Lifesciences in Japan. In fiscal 2005, international sales represented 16 percent of our
net revenues, compared to 17 percent of our net revenues in fiscal 2004. Purchases by Tyco
Healthcare accounted for 11 percent of net revenues in fiscal 2005. |
In the United States, we sold 153,197 SomaSensors in fiscal 2005, and internationally, we sold
59,890 SomaSensors in fiscal 2005. We placed 306 INVOS System monitors in the United States and
215 internationally in fiscal 2005, and our installed base of INVOS System monitors in the United
States was approximately 1,100, in 500 hospitals, as of November 30, 2005.
Sales of our products as a percentage of net revenues were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended November 30, |
| Product |
|
2005 |
|
2004 |
SomaSensors |
|
|
75 |
% |
|
|
78 |
% |
INVOS System Monitors |
|
|
23 |
% |
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
Total INVOS System |
|
|
98 |
% |
|
|
96 |
% |
CorRestore Systems |
|
|
2 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Effective December 1, 2005, we increased the suggested list price of the adult SomaSensor and
the pediatric SomaSensor in the United States to $140.00 and $155.00, respectively. Although these
prices may not apply to existing customers or to any existing sales quotations issued before the
price increase was effective, we expect that the average selling price of SomaSensors in the United
States will increase in fiscal 2006, primarily as a result of the addition of new customers at our
suggested retail prices and increased sales of our pediatric SomaSensor.
40
Gross Margin. Gross margin as a percentage of net revenues was 87 percent for the fiscal year
ended November 30, 2005 and 84 percent for the fiscal year ended November 30, 2004. The increase
in gross margin as a percentage of net revenues is primarily attributable to the increase in the
average selling price of SomaSensors in the United States and increased sales of the INVOS System
monitors to pediatric hospitals in the United States
Research, Development and Engineering Expenses. Our research, development and engineering
expenses increased $156,573, or 42 percent, from $369,106 in fiscal 2004 to $525,679 in fiscal
2005. The increase is primarily attributable to development costs associated with our next
generation INVOS System monitor, scheduled to be launched in the first half of 2006. We
expect our research, development and engineering expenses to increase in fiscal 2006, primarily as
a result of our hiring additional research and development personnel.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
increased $5,003,652, or 61 percent, from $8,237,401 for the fiscal year ended November 30, 2004 to
$13,241,053 for the fiscal year ended November 30, 2005, primarily due to a 62 percent increase in
our sales and marketing expenses during fiscal 2005 because of our increased sales personnel and
our increased sales and marketing efforts. The increase in selling, general and administrative
expense is primarily attributable to:
| |
• |
|
a $1,031,964 increase in salaries, wages and related expenses, primarily as a result of
an increase in the number of employees, principally in sales and marketing (from an average
of 32 employees for the fiscal year ended November 30, 2004 to an average of 42 employees
for the fiscal year ended November 30, 2005); |
| |
| |
• |
|
an impairment expense of $929,093 as a result of the write-down of our intangible asset
associated with the acquisition of the license for the CorRestore System; |
| |
| |
• |
|
an $832,012 increase in employee sales commissions as a result of increased sales and
increased sales personnel during fiscal 2005; |
| |
| |
• |
|
an $811,524 increase in commissions paid to our independent sales representative firms
as a result of increased sales; |
| |
| |
• |
|
a $661,785 increase in travel and selling-related expenses as a result of our increased
sales personnel and increased sales and marketing activities; |
| |
| |
• |
|
a $377,153 increase in audit-related expenses, primarily as a result of costs associated
with our first internal control assessment under Section 404 of the Sarbanes-Oxley Act and
related regulations; |
| |
| |
• |
|
a $365,770 increase in accrued incentive compensation expense due to our fiscal 2005
financial performance, primarily increased sales and net income, in accordance with the
2005 Incentive Compensation Plan; and |
| |
| |
• |
|
a $105,120 increase in employer 401(k) matching contributions as a result of increased
personnel and increased salaries and wages as described above. |
During fiscal 2004 we incurred $95,998 of expenses as a result of the termination of some of our
independent sales representative firms.
We expect our selling, general and administrative expenses to increase in fiscal 2006,
primarily as a result of our hiring additional direct sales personnel in fiscal 2005 and 2006,
increased sales commissions payable to our independent sales representative firms, increased
clinical research expense, and increased sales and marketing expenses.
Income Tax Benefit. As of November 30, 2005, we further adjusted our deferred tax asset
valuation allowance resulting in the recognition of additional deferred tax assets as a result of
expected future tax benefits related to our net operating loss carryforwards. Recognition of this
additional deferred tax asset resulted in a non-cash tax benefit on our statement of operations for
fiscal 2005 of $3,300,000, and increased our net income for fiscal 2005 to $7,751,087, or $0.66 per
diluted common share. As 2006 progresses and we assess our plans for future years, we will
continue to review the appropriateness of adjusting our deferred tax asset valuation allowance and
recognizing additional deferred tax assets.
41
Fiscal Year Ended November 30, 2004 Compared to Fiscal Year Ended November 30, 2003
Net Revenues. Our net revenues increased $3,247,722, or 35 percent, from $9,360,893 in the
fiscal year ended November 30, 2003 to $12,608,615 in the fiscal year ended November 30, 2004. The
increase in net revenues is primarily attributable to:
| |
• |
|
an increase in U.S. sales of $3,100,634, or 42 percent, from $7,416,380 in fiscal 2003
to $10,517,014 in fiscal 2004. The increase in U.S. sales was primarily due to an increase
in sales of the disposable SomaSensor of $2,967,150, or 49 percent, as a result of a 22
percent increase in SomaSensor unit sales and a 22 percent increase in SomaSensor average
selling prices. This increase in our average selling prices is attributable to the
addition of new customers at our higher suggested retail prices, which were effective
September 1, 2003, increased sales of our small adult SomaSensor that was launched in the
third quarter of fiscal 2003 and sells for a premium price compared to the adult
SomaSensor, increased sales of our pediatric SomaSensor which also sells for a higher price
than the adult SomaSensor, and the upgrade of certain customers to our most recent model
INVOS System monitor in exchange for the customer agreeing to pay a higher price for the
disposable SomaSensor. In addition, sales of the INVOS System monitor in the United States
increased $332,779, or 49 percent, as a result of increased purchases by pediatric
hospitals. These increases were partially offset by a decrease in CorRestore System
revenues of $199,295, or 29 percent; and |
| |
| |
• |
|
an increase in international sales of $147,089, or 8 percent, from $1,944,513 in fiscal
2003 to $2,091,602 in fiscal 2004. The increase in international sales was primarily due
to increased purchases of the INVOS System monitor and disposable SomaSensor by Edwards
Lifesciences in Japan, which was partially offset by decreased purchases by Tyco Healthcare
in Europe. In fiscal 2004, international sales represented 17 percent of our net revenues,
compared to 21 percent of our net revenues in fiscal 2003. Purchases by Tyco Healthcare
accounted for 12 percent of net revenues in fiscal 2003. |
In
the United States, we sold 111,406 SomaSensors in fiscal 2004. We placed 193 INVOS System
monitors in the United States and 133 internationally in fiscal 2004, and our installed base of
INVOS System monitors in the United States was approximately 800, in 380 hospitals, as of November
30, 2004.
Sales of our products as a percentage of net revenues were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended November 30, |
| Product |
|
2004 |
|
2003 |
SomaSensors |
|
|
78 |
% |
|
|
71 |
% |
|
|
|
|
|
|
|
|
|
INVOS System Monitors |
|
|
18 |
% |
|
|
21 |
% |
|
|
|
|
|
|
|
|
|
Total INVOS System |
|
|
96 |
% |
|
|
92 |
% |
|
|
|
|
|
|
|
|
|
CorRestore Systems |
|
|
4 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Gross Margin. Gross margin as a percentage of net revenues was 84 percent for the fiscal year
ended November 30, 2004 and 77 percent for the fiscal year ended November 30, 2003. The increase
in gross margin as a percentage of net revenues is primarily attributable to:
| |
• |
|
a change in the sales mix with increased sales of the disposable SomaSensor, which has a
higher gross margin percentage than the INVOS System monitor or CorRestore System; |
| |
| |
• |
|
the increase in the average selling price of SomaSensors; |
| |
| |
• |
|
a significant reduction in the cost of our SomaSensor in May 2004 as a result of
changes in our manufacturing process; and |
| |
| |
• |
|
the change in sales mix with increased sales in the United States, which have higher
gross margins than our international sales to distributors. |
Research, Development and Engineering Expenses. Our research, development and engineering
expenses decreased $43,847, or 11 percent, from $412,953 in fiscal 2003 to $369,106 in fiscal 2004.
The decrease
42
is primarily attributable to $46,891 in decreased costs associated with the development of the
CorRestore System and $24,516 in decreased costs associated with the development of the INVOS
System monitor, partially offset by increased costs associated with the development of the
disposable SomaSensor and increased engineering salaries.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
increased $1,478,674, or 22 percent, from $6,758,637 for the fiscal year ended November 30, 2003 to
$8,237,401 for the fiscal year ended November 30, 2004. The increase in selling, general and
administrative expense is primarily attributable to:
| |
• |
|
a $398,329 increase in salaries, wages and related expenses, primarily as a result of an
increase in the number of employees, principally in sales and marketing (from an average of
28 employees for the fiscal year ended November 30, 2003 to an average of 32 employees for
the fiscal year ended November 30, 2004); |
| |
| |
• |
|
a $393,196 increase in employee sales commissions as a result of increased sales and
increased sales headcount during fiscal 2004; |
| |
| |
• |
|
a $352,948 increase in commissions paid to our independent sales representative firms as
a result of increased sales; |
| |
| |
• |
|
a $226,588 increase in accrued incentive compensation expense due to our fiscal 2004
financial performance, primarily increased sales and net income, in accordance with the
2004 Incentive Compensation Plan; |
| |
| |
• |
|
a $117,416 increase in travel and selling-related expenses as a result of our increased
sales headcount and increased sales and marketing activities; |
| |
| |
• |
|
$96,254 in costs associated with a 401(k) matching contribution program that we
implemented in fiscal 2004; and |
| |
| |
• |
|
$95,998 in costs associated with the termination of some of our independent sales
representative firms in the second quarter of fiscal 2004. |
These increases were partially offset by a $169,522 decrease in customer education expenses for the
CorRestore System.
Income Tax Benefit. As of November 30, 2004, we adjusted our deferred tax asset valuation
allowance resulting in the recognition of a deferred tax asset of $6,700,000 as a result of
expected future tax benefits related to our net operating loss carryforwards. Recognition of this
deferred tax asset resulted in a non-cash tax benefit on our statement of operations for fiscal
2004, and increased our net income for fiscal 2004 to $8,706,576, or $0.77 per diluted common
share.
Effects of Inflation
We do not believe that inflation has had a significant impact on our financial position or
results of operations in the past three years.
Liquidity and Capital Resources
General
Our principal sources of operating funds have been the proceeds of equity investments from
sales of our common shares and, in fiscal years 2004 and 2005, cash provided by operating
activities. See Statements of Shareholders’ Equity of our financial statements included elsewhere
in this prospectus.
As of November 30, 2005, we did not have any outstanding or available debt financing
arrangements, we had working capital of $18.0 million and our primary source of liquidity was $13.1
million of cash and cash equivalents. Pending their ultimate use, we currently invest our
available funds in bank savings accounts.
We believe that cash and cash equivalents on hand at November 30, 2005 will be adequate to
satisfy our operating and capital requirements for more than the next twelve months.
43
Cash Flows From Operating Activities
Net
cash provided by (used in) operations during fiscal 2005, 2004 and
2003 was $3,687,653, $2,233,331 and
($630,577), respectively. In fiscal 2005, cash was provided primarily by:
| |
• |
|
$5,764,166 of net income before income taxes, non-cash intangible impairment expense,
and non –cash depreciation and amortization expense; |
| |
| |
• |
|
a $462,485 increase in accrued liabilities, primarily as a result of the increased
accrued incentive compensation and accrued sales commissions as a result of our fiscal 2005
financial performance, partially offset by reduced accrued 401(k) matching contributions as
of the end of the fiscal year and decreased accrued professional fees; and |
| |
| |
• |
|
a $184,000 increase in accounts payable, primarily as a result of increased inventory
and operating expenses, partially offset by more timely payments made to vendors. |
Cash provided by operations in fiscal 2005 was partially offset by:
| |
• |
|
a $1,509,196 increase in accounts receivable primarily as a result of higher fourth
quarter sales in fiscal 2005 than in the fourth quarter of fiscal 2004, and the timing of
more of the sales in fiscal 2005 towards the end of the fourth quarter; |
| |
| |
• |
|
a $859,312 increase in inventories, primarily due to the acquisition of SomaSensors and
components associated with our INVOS System monitor due to anticipated sales; inventories
on our balance sheet increased less 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; and |
| |
| |
• |
|
a $365,410 increase in prepaid expenses, primarily due to the timing of the renewal of
our product liability and general liability insurance policies, and increased prepaid
expenses for trade shows and marketing programs. |
| |
| |
|
|
We expect our working capital requirements to increase as sales increase. |
The increase in inventories described above is greater than shown on our balance sheet because
it includes INVOS System monitors that we capitalized because they are being used as demonstration
units and no capital cost sales equipment. We capitalized approximately $484,121 of costs from
inventory for INVOS System monitors being used as demonstration units and no capital cost sales
equipment at customers during fiscal 2005, compared to $565,962 in fiscal 2004. As of November 30,
2005, we have capitalized $1,916,655 in costs for INVOS System monitors being used as demonstration
and no capital cost sales equipment, and these assets have a net book value of $1,096,730. We
depreciate these assets over five years.
Cash Flows From Investing Activities
Net cash used in investing activities in fiscal 2005, 2004 and 2003 was $134,637, $84,003 and
$50,665, respectively. In fiscal 2005, these expenditures were primarily for computer equipment
for our new employees, leasehold improvements and furniture and fixtures associated with leasehold
improvements to our facilities.
Cash Flows From Financing Activities
Net cash provided by financing activities in fiscal 2005, 2004 and 2003 was $2,525,679,
$2,681,022 and $538,626, respectively. During fiscal 2005, we issued 561,839 common shares as a
result of stock option exercises, for proceeds of $2,525,679. During fiscal 2004, we issued
321,276 common shares as a result of stock option exercises by employees, directors and former
employees, for proceeds of $1,541,022. In April 2004, CorRestore LLC exercised its warrant to
purchase 380,000 of our newly-issued common shares, at $3.00 per share, for proceeds of $1,140,000.
During fiscal 2003, we issued 148,371 common shares as a result of stock option exercises by
employees, directors and former employees, for proceeds of $538,626.
44
Contractual Obligations
The following information is provided as of November 30, 2005 with respect to our known
contractual obligations specified in the following table, aggregated by type of contractual
obligation:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments due by period |
| |
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
More |
| |
|
|
|
|
|
than 1 |
|
1-3 |
|
3-5 |
|
than 5 |
| Contractual Obligations |
|
Total |
|
year |
|
years |
|
years |
|
years |
Long-term debt obligations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Capital lease obligations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Operating lease obligations |
|
$ |
590,200 |
|
|
$ |
140,400 |
|
|
$ |
288,700 |
|
|
$ |
161,100 |
|
|
|
— |
|
Purchase obligations |
|
|
2,010,000 |
|
|
|
2,010,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other long-term liabilities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Purchase obligations consist primarily of purchase orders executed for inventory components.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or financing activities.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (revised), Share Based Payment. This Statement revises Statement No.
