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Article by DailyStocks_admin    (01-14-10 11:22 PM)

Filed with the SEC from Dec 24 to Dec 30:

Somanetics (SMTS)
Discovery Group reported that it now has 631,737 shares (5.2%). The company paid a little more than $11.1 million, or $17.59 per share, to acquire its holding.

BUSINESS OVERVIEW

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 and elsewhere in the body in tissues beneath the sensor in patients with or at risk for restricted blood flow. 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 technology, which is used with multiple single-use disposable sensors, called SomaSensors or OxyAlert sensors. During our fiscal year ended November 30, 2008, net revenues from disposable sensors comprised approximately 72 percent of our net revenues. As of November 30, 2008, we had an installed base of 2,523 INVOS System monitors in the United States in 714 hospitals, and during fiscal 2008 we sold 424,647 sensors worldwide.
Clinical studies have shown that using the INVOS System to monitor and provide information to help manage the regional brain blood oxygen saturation of patients is associated with significantly fewer incidences of major organ dysfunction, 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, and the results were published in the January 2007 issue of a peer-reviewed anesthesia journal. 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 major organ morbidity or mortality was reduced from 11 percent to three percent and patients with major organ morbidity or mortality have significantly longer length of stay in the intensive care unit, or ICU, than those without. 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 are currently expanding the use of our INVOS System in the pediatric and neonatal ICU’s with the launch of our smaller sensor in the first half of fiscal 2008. Some of our potential future markets may include other major surgeries involving high risk patients. While our initial focus has been commercializing the INVOS System to measure blood oxygen saturation changes in the brain, many clinicians in the pediatric and neonatal ICU use the INVOS System to assess changes in oxygen saturation in regions of the body other than the brain in addition to cerebral oxygen saturation. 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 May 2008, we received 510(k) clearance from the FDA to market our INVOS System to monitor changes in blood oxygen saturation in any tissues beneath the sensor, not limited to brain and somatic tissue, in any individual. Our four-channel cerebral and somatic INVOS System monitor, which we launched in the second quarter of 2006, can display information from four disposable sensors. This feature allows for the simultaneous monitoring of changes in blood oxygen saturation in tissues beneath the sensor in four different places in the body in patients with or at risk for restricted blood flow.
We are sponsoring and evaluating sponsorship of clinical trials which may allow us to more actively target the sale of the INVOS System for use in high risk patient populations. There are also numerous other independent clinical studies evaluating the use of the INVOS System.

In November 2008, we acquired substantially all of the assets of ICU Data Systems, Inc., a technology development company, for approximately $2,000,000 in cash plus the assumption of specified liabilities. ICU Data Systems has developed a patented technology that integrates data from a broad array of hospital bedside devices, such as physiological monitors, ventilators and infusion devices, into a single bedside display for comparison, data management and storage. We plan to further develop and launch our newly-acquired data integration technology as a stand-alone device in mid-2009. The INVOS System is one of many devices whose data can be integrated into the stand-alone device. To support the addition of the derived parameter features to the system, we will pursue a new FDA 510(k) clearance in 2009. In addition, we expect to invest to combine the ICU Data Systems and INVOS System technologies in a single product for launch expected in the second half of 2010. We also plan to pursue a new FDA 510(k) clearance for this integrated device in 2010.
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 44 persons at the end of fiscal 2006 to 55 persons at the end of fiscal 2008, and two independent sales representative firms. The direct sales team will also be expected to sell our integrated data device. Outside the United States, we market the INVOS System through independent distributors, including Covidien, formerly Tyco Healthcare, in Europe, Canada, the Middle East and South Africa, and Edwards Lifesciences Ltd. in Japan. We expect to increase the size of our U.S. direct sales team in fiscal 2009 and are planning to hire direct salespersons and clinical specialists in Europe to support Covidien and sell our integrated data device. Our net revenues have increased from $28.7 million in the fiscal year ended November 2006 to $47.5 million in fiscal 2008, representing a compounded annual growth rate of 28.6 percent. As a percentage of net revenues, our gross margin decreased from 88 percent in fiscal 2006 to 87 percent in fiscal 2008.
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 ® , Reflecting the Color of Life ® , Enlightening Medicine ® , CorRestore ® , OxyAlert ® , OxyAlert NIRSensor ® , and iCuro ® are our United States registered trademarks. Each of the other trademarks, trade names or service marks appearing in this report is either pending registration or belongs to its respective holder.
Industry
Market Opportunity
We believe that in the United States in 2008 there were 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 tissue 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 other tissues 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 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 technology, which is used with multiple single-use disposable sensors. For multi-channel cerebral monitoring, disposable sensors are placed on both sides of a patient’s forehead and are connected to the monitor. The INVOS System uses our proprietary technology to analyze information received from the disposable sensors and provides a continuous digital and trend display of an index of the blood oxygen saturation in the area of the body under the sensors. Our four-channel cerebral and somatic INVOS System monitor, which we launched in the second quarter of 2006, can display information from four disposable sensors. This feature allows for the simultaneous monitoring of changes in blood oxygen saturation in tissues beneath the sensor in four different places in the body in patients with or at risk for restricted blood flow.

