Item 1. Business
Ophthalmic Imaging Systems (the “Company,” “OIS,” “we,” “us,” or “our”) was incorporated under the laws of the State of California on July 14, 1986. We are headquartered in Sacramento, California and engaged in the business of designing, developing, manufacturing and marketing digital imaging systems and informatics solutions. Since our inception, we have developed products that primarily address the needs of the ophthalmic angiography markets, both fluorescein and indocyanine green. The current flagship products in our angiography line are our WinStation digital imaging systems and EyeScan systems. These systems are targeted primarily at retinal specialists and general ophthalmologists for use in the diagnosis and treatment of retinal diseases and other ocular pathologies. OIS also provides Picture Archiving and Communication Systems “PACS” and Electronic Medical Records (“EMR”) and Practice Management (“PM”) software to such eye-care providers. In addition, through our wholly-owned subsidiary Abraxas Medical Solutions Inc., a Delaware corporation (“Abraxas”), we provide EMR and PM to the following ambulatory-care specialties: obstetrics/gynecology (“OB/GYN”), orthopedics and primary care.
Our objective is to become a leading provider of a diverse range of complimentary ophthalmic products and services for the ocular healthcare industry. We are currently focusing our development efforts on products for the ocular healthcare market, as well as features and enhancements to our existing products. We are also applying our technology in the ophthalmic imaging field toward the development of new ocular imaging devices and exploration of telemedicine/managed care applications targeted at the general ophthalmology and optometry markets. We believe that as the U.S. healthcare system moves toward managed care, the needs of managed care providers are changing the nature of demand for medical imaging equipment and services. New opportunities in telemedicine (the electronic delivery and provision of health care and consultative services to patients through integrated health information systems and telecommunications technologies), combined with lower cost imaging devices and systems, are emerging to assist physicians and managed care organizations in delivering high quality patient care while reducing costs.
During 2004, we entered the Ophthalmic PACS software market. PACS enables medical staff to access new and archived images remotely, thus, improving the method in which to diagnose patients. The ability to instantaneously share information between locations allows specialists to manage more patients in separate locations quickly and efficiently. The PACS system can be completely integrated with our customers’ existing infrastructure, including image acquisition, image analysis, short and long-term storage, archiving, disaster recovery, viewing and monitoring. The current flagship product in our PACS product line is our SymphonyTM software.
In January 2008, we acquired the rights to EMR and PM Software as developed by AcerMed, Inc. (“AcerMed”). Our EMR and PM Software were designed to automate the clinical, administrative, and financial operations of a medical office. This means that paper charting can be virtually eliminated and clinical charting would be done using, for example, a wireless computer pen tablet at the point of care.
On October 21, 2009, we purchased substantially all the assets of MediVision, Medical Imaging Ltd., formerly our parent company (the “MediVision Asset Purchase”). (For additional details of the MediVision Asset Purchase, see Item 8. Financial Statements and Supplementary Data, Note 7. Related Party Transactions, MediVision Asset Purchase). Such assets included certain European operations as conducted by CCS Pawlowski GmbH, a branch office in Belgium, agreements under which MediVision contracted with third parties for distribution and other services, and rights to intellectual property. This acquisition provides OIS with access to new customers and regional control over operations in the European market. In addition, we hired most of MediVision’s R&D employees in early 2009 and moved them to our offices in the United States and Israel.
In November 2009, OIS EyeScan received FDA 510(k) clearance. OIS EyeScan is a portable imaging device that enables practices to capture images of both the anterior and posterior segment of the eye. OIS EyeScan diversifies our product portfolio by adding a low cost product with more functionality than our existing image capture solutions.
On May 18, 2010 we received ISO-13485 accreditation from the International Organization for Standards (ISO) for the management system of medical device companies. ISO-13485 facilitates a framework that aligns with the requirements of regulatory agencies in the health care industry while maintaining a focus on customer satisfaction. This standard provides an international umbrella under which companies from different countries can comply. ISO-13485 accreditation allows us to sell our products in various countries internationally.
On December 17, 2010 and December 28, 2010 Abraxas and OIS EMR VERSION 4.1.7 were 2011/2012 compliant and certified as a Complete EHR by the Certification Commission for Health Information Technology (CCHIT®), an Office of the National Coordinator for Health Information Technology -Authorized Testing and Certification Body, in accordance with the applicable eligible provider certification criteria adopted by the Secretary of Health and Human Services. The 2011/2012 criteria support the Stage 1 meaningful use measures required to qualify eligible providers and hospitals for funding under the American Recovery and Reinvestment Act of 2009.
Products
OIS Products
WinStationTM Systems
Our WinStation systems and products, categorized by resolution, are primarily used by retina specialists and general ophthalmologists to capture color images of the retina and to perform a diagnostic procedure known as fluorescein angiography. This procedure is used to diagnose and monitor pathology and provide important information in making treatment decisions. Fluorescein angiography is performed by injecting a fluorescent dye into the bloodstream. As the dye circulates through the blood vessels of the eye, the WinStation system, connected to a medical image capture device called a fundus camera, takes detailed images of the patient’s retina. These digital images provide a “road map” for treatment.
Over the past 40 years, fluorescein angiography has been performed using photographic film, which requires special processing and printing. Currently fundus cameras offer an option for integration with a digital imaging system. Our digital WinStation systems allow for immediate diagnosis and treatment of the patient. Images are automatically transferred to a database and permanently stored and archived. We also offer a variety of networking and printer options.
Our WinStation systems are also used by ophthalmologists to perform indocyanine green (“ICG”) angiography. ICG angiography is a diagnostic test procedure used for patients with Age-related Macular Degeneration, a leading cause of blindness afflicting over 8 million people in the United States. ICG angiography, used for approximately 5% of patient angiography, is a dye procedure that can only be performed using a digital imaging system such as our WinStation Systems.
WinStation Slit Lamp
Slit Lamps are used by a majority of eye care practitioners, including most ophthalmologists and optometrists, for examination primarily of the front of the eye. WinStation Slit Lamp adapts to most slit lamp models and captures 5 megapixel still images; as well as high resolution videos. The WinStation Slit Lamp is powered by the same database management and archiving that powers the OIS Symphony image management solution.
OIS EyeScan
The OIS EyeScan is a portable imaging device that enables practices to capture images of both the anterior and posterior segment of the eye. The OIS EyeScan captures live video and 5.3 megapixel images from the following imaging modules: Color Mydriatic Retina, Color non Mydriatic retina, Fluorescein Angiography, Optic Nerve Head Stereo Imaging, Red Reflex Imaging Module, Corneal Fluorescence, Tear Film imaging.
Symphony and Symphony Web
Symphony and Symphony Web are our Ophthalmic PACS products. The OIS Symphony Image Management System automatically imports images and diagnostic reports from the diagnostic devices within the practice into a single system. OIS Symphony System allows patient images and diagnostic reports captured from different devices to be viewed side-by-side on one screen with reviewing tools that are proprietary to OIS.
OIS Symphony Web enables OIS to deliver all of the OIS Symphony functionality in a full function web-based client.
OIS EMR and OIS PM
With OIS’ ophthalmic EMR solution, practices can make the transition to a paperless office using software that manages all aspects of the practice. OIS EMR and OIS PM were created using a single software platform and database. OIS EMR/PM solution enables users to move back and forth between various applications with a single click and for information to be natively present in each application, eliminating duplicate entry or lost data.
Abraxas Products
Abraxas’ proprietary software uses the latest technology to automate the workflow of a medical practice consisting of clinical, financial and administrative tasks, all using a single database. Abraxas’ software modules include:
Abraxas EMR
EMR can be populated with Clinical Pathways that are specific to a particular medical specialty. Following these Clinical Pathways, documenting a patient encounter can be as easy as "point and click" on a wireless touch-tablet computer. Alternatively, voice recognition, handwriting, handwriting recognition or typing can be used for charting. Clinicians can have access to the patient's prior chart notes, test results, clinical information, medical images and other information. They can write electronic prescriptions or electronically enter orders for radiology, lab work and other procedures. Certain lab results will come back to the system electronically and populate patients’ data. This eliminates the hassle of finding, pulling, carrying, filing and often times losing traditional paper charts.
Abraxas PM
Various codes for differing types of office visits are recommended based on the documentation and charges generated at the time of charting, therefore, data entry for billing purposes can be eliminated. PM allows for preprocessing of claims and editing for American National Standards Institute (ANSI) compliance prior to submission to minimize payer rejections. This results in quicker turnover of accounts receivable and, thus, a more efficient collections process which, in turn, may improve cash flow. Staff members can review detailed management and financial reports and access on-screen accounts receivable reports with filtering based on a wide range of criteria. These filters allow for identification of problem accounts.
Abraxas Scheduling
Patient and resource scheduling is also available and built around the needs of busy practices. This software allows users to view on-screen the schedules of one or multiple physicians at any time, reserve time frames for specific appointment reasons and color code them for on-screen identification, and keep track of patients’ scheduling history.
Markets
Having reviewed various third party sources, including reports by the National Physician’s Census Academy of Ophthalmology and data provided by the American Osteopathic Association, we believe there are approximately 18,000 ophthalmologists in the United States and approximately 28,000 ophthalmologists practicing medicine in our target countries outside the United States. This group has been traditionally divided into two major groups: anterior segment (front of the eye) and posterior segment (back of the eye). Within these groups there are several sub-specialties including medical retina, retina and vitreous, glaucoma, neurology, plastics, pediatric, cataract, cornea and refractive surgery. There are also approximately 35,000 practicing optometrists in the United States.
WinStation and Symphony
The WinStation market consists of current fundus camera owners and potential purchasers of fundus cameras suitable for interfacing with our digital imaging system products. We believe there are now over 9,000 fundus cameras in clinical use in the United States and an additional 12,000 in the international market. It is estimated that new fundus camera sales fluctuate between approximately 800 and 1,200 units per year, worldwide, at an average per unit selling price of approximately $24,000 for a non-integrated unit. Of total cameras worldwide, including new and previously owned, a significant number are suitable to be interfaced with our digital imaging systems.
Currently, we know of 5 manufacturers of fundus cameras. These manufacturers produce a total of 24 models, 8 current and 16 legacy models for each of which we have designed optical and electronic interfaces.
The Symphony and Symphony Web products are marketed to the same target market as WinStation customers.
OIS EyeScan
The OIS EyeScan system is targeted primarily at eye care professionals that want to capture images digitally on anterior (front) and posterior (back) of the eye. As described above, we believe that there are approximately 18,000 eye care specialist in the United States and approximately 28,000 eye care specialist practicing medicine in our target countries outside the United States. In addition, there are also approximately 35,000 practicing optometrists in the United States. We currently know of 3 manufacturers of imaging systems which are similar to the EyeScan.
EMR and PM Software
The primary target market for OIS EMR and PM software is ophthalmologists with various specialties, as described above, numbering approximately 18,000 in the United States.
In order to increase our research and development and marketing effectiveness, Abraxas focuses primarily on the following types of office based physicians: obstetrics and gynecology, and orthopedic. Having reviewed various third-party sources, including reports by the National Physician's Census, we believe there are approximately 35,000 office-based obstetrics and gynecology physicians, and approximately 19,000 office-based orthopedic physicians in the United States. Abraxas' secondary market is primary care of which there are approximately 235,000 office-based primary care physicians in the United States as reported by the National Physician's Census.
EMR software is used to automate the clinical workflow of medical offices. PM software is used to automate the financial and administrative tasks of medical offices. Medical practices in the United States began automating their practice management decades ago. By the late 1990’s, PM software had become widely accepted. The market for EMR, on the other hand, has started to increase as a result of various financial incentives and governmental forces.
Currently, the EMR industry has no dominant leader. It includes both large and small publicly traded companies, as well as large and small privately held companies.
OIS Sales, Marketing and Distribution
We utilize a direct and indirect sales force to distribute our products throughout the United States, Europe, and various other countries. As of December 31, 2010, our U.S. sales and marketing organization consisted of two distribution channels. The first is a software channel that reports to the Director of Sales Software and is comprised of Sales Managers, Technical Support Specialists and Product Specialists, among others, who are located throughout the United States. These employees provide marketing, sales, maintenance, installation and training services. The second channel reports to the National Sales Director, Diagnostic and is dedicated to Diagnostic sales and consists of various Sales Managers, among others. Each of the two channels is supported by inside sales representatives that are outsourced from well-known providers of sales outsourcing, whose function it is to drive broader penetration into both markets. In Europe we have several sales representatives and product specialists. These employees provide marketing, sales, maintenance, installation and training services.
Below is the volume discount table that was available to our distributors for 2010.
CCS Pawlowski GmbH
CCS Pawlowski GmbH, a German corporation (“CCS”), was a subsidiary of MediVision which owned 63% of CCS’ ownership interests. We acquired this ownership interest in the MediVision Asset Purchase. (For additional details, see Item 8. Financial Statements and Supplementary Data, Note. 6. Related Party Transactions,, MediVision Asset Purchase.)
During the years ending December 31, 2010 and 2009, CCS was the exclusive distributor of certain of our products in Germany and Austria. Products were sold to CCS at a volume driven discount which was uniformly applicable to all of our distributors, including CCS. Below is the volume discount table that was available to our distributors for 2010. CCS will continue to be our exclusive distributor of certain products in Germany and Austria.
Abraxas Sales and Marketing
Abraxas utilizes a direct sales force in marketing and selling its products throughout the United States. At December 31, 2010, Abraxas’ sales and marketing organization consisted of one sales manager, four territory sales representatives, two marketing personnel, and sixteen product specialists. These personnel provide marketing, sales, maintenance, installation and training services.
OIS Europe Sales and Marketing
OIS Europe utilizes a direct sales force in marketing and selling its products throughout Europe. At December 31, 2010, OIS Europe’s sales and marketing organization consisted of one sales representative and one product specialist. These personnel provide marketing sales, maintenance, installation and training services. In addition to our direct sales force in Europe, we have distribution agreements with distributors throughout Europe to sell and market our products.
CCS Sales and Marketing
CCS utilizes a direct sales force in marketing and selling its products throughout Europe. At December 31, 2010, CCS’ sales and marketing organization consists of 2 sales representative and 2 product specialists. These personnel provide marketing, sales, maintenance, installation and training services.
OIS Manufacturing and Production
Excluding our EyeScan product, we are primarily a systems integrator with proprietary software, optical interfaces and electronic fundus camera interfaces. The manufacturing of certain components are subcontracted to outside vendors and assembled by OIS. We use outside vendors to minimize production time and reduce capital requirements. We store and assemble the manufactured components in our 13,552 square foot facility located in Sacramento, California.
We have been audited by the Food and Drug Administration (the “FDA”) as recently as May 2007 and there were no findings made. We also have Form 510(k)‘s, a pre-marketing notification filed with the FDA which provides certain safety and effectiveness information, on file for our digital angiography products.
On May 18, 2010 we received ISO-13485 accreditation from the International Organization for Standards (ISO) for the management system of medical device companies. ISO-13485 facilitates a framework that aligns with the requirements of regulatory agencies in the health care industry while maintaining a focus on customer satisfaction. This standard provides an international umbrella under which companies from different countries can comply. ISO-13485 accreditation allows us to sell our products in various countries internationally.
On December 28, 2010, OIS EMR VERSION 4.1.7 was 2011/2012 compliant and certified as a Complete EHR by the Certification Commission for Health Information Technology (CCHIT®), an Office of the National Coordinator for Health Information Technology -Authorized Testing and Certification Body, in accordance with the applicable eligible provider certification criteria adopted by the Secretary of Health and Human Services. The 2011/2012 criteria support the Stage 1 meaningful use measures required to qualify eligible providers and hospitals for funding under the American Recovery and Reinvestment Act of 2009.
Abraxas’ Operations
Abraxas is a software developer that operates in its 6,232 square foot facility located in Irvine, California.
On December 17, 2010 Abraxas EMR VERSION 4.1.7 was 2011/2012 compliant and certified as a Complete EHR by the Certification Commission for Health Information Technology (CCHIT®), an Office of the National Coordinator for Health Information Technology -Authorized Testing and Certification Body, in accordance with the applicable eligible provider certification criteria adopted by the Secretary of Health and Human Services. The 2011/2012 criteria support the Stage 1 meaningful use measures required to qualify eligible providers and hospitals for funding under the American Recovery and Reinvestment Act of 2009.
OIS Components, Raw Materials and Suppliers
As a systems integrator, a significant number of the major hardware components in our products are procured from sole source vendors. Whenever possible, however, we seek multiple vendors from which to procure our components. Moreover, we work closely with our principal component suppliers, such as Dell Computer, MegaVision, Canon and our other vendors to maintain dependable working relationships and to continually integrate into the manufacturing of our products, whenever feasible, the most current, proven, pertinent technologies. But, as with any manufacturing company dependent on subcontractors and component suppliers, significant delays in receiving products or unexpected vendor price increases could adversely affect our business.
OIS Warranties
We generally provide a 12-month limited warranty for parts, labor and shipping charges in connection with the sale of our hardware products. Peripheral products such as monitors, printers and computers also carry the original manufacturer’s warranty.
In the North American market, in order to ensure quality control and the proper functioning of our products on-site at a doctor’s office, we generally install the system and train the doctor and the doctor’s staff for a fee. Customers are not required to purchase such services in connection with the purchase of our products. We also offer service plans for sale to our customers as a supplement to the original manufacturer’s warranties.
OIS Competition
The healthcare industry is characterized by extensive research and development efforts and rapid technological change. Competition for products that can diagnose and evaluate eye disease is intense and expected to increase.
With respect to our WinStation products, we are aware of two primary competitors in the United States, which produce and deliver digital fundus imaging systems in volume, Topcon and Zeiss. In addition, there are a few other small competitors. Both Topcon and Zeiss, however, manufacture fundus cameras and produce angiography products that interface mostly with their own fundus cameras. In contrast, our products interface with different models of fundus cameras from a wide variety of manufacturers. Three other companies are known to have systems primarily in the international market, and the U.S. market to a limited extent, each with a small market share.
We are aware of five primary competitors for the WS Slit Lamp, namely Veatch, MVC, Kowa, Helioasis and Lombart. Additionally, there are several other companies, which manufacture similar systems, but these systems currently have minimal market presence.
We are aware of three primary competitors for the EyeScan imaging capturing system, namely Zeiss, Topcon and Kowa.
We are aware of two primary competitors for the Ophthalmic PACS that develop similar solutions.
We do not consider many of the companies currently offering some type of EMR or PM products as competitors, as they sell to hospitals and to certain medical specialties that are not in our current target market. We are aware of a few competitors for its EMR and PM products in ophthalmology. The main competitor is NextGen, which provides solutions for the multi-specialty medical market, and smaller competitors such as HCIT, Eye Doc and Compulink, which provide EMR and or PM solutions predominantly to the ocular healthcare market.
Although we continue to work to develop new and improved products, many companies are engaged in research and development of new devices and alternative methods to diagnose and evaluate eye disease. Introduction of such devices and alternative methods could hinder our ability to compete effectively and could have a material adverse effect on our business, financial condition and results of operations. Many of our competitors and potential competitors have substantially greater financial, manufacturing, marketing, distribution and technical resources than us.
Abraxas Competition
Abraxas does not consider many of the companies currently offering some type of EMR or PM products as competitors, as they sell to hospitals, large clinics, surgery centers and other facilities, and to certain medical specialties that are not in Abraxas’ current target market. Abraxas is aware of a few competitors for its EMR and PM products, primarily Allscripts/Misys Healthcare Systems, Sage Software, and NextGen, which provide solutions for the multi-specialty medical market. Others, mainly Digi-Chart and Greenway provide the EMR and PM solutions predominantly to the obstetrics and gynecology market, while other companies specialize in the orthopedic market or the primary care market.
The acquisition of EMR, PM and Scheduling has allowed us to broaden our product offerings to the primary care, obstetrics and gynecology, and orthopedic. However there is no guarantee that our sales efforts will be successful. Additional research and development efforts, long sales cycles, new sales training requirements and potential resistance to the initial high cost of the EMR, PM or Scheduling software may hinder our success in selling these products.
OIS Europe Competition
We are aware of 3 primary competitors for market share in Europe, namely Zeiss, Topcon and Canon. Additionally, there are several other companies, which manufacture similar systems, but these systems currently have minimal market presence.
CCS Sales and Competition
We are aware of 5 primary competitors for market share in Germany, namely Zeiss, Topcon, Scholz, Canon, Imedos. Additionally, there are several other companies which manufacture similar systems but these systems currently have minimal market presence.
OIS Research and Development
During 2010, OIS focused our recent research and development efforts on new digital image capture products. Our net research and development expenditures in the years ended December 31, 2010 and 2009 were approximately $2,771,200 and $1,956,000, respectively.
Prior to March 2009, MediVision performed our research and development services whereby MediVision billed us, on a monthly basis, at cost plus 12%. These research and development services included direct labor, consultants’ fees, travel expenses and the applicable portion of general and administrative expenses. During the year ended December 31, 2009, we paid approximately $294,000 to MediVision for research and development services.
In March 2009, we hired all of MediVision’s research and development staff and moved them to our offices in the United States and Israel, thereby streamlining our research and development efforts. Prior to this, MediVision and other outsourced consultants conducted most of our research and development.
Abraxas Research and Development
Abraxas’ research and development team is located in Irvine, California. Abraxas continues to focus its research and development efforts on the adaptation of its software to the target market as described above. Our net research and development expenditures in the years ending December 31, 2010 and 2009 were approximately $1,529,900 and $1,073,000 respectively.
Patents, Trademarks and Other Intellectual Property
On June 15, 1993, we were issued United States Letters Patent No. 5,220,360 for "Apparatus and Method for Topographical Analysis of the Retina." This patent relates to the Glaucoma-Scope apparatus, and methods used by the apparatus for topographically mapping the retina and comparing the mapping to previous mappings.
We currently have patent applications outstanding with the U.S. Patent and Trademark Office and for the European patent authorities under PCT treaty for “A Device, Method and System for Automatic Montage of Segmented Retinal Images” and a “Method for Stabilizing a Sequence Angiographic Images” and for an “Integrated retinal imager and method.”
We have registered trademarks for “AutoMontage,” “OIS Symphony,” and “Ophthalmology Office.”
We have copyrights for “WinStation Version 5,” “WinStation Version 6” and “WinStation XP, Version 10.”
In 2007, we entered into a licensing agreement pursuant to which we were granted the right to commercialize background technology and a family of patents for an ocular imaging device, integrate it into our existing and/or future products and retain exclusive rights of use, marketing and sale thereof worldwide.
Further, although we believe that our products do not and will not infringe on patents or violate proprietary rights of others, it is possible that our existing rights may not be valid or that infringement of existing or future patents, trademarks or proprietary rights may occur or be claimed to occur by third parties.
In the event that any of our products infringe patents, trademarks or proprietary rights of others, we may be required to modify the design of such products, change the names under which the products or services are provided or obtain licenses. There can be no assurance that we will be able to do so in a timely manner, upon acceptable terms and conditions, or at all. The failure to do any of the foregoing could have a material adverse effect on our business. There can be no assurance that our patents or trademarks, if granted, would be upheld if challenged or that competitors might not develop similar or superior processes or products outside the protection of any patents issued to us. In addition, there can be no assurance that we will have the financial or other resources necessary to enforce or defend a patent or trademark infringement or proprietary rights violation action. Moreover, if our products infringe patents, trademarks or proprietary rights of others, we could, under certain circumstances, become liable for damages, which also could have a material adverse effect on our business.
We also rely on trade secrets, know-how, continuing technological innovation and other unpatented proprietary technology to maintain our competitive position. Certain of the proprietary software, optical interfaces and synchronization modules of our digital imaging systems are largely proprietary and constitute trade secrets, but the basic computer hardware and video components are purchased from third parties. No patent applications have been filed with respect thereto. If challenged, we anticipate aggressively defending our unpatented proprietary technology, although there is no assurance that others will not independently develop substantially equivalent proprietary information or techniques, or otherwise gain access to our trade secrets or disclose such technology, or that we can meaningfully protect our rights to our unpatented trade secrets and other proprietary technology.