123, “Accounting for Stock-Based Compensation,” and requires that compensation costs related to
share-based payment transactions, including stock options, be recognized in the financial
statements. In November 2005, we approved the acceleration of vesting of all unvested stock
options as of November 30, 2005. The primary purpose of this accelerated vesting was to eliminate
compensation expense we would recognize in our results of operations upon the adoption of SFAS
123R, which is effective for our fiscal quarter beginning December 1, 2005. After the effects of
the accelerated vesting, the initial adoption of SFAS 123R is expected to be immaterial. However,
the issuance of additional stock compensation under the 2005 Stock Incentive Plan in future years
will have an additional impact on our financial statements.
Critical Accounting Policies
We believe our most significant accounting policies relate to the recording of an intangible
asset for license acquisition costs related to our acquisition of exclusive, worldwide,
royalty-bearing licenses to specified rights relating to the CorRestore System and related products
and accessories, our accounting treatment of stock options issued to employees, our accounting
treatment for income taxes, and our revenue recognition associated with our no capital cost sales
program.
CorRestore Intangible Asset
In fiscal years 2000, 2001 and 2003, we recorded an intangible asset related to our
acquisition of exclusive, worldwide, royalty-bearing licenses to specified rights relating to the
CorRestore System and related products and accessories. License acquisition costs include our
estimate of the fair value of ten-year vested stock options to purchase common shares granted to
one of our directors in connection with negotiating and assisting us in completing the transaction,
and our estimate of the fair value of the vested portion of five-year warrants to purchase common
shares issued in the transaction. Consistent with the treatment of the vested warrants to purchase
common shares, we intend to include in license acquisition costs, and additional paid in capital,
the fair value of the vested portion of the unvested warrants to purchase common shares, estimated
using the Black-Scholes valuation model, when and if they become vested. However, we do not expect
any of these remaining warrants to become vested before their November 21, 2006 expiration date,
based on sales of CorRestore products to date.
45
We estimated the value of the stock options to purchase common shares and the vested warrants
to purchase common shares using the Black-Scholes valuation model. The Black-Scholes valuation
model requires the following assumptions: expected life period of the security, expected
volatility of our stock price during the period, risk-free interest rate, and dividend yield.
Given the assumptions inherent in the Black-Scholes valuation model, it would have been possible to
calculate a different value for our intangible asset by changing one or more of the valuation model
variables or by using a different valuation model. However, we believe that the model is
appropriate, that the judgments and assumptions that we have made at the time of valuation were
also appropriate, and that the reported results would not be materially different had one or more
of the variables been different or had a different valuation model been used.
We have adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other
Intangible Assets.” This statement establishes accounting and reporting standards for goodwill and
other intangible assets. The effect of adopting this Statement has been to discontinue amortizing
our license acquisition costs related to our acquisition of exclusive, worldwide, royalty-bearing
licenses to specified rights relating to the CorRestore System and related products and accessories
described above because we believe these licenses have an indefinite life. Therefore, we recorded
no amortization expense related to these license acquisition costs in fiscal 2005, 2004 or 2003.
It is possible to determine a different life for these licenses, and if they had a definite life,
we would amortize the intangible asset over the remaining useful life. However, we believe it is
appropriate to use an indefinite life for these licenses. Indefinite lived intangible assets are
reviewed annually for impairment at the end of our fiscal year, and whenever events or changes in
circumstances indicate that the carrying value of the asset may not be recovered. We evaluate
impairment by comparing the fair value of the intangible asset, determined using a cash flow
method, with its carrying value.
In November 2005, we wrote off the remaining CorRestore license acquisition cost intangible
asset, and recorded an impairment expense of $929,093. We wrote this off based on the cash flow
impairment analysis that was performed, the declining sales of CorRestore products and the
uncertainty regarding future prospective, randomized clinical data. Management does not expect net
positive future cash flow from the CorRestore product for the foreseeable future.
Employee Stock Options
In December 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (revised), Share Based Payment. This Statement requires that
compensation costs related to share-based payment transactions, including stock options, stock
appreciation rights and restricted stock be recognized in the financial statements. This Statement
will be effective for our fiscal quarter beginning December 1, 2005.
We currently account for stock-based compensation of employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations. Accordingly, compensation costs for stock options granted
to employees are measured as the excess, if any, of the market price of our stock at the date of
the grant over the amount an employee must pay to acquire the stock. No compensation expense has
been charged against income for fiscal 2005, 2004 and 2003 for stock option grants to employees
because our stock option grants are priced at the market value as of the date of grant.
In November 2005, we approved the acceleration of vesting of all unvested stock options as of
November 30, 2005. The primary purpose of this accelerated vesting was to eliminate compensation
expense we would recognize in our results of operations upon the adoption of SFAS 123R, which is
effective for our fiscal quarter beginning December 1, 2005. After the effects of the accelerated
vesting, the initial adoption of SFAS 123R is expected to be immaterial. The issuance of
additional stock compensation under the 2005 Stock Incentive Plan in future years will have an
additional impact on our financial statements.
Stock-based compensation of consultants and advisors is determined based on the fair value of
the options or warrants on the grant date pursuant to the methodology of SFAS No. 123, estimated
using the Black-Scholes model. The resulting amount is recognized as compensation expense and an
increase in additional paid-in capital over the vesting period of the options or warrants. As a
result, we recorded $11,221 of compensation expense, and
46
an equal increase in additional paid in capital, for stock options vesting in favor of
non-employees in fiscal 2005, and $8,471 of compensation expense in fiscal 2003.
During fiscal 2005, we granted 162,146 stock options to our employees and directors, in fiscal
2004 we granted 53,500 stock options to our employees and directors, and in fiscal 2003 we granted
471,000 stock options to our employees and directors.
Had we recognized compensation expense for our stock options that vested in fiscal 2005 using
the fair value method of accounting based on the fair value of the options on the grant date using
the Black-Scholes valuation model, we would have recorded $1,804,000 in compensation expense and
realized pro forma net income of $5,958,308, or $0.51 per diluted common share. For fiscal 2004,
had we recognized compensation expense for our stock options that vested in fiscal 2004, using the
fair value method of accounting based on the fair value of the options on the grant date using the
Black-Scholes valuation model, we would have recorded $796,000 in compensation expense and realized
pro forma net income of $7,911,576, or $0.70 per diluted common share. For fiscal 2003, had we
recognized compensation expense for stock options that vested in fiscal 2003, using the fair value
method of accounting based on the fair value of the options on the grant date using the
Black-Scholes valuation model, we would have recorded $962,000 in compensation expense and incurred
a pro forma net loss of $880,943, or $0.09 per diluted common share.
Income Taxes
We have performed the required assessment of positive and negative evidence regarding
realization of our deferred tax assets in accordance with SFAS No. 109, including our past
operating results, the existence of cumulative losses over our history up to the most recent three
fiscal years, and our forecast for future net income. Our assessment of our deferred tax assets,
and the reversal of part of our valuation allowance, included assuming that our net revenues and
pre-tax income will grow in future years consistent with the growth guidance given for fiscal 2006
and making allowance for the uncertainties surrounding, among other things, our future rate of
growth in net revenues, the rate of adoption of our products in the marketplace, and the potential
for competition to enter the marketplace. In reversing a portion of our valuation allowance, we
have concluded that it is more likely than not that such assets will be realized.
During fiscal 2004, we adjusted our deferred tax asset valuation allowance resulting in the
recognition of a deferred tax asset of $6,700,000 related to the expected future benefits of our
net operating loss carryforwards, in accordance with Statement of Financial Accounting Standards
No. 109, “Accounting for Income Taxes.” During fiscal 2005, we further adjusted our deferred tax
asset valuation allowance resulting in the recognition of an additional net deferred tax asset of
$3,300,000.
The effect of recognizing this asset on our balance sheet, and associated tax benefit on our
statement of operations, is to increase our net income for fiscal 2005 to $7,751,087, or $0.66 per
diluted common share, and to increase our net income for fiscal 2004 to $8,706,576, or $0.77 per
diluted common share. Given the assumptions inherent in our financial plans, it is possible to
calculate a different value for our deferred tax asset by changing one or more of the variables in
our assessment. However, we believe that our evaluation of our financial plans was reasonable, and
that the judgments and assumptions that we made at the time of developing the plan were
appropriate.
No Capital Cost Sales Revenue Recognition
We offer to our customers in the United States a no capital cost sales program whereby we ship
the INVOS System monitor to the customer at no charge. Under this program, we do not recognize any
revenue upon the shipment of the INVOS System monitor. We recognize SomaSensor revenue when we
receive purchase orders and ship the product to the customer. At the time of shipment of the
monitor, we capitalize the INVOS System monitor as an asset and depreciate this asset over five
years. We believe this is consistent with our stated revenue recognition policy, which is
compliant with Staff Accounting Bulletin No. 104 and Emerging Issues Task Force No. 00-21, “Revenue
Arrangements with Multiple Deliverables.”
47
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Somanetics Corporation is responsible for establishing and maintaining
adequate internal control over financial reporting. Somanetics Corporation’s internal control
system was designed to provide reasonable assurance to the company’s management and board of
directors regarding the preparation and fair presentation of published financial statements. All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Somanetics Corporation management assessed the effectiveness of the company’s internal control
over financial reporting as of November 30, 2005. In making this assessment, it used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on our assessment, we believe that, as of November
30, 2005, the company’s internal control over financial reporting is effective based on those
criteria.
Somanetics Corporation’s independent auditors have audited the financial statement’s prepared
by the company. Their report on the financial statements appears on the next page. Management’s
assessment of the company’s internal control over financial reporting has been audited by our
independent auditors, as stated in their report included in Item 9A. “Controls and Procedures.”
January 23, 2006
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Somanetics Corporation
Troy, Michigan
We have audited the accompanying balance sheets of Somanetics Corporation (the “Company”) as of
November 30, 2005 and 2004, and the related statements of operations, shareholders’ equity, and
cash flows for each of the three years in the period ended November 30, 2005. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial
position of Somanetics Corporation at November 30, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended November 30, 2005,
in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Company’s internal control over financial reporting
as of November 30, 2005, based on the criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
January 26, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness
of the Company’s internal control over financial reporting and an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
January 26, 2006
50
SOMANETICS CORPORATION
BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
| |
|
November 30, |
|
| |
|
2005 |
|
|
2004 |
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents (Note 2) |
|
$ |
13,148,237 |
|
|
$ |
7,069,542 |
|
Accounts receivable |
|
|
3,531,740 |
|
|
|
2,022,544 |
|
Inventory (Note 2) |
|
|
1,058,101 |
|
|
|
682,910 |
|
Prepaid expenses |
|
|
623,303 |
|
|
|
257,893 |
|
Deferred tax
asset — current (Note 5) |
|
|
1,561,322 |
|
|
|
510,000 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
19,922,703 |
|
|
|
10,542,889 |
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT: (Note 2) |
|
|
|
|
|
|
|
|
Demonstration and no capital cost sales equipment at customers |
|
|
1,916,655 |
|
|
|
1,628,431 |
|
Machinery and equipment |
|
|
768,992 |
|
|
|
704,581 |
|
Furniture and fixtures |
|
|
289,397 |
|
|
|
255,044 |
|
Leasehold improvements |
|
|
187,135 |
|
|
|
171,882 |
|
|
|
|
|
|
|
|
Total |
|
|
3,162,179 |
|
|
|
2,759,938 |
|
Less accumulated depreciation and amortization |
|
|
(1,836,438 |
) |
|
|
(1,675,881 |
) |
|
|
|
|
|
|
|
Net property and equipment |
|
|
1,325,741 |
|
|
|
1,084,057 |
|
|
|
|
|
|
|
|
OTHER ASSETS: |
|
|
|
|
|
|
|
|
Deferred tax asset – non-current (Note 5) |
|
|
8,438,678 |
|
|
|
6,190,000 |
|
Intangible assets, net (Note 2) |
|
|
16,921 |
|
|
|
952,926 |
|
Other |
|
|
15,000 |
|
|
|
15,000 |
|
|
|
|
|
|
|
|
Total other assets |
|
|
8,470,599 |
|
|
|
7,157,926 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
29,719,043 |
|
|
$ |
18,784,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
712,796 |
|
|
$ |
529,097 |
|
Accrued liabilities (Notes 4 and 6) |
|
|
1,165,594 |
|
|
|
703,109 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,878,390 |
|
|
|
1,232,206 |
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 6) |
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY: (Note 3) |
|
|
|
|
|
|
|
|
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, 10,715,885 shares at November 30, 2005,
and 10,137,782 shares at November 30, 2004 |
|
|
107,159 |
|
|
|
101,378 |
|
Additional paid-in capital |
|
|
64,864,554 |
|
|
|
62,333,435 |
|
Accumulated deficit |
|
|
(37,131,060 |
) |
|
|
(44,882,147 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
27,840,653 |
|
|
|
17,552,666 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
$ |
29,719,043 |
|
|
$ |
18,784,872 |
|
|
|
|
|
|
|
|
See notes to financial statements
51
SOMANETICS CORPORATION
STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended November 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
NET REVENUES (Notes 2 and 9) |
|
$ |
20,509,252 |
|
|
$ |
12,608,615 |
|
|
$ |
9,360,893 |
|
COST OF SALES |
|
|
2,601,488 |
|
|
|
2,050,253 |
|
|
|
2,139,827 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
17,907,764 |
|
|
|
10,558,362 |
|
|
|
7,221,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Research, development and engineering
(Note 2) |
|
|
525,679 |
|
|
|
369,106 |
|
|
|
412,953 |
|
Selling, general and administrative (Note 2) |
|
|
13,241,053 |
|
|
|
8,237,401 |
|
|
|
6,758,637 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
13,766,732 |
|
|
|
8,606,507 |
|
|
|
7,171,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
4,141,032 |
|
|
|
1,951,855 |
|
|
|
49,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
310,055 |
|
|
|
54,721 |
|
|
|
23,110 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
310,055 |
|
|
|
54,721 |
|
|
|
23,110 |
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES |
|
$ |
4,451,087 |
|
|
$ |
2,006,576 |
|
|
$ |
72,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX BENEFIT |
|
|
3,300,000 |
|
|
|
6,700,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
7,751,087 |
|
|
$ |
8,706,576 |
|
|
$ |
72,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER COMMON
SHARE — BASIC (Note 2) |
|
$ |
.75 |
|
|
$ |
.89 |
|
|
$ |
.01 |
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER COMMON
SHARE — DILUTED (Note 2) |
|
$ |
.66 |
|
|
$ |
.77 |
|
|
$ |
.01 |
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING —
BASIC (Note 2) |
|
|
10,322,226 |
|
|
|
9,780,104 |
|
|
|
9,113,854 |
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING —
DILUTED (Note 2) |
|
|
11,797,799 |
|
|
|
11,323,272 |
|
|
|
9,466,838 |
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements
52
SOMANETICS CORPORATION
STATEMENTS OF SHAREHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Additional |
|
|
|
|
|
|
Total |
|
|
|
|
| |
|
Share |
|
|
Paid-In |
|
|
Accumulated |
|
|
Shareholders’ |
|
|
Comprehensive |
|
| |
|
Value |
|
|
Capital |
|
|
Deficit |
|
|
Equity |
|
|
Income (Loss) |
|
Balance at December 1, 2002 |
|
$ |
90,779 |
|
|
$ |
59,071,122 |
|
|
$ |
(53,661,309 |
) |
|
$ |