Surgeons, anesthesiologists, pediatric and neonatal ICU physicians, and other medical professionals can use the information provided by the INVOS System, in conjunction with other available information, to identify brain and other tissue oxygen imbalances and take necessary corrective action, potentially improving patient outcomes and reducing the costs of care. Once the cause of a cerebral or other tissue 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 demand can be more effectively assessed. Therefore, it responds to the changes in factors that affect the balance between oxygen supply and demand, including changes in arterial oxygen saturation, blood flow, hemoglobin concentration and oxygen consumption. The INVOS System responds to global changes in brain or other tissue oxygen levels and to events that affect oxygen levels in the region beneath the sensor.

ICU Data Systems, Inc.
In November 2008, we acquired substantially all of the assets of ICU Data Systems, Inc. ICU Data Systems has developed a patented technology that integrates data from a broad array of hospital bedside devices, such as physiological monitors, ventilators and infusion devices, into a single bedside display for comparison, data management and storage. The data integration technology allows customized presentation of data from various bedside devices for comparison on the same display and on the same timeline. The device can also calculate and display derived parameters, or calculated parameters based on the combination of two or more discrete parameters. In addition, the device can produce user-defined, automated event marks and alerts. All resulting information can be stored for inclusion in the patient record and clinical research.

We plan to further develop and launch our newly-acquired data integration technology as a stand-alone device in mid-2009. The INVOS System is one of many devices whose data can be integrated into the stand-alone device. To support the addition of the derived parameter features to the system, we will pursue a new FDA 510(k) clearance in 2009. In addition, we expect to invest to combine the ICU Data Systems and INVOS System technologies in a single product for launch expected in the second half of 2010. We also plan to pursue a new FDA 510(k) clearance for this integrated device in 2010.
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:
• 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 high risk 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.

• Sponsor Clinical Studies to Promote Expanded Acceptance of the INVOS System. We believe that our INVOS System has been evaluated in over 600 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. In addition, in January 2007 the results of the first prospective, randomized clinical trial mentioned above were published in a peer-reviewed anesthesia journal. We plan to sponsor clinical studies using the INVOS System to demonstrate its benefits. We are also sponsoring and evaluating sponsorship of other clinical trials which may allow us to more actively target the sale of the INVOS System for use in other high risk 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. In early 2008, The Society of Thoracic Surgeons began collecting cerebral oximetry information as part of its STS Adult Cardiac Surgery Database, which is used to develop practice standards intended to improve qualify and safety.

• 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 44 persons at the end of fiscal 2006 to 55 persons at the end of fiscal 2008, and two independent sales representative firms. The direct sales team will also be expected to sell our integrated data device. We expect to increase the size of our U.S. direct sales team in fiscal 2009 and are planning to hire direct salespersons and clinical specialists in Europe to support Covidien. We participate in trade shows and medical conferences, ongoing peer-to-peer educational programs and targeted public relations opportunities.

• 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 our sensors. We expect that such arrangements will provide another distribution channel for our INVOS System. We plan to further develop and launch our newly-acquired data integration technology as a stand-alone device in mid-2009. The INVOS System is one of many devices whose data can be integrated into the stand-alone device. In addition, we expect to invest to combine the ICU Data Systems and INVOS System technologies in a single product for launch expected in the second half of 2010. We also plan to pursue a new FDA 510(k) clearance for this integrated device in 2010.