We seek to protect our unpatented proprietary technology, in part, through proprietary confidentiality and nondisclosure agreements with employees, consultants and other parties. Our confidentiality agreements with our employees and consultants generally contain standard industry provisions requiring such individuals to assign to us, without additional consideration, any inventions conceived or reduced to practice by them while employed or retained by OIS, subject to customary exceptions. There can be no assurance, however, that proprietary information agreements with employees, consultants and others will not be breached, that we will have adequate remedies for any breach or that our trade secrets will not otherwise become known to or independently developed by competitors.
Government Regulation
The marketing and sale of our products are subject to certain domestic and foreign governmental regulations and approvals. Pursuant to Section 510(k) of the Federal Food, Drug and Cosmetic Act (“FDCA”), we are required to file, and have submitted, a pre-marketing notification with the FDA which provides certain safety and effectiveness information concerning our diagnostic imaging systems. The FDA has approved our pre-marketing notification submittals, thereby granting us permission to market our products, subject to the general controls and provisions of the FDCA. The classification of our products require, among other things, annual registration, listing of devices, good manufacturing practices, labeling and prohibition against misbranding and adulteration. Further, because we are engaged in international sales, our products must satisfy certain manufacturing requirements and may subject us to various filing and other regulatory requirements imposed by foreign governments as a condition to the sale of such products.
We have registered our manufacturing facility with both the FDA and certain California authorities as a medical device manufacturer and operate such facility under FDA and California requirements concerning Quality System Requirements (“QSR”). As a medical device manufacturer, we are required to continuously maintain our QSR compliance status and to demonstrate such compliance during periodic FDA and California inspections. If the facilities do not meet applicable QSR regulatory requirements, we may be required to implement changes necessary to comply with such regulations.
Although the FDA has made findings which permit us to sell our products in the marketplace, such findings do not constitute FDA approval of these devices and we cannot predict the effect that future legislation or regulatory developments may have on our operations. Additional regulations, reconsideration of approvals granted under current regulations, or a change in the manner in which existing statutes and regulations are interpreted or applied may have a material adverse impact on our business, financial condition and results of operations. Moreover, new products and services developed by us, if any, may also be subject to the same or other various federal and state regulations, in addition to those of the FDA.
An FDA inspection of our Sacramento, California facility was conducted in March 2011. There were 4 observations made during the inspection. A corrective action plan will be implemented to correct those issues and no further action is expected by the FDA.
A California Department of Health inspection of our Sacramento, California facility was conducted in August 2009. There were 3 violations found during the inspection. A corrective action plan was implemented to correct those issues and no further action was taken by the Department of Health.
On May 18, 2010 we received ISO-13485 accreditation from the International Organization for Standards (ISO) for the management system of medical device companies. ISO-13485 facilitates a framework that aligns with the requirements of regulatory agencies in the health care industry while maintaining a focus on customer satisfaction. This standard provides an international umbrella under which companies from different countries can comply. ISO-13485 accreditation allows us to sell our products in various countries internationally.
Under the American Recovery and Reinvestment Act of 2009, physicians who implement a certified EMR software program and become meaningful users between 2010 and 2012 will each be eligible for $44,000 in incentive payments and physicians who become meaningful users between 2012 and 2014 will be eligible for lower payments. Physicians who have not become meaningful users by 2014 will not qualify for any payments. In addition, beginning in 2016, Medicare reimbursement will begin to decrease for clinics that do not meet the above criteria. We anticipate this legislation will have positive effects on our revenues as physicians adopt EMR software programs at higher rates than they do currently. We expect to see this positive trend begin in mid-2011 and beyond.
On December 17, 2010 and December 28, 2010 Abraxas and OIS EMR Version 4.1.7 were 2011/2012 compliant and certified as a Complete EHR by the Certification Commission for Health Information Technology (CCHIT®), an Office of the National Coordinator for Health Information Technology -Authorized Testing and Certification Body in accordance with the applicable eligible provider certification criteria adopted by the Secretary of Health and Human Services. The 2011/2012 criteria support the Stage 1 meaningful use measures required to qualify eligible providers and hospitals for funding under The American Recovery and Reinvestment Act of 2009.
Insurance
We maintain general commercial and property insurance coverage for our business operations, as well as directors and officers insurance and product liability insurance. During 2010, we did not receive any product liability claims and are unaware of any threatened or pending claims. To the extent that product liability claims are made against us in the future, such claims may have a material adverse impact on our business.
Employees
As of December 31, 2010, we have 123 employees, 3 of whom are part-time, 67 of whom are employed by OIS and 39 of whom are employed by Abraxas. We also engage the services of consultants from time to time to assist us on specific projects in the areas of research and development, software development, regulatory affairs and product services, as well as general corporate administration. Certain of these consultants periodically sub-contract engineers as independent consultants for specific projects.
We have no collective bargaining agreements covering any of our employees. In addition, we have never experienced any material labor disruption and we are unaware of any current efforts or plans to organize our employees.
Item 1A.
Item 1A.
Risk Factors
Current economic conditions may adversely affect our industry, business, financial position and results of operations and could cause the market value of our common stock to decline.
The global economy is currently undergoing a period of unprecedented volatility and the future economic environment may continue to be less favorable than that of recent years. It is uncertain how long the economic downturn that the U.S. economy has entered will last. The economic downturn has resulted in, and could lead to, further reduced spending specifically related to physicians’ equipment and software. Our products require a large initial outlay of funds, which physicians in the current economic climate are hesitant to do. Also, the credit markets are currently experiencing unprecedented contraction. If current pressures on credit continue or worsen, future debt financing may not be available to us when required or may not be available on acceptable terms, and as a result we may be unable to grow our business, take advantage of business opportunities, respond to competitive pressures or satisfy our obligations under our indebtedness.
If we are unable to obtain additional capital, we may be required to eliminate certain operations.
Our operations require substantial funds for, among other things, continuing research and development and manufacturing and marketing of our existing products. We may need to seek additional capital, possibly through public or private sales of our securities in order to fund our operations. However, we may not be able to obtain additional funding in sufficient amounts or on acceptable terms when needed. Insufficient funds may require us to delay, scale back or eliminate certain or all of our research and development programs or license from third parties products or technologies that we would otherwise seek to develop ourselves. Any of these may adversely affect our continued operations.
If we fail to develop and successfully introduce new and enhanced products that address rapid technological changes in our markets and meet the needs of our customers, our business may be harmed.
Our industry is characterized by extensive research and development, rapid technological change, frequent innovations and new product introductions, changes in customer requirements and evolving industry standards. Demand for our products could be significantly diminished by new technologies or products that replace them or render them obsolete, which would have a material adverse effect on our business, financial condition and results of operations.
Our future success depends on our ability to anticipate our customers’ needs and develop products that address those needs. This will require us to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. We have incurred substantial research and development expenditures in the past and plan to continue to do so in the future. Over the last three fiscal years, our research and development expenses have been in the range of 18% to 21% of our net revenues. Although we have spent considerable resources on research and development, we may still be unable to introduce new products or, if we do introduce a new product, such product or products may not achieve sufficient market acceptance. Failure to successfully identify new product opportunities and develop and bring new products to market in a timely and cost effective manner may lead to a reduction in sales and adversely affect our business.
The markets in which we sell our products are intensely competitive and increased competition could cause reduced sales levels, reduced gross margins or loss of market share.
Competition for products that diagnose and evaluate eye disease is intense and is expected to increase. Although we continue to work on developing new and improved products, many companies are engaged in research and development of new devices and alternative methods to diagnose and evaluate eye disease. Many of our competitors and potential competitors have substantially greater financial, manufacturing, marketing, distribution and technical resources than us. Any business combinations or mergers among our competitors, forming larger competitors with greater resources, or the acquisition of a competitor by a major medical or technology corporation seeking to enter this business, could result in increased competition. Introduction of new devices and alternative methods could hinder our ability to compete effectively and could have a material adverse effect on our business, financial condition and results of operations.
We may experience a decline in the selling prices of our products as competition increases, which could adversely affect our operating results.
As competing products become more widely available, the average selling price of our products may decrease. Trends toward managed care, health care, cost containment and other changes in government and private sector initiatives in the United States and other countries in which we do business are placing increased emphasis on the delivery of more cost-effective medical therapies which could adversely affect prices of our products. If we are unable to offset the anticipated decrease in our average selling prices by increasing our sales volumes, our net sales will decline. To compete we must continue to reduce the cost of our products. Further, as average selling prices of our current products decline, we must develop and introduce new products and product enhancements with higher margins. If we cannot maintain our net sales and gross margins, our operating results could be seriously harmed, particularly if the average selling prices of our products decreases significantly.
Our products are subject to U.S. and international medical regulations and controls, which impose substantial financial costs on us and which can prevent or delay the introduction of new products.
Our ability to sell our products is subject to various federal, state and international rules and regulations. In the United States, we are subject to inspection and market surveillance by the FDA, to determine compliance with regulatory requirements. The regulatory process is costly, lengthy and uncertain. Any delays in obtaining or failure to obtain regulatory approval of any of our products could cause a loss of sales or incurrence of additional expenses, which could adversely affect our business.
Our international sales are a growing portion of our business; accordingly, we may increasingly become subject to the risks of doing business in foreign countries.
Our international business exposes us to certain unique and potentially greater risks than our domestic business and our exposure to such risks may increase if our international business continues to grow, as we anticipate. Our international business is sensitive to changes in the priorities and budgets of international customers, which may be driven by changes in worldwide economic conditions and regional and local economic factors.
Our international sales are also subject to local government laws and regulations and practices which may differ from U.S. Government regulation, including regulations relating to import-export control, investments, exchange controls and varying currency and economic risks. We are also exposed to risks associated with using foreign representatives and consultants for international sales and operations and teaming with international consultants and partners in connection with international operations. As a result of these factors, we could incur losses on such operations which could negatively impact our results of operations and financial condition.
We depend on skilled personnel to effectively operate our business in a rapidly changing market, and if we are unable to retain existing or hire additional personnel, our ability to develop and sell our products could be harmed.
Our success depends to a significant extent upon the continued service of our key senior management, sales and technical personnel, any of whom could be difficult to replace. Competition for qualified employees is intense, and our business could be adversely affected by the loss of the services of any of our existing key personnel. We cannot assure that we will continue to be successful in hiring and retaining properly trained personnel. Our inability to attract, retain, motivate and train qualified new personnel could have a material adverse effect on our business.
We may not be able to protect our proprietary technology, which could adversely affect our competitive advantage.
We rely on a combination of patent, copyright, trademark and trade secret laws, non-disclosure and confidentiality agreements and other restrictions on disclosure to protect our intellectual property rights. We cannot assure that our patent applications will be approved, any patents that may be issued will protect our intellectual property, any issued patents will not be challenged by third parties or any patents held by us will not be found by a judicial authority to be invalid or unenforceable. Other parties may independently develop similar or competing technology or design around any patents that may be issued to or held by us. We cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Moreover, if we lose any
key personnel, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees.
The long sales cycles for our products may cause us to incur significant expenses without offsetting revenues.
Customers typically expend significant effort in evaluating, testing and qualifying our products before making a decision to purchase them, resulting in a lengthy initial sales cycle. While our customers are evaluating our products we may incur substantial sales, marketing and research and development expenses to customize our products to the customer’s needs. We may also expend significant management efforts, increase manufacturing capacity and order long-lead-time components or materials. Even after this evaluation process, a potential customer may not purchase our products. As a result, these long sales cycles may cause us to incur significant expenses without ever receiving revenue to offset those expenses.
If we fail to accurately forecast components and material requirements for our products, we could incur additional costs and significant delays in shipments, which could result in the loss of customers.
We must accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials. Lead times for components and materials that we order vary significantly and depend on factors including the specific supplier requirements, the size of the order, contract terms and current market demand for components. If we overestimate our component and material requirements, we may have excess inventory, which would increase our costs, impair our available liquidity and could have a material adverse effect on our business, operating results and financial condition. If we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt and delay delivery of our products to our customers. Any of these occurrences would negatively impact our net sales, business and operating results and could have a material adverse effect on our business, operating results and financial condition.
Our dependence on sole source suppliers exposes us to possible supply interruptions that could delay or prevent the manufacture of our systems.
Certain of the components used in our products are purchased from single sources. While we believe that most of these components are available from alternate sources, an interruption of these or other supplies could have a material adverse effect on our ability to manufacture some of our systems.
Some of our medical customers’ willingness to purchase our products depends on their ability to obtain reimbursement for medical procedures using our products and our revenues could suffer from changes in third-party coverage and reimbursement policies.
Our medical segment customers include doctors, clinics, hospitals and other health care providers whose willingness and ability to purchase our products depends in part upon their ability to obtain reimbursement for medical procedures using our products from third-party payers, including private insurance companies, and in the U.S. from health maintenance organizations, and federal, state and local government programs, including Medicare and Medicaid. Third-party payers are increasingly scrutinizing health care costs submitted for reimbursement and may deny coverage and reimbursement for the medical procedures made possible by our products. Failure by our customers to obtain adequate reimbursement from third-party payers for medical procedures that use our products or changes in third-party coverage and reimbursement policies could have a material adverse effect on our sales, results of operations and financial condition.
We have limited product liability insurance and if we are held liable in a products liability lawsuit for amounts in excess of our insurance coverage, we could be rendered insolvent.
There can be no assurance that we will not be named as a defendant in any litigation arising from the use of our products. Although we have our own product liability insurance policy with a limit of $4 million, should such litigation ensue and we are held liable for amounts in excess of such insurance coverage, we could be rendered insolvent. In addition, there can be no assurance that product liability insurance will continue to be available to us or that the premiums therefore will not become prohibitively expensive.
If our facilities were to experience a catastrophic loss, our operations would be seriously harmed.
Our facilities could be subject to a catastrophic loss such as fire, flood or earthquake. A substantial portion of our manufacturing activities and many other critical business operations are located near major earthquake faults in California, an area with a history of seismic events. Our corporate headquarters is also in a possible flood zone. Any such losses at our facilities could disrupt our operations, delay production, shipments and revenue and result in large expenses to repair or replace the facility. Any such loss could have a material adverse effect on our sales, results of operations and financial condition.
Any failure to meet our debt obligations could harm our business, financial condition and results of operations.
As of December 31, 2010, we had debt outstanding of $2,822,516 consisting of $1,097,840 in outstanding loans from institutional investors, $1,500,000 in bank notes, $113,314 Abraxas loan, and $111,361 of notes for capital leases and auto loans.
If our cash flow and capital resources are insufficient to fund our debt obligations, we may be forced to sell assets, seek additional equity or debt capital or restructure our debt. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely harm our ability to incur additional indebtedness on acceptable terms. Our cash flow and capital resources may be insufficient to pay interest and principal on our debt in the future. If that should occur, our capital raising or debt restructuring measures may be unsuccessful or inadequate to meet our scheduled debt service obligations, which could cause us to default on our obligations and further impair our liquidity.
If we fail to maintain an effective system of our internal control over financial reporting, we may not be able to report our financial results accurately or timely, which could have a material adverse effect on our business.
As part of the restatement process relating to the filing of this Annual Report, we have conducted an assessment of our internal control over financial reporting, identified a material weakness in our internal control over financial reporting related to our derivative liability financial instrument policies and concluded that our internal control over financial reporting was not effective as of December 31, 2010. As a result, we have specifically implemented remedial work to obtain reasonable assurance regarding our internal controls over financial reporting related to our derivative liability financial instrument policies. See “Controls and Procedures” in Item 9A in this Annual Report. There can be no assurance that our remedial actions will ensure that, in the future, we will not have material weaknesses in internal control over financial reporting relating to our derivative liability financial instrument policies or in other internal control over financial reporting or disclosure controls and procedure issues.
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material information otherwise required to be contained in a periodic report or to detect errors or fraud in a timely matter. Furthermore, controls and procedures we implement may become inadequate because of changes in conditions and that the degree of compliance with the controls and procedures may deteriorate. If we fail to maintain an effective control system, we may be unable to produce reliable financial reports or prevent fraud. This failure could result in future restatements or delays in filing, or the need to amend filed, periodic reports with the SEC and information we provide our lenders, investors and others, which could result in us incurring additional costs and affect our ability to maintain our existing financing, obtain other financing, or, when needed, raise capital.
Risks Related to Our Common Stock
We may experience volatility in our stock price, which could negatively affect your investment, and you may not be able to resell your shares at or above the offering price.
The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including: quarterly variations in operating results; changes in financial estimates by securities analysts; changes in market valuations of other similar companies; announcements by us or our competitors of new products or of significant technical innovations, contracts, acquisitions, strategic partnerships or joint ventures; additions or departures of key personnel; any deviations in net sales or in losses from levels expected by securities analysts; and future sales of common stock.
In addition, the stock market has recently experienced extreme volatility that has often been unrelated to the performance of particular companies. These market fluctuations may cause our stock price to fall regardless of our financial performance.
Because our securities trade on the OTC Bulletin Board, your ability to sell your shares in the secondary market may be limited.
The shares of our common stock have been listed and principally quoted on the Nasdaq OTC Bulletin Board under the trading symbol “OISI” since May 28, 1998. As a result, it may be more difficult for an investor to dispose of OIS’ securities or to obtain accurate quotations on their market value. Furthermore, the prices for OIS’ securities may be lower than might otherwise be obtained.
Moreover, because our securities currently trade on the OTC Bulletin Board, they are subject to the rules promulgated under the Securities Exchange Act of 1934, as amended, which impose additional sales practice requirements on broker-dealers that sell securities governed by these rules to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000, excluding the value of the individual’s primary residence, or annual individual income exceeding $200,000 or $300,000 jointly with their spouses). For such transactions, the broker-dealer must determine whether persons that are not established customers or accredited investors qualify under the rule for purchasing such securities and must receive that person’s written consent to the transaction prior to sale. Consequently, these rules may adversely affect the ability of purchasers to sell our securities and otherwise affect the trading market in OIS’ securities.
Because our shares are deemed “penny stocks,” you may have difficulty selling them in the secondary trading market.
The Securities and Exchange Commission has adopted regulations which generally define a “penny stock” to be any equity security that has a market price (as therein defined) less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions. Additionally, if the equity security is not registered or authorized on a national securities exchange that makes certain reports available, the equity security may also constitute a “penny stock.” As OIS’ common stock falls within the definition of penny stock, these regulations require the delivery by the broker-dealer, prior to any transaction involving our common stock, of a risk disclosure schedule explaining the penny stock market and the risks associated with it. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock. The ability of broker-dealers to sell our common stock and the ability of shareholders to sell OIS’ common stock in the secondary market would be limited. As a result, the market liquidity for our common stock would be severely and adversely affected. We can provide no assurance that trading in our common stock will not be subject to these or other regulations in the future, which would negatively affect the market for our common stock.
We have additional securities available for issuance, including preferred stock, which if issued could adversely affect the rights of the holders of our common stock.
Our articles of incorporation authorize the issuance of 100,000,000 shares of common stock and 20,000,000 shares of preferred stock. The common stock and the preferred stock can generally be issued as determined by our board of directors without shareholder approval.
Any issuance of preferred stock could adversely affect the rights of the holders of common stock by, among other things, establishing preferential dividends, liquidation rights or voting powers. Accordingly, shareholders will be dependent upon the judgment of our management in connection with the future issuance and sale of shares of our common stock and preferred stock, in the event that buyers can be found therefor. Any future issuances of common stock or preferred stock would further dilute the percentage ownership of OIS held by the public shareholders. Furthermore, the issuance of preferred stock could be used to discourage or prevent efforts to acquire control of us through acquisition of shares of common stock.
Item 1B.
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
Item 2.
Properties
We lease our facility space in Sacramento California under a cancelable operating lease that expires in June 2012. This facility consists of 13,552 square feet of office, manufacturing and warehouse space. We pay minimum monthly lease payments for this property of $11,926. Abraxas leases facility space in Irvine, California under a noncancelable lease which will expire in August 2013. This facility consists of 6,232 square feet of office space. We pay $13,763 per month for this office space.
Management believes our leased facilities are suitable and adequate to meet our current needs.
Item 3.
Item 3.
Legal Proceedings
We are not party to any material pending legal proceedings
Item 4.
Item 4.
Reserved.
PART II
Item 5.
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our shares of common stock, no par value, have been listed and principally quoted on the OTC Bulletin Board under the trading symbol “OISI” since May 28, 1998 and prior to that on the Small-Cap Market. The following table sets forth the high and low sales prices for our common stock as reported on the OTC Bulletin Board. These prices reflect inter-dealer prices, without retail markup, markdown or commissions, and may not represent actual transactions.
On April 8, 2011, the closing price for our common stock, as reported by the Nasdaq OTC Bulletin Board, was $0.75 per share and there were approximately 99 shareholders of record.
Dividend Policy
We have not paid any cash dividends since our inception and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We expect to retain our earnings, if any, to provide funds for the expansion of our business. Future dividend policy will be determined periodically by the Board of Directors based upon conditions then existing, including our earnings and financial condition, capital requirements and other relevant factors.
Item 6.
Item 6.
Selected Financial Data
Not applicable.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
To date, we have designed, developed, manufactured and marketed ophthalmic digital imaging systems and informatics solutions and have derived substantially all of our revenues from the sale of such products. The primary target market for our digital angiography systems and informatics solutions has been retinal specialists and general ophthalmologists. In January 2008, we purchased EMR, PM and scheduling software to be sold to the following ambulatory-care specialties: ophthalmology, OB/GYN, orthopedics and primary care.
There can be no assurance that we will be able to achieve or sustain significant positive cash flows, revenues or profitability in the future.
Restatement
During the year-end financial close process of fiscal 2010, we discovered errors in our accounting treatment for warrants to purchase shares of our common stock and embedded conversion options issued in connection with a convertible note. As a result on March 17, 2011, management concluded that we should restate our financial statements for fiscal 2009, and for quarterly periods in 2010 and 2009. On April 13, 2011, management concluded that we should restate our financial statements for fiscal 2008 and 2007. The restatement adjustments reflect the correction of errors made in the application of generally accepted accounting principles (“GAAP”).
Anti-dilution provisions which are present in all of these instruments adjust the exercise price of the warrants and conversion price of the convertible debt if the Company sells any equity securities or securities convertible into equity, options or rights to purchase equity securities, at a per share selling price less than the exercise price pursuant to a weighted-average formula. These anti-dilution provisions present in these instruments require liability accounting treatment rather than equity accounting treatment. The Company evaluated the effects of these errors on prior periods’ consolidated financial statements, individually and in the aggregate, in accordance with guidance provided by SEC Staff Accounting Bulletin No. 108 codified as Topic 1.N “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements,” and concluded the balance sheet at December 31, 2009, 2008 and 2007 and its consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal years ended December 31, 2009, 2008 and 2007 are materially misstated as follows:
For a discussion of the significant restatement adjustments and the background leading to the adjustments, see Note 2 - Restatement of Consolidated Financial Statements to the Consolidated Financial Statements included in Item 8 of this Annual Report.This Annual Report contains:
·
Audited consolidated financial statements for the Company’s fiscal year ended December 31, 2010 contained in Item 8 of this Report.
·
Audited restated consolidated financial statements for the fiscal year ended December 31, 2009 contained in Item 8 of this Annual Report.
·
Audited restated consolidated financial statements for the fiscal year ended December 31, 2008 contained in Item 8 of this Annual Report.
·
Audited restated consolidated financial statements for the fiscal year ended December 31, 2007 contained in Item 8 of this Annual Report.