5,500,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For cash, exercise of stock options |
|
|
1,484 |
|
|
|
537,142 |
|
|
|
|
|
|
|
538,626 |
|
|
|
|
|
Warrants issued to acquire license |
|
|
|
|
|
|
44,793 |
|
|
|
|
|
|
|
44,793 |
|
|
|
|
|
Stock options issued to non-employees |
|
|
|
|
|
|
8,471 |
|
|
|
|
|
|
|
8,471 |
|
|
|
|
|
Cashless exercise of warrants |
|
|
724 |
|
|
|
(724 |
) |
|
|
|
|
|
|
— |
|
|
|
|
|
Net income and comprehensive income |
|
|
|
|
|
|
|
|
|
|
72,586 |
|
|
|
72,586 |
|
|
$ |
72,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2003 |
|
$ |
92,987 |
|
|
$ |
59,660,804 |
|
|
$ |
(53,588,723 |
) |
|
$ |
6,165,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For cash, exercise of stock options |
|
|
3,213 |
|
|
|
1,537,809 |
|
|
|
|
|
|
|
1,541,022 |
|
|
|
|
|
For cash, exercise of warrants |
|
|
3,800 |
|
|
|
1,136,200 |
|
|
|
|
|
|
|
1,140,000 |
|
|
|
|
|
Cashless exercise of warrants |
|
|
1,378 |
|
|
|
(1,378 |
) |
|
|
|
|
|
|
— |
|
|
|
|
|
Net income and comprehensive income |
|
|
|
|
|
|
|
|
|
|
8,706,576 |
|
|
|
8,706,576 |
|
|
$ |
8,706,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2004 |
|
$ |
101,378 |
|
|
$ |
62,333,435 |
|
|
$ |
(44,882,147 |
) |
|
$ |
17,552,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For cash, exercise of stock options |
|
|
5,618 |
|
|
|
2,520,061 |
|
|
|
|
|
|
|
2,525,679 |
|
|
|
|
|
Cashless exercise of warrants |
|
|
163 |
|
|
|
(163 |
) |
|
|
|
|
|
|
— |
|
|
|
|
|
Consultant stock option expense |
|
|
|
|
|
|
11,221 |
|
|
|
|
|
|
|
11,221 |
|
|
|
|
|
Net income and comprehensive income |
|
|
|
|
|
|
|
|
|
|
7,751,087 |
|
|
|
7,751,087 |
|
|
$ |
7,751,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2005 |
|
$ |
107,159 |
|
|
$ |
64,864,554 |
|
|
$ |
(37,131,060 |
) |
|
$ |
27,840,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements
53
SOMANETICS CORPORATION
STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended November 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,751,087 |
|
|
$ |
8,706,576 |
|
|
$ |
72,586 |
|
Adjustments to reconcile net income to net
cash provided by (used in) operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
(3,300,000 |
) |
|
|
(6,700,000 |
) |
|
|
— |
|
Intangible asset impairment |
|
|
929,093 |
|
|
|
— |
|
|
|
— |
|
Depreciation and amortization |
|
|
383,986 |
|
|
|
282,558 |
|
|
|
235,537 |
|
Compensation expense for consultant stock options |
|
|
11,221 |
|
|
|
— |
|
|
|
8,471 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable (increase) |
|
|
(1,509,196 |
) |
|
|
(3,929 |
) |
|
|
(790,830 |
) |
Inventory (increase) |
|
|
(859,312 |
) |
|
|
(158,611 |
) |
|
|
(456,579 |
) |
Prepaid expenses (increase) |
|
|
(365,410 |
) |
|
|
(134,690 |
) |
|
|
(26,895 |
) |
Accounts payable increase (decrease) |
|
|
183,699 |
|
|
|
(112,135 |
) |
|
|
170,352 |
|
Accrued liabilities increase |
|
|
462,485 |
|
|
|
353,562 |
|
|
|
156,781 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
3,687,653 |
|
|
|
2,233,331 |
|
|
|
(630,577 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment (net) |
|
|
(134,637 |
) |
|
|
(84,003 |
) |
|
|
(50,665 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(134,637 |
) |
|
|
(84,003 |
) |
|
|
(50,665 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Common Shares |
|
|
2,525,679 |
|
|
|
2,681,022 |
|
|
|
538,626 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,525,679 |
|
|
|
2,681,022 |
|
|
|
538,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS |
|
|
6,078,695 |
|
|
|
4,830,350 |
|
|
|
(142,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD |
|
|
7,069,542 |
|
|
|
2,239,192 |
|
|
|
2,381,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS,
END OF PERIOD |
|
$ |
13,148,237 |
|
|
$ |
7,069,542 |
|
|
$ |
2,239,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Non cash investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Demonstration and no capital cost sales equipment capitalized
from inventory (Note 2) |
|
$ |
484,121 |
|
|
$ |
565,962 |
|
|
$ |
370,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants and stock options in connection
with license acquisition (Note 2) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
44,793 |
|
See notes to financial statements
54
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Organization and Operations
We are a Michigan corporation that was formed in 1982. We develop, manufacture and market the
INVOS® System, a non-invasive patient monitoring system that continuously measures
changes in blood oxygen levels. The principal markets for our products are the United States,
Europe, and Japan. The INVOS System, based on our In Vivo Optical Spectroscopy, or INVOS,
technology, is used to measure changes in regional blood oxygen saturation in the brain and in
somatic, or skeletal muscle, tissue in regions of the body other than the brain. The INVOS System
measurement is made by transmitting low-intensity visible and near-infrared light through a portion
of the body with sensors, called SomaSensors, and detecting the manner in which the exposed
substance interacts with light at specific wavelengths.
In June 1996 we received clearance from the FDA to market our model 3100A INVOS Cerebral
Oximeter in the United States, and in October 1997 we received clearance from the FDA to market
enhancements to our INVOS Cerebral Oximeter in the United States. In September 2000 we received
FDA clearance to market our latest model INVOS Cerebral Oximeter in the United States, which has
the added capability of being able to monitor pediatric patients. In November 2005, we received
FDA clearance to market the INVOS System to monitor changes in blood oxygen saturation in skeletal
muscle tissue in regions of the body other than the brain in patients with or at risk for
restricted blood flow.
We also develop and market the CorRestore® System, including the CorRestore Patch,
for use in cardiac repair and reconstruction, including heart surgeries called surgical ventricular
restoration, or SVR. In 2000, we entered into a license agreement with the inventors of the
CorRestore System and their company, CorRestore LLC, granting us exclusive, worldwide,
royalty-bearing licenses to specified rights relating to the CorRestore System and related products
and accessories for SVR (Note 2).
In November 2001, we received clearance from the FDA to market the CorRestore Patch in the
United States. In April 2003, we met the requirements to use the CE Mark for the CorRestore Patch,
which allows us to market the CorRestore System in the European Economic Community. However, in
September 2004, the European Economic Community changed its regulations, limiting approval
authority for animal tissue implant products sold in Europe to some independent registration
agencies that do not include our registrar. Refer to Note 2 for a discussion of the impairment of
the CorRestore license acquisition cost intangible asset.
2. Summary of Significant Accounting Policies
Cash Equivalents consist of short-term, interest-bearing investments maturing within three
months of our acquisition of them.
Inventory is stated at the lower of cost or market on a first-in, first-out (FIFO) basis.
Inventory consists of:
| |
|
|
|
|
|
|
|
|
| |
|
November 30, |
|
| |
|
2005 |
|
|
2004 |
|
Purchased components |
|
$ |
652,876 |
|
|
$ |
323,053 |
|
Finished goods |
|
|
352,560 |
|
|
|
358,815 |
|
Work in process |
|
|
52,665 |
|
|
|
1,042 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,058,101 |
|
|
$ |
682,910 |
|
|
|
|
|
|
|
|
Property and Equipment are stated at cost. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the assets, which range from two to
five years. Depreciation expense was $377,074, $275,646 and $228,625 for the fiscal years ended
November 30, 2005, November 30, 2004 and November 30, 2003, respectively. We offer to our United
States customers a no capital cost sales program whereby we ship the INVOS System monitor to the
customer at no charge. The INVOS System monitors that are shipped to our customers are classified
as no capital cost sales equipment and are depreciated over five years. As of November
55
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS — (Continued)
30, 2005, we have capitalized $1,916,655 in costs for INVOS System monitors being used as
demonstration and no capital cost sales equipment, and these assets had a net book value of
$1,096,730. As of November 30, 2004, we have capitalized approximately $1,628,000 in costs for
INVOS System monitors being used as demonstration and no capital cost sales equipment, and these
assets had a net book value of approximately $901,000. Property and equipment are reviewed for
impairment whenever events or changes in circumstances indicate that the net book value of the
asset may not be recovered.
Intangible Assets consist of patents and trademarks, and license acquisition costs. Patents
and trademarks are recorded at cost and are being amortized on the straight-line method over 17
years. The carrying amount and accumulated amortization of these patents and trademarks is as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
November 30, |
|
| |
|
2005 |
|
|
2004 |
|
Patents and trademarks |
|
$ |
111,733 |
|
|
$ |
111,733 |
|
Less: accumulated amortization |
|
|
(94,812 |
) |
|
|
(87,900 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
16,921 |
|
|
$ |
23,833 |
|
|
|
|
|
|
|
|
Amortization expense was $6,912 for the fiscal years ended November 30, 2005, November 30,
2004, and November 30, 2003. Amortization expense for each of the next two fiscal years is
expected to be approximately $6,900 per year, and approximately $3,100 in fiscal 2008.
License acquisition costs related to our acquisition of exclusive, worldwide, royalty-bearing
licenses to specified rights relating to the CorRestore System, and related products and
accessories. On June 2, 2000, we entered into a License Agreement with the inventors and their
company, CorRestore LLC, granting us exclusive, worldwide, royalty-bearing licenses to specified
rights relating to the CorRestore System and related products and accessories for SVR. Pursuant to
the license agreement, CorRestore LLC has agreed to provide various consulting services to us. We
have agreed to pay all of the expenses of such consultation, of clinical testing of the CorRestore
System, training doctors in SVR and training our personnel and customers in the use of the
CorRestore System.
In exchange for the licenses and consulting services, we agreed to the following compensation
for CorRestore LLC and its agent, Joe B. Wolfe: (1) a royalty of 10 percent of our “net sales” of
products subject to the licenses, (2) five-year warrants to purchase up to 400,000 common shares at
$3.00 per share, exercisable to purchase 300,000 shares immediately and to purchase an additional
50,000 shares upon our receipt of clearance or approval from the FDA to market the CorRestore Patch
in the United States and another 50,000 shares upon our receipt of CE certification for the
CorRestore System, (3) additional five-year warrants to purchase up to 2,100,000 common shares at
$3.00 per share, granted when we received clearance from the FDA to market the CorRestore Patch in
the United States, exercisable based on our cumulative net sales of the CorRestore System products,
and (4) a consulting fee of $25,000 a year to each of the two inventors until we sell 1,000
CorRestore Patches. In April 2004, CorRestore LLC exercised its warrant to purchase 380,000 of our
newly-issued common shares, at $3.00 per share, for proceeds of $1,140,000. In May 2005, Joe B.
Wolfe, agent for CorRestore LLC and one of our former directors, purchased 20,000 common shares
under his warrants by a cashless exercise. As a result of this cashless exercise, we issued 16,264
common shares to Mr. Wolfe, retaining 3,736 common shares in payment of the exercise price.
License acquisition costs consist of professional service fees recorded at cost, our estimate
of the fair value of the ten-year vested stock options to purchase
50,000 common shares at $3.00 per
share granted to one of our then current directors in connection with negotiating and assisting us
in completing the transaction, and our estimate of the fair value of the 400,000 common share
vested portion of the five-year warrants to purchase common shares at
$3.00 per share issued in the
transaction. Consistent with the treatment of the vested warrants to purchase common shares, we
intend to include in license acquisition costs, and additional paid in capital, the fair value of
the vested portion of the unvested warrants to purchase common shares, estimated using the
Black-Scholes valuation model, when and if they become vested. However, we do not expect any of
these remaining warrants to become vested before their November 21, 2006 expiration date, based on
sales of CorRestore products to date.
56
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS — (Continued)
We estimated the value of the stock options to purchase 50,000 common shares using the
Black-Scholes valuation model with the following assumptions: expected volatility (the measure by
which the stock price has fluctuated or is expected to fluctuate during the period) 111.16 percent,
risk-free interest rate of 7.5 percent, expected life of 4 years and dividend yield of 0 percent.
We estimated the value of the warrants to purchase 300,000 common shares that vested immediately in
this transaction using the Black-Scholes valuation model with the following assumptions: expected
volatility (the measure by which the stock price has fluctuated or is expected to fluctuate during
the period) 111.16 percent, risk-free interest rate of 7.5 percent, expected life of 5 years and
dividend yield of 0 percent. We estimated the value of the warrants to purchase 50,000 common
shares that vested upon receipt of FDA clearance in November 2001 using the Black-Scholes valuation
model with the following assumptions: expected volatility (the measure by which the stock price
has fluctuated or is expected to fluctuate during the period) 100.68 percent, risk-free interest
rate of 4.0 percent, expected life of 42 months and dividend yield of 0 percent. We estimated the
value of the warrants to purchase 50,000 common shares that vested upon receipt of CE Mark
certification in April 2003 using the Black-Scholes valuation model with the following assumptions:
expected volatility (the measure by which the stock price has fluctuated or is expected to
fluctuate during the period) 64.70 percent, risk-free interest rate of 2.0 percent, expected life
of 25 months and dividend yield of 0 percent.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” This statement establishes
accounting and reporting standards for goodwill and other intangible assets. We adopted this
statement in the first quarter of fiscal 2002. The effect of adopting this statement has been to
discontinue amortizing our license acquisition costs related to our acquisition of exclusive,
worldwide, royalty-bearing licenses to specified rights relating to the CorRestore System and
related products and accessories described above because we believe these licenses have an
indefinite life. The carrying amount and accumulated amortization of these license acquisition
costs is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
November 30, |
|
| |
|
2005 |
|
|
2004 |
|
License acquisition costs |
|
$ |
— |
|
|
$ |
1,258,163 |
|
Less: accumulated amortization |
|
|
— |
|
|
|
(329,070 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
— |
|
|
$ |
929,093 |
|
|
|
|
|
|
|
|
In November 2005, we wrote off the remaining CorRestore license acquisition cost intangible
asset, based on the cash flow impairment analysis that was performed, the declining sales of
CorRestore products and the uncertainty regarding future prospective, randomized clinical data.
Management does not expect net positive future cash flow from the CorRestore product. This
impairment expense has been recognized in selling, general and administrative expenses in the
financial statements.
Revenue Recognition occurs when there is persuasive evidence of an arrangement with the
customer, the product has been delivered, the sales price is fixed or determinable, and
collectibility is reasonably assured. The product is considered delivered to the customer once we
have shipped it, as this is when title and risk of loss have transferred.
Research, Development and Engineering costs are expensed as incurred.
Net
Income (Loss) Per Common Share — basic and diluted is computed using the weighted average
number of common shares outstanding during each period. Weighted
average shares outstanding —
diluted, for the years ended November 30, 2005, November 30, 2004 and November 30, 2003, include
the potential dilution that could occur for common stock issuable under stock options or warrants.
As of November 30, 2005, 2004 and 2003, the difference between
weighted average shares — diluted
and weighted average shares — basic is calculated as follows:
57
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Weighted
average shares — basic |
|
|
10,322,226 |
|
|
|
9,780,104 |
|
|
|
9,113,854 |
|
Add: effect of dilutive common
shares and warrants |
|
|
1,475,573 |
|
|
|
1,543,168 |
|
|
|
352,984 |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares — diluted |
|
|
11,797,799 |
|
|
|
11,323,272 |
|
|
|
9,466,838 |
|
At November 30, 2005, there were no stock options outstanding that were excluded from the
computation of net income per common share — diluted, at November 30, 2004, there were
approximately 500 stock options outstanding that were excluded from the computation of net income
per common share — diluted, and at November 30, 2003 there were approximately 99,000 stock options
outstanding that were excluded from the computation of net income per
common share — diluted, as
the exercise price of these options exceeded the average price per share of our common stock. In
addition, there were approximately 2,100,000 warrants outstanding that were excluded from the
computation, as the warrants are contingent on achieving specified future sales targets that we do
not expect to achieve. As of November 30, 2005, we had outstanding 4,014,232 warrants and options
to purchase common shares, as of November 30, 2004, we had outstanding 4,436,315 warrants and
options to purchase common shares, and as of November 30, 2003, we had outstanding 5,308,819
warrants and options to purchase common shares.