• Develop Additional Applications and Markets for the INVOS System . We have developed a smaller sensor for use with infants, and are making other advances to the design and performance features of the INVOS System, including the disposable sensor. We are also evaluating additional potential market segments for our INVOS System, such as use in other major surgeries, in the adult ICU, and for applications of the technology to monitor other tissues. We are also exploring several novel near-infrared spectroscopy and imaging technologies and products under a Contract Development Agreement with Shirley Research Corporation. See “NeuroPhysics Corporation and Shirley Research Corporation” below. 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.
The INVOS System
Components of the INVOS System
The INVOS System consists of a portable monitoring system, including proprietary technology, which is used with multiple single-use disposable sensors.
• Monitor . Our oximeter is a portable monitor that uses our proprietary technology to analyze information received from the disposable sensors. It provides a continuous digital and trend display of an index of the oxygen saturation in the region of the body under the sensors. 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 USB storage device or through a direct link to a computer. Our four-channel cerebral and somatic INVOS System monitor, which we launched in the second quarter of 2006, measures approximately 11 inches wide, 9 inches high, and 7 inches deep and weighs approximately 11 pounds. We provide a one-year warranty on the monitor. As of November 30, 2008, we had an installed base of 2,523 INVOS System monitors in the United States in 714 hospitals.

• Disposable sensors . Each single-use disposable sensor contains a light source and two light detectors. For multi-channel cerebral monitoring, disposable sensors 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 four-channel cerebral and somatic INVOS System monitor, which we launched in the second quarter of 2006, can display information from four sensors. This feature allows for the simultaneous monitoring of changes in blood oxygen saturation in tissues beneath the sensors in four different places in the body in patients with or at risk for restricted blood flow. The number of sensors used depends on the application. The INVOS System is being used to monitor simultaneously the brain and other tissue initially for patients in the pediatric and neonatal ICU and for monitoring other, non-brain tissue alone, and we expect that it will later also be used on adults for other, non-brain tissue. The disposable sensors contain information that is processed by the INVOS System allowing it to automatically calibrate each sensor. During our fiscal year ended November 30, 2008, net revenues from our disposable sensors comprised approximately 72 percent of our net revenues. During fiscal 2008 we sold 424,647 sensors 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 disposable sensors transmitting low-intensity visible and near-infrared light through 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 disposable sensor contains a light source and two light detectors. The dual detector design of the sensor 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 other 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 other tissue under examination to provide a measurement of changes in brain or other 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 other tissue monitoring in the following key market segments:
• 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.

MANAGEMENT DISCUSSION FROM LATEST 10K
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 the blood oxygen levels in the brain and elsewhere in the body in tissues beneath the sensor in patients with or at risk for restricted blood flow.
We began commercializing our model 5100 INVOS System 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 are currently expanding the use of our INVOS System in the pediatric and neonatal ICU’s with the launch of our smaller sensor in the first half of fiscal 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. In May 2008, we received 510(k) clearance from the FDA to market our INVOS System to monitor changes in blood oxygen saturation in any tissues beneath the sensor, not limited to brain and somatic tissue, in any individual. Our four-channel cerebral and somatic INVOS System monitor, which we launched in the second quarter of 2006, can display information from four disposable sensors. This feature allows for the simultaneous monitoring of changes in blood oxygen saturation in tissues beneath the sensor in four different places in the body in patients with or at risk for restricted blood flow, in somatic tissue.
In November 2008, we acquired substantially all of the assets of ICU Data Systems, Inc., a technology development company, for approximately $2,000,000 in cash plus the assumption of specified liabilities. ICU Data Systems has developed a patented technology that integrates data from a broad array of hospital bedside devices, such as physiological monitors, ventilators and infusion devices, into a single bedside display for comparison, data management and storage. We plan to further develop and launch our newly-acquired data integration technology as a stand-alone device in mid-2009. The INVOS System is one of many devices whose data can be integrated into the stand-alone device. To support the addition of the derived parameter features to the system, we will pursue a new FDA 510(k) clearance in 2009. In addition, we expect to invest to combine the ICU Data Systems and INVOS System technologies in a single product for launch expected in the second half of 2010. We also plan to pursue a new FDA 510(k) clearance for this integrated device in 2010.

Net Revenues and Cost of Sales
We derive our revenues primarily from sales of INVOS Systems to hospitals in the United States through our direct sales team and independent sales representative firms, although we expect to derive modest revenues in fiscal 2009 from our newly-acquired data integration technology, which we plan to launch as a stand-alone device in mid-2009 through our direct sales team. Outside the United States, we have distribution agreements with independent distributors for the INVOS System, including Covidien, formerly Tyco Healthcare, in Europe, Canada, the Middle East and South Africa, and Edwards Lifesciences Ltd. in Japan. Our cost of sales represent the cost of producing monitors and disposable sensors. Revenues from outside the United States contributed 20 percent to our fiscal 2008 net revenues. As a percentage of net 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 sensors. We intend that disposable sensors will form the basis of a recurring revenue stream. In addition, 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. 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. We recognize sensor revenue when we receive purchase orders and ship the product to the customer.

