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A Message from the CEO, October 11, 2007

Dear Shareholders:

Since it has been several months since I last put out a shareholder letter, I thought that now was a good a time to update everyone on what has been going on here at Somatic Systems, Inc. Much of what I am writing here is in response to various emails and calls our company has received over the last eight weeks.


Q. A shareholder expressed dissatisfaction that we have been talking about investing capital in promoting consumer awareness of Somatics; he asked “what have they been doing for the past 14 years?”

A. The answer is that evaluating us as a big company... we weren’t one: We were a small clinic, working as the only institution developing this gem of a pain care management technique for the future of health care. Then, about 7 years ago, we began preparing to create the ideal training school for Clinical Somatics™, which is not only the best but the only way to be authentically and successfully trained in this technique.

During that time, as well as in the past year using a significant portion of the modest funds we raised since going public, we also developed savvy and comprehensive strategies and infrastructures for growing the business of Somatics. For the four different product categories of Clinical Somatics...

  • Clinical Sessions,
  • Group Classes,
  • Products, and
  • Training Programs

...there are a lot of pieces to build if the ultimate goal of all this is to be a Starbucks and not a local rundown curbside coffee truck. This is so much less expensive to build than a medical chain, but let that not make us lose perspective and think that it free or easy. We are still building an entire profession from scratch, in terms of it being a worldwide or even national standard for consumers to use for pain treatment and fitness. That isn’t just about having the best mousetrap: You have to have a way to sell it. So the fact is, relative to most industries, our development tasks list has been tiny, but it has still been a lot of work. This work has built all the passionately exciting and mundanely necessary components of our 3 different divisions (that sell Somatics’ 4 different products) — Clinics, Products, and the Training Program.

There’s much more work to be done, and that is the goal of fundraising: These next steps take additional capital. This is not different than most Pink Sheets companies — except that we require a lot less money, because our overhead to grow is much smaller than for surgical pain care clinics, medical facilities, and the like.

Topics such as our overhead do beg clarification of the developmental stage of our company. Our stage is very clear to us, but I donít know if it is always clear is to outside shareholders. Questions in that vein might include “why aren’t they doing more business?”; or, “if their product is so great, why don’t they already have extensive cash flow and assets to expand without raising capital?”

The answer is very simple: We are not a Development stage company. In fact, that is what I have asserted in the past is one our strengths ó proprietary development stage efforts are what we already spent our time and resources on in the first 14 years. Instead of our challenge and financial need being Research and/or Development, it is “Production”. If we don’t grow, it’s not because we don’t have a great product or system, but rather because to grow we need to produce our product — more clinicians and service outlets, more products for consumer markets, more marketing of and resources to run more and larger professional training classes.

The best way to think about us (and I do apologize for repeating this ad nauseum) is that we really do have the best “mousetrap” ever developed for chronic pain, injuries, and musculoskeletal limitations. But that means absolutely nothing (other than academic pride) — nothing from a business standpoint — unless we can have a factory to produce the mousetraps, a sales force to sell and take orders, a fulfillment staff, a customer service process, and a careful management structure to make sure we strike the right production and promotion balance to keep a good economy of scale and good inventory control. The greatest ideas have failed without clear plans. We are like a restaurant with the best chef and a great “gimmick” for an affluent market: Even a restaurant like that needs to put a lot of resources behind promotion and operation and general presence and branding in the consumer market.

Generally speaking, Somatics needs to allocate money towards:

  • marketing our existing clinics,
  • producing and promoting some new easy, low-cost consumer products (such as a few exercise videos, etc.),
  • and more aggressively promoting our training program — to existing markets, but also aggressive outreach to important fields such as medicine, physical therapy, gerontology, sports medicine, and others.

We have spent less than $100,000 promoting Somatics, and yet we have still grown our training by 50% each year, and continue to add customers of all kinds. The work and our training programs are simply that good. We want to put capital towards a national branding and public relations campaign, including media placement and high-contact presentations and consumer education events, broad promotional appearances and marketing materials, and outreach to influential contacts higher up on the chain (the gym owners, the coaches, the pain management clinic managers, the massage and physical therapy school faculty and directors).

Some examples of those larger scale efforts in the works already, even without additional funding, include...