Accounting Pronouncements In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148,
“Accounting for Stock-Based Compensation —
Transition and Disclosure.” This Statement, which is effective for fiscal years ending after
December 15, 2002, amends Statement No. 123, “Accounting for Stock-Based Compensation,” and
provides alternative methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. In addition, Statement No. 148 amends the disclosure
requirements of Statement No. 123 regardless of the accounting method used to account for
stock-based compensation. We have chosen to continue to account for stock-based compensation of
employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, “Accounting for Stock Issued to Employees,” and related interpretations. However, we adopted
the enhanced disclosure provisions as defined by Statement No. 148 beginning with our fiscal
quarter ended February 28, 2003
(Note 7).
In December 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (revised), Share Based Payment. This Statement revises Statement No.
123, “Accounting for Stock-Based Compensation,” and requires that compensation costs related to
share-based payment transactions, including stock options, restricted stock and restricted stock
units be recognized in the financial statements. This Statement will be effective for our fiscal
quarter beginning December 1, 2005.
In November 2005, we approved the acceleration of vesting of all unvested stock options as of
November 30, 2005. The primary purpose of this accelerated vesting was to eliminate compensation
expense we would recognize in our results of operations upon the adoption of SFAS 123R, which is
effective for our fiscal quarter beginning December 1, 2005. After the effects of the accelerated
vesting, the initial adoption of SFAS 123R is expected to be immaterial. However, the issuance of
additional stock compensation under the 2005 Stock Incentive Plan in future years will have an
additional impact on our financial statements.
Use Of Estimates The preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses for each fiscal period. Actual results could differ from
those estimated.
Reclassifications Certain reclassifications have been made to the financial statements for
2004 and 2003 to conform to 2005 presentation.
3. Stock Offerings and Common Shares
On March 6, 2000, we entered into the Private Equity Line Agreement with Kingsbridge Capital
Limited, a private institutional investor, which was subsequently terminated on April 10, 2001. In
connection with the Private Equity Line Agreement, we issued to Kingsbridge Capital warrants which
entitled the holder to purchase 205,097
58
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS — (Continued)
common shares, after adjustment for the April 2001 private placement and the January 2002
public offering, at a purchase price of $4.25 per share. The exercise price of the warrants was
payable either in cash or by a cashless exercise.
In November 2003, Kingsbridge purchased 100,000 common shares under the warrants by a cashless
exercise. As a result of this cashless exercise, we issued 53,603 common shares to Kingsbridge,
retaining 46,397 common shares in payment of the exercise price. In March 2004, Kingsbridge
Capital Limited purchased 40,000 common shares under its warrants by a cashless exercise. As a
result of this cashless exercise, we issued 24,097 common shares to Kingsbridge, retaining 15,903
common shares in payment of the exercise price. In May 2004, Kingsbridge Capital Limited purchased
the remaining 65,097 common shares under its warrants by a cashless exercise. As a result of this
cashless exercise, we issued 47,475 common shares to Kingsbridge, retaining 17,622 common shares in
payment of the exercise price. Kingsbridge now has no warrants remaining to purchase common
shares.
On April 9, 2001, we completed the private placement of newly-issued common shares for which
Brean Murray & Co., Inc., as our exclusive placement agent, received warrants to purchase 25,000
common shares at $2.10 per share. In October 2003, Brean Murray & Co., Inc. transferred the 25,000
warrants to persons who are or were employees of Brean Murray & Co., Inc., and in November 2003,
those persons exercised the warrants to purchase all 25,000 common shares under the warrants by a
cashless exercise. As a result of this cashless exercise, we issued 18,832 restricted common
shares to those individuals, retaining 6,168 common shares in payment of the exercise price, and no
more common shares remain subject to these warrants.
On January 16, 2002, we completed a public offering of 1,000,000 newly-issued common shares at
a price of $4.25 per share, for gross proceeds of $4,250,000. Our estimated net proceeds, after
deducting the placement agent’s commission and the estimated expenses of the offering, were
approximately $3,680,000. Brean Murray & Co., Inc. was our placement agent for the offering and
received for its services (1) $340,000 as a placement agent fee, and (2) warrants to purchase
100,000 common shares at $5.10 per share exercisable during the four-year period beginning January
11, 2003. In June 2004, Brean Murray & Co., Inc. purchased 100,000 common shares under these
warrants by a cashless exercise. As a result of this cashless exercise, we issued 66,265 common
shares to Brean Murray & Co., Inc., retaining 33,735 common shares in payment of the exercise
price. Brean Murray & Co., Inc. now has no warrants remaining to purchase common shares.
Pursuant to the CorRestore License Agreement, CorRestore, LLC and its agent, Joe B. Wolfe,
received warrants to purchase 400,000 common shares exercisable at $3.00 per share until June 2,
2005, and received warrants to purchase an additional 2,100,000 common shares exercisable at $3.00
per share until November 21, 2006, dependent upon our cumulative net sales of CorRestore products.
In April 2004, CorRestore LLC exercised its warrant to purchase 380,000 of our newly-issued common
shares, at $3.00 per share, for proceeds of $1,140,000. In May 2005, Joe B. Wolfe, agent for
CorRestore LLC and one of our former directors, purchased 20,000 common shares under his warrants
by a cashless exercise. As a result of this cashless exercise, we issued 16,264 common shares to
Mr. Wolfe, retaining 3,736 common shares in payment of the exercise price. As of November 30,
2005, the 2,100,000 warrants remain outstanding, but the sales requirements for exercise of those
warrants have not been met and we do not expect that they will be met.
During fiscal 2005, we issued 561,839 common shares as a result of stock option exercises, for
proceeds of $2,525,679. During fiscal 2004, we issued 321,276 common shares as a result of stock
option exercises by employees, directors and former employees, for proceeds of $1,541,022. During
fiscal 2003, we issued 148,371 common shares as a result of stock option exercises by employees,
directors and former employees, for proceeds of $538,626.
Common shares reserved for future issuance upon exercise of stock options and warrants as
discussed above at November 30, 2005, are as follows:
59
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS — (Continued)
| |
|
|
|
|
1991 Incentive Stock Option Plan |
|
|
14,663 |
|
1993 Director Stock Option Plan |
|
|
500 |
|
1997 Stock Option Plan |
|
|
1,731,754 |
|
2005 Stock Incentive Plan |
|
|
600,000 |
|
Options Granted Independent of Option Plans |
|
|
73,100 |
|
License Acquisition Warrants |
|
|
2,100,000 |
|
|
|
|
|
|
Total shares reserved for future issuance |
|
|
4,520,017 |
|
|
|
|
|
|
4. Accrued Liabilities
Accrued liabilities consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
November 30, |
|
| |
|
2005 |
|
|
2004 |
|
Incentive Compensation |
|
$ |
701,658 |
|
|
$ |
390,978 |
|
Sales Commissions |
|
|
352,459 |
|
|
|
153,180 |
|
401(k) Match |
|
|
42,164 |
|
|
|
97,071 |
|
Clinical Research |
|
|
21,675 |
|
|
|
— |
|
Warranty |
|
|
16,850 |
|
|
|
10,750 |
|
Royalty |
|
|
13,788 |
|
|
|
9,130 |
|
Taxes |
|
|
11,375 |
|
|
|
— |
|
Professional Fees |
|
|
5,625 |
|
|
|
42,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,165,594 |
|
|
$ |
703,109 |
|
|
|
|
|
|
|
|
5. Income Tax
Deferred income taxes reflect the estimated future tax effect of (1) temporary differences
between the amount of assets and liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations and (2) net operating loss and tax credit carryforwards. Our
deferred tax assets primarily represent the tax benefit of net operating loss carryforwards and
research and general business tax credit carryforwards. We had deferred tax assets of
approximately $18,321,000 as of November 30, 2005, partially offset by valuation allowances of
approximately $8,321,000, due to the uncertainty of utilizing such assets against future earnings,
prior to their expiration. Our deferred tax assets include approximately $4,236,000, with a full
valuation allowance, related to the exercise of stock options. If realized in the future, these
tax benefits will be recognized in additional paid in capital. As of November 30, 2004, we had
deferred tax assets of approximately $16,657,000, partially offset by valuation allowances of
approximately $9,957,000, due to the uncertainty of utilizing such assets against future earnings,
prior to their expiration. We have used a statutory income tax rate of 34 percent when calculating
our deferred tax assets. We have paid no income taxes for fiscal 2005 or fiscal 2004.
The components of deferred income tax assets as of November 30, 2005 and 2004 were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
November 30, |
|
| |
|
2005 |
|
|
2004 |
|
| |
|
(in thousands) |
|
Net operating loss carryforwards |
|
$ |
17,620 |
|
|
$ |
16,216 |
|
Other |
|
|
91 |
|
|
|
90 |
|
Basis difference of fixed assets and intangibles |
|
|
167 |
|
|
|
(92 |
) |
Research and general business tax credit carryforwards |
|
|
443 |
|
|
|
443 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
18,321 |
|
|
|
16,657 |
|
Valuation allowance |
|
|
(8,321 |
) |
|
|
(9,957 |
) |
|
|
|
|
|
|
|
Deferred tax asset |
|
$ |
10,000 |
|
|
$ |
6,700 |
|
|
|
|
|
|
|
|
The items accounting for the difference between income taxes computed at the federal statutory
rate and the provision for income taxes are as follows:
60
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Fiscal Year Ended November 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Taxes at
U.S. statutory rate — 34 percent |
|
$ |
1,513,370 |
|
|
$ |
682,236 |
|
|
$ |
24,679 |
|
Nondeductible meals and entertainment |
|
$ |
24,050 |
|
|
$ |
15,109 |
|
|
$ |
9,531 |
|
Change in valuation allowance |
|
$ |
(4,837,420 |
) |
|
$ |
(7,397,345 |
) |
|
$ |
(34,210 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) from
continuing operations |
|
$ |
(3,300,000 |
) |
|
$ |
(6,700,000 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
(74.1 |
)% |
|
|
(333.9 |
)% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
We have performed the required assessment of positive and negative evidence regarding
realization of our deferred tax assets in accordance with SFAS No. 109, “Accounting for Income
Taxes,” including our past operating results, the existence of cumulative losses over our history
up to the most recent three fiscal years, and our forecast for future net income. Our assessment
of our deferred tax assets, and the reversal of part of our valuation allowance, included assuming
that the net asset will be realized is that our net revenues and pre-tax income will grow in future
years consistent with the growth guidance given for fiscal 2006 and making allowance for the
uncertainties surrounding, among other things, our future rate of growth in net revenues, the rate
of adoption of our products in the marketplace, and the potential for competition to enter the
marketplace. In reversing a portion of our valuation allowance, we have concluded that it is more
likely than not that our net deferred tax assets will be realized.
For the fiscal year ended November 30, 2005, we recorded a net income tax benefit of
$3,300,000, which consisted on income tax expense recorded at an estimated effective tax rate of 34
percent in the amount of $1,261,223 for the first three quarters of fiscal 2005 and a deferred tax
benefit of $4,561,223 recorded in the fourth quarter of fiscal 2005. For the fiscal year ended
November 30, 2004, our income tax benefit of $6,700,000 consisted entirely of deferred tax
benefits. We had no current or deferred income tax expense or benefit for the fiscal year ended
November 30, 2003.
As of November 30, 2005, net operating loss carryforwards of approximately $51.8 million were
available for Federal income tax purposes for future years. Our ability to use the net operating
loss carryforwards incurred on or before March 27, 1991 (the date we completed our initial public
offering) is limited to approximately $296,000 per year. Research and business general tax credits
of approximately $443,000 are also available to offset future taxes. These losses and credits
expire, if unused, at various dates from 2005 through 2025.
Use of our net operating loss carryforwards, tax credit carryforwards and certain future
deductions could be restricted, in the event of future changes in our equity structure, by
provisions contained in the Tax Reform Act of 1986.
6. Commitments and Contingencies
We have a lease agreement for a 23,392 square foot, stand-alone office, assembly and warehouse
facility. The current lease, as amended, expires December 31, 2009.
Operating lease expense for the years ended November 30, 2005, 2004 and 2003 was approximately
$162,800, $204,000, and $216,000, respectively. Approximate future minimum lease commitments are
as follows:
| |
|
|
|
|
| Year
ending November 30, |
|
|
|
|
2006 |
|
$ |
140,400 |
|
2007 |
|
$ |
142,900 |
|
2008 |
|
$ |
145,800 |
|
2009 |
|
$ |
148,700 |
|
2010 |
|
$ |
12,400 |
|
|
|
|
|
Total |
|
$ |
590,200 |
|
|
|
|
|
In December 1991, we amended and restated our profit sharing plan to include a 401(k) plan
covering substantially all employees. Under provisions of the plan, participants may contribute,
annually, between 1 percent and 25 percent of their compensation. In November 2004, our board of
directors approved a discretionary
61
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS — (Continued)
contribution to the 401(k) Plan, as soon as practicable after December 31, 2004, equal to $2
for every $1 contributed by Company employees to the 401(k) Plan during calendar 2004, up to a
Company contribution of 4 percent of the employee’s compensation, and also approved matching
contributions to the 401(k) Plan equal to $2 for every $1 contributed by Company employees to the
401(k) Plan at each payroll date on or after January 1, 2005, up to a Company contribution of 4
percent of the employee’s compensation, and continuing until terminated by further action of the
board of directors. In addition, at the discretion of the board of directors, we may make other
annual discretionary contributions to the plan. Matching contributions made for fiscal 2005 were
approximately $202,000. The discretionary contribution made in February 2005, for calendar 2004,
was approximately $113,000. We did not make any matching or discretionary contributions to the
plan for the year ended November 30, 2003.
As of November 30, 2005, we have employment agreements or change in control, invention,
confidentiality, non-compete and non-solicitation agreements with all of our executive officers.
The employment agreement with our Vice President, Sales and Marketing and the change in control
agreements with five of our executive officers provide for severance benefits equal to one year’s
salary upon termination of employment without cause or for good reason 90 days before to one year
after a change in control of the Company that occurs by June 13, 2008, June 29, 2008 for one
executive. The employment agreement with our President and Chief Executive Officer provides for
severance benefits equal to one year’s salary and six months of benefits upon termination of his
employment without cause or if his employment terminates because his agreement expires. His
employment agreement expires April 30, 2006 unless earlier terminated as provided in the agreement.
All executive officers have agreed not to compete with us and not to solicit our employees during
specified periods following the termination of employment, and they have agreed to various
confidentiality obligations. The estimated financial exposure of these employment agreements, upon
a change of control of the Company and termination of all of the executives without cause, is
approximately $934,000.
We may become subject to product liability claims by patients or physicians, and may become a
defendant in product liability or malpractice litigation. We have obtained product 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 product liability.
7. Stock Option Plans
In February 1991 and January 1997, we adopted stock option plans, and in February 2005, we
adopted a stock incentive plan, for our key employees, directors, consultants and advisors and,
under the 2005 plan, independent contractors and agents. The stock option plans provide for our
issuance of options to purchase a maximum of 115,000 common shares under the 1991 plan and
2,560,000 common shares under the 1997 plan. The 2005 plan permits us to grant stock options,
including both nonqualified options and incentive options, restricted stock and restricted stock
units, up to 600,000 common shares. In addition, we granted options to employees independent of
the plans. Options granted generally have a 10-year life, and vest over a three-year period,
except the options granted in 2005 vested on November 30, 2005. Awards and expirations under the
1991 plan, 1997 plan, 2005 plan and independent of the plans during the years ended November 30,
2005, 2004 and 2003 are listed below.