The Company has not amended, and does not intend to amend, its previously filed Annual Report on Form 10-K or its previously filed Quarterly Reports on Form 10-Q for the periods affected by the restatement adjustments. The financial statements and related interim financial information contained in such reports is superseded by the information in this Annual Report and the financial statements and related interim financial information contained in such previously filed reports should not be relied upon.
2010 Highlights
On May 26, 2010, we completed the 2nd and final installment to the Purchase Agreement with U.M. AccelMed, Limited Partnership, an Israeli limited partnership (“AccelMed”), whereby we issued 3,581,089 shares of our common stock at $0.56 per share and a warrant to purchase up to 1,193,696 shares of our common stock for an aggregate purchase price of $1,999,967, before financing fees. As of December 31, 2010, AccelMed our largest shareholder beneficially owned 13,338,603 shares of our common stock which represents 44% of our outstanding shares.
In 2010, we launched the OIS EyeScan in the United States, Europe, and various other countries. The OIS EyeScan is a portable imaging device that enables practices to capture images of both the anterior and posterior segment of the eye. The OIS EyeScan captures live video and 5.3 megapixel images from the following imaging modules: Color Mydriatic Retina, Color Non Mydriatic Retina, Fluorescein Angiography, Optic Nerve Head Stereo Imaging, Red Reflex Imaging Module, Corneal Fluorescence and Tear Film Imaging.
On December 17, 2010 and December 28, 2010 Abraxas and OIS EMR VERSION 4.1.7 were 2011/2012 compliant and certified as a Complete EHR by the Certification Commission for Health Information Technology (CCHIT®), an Office of the National Coordinator for Health Information Technology -Authorized Testing and Certification Body, in accordance with the applicable eligible provider certification criteria adopted by the Secretary of Health and Human Services. The 2011/2012 criteria support the Stage 1 meaningful use measures required to qualify eligible providers and hospitals for funding under the American Recovery and Reinvestment Act of 2009.
New Accounting Pronouncements
FASB Accounting Standards Update No. 2010-28, Intangibles - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts
In December 2010, the FASB issued Accounting Update No. 2010-28, Intangibles - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts, to modify step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The effect of the update will eliminate an entity’s ability to assert that a reporting unit is not required to perform step 2 of the goodwill impairment test because the carrying amount of the reporting unit is zero or negative despite qualitative factors that indicate the goodwill is more likely than not impaired. As a result, goodwill impairment may be reported sooner than under current factors. Accounting Standards Update No. 2010-28 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted.
FASB Accounting Standards Update No. 2010-8, Technical Corrections to Various Topics.
In February 2010, the FASB issued Accounting Update No. 2010-8, Technical Corrections to Various Topics, to eliminate inconsistencies and to clarify guidance on various Codification Topics. Except for certain amendments to Topic 815 and the nullification of paragraph 852-740-45-2, Update No. 2010-08 was effective for the first reporting period beginning after issuance. The adoption of Accounting Standards Update No. 2010-8 did not have a material impact on our consolidated financial statements.
FASB Accounting Standards Update No. 2010-06, Fair Value Measurement and Disclosures.
In January 2010, the FASB issued Accounting Update No. 2010-06, Fair Value Measurement and Disclosures, to improve disclosures about Fair Value Measurements. The amendments in this Update will require new disclosures related to the transfer in and out of Level 1 and 2, and require that a reporting company present Level 3 activity on a gross basis rather than one net number. In addition, the amendments in this Update clarify existing disclosures related to the level of disaggregation and disclosures about inputs and valuation techniques. Update No. 2010-06 was effective for reporting periods beginning after December 15, 2009. The adoption of Accounting Standards Update No. 2010-06 did not have a material impact on the consolidated financial statements.
FASB Accounting Standards Update No. 2010-04, Accounting for Various Topics, Technical Corrections to SEC Paragraphs.
In January 2010, the FASB issued Accounting Update No. 2010-4, Accounting for Various Topics, Technical Corrections to SEC Paragraphs, to update SEC staff announcements for codification references. The adoption of Accounting Standards Update No. 2010-04 will not have a material impact on the consolidated financial statements.
FASB Accounting Standards Update No. 2010-01, Accounting for Distributions to Shareholders with Components of Stock and Cash.
In January 2010, the FASB issued Accounting Update No. 2010-01, Accounting for Distributions to Shareholders with Components of Stock and Cash, to clarify the accounting for a distribution to shareholders that offers the ability to elect to receive the entire distribution in cash or shares. Accounting Standards Update No. 2010-06 was effective for reporting periods beginning after December 15, 2009. The adoption of Accounting Standards Update No. 2010-01 did not have a material impact on the consolidated financial statements.
FASB Accounting Standards Update No. 2009-14, Certain Revenue Arrangements That Include Software Elements, a Consensus of the FASB Emerging Issues Task Force.
In October 2009, the FASB issued Accounting Standards Update No. 2009-14, Certain Revenue Arrangements That Include Software Elements, a Consensus of the FASB Emerging Issues Task Force, to amend guidance used to allocate and measure revenues by an enterprise that sells or leases tangible products in an arrangement that contains software that is more than incidental to the tangible product as a whole. The amendments in the Update require that hardware components of a tangible product containing software elements always be excluded from the software revenue guidance. The Update provides additional guidance on how to determine which software, if any, related to the tangible products also would be excluded from the scope of the software revenue guidance. Update No. 2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of Accounting Standards Update No. 2009-11 is not expected to have a material impact on the consolidated financial statements.
FASB Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, a Consensus of the FASB Emerging Issues Task Force, to amend guidance which establishes a selling price hierarchy for determining the selling price of a deliverable in a multiple-deliverable revenue arrangement. The amendments in this Update also will replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenues is based on entity-specific assumptions rather than assumptions of marketplace participation. In addition, the amendment revises certain disclosure requirements. Update No. 2009-13 will become effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of Accounting Standards Update No. 2009-14 is not expected to have a material impact on the consolidated financial statements.
FASB Accounting Standards Update No. 2009-01, Generally Accepted Accounting Principles.
In October 2009, the FASB issued Accounting Standards Update No. 2009-01, Generally Accepted Accounting Principles, to amend the FASB Accounting Standards Codification for the issuance of the FASB Statement No. 168, the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards Codification will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB. Rules and interpretive releases of the Security and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. The adoption of Update No. 2009-01 did not have a material impact on the consolidated financial statements.
FASB Accounting Standards Codification Topic 855, Subsequent Events.
On June 30, 2009, we adopted Topic 855, Subsequent Events, which is generally based on Financial Accounting Standard 165 which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, Topic 855 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of Topic 855 did not have a material impact on the consolidated financial statements.
FASB Accounting Standards Codification Topic 810, Consolidation.
Topic 810 Consolidation, is generally based on Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R), which was issued in June 2009, which among other things requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity; to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those
investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. Topic 810, Consolidation, became effective on January 1, 2010. The adoption of Topic 810 did not have a material impact on the consolidated financial statements.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”). The information contained in the financial statements is, to a significant extent, based on effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset or relieving a liability.
Management is also required to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. In addition, GAAP itself may change from one previously acceptable method to another. Although the economics of our transactions would not change, the timing of the recognition of such events for accounting purposes may change.
We re-evaluate our estimates and assumptions used in our financials on an ongoing and quarterly basis. We adjust these estimates and assumptions as needed and as circumstances change. If circumstances change in the future, we will adjust our estimates and assumptions accordingly. At the present time, we cannot definitively determine whether our assumptions and estimates will change in the future. Based on history, however, it is likely that there will be changes in some of our estimates and assumptions.
Revenue Recognition
Our revenue recognition policies are in compliance with applicable accounting rules and regulations including FASB Accounting Standards Codification Topic 985, Software, Topic 605 Revenue and Subtopic 25 Multiple-Element Arrangements. When accounting for revenue with multiple element arrangements, the multiple components of our revenue are considered separate units of accounting in that revenue recognition occurs at different points of time for (1) product shipment, (2) installation and training services, and (3) service contracts based on performance or over the contract term as we incur expenses related to the contract revenue.
Revenue for products is recognized when title passes to the customer, which is upon shipment, provided there are no conditions to acceptance, including specific acceptance rights. If we make an arrangement that includes specific acceptance rights, revenue is recognized when the specific acceptance rights are met. Upon review, we concluded that consideration received from our customer agreements are reliably measurable because the amount of the consideration is fixed and no specific refund rights are included in the arrangement. We defer 100% of the revenue from sales shipped during the period that we believe may be uncollectible.
Installation revenue is recognized when the installation is complete. Separate amounts are charged and assigned in the customer quote, sales order and invoice, for installation and training services. These amounts are determined based on fair value, which is calculated in accordance with industry and competitor pricing of similar services and adjustments according to market acceptance. There is no price reduction in the product price if the customer chooses not to have us complete the installation.
Extended product service contracts are offered to our customers and are generally entered into prior to the expiration of our one year product warranty. The revenue generated from these transactions is recognized over the contract period, normally one to four years.
We do not have a general policy for cancellation, termination, or refunds associated with the sale of its products and services. All items are on one quote/purchase order with payment terms specified for the whole order. Occasionally, we have customers who require specific acceptance tests and accordingly, we do not recognize such revenue until these specific tests are met.
Tax Provision
Deferred taxes are calculated using the asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
We calculate a tax provision quarterly and determine the amount of our deferred tax asset that will more-likely-than-not be used in the future. In making this determination, we have to assess the amount of our unlimited and capped NOL amounts we
will more likely than not be able to use, as well as the deferred tax asset amount related to the temporary differences of our balance sheet accounts.
FASB Accounting Standards Codification Topic No. 740, Taxes, provides the accounting for uncertainty in income taxes recognized in a company’s financial statements. Topic No. 740 also prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. In addition, Topic No. 740 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We apply Topic No. 740 to all of our tax positions.
We do not currently allocate our taxes between us and our subsidiary, Abraxas, due to the immaterial impact of Abraxas on our tax provision.
Warranty Reserve
Our warranty reserve contains two components, a general product reserve recorded on a per product basis and specific reserves recorded as we become aware of system performance issues. The product reserve is calculated based on a fixed dollar amount per product shipped each quarter. Specific reserves usually arise from the introduction of new products. When a new product is introduced, we reserve for specific problems arising from potential issues, if any. As issues are resolved, we reduce the specific reserve. These types of issues can cause our warranty reserve to fluctuate outside of sales fluctuations.
We estimate the cost of the various warranty services by taking into account the estimated cost of servicing routine warranty claims in the first year, including parts, labor and travel costs for service technicians. We analyze the gross profit margin of our service department, the price of our extended warranty contracts, factor in the hardware costs of the various systems, and use a percentage to calculate the cost per system to use for the first year manufacturer’s warranty.
In 2010, the general warranty reserve increased from $98,599 to $172,725 due to the increase in product shipments compared to the amount of replacements, repairs or upgrades performed.
In 2009, the general warranty reserve increased from $67,000 to $98,599 due to the increase in product shipments compared to the amount of replacements, repairs or upgrades performed.
Securities Purchase Agreement
On June 24, 2009, we entered into a Purchase Agreement with AccelMed. Pursuant to the terms of the Purchase Agreement, we completed the 1st installment on June 24, 2009, whereby we issued and sold to AccelMed 9,633,228 shares of our common stock and a warrant to purchase up to 3,211,076 shares, at an exercise price of $1.00 per share, for an aggregate purchase price of $3,999,972. We recorded $3,552,599 of the aggregate purchase price of $3,999,972 to common stock, net of stock issuance cost and amount allocated to warrants. On May 26, 2010 the 2nd and final installment was completed, under which we issued to AccelMed 3,581,089 shares and a warrant to purchase up to 1,193,696 shares, at an exercise price of $1.00 per share, for an aggregate purchase price of $1,999,967. We recorded $1,346,326 of the aggregate purchase price of $1,999,967 to common stock, net of stock issuance costs, and we allocated the remaining amount to warrants. During the year ended December 31, 2009 we began accounting for warrants as derivative liability financial instruments. (For additional details on our accounting for the warrants issued to AccelMed See Item 8, Consolidated Financial Statements, Notes to Financial Statements, Note 2. Restatement of Consolidated Financial Statements.)
The 1st installment and 2nd installment were recorded as an increase in cash and equity of $3,999,972 and $1,999,967, respectively. We treated the warrants issued in the 1st and 2nd Installments as a reduction to our common stock and an increase to additional paid-in-capital. (For additional details, see Item 8. Financial Statements and Supplementary Data, Note 7. Related Party Transactions, U.M. AccelMed, Limited Partnership).
Debt and Warrants
On October 29, 2007, we issued convertible notes (the “Notes”) which are convertible into shares of our common stock and warrants (the “Warrants”) to The Tail Wind Fund Ltd. and Solomon Strategic Holdings, Inc. (together with The Tail Wind Fund Ltd., the “Holders”) to purchase an aggregate of 616,671 shares of our common stock at an exercise price of $1.87 per share. These warrants expire on December 10, 2012.
On June 24, 2009, we entered into an Extension Agreement (the “Extension Agreement”) by and between us and the Holders. Pursuant to the Extension Agreement, with respect to the Notes, the Holders agreed to extend the principal payments due thereon for 18 months, such that the next principal payment with respect to the Notes will be due December 31, 2010, and extend the maturity date of the Notes to October 31, 2011. As consideration for these extensions and waivers, we issued warrants (the “New Warrants”) to the Holders to purchase an aggregate of 500,000 shares of our common stock. These New Warrants have an exercise price of $1 per share and expire on June 24, 2012. Pursuant to certain anti-dilution provisions in the Notes and Warrants, which were triggered as a result of the sale of securities under the Purchase Agreement with AccelMed, the conversion and exercise prices changed from $1.64 to $1.06 per share for the Notes and $1.87 to $1.21 per share for the Warrants. Based on
these changes, the Holders received an additional 371,157 and 333,686 shares of common stock under the Notes and Warrants, respectively. During the 1st quarter of 2010 the Holders converted an aggregate of $250,000 of the Convertible Notes principle balance into 219,780 shares of our common stock. (For additional details, see Item 8. Financial Statements and Supplementary Data, Note. 6 Notes Payable).
On October 23, 2009, we entered into a Secured Debenture (the “Secured Debenture”) with United Mizrahi Bank. Under the Secured Debenture we agreed to assume MediVision’s loan with United Mizrahi Bank, pursuant to the completion of the transactions contemplated in the MediVision Asset Purchase, in a principal amount not to exceed $1,500,000, plus interest (the “Loan Amount”). We also agreed to secure the Loan Amount by granting United Mizrahi Bank a security interest in all or substantially all of its assets. The Loan Amount accrues interest at a rate equal to LIBOR plus 4.75%. In addition, principal payments are required to be made in 18 equal monthly installments beginning January 31, 2011. On March 3, 2011, we and United Mizrahi Bank amended the terms of the Secured Debenture to increase the Loan Amount from $1,500,000 to $2,250,000 and defer principal payments due thereon for 6 months. As consideration for refinance of the note, the Company issued warrants to purchase an aggregate of 215,000 shares of the Company’s common stock. These Warrants have an exercise price of $1 per share and expire on March 3, 2014
On October 23, 2009, in connection with the assumption of the United Mizrahi loan, we issued to United Mizrahi Bank a warrant (the “Warrant”) to purchase 350,000 shares of our common stock at an exercise price of $1.00 which will expire upon the earlier of October 23, 2012 or twelve months following the completion of (1) a primary public offering of our common stock (a “Public Offering”) or (2) (a) the sale of all or substantially all of our assets or (b) the merger or consolidation of the Company with or into another entity, pursuant to which 50% of the Company’s outstanding common stock is held by person(s) who prior to the transaction held, in aggregate, less than 5% (together, a “Liquidity Event,” and together with a Public Offering, an “Exit Event”); provided however, if the underwriter in a Public Offering or the purchasing person(s) in a Liquidity Event require that all our outstanding warrants and options, including the Warrant be exercised prior to or part of the Public Offering or Liquidity Event, as applicable, then the Warrant will terminate, subject to certain notice requirements, upon completion of such transactions.
The exercise price of the Warrant is $1.00, subject to the happening of certain events, including, but not limited to, the payment of a stock dividend or a stock split. The Warrant also includes certain anti-dilution provisions if we issue or sell any equity securities or securities convertible into equity, options or rights to purchase equity securities at a per share selling price less than the exercise price, then the exercise price will be adjusted pursuant to a weighted-average formula. (For additional details, see Item 8. Financial Statements and Supplementary Data, Note 7. Related Party Transactions, Warrant to United Mizrahi Bank).
There were 6,205,129 warrants outstanding and exercisable as of December 31, 2010 with a weighted average remaining contractual life of 1.57 years, a weighted average exercise price of $1.03. There is no intrinsic value of warrants outstanding at December 31, 2010. (For additional details, see Item 8. Financial Statements and Supplementary Data, Note. 12. Warrants)
We record the fair value of warrants in the balance sheet as financial liabilities and changes in the fair value of the warrants are reported in earning each reporting period.
Fair value of financial instrument.
The following are the methods and assumptions we used to estimate the fair value of our financial instruments
Cash and cash equivalents
Due to their short term nature, carrying amounts approximates fair value
Accounts receivable
Due to their short term nature, carrying amount approximates fair value
Trade accounts payable
Due to their short term nature, carrying amount approximates fair value
Long-term debt
Due to the short term nature of the current portion of long-term debt, the carrying amount approximates fair value. The noncurrent portion of long-term debt approximates fair value because of the variable rate terms of these instruments.
Derivative Liability Financial Instruments
Derivative liability financial instruments are comprised of warrants to purchase shares of our common stock and embedded conversion options issued in connection with a convertible note. Anti-dilution provisions present in these instruments adjust the exercise price of the warrants and conversion price of the convertible debt if the Company sells any equity securities or securities convertible into equity, options or rights to purchase equity securities, at a per share selling price less than the exercise price pursuant to a weighted-average formula. These anti-dilution provisions present in these securities result in liability accounting treatment rather than equity accounting treatment. The Company records all derivative liability financial instruments in the balance sheet within the Derivative Liability Financial Instruments financial statement caption at fair value on a recurring basis.
Changes in the fair values of these instruments are reported in earnings. The Company does not hold any derivative liability financial instruments that reduce risk associated with hedging exposure accordingly the Company has not designated any of its derivative liability financial instruments as hedge instruments.
Fair Value is defined as the price that would be received to sell an asset or price paid to transfer a liability in an orderly transaction between market participants at the measurement date. A market or observable input is the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs.
The standard characterizes inputs used in determining fair value according to a hierarchy that prioritizes those inputs based upon the degree to which they are observable. The three levels of the fair-value-measurement hierarchy are as follows:
·
Level 1 - inputs represent quoted prices in active markets for identical assets or liabilities (for example exchange-traded commodity derivatives).
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Level 2- inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (for example, quoted market prices for similar assets or liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated inputs).
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Level 3- inputs that are not observable from objective sources, such as the Company’s internally developed assumptions used in pricing as asset or liability (for example, an estimate of future cash flows used in a company’s internally developed present value in that company’s internally developed present value of future cash flows model that underlies the fair-value measurement).
In determining fair value, we utilize observable market data when available, or models that incorporate observable market data. In addition to market information, we incorporate transaction-specific details that, in management’s judgment, market participants would take into account in measuring fair value.
In arriving at fair-value estimates, we utilize the most observable inputs available for the valuation technique employed. If a fair-value measurement reflects inputs at multiple levels within the hierarchy, the fair-value measurement characterized based upon the lowest level of input that is significant to the fair-value measurement. For us, recurring fair-value measurements are performed for warrant liabilities and embedded conversion option liabilities related to notes payable.
All derivative liability financial instruments are recognized in the balance sheet at their fair value. Changes in the fair values of derivatives liability financial instruments are reported in earnings. We do not hold any derivative liability financial instruments that reduce risk associated with hedging exposure and we have not designated any of our derivative liability financial instruments as hedge instruments.
Goodwill and Other Intangible Assets
The Company tests goodwill and other intangible assets for impairment on an annual basis and between annual tests if current events or circumstances require an interim impairment assessment. Goodwill is allocated to various reporting units, which are generally an operating segment or one reporting level below the operating segment. The Company compares the fair value of each reporting unit to its carrying amount to determine if there is potential goodwill impairment. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value of its goodwill. The Company compares the fair values of other intangible assets to their carrying amounts. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized. Fair values of goodwill and other intangible assets are determined based on discounted cash flows or appraised values, as appropriate.
The Company has not recorded an impairment loss related to goodwill during the years ended December 31, 2010 and 2009, respectively. As of December 31, 2010 the Company considered intangible assets related to the Electro-optical Unit, purchased from MediVision on October 21, 2009, to be impaired. The Company recorded an impairment loss equal to the total value of Electro-optical Unit intangible assets of $199,000. The Company did not record an impairment loss related to other intangible assets during the year ended December 31, 2009.
Software Capitalization
The cost of software developed internally is expensed until technological feasibility of the software product has been established. Thereafter, software development costs are capitalized through the general release of the software products and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized software development costs are amortized on a straight-line basis over the products’ respective estimated economic lives, which are typically three years. The amortization of capitalized software development costs is included in cost of product sales in the consolidated statements of operation.
In 2008, we capitalized our EMR and PM software that we acquired from AcerMed through the bankruptcy court. This software was purchased with the intention that it would be sold, leased or marketed upon modification by our research and development team to our customers. The amount that we capitalized for this software was $570,077. During the first three months of 2009, we began to sell this software and we began to amortize this asset using the straight-line method of amortization over the economic life of the asset, which we concluded to be three years. Our EMR and PM software was amortized during the year ended December 31, 2010 by $190,024.
We also capitalized the development costs incurred to prepare this software for sale. Development costs were capitalized once technological feasibility was established. We determined that the software was technologically feasible because we had worked with a model/prototype that had been in the market before our acquisition. The amount of development that we capitalized in connection with this software is $1,150,831. During the first three months of 2009, we began to sell this software and we began to amortize this asset using the straight-line method of amortization over the economic life of the asset, which we concluded to be three years. The amount of this asset that was amortized during the year ended December 31, 2010 was $383,612.
In 2008, we also capitalized $504,711 of costs associated with the development of a web-based software once technological feasibility was established. During the first three months of 2009, we began to sell this software and so, we began to amortize this asset using the straight-line method of amortization over the economic life of the asset, which we concluded to be three years. The amount of this asset that was amortized during the year ended December 31, 2010 was $168,236.
Principles of Consolidation
The consolidated financial statements include the accounts of OIS, Abraxas Medical Solutions, Inc., a Delaware, corporation (“Abraxas”), the 63% investment in CCS Pawlowski GmbH (“CCS”) a German Corporation, OIS Europe, a Belgian based branch of OIS, and OIS Global, an Israel based subsidiary of OIS. All significant intercompany balances and transactions have been eliminated in consolidation.
Foreign currencies
The Consolidated Financial Statements are presented in the reporting currency of Ophthalmic Imaging Systems, U.S. Dollars (“USD”). The functional currency for the Company’s wholly-owned subsidiary, OIS Europe and our 63% investment in CCS, is the European Union Euro (€). Accordingly, the balance sheet of OIS Europe and CCS is translated into USD using the exchange rate in effect at the balance sheet date. Revenues and expenses are translated using the average exchange rates in effect during the period. Translation differences are recorded directly in shareholders’ equity as “foreign currency translation adjustment.” Gains or losses on transactions denominated in a currency other than the subsidiaries’ functional currency which arise as a result of changes in foreign exchange rates are recorded in the statement of operations. The statement of cash flows reflects the reporting currency equivalent of foreign currency cash flows using the exchange rates in effect at the time of the cash flow.
Segment Reporting
Our business consists of two operating segments: OIS and Abraxas, our wholly-owned subsidiary. Our management reviews Abraxas’ results of operation separately from that of OIS. Our operating results for Abraxas exclude income taxes. The provision for income taxes is calculated on a consolidated basis, and accordingly, is not presented by segment. It is excluded from the measure of segment profitability as reviewed by our management.