  • Television show to air in 48 local markets and on two national cable channels (WE tv and the Travel Channel). The program is not an infomercial — it is educational programming meant for general audiences as well as the health industry — but it does provide promotion of our Somatics system and “call to action” information for our company.
  • Two books being written now exclusively about Clinical Somatics, one by a published author with an existing publishing relationship, and the other by Somatic Systems ourselves. Both books are targeted at educating the public about Clinical Somatics deeply enough to get a broad audience thoroughly invested in it. This is a common outcome of many diet, self-help, and fitness books in the current era. Some, such as the South Beach Diet, have been explosively successful.

    Our Somatics books are much more likely to become a strong, definitive topic (rather than a fad) because no other is no other pain-care systemís outcomes are as good as Clinical Somatics, and because Clinical Somatics has so many applications and applicable demographics.

    Unlike any previous publications on Clinical Somatics, the books will have a marketing focus and a call-to-action, with the goal of getting readers to practitioners, clinics, classes, training programs, and Somatic Systems.
  • Expanded web services and promotional efforts over the years to come.
  • Offering our training in a new location, to serve a new geographical and logistical market, with goals of increasing training enrollment (serving some of the people who have not yet enrolled over the years because they needed classes to be offered in a different location) and distribution of practitioners in other regions and markets.
  • The initial work we have done with the Military and the VA.
  • The current Department of Education licensing effort for our Training Program, combined with additional efforts to add accreditations and licenses, which offer more and more financial aid options and connections to bigger institutions and higher level trainee populations (orthopedists, rehabilitation specialists, etc.).


Q. I recently heard from a shareholder who said our plans were vague and that we had no chance of making money.

A. To my knowledge, this is not a shareholder who is privy to any of our specific plans. We do have models and plans to grow all three of our divisions — Clinics, Products, Training:

  1. Clinics: Clinics cost less than $100k to open, and make about $200-400k revenue on $150-320k in expenses — with only two fully trained practitioners (and a small “non-skilled” support staff). A four practitioner clinic makes $400-750 revenue on $260-540k in expenses. A six practitioner clinic makes $600k to $1.1million revenue on $380-750k in expenses.
  1. Products: Clinic revenue figures described above do not include any retail product sales that occur at Clinic locations. Sale of 40,000 low priced items ($19 to $40 retail price per unit) such as exercise books or CDs or floor mats means an estimated $1 million revenue. These items are an easy sell at Clinic locations and as a result of national marketing in regions where no clinics exist ó especially with a national television spot coming soon.
  1. Training: A full-sized class for the Training Program (a target we have not yet reached) makes approximately $200,000 in the first year. This figure is for tuition alone; it does not include the revenue increases in our other divisions (Clinics and Products) that typically occur. The profit margin on this training revenue is approximately 25%; in other words, expenses are about $150k — and these expenses do not increase at all if tuition prices are raised.

    This revenue and profit margin comes from a current tuition of $5,000 per student for the first semester. This amount is underpriced for it’s value, and could easily move up to $10,000, given the right market conditions, word of mouth, and consumer awareness. This could mean as much as $400k revenue for a Training semester 1 (with no increase in expenses).

    Keep in mind that a Training semester 1 is composed of two modules lasting 9 contiguous days each, conducted approximately 3 months apart. This means that a semester of training (and revenue) occupies only 18 days of the Training Programís class time.

    With enough demand, this set of two 9-day modules could be offered at the same location (or multiple locations) all year round, for tremendous revenue potential. And of course, each training class increases both sales in other divisions and general consumer awareness.

    Remember that each training class continues for two additional semesters (with each semester consisting of two distinct 9-day modules). Tuition for each of the second and third semesters is currently half that of the first semester. Attrition has been very low (less than 20%), so in addition to the potential of $200-400k per new class each year, revenue will also include an additional $80k to $160k per 18 additional days of returning training classes.

    Please also note that, at the least, we expect to either raise semester 1 tuition or increase semester 2 and 3 tuitions to a price closer to that of semester 1 tuition, as demand grows. Our internal analysis of the content, value, and student satisfaction of the 2nd and 3rd semesters supports this plan. Thus, in any given year...
    $200k per new class + $80k per semester 2 class + $80k per semester 3 class
    might become
    $200k + $180 + $180k or similar.