At November 30, 2005, no additional options may be granted under the 1991 plan, 5,501 common
shares were available for options to be granted under the 1997 plan, and 500,284 common shares were
available to be granted or awarded under the 2005 plan.
In January 1993, we adopted the Somanetics Corporation 1993 Director Stock Option Plan. The
directors plan provided up to 24,000 common shares for the grant of options to each director who
was not one of our officers or employees. In January 1998, our board of directors terminated the
directors plan, except as to options previously granted under the directors plan. Therefore, no
additional options may be granted under the directors plan.
In October 1995, SFAS No. 123, “Accounting for Stock-Based Compensation,” was issued. In
December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised), Share Based Payment. This Statement revises Statement No. 123,
“Accounting for Stock-Based Compensation,” and requires that compensation costs related to
share-based payment transactions, including stock
62
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS — (Continued)
options, restricted stock and restricted stock units be recognized in the financial
statements. This Statement will be effective for our fiscal quarter beginning December 1, 2005.
We currently account for stock-based compensation of employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations. Accordingly, compensation costs for stock options granted
to employees are measured as the excess, if any, of the market price of our stock at the date of
the grant over the amount an employee must pay to acquire the stock. No compensation expense has
been charged against income for stock option grants to employees for fiscal 2005, 2004 and 2003.
In November 2005, we approved the acceleration of vesting of all unvested stock options as of
November 30, 2005. The primary purpose of this accelerated vesting was to eliminate compensation
expense we would recognize in our results of operations upon the adoption of SFAS 123R, which is
effective for our fiscal quarter beginning December 1, 2005. After the effects of the accelerated
vesting, the initial adoption of SFAS 123R is expected to be immaterial. However, the issuance of
additional stock compensation under the 2005 Stock Incentive Plan in future years will have an
additional impact on our financial statements.
Stock-based compensation of consultants and advisors is determined based on the fair value of
the options or warrants on the grant date pursuant to the methodology of SFAS No. 123, estimated
using the Black-Scholes model with the assumptions described in the next paragraph. The resulting
amount is recognized as compensation expense and an increase in additional paid-in capital over the
vesting period of the options or warrants. As a result, we recorded $11,221 of compensation
expense, and an equal increase in additional paid in capital, for stock options issued to
non-employees in fiscal 2005, and $8,471 of compensation expense in fiscal 2003. We recorded no
such expense in fiscal 2004.
Had compensation expense for our stock options granted to employees been determined based on
the fair value of the options on the grant date pursuant to the methodology of SFAS No. 123, our
results of operations on a pro forma basis would have been as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Fiscal Year Ended November 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net income |
|
$ |
7,751,087 |
|
|
$ |
8,706,576 |
|
|
$ |
72,586 |
|
Add: Stock-based employee compensation
included in actual net income |
|
$ |
11,221 |
|
|
$ |
0 |
|
|
$ |
8,471 |
|
Deduct: Total stock-based employee
compensation, had fair value method been
applied |
|
$ |
(1,804,000 |
) |
|
$ |
(796,000 |
) |
|
$ |
(962,000 |
) |
|
|
|
|
|
|
|
|
|
|
Pro-forma net income (loss) |
|
$ |
5,958,308 |
|
|
$ |
7,911,576 |
|
|
$ |
(880,943 |
) |
|
|
|
|
|
|
|
|
|
|
Net income
per common share — diluted |
|
$ |
.66 |
|
|
$ |
.77 |
|
|
$ |
.01 |
|
Pro-forma net income (loss) per common
share — diluted, had fair value method been
applied |
|
$ |
.51 |
|
|
$ |
.70 |
|
|
$ |
(.09 |
) |
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for 2005, 2004 and 2003:
expected volatility (the measure by which the stock price has fluctuated or is expected to
fluctuate during the period) 57.00 percent for 2005 (61.00 percent for 2004 and 64.32 percent for
2003), risk-free interest rate of 4.0 percent for 2005 (4.0 percent for 2004 and 2003), expected
lives of 7 years for fiscal 2005 (7 years for 2004 and 2003) and dividend yield of 0 percent.
63
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS — (Continued)
A summary of our stock option activity and related information for the years ended November
30, 2005, 2004 and 2003 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
| |
|
Common |
|
|
Exercise |
|
|
Common |
|
|
Exercise |
|
|
Common |
|
|
Exercise |
|
| |
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Options outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1, |
|
|
2,316,315 |
|
|
$ |
3.83 |
|
|
|
2,603,722 |
|
|
$ |
3.89 |
|
|
|
2,332,753 |
|
|
$ |
4.04 |
|
Options granted |
|
|
168,257 |
|
|
|
13.79 |
|
|
|
53,500 |
|
|
|
10.23 |
|
|
|
471,000 |
|
|
|
3.75 |
|
Options exercised |
|
|
(561,839 |
) |
|
|
4.50 |
|
|
|
(321,276 |
) |
|
|
4.79 |
|
|
|
(148,371 |
) |
|
|
3.63 |
|
Options canceled |
|
|
(8,501 |
) |
|
|
8.29 |
|
|
|
(19,631 |
) |
|
|
13.94 |
|
|
|
(51,660 |
) |
|
|
10.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, |
|
|
1,914,232 |
|
|
|
4.59 |
|
|
|
2,316,315 |
|
|
|
3.83 |
|
|
|
2,603,722 |
|
|
|
3.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, |
|
|
1,914,232 |
|
|
$ |
4.59 |
|
|
|
1,827,008 |
|
|
$ |
3.91 |
|
|
|
1,784,482 |
|
|
$ |
4.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the price ranges of our stock options outstanding and exercisable as of November
30, 2005 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options outstanding |
|
|
Options exercisable |
|
| |
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
| Range of Exercise |
|
Options |
|
|
Exercise |
|
|
Remaining |
|
|
Options |
|
|
Exercise |
|
| Prices |
|
Outstanding |
|
|
Price |
|
|
Life (years) |
|
|
Exercisable |
|
|
Price |
|
$1.70 — $5.00 |
|
|
1,391,001 |
|
|
$ |
3.03 |
|
|
|
6.11 |
|
|
|
1,391,001 |
|
|
$ |
3.03 |
|
$5.01 — $10.00 |
|
|
332,478 |
|
|
|
5.95 |
|
|
|
2.56 |
|
|
|
332,478 |
|
|
|
5.95 |
|
$10.01 — $26.30 |
|
|
190,753 |
|
|
|
13.56 |
|
|
|
9.43 |
|
|
|
190,753 |
|
|
|
13.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,914,232 |
|
|
$ |
4.59 |
|
|
|
5.83 |
|
|
|
1,914,232 |
|
|
$ |
4.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Related Party Transactions
In connection with our April 2001 private placement of common shares, Brean Murray & Co., Inc.
was our placement agent and received for its services warrants to purchase 25,000 common shares at
$2.10 per share exercisable during the four-year period beginning April 9, 2002. At the time, A.
Brean Murray, one of our then current directors, and his wife controlled Brean Murray & Co., Inc.
In October 2003, Brean Murray & Co., Inc. transferred the 25,000 warrants to persons who are or
were employees of Brean Murray & Co., Inc., and in November 2003, those persons exercised the
warrants to purchase all 25,000 common shares under the warrants by a cashless exercise. As a
result of this cashless exercise, we issued 18,832 restricted common shares to those individuals,
retaining 6,168 common shares in payment of the exercise price, and no common shares remain subject
to these warrants.
In connection with our CorRestore license, effective November 21, 2001, we granted Joe B.
Wolfe five-year warrants to purchase 180,000 common shares,
exercisable at $3.00 per share. Mr. Joe
B. Wolfe was one of our then current directors. In May 2005, Joe B. Wolfe, agent for CorRestore
LLC and one of our former directors, purchased 20,000 common shares under his warrants by a
cashless exercise. As a result of this cashless exercise, we issued 16,264 common shares to Mr.
Wolfe, retaining 3,736 common shares in payment of the exercise price. Mr. Wolfe has no vested
warrants remaining to purchase common shares.
In connection with our January 2002 public offering of common shares, Brean Murray & Co., Inc.
was our placement agent and received for its services (1) $340,000 as a placement agent fee, and
(2) warrants to purchase
64
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS — (Continued)
100,000 common shares at $5.10 per share exercisable during the four-year period beginning
January 11, 2003. In June 2004, Brean Murray & Co., Inc. purchased 100,000 common shares under
these warrants by a cashless exercise. As a result of this cashless exercise, we issued 66,265
common shares to Brean Murray & Co., Inc., retaining 33,735 common shares in payment of the
exercise price. Brean Murray & Co., Inc. now has no warrants remaining to purchase common shares.
9. Major Customers and Foreign Sales
Tyco Healthcare, part of Tyco International Ltd., our international distributor in Europe, the
Middle East, Africa and Canada for our INVOS System, accounted for 11 percent of net revenues for
the fiscal year ended November 30, 2005, and 12 percent of net revenues for the fiscal year ended
November 30, 2003.
Additionally, foreign net revenues for the fiscal year ended November 30, 2005 were
$3,303,692, for the fiscal year ended November 30, 2004 were $2,091,602, and for the fiscal year
ended November 30, 2003 were $1,944,513.
10. Segment Information
We operate our business in one reportable segment, the development, manufacture and marketing
of medical devices. Each of our two product lines have similar characteristics, customers,
distribution and marketing strategies, and are subject to similar regulatory requirements. In
addition, in making operating and strategic decisions, our management evaluates net revenues based
on the worldwide net revenues of each major product line, and profitability on an enterprise-wide
basis due to shared costs. Approximately 98 percent of our net revenues in fiscal 2005 were
derived from our INVOS System product line, compared to 96 percent of our net revenues in fiscal
2004 and 92 percent of our net revenues in fiscal 2003.
65
QUARTERLY INFORMATION (unaudited)
The following is a summary of our quarterly operating results for the fiscal years ended
November 30, 2005 and 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter |
| |
|
First |
|
Second |
|
Third |
|
Fourth |
| |
|
(in thousands, except per share data) |
| Year Ended November 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
4,032,617 |
|
|
$ |
5,082,746 |
|
|
$ |
5,242,848 |
|
|
$ |
6,151,041 |
|
Gross margin |
|
|
3,482,468 |
|
|
|
4,437,906 |
|
|
|
4,581,652 |
|
|
|
5,405,738 |
|
Net income |
|
|
563,926 |
|
|
|
890,183 |
|
|
|
994,147 |
|
|
|
5,302,831 |
* |
Net income per common
share — basic |
|
$ |
0.06 |
|
|
$ |
0.09 |
|
|
$ |
0.10 |
|
|
$ |
0.50 |
|
Net income per common
share — diluted |
|
$ |
0.05 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
0.43 |
|
* Includes the effects of a reversal of $4,561,223 of our valuation allowance, as described in Note
5 of Notes to Financial Statements. Also includes an impairment expense of $929,093 in connection
with the write-off of our intangible asset associated with the acquisition of the license for the
CorRestore System, as described in Note 2 of Notes to Financial Statements.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended November 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
2,670,265 |
|
|
$ |
3,032,976 |
|
|
$ |
3,076,373 |
|
|
$ |
3,829,001 |
|
Gross margin |
|
|
2,149,872 |
|
|
|
2,513,660 |
|
|
|
2,632,536 |
|
|
|
3,262,294 |
|
Net income |
|
|
292,744 |
|
|
|
409,730 |
|
|
|
539,722 |
|
|
|
7,464,380 |
** |
Net income per common
share — basic |
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
$ |
0.74 |
|
Net income per common
share — diluted |
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
$ |
0.64 |
|
**Includes the effects of a reversal of $6,700,000 of our valuation allowance, as described in Note
5 of Notes to Financial Statements.
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our management has evaluated, with the participation of our principal executive and principal
financial officers, the effectiveness of our disclosure controls and procedures and of our internal
control over financial reporting, both as of November 30, 2005. Based on their evaluation, our
principal executive and principal financial officers have concluded that these controls and
procedures are effective as of November 30, 2005. See Item 8 of this report for Management’s
Report on Internal Control Over Financial Reporting, which is incorporated in this Item 9A by
reference. There was no change in our internal control over financial reporting identified in
connection with such evaluation that occurred during our fourth fiscal quarter ended November 30,
2005 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Disclosure controls and procedures are our controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated
and communicated to our management, including our principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure.
Internal control over financial reporting is a process designed by, or under the supervision
of, our principal executive and principal financial officers, and effected by our board of
directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and includes those policies
and procedures that: (1) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect our transactions and dispositions of assets, (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and directors, and (3) and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on the financial statements.
67
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Somanetics Corporation
Troy, Michigan
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting, that Somanetics Corporation (the “Company”) maintained
effective internal control over financial reporting as of November 30, 2005, based on the criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness of the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over
financial reporting as of November 30, 2005, is fairly stated, in all material respects, based on
the criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of November 30,
2005, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the balance sheets as of November 30, 2005 and 2004, and the related
statements of operations, shareholders’ equity, and cash flows for each of the three years in the
period ended November 30, 2005 of the Company and our report dated January 26, 2006 expressed an
unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
January 26, 2006
68
ITEM 9B. OTHER INFORMATION
None.
69
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 regarding our executive officers is included in the
Supplemental Item in Part I of this Report, and is incorporated in this Item 10 by reference.
Our directors are as follows:
| |
|
|
|
|
|
|
| Name |
|
Age |
|
Position |
Bruce J. Barrett
|
|
|
46 |
|
|
President, Chief Executive Officer and a Director |
Dr. James I. Ausman (1) (2) (3)
|
|
|
68 |
|
|
Director |
Daniel S. Follis (1) (2) (3)
|
|
|
68 |
|
|
Director |
Robert R. Henry (1) (2) (3)
|
|
|
65 |
|
|
Director |
|
|
|
| (1) |
|
Member of the Compensation Committee. |
| |
| (2) |
|
Member of the Audit Committee. |
| |
| (3) |
|
Member of the Nominating Committee. |
Bruce J. Barrett. Mr. Barrett has served as our President and Chief Executive Officer and as
one of our directors since June 1994. Earlier in his career, Mr. Barrett served as the Director,
Hospital Products Division, for Abbott Laboratories, Ltd., a health care equipment manufacturer and
distributor, and as the Director, Sales and Marketing, for Abbott Critical Care Systems, a division
of Abbott Laboratories, Inc., a health care equipment manufacturer and distributor. While at
Abbott Critical Care Systems, Mr. Barrett managed Abbott’s invasive oximetry products for
approximately four years. Prior to joining Abbott Laboratories, he served as the group product
manager of hemodynamic monitoring products of Baxter Edwards Critical Care, an affiliate of Baxter
International, Inc., another health care equipment manufacturer and distributor. Mr. Barrett
received a B.S. degree in marketing from Indiana State University and an M.B.A. degree from Arizona
State University. Mr. Barrett is a party to an employment agreement with us that requires us to
elect him to the offices he currently holds.
James I. Ausman, M.D., Ph.D. Dr. Ausman has served as one of our directors since June 1994.