We evaluate our reporting segments in accordance with According to FASB Accounting Standards Codification Topic 280, Segment Reporting. Our Chief Financial Officer (“CFO”) has been determined as the Chief Operating Decision Maker as defined by Topic 280. The CFO allocates resources to Abraxas based on its business prospects, competitive factors, net sales and operating results.
Other
We expense all costs as incurred, including costs of services performed under extended warranty contracts. Estimates are used in determining the expected useful lives of depreciable assets.
Results of Operations
Selected Financial Data
(1) We have restated our consolidated balance sheet at December 31, 2009, 2008 and 2007 and the respective consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal years ended December 31, 2009, 2008 and 2007. The restatement adjustments reflect the correction of errors made in connection with our accounting treatment for warrants to purchase shares of our common stock and embedded conversion options issued in connection with a convertible note. For a discussion of the significant restatement adjustments and the background leading to the adjustments, see Note 2 - Restatement of Consolidated Financial Statements to the Consolidated Financial Statements included in Item 8 of this Annual Report.
(1) We have restated our consolidated balance sheet at December 31, 2009, 2008 and 2007 and the respective consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal years ended December 31, 2009, 2008 and 2007. The restatement adjustments reflect the correction of errors made in connection with our accounting treatment for warrants to purchase shares of our common stock and embedded conversion options issued in connection with a convertible note. For a discussion of the significant restatement adjustments and the background leading to the adjustments, see Note 2 - Restatement of Consolidated Financial Statements to the Consolidated Financial Statements included in Item 8 of this Annual Report.
(1) We have restated our consolidated balance sheet at December 31, 2009, 2008 and 2007 and the respective consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal years ended December 31, 2009, 2008 and 2007. The restatement adjustments reflect the correction of errors made in connection with our accounting treatment for warrants to purchase shares of our common stock and embedded conversion options issued in connection with a convertible note. For a discussion of the significant restatement adjustments and the background leading to the adjustments, see Note 2 - Restatement of Consolidated Financial Statements to the Consolidated Financial Statements included in Item 8 of this Annual Report.
(1) We have restated our consolidated balance sheet at December 31, 2009, 2008 and 2007 and the respective consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal years ended December 31, 2009, 2008 and 2007. The restatement adjustments reflect the correction of errors made in connection with our accounting treatment for warrants to purchase shares of our common stock and embedded conversion options issued in connection with a convertible note. For a discussion of the significant restatement adjustments and the background leading to the adjustments, see Note 2 - Restatement of Consolidated Financial Statements to the Consolidated Financial Statements included in Item 8 of this Annual Report.
Comparison of Year Ended December 31, 2010 to Year Ended December 31, 2009
Revenues
Our revenues for the year ended December 31, 2010 were $18,631,912 representing an increase of $5,062,612 or 37% as compared to revenues of $13,569,300 for the year ended December 31, 2009. The increase in revenues for 2010 resulted from an increase in total product sales of $4,549,823 and service sales of $512,789.
The increase in product sales is due to EyeScan product revenue of $2,672,818, EMR/PM product revenue of $1,645,755, product revenue from our new subsidiary CCS of $493,347, new branch in Europe of $360,464, Symphony revenue of $999,934, offset by a decrease in WinStation revenue of $1,622,495.
The increase in service sales of $512,789 is due to an increase in service revenue from OIS of $263,076, service revenue from Abraxas of $57,610 and service revenue from our new subsidiaries, CCS and OIS Europe of $113,414 and $78,689, respectively.
Digital angiography systems, Symphony and EMR and PM products accounted for approximately 77% and 73% of our total revenues during 2010 and 2009, respectively. Service revenue for the years ended 2010 and 2009 accounted for approximately 23% and 27% of our total revenues for the years ended 2010 and 2009, respectively.
Gross Margins
Gross margins remained relatively flat at 55% and 54% during fiscal 2010 and 2009, respectively. We anticipate that our gross margins will increase if our product sales grow to cover our fixed personnel costs.
Sales and Marketing Expenses
Sales and marketing expenses accounted for 37% and 30% of revenues during fiscal 2010 and 2009, respectively. Sales and marketing expenses were $6,908,325 during fiscal 2010, representing an increase of $2,783,845 or 67% compared to sales and marketing expenses of $4,124,480 in fiscal 2009. This increase was primarily due to an increase in marketing efforts introducing the EyeScan internationally and in the optometry market of approximately $440,000, as well as the addition of sales representatives of approximately $1,719,000. Abraxas added three sales representatives, which increased their expenses by approximately $223,000. The remaining increase in sales and marketing is attributable to the acquisition of OIS Europe and CCS on October 21, 2009 which added approximately $408,000 of sales and marketing expenses.
General and Administrative Expenses
General and administrative expenses accounted for 13% and 17% of revenues during fiscal 2010 and 2009, respectively. Expenses were $2,433,619 during fiscal 2010, representing an increase of $178,230 or 8% compared to expenses of $2,255,389 during fiscal 2009. The increase is primarily due to an increase of legal and consulting fees of approximately $62,000, an increase of general and administrative expenses related to the acquisition of the CCS and OIS Europe operations of approximately $99,000.
Impairment related to the debt of MediVision of $4,436,187 during fiscal 2009 was comprised of accounts receivable and notes receivable from MediVision of $450,000 and $3,152,379, respectively, $560,000 in prepaid assets for funds advanced to MediVision in anticipation of the completion of the Electro-optical Unit and $273,808 that we paid to MediVision for exclusivity rights to sell the Electro-optical Unit in the U.S. Based upon revised estimates and the timing of the shifting of business focus from the Electro-optical Unit to other products through the end of 2010, management decided to impair the aggregate balance of the Electro-optical unit intangible asset or $199,000.
Research and Development Expenses
Research and development expenses as a percentage of revenues remained flat at 21% of revenues during fiscal 2010 and 2009. Expenses were $3,880,593 during 2010, representing an increase of $1,027,101 or 36% compared to expenses of $2,853,492. This increase in expense is due to an increase in software testing and quality control related expenses of approximately $360,000, an increase in consulting expenses of approximately $49,000, an increase in Abraxas’ employee related expenses of approximately $446,000, the impairment of the Electro-optical Unit intangible asset of $199,000, the addition of CCS which added approximately $36,000 of expenses, offset by a decrease in charges from MediVision and OIS Global of approximately $81,000.
Other Income (Expense), net
Other income (expense) was $370,410 during 2010 compared to $(665,742) during 2009. The increase of $1,036,152 of other income (expense) was primarily due to the change in fair values of OIS’ derivative liability financial instruments of $2,150,547 and the decrease in other expense of $88,793, offset by the legal settlement in 2009 between OIS and a former employee of $1,200,000 and the decrease in interest income of $30,634.
Income Taxes
The income tax expense for the year ended December 31, 2010 consisted of the following:
We analyzed our operating results for 2009, 2010, and projected operating results for 2011, combined with the downward turn in the economy, and determined that it is not more-likely-than-not that we will be able to use our deferred tax asset in the future.
The Company’s effective tax rate for the years ended December 31, 2010 and 2009 was 3% and 0%, see Item 8. Financial Statements and Supplementary Data, Note 10. Income Taxes, for the reconciliation of the statutory rate to the effective tax rate.
Net Loss
We reported a net loss of $2,424,944 or $0.08 basic loss per share during 2010 compared to net loss of $7,003,545 or $0.32 basic loss per share during 2009.
Export Sales
Revenues from sales to customers located outside of the United States accounted for approximately 18% and 9% of our net sales for 2010 and 2009, respectively.
Comparison of Year Ended December 31, 2009 to Year Ended December 31, 2008
Revenues
Our revenues for the year ended December 31, 2009 were $13,569,300 representing an increase of $1,078,183 or 9% as compared to revenues of $12,491,117 for the year ended December 31, 2008. The increase in revenues for 2009 resulted from an increase in total product sales of $1,055,767 and service sales of $22,416. The increase in product sales is due to EMR/PM product revenue of $1,638,926, product revenue from our new subsidiaries, CCS and OIS Europe of $128,155, Symphony revenue of $501,800, offset by a decrease in WinStation revenue of $1,213,114. The increase in service sales of $22,416 is due to an increase in service revenue from Abraxas of $84,074, service revenue for the fourth quarter of our new subsidiaries, CCS and OIS Europe of $22,323, offset by a decrease in service revenue from our WinStation and Symphony product line of $83,981.
Digital angiography systems, Symphony and EMR and PM products accounted for approximately 73% and 71% of our total revenues during 2009 and 2008, respectively. Service revenue for the years ended 2009 and 2008 accounted for approximately 27% and 29% of our total revenues for the years ended 2009 and 2008, respectively.
Gross Margins
Gross margins remained flat at 54% during fiscal 2009 and 2008, respectively. We anticipate that our gross margins will increase if our product sales grow to cover our fixed personnel costs.
Sales and Marketing Expenses
Sales and marketing expenses accounted for 30% and 32% of revenues during fiscal 2009 and 2008, respectively. Sales and marketing expenses were $4,124,480 during fiscal 2009, representing an increase of $89,664 or 2% compared to sales and marketing expenses of $4,034,816 in fiscal 2008. The increase in sales and marketing expense was primarily the result of expansion of the sales and marketing department during the year.
General and Administrative Expenses
General and administrative expenses as a percentage of revenues remained flat at 17% during fiscal 2009 and 2008, respectively. Expenses were $2,255,389 during fiscal 2009, representing an increase of $185,177 or 9% compared to expenses of $2,070,212 during fiscal 2008. The increase is primarily due to an increase of bad debt expense related to customers of approximately $239,000, an increase of general and administrative expenses related to the acquisition of the CCS and OIS Europe
operations of approximately $62,000, offset by a decrease in legal expenses of approximately $493,000.
Impairment related to the debt of MediVision of $4,436,187 during fiscal 2009 was comprised of accounts receivable and notes receivable from MediVision of $450,000 and $3,152,379, respectively, $560,000 in prepaid assets for funds advanced to MediVision in anticipation of the completion of the Electro-optical Unit and $273,808 that we paid to MediVision for exclusivity rights to sell the Electro-optical Unit in the U.S. Based upon revised estimates and the timing of the shifting of business focus from the Electro-optical Unit to other products through the end of 2010, management decided to impair the aggregate balance of intercompany indebtedness from MediVision.
Research and Development Expenses
Research and development expenses accounted for 21% of revenues during fiscal 2009 and 18% during fiscal 2008. Expenses were $2,853,492 during 2009, representing an increase of $633,832 or 29% compared to expenses of $2,219,660 during 2008. The increase in research and development is due to the capitalization of $1,150,831 of research and development expenses performed by Abraxas during fiscal 2008 offset by the decrease in research and development performed by MediVision of $439,168 and Abraxas of $77,831 during fiscal 2009.
Other Income (Expense), net
Other income (expense) was $(665,742) during 2009 compared to $(519,960) during 2008. The increase of $145,782 in other expense was primarily due to a change in the fair value of derivative liability financial instruments of $1,466,805 offset by a legal settlement between OIS and a former employee of $1,200,000, combined with a decrease in interest income of $171,436 resulting from the reduction of interest earned on notes receivable which were impaired during 2009.
Income Taxes
The income tax expense for the year ended December 31, 2009 consisted of the following:
We analyzed our operating results from 2008, 2009, and projected operating results for 2010, combined with the downward turn in the economy, and determined that it is not more-likely-than-not that we will be able to use our deferred tax asset in the future.
The Company’s effective tax rate for the years ended December 31, 2009 and 2008 was 0% and (112%), see Item 8. Financial Statements and Supplementary Data, Note 10. Income Taxes, for the reconciliation of the statutory rate to the effective tax rate.
Net Loss
We reported a net loss of $7,012,056 or $0.32 basic loss per share during 2009 compared to net loss of $3,421,014 or $0.20 basic loss per share during 2008.
Export Sales
Revenues from sales to customers located outside of the United States accounted for approximately 9% and 7% of our net sales for 2009 and 2008, respectively.
Comparison of Year Ended December 31, 2008 to Year Ended December 31, 2007
Revenues
Our revenues for the year ended December 31, 2008 were $12,491,117 representing a decrease of $1,997,927 or 14% as compared to revenues of $14,489,044 for the year ended December 31, 2007. The decreased revenues for 2008 resulted from decreased product sales of $2,644,447, including installation, offset by increased service revenues of $646,520. The decrease in product sales is primarily due to the decrease of our main WinStation systems and installation of approximately $1,927,000. Digital angiography systems and EMR and PM products accounted for approximately 71% and 79% of our total revenues during 2008 and 2007, respectively. The decrease in our product sales is primarily due to personnel changes in our sales and marketing
departments and, more recently, changes in the global economy. Service revenue for the years ended 2008 and 2007 accounted for approximately 29% and 21% of our total revenues for the years ended 2008 and 2007, respectively. The increased service revenue is primarily due to the increase in our extended service contracts due to an increase in our customer base and more customers understanding the benefits of purchasing extended warranty contracts. Our remaining service revenue which has remained constant consists of non-warranty repairs and parts, and technical support phone billings for customers not under warranty.
Gross Margins
Gross margins decreased to 54% from 57% in fiscal 2008 versus 2007, respectively, primarily due to the decrease in sales of our EMR and PM products which have related fixed direct labor costs. We anticipate that our gross margins will increase if our product sales grow to cover the fixed personnel costs.
Sales and Marketing Expenses
Sales and marketing expenses accounted for 29% and 24% of revenues during fiscal 2008 and 2007, respectively. Sales and marketing expenses were $4,034,816 during fiscal 2008, representing an increase of $539,890 or 15% compared to sales and marketing expenses of $3,494,926 in fiscal 2007. The increase in sales and marketing expenses were primarily the result of filling vacant sales positions during the year in OIS of approximately $178,000, the addition of Abraxas sales and marketing expenses of $438,000, offset by restructuring of the marketing department at OIS of ($66,000).
General and Administrative Expenses
General and administrative expenses accounted for 17% and 15% of revenues in fiscal 2008 and 2007, respectively. Expenses were $2,070,212 during fiscal 2008, representing a decrease of $141,866 or 6% compared to expenses of $2,212,078 during fiscal 2007. The decrease is primarily due to an increase in the general and administrative allocation of OIS to other departments of approximately $154,000, a decrease in OIS bonus expense related to writing off of executive bonuses that were accrued in 2007 but not approved for payment in 2008 of $143,000, a decrease in investor relations and business development expenses of approximately $101,000, offset by an increase in legal expenses of approximately $132,000 and the addition of Abraxas’ general and administrative expenses of $166,000.
Research and Development Expenses
Research and development expenses accounted for 18% of revenues during fiscal 2008 and 11% during fiscal 2007. Expenses were $2,219,660 during 2008, representing an increase of $588,440 or 36% compared to expenses of $1,631,220 during 2007. This increase was due to the increase in our research and development efforts on new digital image capture products. In the future, we expect our research and development expenditures to increase with the addition of Abraxas’s research and development expenses to be offset by a reduction in the research and development expenses subcontracted from MediVision and other consultants. In 2008 and 2007, outside consultants and MediVision conducted most of our research and development.
Other Income (Expense), net
Other expense was ($519,960) during 2008 compared to other income of $59,264 during 2007. The increase of $579,224 in other expense was primarily due to an increase of interest expense of $446,278 due to the change in fair value of the financial liabilities, combined with a decrease in interest income of $98,638 resulting from a combination of a decrease of our cash balance and a decrease in interest rates.
Income Taxes
The income tax expense for the year ended December 31, 2008 consisted of the following:
In 2008, we determined that we will not more-likely-than-not be able to use any of our deferred tax asset in the future. We analyzed our operating results from 2007, 2008 and projected operating results for 2009, combined with the downward turn in the economy and results of our largest annual tradeshow in the fourth quarter of 2008 and determined that it is not more-likely-than-not that we will be able to use our deferred tax asset in the future. In 2007, we determined that we will use $2,334,000 of capped net operating losses in the future and projected taxable income in 2008. In 2007, we did not have enough information to determine whether we would use the remaining net operating losses of $539,855. We had no net operating loss carryforward for California state income tax purposes at December 31, 2007.
At December 31, 2008 and 2007, management reviewed recent operating results and projected future operating results, as well as the current conditions in the global economy and medical industry. On each of these dates, management determined whether it was more-likely-than-not that a portion of the deferred tax assets attributable to net operating losses would be realized. For a description of our analysis in determining our deferred tax asset, see “Critical Accounting Policies, Tax Provision” above.
Due to changes in ownership which occurred in prior years, Section 382 of the Internal Revenue Code of 1986, as amended, provides for significant limitations on the utilization of net operating loss carryforwards and tax credits. As a result of these limitations, a portion of these loss and credit carryovers may expire without being utilized.
Net (Loss) Income
We reported a net loss of ($3,421,014) or ($0.20) basic loss per share during 2008 compared to net income of $943,449 or $0.06 basic earnings per share during 2007.
Export Sales
Revenues from sales to customers located outside of the United States accounted for approximately 7% and 5% of our net sales for 2008 and 2007.
Balance Sheet
Our assets decreased by $417,891 as of December 31, 2010 as compared to the December 31, 2009. This decrease was primarily due to a decrease in cash and equivalents of $1,500,329, the amortization of capitalized software development and research and development of $741,873, closing of our certificate of deposit which secured our line of credit of $158,213, and decrease in other intangible assets of $199,000 due to the impairment of the Electro-optical Unit intangible asset, offset by an increase in accounts receivable of $1,377,282 as a result of an increase in sales and an increase in inventories of $766,548.
Our liabilities increased by $369,812 mainly due to a increase in accounts payable of $346,996, an increase in accrued liabilities and customer deposits of $345,201, offset by a decrease the line of credit of $150,000 which was paid off during the year, and a decrease in financial liability derivative instruments of $165,599.
Our stockholders’ equity decreased by $787,703 primarily due to the net loss from fiscal 2010 of ($2,472,359), offset by the net proceeds of the second installment of the AccelMed stock purchase of $1,999,967, the conversion of debt by the Tail Wind Fund, Ltd. and Solomon Strategic Holdings, Inc. of $250,000 into 219,780 shares of common stock.
Liquidity and Capital Resources
Our operating activities used cash of $3,269,151 during 2010 as compared to $62,003 during 2009. The cash used by operations in 2010 was primarily due to the net loss of ($2,472,359), the change in accounts receivable of $1,296,551, the change in the provision for bad debt of $81,995, the change in the fair value of the derivative liability financial instruments of ($683,742), the change in inventories of $774,961, the change in prepaid expenses of $177,930, the change in customer deposits of $246,375, offset by depreciation of $260,420, amortization intangible assets of $102,538, the disposal of the Electro-Optical intangible asset of $199,000, the amortization of capitalized software of $168,236, the amortization of software licenses of $573,635, the change in accrued liabilities and warranty expense of $590,908, the change in accounts payable of $389,513 and the change in deferred extended warranty revenue of $94,285.
Net cash used in investing activities was $267,885 during 2010 versus $1,368,474 during 2009. Our investing activities in 2010 consisted of capital asset acquisitions.
Cash provided by financing activities was $2,077,034 during 2010 as compared to $4,608,088 during 2009. The cash provided by financing activities during 2010 was from proceeds of $113,314 from new borrowings, $1,999,967 from the proceeds of sale of stock, offset by $13,287 of principal payments on notes receivable and stock issuance costs of $22,960.
On December 31, 2010, our cash and cash equivalents were $3,905,910. Management anticipates that additional sources of capital beyond those currently available to it may be required to continue funding of research and development for new products and selling and marketing related expenses for existing products.
We will continue to evaluate alternative sources of capital to meet our cash requirements, including other asset or debt financing, issuing equity securities and entering into other financing arrangements. There can be no assurance, however, that any of the contemplated financing arrangements described herein will be available and can be obtained on terms favorable to us.
Seasonality
Our most effective marketing tool is the demonstration and display of our products at the annual meeting of the American Academy of Ophthalmology held during the fall of each year. A significant amount of our sales orders are generated during or shortly after this meeting. Accordingly, we expend a considerable amount of time and resources during the fourth quarter of our fiscal year preparing for this event.
Trends
Under the American Recovery and Reinvestment Act of 2009 (the “American Recovery Act”), physicians who implement a certified EMR software program and become meaningful users between 2010 and 2012 will each be eligible for $44,000 to $63,750 in incentive payments, and physicians who become meaningful users between 2012 and 2014 will be eligible for lower payments. Physicians who have not become meaningful users by 2014 will not qualify for any payments. In addition, beginning in 2016, Medicare reimbursement will begin to decrease for clinics that do not meet the above criteria. The Centers for Medicare and Medicaid Service’s (CMS) final rule on Meaningful Use of and Electronic Heath Record (EHR) and EHR Standards and Certification Regulations released on July 13, 2010, clarifies provisions under the American Recovery and Reinvestment Act. We anticipate this legislation will have positive effects on our sales as physicians adopt EMR software programs at higher rates than they do currently. On December 17, 2010 and December 28, 2010 Abraxas and OIS EMR VERSION 4.1.7 were 2011/2012 compliant and certified as a Complete EHR by the Certification Commission for Health Information Technology (CCHIT®), an Office of the National Coordinator for Health Information Technology -Authorized Testing and Certification Body, in accordance with the applicable eligible provider certification criteria adopted by the Secretary of Health and Human Services. The 2011/2012 criteria support the Stage 1 meaningful use measures required to qualify eligible providers and hospitals for funding under the American Recovery and Reinvestment Act of 2009.
Off- Balance Sheet Arrangements
None.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8.
Item 8.
Financial Statements and Supplementary Data
Our consolidated financial statements for the year ended December 31, 2010 and 2009 are attached hereto.
OPHTHALMIC IMAGING SYSTEMS
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2010 and 2009 and
For the Years Ended December 31, 2010 and 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Ophthalmic Imaging Systems
We have audited the accompanying consolidated balance sheets of Ophthalmic Imaging Systems and subsidiaries (the "Company") as of December 31, 2010, 2009, 2008 and 2007, and the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Ophthalmic Imaging Systems and subsidiaries as of December 31, 2010, 2009, 2008 and 2007, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the accompanying consolidated financial statements, the Company restated its consolidated financial statements for the years ended December 31, 2009, 2008 and 2007.
As discussed in Note 1 to the accompanying consolidated financial statements, effective January 1, 2009, the Company changed its method of accounting for business combinations with the adoption of Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations.
/s/ Perry-Smith, LLP
Sacramento, California
April 15, 2011
OPHTHALMIC IMAGING SYSTEMS
CONSOLIDATED BALANCE SHEETS
(Continued)
OPHTHALMIC IMAGING SYSTEMS
CONSOLIDATED BALANCE SHEETS
(Continued)
The accompanying notes are an integral
part of these consolidated financial statements.
OPHTHALMIC IMAGING SYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2010 and 2009
The amount of anti-dilutive shares for the twelve months ended December 31, 2010 and 2009 are 1,625,021 and 520,748, respectively.
The accompanying notes are an integral
part of these consolidated financial statements.
OPHTHALMIC IMAGING SYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
As of and For the Years Ended December 31, 2010 and 2009
The accompanying notes are an integral
part of these consolidated financial statements.
OPHTHALMIC IMAGING SYSTEMS
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2010 and 2009
The accompanying notes are an integral
part of these consolidated financial statements.
OPHTHALMIC IMAGING SYSTEMS
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2010 and 2009
The accompanying notes are an integral
part of these consolidated financial statements.
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ophthalmic Imaging Systems (the “Company,” “OIS,” “we,” “us” or “our”) was incorporated under the laws of the State of California on July 14, 1986. We are headquartered in Sacramento, California and are engaged in the business of designing, developing, manufacturing and marketing digital imaging systems, image enhancement and analysis software and informatics solutions for use by practitioners in the ocular health field. Our products are used for a variety of standard diagnostic test procedures performed in most eye care practices.
