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At February 28, 2010, the Registrant had 17,540,128 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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FISCAL YEAR 2009 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These statements include, but are not limited to, those concerning the following: regarding future events, our future financial performance, business strategy, product introductions and plans and objectives of management for future operations, regulatory approvals, and clinical timelines. Forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially. For a detailed discussion of these risks and uncertainties, see the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Form 10-K. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.
We develop, manufacture and sell minimally-invasive medical devices that are used in the diagnosis and treatment of breast cancer. Our initial product focus has been biopsy systems and breast tissue markers and in January 2008 we launched a radiation balloon catheter for localized partial breast irradiation therapy. With the emergence of clinicians coordinating multi-disciplinary patient care through integrated breast centers, we believe that our ability to provide a broad array of products will enhance our competitive positioning. Since we launched our first breast tissue marker products in 2002, we have established over 1,000 customer accounts. In 2009, we generated net revenues of $55.6 million. The sale of disposable products, including our breast biopsy probes, radiation therapy products and tissue markers, accounted for 90.0% of our revenues in 2009.
The EnCor system, our flagship product for use in breast biopsy procedures, is a minimally-invasive vacuum-assisted breast biopsy system. EnCor allows users to obtain multiple biopsy samples with a quick, single probe insertion. In contrast to existing competitive systems, EnCor is the only commercialized “open/closed” tissue collection system compatible in all three imaging modalities, providing the operator with a clear view of tissue samples through a proprietary transparent collection chamber, and the ability to either open the chamber to examine and remove one or more samples or to continue uninterrupted collection of multiple samples. EnCor also incorporates novel programmability, which allows the user to select automated cutting patterns, tissue density, number of samples, and to deliver anesthetic. The EnCor system’s handpieces and disposable probes are compatible with the most commonly used imaging modalities, including x-ray, ultrasound, magnetic resonance imaging, or MRI, and positron emission tomography, or PET. With its simplicity and versatility, we believe that EnCor can play an important role in the paradigm shift from invasive open surgical to minimally-invasive biopsy procedures. We launched the EnCor system on a limited basis and conducted marketing preference testing in late 2004 and subsequently progressed with a full commercial launch in November 2005. In 2007, we further enhanced the versatility of the EnCor system with the FDA clearance in the United States of our SenoSonix system, a combination of EnCor with state-of-the art ultrasound imaging technology, and with the commercial launch of VisiLoc, an MRI visible obturator that helps to facilitate accurate probe placement under MRI guidance. As of December 31, 2009, we had an installed base of 991EnCor systems and we had sold more than 310,000 EnCor disposable probes.
Our Contura Multi-Lumen Radiation Balloon Catheter, or Contura MLB, our flagship radiation therapy product, for which we received FDA 510(k) clearance in May 2007, launched in January 2008 and received its CE Mark in Europe in March 2009, is designed to be a novel localized partial breast irradiation therapy device that uses vacuum to remove excess seroma and air to enhance conformance of often irregularly shaped lumpectomy cavity walls to the balloon’s surface in order to deliver precise irradiation dosing through multiple radiation source lumens. We believe that Contura MLB can play an important role in the paradigm shift from traditional whole breast radiation therapy to localized partial breast radiation therapy. In 2008 and 2009, our Contura MLB program was the subject matter of a law suit filed by Hologic and its affiliates that generally alleged patent infringement of certain Hologic brachytherapy patent claims. On December 17, 2009, the jury in the case returned a verdict ruling in our favor on all counts that were then remaining in the matter; however, Hologic has subsequently filed an appeal in February of this year.
Our headquarters is in Irvine, California and we were incorporated in Delaware in January 1998.
One in eight women in the United States will develop breast cancer during her lifetime, a risk that was one in fourteen in 1960. It is estimated that in the United States, approximately 192,000 new cases of breast cancer were diagnosed in 2008. Breast cancer is the second-leading cause of cancer-related death in U.S. women overall, and the leading cause of cancer-related death for women of ages 20 to 59. Over 70% of breast cancers occur in women who have no identifiable risk factor other than age. The older a woman is, the greater her chance of getting breast cancer. One of the major challenges in the treatment of breast cancer is that, while the disease typically does not show symptoms in early stages, survival is dramatically impacted by the stage at which the disease is diagnosed and treated. If breast cancer is detected at an early “localized” stage and treated, the 5-year survival rate is 98%. If the cancer has spread to nearby lymph nodes, the 5-year survival rate decreases to 81%. If the cancer has spread, or metastasized, to organs such as the lungs, bone marrow, liver or brain, the 5-year survival rate falls to 26%. These statistics underscore the need for early diagnosis and treatment of breast cancer. Currently, 62% of breast cancers are discovered at an early, localized stage. The number of breast biopsies performed annually has increased significantly since 1997 when the American Cancer Society updated its guidelines for breast cancer screening, recommending that women should begin annual screening at age 40 rather than the previously recommended age 50. However, some studies conclude that annual breast cancer screening by mammography for women under age 50 may be more harmful, due to increased radiation exposure, than beneficial and as a result of this and other factors, the trend towards earlier and broader screening programs may not continue or mammography may be supplemented by other screening modalities in the future. Recently, an independent panel of experts appointed by the federal Department of Health and Human Services recommended a return to screening starting at age 50. In response to this recommendation, the American Cancer Society has stated that it does not plan to revise its guidelines. In addition, outside of the United States, mammography screening programs are in the early stage of adoption, which has been accelerating in the last several years.
Breast Cancer Screening, Diagnosis and Treatment
The principal means of breast cancer screening are physical examination and mammography. In a physical examination, the patient’s breast is examined to search for palpable lesions or any other abnormalities. However, physical examination cannot detect small, early stage lesions that may be cancerous. As a result, mammography, a low-dose x-ray imaging technique, is recognized as the best screening method for detecting breast cancer in its earliest stages, when the disease is most successfully treated and there are more treatment options. Historically, mammograms are believed to find 85% to 90% of breast cancers in women over 50, and can discover a lesion one to four years before a lump can be felt. Newer technologies, such as digital mammography and tomosynthesis, are being introduced into the market and may help increase the lesion detection rate. Nevertheless, for patients with dense breast tissue, breast implants or patients who are breastfeeding, the images produced by a mammogram can be difficult for a radiologist to interpret. Consequently, physicians will often order a secondary screening using ultrasound, or, in some cases, MRI.
If breast cancer screening detects a lesion, a physician will typically recommend that the patient undergo a breast biopsy, a diagnostic procedure in which breast tissue samples are extracted to determine whether a lesion is benign or malignant. The breast biopsy procedure is performed by either a radiologist or surgeon. As a final step in the biopsy procedure, the physician usually places a tissue marker at the location from which the sample was removed as a point of reference. If the sample is found to be cancerous and more tissue must be removed from the breast, the marker will help the physician identify the specific area from which tissue should be removed. This can minimize the amount of healthy tissue removed from the breast during surgery. If surgery is not required, the marker will be visible on future screenings to enable the physician to identify the site of the previous biopsy.
If a breast biopsy indicates that a patient’s lesion is malignant, the patient is often scheduled for surgery to remove the tumor and to sample nearby lymph nodes to determine if the cancer has spread. Surgical procedures include a breast conserving therapy, known as lumpectomy, in which the cancerous lesion and a margin of surrounding normal tissue is removed, and mastectomy, in which the entire breast is removed. It is estimated that at least 50% of women with breast cancer, typically women whose breast cancer was detected at an early stage, are good candidates for lumpectomies. In most cases, a course of radiation therapy after lumpectomy is part of the treatment, as a means of destroying any cancer cells that may remain. Additionally, 75% of women who have mastectomies go on to have surgical reconstruction of one or both breasts, either using artificial implants or their own body tissue to rebuild the breast. Some women who have lumpectomies also choose breast reconstruction for cosmetic improvement.
Evolution of Breast Biopsy Procedures
According to the Millennium Research Group, there were approximately 1.9 million breast biopsies performed in the United States in 2009. This number has increased significantly since 1997, at which time approximately 750,000 biopsies were performed, and is expected to continue to increase year-over-year. In 1997, the American Cancer Society updated its guidelines for breast cancer screening, recommending that women should begin annual screening at age 40. The previous guideline had recommended annual mammography for women beginning at age 50. This updated guidance, along with increased public awareness and technological improvements in screening and diagnostic equipment, likely has contributed to the increase in breast biopsies over the past decade. Biopsy methods include surgical biopsy, needle biopsy, and vacuum-assisted biopsy, all of which, according to the American Cancer Society, have similar accuracy rates.
Surgical Biopsy. Traditionally, most breast biopsies were performed as open surgical procedures, and such procedures remain common today, often being preferred for large lesions. The procedure has several drawbacks. Surgery is highly invasive, requires at least one full day of recovery and can leave a visible scar and depression at the site of the removed tissue. It can also lead to scar tissue formation within the breast, which can complicate the interpretation of follow-up mammograms.
Needle Biopsy. Needle biopsy emerged as the first minimally-invasive biopsy technique, enabling extraction of tissue samples without surgery, but rather through insertion of a needle to remove tissue. The typical procedure involves repeated needle insertions to acquire multiple samples. If the breast lesion is large enough to feel, the physician can do a needle biopsy by directly guiding the needle into the lesion. If the lesion is too small or too deep within the breast to be felt, a needle biopsy is done using breast imaging methods to guide the needle into the lesion. There are two types of needle biopsy:
Vacuum-Assisted Biopsy. In a single sample, vacuum-assisted biopsy is able to remove approximately six to ten times as much breast tissue as core needle biopsy. Vacuum-assisted biopsy incorporates a special probe that can capture tissue samples from a single insertion into the breast through a small nick in the skin, promoting minimal patient discomfort and a relatively short procedure time. Vacuum-assisted biopsy is typically performed with imaging technology, either using a specially designed stereotactic x-ray table to pinpoint the site of the lesion, or with real-time ultrasound guidance. During the procedure, vacuum is used to draw tissue from the lesion into an opening located on or at the end of the biopsy probe, and a cutter is then used to sever this tissue sample. Among the minimally-invasive biopsy options, vacuum-assisted biopsy is the only method that can obtain multiple contiguous tissue samples with a single insertion, which makes the procedure an attractive alternative for most lesions, including those that may be indicative of early stage cancer.
A vacuum-assisted biopsy device can either be an “open” or “closed” system. An open system requires each sample to be individually cut, extracted and removed from the device, a relatively time consuming process that requires the assistance of a technician. The first open system vacuum-assisted biopsy device, the Mammotome, was introduced in 1995. A closed system automatically transports samples to a sealed tissue collection chamber, allowing multiple samples to be collected without having to interrupt collection by removing tissue from the device. In 2002, a closed system vacuum-assisted biopsy device called the ATEC was introduced. Both open and closed systems have been widely adopted. While closed systems may result in faster procedure times and minimize fluid loss, open systems allow visualization of the sample, which may be preferred by a technician to ensure that the proper area of the breast is being targeted. Today, in many cases customers prefer a vacuum-assisted biopsy system that is compatible with all three major imaging modalities, stereotactic, ultrasound, and MRI.
According to the Millennium Research Group, vacuum-assisted biopsies became the predominant biopsy method, surpassing open surgical breast biopsy procedures in 2007. Vacuum-assisted biopsies are already the predominant minimally-invasive method, accounting for 681,700 of 1,839,500 such procedures performed in the United States in 2008. Millennium projects that vacuum-assisted biopsies will account for 1,075,900 of 2,342,200 such procedures performed in the United States in 2013.
Evolution from Whole to Partial Breast Irradiation Therapy
Following a lumpectomy to remove a cancerous breast tumor, many patients are subsequently treated with breast radiation therapy to destroy any cancer cells that may remain. Similar to the evolution in breast biopsy toward minimally-invasive procedures, radiation therapy is beginning to transition from whole breast radiation, which is currently used in the vast majority of cases, to more localized radiation therapy.
Whole Breast Radiation. Following a lumpectomy, the current standard of care is to treat patients with external beam radiation that is widely directed at the whole breast. Although the use of radiation has improved long-term survival rates, this treatment is inconvenient for patients, often requiring daily outpatient radiation treatments for six to eight weeks, and can expose healthy tissue and organs to damaging effects from the radiation.
Accelerated Partial Breast Irradiation, or APBI. APBI delivers localized radiation to a targeted surgical site. For appropriate patients, this method offers a number of advantages including greatly-diminished treatment time, concentrated radiation exposure and the reduction of skin irritation and burning. There are currently three approaches to APBI in the market.
Breast Care Market Trends
The breast care market has undergone a significant evolution over recent years, driven by advancements in imaging technologies, which has led a paradigm shift to less invasive devices and procedures for screening and for diagnosis, and to comprehensive patient care through integrated breast centers.
Advances in Imaging Technology for Screening. Digital mammography is being rapidly adopted as clinical studies suggest advantages over traditional film mammography. When the patient has dense breast tissue, breast implants or is breastfeeding, the images produced by either traditional or digital mammography can be difficult for a radiologist to interpret. Consequently, physicians will often order a secondary screening using ultrasound. MRI may also be used as a secondary screening method for these patients, and is being recommended as a primary screening technique for high-risk women as young as 30. Breast tomosynthesis, a newer form of digital mammography which is an emerging technology that is currently in the experimental development stage. Tomosynthesis is a process in which multiple 2D x-rays of the breast are combined using computer software to produce a more focused 3D image.
Advances in Imaging Technology for Biopsy. Technological advances in imaging have allowed for more effective and less invasive diagnosis and treatment of breast cancer. While stereotactic x-ray imaging and ultrasound guidance are used most frequently in conjunction with biopsy procedures, MRI may also become an important alternate imaging modality for both diagnosis and treatment.
Paradigm Shift to Less Invasive Procedures. Advancements in imaging technology have allowed abnormal breast tissue to be identified at an early stage and have helped facilitate the emergence of novel, less invasive diagnostic and therapeutic devices for accessing and removing this tissue. For example, open surgical biopsies and needle biopsies are giving way to minimally-invasive vacuum-assisted procedures. Similarly, excision of tumors is shifting from invasive mastectomies to less invasive lumpectomies. In addition, radiation treatment is shifting from whole breast radiation to partial breast radiation.
Emergence of Integrated Breast Centers. Effective screening, diagnosis and treatment of breast cancer require interaction among specialists in multiple departments of a healthcare system. These include, but are not limited to, surgery, oncology, radiology, pathology and plastic surgery. While many of these services exist in any given healthcare system, the concept of a breast center is to organize these services into a coordinated, multidisciplinary approach where the patient’s care is integrated. This coordinated approach allows for higher-quality and more patient-focused care than she might receive from the same specialists working in isolation. Breast centers can be at one physical location, with all services available at one site, or they can be virtual, organizing the interaction of diverse services found at different locations. A factor in the accelerating establishment of integrated breast centers is the increasing public awareness of the importance of quality breast care. Breast centers are also actively educating the general public as it relates to the latest clinical and technological advances available in minimally-invasive diagnosis and treatment.