Since July 2002, he has served as a consultant for Navigant Consulting, Inc. (formerly, The Tiber
Group), a healthcare strategic planning and market research company. He has been Professor of the
Department of Neurosurgery at the University of Illinois at Chicago since 1991 and served as its
head from 1991 until September 2001. From September 1978 until August 1991, he was Chairman of the
Department of Neurosurgery at Henry Ford Hospital in Detroit. From December 1987 until July 1991,
he served as Director of the Henry Ford Neurosurgical Institute, also at Henry Ford Hospital. In
addition, he was Clinical Professor of Surgery, Section of Neurosurgery at the University of
Michigan in Ann Arbor from 1980 until 1991. Dr. Ausman received a B.S. degree in chemistry and
biology from Tufts University, a Doctorate of Medicine from Johns Hopkins University School of
Medicine, a Masters of Arts in Physiology from the State University of New York at Buffalo, and a
Ph.D. in Pharmacology from George Washington University. He has also received graduate training in
neurosurgery at the University of Minnesota and has obtained board certification from the American
Board of Neurological Surgery. He is now a Clinical Professor of Neurosurgery at the University of
California at Los Angeles and, since 1994, has been the editor of Surgical Neurology. He serves as
the medical expert for KMIR 6 TV in Palm Desert, California.
Daniel S. Follis. Mr. Follis has served as one of our directors since April 1989. Since
1981, he has served as President of Verschuren & Follis, Inc., which advises and administers The
Infinity Fund, a limited partnership that invests in emerging growth companies. Since 1995 he has
also served as President of Follis Corporation, a sales and marketing company engaged in media
sales, television production, serving as a manufacturer’s representative and investment management.
Mr. Follis received a B.A. degree in business from Michigan State University.
Robert R. Henry. Mr. Henry has served as one of our directors since December 1998. He has
been President of Robert R. Henry & Co., Inc., a financial consulting and investment firm, since
1989. Mr. Henry has been an advisory director of Morgan Stanley & Co. Incorporated since 1989, and
from 1977 to 1989 was a managing director of Morgan Stanley. He received an M.B.A. from Harvard
Business School and a B.A. from Williams College.
70
Our directors serve staggered three-year terms. Our directors will hold office until the
Annual Meeting of Shareholders to be held in 2006 for Messrs. Follis and Henry, the Annual Meeting
of Shareholders to be held in 2007 for Mr. Barrett, and the Annual Meeting of Shareholders to be
held in 2008 for Dr. Ausman, and until their successors are elected and qualified, or until their
earlier death, resignation or removal. Directors may be removed only for cause by a vote of the
holders of a majority of the shares entitled to vote at an election of the directors.
Audit Committee
Our board of directors has established a separately-designated, standing Audit Committee that
consists of three directors and is established for the purpose of overseeing our accounting and
financial reporting processes and audits of our financial statements. Mr. Henry (Chairman), Dr.
Ausman and Mr. Follis are the current members of this committee. Each of the members of our Audit
Committee is independent as independence for audit committee members is defined in the listing
standards of The Nasdaq Stock Market, Inc. Marketplace Rules, as those standards have been modified
or supplemented, and SEC rules and regulations.
Audit Committee Financial Expert
Our board of directors has determined that Mr. Henry is an Audit Committee financial expert,
as defined by the Securities and Exchange Commission, serving on our Audit Committee. Mr. Henry is
independent as independence for audit committee members is defined in the listing standards of The
Nasdaq Stock Market, Inc. Marketplace Rules, as those standards have been modified or supplemented.
Mr. Henry’s experience that qualifies him as our Audit Committee financial expert includes
investment banking experience serving as managing director of Morgan Stanley from 1977 to 1989,
corporate securities underwriting experience with Morgan Stanley from 1965 to 1977 and an M.B.A.
from Harvard Business School in 1964. See the description of his background above in this Item 10
Compensation Committee
Our board of directors has a standing Compensation Committee which consists of three
directors. Mr. Follis (Chairman), Dr. Ausman and Mr. Henry are the current members of this
committee. Each of the members of our Compensation Committee is independent as independence is
defined in the listing standards of The Nasdaq Stock Market, Inc. Marketplace Rules, as those
standards have been modified or supplemented. The Compensation Committee makes recommendations to
the board of directors with respect to compensation arrangements and plans for senior management,
officers and directors of the Company and administers the Company’s 1991 Incentive Stock Option
Plan, 1997 Stock Option Plan, and 2005 Stock Incentive Plan.
Nominating Committee
Our board of directors has a standing Nominating Committee which consists of three directors.
Dr. Ausman (Chairman), Mr. Henry and Mr. Follis are the current members of this committee. The
Nominating Committee identifies individuals to become board members and selects, or recommends for
the board’s selection, director nominees to be presented for shareholder approval at the annual
meeting of shareholders or to fill any vacancies. Each of the members of our Nominating Committee
is independent as independence is defined in the listing standards of The Nasdaq Stock Market, Inc.
Marketplace Rules, as those standards have been modified or supplemented.
The Nominating Committee’s policy is to consider any director candidates recommended by
shareholders. Such recommendations must be made pursuant to timely notice in writing to our
Secretary, at Somanetics Corporation, 1653 East Maple Road, Troy, Michigan 48083-4208. To be
timely, the notice must be received at our offices at least 120 days before the anniversary of the
mailing of our proxy statement relating to the previous annual meeting of shareholders. The notice
must set forth:
| |
• |
|
with respect to the director candidate, |
| |
• |
|
the candidate’s name, age, business address and residence address, |
| |
| |
• |
|
the candidate’s principal occupation or employment, |
| |
| |
• |
|
the number of our common shares beneficially owned by the candidate, |
71
| |
• |
|
information with respect to the candidate’s independence, as defined
under Nasdaq’s listing standards for independent directors in general
and with respect to Audit Committee members, |
| |
| |
• |
|
information with respect to other boards on which the candidate
serves, |
| |
| |
• |
|
information with respect to direct or indirect transactions,
relationships, arrangements and understandings between the candidate
and us and between the candidate and the shareholder giving the notice,
and |
| |
| |
• |
|
any other information relating to the candidate that we would be
required to disclose in our proxy statement if we were to solicit
proxies for the election of the candidate as one of our directors or
that is otherwise required under Securities and Exchange Commission
rules, including the candidate’s written consent to being named in the
proxy statement as a nominee and to serving as a director if elected,
and |
| |
• |
|
with respect to the shareholder giving the notice, |
| |
• |
|
the name and address of the shareholder as they appear on our stock
transfer records, and |
| |
| |
• |
|
the number of our common shares beneficially owned by the
shareholder (and the period they have been held). |
The Nominating Committee has not established specific, minimum qualifications for recommended
nominees or specific qualities or skills for one or more of our directors to possess. The
Nominating Committee uses a subjective process for identifying and evaluating nominees for
director, based on the information available to, and the subjective judgments of, the members of
the Nominating Committee and our then current needs, although the committee does not believe there
would be any difference in the manner in which it evaluates nominees based on whether the nominee
is recommended by a shareholder. Historically, nominees have been existing directors or business
associates of our directors or officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and
persons who own more than ten percent of a registered class of our equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by Securities and
Exchange Commission regulation to furnish us with copies of all Section 16(a) reports they file.
Based solely on review of the copies of such reports furnished to us during or with respect to
fiscal 2005, or written representations that no Forms 5 were required, we believe that during the
fiscal year ended November 30, 2005 all Section 16(a) filing requirements applicable to our
officers, directors and greater than ten-percent beneficial owners were complied with.
Code of Business Conduct and Ethics
We adopted a Code of Business Conduct and Ethics on December 12, 2003 that applies to all of
our employees, officers and directors, including our principal executive officer, principal
financial officer, principal accounting officer or controller, or persons performing similar
functions. Our Code of Business Conduct and Ethics contains written standards that we believe are
reasonably designed to deter wrongdoing and to promote:
| |
• |
|
Honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships; |
| |
| |
• |
|
Full, fair, accurate, timely, and understandable disclosure in reports and documents
that we file with, or submit to, the Securities and Exchange Commissions and in other
public communications we make; |
| |
| |
• |
|
Compliance with applicable governmental laws, rules and regulations; |
| |
| |
• |
|
The prompt internal reporting of violations of the code to an appropriate person or
persons named in the code; and |
| |
| |
• |
|
Accountability for adherence to the code. |
This Code of Business Conduct and Ethics is attached to our Annual Report on Form 10-K for the
fiscal year ended November 30, 2003 as Exhibit 14.1. We have also posted it on our Web site at
http://www.somanetics.com. We will provide to any person without charge, upon request, a copy of
our Code of
72
Business Conduct and Ethics. Requests for a copy of our Code of Business Conduct and Ethics
should be made to our Secretary at Somanetics Corporation, 1653 East Maple Road, Troy, Michigan
48083-4208. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding
an amendment to, or a waiver from, a provision of our Code of Business Conduct and Ethics that
applies to our principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions and that relates to any element of
the code definition enumerated in Securities and Exchange Commission, Regulation S-K, Item 406(b)
by posting such information on our Web site at http://www.somanetics.com within four business days
following the date of the amendment or waiver.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information for each of the fiscal years ended November 30,
2005, 2004 and 2003 concerning compensation of (1) all individuals serving as our Chief Executive
Officer during the fiscal year ended November 30, 2005, and (2) our four most highly-compensated
other executive officers in fiscal 2005 who were serving as executive officers as of November 30,
2005 and whose total annual salary and bonus exceeded $100,000:
Summary Compensation Table
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
All Other |
| |
|
|
|
|
|
Annual Compensation |
|
Underlying |
|
Compensation |
| Name and Principal Position |
|
Year |
|
Salary($) |
|
Bonus($) |
|
Options(#) |
|
($) (1) |
Bruce J. Barrett, President |
|
|
2005 |
|
|
|
250,377 |
|
|
|
302,999 |
|
|
|
31,919 |
|
|
|
11,574 |
|
and Chief Executive Officer |
|
|
2004 |
|
|
|
238,415 |
|
|
|
184,653 |
|
|
|
— |
|
|
|
11,374 |
|
|
|
|
2003 |
|
|
|
225,500 |
|
|
|
103,253 |
|
|
|
132,000 |
|
|
|
3,174 |
|
| |
Richard S. Scheuing, Vice |
|
|
2005 |
|
|
|
119,853 |
|
|
|
76,030 |
|
|
|
12,220 |
|
|
|
7,855 |
|
President, Research and |
|
|
2004 |
|
|
|
114,811 |
|
|
|
49,162 |
|
|
|
— |
|
|
|
6,574 |
|
Development |
|
|
2003 |
|
|
|
111,100 |
|
|
|
19,002 |
|
|
|
56,000 |
|
|
|
— |
|
| |
Dominic J. Spadafore, Vice |
|
|
2005 |
|
|
|
136,097 |
|
|
|
190,376 |
|
|
|
11,680 |
|
|
|
11,015 |
|
President, Sales and |
|
|
2004 |
|
|
|
133,486 |
|
|
|
100,570 |
|
|
|
— |
|
|
|
9,778 |
|
Marketing |
|
|
2003 |
|
|
|
130,866 |
|
|
|
64,553 |
|
|
|
36,000 |
|
|
|
1,578 |
|
| |
Mary Ann Victor, Vice President |
|
|
2005 |
|
|
|
117,699 |
|
|
|
93,360 |
|
|
|
12,861 |
|
|
|
9,297 |
|
and Chief Administrative |
|
|
2004 |
|
|
|
111,384 |
|
|
|
57,861 |
|
|
|
— |
|
|
|
7,689 |
|
Officer and Secretary |
|
|
2003 |
|
|
|
106,400 |
|
|
|
29,005 |
|
|
|
56,000 |
|
|
|
897 |
|
| |
Pamela A. Winters, Vice |
|
|
2005 |
|
|
|
119,853 |
|
|
|
76,030 |
|
|
|
12,220 |
|
|
|
8,890 |
|
President, Operations |
|
|
2004 |
|
|
|
114,811 |
|
|
|
49,461 |
|
|
|
— |
|
|
|
7,621 |
|
|
|
|
2003 |
|
|
|
111,100 |
|
|
|
26,562 |
|
|
|
50,000 |
|
|
|
948 |
|
|
|
|
| (1) |
|
Amounts for 2005 include (a) the following matching contributions paid by us into our 401(k)
plan on behalf of the following persons: $8,400 for Mr. Barrett, $7,855 for Mr. Scheuing, $8,400
for Mr. Spadafore, $8,400 for Ms. Victor and $7,855 for Ms. Winters, and (b) the following premiums
paid for additional disability insurance for the following persons: $3,174 for Mr. Barrett, $2,615
for Mr. Spadafore, $897 for Ms. Victor and $1,035 for Ms. Winters. |
Stock Option Grants
The following table sets forth information concerning individual grants of stock options made
during the fiscal year ended November 30, 2005 to each of our executive officers named in the
Summary Compensation Table
73
above. Amounts in the following table represent potential realizable
gains that could be achieved for the options if exercised at the end of the option term. The five
percent and ten percent assumed annual rates of compounded stock price appreciation are calculated
based on the requirements of the Securities and Exchange Commission and do not represent an
estimate or projection of our future stock prices. These amounts represent certain assumed rates
of appreciation in the value of our common shares from the fair market value on the date of grant.
Actual gains, if any, on stock option exercises depend on the future performance of the common
shares and overall stock market conditions. The amounts reflected in the following table may not
necessarily be achieved.
Option Grants In Last Fiscal Year
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Individual Grants |
|
|
| |
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
Potential |
| |
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
Realizable Value at |
| |
|
Number of |
|
Options |
|
|
|
|
|
|
|
|
|
Assumed Annual |
| |
|
Securities |
|
Granted to |
|
|
|
|
|
|
|
|
|
Rates of Stock Price |
| |
|
Underlying |
|
Employees |
|
Exercise |
|
|
|
|
|
Appreciation |
| |
|
Options |
|
in Fiscal |
|
Price |
|
Expiration |
|
for Option Term |
| Name |
|
Granted (#) (1) |
|
Year |
|
($/Sh) |
|
Date |
|
5% ($) |
|
10% ($) |
Bruce J. Barrett |
|
|
31,919 |
|
|
|
24.2 |
|
|
|
13.55 |
|
|
|
4/21/15 |
|
|
|
271,998 |
|
|
|
689,298 |
|
Richard S. Scheuing |
|
|
12,220 |
|
|
|
9.2 |
|
|
|
13.55 |
|
|
|
4/21/15 |
|
|
|
104,133 |
|
|
|
263,893 |
|
Dominic J. Spadafore |
|
|
11,680 |
|
|
|
8.8 |
|
|
|
13.55 |
|
|
|
4/21/15 |
|
|
|
99,531 |
|
|
|
252,232 |
|
Mary Ann Victor |
|
|
12,861 |
|
|
|
9.7 |
|
|
|
13.55 |
|
|
|
4/21/15 |
|
|
|
109,595 |
|
|
|
277,736 |
|
Pamela A. Winters |
|
|
12,220 |
|
|
|
9.2 |
|
|
|
13.55 |
|
|
|
4/21/15 |
|
|
|
104,133 |
|
|
|
263,893 |
|
|
|
|
| (1) |
|
The options listed in the table were non-qualified stock options granted to Messrs. Barrett,
Scheuing and Spadafore, Ms. Victor and Ms. Winters in fiscal 2005 under our 2005 Stock Incentive
Plan or 1997 Stock Option Plan, exercisable at the then current fair market value of the underlying
common shares. Each of these options is exercisable in full beginning November 30, 2005. Each
option also becomes 100 percent exercisable 10 days before or immediately upon specified changes in
control. The portion of these options that is exercisable at the date of termination of employment
remains exercisable until the expiration date of the option, unless termination is for cause. |
If, upon exercise of any of the options described above, we must pay any amount for income tax
withholding, in the Compensation Committee’s or the board of directors’ sole discretion, either the
optionee will pay such amount to us or we will appropriately reduce the number of common shares we
deliver to the optionee to reimburse us for such payment. The Compensation Committee or the board
may also permit the optionee to choose to have these shares withheld or to tender common shares the
optionee already owns. The Compensation Committee or the board may also make such other
arrangements with respect to income tax withholding as it shall determine.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
The following table sets forth information concerning each exercise of stock options during
the fiscal year ended November 30, 2005 by each of the executive officers named in the Summary
Compensation Table above and the value of unexercised options held by them as of November 30, 2005:
74
Aggregated Option Exercises In Last Fiscal Year And FY-End Option Values
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Number of Securities |
|
Value of Unexercised |
| |
|
Shares |
|
|
|
|
|
Underlying Unexercised |
|
In-the-Money Options |
| |
|
Acquired on |
|
Value |
|
Options at FY-End (#) |
|
at FY-End ($) |
| Name |
|
Exercise (#) |
|
Realized ($)(1) |
|
Exercisable |
|
Unexercisable |
|
Exercisable |
|
Unexercisable |
Bruce J. Barrett |
|
|
178,200 |
|
|
|
3,198,532 |
|
|
|
761,919 |
|
|
|
— |
|
|
|
20,488,234 |
|
|
|
— |
|
Richard S. Scheuing |
|
|
50,000 |
|
|
|
875,000 |
|
|
|
138,220 |
|
|
|
— |
|
|
|
3,709,399 |
|
|
|
— |
|
Dominic J. Spadafore |
|
|
30,000 |
|
|
|
723,100 |
|
|
|
117,680 |
|
|
|
— |
|
|
|
3,178,185 |
|
|
|
— |
|
Mary Ann Victor |
|
|
51,000 |
|
|
|
977,300 |
|
|
|
153,261 |
|
|
|
— |
|
|
|
4,083,211 |
|
|
|
— |
|
Pamela A. Winters |
|
|
75,750 |
|
|
|
1,620,713 |
|
|
|
163,220 |
|
|
|
— |
|
|
|
4,257,089 |
|
|
|
— |
|
|
|
|
| (1) |
|
“Value Realized” represents the fair value of the underlying securities on the exercise date,
based on the average of the high and low sales prices on the date of exercise, minus the aggregate
exercise price of the options. |
Compensation of Directors
We refer to our directors who are not our officers or employees as Outside Directors.