Principals of Consolidation
In January 2008, the Company, through Abraxas Medical Solutions, Inc., a wholly-owned subsidiary (“Abraxas”), purchased substantially all of the assets of AcerMed, Inc., a leading software developer for Electronic Medical Records (EMR) and Practice Management (PM) software.
On October 21, 2009, the Company completed its Asset Purchase transaction with MediVision to purchase substantially all the assets of MediVision, which was completed on October 21, 2009. Such assets include the European operations which consisted of MediVision’s business as conducted by CCS Pawlowski GmbH (“CCS”) and its branch office in Belgium (the “OIS Europe”). Accordingly, the Company began consolidating the results of operations of CCS and OIS Europe as of October 21, 2009.
The consolidated financial statements include the accounts of OIS, Abraxas, the 63% investment in CCS, OIS Europe, and OIS Global. All significant intercompany balances and transactions have been eliminated in consolidation.
Foreign currencies
The consolidated financial statements are presented in the reporting currency of Ophthalmic Imaging Systems, U.S. Dollars (“USD”). The functional currency for the Company’s wholly-owned subsidiary, OIS Europe and its 63% investment in CCS, is the European Union Euro (€). Accordingly, the balance sheet of OIS Europe and CCS is translated into USD using the exchange rate in effect at the balance sheet date. Revenues and expenses are translated using the average exchange rates in effect during the period. Translation differences are recorded directly in shareholders’ equity as “Foreign currency translation adjustment.” Gains or losses on transactions denominated in a currency other than the subsidiaries’ functional currency which arise as a result of changes in foreign exchange rates are recorded in the statement of operations. The statement of cash flows reflects the reporting currency equivalent of foreign currency cash flows using the exchange rates in effect at the time of the cash flow.
Segment Reporting
Our business consists of two operating segments: OIS and Abraxas, our wholly-owned subsidiary. Our management reviews Abraxas’ results of operation separately from that of OIS. Our operating results for Abraxas exclude income taxes. The provision for income taxes is calculated on a consolidated basis, and accordingly, is not presented by segment. It is excluded from the measure of segment profitability as reviewed by our management. CCS does not meet the materiality requirements for segment reporting, and accordingly, CCS’ financial information is reported as Other in the following table.
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
We evaluate our reporting segments in accordance with FASB Accounting Standards Codification Topic 280, Segment Reporting (“Topic 280”). Our Chief Financial Officer (“CFO”) has been determined as the Chief Operating Decision Maker as defined by Topic 280. The CFO allocates resources to Abraxas based on its business prospects, competitive factors, net sales and operating results.
All significant intercompany balances and transactions have been eliminated in consolidation.
The following presents our financial information by segment for the years ended December 31, 2010 and 2009:
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers highly liquid investments with original maturities of three months or less as cash equivalents.
At December 31, 2010, the Company had deposits with carrying amounts of $3,905,910 including bank balances of $3,843,573, Federally insured balances totaled $1,799,143 and uninsured balances totaled $2,044,430 at December 31, 2010.
Concentrations of Credit Risk and Export Sales
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high quality financial institutions. Concentrations of credit risk with respect to trade receivables are limited due to the Company’s policy of requiring deposits from customers, the number of customers we have and their geographic dispersion. The Company maintains reserves for potential credit losses and such losses have historically been within management’s expectations. No single customer comprised 10% or more of net sales during the years ended December 31, 2010 or 2009.
Revenues from sales to customers located outside of the United States accounted for approximately 18% and 9% of net sales during the years ended December 31, 2010 and 2009, respectively.
Inventories
Inventories, which consist primarily of purchased system parts, subassemblies and assembled systems, are stated at the lower of cost (determined using the first-in, first-out method) or market.
Allowance for Doubtful Accounts
The Company generally offers customer terms of 50% deposit paid up-front, remaining 50%, less installation portion, net 15 days after shipment of product, and the installation portion after installation is complete. The allowance for doubtful accounts balance is estimated based on historical experience and any specific customer/installation issues that have been identified. The Company periodically assesses the adequacy of its recorded allowance for doubtful accounts, and adjusts the balance as necessary.
Changes in the allowance for doubtful accounts were as follows:
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Change in Rebate Estimates
Our rebate program provides customers with an incentive to purchase system upgrades. When purchasing an upgrade, we provide the customer with a discount upon receipt of the old system. Typically, customers pay for the upgrade net of the discount and the old system is returned to us.
The quote/purchase order the customer signs includes a line item for the rebate discount, which is then calculated into the net total. The quote specifically states that the old system must be received within 30 days from the completion of the installation of the upgrade for the customer to receive the discount. We then bill the customer for the full amount. At this point we record the gross sale amount and reserve for the rebate portion of the sale. If a customer pays the full amount and the old system has not been returned yet, we assume that the customer will return the old system and record the rebate portion of the payment in a deposit liability account. If the customer pays the net amount and the old system has not been returned, we continue to bill the customer for the rebate portion until the old system is returned or the rest of the amount due is paid.
When 30 days have elapsed from the date the upgrade has been installed and the old system has not been received, we contact the customer and ask what the customer intends to do with the old system. If the customer intends to return the system, we continue to record the reserve. If the customer disposed of the system or intends to keep the system or contact cannot be made, we bill the customer for the full price of the upgrade system and stop reserving for the rebate credit. Until then, we continue to reserve for the rebate until we receive payment for the full price of the upgrade or the old system. These arrangements are not pervasive with our customers. If the old system is not returned, we stop reserving for the rebate portion. If the old system is not returned and we have received the full invoice amount, we remove the rebate portion of the payment out of the deposit liability account and apply it to the sale. At this point we stop reserving for the rebate.
If the old system is returned, we remove the rebate portion from the reserve account and reduce the accounts receivable.
Furniture and Equipment
Furniture and equipment are stated at cost and depreciated or amortized on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives generally range from three to seven years. The Company evaluates furniture and equipment for financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable.
Acquisitions
The Company accounts for acquisitions using the purchase method. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the net assets acquired is recorded as goodwill. For all acquisitions, operating results are included in the Consolidated Statement of Operations since the date of the acquisitions.
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill and Other Intangible Assets
The Company tests goodwill and other intangible assets for impairment on an annual basis and between annual tests if current events or circumstances require an interim impairment assessment. Goodwill is allocated to various reporting units, which are generally an operating segment or one reporting level below the operating segment. The Company compares the fair value of each reporting unit to its carrying amount to determine if there is potential goodwill impairment. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value of its goodwill. The Company compares the fair values of other intangible assets to their carrying amounts. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized. Fair values of goodwill and other intangible assets are determined based on discounted cash flows or appraised values, as appropriate.
The Company has not recorded an impairment loss related to goodwill during the years ended December 31, 2010 and 2009, respectively. During the year ended December 31, 2010 the Company considered intangible assets related to the Electro-optical Unit, purchased from MediVision on October 21, 2009, to be impaired. The Company recorded an impairment loss equal to the total value of Electro-optical Unit intangible assets of $199,000 during the year ended December 31, 2010. The Company did not record an impairment loss related to other intangible assets during the year ended December 31, 2009.
Software Capitalization
The cost of software developed internally is expensed until technological feasibility of the software product has been established. Thereafter, software development costs are capitalized through the general release of the software products and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized software development costs are amortized on a straight-line basis over the products’ respective estimated economic lives, which are typically three years. The amortization of capitalized software development costs is included in cost of product sales in the consolidated statements of operation.
In 2008, the Company capitalized our EMR and PM software that we acquired from AcerMed through the bankruptcy court. This software was purchased with the intention that it would be sold, leased or marketed upon modification by our research and development team to our customers. The amount that we capitalized for this software was $570,077. During the first three months of 2009, the Company began to sell this software and we began to amortize this asset using the straight-line method of amortization over the economic life of the asset, which we concluded to be three years. Amortization expense related to these assets was $190,024 for the years ended December 31, 2010 and 2009.
The Company also capitalized the development costs incurred to prepare this software for sale. Development costs were capitalized once technological feasibility was established. We believe that the software was technologically feasible when we began to capitalize the costs because we had worked with a model/prototype that had been in the market before our acquisition. The amount of development that we capitalized in connection with this software is $1,150,831. During the first three months of 2009, we began to sell this software, and we began to amortize this asset using the straight-line method of amortization over the economic life of the asset, which we concluded to be three years. Amortization expense related to this asset was $383,612 for the years ended December 31, 2010, and 2009.
In 2008, the Company also capitalized $504,711 of costs associated with the development of a web-based software once technological feasibility was established. During the first three months of 2009, we began to sell this software and we began to amortize this asset using the straight-line method of amortization over the economic life of the asset, which we concluded to be three years. Amortization expense related to this asset was $168,236 for the yeas ended December 31, 2010 and 2009.
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED
Revenue Recognition
The Company’s revenue recognition policies comply with applicable accounting rules and regulations including FASB Accounting Standards Codification Topic 985, Software, and Topic 605, Revenue, and Subtopic 25, Multiple-Element Arrangements. Under Topic 605, Subtopic 25, the multiple components of our revenue are considered separate units of accounting in that revenue recognition occurs at different points of time for (1) product shipment, (2) installation and training services, and (3) service contracts based on performance or over the contract term as we incur expenses related to the contract revenue.
Revenue for products is recognized when title passes to the customer, which is upon shipment, provided there are no conditions to acceptance, including specific acceptance rights. If we make an arrangement that includes specific acceptance rights, revenue is recognized when the specific acceptance rights are met. In addition, consideration received from our customer agreements are reliably measurable because the amount of the consideration is fixed and no specific refund rights are included in the arrangement and, thus, such consideration is reliably measurable. We defer 100% of the revenue from sales shipped during the period that we believe may be uncollectible.
Installation revenue is recognized when the installation is complete. Separate amounts are charged and assigned in the customer quote, sales order and invoice, for installation and training services. These amounts are determined based on fair value, which is calculated in accordance with industry and competitor pricing of similar services and adjustments according to market acceptance. There is no price reduction in the product price if the customer chooses not to have us complete the installation.
Extended product service contracts are offered to our customers and are generally entered into prior to the expiration of our one year product warranty. The revenue generated from these transactions is recognized over the contract period, normally one to four years.
We do not have a general policy for cancellation, termination, or refunds associated with the sale of our products and services. All items are on one quote/purchase order with payment terms specified for the whole order.
Warranty Reserve
The Company’s warranty reserve contains two components, a general product reserve recorded on a per product basis and specific reserves recorded as we become aware of system performance issues. The product reserve is calculated based on a fixed dollar amount per product shipped each quarter. Specific reserves usually arise from the introduction of new products. When a new product is introduced, we reserve for specific problems arising from potential issues, if any. As issues are resolved, we reduce the specific reserve. These types of issues can cause our warranty reserve to fluctuate outside of sales fluctuations.
The Company estimates the cost of the various warranty services by taking into account the estimated cost of servicing routine warranty claims in the first year, including parts, labor and travel costs for service technicians. We analyze the gross profit margin of our service department, the price of our extended warranty contracts, factor in the hardware costs of the various systems, and use a percentage to calculate the cost per system to use for the first year manufacturer’s warranty.
Shipping and Handling Costs
Shipping and handling costs are included with cost of sales.
Advertising Costs
Advertising expenditures totaled $292,946 and $114,301, for the years ended December 31, 2010 and 2009, respectively.
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative Liability Financial Instruments
Derivative liability financial instruments are comprised of warrants to purchase shares of our common stock and embedded conversion options issued in connection with a convertible note. Anti-dilution provisions present in these instruments adjust the exercise price of the warrants and conversion price of the convertible debt if the Company sells any equity securities or securities convertible into equity, options or rights to purchase equity securities, at a per share selling price less than the exercise price pursuant to a weighted-average formula. The Company records all derivative liability financial instruments in the balance sheet within the Derivative Financial Instruments Liabilities financial statement caption at fair value. Changes in the fair values of these instruments are reported in the results of operations for the period. The Company does not hold any derivative liability financial instruments that reduce risk associated with hedging exposure accordingly the Company has not designated any of its derivatives liability financial instruments as hedge instruments.
Income Taxes
Deferred taxes are calculated using the asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
FASB Accounting Standards Codification Topic No. 740, Taxes, provides the accounting for uncertainty in income taxes recognized in a company’s financial statements. Topic No. 740 also prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. In addition, Topic No. 740 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We apply Topic No. 740 to all of our tax positions.
Pursuant to Topic No. 740, interest and penalties related to unrecognized tax positions are recorded in tax expense.
Loss Per Share
Basic earnings (loss) per share which excludes dilution, is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock, which shares in the earnings of the Company. The treasury stock method is applied to determine the dilutive effect of stock options in computing diluted earnings per share. The Company currently is in a loss position and does not calculate diluted earnings per share.
Stock-based Compensation
The Company uses a Black-Scholes-Merton option valuation model to determine the fair value of stock-based compensation. The Black-Scholes-Merton model incorporates various assumptions including the expected term of awards, volatility of stock price, risk-free rates of return and dividend yield. The expected term of an award is generally no less than the option vesting period and is based on the Company’s historical experience. Expected volatility is based upon the historical volatility of the Company’s stock price. The risk-free interest rate is approximated using rates available on U.S. Treasury securities with a remaining term equal to the option’s expected life. The Company uses a dividend yield of zero in the Black-Scholes-Merton option valuation model as it does not anticipate paying cash dividends in the foreseeable future.
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
There were 6,205,129 warrants outstanding and exercisable as of December 31, 2010 with a weighted average remaining contractual life of 1.57 years, a weighted average exercise price of $1.03. There is no intrinsic value of warrants outstanding at December 31, 2010. (For additional details, see Note. 12. Warrants)
Impact of New Financial Accounting Statements
Financial Accounting Statements issued and not yet adopted.
FASB Accounting Standards Update No. 2010-28, Intangibles-Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts
In December 2010, the FASB issued Accounting Update No. 2010-28, Intangibles-Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts, to modify step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The effect of the update will eliminate an entity’s ability to assert that a reporting unit is not required to perform step 2 of the goodwill impairment test because the carrying amount of the reporting unit is zero or negative despite qualitative factors that indicate the goodwill is more likely than not impaired. As a result, goodwill impairment may be reported sooner than under current factors. Accounting Standards Update No. 2010-28 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not expect the adoption of Accounting Standards Update No. 2010-28 to have a material impact on the consolidated financial statements.
FASB Accounting Standards Update No. 2009-14, Certain Revenue Arrangements That Include Software Elements, a Consensus of the FASB Emerging Issues Task Force.
In October 2009, the FASB issued Accounting Standards Update No. 2009-14, Certain Revenue Arrangements That Include Software Elements, a Consensus of the FASB Emerging Issues Task Force, to amend guidance used to allocate and measure revenues by an enterprise that sells or leases tangible products in an arrangement that contains software that is more than incidental to the tangible product as a whole. The amendments in the Update require that hardware components of a tangible product containing software elements always be excluded from the software revenue guidance. The Update provides additional guidance on how to determine which software, if any, related to the tangible products also would be excluded from the scope of the software revenue guidance. Update No. 2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company does not expect the adoption of Accounting Standards Update No. 2009-14 to have a material impact on the consolidated financial statements.
FASB Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, a Consensus of the FASB Emerging Issues Task Force, to amend guidance which establishes a selling price hierarchy for determining the selling price of a deliverable in a multiple-deliverable revenue arrangement. The amendments in this Update also will replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenues is based on entity-specific assumptions rather than assumptions of marketplace participation. In addition, the amendment revises certain disclosure requirements. Update No. 2009-13 will become effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company does not expect the adoption of Accounting Standards Update No. 2009-13 to have a material impact on the consolidated financial statements.
Financial Accounting Statements Issued and Adopted
FASB Accounting Standards Update No. 2010-8, Technical Corrections to Various Topics.
In February 2010, the FASB issued Accounting Update No. 2010-8, Technical Corrections to Various Topics, to eliminate inconsistencies and to clarify guidance on various Codification Topics. Except for certain amendments to Topic 815 and the nullification of paragraph 852-740-45-2, Update No. 2010-08 was effective for the first reporting period beginning after issuance. The adoption of Accounting Standards Update No. 2010-8 did not have a material impact on our consolidated financial statements.
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FASB Accounting Standards Update No. 2010-06, Fair Value Measurement and Disclosures.
In January 2010, the FASB issued Accounting Update No. 2010-06, Fair Value Measurement and Disclosures, to improve disclosures about Fair Value Measurements. The amendments in this Update will require new disclosures related to the transfer in and out of Level 1 and 2, and require that a reporting company present Level 3 activity on a gross basis rather than one net number. In addition, the amendments in this Update clarify existing disclosures related to the level of disaggregation and disclosures about inputs and valuation techniques. Update No. 2010-06 was effective for reporting periods beginning after December 15, 2009. The adoption of Accounting Standards Update No. 2010-06 did not have a material impact on the consolidated financial statements.
FASB Accounting Standards Update No. 2010-01, Accounting for Distributions to Shareholders with Components of Stock and Cash.
In January 2010, the FASB issued Accounting Update No. 2010-01, Accounting for Distributions to Shareholders with Components of Stock and Cash, to clarify the accounting for a distribution to shareholders that offers the ability to elect to receive the entire distribution in cash or shares. Accounting Standards Update No. 2010-06 was effective for reporting periods beginning after December 15, 2009. The adoption of Accounting Standards Update No. 2010-01 did not have a material impact on the consolidated financial statements.
FASB Accounting Standards Update No. 2009-01, Generally Accepted Accounting Principles.
In October 2009, the FASB issued Accounting Standards Update No. 2009-01, Generally Accepted Accounting Principles, to amend the FASB Accounting Standards Codification for the issuance of the FASB Statement No. 168, the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards Codification will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB. Rules and interpretive releases of the Security and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. The adoption of Update No. 2009-01 did not have a material impact on the consolidated financial statements.
FASB Accounting Standards Codification Topic 855, Subsequent Events.
On June 30, 2009, we adopted Topic 855, Subsequent Events, which is generally based on Financial Accounting Standard 165 which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, Topic 855 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of Topic 855 did not have a material impact on the consolidated financial statements.
FASB Accounting Standards Codification Topic 810, Consolidation.
Topic 810 Consolidation, is generally based on Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R), which was issued in June 2009, which among other things requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity; to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. Topic 810, Consolidation, became effective on January 1, 2010. The adoption of Topic 810 did not have a material impact on the consolidated financial statements.
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2. Restatement of Consolidated Financial Statements
During the year-end financial close process of fiscal 2010, the Company discovered errors in its accounting treatment for warrants to purchase shares of the Company’s common stock and embedded conversion options issued in connection with a convertible note. The warrants were issued to The Tail Wind Fund Ltd. and Solomon Strategic Holdings, Inc. (together with The Tail Wind Fund Ltd., the “Holders”) on October 27, 2007 and June 24, 2009, to United Mizrahi Bank on October 26, 2009, and to U.M. AccelMed, Limited Partnership, an Israeli limited partnership (“AccelMed”) on June 24, 2009 and May 24, 2010. The embedded conversion options were issued in connection with a convertible note issued to the Holders on October 27, 2007 (For additional details on these transactions see Note 6, Notes Payable and Note 7 Related Party Transactions).
Anti-dilution provisions present in all of these instruments adjust the exercise price of the warrants and conversion price of the convertible debt if the Company sells any equity securities or securities convertible into equity, options or rights to purchase equity securities, at a per share selling price less than the exercise price pursuant to a weighted-average formula. These anti-dilution provisions present in these instruments require liability accounting treatment rather than equity accounting treatment. The Company evaluated the effects of these errors on prior periods’ consolidated financial statements, individually and in the aggregate, in accordance with guidance provided by SEC Staff Accounting Bulletin No. 108 codified as Topic 1.N “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements,” and concluded that the consolidated balance sheet at December 31, 2009, 2008 and 2007 and the respective consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal years ended December 31, 2009, 2008 and 2007 interim financial information for the quarters of the fiscal year ended December 31, 2010 and 2009 are materially misstated as follows.
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3. INVENTORIES
Inventories as of December 31, 2010 and 2009 consist of the following:
4 FURNITURE AND EQUIPMENT
Furniture and equipment as of December 31, 2010 and 2009 consist of the following:
Depreciation expense was $260,420 and $225,588 for fiscal years ended 2010 and 2009, respectively.
5. ACCRUED LIABILITIES, PRODUCT WARRANTY AND DEFERRED REVENUE
Accrued Liabilities
Accrued liabilities as of December 31, 2010 and 2009 consist of the following:
Accrued Warranty Expenses
Product warranty reserve changes as of December 31, 2010 and 2009 consist of the following:
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5. ACCRUED LIABILITIES, PRODUCT WARRANTY AND DEFERRED REVENUE (CONTINUED)
Deferred Extended Warranty Revenue
In addition to the Company’s one-year warranty, the Company offers an extended warranty for an additional charge. The Company records the sale of the extended warranty as deferred revenue and amortizes the revenue over the term of the agreement, generally one to four years. At December 31, 2010 and 2009, deferred extended warranty revenue was $1,974,020 and $1,879,722, respectively.
6. NOTES PAYABLE
Notes payable at December 31, 2010 and 2009 consist of the following:
Convertible note
On October 29, 2007, we issued convertible notes (the “Notes”) which are convertible into shares of our common stock and warrants (the “Warrants”) to The Tail Wind Fund Ltd. and Solomon Strategic Holdings, Inc. (together with The Tail Wind Fund Ltd., the “Holders”) to purchase an aggregate of 616,671 shares of our common stock at an exercise price of $1.87 per share. These warrants expire on December 10, 2012.
On June 24, 2009, we entered into an Extension Agreement (the “Extension Agreement”) by and between us and the Holders. Pursuant to the Extension Agreement, with respect to the Notes, the Holders agreed to extend the principal payments due thereon for 18 months, such that the first principal payment with respect to the Notes was due December 31, 2010, and extend the maturity date of the Notes to October 31, 2011. As consideration for these extensions and waivers, we issued warrants (the “New Warrants”) to the Holders to purchase an aggregate of 500,000 shares of our common stock. These New Warrants have an exercise price of $1 per share and expire on June 24, 2012. Pursuant to certain anti-dilution provisions in the Notes and Warrants, which were triggered as a result of the sale of securities under the Purchase Agreement with AccelMed, the conversion and exercise prices changed from $1.64 to $1.06 per share for the Notes and $1.87 to $1.21 per share for the Warrants. Based on these changes, the Holders received an additional 371,157 and 333,686 shares of common stock under the Notes and Warrants, respectively. During the 1st quarter of 2010 the Holders converted an aggregate of $250,000 of the Convertible Notes principal balance into 219,780 shares of our common stock.
The fair value of the conversion option of the Note has been recorded in the balance sheet as a derivative financial liability. The fair value of the conversion option of the Note is determined based on a lattice valuation model and changes in the fair value of the conversion option is reported in earning each reporting period. As of December 31, 2010 and 2009 the total value of the conversion option was $70,400 and $229,398, respectively. The fair value of the Warrants and New Warrants has been recorded in the balance sheet as financial liabilities. The fair values of the Warrants and New Warrants are determined based on a lattice valuation model and changes in the fair value are reported in earning each reporting period. As of December 31, 2010 and 2009 the total value of the Warrants and New Warrants was $363,606 and $430,960, respectively.
United Mizrahi Bank Loan
The United Mizrahi Bank Loan was executed in connection with the close of the MediVision Asset Purchase. (For more details on the United Mizrahi Bank Loan, Note 7.)