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, stock compensation, 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 44 persons at the end of fiscal 2006 to 55 persons at the end of fiscal 2008. We expect to increase the size of our U.S. direct sales team in fiscal 2009 and are planning to hire direct salespersons and clinical specialists in Europe to support Covidien. We also expect increased sales and marketing expenses and increased stock compensation expenses in fiscal 2009. As a result, we expect selling, general and administrative expenses to increase in fiscal 2009.

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.
For the fiscal year ended November 30, 2006, we recorded a research and development expense of $1,000,000 in connection with our former contract development and exclusive licensing agreement with NeuroPhysics Corporation.

We expect our research and development expenses to increase in fiscal 2009 as a result of development costs associated with our newly-acquired data integration technology, development costs associated with our Contract Development Agreement with Shirley Research Corporation and the addition of research and development personnel.
Deferred Tax Assets and Impairment Charges
For the fiscal year ended November 30, 2006, we 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 net tax benefit on our statement of operations for fiscal 2006 of $750,000.
For the fiscal year ended November 30, 2007, we recognized income tax expense at an estimated effective tax rate of 35 percent on our statement of operations. This income tax expense included a non-cash tax expense on our statement of operations for fiscal 2007 of $5,076,276. In November 2007, we wrote off obsolete inventory of $180,521.
For the fiscal year ended November 30, 2008, we recognized income tax expense at an estimated effective tax rate of 36 percent on our statement of operations. This income tax expense included a non-cash tax expense on our statement of operations for fiscal 2008 of $5,586,906. In addition, during fiscal 2008 we recognized deferred tax assets related to the exercise of stock options of approximately $1,012,000. These assets were recognized in additional paid in capital on our balance sheet because they were utilized and reduced current taxes payable.
Results of Operations
Fiscal Year Ended November 30, 2008 Compared to Fiscal Year Ended November 30, 2007
Net Revenues. Our net revenues increased $8,869,785, or 23 percent, from $38,585,832 in the fiscal year ended November 30, 2007 to $47,455,617 in the fiscal year ended November 30, 2008. The increase in net revenues is primarily attributable to:
• an increase in U.S. sales of $6,474,215, or 21 percent, from $31,560,930 in fiscal 2007 to $38,035,145 in fiscal 2008. The increase in U.S. sales was primarily due to an increase in sales of the disposable sensor of $5,619,820, or 23 percent, primarily as a result of a 16 percent increase in sensor unit sales. In addition, sales of the INVOS System monitor in the United States increased $932,969, or 14 percent, primarily as a result of increased purchases by pediatric hospitals; and

• an increase in international sales of $2,395,570, or 34 percent, from $7,024,902 in fiscal 2007 to $9,420,472 in fiscal 2008. The increase in international sales was primarily due to increased purchases of our INVOS System monitor and disposable sensors of $1,655,456 by Covidien in Europe, and $686,471 by Edwards Lifesciences in Japan. In fiscal 2008, international sales represented 20 percent of our net revenues, compared to 18 percent of our net revenues in fiscal 2007. Purchases by Covidien accounted for 14 percent of net revenues in fiscal 2008, compared to 13 percent in fiscal 2007.
In the United States, we sold 288,797 disposable sensors in fiscal 2008, and internationally, we sold 135,850. We placed 517 INVOS System monitors in the United States and 621 internationally in fiscal 2008, and our installed base of INVOS System monitors in the United States was 2,523, in 714 hospitals, as of November 30, 2008.

We believe that the current economic downturn in the United States and abroad could significantly lengthen the sales cycle for our products and reduce the growth in our net revenues in fiscal 2009.
Gross Margin. Gross margin as a percentage of net revenues was 87 percent for the fiscal year ended November 30, 2008 and 88 percent for the fiscal year ended November 30, 2007. The decrease in our gross margin percentage is primarily attributable to increased international sales, due to lower margins we receive on sales to our international distributors. This decrease was partially offset by a six percent increase in the average selling price of disposable sensors in the United States, which is attributable to increased sales of our pediatric sensors, which sell for a higher price than the adult sensor.
Research, Development and Engineering Expenses. Our research, development and engineering expenses increased $590,412, or 88 percent, from $668,815 in fiscal 2007 to $1,259,227 in fiscal 2008. The increase is primarily attributable to an increase in salaries of $279,487 due to the addition of research and development personnel in fiscal 2007 and 2008, and increased costs associated with advances to the design and performance features of our INVOS System monitor and disposable sensors of $214,803. We expect our research, development and engineering expenses to increase in fiscal 2009 primarily as a result of development costs associated with development of our newly-acquired data integration technology as a stand-alone device, development of a single product combining the data integration technology with our INVOS System technology, development costs associated with advances to the design and performance features of the INVOS System, including the disposable sensor, development costs associated with our Contract Development Agreement with Shirley Research Corporation and the hiring of additional research and development personnel.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $3,896,936, or 17 percent, from $22,269,184 for the fiscal year ended November 30, 2007 to $26,166,120 for the fiscal year ended November 30, 2008, primarily due to:

We expect our selling, general and administrative expenses to increase in fiscal 2009, primarily as a result of our hiring additional direct sales personnel in fiscal 2008 and 2009, increased employee sales commissions payable as a result of increased sales, increased sales and marketing expenses and increased stock compensation expenses.
Other Income. During fiscal 2008, interest income decreased to $2,629,967, from $4,008,537 in fiscal 2007, primarily due to decreased interest rates, decreased investment balances, and the use of cash for the repurchase of common shares, partially offset by our increased cash and cash equivalents balances as a result of cash provided by operating activities and maturities and redemptions of investments.
Income Taxes. As of November 30, 2008, we recognized income tax expense at an estimated effective tax rate of 36 percent on our statement of operations. In addition, during fiscal 2008 we recognized deferred tax assets related to the exercise of stock options of approximately $1,012,000. These assets were recognized in additional paid in capital on our balance sheet because they were utilized and reduced current taxes payable. As of November 30, 2007, we recognized income tax expense at an estimated effective tax rate of 35 percent on our statement of operations.
Fiscal Year Ended November 30, 2007 Compared to Fiscal Year Ended November 30, 2006
Net Revenues. Our net revenues increased $9,885,232, or 34 percent, from $28,700,600 in the fiscal year ended November 30, 2006 to $38,585,832 in the fiscal year ended November 30, 2007. The increase in net revenues is primarily attributable to:
• an increase in U.S. sales of $8,284,866, or 36 percent, from $23,276,064 in fiscal 2006 to $31,560,930 in fiscal 2007. The increase in U.S. sales was primarily due to an increase in sales of the disposable sensor of $5,691,400, or 30 percent, primarily as a result of a 24 percent increase in sensor unit sales. In addition, sales of the INVOS System monitor in the United States increased $2,841,360, or 75 percent, primarily as a result of increased purchases by pediatric hospitals; and

• an increase in international sales of $1,600,366, or 30 percent, from $5,424,536 in fiscal 2006 to $7,024,902 in fiscal 2007. The increase in international sales was primarily due to increased purchases of the INVOS System monitor and disposable sensors by Covidien, formerly Tyco Healthcare, in Europe, and increased purchases by Edwards Lifesciences in connection with the launch of our four-channel cerebral and somatic INVOS System monitor in Japan, partially for evaluation and demonstration purposes. In fiscal 2007, international sales represented 18 percent of our net revenues, compared to 19 percent of our net revenues in fiscal 2006. Purchases by Covidien accounted for 13 percent of net revenues in fiscal 2007, compared to 15 percent in fiscal 2006.
In the United States, we sold 248,360 sensors in fiscal 2007, and internationally, we sold 122,690. We placed 509 INVOS System monitors in the United States and 434 internationally in fiscal 2007, and our installed base of INVOS System monitors in the United States was 2,006, in 664 hospitals, as of November 30, 2007.

Other Income. During fiscal 2007, interest income increased to $4,008,537, from $2,582,033 in fiscal 2006, primarily due to our increased cash, cash equivalents, marketable securities and long-term investment balances as a result of cash provided by operating activities and the proceeds from our public offering of common shares that closed in the second quarter of fiscal 2006, and increased interest rates.
Income Taxes. As of November 30, 2007, we recognized income tax expense at an estimated effective tax rate of 35 percent on our statement of operations, and we expect this to continue for future periods. As of November 30, 2006, 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 2006 of $750,000, and increased our net income for fiscal 2006 to $10,399,957, or $0.75 per diluted common share. For fiscal 2006, the reversal of our valuation allowance was net of recorded taxes. The net income tax benefit of $750,000 consisted of income tax expense recorded at an estimated effective tax rate of 34 percent in the amount of $2,604,663 for the first three quarters of fiscal 2006, and a net deferred tax benefit of $3,354,663 recorded in the fourth quarter of fiscal 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