We believe that there is significant opportunity for a company that offers breast centers a full range of minimally-invasive diagnostic and therapeutic devices that are both compatible with multiple imaging modalities and flexible enough to be tailored to the diverse needs of the physicians on the breast care team.
We have commercialized, and are continuing to develop, a broad product line of minimally-invasive breast care devices to be used by breast care specialists. By focusing on the continuum of care from diagnostic to excision and therapeutic procedures, we believe that we will be an attractive and convenient supplier for integrated breast centers.
Our Breast Care Management Product Continuum
Our current commercial products and products under development include:
The EnCor system, our flagship product for use in breast biopsy procedures, is a vacuum-assisted system which allows users to obtain multiple tissue samples with a quick, single insertion. EnCor can be used with multiple imaging modalities, including stereotactic x-ray, ultrasound and MRI. EnCor is the only “open/closed” tissue collection system compatible in all three imaging modalities, providing the operator with a clear view of tissue samples through a proprietary transparent collection chamber, and the ability to either open the chamber to examine and remove one or more samples or to continue uninterrupted collection of multiple samples. Our EnCor system also incorporates proprietary programmability and automation features which provide a competitive advantage to other marketed biopsy systems. In 2007, we further enhanced the versatility of the EnCor system with the FDA clearance in the United States of our SenoSonix system, a combination of EnCor with state-of-the art ultrasound imaging technology, and with the commercial launch of VisiLoc, an MRI visible obturator that helps to facilitate accurate probe placement under MRI guidance.
The Contura Multi-Lumen Radiation Balloon Catheter, or Contura MLB, our flagship radiation therapy product, for which we received FDA 510(k) clearance in May 2007, launched in January 2008 and received its CE Mark in Europe in March 2009, is designed to be a novel localized partial breast irradiation therapy device that uses vacuum to remove excess seroma and air to enhance conformance of often irregularly shaped lumpectomy cavity walls to the balloon’s surface in order to deliver precise radiation dosing through multiple radiation source lumens. In addition, we began marketing Contura Shape Select MLB in 2009, a new larger version of Contura MLB with a novel proprietary design that provides clinicians with enhanced flexibility.
Our goal is to become the leader in providing minimally-invasive solutions across the continuum of care in the breast care market. The key elements of our business strategy to achieve this goal are to:
Our Products and Products under Development
We are focused on developing and offering a broad portfolio of products that address needs across the continuum of breast care, from the diagnosis to the treatment of breast cancer. The sale of disposable products, including our breast biopsy probes, tissue markers and radiation therapy products, accounted for 90.0% of our revenues in 2009, 87.3% in 2008 and 86% in 2007. The following table provides information concerning our primary products and products under development.
Breast Biopsy Systems
Components of Our Breast Biopsy Systems
Our breast biopsy systems primarily consist of two components—reusable handpieces and disposable probes—and are used in conjunction with our SenoRx Breast Biopsy Console.
We offer probes in a variety of sizes, ranging from 7-gauge to 10-gauge, depending on user preference. The probe cutters and tips incorporate one or more of our proprietary tissue cutting technologies.
We also received clearance for and launched additional products that are used together or in conjunction with our EnCor system.
EnCor Breast Biopsy System
Our flagship product for use in breast biopsy procedures, the EnCor system, is a vacuum-assisted breast biopsy system that facilitates adoption of minimally-invasive biopsy procedures over open surgical biopsy. The EnCor system is comprised of a reusable handpiece and disposable probes that are used in conjunction with our SenoRx Breast Biopsy Console. We believe the EnCor system offers a comprehensive set of features which make it an attractive solution for meeting the diverse demands of breast care providers. Key features of the EnCor system include:
The EnCor system also incorporates a number of additional features, including compatibility with our tissue markers, multiple gauge sizes, automated sample rinsing, lighting, an ergonomically-designed handpiece, noise reduction and novel MRI probe insertion accessories and proprietary ultrasound options. We received FDA 510(k) clearance and conducted marketing preference testing of the EnCor system in 2004, with full commercial launch in 2005.
EnCor 360 Breast Biopsy System
Our EnCor 360 system utilizes a vacuum to provide the physician with a contiguous 360° breast biopsy sample. The EnCor 360 system incorporates our mechanical Tri-Concave Tip to penetrate virtually any lesion, regardless of size, location or density. EnCor 360 secures tissue through the end of the probe, providing a large, high-quality sample. Since the EnCor 360 is interchangeable and compatible with the SenoRx Breast Biopsy console, users may select EnCor 360 or EnCor depending upon their clinical and economic objectives.
We received FDA 510(k) clearance in 2002 and launched EnCor 360 in 2003, as our initial product in the vacuum-assisted breast biopsy segment. We intend to continue to offer the EnCor 360 as a low-cost, ultrasound-guided breast biopsy device. We believe that our EnCor 360 and future product enhancements will continue to appeal to clinicians doing ultrasound biopsies in their offices, which is a more price-sensitive segment of the biopsy market.
SenoSonix with EnCor
In October 2007 we received 510(k) clearance from the FDA for SenoSonix with EnCor, an integration of our EnCor system with a state-of-the-art ultrasound imaging system developed by third-party. We received the right to affix CE Mark in the European Union for SenoSonix with EnCor in April of 2008 and patents are currently pending. We are marketing SenoSonix with EnCor primarily for physician in-office procedures, particularly in Europe, where we believe a greater percentage of biopsy procedures are done under ultrasound imaging guidance. SenoSonix with EnCor may be used with either our EnCor or EnCor 360 probes. In April 2009, we introduced a new version of SenoSonix that incorporates “hand-carry” laptop ultrasound technology from a second third party ultrasound OEM source. This version of SenoSonix has increased ease of portability and is well suited for the target physician in-office market.
We are currently developing a next Generation EnCor System that contains all the functional capabilities of
the current EnCor, but is integrated into a new ergonomic, modern design package that incorporates a PC-based, 15 inch Touch Screen Display. The display provides a new, large intuitive user’s interface for easy and flexible control of all features of the EnCor, EnCor360 and EnCor MRI platforms. The display feature also enables:
We expect to commercially launch this product in the second half of 2010.
VisiLoc MRI Visible Obturator
We launched the VisiLoc MRI Visible Obturator in the United States in November 2007. VisiLoc is an MRI visible obturator that is used during an MRI-guided EnCor procedure and is designed to help facilitate biopsy probe placement under MRI guidance.
Gel Mark Ultra, SenoMark, StarchMark, and RFID Tag (Biopsy Site Tissue Markers)
Biopsy site tissue markers are placed at a biopsy site to provide a visible landmark for future surgical reference. If cancer is found and more tissue must be removed from the breast, the marker will help the physician identify the specific area from which tissue should be removed. If surgery is not necessary, the marker will be visible on future mammograms to enable the breast care specialist to identify the site of the biopsy.
We offer a full portfolio of tissue markers that are compatible not only with our EnCor and EnCor 360 biopsy product lines, but also with competing biopsy systems. Our products consist of markers that come in a variety of materials, including gelatin and synthetic materials, titanium and stainless steel, and associated delivery applicators. The markers are designed to facilitate easy placement and optimize visibility under different imaging modalities.
We were first to commercialize markers visible not only under x-ray, but also ultrasound imaging. Gel Mark Ultra is designed to provide pellet-shaped, ultrasound-visible, bioresorbable tissue marker alternatives. Gel Mark UltraCor provides core needle users with an ultrasound-visible tissue marking alternative. SenoMark provides those users who prefer a pad-shape with an ultrasound-visible, bioresorbable tissue marker alternative. StarchMark provides polysaccharide (starch) pellets to help manage and control bleeding. Our UltraCor MRI may be an attractive alternative for clinicians interested in marking lesions under MRI guidance. We received FDA 510(k) clearance and began commercializing Gel Mark in 2002, Gel Mark Ultra and Gel Mark UltraCor in 2004, and SenoMark in 2006. We received FDA 510(k) clearance and conducted marketing preference testing of the Gel Mark UltraCor MRI in 2004, with full commercial launch occurring in the second half of 2006. We received FDA 510(k) clearance and conducted marketing preference testing of StarchMark in 2008, and in April 2009 commercially launched the product.
We submitted an application for FDA 510(k) clearance in the fourth quarter 2009 for a new radio frequency identification (RFID) localization system that allows placement of an RFID tag into a breast lesion preoperatively, typically by a radiologist, for subsequent intraoperative lesion localization and removal by a surgeon. We have not received clearance from the FDA on this product and cannot predict when such approval will ultimately be obtained, if at all. The system employs a needle/syringe-type applicator to percutaneously place the tag in conjunction with a RFID reader. This novel system eliminates the need for preoperative localization wire placement and eliminates the need for close schedule coordination between the radiologist and the surgeon as surgery can be scheduled up to 7 days post tag implantation instead of the same day. The system consists of an applicator, RFID tag, RFID reader, and sterile probe covers. The disposable applicator is used to insert the RFID tag into the breast at the site of a lesion to mark its location. Placement is conducted under ultrasound or x-ray guidance. The reader displays the distance between the tag and the reader and the tag location is also indicated by an audible sound whose pitch and volume is proportional to the “reader to tag” distance. The RFID tag is designed to prevent migration within the tissue after
implantation by incorporating a wire winding with two projecting ends. The RFID reader is a reusable handheld device that has two probes with different detecting ranges; a loop probe that has a detecting range of 0-6cm, and a pencil probe attachment that has a detecting range of 0-3cm, to allow for closer localization in the surgical field. Two different covers are provided to maintain reader sterility during explantation. We are currently conducting market research on the suite of products and intend to commercially launch later in 2010.
Gamma Finder (Gamma Ray Detection Device)
Immediately prior to removal of a malignant lesion in the breast, a patient may be injected with gamma ray emitting isotopes near the site of the lesion to determine if the cancer has spread. Our Gamma Finder is currently the only cordless handpiece probe to detect the emission of gamma rays, and, consequently, whether breast cancer has spread to the lymph nodes. The Gamma Finder detects and gives a numerical indication and an acoustic signal when close to a gamma ray emitting source. Our Gamma Finder has all the features of traditional, larger, corded gamma ray detection devices, with the convenience of a portable and compact device. The Gamma Finder consists of a reusable probe and a disposable sterility sleeve. We began commercializing the Gamma Finder in 2003 upon receipt of FDA 510(k) clearance, and, in 2005, added automatic ten second count and binary pitch mode features.
Contura MLB Radiation Balloon
Current radiation therapy includes less invasive alternatives to whole breast radiation therapy, known as partial breast irradiation therapy, consisting of balloon brachytherapy, conformal radiotherapy and multi-catheter interstitial brachytherapy. We believe that balloon brachytherapy will be widely adopted over time due to its ease of use, low-cost and clinical effectiveness. In January 2008 we launched our Contura Multi-Lumen Radiation Balloon Catheter, or Contura MLB.
Our Contura MLB design consists of a multilumen catheter with several access ports on one end and an inflatable balloon on the other. The balloon is positioned into the cavity formed in the breast following a lumpectomy and subsequently inflated with saline through one of the ports. Small openings in the catheter allow for the suction of excess seroma and air from the lumpectomy cavity through a second access port. We believe that this suction feature will help conform the walls of the lumpectomy cavity to the exterior of the balloon. Multiple lumens are designed to provide for precise placement of radioactive seeds, which we believe will allow clinicians to expand their use of radiation therapy to a greater number of patients. Such patients may include those with smaller anatomies and with tumors closer to the skin, which were not previously able to receive treatment with other minimally-invasive radiation balloon products. The overall design and the use of special balloon materials is intended to control the distance between the radiation source and the tissue in contact with the balloon and to result in controlled radiation dosing.
We received FDA 510(k) clearance for Contura MLB in May 2007, launched in January 2008 and received CE Mark in Europe in March 2009. We began selling Contura MLB in several select countries outside the United States in 2009 and plan to further expand distribution in 2010. Also in 2009, we began marketing Contura Shape Select MLB, a new larger version of Contura MLB with a novel proprietary design that provides clinicians with enhanced flexibility in appropriately fitting the lumpectomy cavity with one balloon catheter, which may be adjusted into different sizes. We anticipate developing and commercializing additional line extensions for this product over the next several years. Clinical investigators for Contura MLB have either presented, published or had accepted 33 articles or abstracts related to Contura MLB.
The cavity left after tumor resection post lumpectomy often makes 3D conformal radiation targeting of the margins difficult because it may be irregularly shaped, change with body movement and position and be radiographically indistinct. Also, cosmetically undesirable dimpling of the skin after healing commonly results from the surgery. The CavityMark is designed to address these issues by helping form the post lumpectomy cavity into a spherical shape and radiographically delineate a target for delivery of 3D conformal radiation therapy. Secondarily, the device helps to provide a scaffold for tissue growth and thereby minimize post lumpectomy skin dimpling. This product is currently in development and we have not yet filed for any regulatory clearances to market it.
SenoPulse RF Generator (Excision/Therapeutic Console)
The SenoPulse RF Generator will be used to power our radiofrequency cutting technologies in order to provide advanced breast tissue cutting capabilities. The SenoPulse RF Generator offers high-frequency and impedance-matching circuitry to enable cutting into a wide variety of tissue types, high start voltage and sustained power for continuous cutting ability, and low heat generation to minimize thermal damage. The SenoPulse RF Generator directs modulated, monopolar radiofrequency energy and will be used in the Single Step cutting and excision devices. We received FDA 510(k) clearance for the SenoPulse RF Generator in 2005.
Tissue Cutting Devices for Excision and Reconstruction
Single Step is an alternative excision device to a scalpel or a straight-bladed electrosurgical scalpel commonly known as a Bovie. The Single Step system is an automated surgical excision device that uses a long-wire RF disposable probe and reusable handpiece to cut and remove a large, intact volume of tissue through a small surgical incision. The Single Step system is powered by the SenoPulse RF Generator. The Single Step probe is inserted into the breast, where the surgeon anchors the device and excises tissue of a predetermined size. The surgeon controls the amount and shape of the tissue removed by selecting the appropriate option on the SenoPulse RF Generator. The Single Step is designed to produce a smooth and optimally-shaped cavity to facilitate lesion removal and subsequent use of balloon brachytherapy. We intend to build upon data obtained with one of our previous products by evaluating the clinical benefit of anchoring or stabilizing lesions in conjunction with the automatic lesion cutting ability of our Single Step system. We received FDA 510(k) clearance for the Single Step and anticipate making several design enhancements and conducting clinical testing prior to fully commercializing the product in 2011. We have also received FDA 510(k) clearance for a second, long wire RF cutting device that may be useful in lesion excision and tissue reconstruction.