Effective June 1, 2005, each Outside Director receives a fee of $1,000 a month and reimbursement of
reasonable expenses of attending board and board committee meetings. In addition, the board of
directors may grant options to Outside Directors on a case by case basis. On May 4, 2005, we
granted a total of 30,000 non-qualified stock options to our Outside Directors under the 2005 Stock
Incentive Plan. The options are 10-year options, exercisable at $14.92 a share, the average of the
high and low sales prices of the common shares on May 4, 2005. The options vested on November 30,
2005 and continue to be exercisable after termination of the director’s service unless the director
is terminated for cause. Until May 4, 2005, our Outside Directors received $1,000 for each board
meeting attended in person, $250 for each telephonic board meeting attended and $250 for each board
committee meeting attended on a date other than the date of a board meeting. The board had also
determined to grant Outside Directors who continued to serve as our directors after each annual
meeting of shareholders, 10-year options to purchase 3,500 common shares each year on the date of
the annual meeting of shareholders, although such options were not granted in fiscal 2005. We also
reimbursed Outside Directors for their reasonable expenses of attending board and board committee
meetings.
Employment Contracts and Termination of Employment and Change-in-Control Arrangements
Bruce J. Barrett. Pursuant to an employment agreement entered into in May 1994, we employ
Bruce J. Barrett as our President and Chief Executive Officer, or in such other position as the
board of directors determines. His employment under the agreement expires on April 30, 2006. Mr.
Barrett’s annual salary is currently $258,544, which may be increased by the board of directors.
Mr. Barrett is also entitled to participate in any bonus plan established by the Compensation
Committee of the board of directors. Mr. Barrett is entitled to various fringe benefits under the
agreement, including 12 months of compensation and six months of benefits if his employment under
the agreement is terminated without cause or if the agreement expires without being renewed. Mr.
Barrett has agreed not to compete with us during specified periods following the termination of his
employment.
Dominic J. Spadafore. Pursuant to an employment agreement entered into in August 2002, we
employ Dominic J. Spadafore as our Vice President, Sales and Marketing, or in such other position
as the board of directors determines. His employment under the agreement expires upon his death,
termination by us upon his disability or with or without cause or termination by Mr. Spadafore.
Mr. Spadafore’s annual salary is currently $142,015, which may be increased by the board of
directors. Mr. Spadafore is also entitled to participate in commission incentive plans. Mr.
Spadafore is entitled to various fringe benefits under the agreement.
As of June 13, 2005, we entered into an amended and restated employment agreement with Dominic
J. Spadafore. The amendment and restatement primarily replaces provisions in his employment
agreement to match those in the new Change in Control, Invention, Confidentiality, Non-Compete and
Non-Solicitation Agreements entered into with five other executive officers and described below.
The agreement now provides for severance benefits equal to one year’s salary upon termination of
employment without cause or for good reason 90 days before to one year after a change of control of
the Company that occurs by June 13, 2008. Mr. Spadafore has agreed not to
75
compete with us and not to solicit our employees during specified periods following the
termination of his employment, and he has agreed to various confidentiality obligations.
Change in Control, Invention, Confidentiality, Non-Compete and Non-Solicitation Agreements.
In June 2005, we entered into Change in Control, Invention, Confidentiality, Non-Compete and
Non-Solicitation Agreements with five of our executive officers: William M. Iacona, Richard S.
Scheuing, Mary Ann Victor, Ronald A. Widman and Pamela A. Winters. These agreements provide for
severance benefits equal to one year’s salary upon termination of employment without cause or for
good reason 90 days before to one year after a change of control of the Company that occurs by June
13, 2008, June 29, 2008 for Mr. Scheuing. The officers have agreed not to compete with us and not
to solicit our employees during specified periods following the termination of employment, and they
have agreed to various confidentiality obligations.
Stock Option Terms. All options granted under our stock option plans that are not already 100
percent exercisable immediately, including options granted to Messrs. Barrett, Scheuing and
Spadafore, Ms. Victor and Ms. Winters, become 100 percent exercisable immediately ten days before
or upon specified changes in control of the Company. On November 30, 2005, our board of directors
accelerated all outstanding options that had not already vested.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended November 30, 2005, Dr. Ausman, Mr. Follis (Chairman) and Mr.
Henry served as the members of our Compensation Committee. None of the members of our Compensation
Committee was, during the fiscal year ended November 30, 2005, one of our officers or employees, or
one of our former officers. None of the committee members had any relationship with us requiring
disclosure by us pursuant to Securities and Exchange Commission rules regarding disclosure of
related-party transactions.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The following information is furnished as of January 26, 2006 with respect to each of our
directors, each of our executive officers named in the Summary Compensation Table in Item 11 of
this report, all of our directors and executive officers as a group, and each person known by us to
own more than 5 percent of our common shares. For purposes of the table below, and in accordance
with the rules of the Securities and Exchange Commission, we deem common shares that are subject to
options that are currently exercisable or exercisable within 60 days of January 26, 2006 to be
outstanding and beneficially owned by the person holding the options for the purpose of computing
the percentage ownership of that person, but we do not treat them as outstanding for the purpose of
computing the percentage ownership of any other person. Except as otherwise noted, the persons or
entities in this table have sole voting and investment power with respect to all of the common
shares beneficially owned by them.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amount and |
|
Percentage |
| |
|
Nature of |
|
of |
| |
|
Common Shares |
|
Common |
| |
|
Beneficially |
|
Shares |
| Name |
|
Owned |
|
Owned(1) |
Daniel S. Follis |
|
|
25,620 |
|
|
|
(2 |
) |
|
|
* |
|
Robert R. Henry |
|
|
283,200 |
|
|
|
(3 |
) |
|
|
2.6 |
|
Bruce J. Barrett |
|
|
778,919 |
|
|
|
(4 |
) |
|
|
6.8 |
|
Dr. James I. Ausman |
|
|
46,785 |
|
|
|
(5 |
) |
|
|
* |
|
Richard S. Scheuing |
|
|
138,220 |
|
|
|
(6 |
) |
|
|
1.3 |
|
Dominic J. Spadafore |
|
|
121,180 |
|
|
|
(7 |
) |
|
|
1.1 |
|
Mary Ann Victor |
|
|
158,361 |
|
|
|
(8 |
) |
|
|
1.5 |
|
Pamela A. Winters |
|
|
163,220 |
|
|
|
(9 |
) |
|
|
1.5 |
|
All directors and executive officers as a group (10 persons) |
|
|
1,962,137 |
|
|
|
(10 |
) |
|
|
15.9 |
|
|
|
|
| * |
|
Less than 1 percent |
| |
| (1) |
|
Based on 10,715,885 common shares outstanding as of January 26, 2006. |
76
|
|
|
| (2) |
|
Includes 13,500 common shares that Mr. Follis has the right to acquire within 60 days of
January 26, 2006. The 25,620 common shares shown above as beneficially owned by Mr. Follis
include 2,820 common shares owned by The Infinity Fund, a limited partnership in which Mr.
Follis is a six percent limited partner and a 50 percent general partner and which is
administered by Verschuren & Follis, Inc., a corporation in which Mr. Follis is a 50 percent
shareholder, a director and the President. |
| |
| (3) |
|
Includes 26,500 common shares that Mr. Henry has the right to acquire within 60 days of
January 26, 2006. |
| |
| (4) |
|
Includes 761,919 common shares that Mr. Barrett has the right to acquire within 60 days of
January 26, 2006 and 17,000 common shares owned jointly with his wife. The street address of
Mr. Barrett is 1653 East Maple Road, Troy, Michigan 48083-4208. |
| |
| (5) |
|
Includes 34,011 common shares that Dr. Ausman has the right to acquire within 60 days of
January 26, 2006, 9,744 common shares owned jointly with his wife, and 3,030 shares held in an
individual retirement account over which Dr. Ausman exercises sole voting and investment
control. |
| |
| (6) |
|
Includes 138,220 common shares that Mr. Scheuing has the right to acquire within 60 days of
January 26, 2006. |
| |
| (7) |
|
Includes 117,680 common shares that Mr. Spadafore has the right to acquire within 60 days of
January 26, 2006 and 3,500 common shares that Mr. Spadafore owns jointly with his spouse. |
| |
| (8) |
|
Includes 153,261 common shares that Ms. Victor has the right to acquire within 60 days of
January 26, 2006, 2,000 common shares held by Ms. Victor’s husband and 3,100 common shares
held by Ms. Victor’s husband jointly with his mother. |
| |
| (9) |
|
Includes 163,220 common shares that Ms. Winters has the right to acquire within 60 days of
January 26, 2006. |
| |
| (10) |
|
Includes 1,654,943 common shares that all executive officers and directors as a group have
the right to acquire within 60 days of January 26, 2006. |
Equity Compensation Plan Information
The following information is provided as of November 30, 2005 with respect to compensation
plans, including individual compensation arrangements, under which our equity securities are
authorized for issuance:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
(c) |
| |
|
|
|
|
|
|
|
|
|
Number of securities |
| |
|
(a) |
|
(b) |
|
remaining available for |
| |
|
Number of securities to |
|
Weighted-average |
|
future issuance under |
| |
|
be issued upon exercise |
|
exercise price of |
|
equity compensation plans |
| |
|
of outstanding options, |
|
outstanding options |
|
(excluding securities |
| Plan category |
|
warrants and rights |
|
warrants and rights |
|
reflected in column (a)) |
Equity compensation
plans approved by
security holders (1) |
|
|
3,941,132 |
|
|
$ |
3.78 |
|
|
|
505,785 |
|
Equity compensation
plans not approved by
security holders (2) |
|
|
73,100 |
|
|
$ |
2.40 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,014,232 |
|
|
|
|
|
|
|
505,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
These plans consist of: (a) the 1991 Incentive Stock Option Plan, which terminated in 2001
except for the options granted before that date, (b) the 1993 Director Stock Option Plan, which
terminated in 1998, except for the options granted before that date, (c) the Somanetics Corporation 1997
Stock Option Plan, (d) the
Somanetics Corporation 2005 Stock Incentive Plan, and (e) the outstanding Warrants granted to
CorRestore LLC and its agent |
77
|
|
|
| |
|
Wolfe & Company to purchase an aggregate of 2,100,000 common shares at
$3.00 per share in connection with the June 2, 2000 CorRestore License Agreement. |
| |
| (2) |
|
These plans consist of non-qualified options to purchase 73,100 common shares granted to three
of our officers, employees and advisors, including one current executive officers, one current
employee and one advisor, granted independent of our stock option plans (including one option
granted in fiscal 2002 as an inducement essential to an new executive officer entering into an
employment agreement with us, which currently represents the right to purchase 70,000 common shares).
The options are subject to anti-dilution adjustments. |
The options granted independent of our stock option plans were granted on April 24, 1997 and
August 1, 2002. All of the options have vested. Options granted to one current officer and vested
at the time of termination of employment, continue to be exercisable until the original termination
date notwithstanding such termination, unless such termination is for cause, in which case such
options expire at the date of such termination. Other options expire at the date of termination of
employment, unless extended in the discretion of the Compensation Committee of our board of
directors.
The non-plan options expire 10 years after they were granted. The exercise prices of these
options, which were at least the fair market value of the underlying common shares on the date of
grant, range from $2.30 to $4.75. At the time these options are exercised, the optionee must pay
the full option price for all shares purchased:
| |
• |
|
in cash, or |
| |
| |
• |
|
with the consent of the Compensation Committee or the board of directors, in its
discretion, and to the extent permitted by applicable law, |
| |
• |
|
in common shares, |
| |
| |
• |
|
by a promissory note payable to the order of us that is acceptable
to the Compensation Committee or the board of directors, |
| |
| |
• |
|
by a cash down payment and a promissory note for the unpaid balance, |
| |
| |
• |
|
subject to any conditions established by the Compensation Committee
or the board of directors, by having us retain from the shares to be
delivered upon exercise of the stock option that number of shares
having a fair market value on the date of exercise equal to the option
price, |
| |
| |
• |
|
by delivery to us of written notice of the exercise, in such form as
the Compensation Committee or the board of directors may prescribe,
accompanied by irrevocable instructions to a stock broker to promptly
deliver to us full payment for the shares with respect to which the
option is exercised from the proceeds of the stock broker’s sale
of the shares or loan against them, |
| |
| |
• |
|
in such other manner as the Compensation Committee or the board of
directors determines is appropriate, in its discretion. |
Specified consolidations, mergers, transfers of substantially all of our properties and
assets, dissolutions, liquidations, reorganizations or reclassifications in such a way that holders
of common shares are entitled to receive stock, securities, cash or other assets with respect to,
or in exchange for, their common shares, are each referred to as a “Transaction.” If we engage in
a Transaction, then each holder of a non-plan option after consummation of the Transaction will be
entitled to receive (for the same aggregate exercise price) the stock and other securities, cash
and assets the holder would have received in the Transaction if he or she had exercised the option
in full immediately before consummation of the Transaction.
In addition, in connection with a Transaction, the Compensation Committee or the board of
directors, acting in its discretion without the consent of any holder of any non-plan option and
regardless of any other provision of the option, may:
| |
• |
|
permit such options to be exercised in full for a limited period of time, after which
all unexercised options and all rights of holders of such options would terminate, |
| |
| |
• |
|
permit such options to be exercised in full for their then remaining terms, or |
| |
| |
• |
|
require all such options to be surrendered to us for cancellation and payment to each
holder in cash of the excess of the fair market value of the underlying common shares as of
the date the Transaction is effective over the exercise price, less any applicable
withholding taxes. |
78
The Compensation Committee or the board of directors may not select an alternative for a holder
that would result in his or her liability under Section 16(b) of the Exchange Act, without the
holder’s consent. If all of the alternatives have such a result, the Compensation Committee or
board of directors will take action to put the holder in as close to the same position as he or she
would have been in if one of the alternatives described above had been selected, but without
resulting in any payment by the holder under Section 16(b) of the Exchange Act. With the consent
of each holder, the Compensation Committee or board of directors may make such provision with
respect to any Transaction as it deems appropriate.