On August 7, 2009, Somanetics Corporation filed a patent infringement action against CAS Medical Systems, Inc. in the United States District Court for the Eastern District of Michigan. The complaint asserts that CAS Medical’s FORE-SIGHT ® Cerebral Oximeter willfully infringes upon one or more of Somanetics’ patents. The complaint also asserts that CAS Medical has engaged in unfair competition and false advertising, by making false or misleading statements in connection with its advertising and promotion of FORE-SIGHT, and false or misleading statements related to Somanetics’ products. The complaint seeks, among other things, compensation for damages and an injunction against CAS Medical from infringing upon Somanetics’ patents. CAS Medical Systems, Inc.’s CEO has stated that he does not believe CAS Medical has infringed on these patents or engaged in unfair competition and that it intends to vigorously defend all of the claims.

On April 3, 2008, we publicly announced that our Board of Directors authorized the repurchase of up to $15 million of our common shares. Purchases may be made from time to time in the open market or in privately negotiated transactions. The prices, timing and amount of, and purposes for, any purchases will be determined by management. On May 9, 2008, we publicly announced that our Board of Directors approved an increase in the limit on the share repurchase program and authorized the repurchase of up to an additional $15 million of our common shares, and on July 1, 2008, we publicly announced that our Board of Directors approved an increase in the limit on the share repurchase program and authorized the repurchase of up to an additional $15 million of our common shares, for a total of $45 million of our common shares under the repurchase program. During the fiscal year 2008, we repurchased 1,805,129 common shares at an average price of $17.42 per share and an aggregate cost of $31,449,420. All of the shares were purchased by us in open-market transactions pursuant to this publicly-announced share repurchase program. The program does not have an expiration date, except upon purchase of the maximum authorized dollar amount of our common shares.