Sales and Marketing
We focus our sales and marketing efforts on increasing awareness of our products among breast care specialists, including radiologists, surgeons and oncologists. We market and sell our products through a direct sales force in the United States. As of December 31, 2009, we employed a president and chief operating officer, a vice president of global marketing, and support staff of 69 direct sales employees, including 19 clinical specialists, nine brachytherapy specialists, six regional sales managers and 35 sales representatives.
In our selling process, we use clinical studies, cost-benefit data and case studies. To date, we have 39 clinical studies that have either been published or presented as abstracts at major medical meetings. Peer-to-peer selling is also a critical element of our strategy. We have developed popular training seminars, including a Continuing Medical Education-accredited course led by our internal personnel and by nationally-known breast cancer specialists Drs. Nathalie Duchesne, Mark Gittleman, Phillip Israel, Terese Kaske, Frank Vicini, Doug Arthur, Dorin Todor, Phillipe Sebag, Rakesh Patel and Robin Wilson who present our clinical data and/or products from time to time. We hosted 73 seminars in 2009, educating and providing hands-on training to over 1,500 clinicians about our products. We initiated a Contura MLB long-term physician registry study with more than 80 patients enrolled at the end of 2009.
An additional element of our educational efforts is our relationships with several manufacturers of ultrasound imaging systems. With these companies, we co-sponsor several breast practice seminars across the country to educate clinicians on the changes that are driving the specialization of breast care and the emergence of integrated breast centers. We also contribute to organizations designed to increase awareness of breast cancer, including our sponsorship of the newsletter and website of the American Society of Breast Surgeons.
International sales have not historically accounted for a significant portion of total sales, but have been increasing incrementally in recent years. We do not have a direct sales force outside of the United States but rather contract with distributors for sales coverage in a number of countries worldwide. We have the authorization to affix the CE Mark to Gel Mark Ultra, Gel Mark UltraCor, and our EnCor system and to commercialize these devices in the European Economic Community, Hong Kong, Singapore, Taiwan, Mexico, South Korea, and Australia. In 2007, we partnered with local distributors who have breast imaging and/or interventional radiology franchises in Austria, Belgium, the United Kingdom, Hong Kong, Ireland, Luxembourg, The Netherlands, Singapore, Switzerland, and Taiwan to sell EnCor and our Gel Mark Ultra products in these ten countries. In 2008 we added distributors in Denmark, Finland, France, Germany, Iceland, Italy, Mexico, Norway, Portugal, Russia, South Korea, Spain and Sweden. In 2009 we added distributors in China, Egypt, Greece, Poland, Saudi Arabia, Thailand, Turkey and the United Arab Emirates. We are currently in negotiations with distributors for a number of additional countries in which our products are already approved and intend to further expand beyond these countries in 2010. Our International Distributors are managed by two sales managers who report to our President, and Chief Operating Officer.
We compete primarily on the basis of our ability to provide minimally-invasive products to diagnose and treat breast cancer safely and effectively, with ease and predictability of product use, brand name recognition and cost. We believe that we compete favorably with respect to these factors, although we cannot assure you that we will be able to continue to do so in the future or that new products that perform better than those we offer will not be introduced.
The markets in which our products compete are highly competitive, subject to change and significantly affected by new product introductions and other activities of industry participants. We face different competitors within different product lines. To our knowledge, we do not have one competitor that produces products that compete with all our products. Several of our competitors have significant financial and human capital resources and have established reputations with our target customers, as well as worldwide distribution channels that are more effective than ours. We are aware that several companies are developing products that, if successfully commercialized, would compete with our current and future products.
Our vacuum assisted breast biopsy and tissue marker products compete with, among others, products sold by Johnson & Johnson, C.R. Bard and Hologic. Contura MLB competes against well-established whole breast external beam radiation devices, as well as current and potential future manufacturers of balloon brachytherapy devices and image-guided targeted radiation beam therapy. We compete directly with the current industry leader, Hologic, as well as other companies that have minimally-invasive therapeutic devices in various stages of development. Short-term brachytherapy products from Cianna Medical and Xoft are also currently sold in the market. Our commercial success will depend on a general market shift from whole to partial breast irradiation and our ability to overcome Hologic’s current market leadership with its current balloon product. Furthermore, we compete against Hologic with their product bundling programs for digital mammography and stereotactic table platforms. Our excision products will compete with manufacturers of handheld surgical excision instrumentation and standard RF cutting devices.
Our competitors dedicate, and we believe they will continue to dedicate, significant resources to promote their products aggressively. The breast cancer market is also characterized by extensive research efforts and technological progress. As a result, new products are likely to be developed and introduced into the market that could compete with our products more effectively.
We assemble and package a significant portion of our finished products at our current corporate headquarters in Irvine, California, where we moved to in August 2008. Our Gamma Finder is licensed and produced exclusively for us by World of Medicine, a German medical device company. We manufacture in-house several components used in our products, and we rely on several outside vendors to produce many components, and in some cases completed products that we quality check, sterilize, and package at our corporate headquarters. We also have established a production engineering department to focus on integrating product changes into the manufacturing process and to continually improve upon product quality and cost.
We manufacture our proprietary products in a controlled environment and have implemented quality control systems as part of our manufacturing processes. We believe our manufacturing facility and control systems comply with the FDA’s Quality System Regulations, or QSRs. We are certified to ISO 13485:2003, the medical device manufacturing standard, and applicable medical device directives promulgated by the European Economic Community, which facilitates entry of our products into the European Economic Community. We have received our CMDCAS Certificate of Registration permitting importation of our devices into Canada.
Since 2005, we have continued to transfer portions of our manufacturing operations to Infus Medical, a contract manufacturer with facilities in Thailand, which currently provides us with certain tissue marker production, biopsy probe production and assembly and packaging services. We anticipate that over time we will continue to transfer additional responsibility to this manufacturer related to production, assembly and packaging. We believe that transferring production of our more established products abroad in a stepwise manner, along with increased sales volume, will result in cost savings and will allow us to focus our domestic efforts on developing, modifying and promoting our newer products. We will continue to produce certain of our products at our facility in Irvine, California for the foreseeable future.
We have one product and several components of other products that we obtain from sole-source suppliers. We rely on one vendor, World of Medicine, for our Gamma Finder product, one vendor, Faulhaber, for our biopsy handpiece motors, one vendor, NuSil Technology, for a coating used in our biopsy probes, one vendor, Advance Polymers, for material used in our Contura MLB and three vendors, UltraSonix, Teratech and Esaote, for the ultrasound technology used in SenoSonix with EnCor. We do not believe that we could replace these suppliers without significant effort and delay in production. Other products and components come from single suppliers, but alternate suppliers are easier to identify, though in many cases we have not yet qualified alternate suppliers. We do not carry a significant inventory of most components used in our products, with the exception of the gamma finder product. Most of our suppliers have no contractual obligations to supply us with, and we are not contractually obligated to purchase from them, the components used in our devices.
On March 5, 2008, we entered into a Lease Agreement with The Irvine Company LLC for the lease of approximately 41,402 square feet space at 3 Morgan, Irvine, California. The term of the lease commenced on November 1, 2008, although we moved into the property in August pursuant to a period of rent-free early occupancy and will expire on January 31, 2014.
Our products are medical devices subject to extensive and rigorous regulation by the FDA, as well as other federal and state regulatory bodies in the United States and comparable authorities in other countries. The FDA regulations govern, among other things, the following activities that we perform, or that are performed on our behalf, to ensure that medical products distributed domestically or exported internationally are safe and effective for their intended uses:
The FDA’s Premarket Clearance and Approval Requirements. Unless an exemption applies, each medical device we wish to distribute commercially in the United States will require either prior 510(k) clearance or a premarket approval, or a PMA, from the FDA. Medical devices are classified into one of three classes—Class I, Class II, or Class III—depending on the degree or risk associated with each medical device and the extent of control needed to ensure safety and effectiveness. Devices deemed to pose lower risks are placed in either Class I or II, which requires the manufacturer to submit to the FDA a premarket notification requesting permission to commercially distribute the device. This process is generally 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 cleared 510(k) device, are placed in Class III, requiring premarket approval. Our minimally-invasive breast care products are Class I and II devices.
510(k) Clearance Pathway. When a 510(k) clearance is required, we must submit a premarket notification to the FDA demonstrating that our proposed device is substantially equivalent to a previously cleared and legally marketed 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet required the submission of a PMA application. By statute, the FDA is required to clear or deny a 510(k) premarket notification within 90 days of submission of the application. As a practical matter, clearance often takes significantly longer. The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence. If the FDA determines that the device, or its intended use, is not substantially equivalent to a previously-cleared device or use, the FDA will place the device, or the particular use, into Class III.
Premarket Approval Pathway. A PMA application must be submitted to the FDA if the device cannot be cleared through the 510(k) process. The PMA application process is much more demanding than the 510(k) premarket notification process. A PMA application must be supported by extensive data, including but not limited to technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device.
After a PMA application is submitted and the FDA determines that the application is sufficiently complete to permit a substantive review, the FDA will accept the application for review. The FDA has 180 days to review an “accepted” PMA application, although the review of an application generally occurs over a significantly longer period of time and can take up to several years. During this review period, the FDA may request additional information or clarification of the information already provided. Also, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with the QSRs. New PMA applications or PMA application supplements are required for significant modification to the manufacturing process, labeling and design of a device that is approved through the premarket approval process. Premarket approval supplements often require submission of the same type of information as a premarket approval application, except that the supplement is limited to information needed to support any changes from the device covered by the original premarket approval application and may not require as extensive clinical data or the convening of an advisory panel. We do not anticipate that any of our products in development will require the submission and approval of a PMA.
Clinical Trials. Clinical trials are almost always required to support an FDA premarket application and are sometimes required for 510(k) clearance. These trials generally require submission of an application for an Investigational Device Exemption, or IDE, to the FDA. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE must be approved in advance by the FDA for a specific number of patients unless the product is deemed a non-significant risk device eligible for more abbreviated IDE requirements. Clinical trials for significant risk devices may not begin until the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical trial sites. Our clinical trials must be conducted under the oversight of an IRB at the relevant clinical trial sites and in accordance with the FDA’s regulations, including but not limited to those relating to good clinical practices. We are also required to obtain patients’ informed consent that complies with both the FDA’s requirements and state and federal privacy regulations. We, the FDA or the IRB at each site at which a clinical trial is being performed may suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the benefits. Even if a trial is completed, the results of clinical testing may not demonstrate the safety and efficacy of the device, may be equivocal or may otherwise not be sufficient to obtain approval or clearance of the product.
Pervasive and Continuing Regulation. After a device is placed on the market, numerous regulatory requirements continue to apply. These include:
After a device receives 510(k) clearance or a PMA, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new clearance or approval. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. We have modified various aspects of some of our marketed products since receiving regulatory clearance, but we believe that new 510(k) clearances are not required for these modifications. If the FDA disagrees with our determination not to seek a new 510(k) clearance or PMA, the FDA may retroactively require us to seek 510(k) clearance or premarket approval. The FDA could also require us to cease marketing and distribution and/or recall the modified device until 510(k) clearance or premarket approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines, penalties and Warning Letters.
The MDR regulations require that we report to the FDA any incident in which our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury.
We have registered with the FDA as a medical device manufacturer and have obtained a manufacturing license from the California Department of Health Services, or CDHS. The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA and the Food and Drug Branch of CDHS, or FDB, to determine our compliance with the QSRs and other regulations, and these inspections may include the manufacturing facilities of our suppliers. We underwent an inspection of our facilities by the FDA in April 2005, which resulted in the issuance in July 2005 of a Warning Letter from the FDA related to, among other things, our failure to adequately validate manufacturing changes we undertook to prevent the tip of the Gel Mark Ultra biopsy site marker shearing off in the patient’s breast during surgery, which we had experienced. The letter required us to take prompt action to strengthen our Quality System and product engineering area. We responded to the FDA with a comprehensive corrective action plan in August 2005. In 2008, no incidents of tip sheer were reported to SenoRx. In addition, we recently underwent an inspection of our manufacturing facilities by the FDA, which resulted in the issuance on September 30, 2009 of an FDA Form 483, Notice of Inspectional Observations, from the FDA related to our failure to properly implement and maintain adequate methods and documentation of the design, testing, production, control, quality assurance, storage, shipping and post-market surveillance for some of our products, including Contura MLB and Gel Mark product line. The Notice of Inspectional Observations will require us to take prompt action to strengthen our Quality System and result in increased expenses. We have completed responding to the observations and are currently implementing a comprehensive corrective action plan to update our facilities and systems and intend to be in full compliance with QSRs. If, upon reinspection, the FDA determines we have not properly addressed their concerns or they identify new violations, we can be subject to any of the following sanctions:
Fraud and Abuse. We may directly or indirectly be subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws. In particular, the federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for or recommending a good or service, for which payment may be made in whole or part under federal healthcare programs, such as the Medicare and Medicaid programs. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. In implementing the statute, the Office of Inspector General, or OIG, has issued a series of regulations, known as the “safe harbors.” These safe harbors set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable element of a safe harbor may result in increased scrutiny by government enforcement authorities, such as the OIG.
International. International sales of medical devices are subject to foreign governmental regulations, which vary substantially from country to country. The time required to obtain clearance or approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements may be different.
The primary regulatory environment in Europe is that of the European Economic Community, which has adopted numerous directives and has promulgated voluntary standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear CE conformity marking, indicating that the device conforms with the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout the member states of the European Economic Community, and other countries that comply with or mirror these directives. The method of assessing conformity varies depending on the type and class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by our designated notified body, an independent and neutral institution appointed by a country to conduct the conformity assessment. This third-party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s device. Such an assessment is required in order for a manufacturer to commercially distribute the product throughout these countries. ISO 9001 and ISO 13845 certifications are voluntary harmonized standards. Compliance establishes the presumption of conformity with the essential requirements for a CE Marking. We have the authorization to affix the CE Mark to Gel Mark Ultra, Gel Mark UltraCor, EnCor and Contura MLB and to commercialize these devices in the European Economic Community, Australia, Hong Kong, Mexico, Singapore, South Korea, Taiwan, and several other countries. We have an active program to comply with the “WEE” directive should it be adopted in Europe and Asia in the next five years.
In 2007 we began partnering with local distributors who have breast imaging and/or interventional radiology franchises in countries outside North America. Through these distributors, we are selling our EnCor and GelMark Ultra products in Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Iceland, Ireland, Italy, Luxembourg, Mexico, The Netherlands, Norway, Portugal, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Taiwan and the United Kingdom. In 2009 we added distributors in China, Egypt, Greece, Poland, Saudi Arabia, Thailand, Turkey and the United Arab Emirates.