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7. RELATED PARTY TRANSACTIONS
U.M. AccelMed, Limited Partnership
As of December 31, 2010, U.M. AccelMed, Limited Partnership, an Israeli limited partnership (“AccelMed”) is our largest shareholder with 13,338,603 shares of our common stock or 44%. On June 24, 2009, we entered into a Purchase Agreement with AccelMed. Pursuant to the terms of the Purchase Agreement, we authorized the issuance and sale of up to an aggregate of 13,214,317 shares of our common stock and warrants to purchase up to an aggregate of 4,404,772 shares of our common stock in two installments. On the date of the Purchase Agreement, we completed the 1st installment, under which we issued to AccelMed 9,633,228 shares and a warrant to purchase up to 3,211,076 shares for an aggregate purchase price of $3,999,972. The 1st Installment Warrant entitles AccelMed to purchase 3,211,076 shares of our common stock at an exercise price of $1.00 per share and expires on June 24, 2012. We recorded $3,552,599 of the aggregate purchase price of $3,999,972 to common stock, net of stock issuance costs and amount allocated to warrants. On May 26, 2010 the 2nd and final installment was completed, under which we issued to AccelMed 3,581,089 shares and a warrant to purchase up to 1,193,696 shares for an aggregate purchase price of $1,999,967. The 2nd installment warrant has an exercise price of $1.00 per share and expires on June 23, 2012. We recorded $1,346,326 of the aggregate purchase price of $1,999,967 to common stock, net of stock issuance costs and amount allocated to warrants. The remaining 124,286 shares of common stock were purchased from MediVision Medical Imaging Ltd. on January 6, 2010 at a purchase price of $0.70 per share. As of April 8, 2011, AccelMed owns 13,338,603 shares of our common stock, or 44%.
The warrants issued to Accelmed include certain anti-dilution provisions which trigger if we issue or sell any equity securities or securities convertible into equity, options or rights to purchase equity securities at a per share selling price less than the exercise price, then the exercise price will be adjusted pursuant to a weighted-average formula. We record the fair value of the warrants issued to AccelMed on June 24, 2009 and May 26, 2010, in the balance sheet as a derivative financial liability. The fair values of these warrants are determined based on a lattice valuation model and changes in the fair value of the warrants are reported in earning each reporting period. As of December 31, 2010 and 2009 the total value of these warrants was $1,169,280 and $1,082,133, respectively.
Pursuant to the terms of the Purchase Agreement, on June 24, 2009, the Company entered into an Agreement (the “ Voting Agreement ”) by and among (i) AccelMed, (ii) MediVision Medical Imaging Ltd. (“ MediVision ”), (iii) Agfa Gevaert N.V. (“ Agfa ”), (iv) Delta Trading and Services (1986) Ltd. (“ Delta ”), and (v) Gil Allon, Noam Allon, Ariel Shenhar and Yuval Shenhar (collectively, the “ Allon/Shenhar Group ” and together with Agfa and Delta, the “ Principal MV Shareholders ”). MediVision and the Principal MV Shareholders are referred to as the “ MediVision/Principal Shareholders Group .” Under the Voting Agreement, following the 1st Installment Closing Date, as long as each of AccelMed and the MediVision/Principal MV Shareholders Group holds between 25% and 50% of the outstanding shares of common stock, the Company agreed to use its best efforts and will take all actions (including, if necessary, amend its bylaws) to cause to be nominated for election to the Company’s Board of Directors, and each of AccelMed and the members of the MediVision/Principal MV Shareholders Group, agreed to vote its shares of common stock owned, whether directly or indirectly, and whether now owned or thereafter acquired, in favor of, the following nominees: (1) two “Independent Directors” as defined under the listing standards of The Nasdaq Capital Market, the identity of one will be designated and named by AccelMed and the identity of the other by the MediVision/Principal MV Shareholders Group; (2) three persons designated and named by AccelMed; (3) three persons designated and named by MediVision; and (4) one person designated and named jointly by AccelMed and MediVision who shall be a reputable individual from the Company’s industry.
Pursuant to the terms of the Voting Agreement, following the 1st Installment Closing Date, as long as either AccelMed or the MediVision/Principal MV Shareholders Group holds less than 25% or more than 50% of the outstanding shares of common stock, the Company agreed to use its best efforts and will take all actions (including, if necessary, amend its bylaws) to cause to be nominated for election to the Company’s Board of Directors, and each of AccelMed and the members of the MediVision/Principal MV Shareholders Group, agreed to vote its shares of common stock, in favor of, the following nominees: (1) two “Independent Directors” as defined under the listing standards of The Nasdaq Capital Market, the identity of one will be designated and named by AccelMed and the identity of the other by either MediVision/Principal MV Shareholders Group; (2) six persons designated and named by AccelMed and the MediVision/Principal MV Shareholders Group, with each of AccelMed and the MediVision/Principal MV Shareholders Group entitled to name the number of persons for election to the Company’s Board of Directors in proportion to their shareholdings in the Company (i.e., calculated based on the percentages of holdings of each out of their combined aggregate holdings, multiplied by six, and rounded to the nearest whole number); (3) one person designated and named jointly by AccelMed and MediVision who shall be a reputable individual from the Company’s industry.
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7. RELATED PARTY TRANSACTIONS (CONTINUED)
The Voting Agreement will terminate when AccelMed ceases to own 10% of the common stock on a fully-diluted basis or the MediVision/Principal MV Shareholder Group ceases to own, in the aggregate, 10% of the common stock on a fully-diluted basis.
Gil Allon (the Company’s Chief Executive Officer), together with Noam Allon, President and Chief Executive Officer of MediVision and Gil Allon’s brother own 20.31% of MediVision’s ordinary shares. Ariel Shenhar (the Company’s Chief Financial Officer) owns 0.58% of MediVision’s ordinary shares. Agfa and Delta own 15.59% and 42.08% of MediVision’s ordinary shares, respectively.
MediVision Medical Imaging Ltd.
As of December 31, 2010, MediVision Medical Imaging Ltd., an Israeli corporation (“MediVision”), is our second largest shareholder with 9,096,481 shares of our common stock, or 30%. As of April 8, 2011, MediVision owns 8,630,825 shares of our common stock, or 28%.
MediVision Asset Purchase
On June 24, 2009, we entered into an Asset Purchase Agreement (“APA”) with MediVision to purchase substantially all the assets of MediVision, which was completed on October 21, 2009 (the “MediVision Asset Purchase”). Such assets included the European operations which consisted of MediVision’s business as conducted by CCS Pawlowski GmbH (“CCS”), its branch office in Belgium (the “Belgium Activities”), certain agreements under which MediVision contracted with third parties for distribution and other services (the “Purchased Agreements”), and rights to intellectual property which resulted from MediVision’s research and development (“R&D”) activities performed in Israel.
As payment for such assets, we agreed to assume a bank loan outstanding with Mizrahi Tefahot Bank Ltd. (the “United Mizrahi Bank”) in the amount of $1,500,000, to which we were previously a guarantor (For more details of the guaranty, see “Note 7. Related Party Transactions, United Mizrahi Bank Loan” below.), liabilities associated with the acquired assets on and after October 21, 2009, the closing date, and certain taxes, and extinguishment of all intercompany indebtedness owed to us with a principal amount of $4,178,622. On March 3, 2011, we and United Mizrahi Bank amended the terms of the loan to increase the principal amount thereunder from $1,500,000 to $2,250,000 and defer principal payments due thereon for 6 months. As consideration for the refinance of the note, the Company issued warrants to purchase an aggregate of 215,000 shares of the Company’s common stock. These Warrants have an exercise price of $1 per share and expire on March 3, 2014.
In addition, in early 2009, we hired all of MediVision’s research and development staff and moved them to our offices in the United States and Israel.
During 2009, we had recorded intercompany accounts and notes receivable due from MediVision of $450,000 and $3,168,622, respectively, prepaid product advances to MediVision of $560,000, which were in anticipation of the completion of the Electro-optical Unit, and $273,808 of exclusivity rights paid to MediVision to sell the Electro-optical Unit in the U.S. All such amounts were extinguished upon completion of the MediVision Asset Purchase. At June 30, 2009, management determined the intercompany indebtedness owed to us by MediVision was impaired and recorded an allowance for doubtful accounts for the outstanding balance equal to $4,436,187. In connection with the MediVision Asset Purchase, management wrote off the balance of intercompany indebtedness owed to us by MediVision, thus, eliminating the allowance for doubtful accounts. Following the completion of the MediVision Asset Purchase, management extinguished an additional $16,243 of intercompany notes receivable due from MediVision.
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7 RELATED PARTY TRANSACTIONS (CONTINUED)
The purchase price of the MediVision Asset Purchase was allocated to the assets acquired, liabilities assumed and noncontrolling interest in CCS using the fair values as determined by management at October 21, 2009. Goodwill was computed as follows:
In connection with the MediVision Asset Purchase, we recorded (1) financial assets of approximately $163,000 which represents cash, (2) tangible assets of approximately $311,000 which are primarily comprised of net accounts receivable, inventory and fixed assets, and (3) intangible assets of approximately $692,000 which are attributable to customer relationships and the Purchased Agreements related to the European operations of approximately $493,000 and intellectual property related to the Electro-optical Unit of approximately $199,000 which resulted from MediVision’s R&D activities performed in Israel. The intangible assets related to customer relationships and Purchased Agreements were valued on the date of acquisition at fair value and will be amortized over an estimated useful life of 8.2 years and will result in additional amortization expense of approximately $60,000 annually. During the year ended December 31, 2010 and 2009, the Company recognized $44,916 and $8,693, respectively, of amortization expense related to customer relationships and Purchased Agreements. At December 31, 2010, the carrying values of the intangible assets acquired from MediVision were as follows: intangible assets related to customer relationships were $411,863 and goodwill was $807,000. During the year ended December 31, 2010 the Company considered intangible assets related to the Electro-optical Unit, purchased from MediVision on October 21, 2009, to be impaired. During the year ended December 31, 2010 the Company recorded an impairment loss equal to the total value of Electro-optical Unit intangible assets of $199,000.
At December 31, 2010 the value of noncontrolling interest related to the business operations purchased from MediVision was $417,074.
Goodwill reflects the replacement cost of an assembled workforce associated with personal reputations, relationships and business specific knowledge and the value of expected synergies and the noncontrolling interest holders. The fair value of goodwill exceeds its carrying amount at December 31, 2010. The Company tests goodwill for impairment on an annual bases and between annual test periods if an event occurs or circumstances change that would reduce its carrying value. During the year ended December 31, 2009, in connection with the MediVision Asset Purchase, we recorded attorney and accounting services expenses of $52,500.
During the years ended December 31, 2010 and 2009, the Company recognized revenue of $1,234,596 and $188,683, respectively, and net losses of $319,689 and $121,333, respectively, related to the business operations purchased in connection with the MediVision Asset Purchase.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
The following unaudited pro forma information, prepared in accordance with Generally Accepted Accounting Principles, presents the results of operations for the twelve month period ended December 31, 2009 presented as though our of certain assets of MediVision had occurred on January 1, 2009. This summary of unaudited pro forma results of operation is presented for informational purposes only and does not purport to be indicative of the results of future operations of the Company or the results that would have actually been attained had the acquisition taken place at the beginning of 2009:
(1) The amount of anti-dilutive shares for the twelve months ended December 31, 2009 is 520,748.
Escrow Agreement
Pursuant to the terms of the APA and an Escrow Agreement (the “Escrow Agreement”) between us, MediVision and Stephen L. Davis, Esq. dated June 24, 2009, MediVision deposited 5,793,452 shares (the “Escrow Shares”) of our common stock into escrow. If MediVision fails to make certain payments under the APA, the Escrow Shares will be distributed to us or sold and the proceeds thereof distributed to us. The agreement will terminate upon the later of (i) October 21, 2011 or (ii) the satisfaction and discharge of the $1,800,000 claim made by the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade & Labor to MediVision. MediVision satisfied the obligation under the ELOP Settlement Agreement on June 28, 2010 and the $1,800,000 claim made by the Office of Chief Scientist of the Israeli Ministry of Industry, Trade and Labor on November 16, 2009.
United Mizrahi Bank Loan
In 2005, we entered into a Secured Debenture (the “Debenture”) in favor of United Mizrahi Bank Ltd., in an amount of up to $2,000,000 (plus interest, commissions and all expenses). Under the terms of the Debenture, we guaranteed the payment of all of the debts and liabilities of MediVision to United Mizrahi Bank up to $2,000,000. The Debenture is secured by a first lien on all of our assets. On June 24, 2009, pursuant to the Purchase Agreement, we agreed, that upon consummation of the APA, to assume MediVision’s loan under the Debenture. On October 23, 2009, we entered into a Secured Debenture (the “Secured Debenture”) with United Mizrahi Bank. Under the Secured Debenture we agreed to assume MediVision’s loan under the Debenture in an amount of up to $1,500,000 (the “Loan Amount”). We also agreed to secure the Loan Amount by granting United Mizrahi Bank a security interest in all or substantially all of our assets. Under the Secured Debenture, United Mizrahi Bank may require the immediate payment of the entire Loan Amount upon certain events, which include among other things, our failure to make a payment on a due date or a breach or failure to perform its obligations pursuant to the Secured Debenture. Upon failure to make a payment, we must pay, within seven days, the amount demanded by United Mizrahi Bank. On March 3, 2011 we and United Mizrahi Bank Ltd amended the terms of the Secured Debenture to increase the Loan Amount from $1,500,000 to $2,250,000 and to defer principal payments due thereon for 6 months.
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
The Loan Amount accrues interest at a rate equal to LIBOR plus 4.75%. In addition, principal payments are required to be made in 18 equal monthly installments beginning January 31, 2011. We must maintain a cash balance of at least $400,000 at the United Mizrahi Bank, as long as the loan remains outstanding. As the balance of the deposit is not legally restricted or held as a compensating balance against borrowings, it is not reported as restricted cash on the balance sheet at December 31, 2010. We are also subject to a debt covenant, whereby our cash plus accounts receivable must be at least 150% of the principal and interest outstanding under the loan. We did not make any principal payment to the United Mizrahi Bank in 2010. On March 3, 2011, the Company, entered into a Refinance Agreement (the “Refinance Agreement ”) by and between the Company and Mizrahi Tefahot Bank Ltd. Pursuant to the terms of the Refinance Agreement, Mizrahi Tefahot Bank Ltd. agreed to increase the Loan Amount from $1,500,000 to $2,250,000 and defer principal payments due thereon for 6 months, such that the next principal payment with respect to the Notes will be due July 1, 2011.
Warrant to United Mizrahi Bank
On October 23, 2009, in connection with the assumption of the United Mizrahi loan, we issued to United Mizrahi Bank a warrant (the “Warrant”) to purchase 350,000 shares of our common stock at an exercise price of $1.00 which will expire upon the earlier of October 23, 2012 or twelve months following the completion of (1) a primary public offering of our common stock (a “Public Offering”) or (2) (a) the sale of all or substantially all of our assets or (b) the merger or consolidation of the Company with or into another entity, pursuant to which 50% of the Company’s outstanding common stock is held by person(s) who prior to the transaction held, in aggregate, less than 5% (together, a “Liquidity Event,” and together with a Public Offering, an “Exit Event”); provided however, if the underwriter in a Public Offering or the purchasing person(s) in a Liquidity Event require that all our outstanding warrants and options, including the Warrant be exercised prior to or part of the Public Offering or Liquidity Event, as applicable, then the Warrant will terminate, subject to certain notice requirements, upon completion of such transaction.
The exercise price of the Warrant is $1.00, subject to the happening of certain events, including, but not limited to, the payment of a stock dividend or a stock split. The Warrant also includes certain anti-dilution provisions if we issue or sell any equity securities or securities convertible into equity, options or rights to purchase equity securities at a per share selling price less than the exercise price, then the exercise price will be adjusted pursuant to a weighted-average formula.
Upon or immediately prior to an Exit Transaction, United Mizrahi may elect to waive all or any portion of the rights under the Warrant for $225,000 (the “Alternative Payment”). If only a portion of the Warrant is waived or if the Warrant was partially exercised prior to the Exit Event, the Alternative Payment will be reduced proportionately. In connection with the issuance of the Warrant to United Mizrahi Bank, we record the fair value of the Warrant, using a lattice valuation model, in the balance sheet as a derivative financial liability. Changes in the fair value of the Warrant are reported in earning each reporting period. As of December 31, 2010 and 2009 these options were recorded as derivative financial liability instruments and were at their fair value of $95,130 and $121,485, respectively.
On March 3, 2011, in consideration for the aforementioned refinance of the note, the Company issued warrants to Mizrahi Tefahot Bank Ltd. To purchase an aggregate of 215,000 shares of the Company’s common stock. These Warrants have an exercise price of $1 per share and expire on March 3, 2014.
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
MediVision Loans and Advances
In connection with the MediVision Asset Purchase, management has written off the balance of intercompany indebtedness which was comprised of accounts receivable and notes receivable from MediVision of $450,000 and $3,168,622, respectively, $560,000 in prepaid assets for funds advanced to MediVision in anticipation of the completion of the Electro-optical Unit and $273,808 that we paid to MediVision for exclusivity rights to sell the Electro-optical Unit in the U.S. As of June 30, 2009, based upon revised estimates and the timing of the shifting of our focus from the Electro-optical Unit to other products through the end of 2010, management decided to impair the aggregate balance of intercompany indebtedness and thus, recorded an allowance for doubtful accounts equal to $4,436,187 offsetting each account and thus, recording an impairment expense for the same amount. Following the completion of the MediVision Asset Purchase, management extinguished an additional $16,243 of intercompany notes receivable due from MediVision.
As of December 31, 2010 and 2009, OIS owed MediVision $0 and $41,847, respectively, related to the settlement of its business relationships with MediVision.
Intercompany Transactions
Until October 21, 2009, upon completion of the MediVision Asset Purchase, we were parties to several agreements with MediVision, pursuant to which MediVision performed the following services:
Distributed our WinStation and Symphony Products in Europe, Africa, Israel and India. Products were sold to MediVision at a volume driven discount according to the price list, set forth below. The volume discount table is applicable to all of our distributors, including MediVision. Below is the volume discount table for our distributors for 2009.
In 2009, until the completion of the MediVision Asset Purchase MediVision purchased products of approximately $225,000. Sales derived from product shipments to MediVision are made at transfer pricing which is based on similar volume discounts that are available to other resellers or distributors of our products.
Performed Research and Development. Prior to July 2009, MediVision performed research and development services. MediVision billed us, on a monthly basis, at cost plus 12%. These research and development services include direct labor, consultants’ fees, travel expenses and the applicable portion of general and administrative expenses. During the years ended December 31, 2009 we paid approximately $294,000 to MediVision for research and development services.
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
CCS Pawlowski GmbH
CCS Pawlowski GmbH, a German corporation (“CCS”), was a subsidiary of MediVision which owned 63% of CCS’ ownership interests. We acquired this ownership interest in the MediVision Asset Purchase.
During the years ending December 31, 2009, CCS was our exclusive distributor of certain of our products in Germany and Austria. Products were sold to CCS at a volume driven discount according to the price list, set forth below. The volume discount table is applicable to all of our distributors, including CCS.
During 2009, prior to the MediVision APA, we sold products to CCS of approximately $113,000. After completion of the MediVision Asset Purchase all inter-company amounts were eliminated upon consolidation.
MediStrategy, Ltd.
We entered into a services agreement with MediStrategy Ltd. (“MS”), an Israeli company owned by Noam Allon, the Company’s Chief Technology Officer. All services provided by MS are performed solely by Noam Allon. In 2010 and 2009, in consideration for the services provided, we agreed to pay MS an annual sum of $216,000 and $30,316. In addition, MS is to be paid an annual performance bonus of up to $40,000 upon achievement of goals specified under the terms of the services agreement as determined by MS, Noam Allon, and our Chairman of the Board.
8. SHARE-BASED COMPENSATION
At December 31, 2010, we have five active stock-based compensation plans (the “Plans”). Options granted under these plans generally have a term of ten years from the date of grant unless otherwise specified in the option agreement. The plans generally expire ten years from the inception of the plans. Options granted under these agreements have a vesting period of up to four years. Incentive stock options under these plans are granted at fair market value on the date of grant and non-qualified stock options granted cannot be less than 85% of the fair market value on the date of grant.
A summary of the Company’s plans as of December 31, 2010 is presented below:
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. SHARE-BASED COMPENSATION (CONTINUED)
In calculating compensation recorded related to stock option grants for the year ended December 31, 2010, the fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option-pricing model and the following weighted average assumptions:
The computation of expected volatility used in the Black-Scholes-Merton option-pricing model is based on the historical volatility of our share price. The expected term is estimated based on a review of historical and future expectations of employee exercise behavior.
A summary of the changes in stock options outstanding under our equity-based compensation plans during the fiscal year ended December 31, 2010 is presented below:
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. SHARE-BASED COMPENSATION (CONTINUED)
Options issued to non-employees reflected in the table above include 717,500 options outstanding on January 1, 2010. None of these shares were exercised in 2010. 86,464 options were granted to non-employees in 2010. None of these options lapsed during the year ended December 31, 2010, resulting in 803,964 options outstanding and 647,297 exercisable at December 31, 2010 for non-employees.
The weighted-average grant-date fair value of OIS options granted during 2010 and 2009 was $0.91 and $0.46, respectively. The weighted-average grant-date fair value of OIS options exercised in 2010 was $0.55. There were no OIS options exercised in 2009.
We recorded an incremental expense of $34.667 and $32,220 for stock-based compensation during the years ended December 31, 2010 and 2009, respectively. As of December 31, 2010, we had $26,191 of unrecognized expense related to non-vested stock-based compensation, which is expected to be recognized through 2013. The total fair value of options vested during the years ended December 31, 2010 and 2009 was $34,667 and $32,220, respectively.
A summary of the status of nonvested shares at December 31, 2010 and changes during the year then ended, is presented below:
Non-vested shares relating to non-employees reflected in the table above include 250,000 and 156,667 shares outstanding at January 1, 2010 and December 31, 2010, respectively.
Abraxas
On December 9, 2009 we granted Abraxas employees options to purchase a total of 10,000 shares of Abraxas common stock. The options are exercisable at $5.00 per share, expire on December 9, 2019, and begin vesting quarterly over three years as follows: 34%, 33%, and 33%.
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. FAIR VALUE MEASUREMENT
The following are the methods and assumptions we used to estimate the fair value of our financial instruments
Cash and cash equivalents
Due to their short term nature, carrying amount approximates fair value
Accounts receivable
Due to their short term nature, carrying amount approximates fair value
Trade accounts payable
Due to their short term nature, carrying amount approximates fair value
Long-term debt
Due to the short term nature of the current portion of long-term debt, the carrying amount approximates fair value. The noncurrent portion of long-term debt approximates fair value because of the variable rate terms of these instruments.
Derivative Liability Financial Instruments
Our financial instruments are accounted for at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or price paid to transfer a liability in an orderly transaction between market participants at the measurement date. A market or observable input is the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs.
The standard characterizes inputs used in determining fair value according to a hierarchy that prioritizes those inputs based upon the degree to which they are observable. The three levels of the fair-value-measurement hierarchy are as follows:
·
Level 1 - inputs represent quoted prices in active markets for identical assets or liabilities (for example exchange-traded commodity derivatives).
·
Level 2- inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (for example, quoted market prices for similar assets or liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated inputs).
·
Level 3- inputs that are not observable from objective sources, such as the Company’s internally developed assumptions used in pricing as asset or liability (for example, an estimate of future cash flows used in a company’s internally developed present value in that company’s internally developed present value of future cash flows model that underlies the fair-value measurement).
In determining fair value, we utilize observable market data when available, or models that incorporate observable market data. In addition to market information, we incorporate transaction-specific details that, in management’s judgment, market participants would take into account in measuring fair value.
In arriving at fair-value estimates, we utilize the most observable inputs available for the valuation technique employed. If a fair-value measurement reflects inputs at multiple levels within the hierarchy, the fair-value measurement characterized based upon the lowest level of input that is significant to the fair-value measurement. For us, recurring fair-value measurements are performed for warrant liabilities and embedded conversion option liabilities related to notes payable.