CONF CALL

Mary Ann Victor
Thank you. Good morning everyone. Thank you for attending our third quarter 2009 investor conference call.
Statements concerning our future business, operating results, expected net revenues, anticipated investments and other guidance are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements are based upon management’s expectations as of today, September 17, 2009. You are cautioned not to place undue reliance on these statements. Information contained in these statements is inherently uncertain and actual performance and results may differ materially.
Factors that could cause results to differ materially from any forward-looking statements include economic conditions in general and in the healthcare market, including the recent global economic crisis; market demand for our products; our dependence on the INVOS System and disposable sensors; and on distributors for a substantial portion of our sales; single source suppliers; competition; the management of our growth; our ability to attract and retain key personnel; the potential for product liability claims; government regulation; challenges associated with developing products and obtaining and maintaining regulatory approval; research and development; the lengthy sales cycle for our product; employee turnover; changes in actual or estimated future income; changes in accounting rules; enforceability and cost of enforcement of patents; potential infringements of others patents; the effect of acquisitions and other factors set forth from time to time in our SEC filings.
The company undertakes no obligation to revise or publicly release the results of any revisions in today’s forward-looking statements.
Now I will turn the call over to our President and CEO, Bruce Barrett.
Bruce J. Barrett
Thank you, Mary Ann. Good morning and welcome to our call.
We began our third quarter with the extension of our exclusive distribution agreement with Covidien in Europe, the Middle East and Africa. This extension enables us to move forward developing our INVOS Cerebral/Somatic Oximeter business in these important markets with an excellent partner.
In August we completed our initial hiring and training of personnel in Europe to support Covidien. We now have four people dedicated to the European market, with one person in each of Germany, Italy, France and Spain.
Also during the quarter we continued to make progress establishing the INVOS System in adult cardiovascular surgeries and laying the groundwork to capitalize on our entry into the neonatal ICU. We also experienced early success with adoption of the INVOS System for use during soldier surgeries performed with patients in a seated position, a new market opportunity that I will discuss later. And we initiated the launch of our Vital Sync System that integrates data from various bedside devices.
In August we filed a patent infringement and unfair competition complaint against CAS Medical Systems in the district court for the eastern district of Michigan. The complaint asserts that CAS Medicals’ FORE-SIGHT Cerebral Oximeter System infringes at least three of Somanetics U.S. patents and that CAS Medical has engaged in a pattern of false and misleading statements in advertising and promoting their device.
From a financial perspective, hospitals continue to limit capital spending and slow adoption of new technology to cope with the adverse economic conditions. U.S. invo system hardware revenue of nearly $1.3 million was almost double what we produced in the second quarter and similar to the same period a year ago. Yet we still found it difficult to finalize capital sales projects.
Purchases of hardware by our international distribution partners were down 58% against a very strong comparative quarter, but also reflecting the global nature of the economic crisis. In the U.S. market sensor revenue increased 13% over the same period a year ago. Sequential growth for sensors over the second quarter was similar to the level we’ve experienced in recent years. Disposable sensor purchases by our international distribution partners increased more than 20% over the same period a year ago.
We delivered strong earnings in the quarter, with diluted earnings per share of $0.17. Throughout the year we have slowed expansion of the U.S. sales and education team and generally managed our investments in response to the adverse economic environment.
We have completed beta testing for our new Vital Sync System and in August we completed initial training of our U.S. field sales and education team to initiate promotion of the system. While this is a capital sale that will take time to produce revenue, we are encouraged by early experience in the marketplace. In particular, early customer feedback reinforces our belief that the Vital Sync System will provide us a tool to accelerate research and understanding of the INVOS System, as well as further differentiate our product in the ICU environment.
In the neonatal ICU, customer response to the INVOS System has been very positive and we are encouraged by feedback from our early users as well as our clinical researchers. While the economic environment has greatly slowed early adoption in the neonatal ICU, we continue to work a growing number of new business opportunities as well as pursue further development for the value proposition for the INVOS System in this important market segment.
With regards to the value proposition, we are working to reduce the cost of use by extending the number of days a sensor can be used on a patient. Currently our sensors are labeled for 24 hour use and are difficult to re-adhere once removed. To extend the useful life of a sensor and reduce the cost of monitoring per day, we are validating and preparing a new FDA 510(k) filing to obtain clearance for an off-the-shelf adhesive solution that can be placed between the sensor and the patient that will permit removal and reapplication of the same sensor for several days. Our neonatal customers and advisors have indicated that extending the use of our sensors in this way would largely address the cost of use issue.
On the value side of the equation, many independent studies are ongoing that we expect to further establish the benefits of use of the INVOS System in the neonatal ICU. Certain of these studies are establishing normal and critical values for oxygen saturation of the brain, kidneys and bowels for patients of various gestational ages. This information allows clinicians to identify patients with abnormal vital organ profusion so they can take corrective action and assess the impact of the therapies. The results of one such study of 100 term and pre-term infants was recently published in the Journal of Neurovascular Research. These data give customers a basic understanding of the values they should expect in normal term and pre-term infants to use as a baseline for understanding when patients fall outside the norm.
Also, Dr. Istvan Seri from L.A. Children’s Hospital, who is a leading expert in hemodynamics and shock in neonates, directed and completed extensive neonatal piglet research in the period. This series of studies assessed the impact of various cardiac drugs routinely used in neonates on brain, bowel and kidney oxygenation and profusion. The results of these experiments seem to conclusively demonstrate the value of the INVOS System in managing cardiac drug use in neonates.
Other studies are evaluating the relationship between INVOS System values and clinical outcomes or pathologies. For example, we are very encouraged by early data evaluating the role of monitoring the regional oxygen saturation of the bowels in pre-term infants at risk of bowel ischemia or neck. Several studies relating to this topic are ongoing, and as these and other results are published we expect to build a stronger argument for use of the INVOS System in the neonatal ICU.
Overall, we are pleased with the progress we are making with our business in a challenging economic environment.
And now Bill is going to review our financial results in more detail for the periods. Bill?
William M. Iacona
Thanks, Bruce.
As we reported this morning, our net revenues for the third quarter were $12.5 million, a 1% increase over the same period of 2008. For the nine months ended August 31, net revenues were $35.5 million, a 5% increase over 2008. U.S. net revenues increased 10% in Q3 to $10.4 million and represented approximately 83% of our total sales for the quarter. For the nine months ended August 31, U.S. net revenues increased 5% to $28.4 million and represented 80% of our total company sales.
For the third quarter, U.S. disposable sensor revenues grew 13% to $9.1 million and our INVOS hardware decreased 2% to approximately $1.3 million. For the first nine months of 2009, U.S. disposable sensor revenues increased 15% to $25.6 million and our INVOS hardware revenues decreased 42% to approximately $2.8 million, reflecting slower hospital capital equipment spending in the U.S. as a result of the current economic climate.
Our international net revenues in Q3 were $2.1 million, a decrease of 28% from $3 million in Q3 ’08, primarily due to reduced purchases of our INVOS System monitor by Covidien in Europe, reflecting slower hospital capital equipment spending in Europe. Year-to-date our international net revenues increased 5% to $7.1 million.
For the quarter ended August 31, we placed 89 INVOS monitors in 53 hospital accounts in the United States. Internationally we sold 87 INVOS monitors. For the nine months ended, we placed 277 INVOS monitors in the U.S. and 360 OUS. As of August 31, 2009 our installed base of INVOS monitors in the U.S. grew to 2,800 monitors in more than 750 hospitals. In the third quarter, our U.S. sensor unit sales increased 10% to 83,540 and year-to-date U.S. sensor units grew 11% to 235,806.
Our combined pediatric and neonatal sensor sales accounted for approximately 35% of total U.S. sensor revenues and 27% of total U.S. sensor units for the quarter and year-to-date 2009. Total company sensor unit sales increased 12% to 132,130 in the third quarter of 2009 and increased 17% to 366,726 for the nine month period.
Gross margin was strong at 88% for the third quarter of 2009 compared to 86% in the same period a year ago, primarily due to an increased percentage of U.S. sales in Q3 of ’09. Year-to-date gross margin percentage was 87% for 2009 and 2008, consistent with our expected gross margin.
During 2009, our operating expenses have increased, primarily as a result of continued investments in sales and marketing and research and development, the establishment of our international BV and related branches in Europe and the hiring of international sales employees. For the three and nine months ended August 31, our operating expenses have increased 20% and 14% respectively compared to 2008, primarily due to items such as trade shows, sales training, recruiting, international sales hires and administrative expenses, as well as investments in R&D headcount and project expenses.
Q3 operating income was $3.2 million compared to $4.2 million a year ago, and year-to-date operating income was $7.6 million compared to $9.1 million in the first nine months of 2008.
Income before income taxes for the quarter was $3.5 million and net income for Q3 was $2.2 million or $0.17 per diluted share. Year-to-date income before income taxes was $8.5 million compared to $11.3 million a year ago and net income for the first nine months of 2009 was $5.3 million compared with $7.1 million in the same period of 2008.
Our balance sheet and operating cash flow continue to remain strong with cash, marketable securities and long-term investments totaling approximately $77.7 million as of August 31. And cash flow from operations for the first nine months of the year were approximately $7.9 million. The company has no borrowings.
I will now turn the call back over to Bruce, who will talk about the business for the remainder of 2009.
Bruce J. Barrett
Thank you, Bill.
At the end of the second quarter we offered guidance for net revenues in the range of $50 to $52 million and operating margin of approximately 20%. To achieve $50 million in revenue we need to deliver the same percentage of our total year sales in the fourth quarter that we’ve achieved in each of the past few years. While economic headwinds may pose a threat, given this history and our new business pipeline we are maintaining our revenue guidance.
With regards to operating margin, we previously offered guidance that operating margin as a percent of sales would come in at about 20% on continuing operations. Through nine months, operating margin is at 21.4% and we remain comfortable with our guidance at the 20% level.
As we close out fiscal 2009, we will continue our efforts to develop the INVOS System opportunities in the cardiovascular surgery, pediatric and neonatal ICU market segments. We estimate these markets represent potential annual disposable sensor revenue worldwide of $800 million.
Over time, there are many other markets that we plan to pursue with the INVOS System. For example, today there is developing market interest in addressing the risk of adverse cerebral outcomes associated with shoulder surgeries performed with a patient in the seated position. There have been several reports of severe adverse cerebral outcomes in patients during this procedure. These adverse outcomes are believed to be the result of inadequate cerebral profusion pressure and oxygenation despite apparently adequate mean arterial pressure. This topic has been the subject of articles in the Anesthesia Patient Safety Foundation Newsletter over the past year, and there is an entire session dedicated to this topic at the upcoming American Society of Anesthesiologists annual meeting in October. At that meeting, we will be working to make the link between the risk of adverse cerebral outcomes in these procedures and the potential safety benefit offered by the INVOS System.
Already our sales team reports 16 hospital centers using the INVOS System in shoulder surgeries. This is a logical additional sales call that our people can make while selling the INVOS System in our core target markets and may represent another avenue to contribute to our growth moving forward.
In summary, we believe we are taking proper steps to strengthen our leadership position with the INVOS System. We have a strong balance sheet and financial profile. We have some exciting developing opportunities and we believe we are positioned to deliver a solid finish to the year.
And now, Bill and I would be glad to answer any of your questions.


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