Payment for patient care in the United States is generally made by third-party payors, including private insurers and government insurance programs, such as Medicare and Medicaid. The Medicare program, the largest single payor in the United States, is a federal governmental health insurance program administered by the Centers for Medicare and Medicaid Services, or CMS. Reimbursement for procedures related to breast cancer has been favorable as a result of the growing awareness of the impact of the disease as well as the recognition that proactive diagnosis and treatment is critical for effective care. The costs associated with the purchase of our products are reimbursed through Medicare, Medicaid and other third-party payors. International market acceptance of our products may depend, in part, upon the availability of reimbursement within the prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country, and include both government-sponsored healthcare and private insurance.
Research and Development
As of December 31, 2009, we had 19 employees, as well as several key on-going consultants, in our research and development department, which is overseen by our chief technical officer. Historically, we developed and successfully brought to market diagnostic products, including our breast biopsy systems and our tissue markers and therapeutic products, such as Contura MLB. We continue to focus on developing additional diagnostic, therapeutic and excision products to further support our focus on serving the continuum of care in the breast care market. We are currently developing next generations of our current products as well as various radio-frequency based excision and reconstructive cutting devices, markers and new therapeutic devices.
Research and development expenses for 2009, 2008 and 2007 were $7.4 million, $6.1million and $6.4 million, respectively. We expect research and development efforts and expenses to increase in absolute dollar terms but decrease as a percentage of net revenues.
Patents and Proprietary Technology
We plan to pursue and maintain intellectual property protection in the United States, Europe, Japan, Canada and other countries such as China and Australia. As of December 31, 2009, we have 65 issued United States patents primarily covering devices relating to breast biopsy, including biopsy site marking devices, excision devices and balloon products, the earliest of which will expire in 2018 and the last of which will expire in 2026, 2 granted European patents which are validated in 14 countries, 3 Canadian patents, and 1 Japanese patent.
In addition, we have 95 pending United States patent applications, 8 pending PCT (international) patent applications, 29 pending European regional patent applications, 27 pending Canadian patent applications, 1 pending Japanese patent applications, 10 pending Australian patent applications, as well as pending patent applications in Brazil, China, Mexico, Russia, South Korea and Singapore. We believe we have a strong intellectual portfolio that has permitted us to make modifications to our products in response to competition without significant disruption to our operations.
We have several issued United States patents related either to the design or use of Contura MLB and additional United States patent applications and continuations are pending. In December 2008, we were granted a patent relating to Contura MLB’s asymmetrical radiation of a breast cavity with a balloon. During the development of Contura MLB, we appropriately considered the intellectual property landscape, including citing as appropriate in our own patent filings the Hologic/Proxima patents that are the subject matter of our litigation with Hologic.
Together, our patents and patent applications protect aspects of our technologies. Key areas of our issued and pending patent coverage include:
We also rely on copyrights, trade secrets, technical know-how and continuing innovation to develop and maintain our competitive position. We seek to protect our proprietary information and other intellectual property by generally requiring our employees, consultants, contractors, outside scientific collaborators and other advisors to execute non-disclosure agreements on commencement of their employment or engagement.
As of December 31, 2009, we had 161 employees, including 81 employees in sales and marketing, 19 employees in research and development, 35 employees in manufacturing, 15 employees in clinical, regulatory and quality assurance and 11 employees in general and administrative. We believe that our future success will depend on our continued ability to attract, hire and retain qualified personnel. None of our employees are represented by a labor union or are parties to a collective bargaining agreement, and we believe our employee relations are good.
We are subject to the reporting requirements under the Securities Exchange Act of 1934. Consequently, we are required to file reports and information with the Securities and Exchange Commission (SEC), including reports on the following forms: 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 Securities Exchange Act of 1934. These reports and other information concerning the company may be accessed through the SEC’s website at http://www.sec.gov. You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling 1-800-SEC-0330.
You may also find on our website at http://www.senorx.com/ electronic copies of 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 Securities Exchange Act of 1934. Such filings are placed on our website as soon as reasonably practicable after they are filed with the SEC. Our charter for our Nominating and Corporate Governance, Audit and Compensation Committees and our Code of Ethics are available on our website. In the event that we grant a waiver under our Code of Ethics, to any of our officers and directors, we will publish it on our website.
RISKS RELATED TO OUR BUSINESS
We have a limited history of operations and a history of net losses, therefore, we may not be able to generate significant revenues or profitability.
We have a limited history of operations upon which you can evaluate our business. We began selling our first products in 2002, fully launched our flagship product for use in breast biopsy procedures, the EnCor system, in November 2005, and launched our flagship radiation therapy product, the Contura MLB, in January 2008. We incurred net losses of $2.9 million in 2009, $8.7 million in 2008, $9.9 million in 2007 and, as of December 31, 2009, had an accumulated deficit of approximately $87.1 million. In order for us to become increasingly profitable, we believe that our EnCor system and Contura MLB must be widely adopted. We cannot assure you that we will be able to achieve or sustain profitability even if we are able to generate significant revenues. Our failure to sustain profitability would negatively impact the market price of our common stock and require us to obtain additional funding. If our future funding requirements increase beyond currently expected levels, as a result of our failure to sustain profitability relating to sales, litigation expenses or otherwise, we cannot make any assurance that additional funding will be available on a timely basis on terms acceptable to us, or at all, particularly in the short-term due to the current credit and equity market funding environments.
Our success depends upon market adoption of our EnCor system and Contura MLB, without which our results of operations will suffer.
Until 2007, we derived our revenues primarily from our tissue marker products. However, our EnCor system and Contura MLB now account for a majority of our revenue growth, and we expect this to continue for the foreseeable future. Our ability to meet this expectation is based upon a number of assumptions, including:
Even if we are able to present potential customers with compelling clinical data, technological advancements or influential user experiences, they may be reluctant to switch from a competing device, which they have grown accustomed to. We may not be successful in our near-term strategy of marketing EnCor and Contura MLB to our existing customer base of tissue marker users, and users of our earlier vacuum-assisted breast biopsy system. Our commercial success also depends on the continued general market shift to less invasive biopsy procedures.
We may be subject to costly claims of infringement or misappropriation of the intellectual property rights of others, which could impact our business and harm our operations.
Our industry has been characterized by frequent demands for licenses and litigation. Our competitors, potential competitors or other patent holders may, in the future, assert that our products and the methods we employ are covered by their patents or misappropriate their intellectual property. In addition, we do not know whether our competitors will apply for and obtain patents that will prevent, limit or interfere with our ability to make, use, sell or import our products. Because patent applications may take years to issue, there may be applications now pending of which we are unaware that may later result in issued patents that our products infringe. There also could be existing patents that one or more components of our systems may inadvertently infringe. Although we may seek to settle any future claims, we may not be able to do so on reasonable terms, or at all. If we lose a claim against us, we may be ordered to pay substantial damages, including compensatory damages, which may be trebled in certain circumstances, plus prejudgment interest. We also could be enjoined, temporarily, preliminarily or permanently, from making, using, selling, offering to sell or importing our products or technologies essential to our products, which could significantly harm our business and operating performance. On February 26, 2010, Hologic filed a notice of its appeal in the matter and the outcome of any such appeal process is unknown. If we lose this appeal, we may be completely prevented from selling Contura MLB and as a result, our future prospects will be significantly harmed. Moreover, any such appeal would be costly to defend and also be a significant distraction to management.
We may become involved in litigation not only as a result of alleged infringement of a third party’s intellectual property rights but also to protect our own intellectual property. Enforcing our patent rights against infringers, even when such litigation is resolved in our favor, could involve substantial costs and divert management’s attention from our core business and harm our reputation.
Our future success will depend in part upon our ability to continue to successfully commercialize our Contura MLB.
Contura MLB, which we received FDA 510(k) clearance in May 2007, has become a significant contributor to our revenues. The Contura MLB commercialization effort is fully engaged, but there remain significant challenges that must be overcome before we can obtain significant revenues from this product, including:
If we are able to overcome these challenges, we may nevertheless be unable to convince potential customers that the Contura MLB represents a compelling alternative to competing products. Short-term brachytherapy products from Cianna Medical and Xoft began to be commercialized in 2008 and we have recently seen competitors discount their brachytherapy products in the market, which may cause our products to be less competitive or require us to also reduce pricing in the future. Our commercial success will also depend on a general market shift from whole to partial breast irradiation. If we are unable to obtain a significant share of the brachytherapy market for the reasons listed above, or that competing products are more compelling and achieve better acceptance by the market, our long-term commercialization experience with the Contura MLB could be significantly below expectations or not achieved at all, which would have a material adverse effect on our future financial performance. Additionally, the adoption of conformal radiotherapy may grow at a faster rate than the overall market for partial breast irradiation therapies, and as a result, could impact the speed of adoption of balloon brachytherapy devices, including Contura MLB.
We have limited clinical data regarding the safety and efficacy of our products. If future data or clinical experience is negative, we may lose significant market share.
Our success depends on the acceptance of our products by the medical community as safe and effective. Physicians that may be interested in using our products may hesitate to do so without long-term data on safety and efficacy. The limited clinical studies on some of our products that have been published or presented as abstracts at major medical meetings typically have been based on the work of a small number of physicians examining small patient populations over relatively short periods. Accordingly, the results of these clinical studies do not necessarily predict long-term clinical results, or even short-term clinical results from the broader physician community. If future safety or efficacy data or clinical experience is negative, we may lose significant market share.
We compete against companies that have more established products and greater resources, which may prevent us from achieving significant market penetration or improved operating results.
Many of our products compete, and our future products may compete, against products that are more established and accepted within our target markets. With fewer resources and operating history than many of our competitors and potential future competitors, and a less-established reputation, it may be difficult for our products to gain significant market penetration. We may be unable to convince physicians to switch their practice away from competing devices. Competing effectively will require us to distinguish our company and our products from our competitors and their products, and turns on factors such as:
Competition could result in price-cutting, reduced profit margins and loss of market share, any of which could have a material adverse effect on our results of operations. In addition, our competitors with greater financial resources could acquire other companies that would enhance their name recognition and market share, and allow them to compete more effectively by bundling together related products. For example one competitor provides incentives for the purchase of its biopsy capital equipment and disposables when purchased with its digital mammography and stereotactic tables. Certain potential customers may view this value proposition as attractive, which could result in their decision not to purchase our products. We also anticipate that new products and improvements to existing products could be introduced that would compete with our current and future products. If we are unable to compete effectively, we will not be able to generate expected sales and our future financial performance will suffer.
Changes in coverage and reimbursement for procedures using our products could affect the adoption of our products and our future revenues.
Breast biopsy procedures and markers are typically reimbursed by third-party payors, including Medicare, Medicaid and private healthcare insurance companies. These payors may adversely change their coverage amounts and reimbursement policies. Reimbursement may be impacted by the general national health care reform initiatives or otherwise by various branches of the federal government. In addition, the Federal Deficit Reduction Act of 2006 may in the future affect future reimbursement rates for our vacuum- assisted biopsy products and Contura MLB products. We cannot assure you that the current scope of coverage or levels of reimbursement will continue to be available or that coverage of, or reimbursement for, our products will be available at all. If physicians, hospitals and other providers are unable to obtain adequate reimbursement for our current products or future products, or for the procedures in which such products are used, they may be less likely to purchase the products, which could have a material adverse impact on our market share. For example, in 2009, there was an increase in reimbursement rates to non hospital based Radiation Oncology centers for multiple-dwell radiation balloon catheter procedures, which includes Contura MLB, relative to single catheter procedures, but a decrease for non hospital based Radiology Oncology centers in rates relative to whole breast radiation therapy.
Our ability to compete depends upon our ability to innovate, develop and commercialize new products and product enhancements.
The markets in which we compete involve rapid and substantial technological development and product innovations. There are few barriers to prevent new entrants or existing competitors from developing or acquiring products or technological improvements that compete effectively against our products or technology. If we are unable to innovate successfully to anticipate or respond to competitive threats, obtain regulatory approvals, or protect such innovation with defensible intellectual property, our revenues could fail to grow or could decline. Our business strategy is in part based upon our expectation that we will continue to make frequent new product introductions and improvements to existing products that will be demanded by our target customers. If we are unable to continue to develop new products and technologies as anticipated, our ability to grow and our future financial performance could be materially harmed.
Our success will depend on our ability to attract and retain key personnel, particularly members of management and scientific staff.
We believe our future success will depend upon our ability to attract and retain employees, including members of management, engineers and other highly skilled personnel. Our employees may terminate their employment with us at any time. Hiring qualified personnel may be difficult due to the limited number of qualified professionals and the fact that competition for these types of employees is intense. If we fail to attract and retain key personnel, we may not be able to execute our business plan. For example, we recently appointed Mr. John Buhler as our Chief Executive Officer. With his new responsibilities, Mr. Buhler will have less time to devote to managing the sales organization and as a result, we will need to hire a new Vice President of Sales or similar position. We may need to internally promote candidates or otherwise recruit and hire from the outside, which may take significant time and become a distraction for the sales team and its sales effort and could have a material adverse impact on our results of operations.
Our business strategy is heavily focused on integrated breast centers and other large institutions.
We are focusing our sales efforts on becoming a preferred provider to integrated breast centers and other large customer accounts. We cannot assure you that we will be able to secure or maintain these accounts or that this strategy will maximize our revenue growth. These targeted customers often have a rigorous and lengthy qualification process for approving new vendors and products. Additionally, breast centers are in many cases not located at one physical location, but instead involve the coordinated efforts of various geographically dispersed offices and physicians, which may complicate the qualification process and may strain our sales and support organizations. Further, these customers have not entered, and we do not expect them in the future to enter, long-term contracts to purchase our products. Therefore, obtaining approval from these potential customers to sell them our products may not result in significant or long-term sales of our products to them. Our strategy of focusing on large institutions may result in relatively few customers contributing a significant amount to our revenues. For example, Kaiser Permanente is our largest customer, in the years ended December 31, 2009 and 2008, represented approximately 4.7% and 4.9%, respectively, of our total revenues. We cannot assure you that Kaiser or other large customer accounts will continue to purchase our products. The loss of any of these customers could have a material adverse impact on our results of operations.
Our strategy of providing a broad array of products to the breast care market may be difficult to achieve, given our size and limited resources.
We aim to be an attractive and convenient supplier for integrated breast centers by offering a broad product line of minimally-invasive devices for breast care specialists. Commercializing several product lines simultaneously may be difficult because we are a relatively small company. Additionally, offering a broad product line will require us to manufacture, sell and support some products that are not as profitable or in as high demand as some of our other products, which could have a material adverse effect on our overall results of operations. To succeed in our approach, we will need to grow our organization considerably and enhance our relationships with third-party manufacturers and suppliers. If we fail to make product introductions successfully or in a timely manner because we lack resources, or if we fail to adequately manufacture, sell and support our existing products, our reputation may be negatively affected and our results of operations could be materially harmed. Additionally, managing such a large line of products may be challenging for an organization of our size. For example, we recently underwent an inspection of our manufacturing facilities by the FDA, which resulted in the issuance on September 30, 2009 of an FDA Form 483, Notice of Inspectional Observations, from the FDA related to our failure to properly implement and maintain adequate methods and documentation of the design, testing, production, control, quality assurance, storage, shipping and post-market surveillance for some of our products, including the Contura MLB and Gel Mark product line.