All derivative liability financial instruments are recognized in the balance sheet at their fair value. Changes in the fair values of derivative liability financial instruments are reported in earnings. We do not hold any derivative liability financial instruments that reduce risk associated with hedging exposure and we have not designated any of our derivative liability financial instruments as hedge instruments.
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. FAIR VALUE MEASUREMENT (Continued)
The Company has no items valued using Level 1 and Level 2 inputs. The following table sets forth the fair value hierarchy of the Company’s financial liabilities that were accounted for at fair value on a recurring bases as of December 31, 2010. No asset financial instruments were recorded at fair value on a recurring basis at December 31, 2010 and December 31, 2009.
The following table summarizes the valuation of our financial liabilities by the fair value hierarchy at December 31, 2010 and 2009.
The Company utilizes inputs that are not observable from objective sources, such as the Company’s internally developed assumptions used in pricing as asset or liability. The company market data or assumptions that market participants would use in pricing the liability. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy. The Company uses an income approach to value its convertible debt and warrant derivative liability financial instruments. These instruments are valued using a lattice valuation model using market information as of the reporting date such as prevailing interest rates, the Company’s stock price volatility, and expected term.
There have been no transfers between Level 1, Level 2, or Level 3 categories.
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. FAIR VALUE MEASUREMENT (Continued)
The embedded conversion option listed above was issued in connection with a convertible note issued to The Tail Wind Fund Ltd. and Solomon Strategic Holdings, Inc. (together with The Tail Wind Fund Ltd., the “Holders”). The warrants listed above issued to the Holders were issued on October 27, 2007 and June 24, 2009 (See Note 6). The warrants issued to United Mizrahi Bank listed above were issued on October 26, 2009 (See Note 7). The warrants issued to U.M. AccelMed, Limited Partnership, an Israeli limited partnership (“AccelMed”) listed above were issued to on June 24, 2009 and May 26, 2010 (See Note 7).
The following table summarizes current derivative liability financial instruments.
The activity relating to derivative liability financial instruments valued on a recurring basis utilizing Level 3 inputs for the twelve months ended December 31, 2010 and December 31, 2009 is summarized below:
Conversion Option
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. FAIR VALUE MEASUREMENT (Continued)
The activity relating to derivative liability financial instruments valued on a recurring basis utilizing Level 3 inputs for the twelve months ended December 31, 2010 and December 31, 2009 is summarized below:
Warrants
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES
The income tax expense for the years ended December 31, 2010 and 2009 consisted of the following:
In 2010 and 2009, we determined that it is not more-likely-than-not that we will be able to use any of our deferred tax asset in the future. Accordingly we have recorded a full valuation allowance against our deferred tax assets at December 31, 2010 and 2009.
The Company’s effective tax rate for the years ended December 31, 2010 and 2009 was 3% and 0%. The reconciliation of the statutory rate to the effective rate is as follows:
The Company did not incur material foreign income tax expense as of or for the years ended December 31, 2010 or 2009.
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES (CONTINUED)
The significant components of the Company’s deferred tax assets and liabilities are as follows:
At December 31, 2010 and 2009, management reviewed recent operating results and projected future operating results, as well as the current conditions in the global economy and medical industry. On each of these dates, management determined whether it was more-likely-than-not that a portion of the deferred tax assets attributable to net operating losses would be realized. Net operating loss expire beginning in 2017 through 2030.
We re-evaluate our estimates and assumptions we use in our financial statements on an ongoing and quarterly basis. We adjust these estimates and assumptions as needed and as circumstances change. If circumstances change in the future, we will adjust our estimates and assumptions accordingly. At the present time, we cannot determine whether our assumptions and estimates will change in the future. Based on historical knowledge, however, it is reasonably likely that there will be some changes in some of our estimates and assumptions. The Company did not identify any material uncertain tax positions or record any interest or penalties associated with uncertain tax positions as of and for the years ended December 31, 2010 and 2009. We do not expect the amount of unrecognized tax positions to increase or decrease in the next twelve months. We do not expect the amount of unrecognized tax positions if recognized to affect the effective tax rate in the next twelve months.
11. COMMITMENTS AND CONTINGENCIES
The Company has no significant commitments and contingencies other than as disclosed in these financial statements and notes thereto.
Operating Leases
The Company leases its corporate headquarters and manufacturing facility under a cancelable operating lease that expires in June 2012. The lease agreement provides for minimum lease payments of $143,109 for the twelve months ended December 31, 2011 and $71,555 for the six months ended June 30, 2012. Abraxas leases a facility for their office under a non cancelable operating lease that expires in August 2013. The lease agreement provides for minimum lease payments of $128,503 and $156,751 for the twelve months ending December 31, 2011 and 2012, and $106,975 for the eight months ending August 2013, respectively. Rental expense charged to operations for all operating leases was $256,454 and $220,685 during the years ended December 31, 2010 and 2009, respectively.
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. WARRANTS
Warrant activity for the years ended December 31, 2010 and 2009 is summarized as follows:
There were 6,205,129 warrants outstanding and exercisable as of December 31, 2010 with a weighted average remaining contractual life of 1.57 years and a weighted average exercise price of $1.03. There is no intrinsic value of warrants outstanding at December 31, 2010. There were an aggregate of 4,950,168 warrants outstanding and exercisable as of December 31, 2009 with a weighted average remaining contractual life of 2.59 years, a weighted average exercise price of $1.05. There is no intrinsic value of warrants outstanding at December 31, 2009.
We record the fair value of warrants in the balance sheet as financial liabilities. The fair values of warrants are determined based on a lattice valuation model and changes in the fair value of the warrants are reported in earning each reporting period.
13. OTHER INCOME - SETTLEMENT
On May 3, 2009, we entered into a Confidential Settlement and Mutual Release Agreement (the “Settlement Agreement”) by and between us, Steven Verdooner, OPKO Health, Inc. and The Frost Group, LLC (collectively “Defendants”). Mr. Verdooner was formerly our president. Pursuant to the Settlement Agreement described further under “Legal Proceedings” below, we received a cash settlement of $1,200,000 on May 13, 2009.
14. SUBSEQUENT EVENTS
On March 3, 2011 the Company and United Mizrahi Bank Ltd amended the terms of the Secured Debenture to increase the Loan Amount from $1,500,000 to $2,250,000 and defer principal payments due thereon for 6 months (For additional details on this transaction see Note 7 Related Party Transactions). In consideration for the refinance of the note, the Company issued warrants to Mizrahi Tefahot Bank Ltd. To purchase an aggregate of 215,000 shares of the Company’s common stock. These Warrants have an exercise price of $1 per share and expire on March 3, 2014.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of December 31, 2010, management of the Company, with the participation of the Company’s Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act. Disclosure controls and procedures are defined as the controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act are accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2010, the Company’s disclosure controls and procedures were not effective because of the material weakness described below.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate “internal control over financial reporting” for the Company, as defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting is defined as 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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) 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 (iii) 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. A “material weakness” is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A “control deficiency” exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. 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 the policies or procedures may deteriorate.
Management of the Company, including the Company’s Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework. Management believes that this evaluation provides a reasonable basis for its opinion.
Management identified the following control deficiency as of December 31, 2010 that constituted a material weakness in the Company’s internal control over financial reporting.
The Company did not maintain an effective control over derivative liability financial instrument policies. Management failed to properly analyze, account and record warrant and derivative liability financial transactions.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission applicable to smaller reporting company’s that permit the Company to provide only management’s report in this annual report.
PLAN FOR REMEDIATION OF MATERIAL WEAKNESSES
The Company’s management has been actively engaged in the planning for, and implementation of, remediation efforts to address the material weakness. These remediation efforts are intended both to address the identified material weakness and to enhance our overall financial control environment. The Company plans to implement proper process of consultation with outside consultants in analyzing complex transactions. The Company will enforce the need for proper documentation and analysis of each
significant transaction as noted in each agreement. Accounting position papers will be prepared on a timely manner and will be cleared with the Company’s independent auditors for appropriate accounting.
We recognize that continued improvement in our internal controls is necessary and are committed to continuing our significant investments as necessary to make these improvements in our internal controls over financial reporting other than related to the aforementioned material weakness.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Each director is elected for a one year term until the next annual meeting of shareholders and their successor is elected and qualified.
The following is a list of the names and ages of our directors and executive officers:
Gil Allon has served as a member of our Board of Directors since August 2000, as our Chief Executive Officer since September 2000. Mr. Allon is also a member of the Compensation, Option and Nomination Committees of our Board of Directors. Mr. Allon served as the Vice President and Chief Operating Officer of MediVision from June 1993 until August 2000. Mr. Allon also served as a member of the Board of Directors of MediVision since MediVision’s inception in June 1993 through December 2004. Mr. Allon received his B.A. and M.Sc. in Computer Science, both with distinction, from the Technion Israel Institute of Technology in Haifa, Israel in May 1987 and December 1989, respectively, and his M.B.A. with distinction in Business Management from the University of Haifa in September 1999. The Company believes that Mr. Allon has the qualifications and skills to serve as a Director based upon his technological and business expertise; his more than 16 years experience in the industry; and his more than 20 year experience in executive and managerial positions with the Company and previous positions.
Ariel Shenhar has served as a member of our Board of Directors from August 2000 until February 2011, as our Vice President and Chief Financial Officer since July 2002 and as our Secretary since August 2002. Mr. Shenhar also served as a member of the Board of Directors of MediVision from August 1994 through December 2004 and as its Vice President and Chief Financial Officer from January 1997 until May 2005. Mr. Shenhar served as a member of the Board of Directors of Fidelity Gold Real Estate Markets Ltd., an Israeli public company engaged in real estate, from 1994 to 1998, as an accountant at Nissan Caspi & Co. Certified Public Accountants in Jerusalem, Israel in 1996, and at Witkowski & Co. Certified Public Accountants in Tel Aviv, Israel from 1994 to 1995. Mr. Shenhar received his B.A. in Economics and Accounting in June 1992 and his M.B.A. in Finance, with distinction, in June 1999 both from the Hebrew University in Jerusalem, Israel, and has been a Certified Public Accountant since January 1997.
Noam Allon has served as a member of our Board of Directors from August 2000 until December 31, 2004 and as our Chief Technology Officer since October 21, 2009. Mr. Allon has served as a director and as President and Chief Executive Officer of MediVision since MediVision’s inception in June 1993. Mr. Allon also serves as the CEO of OIS Global, OIS’s Israeli subsidiary, as the General Manager of the company’s European branch in Belgium, as well as the Co-CEO of our German subsidiary, CCS Pawlowski, GmbH. Mr. Allon received his B. Sc. in Computer Science with distinction, from the Technion Israel Institute of Technology in Haifa, Israel in May 1986.
John H. Brown has served as an independent director and Chairman of our Board of Directors since February 2011. Mr. Brown has spent most of his career as a senior executive and director in the technology and pharmaceutical industries in the United States and abroad. From 2002 to 2007, he served as the President, CEO, and Board Member of Integrated Biosystems, Inc., a pharmaceutical machinery manufacturing company. From 2008 to 2010 he was based in London and served as President of European, Middle Eastern and African operations as well as a Corporate Vice President for Bausch & Lomb. Mr. Brown has led restructuring efforts and has overseen the operations of a broad range of companies in the technology and pharmaceutical industries throughout his career. Mr. Brown holds a Master of Business Administration in Finance from Harvard University and a Bachelor of Science in Engineering from Princeton University. The Company believes that Mr. Brown’s financial and business
expertise, including a diversified background of management and directing companies, gave him the qualifications and skills to serve as a Director.
Jonathan R. Phillips has served as an independent director on our Board of Directors since August 2007. Mr. Phillips is currently a member of the Nomination and Compensation Committees of our Board of Directors. Since 2005, Mr. Phillips has been a Managing Director and Founder of Healthcare Growth Partners, a company that specializes in strategic and financial advisory services to healthcare technology companies. Also, he is currently Chairman of the Board of Directors of Streamline Health Solutions, a NASDAQ-listed company, and serves on its strategy, nomination and governance and compensation committees. Prior to founding Healthcare Growth Partners, Mr. Phillips served for five years, from 2000 to 2005, as a healthcare investment banker at William Blair & Company after working at Deloitte Consulting for over five years specializing in projects for healthcare and non-healthcare clients. He received an undergraduate degree from DePauw University and a Masters of Business Administration from Northwestern University. The Company believes that Mr. Phillips has the qualifications and skills to serve as a Director based upon his significant business experience, including a diversified background of managing and directing medical related companies.
Mr. Merle Symes has served as an independent director on our Board of Directors since August 2010. Mr. Symes served as an independent director on our Board of Directors from July 2005 to August 2007. Mr. Symes was also appointed to the Audit and Special Committees of our Board of Directors. Mr. Symes is the President and Founder of The Provenance Group, LLC, a firm specializing in corporate strategy and innovation, entrepreneurial ventures, and technology transfer, which he founded in 2002. From 2007 to 2009, Mr. Symes was President and CEO of Ulrich Medical USA. From 1997 to 2002, Mr. Symes was Vice President External Technology and Director of Corporate Development in the Surgical Division at Bausch & Lomb, Inc. Mr. Symes received his B.S. in Chemical Engineering in 1973 from South Dakota School of Mines and Technology and his M.B.A., in Finance, in 1979 fro m the Wharton School of the University of Pennsylvania. The Company believes that Mr. Symes has the qualifications and skills to serve as a Director based upon his accounting and finance expertise; his more than 13 years experience in the industry; and his more than 13 years of experience in executive and managerial positions in executive and management positions.
Yigal Berman has served as a director on our Board of Directors since August 2010. Mr. Berman is a member of the audit committee. Mr. Berman served as a member of our Board of Directors from January 2005 to March 2009. Mr. Berman also served as Chairman of the Board of Directors from January 2005 to March 2009, as well as Chairman of each of the Audit, Compensation, Option and Nomination Committees of our Board of Directors. Mr. Berman resigned from the board of directors on March 13, 2009. Mr. Berman has also served as a member of the Board of Directors of MediVision from July 1996 through December 2004. He rejoined the Board of directors of MediVision as chairman in September 2009. In addition, since 1991, Mr. Berman has served as Vice President of Finance and Secretary of Intergamma Investment Company Ltd and is serving today as director in all of their subsidiaries. Since 1 989, Mr. Berman has served as a member of the Board of Directors of Delta Trading, the majority shareholder of MediVision. Mr. Berman received his B.A. in Economics and his M.B.A. in Business Management from the Tel Aviv University in Israel in April 1974 and December 1976, respectively. The Company believes that Mr. Berman has the qualifications and skills to serve as a Director based upon his accounting 0and finance expertise; his years of experience on our Board of directors in the past; and his more than 19 years of experience in executive and managerial positions in executive and management positions.
Dr. Uri Geiger has served as a director on our Board of Directors since June 2009. Dr. Geiger is a member of the compensation and nominating committee. In 2008, Dr. Geiger founded AccelMed, a medical device investment company, which owns 44% of our common stock issued and outstanding. Since January 2009, Dr. Geiger has served as Chairman of A.M. AccelMed (1999) Ltd., AccelMed’s general partner. He is also a director with Medical Compression Systems Ltd. (TASE: MDCL) and the Chairman of Exalenz Bioscience Ltd. (TASE: EXEN) as well as a director on the Board of Directors of Edge Medical Ltd., Tau Hedge Funds Management BV, Non-Linear Technologies, and Peer Medical Ltd. From May 2006 to January 2009, Dr. Geiger served as the CEO of Exalenz Bioscience ltd, a developer of diagnostic medical equipment. Dr. Geiger received his doctorate from Columbia University’s Center for Law & Economics. The Company believes that Dr Geiger’s education and business expertise, including a diversified background of management and directing medical device companies, gave him the qualifications and skills to serve as a Director.
Menachem Inbar has served as a director on our Board of Directors since August 2009. Mr. Inbar is the Chairman of the Audit Committee. Mr. Inbar has spent most of his career as a senior executive with the banking industry in Israel and abroad. Since January 2009, he has served as the Head of Family Office of Arkin Holdings, a financial and equity investment firm. From 2000 to 2009, he was the Managing Partner of Shifmen Inbar Ltd., a boutique investment firm. He is currently a director on the boards of Bezeq Ltd., an Israeli telecommunications company, PAGI Bank, a commercial bank and subsidiary of Benleumi Banking Group, and Carmel Group, a real estate company. Mr. Inbar holds a Bachelor of Arts in Social Science and a Master of Arts in Law, both from the Bar Ilan University in Israel. The Company believes that Mr Inbar’s financial and business expertise, including a diversified background of management and directing companies, gave him the qualifications and skills to serve as a Director.
Uri Ram has served as an independent director since March 2009. Mr. Ram is a member of the Compensation, Option and Nominations Committees of our Board. Currently, he serves as the Sr. Vice President and Chief Financial Officer of Gefen Inc. and is the CEO/Owner of Juram Ltd. and Irams Inc., which are management consulting companies that also invest in new startups. Since 1990, Mr. Ram has served as the President of Del-Ta Engineering & Equipment Ltd., a holding company with $30 million in sales. From 1991 to 2003, Mr. Ram served as the Senior VP of Inter-Gamma Investment Ltd. Inter-Gamma Investment Ltd. is a major shareholder of MediVision Medical Imaging Ltd., a significant shareholder. Mr. Ram has a Master of Arts degree from Israel National Defense College, and a Bachelor of Economics and Political sciences from Bar Ilan University and participated in an EMBA program at the Tel Aviv University. Mr. Ram is a retired Brigadier General of the Israeli Air Force. The Company believes that Mr. Ram has the qualifications and skills to serve as a Director based upon his business expertise and his experience in executive and managerial positions.
Dr. Barak Azmon has served as a independent director on our Board of Directors since February 2011. Dr. Azmon has spent most of his career as a senior executive in the medical device and ophthalmology industries and as an Ophthalmologist in Israel and abroad. Since 2007 he has been a Venture Partner in Accuitive Medical Ventures. Since 2001, he has served as the Chief Executive Officer of Notal Vision, a medical device and ophthalmology company. Dr. Azmon earned his doctorate degree from the Ben-Gurion University in Israel. The Company believes that Dr. Azmon has the qualifications and skills to serve as a Director based upon his industry and business expertise, including serving as an executive officer of a medical device companies and his over 10 years as Ophthalmologist.
Pursuant to the Voting Agreement, described below, AccelMed appointed Uri Geiger, Menachem Inbar, and Barak Azmon to serve on our Board of Directors. The MediVision/Principal MV Shareholders Group (as defined therein) appointed Gil Allon, Uri Ram, and Yigal Berman to serve on our Board of Directors. (For additional details of the voting agreement, see Certain Relationships and Related Transactions, AccelMed, Voting Agreement below.)
Independent Directors
The rules of the SEC require that we, because we are not listed on any national securities exchange, choose a definition of director “independence” for purposes of determining which directors are independent. We have chosen to follow the definition of independence as determined by the Marketplace Rules of The Nasdaq National Market (“NASDAQ”). Pursuant to NASDAQ’s definition, John Brown, Uri Ram, Jonathan Phillips, Barak Azmon, and Merle Symes are independent directors.
Gil Allon, who is not an independent director, is currently a member of the nominations and compensation committees of our board of directors.
Audit Committee
We have an audit committee established by and amongst our board of directors for the purpose of overseeing our accounting and financial reporting processes and audits of our financial statements. This Audit Committee is comprised of Uri Ram, Yigal Berman, Merle Symes, and Menachem Inbar. Our Board of Directors has determined that Yigal Berman, a member of the Audit Committee, qualifies as an audit committee financial expert. This qualification is based upon his education and experience, more fully described above in his biography.
Section 16 (a) Beneficial Ownership Reporting Compliance
Section 16 (a) of the Exchange Act requires our directors, executive officers and holders of more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other of our equity securities.
To our knowledge, based solely on review of the Forms 3 and 4 furnished to us during the year ended December 31, 2010, our acting officers, directors and beneficial owners of more than 10% of our outstanding common stock filed, on a timely basis, all reports required by Section 16(a) of the Exchange Act except as follows: Gil Allon failed to timely file three Forms 4 reporting three separate transactions; MediVision Medical Imaging, Ltd. failed to timely file five Forms 4 reporting five separate transactions; and U.M. AccelMed, Limited Partnership failed to timely file one Form 4 reporting one transaction.
(d) Code of Ethics
We have adopted a Code of Ethics that applies to our principal executive officer and principal financial officer. Our Code of Ethics is attached to this Form 10-K as Exhibit 14. We will provide to any person upon request, without charge, a copy of the Code of Ethics. Such request is to be submitted in writing to us at: Ophthalmic Imaging Systems, Attention: Ariel Shenhar, 221 Lathrop Way, Suite I, Sacramento, California 95815.
(e) Nomination Procedures
There were no material changes to the procedures by which security holders may recommend nominees to our board of directors since filing the proxy statement on Form 14A with the SEC on July 26, 2010.
Item 11.
Item 11. Executive Compensation
The following table shows the total compensation that we paid to Gil Allon, our chief executive officer, Ariel Shenhar, our chief financial officer, and Noam Allon, our chief technology officer for the last two fiscal years. Mr. N. Allon assumed duties as an executive officer on October 21, 2009 when he transitioned from a MediVision representative to an OIS executive officer with the completion of the MediVision Asset Purchase. (For additional details of the MediVision Asset Purchase, see Consolidated Financial Statements for the Year Ended December 31, 2010, Notes to Consolidated Financial Statements, Note 7. Related party transactions, MediVision Asset Purchase). No other executive officer received more than $100,000 in total compensation during the last two fiscal years. Therefore, for purposes of this disclosure, Messrs. G. Allon, A. Shenhar and N. Allon are our only “named executive officers” for the last two fiscal years.
.
SUMMARY COMPENSATION TABLE
(1)
Gil Allon’s 2009 salary represents his annual salary of $218,000 less $43,600, or 20% of his annual salary, which was received in the form of an option to purchase 272,500 shares of common stock on January 6, 2009.
(2)
(3)
Gil Allon’s 2010 bonus is accrued as of December 31, 2010 and not paid as of April 8, 2011
Option awards represent the grant date fair value of stock options granted to Gil Allon our CEO on January 6, 2009 and November 18, 2009.
On January 6, 2009, we granted Gil Allon, our CEO, an option to purchase 272,500 shares of our common stock. The options, vested in 12 equal monthly installments beginning on January 31, 2009, are exercisable at $0.16 per share and expire on January 6, 2019. These options were granted in lieu of $43,600 or 20% of Gil Allon’s annual salary.
On November 18, 2009, we granted Gil Allon, our CEO, an option to purchase 242,141 shares of common stock. The options vest in 4 equal semi-annual installments beginning on May 18, 2010, are exercisable at $0.65 per share and expire on November 18, 2019. (See Financial Statements for the Year Ended December 31, 2009, Notes to Consolidated Financial Statements, Note 8. Share-Based Compensation for the assumptions used to calculate the grant date fair value of the stock option award. See also Outstanding Equity Awards at Fiscal Year-End Table below.)
(4)
Represents automobile expenses we paid for on behalf of Mr. Allon.
(5)
(6)
Ariel Shenhar’s 2009 salary represents his annual salary of $212,000 less $42,400, or 20% of his annual salary, which was received in the form of an option to purchase 265,000 shares of common stock granted on January 6, 2009
Ariel Shenhar’s 2010 bonus is accrued as of December 31, 2010 and not paid as of April 8, 2011.
(7)
Option awards represent the fair value of stock options granted to Ariel Shenhar on January 6, 2009 and November 18, 2009.
On January 6, 2009, we granted Ariel Shenhar, our CFO, an option to purchase 265,000 shares of our common stock. The options, vested in 12 equal monthly installments beginning on January 31, 2009, are exercisable at $0.16 per share and expire on January 6, 2019. These options were granted in lieu of $42,600 or 20% of Ariel Shenhar’s annual salary.