    Keep in mind that the tremendous appeal and value of Clinical Somatics as a professional skill (and Somatic Systems’ proven system of teaching it) has been so powerful that enrollment, while still very modest, has grown 50% each year (that is, with each new training class) — with almost zero dollars in marketing.


Q. “What are the Companyís current priories for growth?”

A. In terms of our specific priorities for growth, our current market analysis says that we need to cooperatively build supply and demand simultaneously, through aggressive marketing of our training program, followed by strong promotion of our existing clinic locations. New clinics are then staffed by training program graduates, and a new round of new clinic promotions begins. Clinical services in turn are effective at growing training interest, which in turn enables more clinics. When we reach targets with training enrollment, we increase marketing of trainings as we begin to fill more clinics and need more clinic practitioners.

In the event of our market really exploding quickly, our control of training as well as clinics means we can intensively train staff to increase clinics and capacity as needed. Additionally, retail products are an easy way to serve a rapid expansion of demand. This expansion is also easily served by group classes at our Clinics, as well as in fitness centers, corporate settings, etc. (and the high-volume of group classes returns much higher gross and net revenue per hour than individual clinic sessions).

Simply stated, we are positioned to grow whichever division(s) expanding markets hunger for first. Given that the best laid plans of any company sometime take slightly different turns than expected, we think this is a smart, sustainable, and agile formula for success no matter what the future holds, and for continuing to thrive and expand indefinitely.


Q. “What are your action plans, with a long term view in mind?”

A. Here are examples of concrete actions beyond the smaller ones that are in process now, which support the national growth plans described above:

  • National branding and marketing/PR campaign for approximately $200,000 annually. The details of this campaign can evolve as we do: We will first strive to increase Training enrollment and stabilize Clinic traffic and revenue, as well as fine-tune web-based offerings. As those profit centers grow, we will focus on making each new Clinic opened not just a successful revenue stream, but one more concentrated, high-contact front in the national marketing campaign. Contracting with a marketing firm in this fashion, on this scale, also enables us to “;kill several birds with one stone”: That is, we have a highly integrated, coordinated marketing engine, which is promoting our work, products, and services for all revenue divisions; and then this can also be shifted in focus to whatever region we are opening a new clinic. Our standard annual operating budget for each clinic allocates $40,000 per two practitioners for marketing. This money will be much more effective when added to a larger marketing effort running and building over the years and across the country.
  • Launch of a national consumer magazine. This publication will be a manageable, small size at first, until awareness and readership grows, driving more subject matter and revenue to increase the magazine’s scale and circulation.
  • Release of a new audio Somatic exercise self-help product coordinated with the airing of our national television show.
  • Addition of a web-based self-help program, much like the South Beach Diet offers, whose subscription services can be very lucrative.
  • Increased targeting of larger corporate clients, especially in high- return areas such as around our New York City office.
  • Increased outreach to the military and VA hospitals.
  • Treatment services (injury repair and prevention as well as performance enhancement) to various sports teams, both at the college and professional levels. This will establish Somatics in areas with tremendous performance and economic returns for the client — and for SMAS. Sports teams are a notoriously difficulty to reach, as they are so barraged by solicitations. However, getting involved with even one team will demonstrate — in very concrete and high profile ways — the great results our Clinical Somatics system has in performance settings. One small example of our efficacy is reflected in the newspaper articles written about an NYU track team runner benched for 2 years by injury, who returned to the team only through Clinical Somatics treatments; journalists reported that the athlete was performing better after coming back than before the injury.
  • Outreach to medical institutions, whose attentions are also notoriously challenging to attain. Funding will be put towards marketing and outreach to practices, both in terms of getting information to a wide population of doctors, and then also targeting individual medical groups strategically to build a gradually snowballing referral base nationally.
  • Founding of an independent non-profit research foundation, to raise funds and apply the foundationís own resources to tracking and publishing pain management and performance gain research data for Somatics treatments.


I hope these answers have been helpful to those of you who own shares of Somatics — as well as those of you who donít, but are interested in learning more about our Company and the healing benefits of Somatics. I always welcome further questions, and will my best to provide extensive and informative answers.


Steven Aronstein,
Chief Executive Officer,
Somatic Systems, Inc.