We believe that demand for minimally-invasive products for the diagnosis and treatment of breast cancer must grow in order for our business to grow as anticipated.
While there have been trends in recent years that favor increased screening, diagnosis and treatment of breast cancer, these trends may not continue. The incidence of breast cancer in the United States appears to have fallen from its highest level over the last few years. Additionally, while the number of breast biopsies performed annually has increased significantly since 1997 when the American Cancer Society updated its guidelines for breast cancer screening, recommending that women should begin annual screening at age 40 rather than the previously recommended age 50, new guidance could be published that could support a reversal of this trend. For example, recently an independent panel of experts appointed by the federal Department of Health and Human Services recommended a return to screening starting at age 50. The American Cancer Society has stated that it does not currently plan to revise its guidelines, but this does not preclude the possibility of future revisions to the guideline. In addition, some studies conclude that annual breast cancer screening by mammography for women under age 50 may be more harmful, due to increased radiation exposure, than beneficial. These factors, in addition to possible future innovations in screening technologies or in breast cancer treatment options, could result in a decline in breast biopsy procedures and radiation therapy, which could reduce our overall market.
We have limited sales and marketing experience and failure to build and manage our sales force or to market and distribute our products effectively could have a material adverse effect on our results of operations.
We rely on a direct sales force to sell our products. In order to meet our anticipated sales objectives, we expect to grow our sales organization significantly over the next several years. There are significant risks involved in building and managing our sales organization, including our ability to:
We expect that our Contura MLB will continue to be a key driver of future growth. However, our sales force has historically sold diagnostic products and therefore has limited experience selling a therapeutic device. Our Contura MLB competes with products that are well-established and with new entrants to the market. Accordingly, it is difficult for us to predict how well our sales force will perform. Our failure to adequately address these risks could have a material adverse effect on our ability to sell our products, causing our revenues to be lower than expected and harming our results of operations.
If we are unable to obtain and maintain intellectual property protection covering our products, others may be able to make, use or sell our products, which could have a material adverse effect on our business and results of operations.
We rely on patent, copyright, trade secret and trademark laws and confidentiality agreements to protect our technology, products and our competitive position in the market. Additionally, our patent applications, including those covering our EnCor system, may not result in patents being issued to us or, if they are issued, may not be in a form that is advantageous to us. Any patents we obtain may be challenged or invalidated by third parties. Competitors also may design around our protected technology or develop their own technologies that fall outside our intellectual property rights. In addition, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors, former employees or current employees, despite the existence of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures of our intellectual property is difficult, and we cannot be certain that the steps we have taken to protect our intellectual property will be effective or that any remedies we may have in these circumstances would be adequate. Moreover, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States.
We may not have adequate intellectual property protection for some of our products and products under development and consequently may need to obtain licenses from third parties. If any such licenses are required, we may be unable to negotiate terms acceptable to us and such failure could have a material adverse effect on our future results of operations.
We may be unsuccessful in our long-term goal of expanding our product offerings outside the United States and Canada.
For the year ended December 31, 2009, we derived approximately 90.2% of our net revenues from sales within the United States and Canada. We have entered into distribution agreements with third parties outside the United States and Canada, but do not anticipate sales of our products through these distributors becoming a significant portion of our revenues in the foreseeable future. If we do begin to offer our products more broadly outside the United States and Canada, we expect that we will remain dependent on third-party distribution relationships and will need to attract additional distributors to increase the number of territories in which we sell our products. Distributors may not commit the necessary resources to market and sell our products to the level of our expectations. If current or future distributors do not perform adequately, or we are unable to locate distributors in particular geographic areas, our ability to realize long-term international revenue growth could be materially adversely affected.
Although some of our products have regulatory clearances and approvals from jurisdictions outside the United States and Canada, others do not. These products may not be sold in these jurisdictions until the required clearances and approvals are obtained. We cannot assure you that we will be able to obtain these clearances or approvals on a timely basis, or at all.
We are dependent on sole-source and single-source suppliers for certain of our products and components, thereby exposing us to supply interruptions that could have a material adverse effect on our business.
We have one product and several components of other products that we obtain from sole suppliers. We rely on one vendor for our Gamma Finder product, one vendor for our biopsy handpiece motors, one vendor for a coating used in our biopsy probes, one vendor for material used in our Contura MLB and three vendors for the ultrasound technology used in SenoSonix with EnCor. Other products and components come from single suppliers, but alternate suppliers are easier to identify. However, in many of these cases we have not yet qualified alternate suppliers and rely upon purchase orders, rather than longer-term supply agreements. We also do not carry a significant inventory of most components used in our products and generally could not replace our suppliers without significant effort and delay in production. In addition, switching components may require product redesign and new regulatory clearances by the FDA, either of which could significantly delay or prevent production and involve substantial costs.
Reliance on third-party vendors may lead to unanticipated interruptions in supply or failure to meet demand on a timely basis. Any supply interruption from our vendors or failure to obtain additional vendors for any of the components could limit our ability to manufacture our products and fulfill customer orders on a timely basis, which could harm our reputation and revenues.
We have limited experience manufacturing certain components of our products in significant quantities, which could adversely impact the rate at which we grow.
We may encounter difficulties in manufacturing relating to our products and products under development for the following reasons:
Our limited manufacturing experience has in the past resulted in unexpected and costly delays. For example, in 2006, as a part of our settlement of litigation with Suros Surgical Systems, a wholly-owned subsidiary of Hologic, we implemented a redesign to the EnCor system cutter. This effort resulted in a short-term decrease in yields and a delay in implementing certain cost improvements, which had an adverse effect on our costs of goods sold. In addition, although we believe that our current manufacturing capabilities will be adequate to support our commercial manufacturing activities for the foreseeable future, we may be required to expand our manufacturing facilities if we experience faster-than-expected growth. If we are unable to provide customers with high-quality products in a timely manner, we may not be able to achieve wide market adoption for our EnCor system or other products and products under development. Our inability to successfully manufacture or commercialize our devices could have a material adverse effect on our product sales.
We rely on third-party manufacturers for certain components, and the loss of any of these manufacturers, or their inability to provide us with an adequate supply of high-quality components, could have a material adverse effect on our business.
Although we manufacture certain components and assemble some of our products at our corporate headquarters in Irvine, California, we rely on third parties to manufacture most of the components of our products. Since the end of 2005, we have transferred, and continue to transfer, a significant portion of our manufacturing and product assembly operations to a third party contract manufacturer in Thailand. Because of the distance between California and Thailand, we may have difficulty adequately supervising and supporting its operations. There are several risks inherent in relying on third-party manufacturers, including:
If a manufacturer fails to meet our needs with high-quality products on a timely basis, we may be unable to meet customer demand, which could have a material adverse effect on our reputation and customer relationships.
Any acquisitions that we make could disrupt our business and have an adverse effect on our financial condition.
We expect that in the future we may identify and evaluate opportunities for strategic acquisitions of complementary product lines, technologies or companies. We may also consider joint ventures and other collaborative projects. However, 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. Furthermore, the integration of any acquisition and the management of any collaborative project may divert management’s time and resources from our core business and disrupt our operations. We do not have any experience with acquiring other product lines, technologies or companies. We may spend time and money on projects that do not increase our revenues. Any cash acquisition we pursue would diminish the funds available to us for other uses, and any stock acquisition would be dilutive to our stockholders.
Our financial controls and procedures may not be sufficient to ensure timely and reliable reporting of financial information, which, as a public company, could materially harm our stock price and NASDAQ listing.
As a public company, we will require greater financial resources than we have had as a private company. We will need to hire additional employees for our finance department. We cannot provide you with assurance that our finance department has or will maintain adequate resources to ensure that we will not have any future material weakness in our system of internal controls. The effectiveness of our controls and procedures may in the future be limited by a variety of factors including:
If we fail to have effective controls and procedures for financial reporting in place, we could be unable to provide timely and accurate financial information and be subject to NASDAQ delisting, SEC investigation, and civil or criminal sanctions.
Product liability claims may lead to expensive and time-consuming litigation, substantial damages, increased insurance rates, and may have a material adverse effect on our financial condition.
Our business exposes us to potential product liability claims that are inherent in the manufacturing, marketing and sale of medical devices. For example, in the past we experienced, and in the future could experience, an issue related to the tip of our Gel Mark Ultra Biopsy Site Marker shearing off in the patient’s breast during the biopsy procedure, which could lead to a claim of damages, though none has previously been made. We may be unable to avoid product liability claims, including those based on manufacturing defects or claims that the use, misuse or failure of our products resulted in a misdiagnosis or harm to a patient. Although we believe that our liability coverage is adequate for our current needs, and while we intend to expand our product liability insurance coverage to any products we intend to commercialize, insurance may be unavailable, prohibitively expensive or may not fully cover our potential liabilities. If we are unable to maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims, we may be unable to continue to market our products and to develop new products. Defending a product liability lawsuit could be costly and have a material adverse effect on our financial condition, as well as significantly divert management’s attention from conducting our business. In addition, product liability claims, even if they are unsubstantiated, may damage our reputation by raising questions about our products’ safety and efficacy, which could materially adversely affect our results of operations, interfere with our efforts to market our products and make it more difficult to obtain commercial relationships necessary to maintain our business.
We may be adversely affected by the impact of environmental and safety regulations.
We are subject to federal, state, local and foreign laws and regulations governing the protection of the environment and occupational health and safety, including laws regulating the disposal of hazardous wastes and the health and safety of our employees. We may be required to obtain permits from governmental authorities for certain operations. If we violate or fail to comply with these laws and regulations, we could incur fines, penalties or other sanctions, which could adversely affect our business and our financial condition and cause our stock price to decline. We also may incur material expenses in the future relating to compliance with future environmental laws. In addition, we could be held responsible for substantial costs and damages arising from any contamination at our present facilities or third-party waste disposal sites. We cannot completely eliminate the risk of contamination or injury resulting from hazardous materials, and we may incur material liability as a result of any contamination or injury.
Our ability to use net operating loss carryforwards may be limited.
Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. We have internally reviewed the applicability of the annual limitations imposed by Section 382 caused by previous changes in our stock ownership and believe such limitations should not be significant. Future ownership changes, including changes resulting from or affected by our IPO, may adversely affect our ability to use our remaining net operating loss carryforwards. If our ability to use net operating loss carryforwards is limited, we may be subject to tax on our income earlier than we would otherwise be had we been able to fully utilize our net operating loss carryforwards.
RISKS RELATED TO REGULATORY MATTERS
The FDA may find that we do not comply with regulatory requirements and take action against us.
We recently underwent an inspection of our manufacturing facilities by the FDA, which resulted in the issuance on September 30, 2009 of an FDA Form 483, Notice of Inspectional Observations, from the FDA related to our failure to properly implement and maintain adequate methods and documentation of the design, testing, production, control, quality assurance, storage, shipping and post-market surveillance for some of our products, including the Contura MLB and Gel Mark product line. The Notice of Inspectional Observations will require us to take prompt action to strengthen our Quality System. We have completed a comprehensive corrective action plan that has been presented to the FDA outlining the steps and timing for coming into compliance with Quality System regulations. FDA may determine we have failed to adequately or timely implement or complete the corrective action plan. Such a determination could lead to the FDA promptly commencing an enforcement action against us without warning, which may include the following sanctions:
Any of these could have a material adverse effect on our reputation, results of operation and financial condition.
If we fail to obtain or maintain necessary FDA clearances or approvals for products, or if clearances or approvals are delayed, we will be unable to commercially distribute and market our products in the United States.
Our products are medical devices, and as such are subject to extensive regulation in the United States and in the foreign countries where we do business. Unless an exemption applies, each medical device that we wish to market in the United States must first receive 510(k) clearance or premarket approval from the FDA. Either process can be lengthy and expensive. The FDA’s 510(k) clearance process usually takes from three to twelve months from the date the application is complete, but it may take longer. The premarket approval process is much more costly, lengthy and uncertain. It generally takes from one to three years from the date the application is completed or even longer. Achieving a completed application is a process that may require numerous clinical trials and the filing of amendments over time. We expect that our products in the foreseeable future will be subject to 510(k) procedures and not premarket approval, or PMA, applications. We may not be able to obtain additional FDA clearances or approvals in a timely fashion, or at all. Delays in obtaining clearances or approvals could adversely affect our revenues and profitability.
Modifications to our devices may require new 510(k) clearances, which may not be obtained.
The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new clearance; however, the FDA can review a manufacturer’s decision. Any modifications to an FDA-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use would require a 510(k) clearance or possibly a premarket approval.
We have modified aspects of some of our products since receiving FDA clearance, but we believe that new 510(k) clearances are not required. We may make additional modifications, and in appropriate circumstances, determine that new clearance or approval is unnecessary. The FDA may not agree with our decisions not to seek new clearances or approvals. If the FDA requires us to seek 510(k) clearances or approval for any modifications to a previously cleared product, we may be required to cease marketing or recall the modified device until we obtain clearance or approval. Also, in these circumstances we may be subject to adverse publicity, regulatory Warning Letters and significant fines and penalties.
Government regulation imposes significant restrictions and costs on the development and commercialization of our products.
Any products cleared or approved by the FDA are subject to on-going regulation. Any discovery of previously unknown or unrecognized problems with the product or a failure of the product to comply with any applicable regulatory requirements can result in, among other things:
Any of these could have a material adverse effect on our reputation and results of operations.
RISKS RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK
Our common stock has been publicly traded for a short time and an active trading market may not be sustained.
Prior to March 2007, there had been no public market for our common stock. An active trading market may not be sustained. The lack of an active market may impair the value of your shares and your ability to sell your shares at the time you wish to sell them. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other companies, products or technologies by using our shares as consideration.
If our public guidance or our future operating performance does not meet investor expectations, our stock price could decline.
As a public company, we provide guidance to the investing community regarding our anticipated future operating performance. Our business typically has a short sales cycle, so that we do not have significant backlog of orders at the start of a quarter, and our ability to sell our products successfully is subject to many uncertainties. In light of these factors, it is difficult for us to estimate with accuracy our future results. Our expectations regarding these results will be subject to numerous risks and uncertainties that could make actual results differ materially from those anticipated. If our actual results do not meet our public guidance or our guidance or actual results do not meet the expectations of third-party financial analysts, our stock price could decline significantly.
We expect that the price of our common stock will fluctuate substantially.