The options may not be transferred other than by will or by the laws of descent and
distribution, and during the optionee’s lifetime, the option is exercisable only by the optionee.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents aggregate fees billed for each of the years ended November 30,
2005 and 2004 for professional services rendered by Deloitte & Touche LLP in the following
categories:
| |
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended |
| |
|
November 30, |
| |
|
2005 |
|
2004 |
Audit Fees (1) |
|
$ |
306,850 |
|
|
$ |
78,050 |
|
Audit-Related Fees |
|
$ |
0 |
|
|
$ |
0 |
|
Tax Fees (2) |
|
$ |
60,550 |
|
|
$ |
46,200 |
|
All Other Fees |
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
| (1) |
|
Consists of fees for the audit of our annual financial statements and, in fiscal 2005, the
audit of our internal controls over financial reporting, review of financial statements included in
our Form 10-Qs, and services provided in connection with our Registration Statement on Form S-8 in
connection with our 2005 Stock Incentive Plan in fiscal 2005. |
| |
| (2) |
|
Consists of tax return preparation fees. |
In accordance with Section 10A(i) of the Exchange Act, before Deloitte & Touche LLP is engaged
by us to render audit or non-audit services, the engagement is approved by our Audit Committee.
None of the audit-related, tax and other services described in the table above were approved by the
Audit Committee pursuant to Rule 2-01(c)(7)(i)(C) of Regulation S-X.
79
\
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) |
|
(1)Financial Statements |
Our financial statements for the following years are included in response to Item 8 of this report:
| |
|
|
Report of Independent Registered Public Accounting Firm |
| |
| |
|
|
Balance Sheets — November 30, 2005 and 2004 |
| |
| |
|
|
Statements of Operations — For Each of the Three Years in the Period Ended November
30, 2005 |
| |
| |
|
|
Statements of Shareholders’ Equity — For Each of the Three Years in the Period
Ended November 30, 2005 |
| |
| |
|
|
Statements of Cash Flows — For Each of the Three Years in the Period Ended November
30, 2005 |
| |
| |
|
|
Notes to Financial Statements |
| |
| |
(2) |
|
Financial Statement Schedules |
| |
| |
|
|
None. |
| |
| |
(3) |
|
Exhibits |
| |
| |
|
|
The Exhibits to this report are as set forth in the “Exhibit Index” on pages 82
to 84 of this report. Each management contract or compensatory plan or arrangement
filed as an exhibit to this report is identified in the “Index to Exhibits” with an
asterisk before the exhibit number. |
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 |
|
|
Date:
January 30, 2006
|
|
By:
|
|
/s/ Bruce J. Barrett |
|
|
|
|
|
|
|
|
|
| |
|
Bruce J. Barrett |
|
|
| |
|
President & Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
/s/ BRUCE J. BARRETT
Bruce J. Barrett
|
|
President and Chief Executive Officer and a Director
(Principal Executive Officer)
|
|
January 30, 2006 |
| |
|
|
|
|
/s/ WILLIAM M. IACONA
William M. Iacona
|
|
Vice President and Chief Financial Officer,
Controller, and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
|
|
January 30, 2006 |
| |
|
|
|
|
/s/ JAMES I. AUSMAN
James I. Ausman, M.D., Ph.D.
|
|
Director
|
|
January 28, 2006 |
| |
|
|
|
|
/s/ DANIEL S. FOLLIS
Daniel S. Follis
|
|
Director
|
|
January 30, 2006 |
| |
|
|
|
|
/s/ ROBERT R. HENRY
Robert R. Henry
|
|
Director
|
|
January 30, 2006 |
81
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
Description |
|
|
|
3(i)
|
|
Restated Articles of Incorporation of Somanetics Corporation,
incorporated by reference to Exhibit 3(i) to the Company’s
Quarterly Report on Form 10-Q for the quarter ended February 28,
1998. |
|
|
|
3(ii)
|
|
Amended and Restated Bylaws of Somanetics Corporation,
incorporated by reference to Exhibit 3(ii) to the Company’s
Annual Report on Form 10-K for the fiscal year ended November 30,
2003. |
|
|
|
10.1
|
|
Lease Agreement, dated September 10, 1991, between Somanetics
Corporation and WS Development Company, incorporated by reference
to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended August 31, 1991. |
|
|
|
10.2
|
|
Extension of Lease, between Somanetics Corporation and WS
Development Company, dated July 22, 1994, incorporated by
reference to Exhibit 10.11 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended August 31, 1994. |
|
|
|
10.3
|
|
Change in ownership of Lease Agreement for 1653 E. Maple Road,
Troy, MI 48083, dated September 12, 1994, between Somanetics
Corporation and First Industrial, L.P., incorporated by reference
to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended August 31, 1994. |
|
|
|
10.4
|
|
Second Addendum, between Somanetics Corporation and First
Industrial Mortgage Partnership, L.P., dated April 14, 1997,
incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended May 31, 1997. |
|
|
|
10.5
|
|
Third Amendment, between Somanetics Corporation and First
Industrial Mortgage Partnership, L.P., dated April 23, 1999,
incorporated by reference to Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended May 31, 1999. |
|
|
|
10.6
|
|
Fourth Amendment, between Somanetics Corporation and First
Industrial Mortgage Partnership, L.P., dated April 13, 2000,
incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended May 31, 2000. |
|
|
|
10.7
|
|
Fifth Amendment, between Somanetics Corporation and First
Industrial Mortgage Partnership, L.P., dated January 22, 2003,
incorporated by reference to Exhibit 10.7 to the Company’s Annual
Report on Form 10-K for the fiscal year ended November 30, 2002. |
|
|
|
10.8
|
|
Sixth Amendment, between Somanetics Corporation and First
Industrial Mortgage Partnership, L.P., dated April 21, 2004,
incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended May 31, 2004. |
|
|
|
*10.9
|
|
Somanetics Corporation Amended and Restated 1991 Incentive Stock
Option Plan, incorporated by reference to Exhibit 10.5 to the
Company’s Annual Report on Form 10-K for the fiscal year ended
November 30, 1991. |
|
|
|
*10.10
|
|
Fourth Amendment to Somanetics Corporation 1991 Incentive Stock
Option Plan, incorporated by reference to Exhibit 10.7 to the
Company’s Annual Report on Form 10-K for the fiscal year ended
November 30, 1992. |
|
|
|
*10.11
|
|
Amended and Restated Fifth Amendment to Somanetics Corporation
1991 Incentive Stock Option Plan, incorporated by reference to
Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the
fiscal year ended November 30, 1995. |
|
|
|
*10.12
|
|
Somanetics Corporation 1993 Director Stock Option Plan,
incorporated by reference to Exhibit 10.8 to the Company’s Annual
Report on Form 10-K for the fiscal year ended November 30, 1992. |
|
|
|
*10.13
|
|
Somanetics Corporation 1997 Stock Option Plan, incorporated by
reference to Exhibit 10.9 to the Company’s Annual Report on Form
10-K for the fiscal year ended November 30, 1996. |
|
|
|
*10.14
|
|
First Amendment to Somanetics Corporation 1997 Stock Option Plan,
incorporated by reference to Exhibit 10.11 to the Company’s
Annual Report on Form 10-K for the fiscal year ended November 30,
1997. |
|
|
|
*10.15
|
|
Second Amendment to Somanetics Corporation 1997 Stock Option
Plan, incorporated by reference to Exhibit 10.12 to the Company’s
Annual Report on Form 10-K for the fiscal year ended November 30,
1998. |
82
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
Description |
| |
*10.16
|
|
Third Amendment to Somanetics Corporation 1997 Stock Option Plan,
incorporated by reference to Exhibit 10.14 to the Company’s
Annual Report on Form 10-K for the fiscal year ended November 30,
1999. |
|
|
|
*10.17
|
|
Fourth Amendment to Somanetics Corporation 1997 Stock Option
Plan, incorporated by reference to Exhibit 10.16 to the Company’s
Annual Report on Form 10-K for the fiscal year ended November 30,
2000. |
|
|
|
*10.18
|
|
Fifth Amendment to Somanetics Corporation 1997 Stock Option Plan,
incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended February 28,
2002. |
|
|
|
*10.19
|
|
Sixth Amendment to Somanetics Corporation 1997 Stock Option Plan,
incorporated by reference to Exhibit 10.18 to the Company’s
Annual Report on Form 10-K for the fiscal year ended November 30,
2002. |
|
|
|
*10.20
|
|
Somanetics Corporation 2005 Stock Incentive Plan, incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form
8-K, dated February 24, 2005 |
|
|
|
*10.21
|
|
Somanetics Corporation 2005 Incentive Compensation Plan, dated as
of November 9, 2004, incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K, dated November 9, 2004
and filed November 12, 2004. |
|
|
|
*10.22
|
|
Employment Agreement, dated May 13, 1994, between Somanetics
Corporation and Bruce J. Barrett, incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended May 31, 1994. |
|
|
|
*10.23
|
|
Amendment to Employment Agreement, dated as of July 21, 1994,
between Somanetics Corporation and Bruce J. Barrett, incorporated
by reference to Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended August 31, 1994. |
|
|
|
*10.24
|
|
Amendment to Employment Agreement, dated as of April 24, 1997,
between Somanetics Corporation and Bruce J. Barrett, incorporated
by reference to Exhibit 10.21 to Amendment No. 1 to the
Registration Statement on Form S-1 (file no. 333-25275), filed
with the Securities and Exchange Commission on May 30, 1997. |
|
|
|
*10.25
|
|
Amendment to Employment Agreement, dated as of April 18, 2000,
between Somanetics Corporation and Bruce J. Barrett, incorporated
by reference to Exhibit 10.3 to the Company’s Quarterly report on
Form 10-Q for the quarter ended May 31, 2000. |
|
|
|
*10.26
|
|
Amendment to Employment Agreement, dated as of March 5, 2001,
between Somanetics Corporation and Bruce J. Barrett, incorporated
by reference to Exhibit 10.2 to the Company’s Quarterly report on
Form 10-Q for the quarter ended February 28, 2001. |
|
|
|
*10.27
|
|
Amendment to Employment Agreement, dated as of January 24, 2003,
between Somanetics Corporation and Bruce J. Barrett, incorporated
by reference to Exhibit 10.26 to the Company’s Annual Report on
Form 10-K for the fiscal year ended November 30, 2002. |
|
|
|
*10.28
|
|
Amended and Restated Employment Agreement between Somanetics
Corporation and Dominic J. Spadafore, incorporated by reference
to Exhibit 99.2 to the Company’s Current Report on Form 8-K,
dated June 13, 2005 and filed June 14, 2005. |
|
|
|
*10.29
|
|
Form of Change in Control, Invention, Confidentiality,
Non-Compete and Non-Solicitation Agreement, between Somanetics
Corporation and five executive officers, dated as of June 13,
2005, incorporated by reference to Exhibit 99.1 to the Company’s
Current Report on Form 8-K, dated June 13, 2005 and filed June
14, 2005. |
|
|
|
*10.30
|
|
Form of Director Stock Option Agreement, incorporated by
reference to Exhibit 10.30 to the Company’s Annual Report on Form
10-K for the fiscal year ended November 30, 2004. |
|
|
|
*10.31
|
|
Form of Officer Non-Qualified Stock Option Agreement,
incorporated by reference to Exhibit 10.31 to the Company’s
Annual Report on Form 10-K for the fiscal year ended November 30,
2004. |
|
|
|
*10.32
|
|
Form of Employee Non-Qualified Stock Option Agreement,
incorporated by reference to Exhibit 10.32 to the Company’s
Annual Report on Form 10-K for the fiscal year ended November 30,
2004. |
|
|
|
*10.33
|
|
Form of Incentive Stock Option Agreement, incorporated by
reference to Exhibit 10.33 to the Company’s Annual Report on Form
10-K for the fiscal year ended November 30, 2004. |
|
|
|
*10.34
|
|
Form of 2005 Stock Incentive Plan Incentive Stock Option
Agreement, incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended May
31, 2005. |
83
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
Description |
| |
*10.35
|
|
Form of 2005 Stock Incentive Plan Officer Non-Qualified Stock
Option Agreement, incorporated by reference to Exhibit 10.2 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended
May 31, 2005. |
|
|
|
*10.36
|
|
Form of 2005 Stock Incentive Plan Incentive Non-Officer
Non-Qualified Stock Option Agreement, incorporated by reference
to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended May 31, 2005. |
|
|
|
*10.37
|
|
Form of 2005 Stock Incentive Plan Director Stock Option
Agreement, incorporated by reference to Exhibit 10.4 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended May
31, 2005. |
|
|
|
*10.38
|
|
Form of Stock Option Agreement, dated as of April 24, 1997,
between Somanetics Corporation and twenty-three employees,
incorporated by reference to Exhibit 10.32 to Amendment No. 1 to
the Registration Statement on Form S-1 (file no. 333-25275),
filed with the Securities and Exchange Commission on May 30,
1997. |
|
|
|
*10.39
|
|
Stock Option Agreement, dated as of August 1, 2002, between
Somanetics Corporation and Dominic J. Spadafore, incorporated by
reference to Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended August 31, 2002. |
|
|
|
*10.40
|
|
Summary of Outside Director Compensation, incorporated by
reference to Item 1.01 to the Company’s Current Report on Form
8-K dated June 13, 2005 and filed June 14, 2005. |
|
|
|
*10.41
|
|
Consulting Agreement, dated February 28, 1983, as amended,
between Somanetics Corporation and Hugh F. Stoddart, incorporated
by reference to Exhibit 10.13 to the Company’s Annual Report on
Form 10-K for the fiscal year ended November 30, 1991. |
|
|
|
10.42
|
|
Current Form of Somanetics Corporation Confidentiality Agreement
used for testing hospitals and clinics, incorporated by reference
to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for
the fiscal year ended November 30, 1992. |
|
|
|
10.43
|
|
Current Form of Somanetics Corporation Confidentiality Agreement
used for the Company’s employees and agents, incorporated by
reference to Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended August 31, 1992. |
|
|
|
10.44
|
|
Registration Rights Agreement, dated as of April 9, 2001, among
Somanetics Corporation and the selling shareholders, incorporated
by reference to Exhibit 4.3 to the Somanetics Corporation
Registration Statement on Form S-3 (file no. 333-59376) filed
April 23, 2001 and effective May 3, 2001. |
|
|
|
10.45
|
|
License Agreement, dated as of June 2, 2000, among Somanetics
Corporation, CorRestore LLC, Constantine L. Athanasuleas, M.D.
and Gerald D. Buckberg, M.D., including forms of warrants from
Somanetics Corporation to CorRestore LLC and Joe B. Wolfe,
incorporated by reference to Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended May 31, 2000. |
|
|
|
10.46
|
|
Amendment No. 1 to License Agreement, dated as of August 1, 2002,
among Somanetics Corporation, CorRestore LLC, Constantine L.
Athanasuleas, M.D., and Gerald D. Buckberg, M.D., incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended August 31, 2002. |
|
|
|
14.1
|
|
Somanetics Corporation Code of Business Conduct and Ethics,
adopted December 12, 2003, incorporated by reference to Exhibit
14.1 to the Company’s Annual Report on Form 10-K for the fiscal
year ended November 30, 2003. |
|
|
|
23.1
|
|
Consent of Deloitte & Touche LLP. |
|
|
|
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. |
84