On November 18, 2009, we granted Ariel Shenhar, our CFO, an option to purchase 318,285 shares of common stock for compensation The options were valued at the grant date fair value, vest in 4 equal semi-annual installments beginning on May 18, 2010, are exercisable at $0.65 per share and expire on November 18, 2019. (See Financial Statements for the Year Ended December 31, 2009, Notes to Consolidated Financial Statements, Note 8. Share-Based Compensation for the assumptions used to calculate the grant date fair value of the stock option award. See also Outstanding Equity Awards at Fiscal Year-End Table below.)
(8)
(9)
(10)
Represents automobile expenses we paid on behalf of Mr. Shenhar.
Ariel Shenhar’s 2009 bonus was paid in 2010.
Noam Allon’s 2010 bonus is accrued as of December 31, 2010 and not paid as of April 8, 2011
(11)
Noam Allon’s 2009 salary represents his fee from the time he assumed duties as an executive officer on October 21, 2009 when he transitioned from a MediVision representative to an OIS executive officer, with the completion of the MediVision Asset Purchase. (For additional details of the MediVision Asset Purchase, see Financial Statements for the Year Ended December 31, 2009, Notes to Consolidated Financial Statements, Note 7. Related party transactions, MediVision Asset Purchase).
(12)
(13)
Noam Allon’s 2009 bonus was paid in 2010.
On December 23, 2009, we granted Noam Allon, Chief Technology Officer, an option to purchase 180,000 shares of common stock. The options were valued at the grant date fair value of the options, vested in 4 equal semi-annual installments beginning on June 23, 2010, are exercisable at $0.84 per share and expire on December 23, 2019. These options were granted in lieu of $29,642, or 20% of his annual fee. (See Financial Statements for the Year Ended December 31, 2009, Notes to Consolidated Financial Statements, Note 8. Share-Based Compensation for the assumptions used to calculate the grant date fair value of the stock option award. See also Outstanding Equity Awards at Fiscal Year-End Table below.)
Employment Agreements
We entered into an employment agreement with Mr. G. Allon for his services as Chief Executive Officer on December 1, 2001. The agreement provides for an indefinite term. Mr. G. Allon is also eligible to participate in our health and welfare insurance plans and is provided an automobile for business use. Either party may terminate the employment agreement upon six months advance notice. The agreement, as amended, sets Mr. G. Allon’s annual salary at $218,000. In January 2009, Mr. G. Allon agreed to waive his bonus plan for 2008 and 2009 which allowed him to earn a maximum bonus of $65,000 per year and to reduce his salary by 20% for 2009. He received options in lieu of the reduction in salary.
We also entered into an employment agreement with Mr. Shenhar for his services as Chief Financial Officer, commencing on July 22, 2002. Mr. Shenhar is also eligible to participate in our health and welfare insurance plans and is provided an automobile for business use. Either party may terminate the agreement upon six months advance notice. The agreement, as amended, sets Mr. Shenhar’s annual salary at $212,000. In January 2009, Mr. Shenhar agreed to waive his bonus plan for 2008 and 2009 which allowed him to earn a maximum bonus of $55,000 per year and to reduce his salary by 20% for 2009. He received options in lieu of the reduction in salary.
On October 21, 2009, in connection with the consummation of the MediVision Asset Purchase. Mr. N. Allon assumed duties as an executive officer. In January 2004 we entered into a services agreement with MediStrategy Ltd. (“MS”), an Israeli company owned by Mr. N. Allon, for his services as our Chief Technology Officer. This agreement between OIS and MS was terminated effective January 1, 2010. On December 23, 2009, Mr. N. Allon received stock options in lieu of the reduction of his fees. In addition, Mr. N. Allon received a $50,000 bonus plan for 2009, based on achieving specific milestones. As of January 1, 2010, OIS Global signed an agreement with MS for Noam Allon’s consulting service. Under the terms of the agreement, MS is to be compensated $13,272 monthly for Noam Allon’s services effective October 1, 2009 through December 31, 2009 and approximately $18,000 monthly effective January 1, 2010 through December 31, 2010.
(1)
These options were issued to Mr. Allon in lieu of $43,600, which comprised 20% of his annual salary for fiscal 2009. The options are valued at $2,686, the grant date fair value.
(2)
These options have not vested. They vest equally over two years every 6 months (1/4 every 6 months) beginning in May 18, 2010.
(3)
These options were issued to Mr. Shenhar in lieu of $42,400, which comprised 20% of his annual salary for fiscal 2009. The options are valued at $2,612, the grant date fair value.
(4)
These options have not vested. They vest equally over two years every 6 months (1/4 every 6 months) beginning in May 18, 2010.
(5)
On December 23, 2009, we granted Noam Allon, Business Development Officer, options to purchase 180,000 shares of common stock in lieu of $29,642, which comprised of 20% of his 2009 annual fee. The options vest in 4 equal semi-annual installments beginning on June 23, 2010, are exercisable at $0.84 per share and expire on December 23, 2019.
Compensation of Directors
(1)
Mr. Phillips received $20,000 for his services as a Director.
(2)
(3)
(4)
Mr. Symes joined the board in August 2010. During 2010 he earned a fee of $5,000 and $260 for the reimbursement of out of pocket expenses.
Mr. Berman jointed the board in August 2010. During 2010 he received $5,000 for his services as a Director and $3,729 for the reimbursement of out of pocket expenses.
Mr. Ram received $18,000 for his services as a Director and $1,738 for the reimbursement of out of pocket expenses.
(5)
Dr Geiger received $15,000 for his services as a Director and $337 for the reimbursement of out of pocket expenses.
(6)
Mr. Inbar received $15,000 for his services as a Director and $3,391 for the reimbursement of out of pocket expenses.
Director Compensation Arrangements
Pursuant to a letter agreement executed on August 31, 2007 between Mr. Phillips and us, and as amended on October 30, 2009, we agreed to the following in connection with his service as a director: (i) to pay Mr. Phillips, in four equal quarterly installments, an annual retainer in the aggregate amount of $20,000 for attendance at up to three Board or Committee meetings per quarter, (ii) to pay Mr. Phillips a fee of $100 per hour, not to exceed $500 per day, for attendance at meetings in excess of three Board meetings per quarter.
Pursuant to a letter agreement dated October 29, 2010 between Mr. Symes and OIS, OIS agreed, in connection with his service as a director, to pay Mr. Symes, in four equal quarterly installments, an annual retainer in the aggregate amount of $20,000 and reimburse for travel expenses according to our travel policy.
Pursuant to a board resolution on December 15, 2010, we agreed, in connection with his service as a director, to pay Mr. Berman, in four equal quarterly installments, an annual retainer in the aggregate amount of $20,000.
Pursuant to a letter agreement dated October 1, 2010 between Mr. Ram and us, we agreed, in connection with his service as chairman of the board: to pay Mr. Ram, in four equal quarterly installments, an annual retainer in the aggregate amount of $30,000. On February 11, 2010, Mr. Ram ceased being the Chairman of the Board of Directors and, therefore, his annual compensation was reduced to $20,000.
Pursuant to the Voting Agreement, AccelMed appointed Uri Geiger and Menachem Inbar to serve on our Board of Directors. Pursuant to this agreement, we have agreed to pay $20,000 per year to Uri Geiger and Menachem Inbar. For more information on this agreement see Item 10, Directors, Executive Officers and Corporate Governance section, See also Financial Statements for the year ending December 31, 2009, Notes to Consolidated Financial Statements, Note 7 Related Party Transactions, U.M. AccelMed, Limited Partnership.
No standard arrangement regarding compensation of the directors has been adopted by the Board and, except as noted above, we have not paid any director compensation.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth as of April 8, 2011, certain information regarding the ownership of our voting securities by each shareholder known to our management to be (i) the beneficial owner of more than 5% of the our outstanding common stock, (ii) our directors during the last fiscal year and nominees for director, and (iii) all executive officers and directors as a group. Unless otherwise noted, we believe that the beneficial owners of the common stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares. Unless otherwise noted, the address of each beneficial owner named below is our corporate address.
_________________
* Less than 1% ownership
(1)
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. Under those rules and for purposes of the table above (a) if a person has decision making power over either the voting or the disposition of any shares, that person is generally deemed to be a beneficial owner of those shares; (b) if two or more persons have decision making power over either the voting or the disposition of any shares, they will be deemed to share beneficial ownership of those shares, in which case the same shares will be included in share ownership totals for each of those persons; and (c) if a person held options to purchase shares that were exercisable on, or became exercisable within 60 days of April 8, 2011, 2011, that person will be deemed to be the beneficial owner of those shares and those shares (but not shares that are subject to options held by any other stockholder) will be deemed to be outstanding for purposes of computing the percentage of the outstanding shares that are beneficially owned by that person.
(2)
Represents options to purchase 1,063,035 shares of common stock, indirect beneficial ownership by spouse of stock options to purchase 60,000 shares and 60,000 shares of common stock.
(3)
Represents options to purchase 929,143 shares of common stock and 30,000 shares of common stock.
(4)
Represents shares subject to stock options.
(5)
Represents options to purchase 60,000 shares of common stock and 15,000 shares of common stock.
(6)
Represents shares subject to stock options.
(7)
Represents shares subject to stock options.
(8)
(9)
(10)
(11)
(12)
(13)
.Represents options to purchase 30,000 shares of common stock
Represents options to purchase 30,000 shares of common stock
Represents options to purchase 30,000 shares of common stock
Represents options to purchase 30,000 shares of common stock
Represents options to purchase 30,000 shares of common stock
Represents options to purchase 2,677,178 shares of common stock and 105,000 shares of common stock
(14)
The members of the Board of Directors of MediVision hold sole voting and dispositive power over the shares of Common Stock beneficially owned by MediVision. The members of MediVision’s Board of Directors are Noam Allon, Yigal Berman, Doron Maor, Mira Nesher and Amnon Roffe. MediVision’s Board may act upon approval of a majority of the board present and voting on an action, assuming a quorum is met. Each of Noam Allon, Yigal Berman, Doron Maor, Mira Nesher and Amnon Roffe expressly disclaims any equitable or beneficial ownership of the shares of Common Stock beneficially owned by MediVision.
(15)
Represents shares of common stock.
(16)
Moshe Arkin shares voting and dispositive power over the shares of Common Stock held by AccelMed with M. Arkin (1999) Ltd., A.M. AccelMed Management (2009), Ltd. and U.M. AccelMed. Mr. Arkin is the sole director and beneficial owner of 99.9% of the outstanding shares of M. Arkin (1999) Ltd., which beneficially owns 80% of A.M. AccelMed Management (2009), Ltd., which is the general partner of AccelMed. Each of Mr. Arkin, M. Arkin (1999) Ltd. and A.M. AccelMed Management (2009), Ltd. expressly disclaim equitable and beneficial ownership of the shares of Common Stock held by AccelMed.
(17)
Represents 13,338,603 shares of our common stock and warrants to purchase 4,404,772 of our common stock at $1.00 per share, respectively
(18)
(19)
David Crook is the CEO and controlling shareholder of Tail Wind Advisory & Management Ltd., a UK corporation authorized and regulated by the Financial Services Authority of Great Britain, which is the investment manager for Tail Wind. Mr. Crook may be deemed to share voting and dispositive power with Tail Wind over the shares of Common Stock held by Tail Wind. Each of Mr. Crook and Tail Wind Advisory & Management Ltd. expressly disclaim equitable and beneficial ownership of the shares of Common Stock held by Tail Wind.
Represents 131,868 shares of common stock, 920,097 of shares issuable upon conversion of Convertible Notes due February 28, 2011, and warrants to purchase 1,239,396 of our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information, as of December 31, 2010, with respect to our equity compensation plans:
(3)
Includes 1,213,836 shares subject to options granted under the 2000 Stock Option Plan (the “2000 Plan”), an option to purchase 159,964 shares of our common stock which was issued to Alon Baraket for acting as the placement agent in the sale and issuance of securities to AccelMed, and an option to purchase 180,000 shares of our common stock which was issued to Noam Allon for consulting services during 2009.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
(a) Related Party Transactions
See Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 7. Related Party Transactions.
(b) Significant ownership
AccelMed holds a 44% ownership of our common stock.
MediVision holds a 29% ownership of our common stock.
(c) Directors
John Brown, Uri Ram, Jonathan Phillips, Barak Azmon, and Merle Symes are independent directors as defined by the NASDAQ Marketplace Rules. Gil Allon, who is not an independent director, is a member of the Compensation and Nomination Committee of our Board of Directors.
Item 14.
Item 14. Principal Accounting Fees and Services
For the fiscal years ended December 31, 2010 and December 31, 2009, Perry-Smith LLP has billed us the following fees for services rendered in connection with the audit and other services in respect to these years:
(1)
Services rendered for the audit of our annual financial statements included in our report on Form 10-K and the reviews of the financial statements included in our reports on Form 10-Q filed with the SEC.
(2)
Services in connection with the preparation of tax returns and the provision of tax advice.
(3)
Services related to Form S-1 and other miscellaneous securities filings.
All (100%) of the fees described above were approved by our Audit Committee.
It is the Audit Committee’s policy to pre-approve all audit and non-audit engagements of our independent auditor.
Item 15.
Item 15. Exhibits, Financial Statement Schedules
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statement of Operations
Consolidated Statement of Stockholders’ Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Exhibit
Number
Description of Exhibit
Footnote Reference
2.1
Asset Purchase Agreement dated June 24, 2009, by and between Ophthalmic Imaging Systems and MediVision Medical Imaging Ltd.
(5)
3.1
Articles of Incorporation of Ophthalmic Imaging Systems.
(1)
3.2
Amendment to Articles of Incorporation (Certificate of Determination of Preferences of Series A Junior Participating Preferred Stock of Ophthalmic Imaging Systems).
(2)
3.3
Amendment to Articles of Incorporation (Certificate of Determination of Preferences of Series B Preferred Stock of Ophthalmic Imaging Systems).
(3)
3.4
Certificate of Amendment to Articles of Incorporation of Ophthalmic Imaging Systems.
(4)
3.5
Amended and Restated Bylaws of Ophthalmic Imaging Systems.
(4)
4.1
Specimen of Stock Certificate.
(1)
Exhibit
Number
Description of Exhibit
Footnote Reference
4.2
Purchase Agreement dated October 29, 2007 among Ophthalmic Imaging Systems, The Tail Wind Fund Ltd. and Solomon Strategic Holdings, Inc.
(7)
4.3
Form of Convertible Notes dated October 29, 2007 issued to The Tail Wind Fund Ltd. and Solomon Strategic Holdings, Inc.
(7)
4.4
Form of Warrant dated October 29, 2007 issued to The Tail Wind Fund Ltd. and Solomon Strategic Holdings, Inc.
(7)
4.5
Registration Rights Agreement dated October 29, 2007 by and among Ophthalmic Imaging Systems, The Tail Wind Fund Ltd., and Solomon Strategic Holdings, Inc.
(7)
4.6
Warrant dated June 24, 2009, issued in favor of U.M. AccelMed, Limited Partnership
(5)
4.7
Warrant dated May 25, 2010, issued in favor of U.M. AccelMed, Limited Partnership
(6)
4.8
Warrant agreement dated March 3, 2011 between Ophthalmic Imaging Systems and Mizrahi Tefahot Bank Ltd.
*
10.1
Lease Agreement, dated as of April 21, 2001, between Ophthalmic Imaging Systems and Jackson-Jahn, Inc.
(8)
10.2
First Amendment to the Lease Agreement dated as of April 21, 2001 between Ophthalmic Imaging Systems and Jackson-Jahn, Inc.
(9)
10.3
Second Amendment to the Lease Agreement dated as of April 21, 2001 between Ophthalmic Imaging Systems and Jackson-Jahn, Inc.
(9)
10.4
Assignment dated October 23, 1990 of U.S. Patent Application for Apparatus and Method for Topographical Analysis of the Retina to Ophthalmic Imaging Systems by Steven R. Verdooner, Patricia C. Meade and Dennis J. Makes (as recorded on Reel 5490, Frame 423 in the Assignment Branch of the U.S. Patent and Trademark Office).
(1)
10.5
Form of International Distribution Agreement used by Ophthalmic Imaging Systems and sample form of End User Software License Agreement.
(1)
10.6
Rental Agreement dated May 1, 1994 by and between Ophthalmic Imaging Systems and Robert J. Rossetti.
(10)
Exhibit
Number
Description of Exhibit
Footnote Reference
10.7
Ophthalmic Imaging Systems’ 1997 Nonstatutory Stock Option Plan and sample form of Nonstatutory Stock Option Agreement.
(11)+
10.8
Form of Indemnification Agreement between Ophthalmic Imaging Systems and each of its directors, officers and certain key employees.
(12)
10.9
Cooperation and Project Funding Agreement dated January 21, 2001, among Israel- United States Binational Industrial Research and Development Foundation, MediVision and Ophthalmic Imaging Systems.
(13)
10.10
2000 Stock Option Plan.
(8)+
10.11
2003 Stock Option Plan.
(14)
10.12
2005 Stock Option Plan.
(4)+
10.13
2009 Stock Option Plan.
(4)+
10.14
2010 Stock Option Plan.
(18)+
10.15
Loan and Security Agreement dated as of February 28, 2005 by and between Ophthalmic Imaging Systems and MediVision Medical Imaging Ltd.
(9)
10.16
Promissory Note dated as of February 28, 2005 by and between Ophthalmic Imaging Systems and MediVision Medical Imaging Ltd.
(9)
10.17
Secured Debenture dated as of July 20, 2005 by and between Ophthalmic Imaging Systems and United Mizrahi Bank Ltd.
(15)
10.18
Research and Development Services Agreement dated as of January 1, 2004 by and between Ophthalmic Imaging Systems and MediVision Medical Imaging Ltd.
(15)
10.19
Distribution Agreement dated as of February 14, 2006 by and between Ophthalmic Imaging Systems and CCS Pawlowski GmbH.
(15)
10.20
Distribution Agreement dated as of January 1, 2004 by and between Ophthalmic Imaging Systems and MediVision Medical Imaging Ltd. and Addendum thereto dated December 9, 2005.
(15)
10.21
Services Agreement dated as of January 1, 2004 by and between Ophthalmic Imaging Systems, MediStrategy Ltd. and Noam Allon and Addendum thereto dated September 30, 2005.
(15)
10.22
Employment Agreement dated December 1, 2001 between Ophthalmic Imaging Systems and Gil Allon.
(16)+
10.23
Amendment to Employment Agreement dated April 12, 2006 between Ophthalmic Imaging Systems and Gil Allon.
(16)+
10.24
Employment Agreement dated July 11, 2002, between Ophthalmic Imaging Systems and Ariel Shenhar.
(16)+
10.25
Amendment to Employment Agreement dated December 3, 2003, between Ophthalmic Imaging Systems and Ariel Shenhar.
(16)+
Exhibit
Number
Description of Exhibit
Footnote Reference
10.26
Amendment to Employment Agreement dated February 29, 2004, between Ophthalmic Imaging Systems and Ariel Shenhar.
(16)+
10.27
Amendment to Employment Agreement dated April 12, 2006, between Ophthalmic Imaging Systems and Ariel Shenhar.
(16)+
10.28
Letter Agreement dated March 12, 2009, between Ophthalmic Imaging Systems and Uri Ram.
(4)+
10.30
Letter Agreement dated August 31, 2007, between Ophthalmic Imaging Systems and William Greer.
(4)+
10.31
Letter Agreement dated October 30, 2009, between Ophthalmic Imaging Systems and William Greer.
(4)+
10.32
Letter Agreement dated August 31, 2007, between Ophthalmic Imaging Systems and Jonathan Phillips.
(4)+
10.33
Letter Agreement dated October 30, 2009, between Ophthalmic Imaging Systems and Jonathan Phillips.
(4)+
10.34
Letter Agreement dated October 29, 2010, between Ophthalmic Imaging Systems and Merle Symes.
*+
10.35
Letter Agreement dated February 8, 2011, between Ophthalmic Imaging Systems and John Brown
* +
10.36
Letter Agreement dated February 8, 2011, between Ophthalmic Imaging Systems and Barak Azmon.
*+
10.37
Purchase Agreement dated June 24, 2009, by and between Ophthalmic Imaging Systems and U.M. AccelMed, Limited Partnership.
(5)
10.39
Agreement dated June 24, 2009, by and among U.M. AccelMed, Limited Partnership, MediVision Medical Imaging Ltd., Agfa Gevaert N.V., Delta Trading and Services (1986) Ltd., Gil Allon, Noam Allon, Ariel Shenhar and Yuval Shenhar. 10.38
Form of Indemnification Agreement.
(5)
10.40
Extension Agreement dated June 24, 2009, by and between the Company, The Tail Wind Fund Ltd. and Solomon Strategic Holdings.
(5)
Code of Ethics.
(9)
23.1
Consent of Perry-Smith LLP, Independent Auditors.
*
31.1
Certification of Principal Executive Officer Required Under Section 302 of Sarbanes-Oxley Act of 2002.
*
31.2
Certification of Principal Financial Officer Required Under Section 302 of Sarbanes-Oxley Act of 2002.
*
Certification of Principal Executive Officer and Principal Financial Officer Required Under Section 906 of Sarbanes-Oxley Act of 2002.
*
________________________
*
Filed herewith.
+
Management contract or compensatory plan or arrangement.
(1)
Incorporated by reference to Ophthalmic Imaging Systems’ Registration Statement on Form S-18, number 33-46864-LA.
(2)
Incorporated by reference to Exhibit A of Exhibit 1 of Ophthalmic Imaging Systems’ Form 8-K, filed on January 2, 1998.
(3)
Incorporated by reference to Exhibit 3.1 of Ophthalmic Imaging Systems’ Form 8-K, filed on November 24, 1999.
(4)
Incorporated by reference to Ophthalmic Imaging Systems Annual report on Form 10-K for the fiscal year ended December 31, 2009, filed on March 29, 2010.
(5)
Incorporated by reference to Ophthalmic Imaging Systems Form 8-K filed on June 29, 2009
(6)
Incorporated by reference to Ophthalmic Imaging Systems Form 8-K filed on May 27, 2010
(7)
Incorporated by reference to Ophthalmic Imaging Systems’ Form 8-K filed on October 31, 2007.
(8)
Incorporated by reference to Ophthalmic Imaging Systems’ Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001, filed on March 26, 2002.
(9)
Incorporated by reference to Ophthalmic Imaging Systems’ Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004, filed on March 18, 2005.
(10)
Incorporated by reference to Ophthalmic Imaging Systems’ Annual Report on Form 10-K for the fiscal year ended August 31, 1994, filed on November 29, 1994.
(11)
Incorporated by reference to Ophthalmic Imaging Systems’ Quarterly Report on Form 10-QSB for the quarterly period ended November 30, 1997, filed on January 14, 1998.
(12)
Incorporated by reference to Ophthalmic Imaging Systems’ Annual Report on Form 10-KSB for the fiscal year ended August 31, 1998, filed on December 15, 1998.
(13)
Incorporated by reference to Ophthalmic Imaging Systems’ Annual Report on Form 10-K for the transition period from September 1, 2000 to December 31, 2000, filed on March 29, 2001.
(14)
Incorporated by reference to Ophthalmic Imaging Systems’ Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed on March 25, 2004.
(15)
Incorporated by reference to Exhibit 99.2 of Ophthalmic Imaging Systems’ Form 8-K filed on July 25, 2005.
(16)
Incorporated by reference to Ophthalmic Imaging Systems’ Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006, filed on March 29, 2006.
(17)
Incorporated by reference to Ophthalmic Imaging Systems’ Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed on March 29, 2010.
(18)
Incorporated by reference to Ophthalmic Imaging Systems’ Form S-8 Registration Statement, file on November 2, 2010.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.