The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:
These and other factors may make the price of our stock volatile and subject to unexpected fluctuation.
Our directors, executive officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.
Our officers, directors and principal stockholders that currently hold more than 5% of our common stock together control nearly a majority of our outstanding common stock. As a result, these stockholders, if they act together, will be able to exercise significant influence over the management and affairs of our company and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control, might have a material adverse effect on the market price of our common stock and may not be in the best interest of our other stockholders.
A sale of a substantial number of shares of our common stock may cause the price of our common stock
All shares of our common stock that were outstanding before the IPO are eligible for resale, subject to compliance with Rule 144 under the Securities Act. If our stockholders sell substantial amounts of our common stock, the market price of our common stock could decline.
Our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that could discourage a takeover.
Our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that might enable our management to resist a takeover, and might make it more difficult for an investor to acquire a substantial block of our common stock. These provisions include:
These provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of these provisions could adversely affect the voting power of holders of our common stock and limit the price that investors might be willing to pay in the future for shares of the common stock.
We do not intend to pay cash dividends.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of any future debt or credit facility may preclude us from paying any dividends. As a result, we anticipate that capital appreciation of our common stock, if any, will be your sole source of potential gain for the foreseeable future.
On March 5, 2008, we entered into a Lease Agreement with The Irvine Company LLC for the lease of approximately 41,402 square feet space at 3 Morgan, Irvine, California. The term of the lease commenced on November 1, 2008 and will expire on January 31, 2014. The lease provided for a period of rent-free early occupancy before the commencement date. We believe the facility is adequate for our current and future needs for at least the next 12 months and has the capacity to accommodate additional headcount and manufacturing that we may need over this period of time.
On January 8, 2008, Hologic and its wholly-owned subsidiaries, including Cytyc Corporation and Cytyc LP, filed a lawsuit against us in the United States District Court, Northern District of California, San Jose Division. The complaint generally alleges patent infringement of certain Hologic brachytherapy patent claims, seeking unspecified monetary damages and an injunction against us for infringement of those claims. On February 6, 2008, Hologic filed a motion seeking a preliminary injunction in the case and requested that the Court stop the sale of Contura MLB. On March 7, 2008, Hologic filed an amended complaint restating its allegations regarding patent infringement, and adding new claims related to unfair competition under the Lanham Act and California state unfair competition and false advertising statutes. On April 25, 2008, the court denied Hologic's request for a preliminary injunction and ordered the parties to schedule a trial within 60 to 90 days of such date. On May 22, 2008, the Court issued an order scheduling the Markman claims construction hearing on the patent counts for June 25, 2008, and the trial in the case to start July 14, 2008. Pursuant to an agreement of the parties, the order also dismissed Hologic's unfair competition and false advertising claims under the Lanham Act and California state law, without prejudice. On June 24, 2008, the Court granted our joint request with Hologic to stay all proceedings, including the previously scheduled Markman claims construction hearing and the trial, until at least August 22, 2008 in order to provide the parties time to discuss possible resolution of the matter. On August 22, 2008, we jointly requested with Hologic that the Court resume proceedings in the pending lawsuit. On October 15, 2008, a Markman claims construction hearing and a hearing on our motion for summary judgment of invalidity of certain claims was held and a ruling was issued on February 18, 2009. In light of the Court's Markman ruling, on May 20, 2009, the parties separately filed motions seeking partial summary judgment: Hologic filed a motion seeking partial summary judgment of infringement for certain claims, and we filed motions seeking partial summary judgment that certain claims were not infringed and that certain claims were invalid. Briefing on the summary judgment motions was completed, and argument was held on August 21, 2009. The Court issued an order on October 30, 2009 ruling that one of the asserted claims of U.S. Patent No. 6,482,142 was invalid, and that physicians using the Contura MLB infringed the other asserted claim of the '142 patent. The Court further ruled that one asserted claim of U.S. Patent No. 6,413,204 and all asserted claims of U.S. Patent No. 5,913,813 were not infringed. The remaining claims in the case were tried by a jury between December 2, 2009 and December 16, 2009. On December 17, 2009, the jury returned a verdict ruling in our favor on all counts remaining in the case. In particular, the jury found that we did not infringe the '204 patent, and that the remaining claims of the '204 patent and '142 patent were invalid for reasons of anticipation and obviousness. The Court issued a final judgment in the case on February 24, 2010. Accordingly, following the result of the jury trial, the Contura MLB does not infringe any valid claim of any of the Hologic patents that were the subject matter of the litigation. On February 26, 2010, Hologic filed a notice of its appeal of the Court's final judgment and other adverse orders, opinions, and rulings relating to the final judgment, claim construction and the summary judgment order. No further dates have been scheduled at this juncture. We believe that the probability of incurring any loss related to this litigation is not determinable, nor is the amount of loss quantifiable at this time. Accordingly, we have not accrued a loss related to this litigation as of December 31, 2009. We intend to continue to vigorously defend ourselves in this matter.
Stock Exchange Listing
Our common stock has traded on the NASDAQ Global Market under the symbol “SENO” since our initial public offering on March 29, 2007. Prior to that time, there was no public market for our stock. On February 26, 2010, the closing sale price of our common stock was $7.19 per share.
As of February 28, 2010 there were approximately 80 stockholders of record of our common stock.
The following table sets forth quarterly high and low closing sales prices of our common stock for the indicated periods.
We have never paid a cash dividend and have no present intention to pay cash dividends in the foreseeable future. The Board of Directors currently intends to retain any future earnings for use in our business.
Sale of Unregistered Securities
We did not sell any unregistered securities during the period covered by this Annual Report on Form 10-K.
Purchase of Equity Securities
We did not purchase any equity securities during the period covered by this Annual Report on Form 10-K.
Stock Performance Graph
The following graph compares the cumulative total stockholder return on our common stock with the cumulative total return of the NASDAQ Composite Index and the NASDAQ Medical Equipment Index for the period beginning on March 29, 2007, our first day of trading after our initial public offering, and ending on December 31, 2009.
The graph assumes that $100 was invested on March 29, 2007 in our common stock, the NASDAQ Composite Index, and the NASDAQ Medical Equipment Index, and that all dividends were reinvested. No dividends have been declared or paid on our common stock. Stock performance shown in the above chart for the common stock is historical and should not be considered indicative of future price performance. This graph was prepared by Research Data Group, Inc.
Annual Percentage Return
The following table presents selected historical financial data. We derived the selected statements of operations data for the years ended December 31, 2009, 2008, and 2007and balance sheet data as of December 31, 2009 and 2008 from our audited financial statements and notes thereto that are included elsewhere in this annual report. We derived the selected statements of operations data for the years ended December 31, 2006 and 2005 and the balance sheet data as of December 31, 2007, 2006 and 2005 from our audited financial statements that do not appear in this annual report.
You should read the following financial information together with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this annual report. The information set forth below is not necessarily indicative of our future financial condition or results of operations.
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see the “Risk Factors” section in Item 1A of Part I of this Form 10-K. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Form 10-K. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.
We develop, manufacture and sell minimally-invasive medical devices that are used in the diagnosis and treatment of breast cancer. We were incorporated in 1998. From our inception until 2002, our principal activity was the development and regulatory clearance of our initial products, primarily our biopsy tissue markers and our first breast biopsy system, the EnCor 360. We launched our first biopsy tissue markers in 2002 and our EnCor 360 in 2003. The EnCor 360 hardware subsequently served as a platform to facilitate the later launch of the EnCor probes, handpieces and other probes, which are compatible with the major imaging modalities.
In 2004, we received 510(k) clearance from the FDA to market our EnCor breast biopsy system, our flagship product for use in breast biopsy procedures, conducting market preference testing commencing in the fourth quarter of 2004. Over the subsequent period ending in October 2005, we began selling the product on a limited basis while we focused on enhancing certain components of the product to optimize its performance, and we subsequently progressed with a full commercial launch of our EnCor system in November 2005.
We have and are continuing to develop minimally-invasive products for surgical excision of lesions and for breast cancer treatment. We received 510(k) clearance for our Contura Multi-Lumen Radiation Balloon Catheter, or Contura MLB, in May 2007 and launched in January 2008. Contura MLB is one of a new class of devices designed to reduce radiation treatment time to five days from six to eight weeks in patients eligible for the treatment. We also believe that Contura MLB may present radiation oncologists with opportunities to optimize dosing for certain patients. We are also developing next generation tissue marker products, additional EnCor line extensions, line extensions of Contura MLB, devices to assist in lesion location and certain other excision and reconstructive tissue cutting devices.
Before 2007, we derived our revenues primarily from our tissue marker products. However, our EnCor system accounted for a majority of our revenue growth in 2007and 2008. Our ability to continue to grow revenues is based upon a number of assumptions, which may not ultimately occur, including retention of our sales force, growth in the market for minimally-invasive breast biopsy procedures and rapid adoption of the product by physicians who specialize in breast care. We expect our Contura MLB to increasingly contribute to our revenues and we are marketing this device as a compelling alternative to competing devices.
For the year ended December 31, 2009, we generated net revenues of $55.6 million and a net loss of $2.9 million. As of December 31, 2009, our accumulated deficit was $87.1 million. We have not been profitable since inception. We expect our operating expenses to increase as we expand our business to meet anticipated increased demand for our EnCor system, expand sales of our Contura MLB and devote resources to our sales and marketing and research and development activities.
We derive our revenues primarily from the sales of our breast biopsy systems, breast biopsy capital equipment, our tissue markers, Contura MLB and other products for breast care. Our largest market for these products is in the United States and Canada, where we employ a direct sales force. Our breast biopsy systems, the EnCor and EnCor 360, consist of two primary components: reusable handpieces and disposable probes, and are used in conjunction with our SenoRx Breast Biopsy Console. The disposable probes form the basis of a recurring revenue stream and also contribute to the sales of tissue markers. Diagnostic adjunct revenue consists primarily of tissue marker sales, both used with our breast biopsy systems and with competitor’s biopsy products. Our breast biopsy capital equipment includes a reusable handpiece, a control module and vacuum source used in conjunction with our disposable biopsy probe. We expect that the sales of biopsy disposable products will continue to grow in 2010. Sales of biopsy capital equipment and sales of our adjunct products, such as our tissue markers and Gamma Finder, have begun to show signs of recovery as a result of the improvement in the general economic environment and we expect additional growth in the coming quarters. We have experienced significant revenue growth for Contura MLB since its commercial launch in January 2008. We anticipate that Contura MLB will continue to provide revenue increases quarter over quarter in the coming quarters, however, at a lower percentage growth rate than in 2009. We believe that overall placements of EnCor systems will continue to increase in 2010.
Cost of Goods Sold
Our cost of goods sold consists of the cost to manufacture and assemble our products, primarily including materials, components and labor. We assemble and package all of our finished products with the exception of our Gamma Finder product. We expect that our cost of goods sold as a percentage of revenues will decrease, and, correspondingly, gross profits will increase, as a percentage of net revenues with increased sales volume, product enhancements and outsourced manufacturing efficiencies. At the end of 2005, we entered into an agreement with a contract manufacturer in Thailand and began to transfer a portion of our manufacturing for certain components of our products to this site, and we anticipate that we will transfer additional manufacturing to this site in order to increase gross margins. We anticipate that our gross margin will continue to increase, though at a slower rate, in 2010 due to design and production process improvements, changes in product mix, the manufacturing efficiencies that we expect to see with increased production and the continued successful transfer of manufacturing of certain products and product components to our Thailand contract manufacturer.
Our operating expenses consist of selling and marketing, research and development, and general and administrative expenses. Stock-based compensation, a non-cash item, is primarily included in these expenses.
Our selling and marketing expenses consist of salaries and related expenses of our direct sales team and sales management, travel, clinical education and training expenses, marketing and promotional expenses, and costs associated with tradeshows. We expect selling and marketing expenses to increase in absolute terms as we expand our sales organization and promotional activities, although at a rate less than our revenue growth rate.
Our research and development expenses consist of salaries and related expenses of our research and development personnel and consultants and costs of product development, which include patent filing and maintenance costs, production engineering, clinical and regulatory support and post-clearance clinical product enhancements. We expense all our research and development costs as they are incurred. We expect research and development expenses to increase in absolute terms and as a percent of revenues in 2010 as we continue to develop, enhance, obtain clinical results and commercialize existing and new products.
In addition, we recently underwent an inspection of our manufacturing facilities by the FDA, which resulted in the issuance on September 30, 2009 of an FDA Form 483, Notice of Inspectional Observations, from the FDA related to our failure to properly implement and maintain adequate methods and documentation of the design, testing, production, control, quality assurance, storage, shipping and post-market surveillance for some of our products, including Contura MLB and Gel Mark product line. The Notice of Inspectional Observations will require us to take prompt action to strengthen our Quality System and will result in increased expenses.
Our general and administrative expenses consist of the cost of corporate operations, litigation and professional services. We expect general and administrative expenses to decrease in absolute dollars as a result of the completion of the trial relating to the Hologic patent infringement lawsuit. In 2009 and 2008, we incurred $5.5 million and $4.9 million, respectively, in patent litigation expenses related to alleged patent infringement by Hologic. On December 18, 2009 a jury delivered a verdict in our favor. On February 26, 2010, Hologic filed a notice of its appeal in the matter As a result, we believe that the probability of incurring any loss related to this litigation is not determinable, nor is the amount of loss quantifiable at this time. Accordingly, we have not accrued a loss related to this litigation as of December 31, 2009. We expect to incur stock-based compensation expense for option grants and RSU’s. We expect these expenses to remain essentially flat with 2009 levels. We also expect to incur stock-based compensation expense related to the issuance of common stock under our employee stock purchase plan.
Interest income represents income generated from our cash and cash equivalents and short-term investments that are invested generally in liquid money-market funds and commercial paper. During 2009, we had a term loan with Silicon Valley Bank or SVB, resulting in interest expense. Interest expense also includes the fair value for any equity interests, such as warrants, granted in conjunction with the debt obligations. The fair value of the equity interests were amortized to interest expense over the term of the related debt obligations. Interest expense has decreased due to the retirement of certain debt obligations in 2007 and early 2008 and lower available interest rates.
Income Tax Expense
Due to uncertainty surrounding the realization of deferred tax assets through future taxable income, we have provided a full valuation allowance and no benefit has been recognized for our net operating loss and other deferred tax assets.
Results of Operations
The following table sets forth our results of operations expressed as percentages of revenues for the years ended December 31, 2009, 2008 and 2007:
Year ended December 31, 2009 Compared to year Ended December 31, 2008
Net Revenues. Net revenues increased $8.9 million, or 19.0%, to $55.6 million in 2009 from $46.7 million in 2008. Therapeutic disposable revenues increased $6.4 million, or 123.0%, resulting from increased adoption of our Contura MLB. We began sales of the Contura MLB to a limited number of clinical sites in June 2007 following the May 2007 FDA 510(k) clearance, with full commercialization in January 2008. Biopsy disposable revenues increased $2.9 million or 13.9% from 2008 due to a larger installed base of EnCor systems. Total disposable product sales, which includes Contura MLB and EnCor probes, increased 22.7% to $50.0 million or 90.0% of net revenues in 2009 from $40.7 million or 87.3% of net revenues for the same period a year ago. These increases were off set by a decrease in biopsy capital revenues of $287,000, or 6.1%, and a decrease of diagnostic adjunct revenues of $118,000, or 0.7%. We believe that the decreases in biopsy capital and Gamma Finder sales were a result of the global recession, tight credit markets and currency fluctuations negatively impacting our global capital equipment sales.
Cost of Goods Sold and Gross Profit. Cost of goods sold decreased $138,000, or 0.8%, to $16.4 million in 2009 from $16.5 million in 2008. The decrease in total cost of goods sold primarily consisted of a decrease in direct labor, manufacturing overhead and material costs associated with our increase in product sales, which was partially offset by an increase of $925,000 in the provision for inventory obsolescence. Gross profit increased $9.0 million, or 29.9% to $39.2 million for 2009 from $30.2 million or 64.6% for 2008. Gross margins continue to benefit from improved efficiencies in the production of our disposable biopsy probe and leverage from the allocation of fixed manufacturing overhead over greater product revenues and inventory unit production.
Selling and Marketing Expenses. Selling and marketing expenses increased $763,000, or 3.3%, to $23.9 million in 2009 from $23.1 million in 2008. The increase primarily consisted of $602,000 in salaries and related employee costs due to the modest increases to our sales organization, a $349,000 increase in selling and promotional related expenses and a $64,000 increase in professional services, which were partially offset by a $174,000 decrease in departmental related costs and a $78,000 decrease in equity based compensation charges including deferred compensation and the discount associated with shares purchased by employees under our Employee Stock Purchase Plan.
Research and Development Expenses. Research and development expenses increased $1.2 million, or 20.4%, to $7.4 in 2009 from $6.1 million in 2008. The increase in these expenses consisted primarily of $401,000 in salaries and the related employee costs, an increase of $362,000 for new product development and support of existing product lines, an increase of $197,000 in departmental related costs, an increase of $195,000 for patent related professional fees and an increase of $94,000 in equity based compensation charges including deferred compensation and the discount associated with shares purchased by employees under our Employee Stock Purchase Plan.
General and Administrative Expenses. General and administrative expenses increased $594,000, or 5.9%, to $10.7 million in 2009 from $10.1 million in 2008. The increase primarily consisted of an increase of $593,000 to $5.5million in attorney and related litigation costs incurred responding to the allegations by Hologic of patent infringement relating to our Contura MLB, an increase of $130,000 in salaries and the related employee costs, an increase of $101,000 for state franchise taxes and an increase of $36,000 for departmental costs. These increases were partially offset by a decrease of $143,000 for professional services, including general legal fees and a decrease of $92,000 for public company related costs, including legal, SOX and financial reporting expenses and a decrease of $33,000 in equity based compensation charges including deferred compensation and the discount associated with shares purchased by employees under our Employee Stock Purchase Plan.
Interest Expense. Interest expense increased $113,000 to $198,000 in 2009 from $85,000 in 2008. The increase is primarily due to the $2.0 million advance in November 2008 from our term loan with SVB.
Interest Income. Interest income decreased $493,000 to $27,000 in 2009 from $520,000 in 2008 primarily due to lower interest rates and lower cash balances resulting from working capital needs for operations and spending on patent litigation.
Year ended December 31, 2008 Compared to year Ended December 31, 2007
Net Revenues. Net revenues increased $11.6 million, or 33.2%, to $46.7 million in 2008 from $35.0 million in 2007. The increase primarily consisted of $4.8 million in biopsy disposable revenues, an increase of 29.8% from 2007 due to a larger installed base of EnCor systems. Biopsy capital equipment revenues increased $1.4 million, or 42.1% in 2008 due to a greater number of customers purchasing our breast biopsy systems as compared to those customers acquiring the capital through a “product supply agreement” and increased equipment sales to international distributors. Diagnostic adjunct revenues increased $798,000, or 5.3%, primarily due to an increase in marker sales resulting from increased EnCor disposable biopsy sales and sales of markers used with competitive biopsy disposables and increased Gamma Finder sales. Therapeutic revenues increased $4.6 million as we began sales of our Contura MLB to a limited number of clinical sites in June 2007 following the May 2007 FDA 510(k) clearance, with full commercialization in January 2008.
Cost of Goods Sold and Gross Profit. Cost of goods sold increased $1.4 million, or 9.1%, to $16.5 million in 2008 from $15.1 million in 2007. The increase in total cost of goods sold primarily consisted of an increase in direct labor, manufacturing overhead and material costs associated with our increase in unit sales. Gross profit increased $10.3 million or 51.6% to $30.2 million in 2008 from $19.9 in 2007. Gross profit as a percentage of net revenues increased by 7.8% to 64.6% in 2008 from 56.8% in 2007. The increase in gross profit as a percentage of net revenues was primarily attributable to improved efficiencies in the production of our disposable biopsy probe and gross margin contribution from the sales of our Contura MLB. Additionally, gross margins continue to benefit from the allocation of manufacturing overhead over greater product revenues and inventory unit production.
Selling and Marketing Expenses. Selling and marketing expenses increased $4.1 million, or 21.5%, to $23.1 million in 2008 from $19.0 million in 2007. The increase primarily consisted of $3.5 million in salaries and related employee costs due to the expansion of our sales organization, a $133,000 increase in departmental related expenses, a $147,000 increase in selling and promotional related expenses and a $274,000 increase in equity based compensation.
Research and Development Expenses. Research and development expenses decreased $242,000, or 3.8%, to $6.1 in 2008 from $6.4 million in 2006. The decrease in these expenses consisted primarily of project costs, predominately for the Contura MLB, which decreased $502,000 and a decrease of $60,000 in equity based compensation. This decrease was partially offset by an increase of $62,000 for salaries and the related employee costs, a $116,000 increase for patent related expenses and an increase of $142,000 in departmental related expenses.
General and Administrative Expenses. General and administrative expenses increased $5.9 million, or 141.1%, to $10.1 million in 2008 from $4.2 million in 2007. The increase primarily consisted of $4.9 million in attorney and related litigation costs incurred in connection with responding to the allegations by Hologic of patent infringement relating to our Contura MLB, $265,000 for public company related costs, including legal and reporting expenses, which includes first year Sarbanes Oxley implementation costs, $275,000 for salaries and the related employee costs, $287,000 for departmental costs and $173,000 for increased professional fees.
Interest Expense. Interest expense decreased $1.6 million to $85,000 in 2008 from $1.6 million in 2007. The decrease was primarily due to the repayment of the December 2006 subordinated note.
Loss on Debt Extinguishment. In November 2007, we incurred a $1.3 million expense on the retirement of a December 2006 Subordinate Note facility that had an original principal amount of $10.0 million outstanding under it, representing the unamortized debt issuance and debt discounts which would have been otherwise charged to interest expense over the term of the facility. In 2008, we did not incur any expense related to this item.
Change in Fair Value of Convertible Promissory Notes and Warrant Valuation. In 2007, we recorded income of $160,000 for the change in fair value of our May 2006 convertible promissory notes that had an original aggregate principal amount of $8.0 million outstanding, in accordance with FAS No. 155, and income of $831,000 for the reduction in the fair value of a related warrant liability. In 2008, we did not incur any expense related to this item.
Interest Income. Interest income decreased $1.1 million to $520,000 in 2008 from $1.6 million in 2007 primarily due to lower cash and short-term investment balances resulting from the repayment of $10.3 million for the retirement of the December 2006 Subordinated Note, $2.0 million to repay a February 2003 convertible subordinated note and 2002 note obligations owing to Century Medical, as well as working capital needs.
Liquidity and Capital Resources
We have incurred losses since our inception in January 1998 and, as of December 31, 2009, we had an accumulated deficit of $87.1 million. From inception through December 31, 2009, we generated cumulative gross profit from the sale of our product offerings of $126.1 million. To date, our operations have been funded primarily with proceeds from the issuance of our preferred stock, debt issuances and our IPO that closed in April 2007. Cumulative net proceeds from the issuance of preferred stock totaled $46.8 million. Proceeds from the issuance of promissory notes totaled $8.0 million. Net proceeds from our IPO, including the sale of shares pursuant to the subsequent underwriters’ overallotment and after deducting total expenses, was $44.8 million. All of our preferred stock converted into common stock upon the closing of the IPO. In November 2007 we used $10.3 million to retire a December 2006 Subordinated Note and in February 2008 we used $2.0 million to repay a February 2003 convertible subordinated note and 2002 note obligations owing to Century Medical. In September 2008 we amended our existing loan agreement with SVB to, among other items, increase the total maximum amount available for borrowing from $4.0 million to $12.0 million. As of December 31, 2009, $2.0 million has been drawn down under this facility, of which $1.6 million is outstanding, and $8.1 million was available based on the borrowing formula for the facility.
We believe that our cash and cash equivalents will be sufficient to meet our projected operating requirements for at least the next 12 months.
Net Cash Provided By Operating Activities—Year Ended 2009
Net cash provided by operating activities was $3.8 million, for the year ended December 31, 2009, which was primarily a function of an increase in accounts payable and accrued expenses of $2.3 million, a decrease in inventory of $944,000, and an increase in deferred revenue of $282,000. These sources of cash were partially offset by an increase in accounts receivable of $1.6 million and an increase in other assets of $110,000. The $2.3 million increase in accounts payable and accrued expenses was primarily due to the timing of payment obligations, the $944,000 decrease in inventory was due to a focus on cost containment measures and the $282,000 increase in deferred revenue resulted from a higher number of equipment service contracts. The increase in accounts receivable was primarily due to an increase in net sales and an increase in sales outside the United States, which include extended payment terms for initial stocking orders. While we expect that the amount of accounts receivable will fluctuate based on the timing of sales and collections, we expect our ratio of overall investment in accounts receivable as compared to revenues will continue to modestly increase.
Net Cash Used in Investing Activities—Year Ended 2009
Net cash used in investing activities amounted to $616,000 during the year ended December 31, 2009, was primarily attributable to the purchase of new manufacturing molds and demonstration units.
Net Cash Used in Financing Activities—Year Ended 2009
Net cash used in financing activities was $199,000 during the year ended December 31, 2009, which was primarily attributable to the scheduled repayments of $375,000 on our term loan with SVB, $50,000 cash payment for the annual renewal of the SVB working capital facility, $57,000 payment of payroll taxes for the net share settlement of equity awards, $11,000 repayment of capital leases and the repayment of a $10,000 equipment loan. These uses of cash were offset by $305,000 related to the proceeds from the issuance of common stock from option exercises and purchases of stock pursuant to our Employee Stock Purchase Plan.
Net Cash Used in Operating Activities—Year Ended 2008
Net cash used in operating activities was $11.9 million, for the year ended December 31, 2008, which was primarily a function of an increase in inventory of $3.9 million, an increase in accounts receivable of $2.9 million, an increase in other assets of $225,000, and a decrease in accounts payable and accrued expenses of $560,000. These uses of cash were partially offset by a decrease in prepaid expenses of $158,000 and an increase in deferred revenue of $68,000. The aggregate increased investment in inventory of $3.9 million resulted primarily from two major factors, including (i) our decision to build shelf stock for our higher volume products in order to better service our customers as well as accommodate our move to the new manufacturing facility in late August 2008, and (ii) the need to purchase longer-term quantities of certain parts due to long lead times. We expect inventory will modestly decrease in 2009. The increase in accounts receivable was primarily due to an increase in net sales and an increase in sales outside the United States, which include extended payment terms for initial stocking orders. While we expect that the amount of accounts receivable will fluctuate based on the timing of sales and collections, we expect our ratio of overall investment in accounts receivable as compared to revenues will continue to modestly increase. The $560,000 decrease in accounts payable and accrued expenses resulted from the use of funds, including funds borrowed under our bank loan facility with SVB that allowed us to reduce outstanding accounts payable with certain vendors.
Net Cash Provided by Investing Activities—Year Ended 2008
Net cash provided by investing activities amounted to $9.8 million during the year ended December 31, 2008, was primarily attributable to the maturities of short-term investments which was partially offset by the $970,000 addition of new manufacturing molds and equipment, business intelligence software, leasehold improvements to our new Irvine facility and demonstration units.
Net Cash Provided by Financing Activities—Year Ended 2008
Net cash provided by financing activities was $242,000 during the year ended December 31, 2008, primarily attributable to $2.0 million advance on our term loan and $370,000 related to the proceeds from the issuance of common stock from option exercises and ESPP stock purchases. These proceeds were partially offset by the repayment of $2.0 million for the Century Medical notes and $30,000 cash paid for the annual renewal of the SVB working capital facility
Net Cash Used in Operating Activities—Year Ended 2007
Net cash used in operating activities was $10.3 million, for the year ended December 31, 2007, which was a function of an increase in inventory of $2.7 million, an increase in accounts receivable of $1.2 million, a decrease in accounts payable and accrued expenses of $748,000, and an increase in prepaid expenses of $324,000. These uses of cash were partially offset by a decrease in other assets of $384,000 and an increase in deferred revenue of $58,000. The aggregate increased investment in inventory of $2.7 million resulted primarily from two major factors, including our decision to build shelf stock of our higher volume products in order to better service our customers, and the need to purchase longer-term quantities of certain parts due to long lead times. We expect inventory will continue to increase in 2008. The increase in accounts receivable was primarily due to an increase in net sales. While we expect that the amount of accounts receivable will fluctuate based on the timing of sales and collections, we expect our ratio of overall investment in accounts receivable as compared to revenues will remain constant as compared to 2007. The $748,000 decrease in accounts payable and accrued expenses resulted from the use of proceeds from our April 2007 IPO, which allowed us to reduce outstanding accounts payable with certain vendors.
Net Cash Used in Investing Activities—Year Ended 2007
Net cash used in investing activities amounted to $11.3 million during the year ended December 31, 2007, primarily attributable to the purchase of short-term investments and the addition of demonstration units and new manufacturing molds.
Net Cash Provided by Financing Activities—Year Ended 2007
Net cash provided by financing activities was $31.4 million during the year ended December 31, 2007, primarily attributable to proceeds of $47.1 million from our April 2007 IPO and underwriters’ overallotment, a $2.8 million advance on our working capital facility and $61,000 related to the proceeds from the issuance of common stock from option exercises. These proceeds were partially offset by an aggregate of $17.8 million in repayments under our various debt facilities and $941,000 in cash paid for deferred offering costs including legal, accounting and printing fees, which were offset against offering proceeds at the completion of our IPO in April 2007.
Our accounts receivable days outstanding were 52 days at December 31, 2009, 51 days at December 31, 2008 and 47 days at December 31, 2007. Our products are typically sold for terms net 30 days from shipment. We review our accounts receivable balances and customers regularly to establish and maintain an appropriate allowance for doubtful accounts. Our account analysis includes reviewing the customer’s historical payment history, the amount and number of days an account is outside of payment terms, the magnitude of the account balance, historical order patterns and any specific knowledge about the customer’s financial condition. Our allowance for doubtful accounts as a percentage of gross receivables was 2.4%, 2.7% and 2.0% at December 31, 2009, 2008 and 2007, respectively. Our reserve requirements are based on our review of every account and we place particular emphasis on each customer account with an account receivable balance more than 90 days old and on that customer’s specific payment history and other financial information. As our revenues increase, we anticipate our days sales outstanding will fluctuate moderately.
The following summarizes our long-term contractual obligations at December 31, 2009:
The operating leases shown above reflect payments related to our real estate lease in Irvine, California, which expires in January 2014 and will amount to $3.0 million over the 63 month duration of the lease, which commenced in November 2008.
Working Capital Facility with Silicon Valley Bank. We have a working capital facility with SVB that, as a result of amendments to this facility in February 2007 and September 2008, has an aggregate limit of $12.0 million. In connection with the September 2008 amendment, we also entered into an Export-Import Bank of the United States Working Capital Guarantee Program Borrower Agreement, which helped increase the total maximum amount available for borrowing under the facility, which is now $12.0 million. Previously, our credit facility with SVB provided for a maximum borrowing amount of $4.0 million.
Revolving Line. The SVB facility provides for a domestic receivables-based revolving line of credit in an aggregate amount of up to $10.0 million, or, if less, the sum of 80% of eligible domestic accounts receivable plus 25% of eligible domestic inventory, coupled with a foreign receivables-based revolving line of credit, guaranteed by Export-Import Bank of the United States, in an aggregate amount of up to $2.5 million, or if less, the sum of 90% of eligible foreign accounts receivable plus 50% of eligible export-related inventory. No more than $10.0 million, in the aggregate, will be available for combined draw-downs under these two revolving lines of credit, a maturity date of September 2010 and bears interest at an annual rate equal to the prime rate plus 0.25% (4.25% at December 31, 2009), provided that the annual rate will increase to prime rate plus 1.00% if a financial ratio relating to our liquidity falls below a specified level. Interest is due monthly, with the balance due at the maturity date. The domestic portion of revolving line is subject to a $1.0 million sublimit available for cash management services provided by SVB, including the issuance of short-term letters of credit and foreign exchange contracts. At December 31, 2009, there was $8.1 million available to borrow on the revolving line.
Term Loan. The SVB facility also provides for a term loan in an aggregate amount of up to $2.0 million, with a maturity date of March 2013, provided that if the revolving line is not renewed at its maturity date, all amounts outstanding under the term loan will become due at such time. The term loan bears interest at an annual rate equal to the prime rate plus 0.75% (4.75% at December 31, 2009), provided that the annual rate applicable to the term loan increases to an annual rate equal to the prime rate plus 1.50% if a financial ratio relating to our liquidity falls below a specified level. A single advance is permitted and was drawn down in November 2008. Monthly payments of interest only on the amount outstanding were due through March 2009, followed by forty-eight (48) consecutive monthly installments of amortized principal and interest through the maturity date. A principal amount of $1.6 million was outstanding at December 31, 2009.
Loan Agreement Obligations. The obligations under the SVB facility are secured by security interest on substantially all of our assets, excluding intellectual property for which we gave a negative pledge against encumbering. The SVB facility contains certain restrictive loan covenants, including, among others, financial covenants requiring a minimum tangible net worth and a minimum liquidity ratio, and covenants limiting our ability to dispose of assets, make acquisitions, be acquired, incur indebtedness, grant liens or enter into negative pledge agreements, make investments, make distributions in respect of our capital stock (including repurchases of such capital stock) or enter into transactions with affiliates. The SVB facility also contains events of default that include, among others, failure to make payments when due, inaccuracy of representations and warranties, violation of covenants, events constituting a material adverse change, bankruptcy and insolvency events, material judgments, and cross defaults to certain other agreements. The occurrence of an event of default could result in the acceleration of our obligations and an increase to the applicable interest rate, and would permit SVB to exercise remedies with respect to the collateral.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in material off-balance sheet activities, including the use of structured finance, special purpose entities or variable interest entities.
Realization of our deferred tax assets is dependent upon the timing and amount of our future earnings, if any. Accordingly, we have established full deferred tax asset valuation allowances as of December 31, 2009, 2008 and 2007 to reflect these uncertainties.
As of December 31, 2009, we had federal and state net operating loss carryforwards of approximately $65.2 million and $45.9 million, respectively, and $1.8 million in federal tax credit carryforwards and $2.2 million in state tax credit carryforwards. The federal net operating loss carryforwards and tax credit carryforwards will begin to expire in 2018. The state net operating loss carryforwards began to expire in 2009. The state tax credit carryforwards do not expire. The utilization of the net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code. This annual limitation may result in the expiration of net operating loss and tax credit carryforwards before we are able to utilize them. As of December 31, 2009 the Company conducted an analysis with regard to its ownership and concluded an ownership change had not occurred.
Critical Accounting Policies
We prepare our financial statements in accordance with accounting principles generally accepted in the United States. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We regularly evaluate our estimates and assumptions based upon historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent actual results differ from those estimates, our future results of operations may be affected.
While our significant accounting policies are more fully described in Note 1 of the notes to our audited financial statements, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results.
Revenue is recognized when (a) persuasive evidence of an arrangement exists; (b) title has transferred; (c) the fee is fixed or determinable; and (d) collectability is reasonably assured. Our recognition policy is significant because our revenue is a key component of our operations and the timing of revenue recognition determines the timing of certain expenses, such as sales commissions. Revenue results are difficult to predict, and any shortfall in revenues could cause our operating results to vary significantly from period to period.
For those sales that include multiple deliverables, we allocate revenue based on the relative fair values of the individual components as determined in accordance with ASC No. 605-25 (formerly, EITF Issue No. 00-21), “Revenue Arrangements with Multiple Deliverables.” When more than one element, such as hardware and disposables, are contained in a single arrangement, revenues are allocated between the elements based on each element’s relative fair value, provided that each element meets the criteria for treatment as a separate unit of accounting. An item is considered a separate unit of accounting if it has value to the customer on a standalone basis and there is objective and reliable evidence of the fair value of the undelivered items. Fair value is generally determined based upon the price charged when the element is sold separately. In the absence of fair value for a delivered element, we allocate revenue first to the fair value of the undelivered elements and allocate the residual revenue to the delivered elements. In the absence of fair value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in a deferral of revenue recognition for the delivered elements until all undelivered elements have been fulfilled.
We place certain equipment with customers in return for the customer purchasing a minimum number of disposable devices during a specified contract period. Title to the equipment passes to the customer at the end of the contract period if the minimum purchase requirements are met. The cost of the equipment, which is included in other long-term assets in the accompanying balance sheets, is amortized to cost of goods sold based on the monthly disposable unit shipments compared to the total purchase commitment of disposables. In the event the customer does not fulfill the minimum purchase requirements, collection efforts may be undertaken and we will attempt to recover the equipment. If the collection efforts or recovery of the equipment is not successful, the unamortized equipment cost would be expensed to cost of goods sold.
We also account for a customer’s advance payment on product purchases and service contracts as deferred revenue. As product is purchased or the service contract period matures, the applicable sales value is recognized as revenue.
Effective January 1, 2006, we adopted ASC 718 (formerly SFAS No. 123R), which requires that all stock-based compensation to employees, including grants of employee stock options, be expensed in our financial statements based on their respective grant date fair values. Under ASC 718, we estimate the fair value of each stock-based payment award using the Black-Scholes option pricing model.
The determination of the fair value of stock-based payment awards using the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We did not have a history of market prices of our common stock as we were not a public company until our April 2007 initial public offering, and as such, we estimate volatility in accordance with ASC 718, (formerly SAB No. 107) using historical volatilities of other publicly traded companies in our industry. The expected life of the awards is based on the simplified method as defined in ASC 718. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our awards. The dividend yield assumption is based on our history and expectation of not paying any dividends. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We recognized stock-based compensation expense in our financial statements based on awards that are ultimately expected to vest.
A summary of significant assumptions used in determining the fair value of the options is as follows:
If factors change and we employ different assumptions, stock-based compensation expense may differ significantly form what we recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant addition equity awards to employees or we assume unvested equity awards in connection with acquisitions.
We assess the recoverability of our inventories at least quarterly through a review of inventory levels in relation to foreseeable demand, generally over twelve months. Foreseeable demand is based upon all available information, including sales backlog and forecasts, product marketing plans and product life-cycle information. When the inventory on hand exceeds the foreseeable demand, we write down the value of those inventories which, at the time of our review, we expect to be unable to sell. The amount of the inventory write-down is the excess of historical cost over estimated realizable value. Once established, these write-downs are considered permanent adjustments to the cost basis of the excess inventory. Demand for our products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those projected by management. In the event that actual demand or product pricing is lower than originally projected, additional inventory write-downs may be required. Further, on a quarterly basis, we assess the net realizable value of our inventories. When the estimated average selling price, plus costs to sell our inventory, falls below our inventory cost, we adjust our inventory to its current estimated market value.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We use a specific identification method for some items, and a percentage of aged receivables for others. The percentages are determined based on our past experience. If the financial condition of our customers were to deteriorate, our actual losses might exceed our estimates, and additional allowances would be required.
Certain of our products incorporate software which is incidental to the product as a whole. Software development costs incurred prior to the establishment of technological feasibility are expensed as research and development costs. We define the establishment of technological feasibility as the completion of a final working model that has been incorporated into a product that has been cleared by the FDA, at which time the product can be sold to third parties. As a result, we have expensed all software development costs.
Impairment of Long-lived Assets
Long-lived assets, including fixed assets, are continually monitored and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset and its eventual disposition. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance, growth rates and other factors. Our estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, changes to our business model or changes in our operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. We determine fair value by using available market data, comparable asset quotes and/or discounted cash flow models.
Deferred Income Taxes
We evaluate the realizability of our deferred tax assets and assess the need for a valuation allowance quarterly. We record a valuation allowance to reduce our deferred tax assets to the net amount that is more likely than not to be realized. Our assessment of the need for a valuation allowance is based upon our history of operating results, expectations of future taxable income and the ongoing prudent and feasible tax planning strategies available to us. In the event that we determine that we will not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax assets would be charged against income in the period such determination is made. Likewise, in the event we were to determine that we will be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination is made.
Fair Value of Financial Instruments
At each reporting date, we were required to estimate the fair value of our May 2006 convertible promissory notes in its entirety with changes in fair value recognized in the statement of operations. Our estimate of fair value was based upon a valuation which encompasses the probability weighted scenarios of the conversion features, as well as the timing and method of payment of interest associated with our May 2006 notes.
At each reporting date, we were also required to estimate the fair value of the warrant issued in conjunction with our 2006 Subordinated Note. Our estimate of fair value was determined using the Black-Scholes option pricing model, which requires inputs for risk-free interest rate, dividend yield, volatility, the life of the warrant and the fair value of the underlying security.
Recent Accounting Pronouncements
In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements, which amends the guidance in ASC 820, Fair Value Measurements and Disclosures. ASU No. 2010-06 requires companies to disclose transfers between Level 1 and Level 2 within the fair value hierarchy and describe the reasons for the transfers. In addition, in the reconciliation of assets and liabilities in Level 3 of the fair value hierarchy, companies are required to present sales, purchases, issuances and settlements on a gross rather than net basis. ASU No. 2010-06 also clarifies that companies should provide fair value measurement disclosures for each class of assets and liabilities and that companies should disclose the inputs and valuation techniques used to measure assets and liabilities that fall either in Level 2 or Level 3. ASU No. 2010-06 will be effective for interim and annual periods beginning after December 15, 2009, except for the new Level 3 reconciliation disclosures, which will be effective for interim and annual periods beginning after December 15, 2010. This update is not expected to have a material impact on our financial position and results of operations.
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force, which amends the guidance in ASC 605, Revenue Recognition. ASU 2009-13 eliminates the residual method of accounting for revenue on undelivered products and instead, requires companies to allocate revenue to each of the deliverable products based on their relative selling price. In addition, this ASU expands the disclosure requirements surrounding multiple-deliverable arrangements. This update is effective beginning January 1, 2011 and can be applied prospectively or retrospectively. Adoption is not expected to materially impact our financial position, results of operations or cash flows directly when it becomes effective, as we will not elect retrospective adoption. However, this update may impact how we reflect multiple-element arrangements entered into subsequent to January 1, 2011, in the financial statements.
The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and investments in a variety of marketable securities, including commercial paper, money market funds and corporate debt securities and U.S. government securities. Our cash and cash equivalents as of December 31, 2009, included liquid money market accounts. Due to the liquid nature of our cash and cash equivalents, we believe we have no material exposure to interest rate risk. Additionally, since the majority of our debt carries interest at fixed rates, we also believe changes in interest rates will not cause significant changes in our interest expense. Our revenues are denominated in U.S. dollars. Accordingly, we have not had exposure to foreign currency rate fluctuations. We expect to continue to realize our revenues in U.S. dollars.
Our Financial Statements as of December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009, together with the reports of our independent registered public accounting firm, are included under Part IV, Item 14 of this report.
Evaluation of Disclosure Controls and Procedures. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management as appropriate to allow for timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness 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 policies or procedures my deteriorate.
To evaluate the effectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control-Integrated Framework, issue by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment using those criteria, management has concluded that we maintained effective internal control over financial reporting as of December 31, 2009.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act of 1934, as amended) that occurred during the fourth quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
We have audited the internal control over financial reporting of SenoRx, Inc. (the “Company”) as of December 31, 2009, based on 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, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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 the 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the 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 financial statements as of and for the year ended December 31, 2009, of the Company and our report dated March 10, 2010, expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 10, 2010
The information required by this Item is incorporated by reference to the definitive proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our 2009 fiscal year (the “2010 Proxy Statement”).
The information required by this Item is incorporated by reference to the 2010 Proxy Statement.
The information required by this Item is incorporated by reference to the 2010 Proxy Statement.
The information required by this Item is incorporated by reference to the 2010 Proxy Statement.
The information required by this Item is incorporated by reference to the 2010 Proxy Statement.
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
We have audited the accompanying balance sheets of SenoRx, Inc. (the “Company”) as of December 31, 2009 and 2008, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the 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 SenoRx, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, 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 December 31, 2009, 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 March 10, 2010, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS