UNITED STATES
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
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For the quarterly period ended March 31, 2009
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Commission File Number: 1-11140
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OPHTHALMIC IMAGING SYSTEMS |
|
California |
| 94-3035367 |
(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
incorporation or organization) |
|
|
221 Lathrop Way, Suite I, Sacramento, CA 95815
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(916) 646-2020 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x | No o |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o | No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | o |
Non-Accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes x | No o |
As of May 14, 2009, 16,866,831 shares of common stock, no par value, were outstanding.
OPHTHALMIC IMAGING SYSTEMS
FORM 10-Q
FOR THE QUARTER ENDED March 31, 2009
PART I FINANCIAL INFORMATION
FINANCIAL STATEMENTS |
1
Ophthalmic Imaging Systems
Condensed Consolidated Balance Sheets
Assets | March 31, 2009 |
| December 31, 2008 |
| ||
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents | $ | 1,097,788 |
| $ | 2,224,625 |
|
Accounts receivable, net |
| 1,581,717 |
|
| 1,698,093 |
|
Receivables from related parties |
| 517,300 |
|
| 500,365 |
|
Note receivable from related party |
| 3,080,282 |
|
| 2,878,234 |
|
Inventories |
| 1,057,182 |
|
| 1,206,733 |
|
Prepaid expenses and other current assets |
| 193,292 |
|
| 233,418 |
|
Total current assets |
| 7,527,561 |
|
| 8,741,468 |
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Furniture and equipment, net of accumulated depreciation of $813,341 and $763,240 respectively |
| 386,428 |
|
| 409,280 |
|
Restricted cash |
| 158,172 |
|
| 158,031 |
|
Licensing agreement |
| 273,808 |
|
| 273,808 |
|
Prepaid financing |
| 72,134 |
|
| 88,780 |
|
AcerMed asset purchase |
| 570,077 |
|
| 570,077 |
|
(Accumulated amortization – AcerMed asset purchase) |
| (47,506 | ) |
| — |
|
Capitalized imaging software |
| 504,711 |
|
| 424,244 |
|
(Accumulated amortization – Capitalized imaging software) |
| (42,059 | ) |
| — |
|
Capitalized software development |
| 1,150,831 |
|
| 1,150,831 |
|
(Accumulated amortization – Capitalized software development) |
| (95,903 | ) |
| — |
|
Prepaid products |
| 460,000 |
|
| 460,000 |
|
Other assets |
| 266,972 |
|
| 348,190 |
|
Total assets | $ | 11,185,226 |
| $ | 12,624,709 |
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|
|
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|
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Liabilities and Stockholders’ Equity |
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|
|
|
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Current liabilities: |
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|
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|
|
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Accounts payable | $ | 471,412 |
| $ | 831,980 |
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Accrued liabilities |
| 902,231 |
|
| 1,072,551 |
|
Deferred extended warranty revenue |
| 2,348,877 |
|
| 1,910,824 |
|
Customer deposits |
| 44,191 |
|
| 101,679 |
|
Notes payable- current portion |
| 1,641,082 |
|
| 1,611,063 |
|
Total current liabilities |
| 5,407,793 |
|
| 5,528,097 |
|
|
|
|
|
|
|
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Noncurrent liabilities: |
|
|
|
|
|
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Line of credit |
| 150,000 |
|
| 150,000 |
|
Notes payable, less current portion |
| 272,927 |
|
| 500,159 |
|
Total liabilities |
| 5,830,720 |
|
| 6,178,256 |
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
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Common stock, no par value, 35,000,000 shares authorized; 16,866,831 issued and outstanding |
| 16,513,832 |
|
| 16,504,773 |
|
Additional paid-in-capital |
| 7,908 |
|
| 966 |
|
Accumulated deficit |
| (11,167,234 | ) |
| (10,059,286 | ) |
Total stockholders’ equity |
| 5,354,506 |
|
| 6,446,453 |
|
Total liabilities and stockholders’ equity | $ | 11,185,226 |
| $ | 12,624,709 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Ophthalmic Imaging Systems
Condensed Consolidated Statements of Operations
|
| Three months ended March 31, |
| ||||
|
| 2009 |
| 2008 |
| ||
Sales – products |
| $ | 1,325,023 |
| $ | 2,117,654 |
|
Cost of sales – products |
|
| 690,330 |
|
| 1,040,570 |
|
Gross profit – products |
|
| 634,693 |
|
| 1,077,084 |
|
|
|
|
|
|
|
|
|
Sales – products to related parties |
| $ | 119,080 |
| $ | 161,799 |
|
Cost of sales – products to related parties |
|
| 65,482 |
|
| 102,471 |
|
Gross profit – products to related parties |
|
| 53,598 |
|
| 59,328 |
|
|
|
|
|
|
|
|
|
Sales – service |
| $ | 965,428 |
| $ | 868,239 |
|
Cost of sales – service |
|
| 329,184 |
|
| 400,791 |
|
Gross profit – service |
|
| 636,244 |
|
| 467,448 |
|
|
|
|
|
|
|
|
|
Net revenues |
| $ | 2,409,531 |
| $ | 3,147,692 |
|
Cost of sales |
|
| 1,084,996 |
|
| 1,543,832 |
|
Gross profit |
|
| 1,324,535 |
|
| 1,603,860 |
|
Operating expenses: |
|
|
|
|
|
|
|
Sales and marketing |
|
| 904,156 |
|
| 944,009 |
|
General and administrative |
|
| 511,023 |
|
| 523,016 |
|
Research and development |
|
| 710,344 |
|
| (3,667 | ) |
Research and development – related parties |
|
| 260,898 |
|
| 440,644 |
|
Total operating expenses |
|
| 2,386,421 |
|
| 1,904,002 |
|
Loss from operations |
|
| (1,061,886 | ) |
| (300,142 | ) |
Interest and other expense, net |
|
| (43,910 | ) |
| (33,223 | ) |
Net loss before income taxes |
|
| (1,105,796 | ) |
| (333,365 | ) |
Income taxes |
|
| (2,153 | ) |
| (1,286 | ) |
|
|
|
|
|
|
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Net loss |
| $ | (1,107,949 | ) | $ | (334,651 | ) |
|
|
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Shares used in the calculation of basic and diluted |
|
|
|
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|
|
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net loss per share (1) |
|
| 16,866,831 |
|
| 16,866,831 |
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|
|
|
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Basic and diluted net loss per share |
| $ | (0.07 | ) | $ | (0.02 | ) |
(1) The amount of anti-dilutive shares for the three months ended March 31, 2009 and 2008 are 281,524 and 236,554, respectively.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Ophthalmic Imaging Systems
Condensed Consolidated Statements of Cash Flows
|
| Three months ended March 31, |
| ||||
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| 2009 |
| 2008 |
| ||
|
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Operating activities: |
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|
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Net loss |
| $ | (1,107,949 | ) | $ | (334,651 | ) |
Adjustments to reconcile net loss to net cash used in operating activities |
|
|
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|
|
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Depreciation and amortization |
|
| 52,709 |
|
| 47,947 |
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Amortization (acquisition) of AcerMed software license |
|
| 47,506 |
|
|
|
|
Amortization (development) of imaging software |
|
| 42,059 |
|
|
|
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Amortization (development) of R&D – AcerMed software |
|
| 95,903 |
|
|
|
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Amortization of prepaid financing related to note payable |
|
| 16,646 |
|
| 15,896 |
|
Stock based compensation expense |
|
| 9,060 |
|
| 7,569 |
|
Net decrease (increase) in current assets other than cash and cash equivalents |
|
| 301,288 |
|
| (203,004 | ) |
Net increase in accounts receivable – related parties |
|
| (16,935 | ) |
| (99,510 | ) |
Net decrease (increase) in other assets |
|
| 610 |
|
| (8,337 | ) |
Net decrease in current liabilities other than short-term borrowings |
|
| (155,221 | ) |
| (4,846 | ) |
Net cash used in operating activities |
|
| (714,324 | ) |
| (578,936 | ) |
Investing activities: |
|
|
|
|
|
|
|
Acquisition of furniture and equipment |
|
| (25,092 | ) |
| (56,020 | ) |
Acquisition of patents |
|
| — |
|
| (285 | ) |
Acquisition of AcerMed software license |
|
| — |
|
| (463,015 | ) |
Development of imaging software |
|
| — |
|
| (157,836 | ) |
Development of R&D – AcerMed software |
|
| — |
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| (225,892 | ) |
|
|
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|
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|
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Net cash used in investing activities |
|
| (25,092 | ) |
| (903,048 | ) |
Financing activities: |
|
|
|
|
|
|
|
Principal payments on notes payable |
|
| (196,751 | ) |
| — |
|
Advance to related parties |
|
| (202,048 | ) |
| (618,532 | ) |
Increase in discount/premium related to note payable |
|
| 6,942 |
|
| 29,722 |
|
Proceeds from line of credit |
|
| 4,436 |
|
| — |
|
Net cash used in financing activities |
|
| (387,421 | ) |
| (588,810 | ) |
Net decrease in cash and equivalents |
|
| (1,126,837 | ) |
| (2,070,794 | ) |
Cash and equivalents, beginning of the period |
|
| 2,224,625 |
|
| 7,630,284 |
|
Cash and equivalents, end of the period |
| $ | 1,097,788 |
| $ | 5,559,490 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Notes to Condensed Consolidated Financial Statements
Three Month Periods ended March 31, 2009 and 2008
Note 1. | Basis of Presentation |
The accompanying unaudited condensed consolidated balance sheet as of March 31, 2009, condensed consolidated statements of operation for the three months ended March 31, 2009 and 2008 and the condensed consolidated statements of cash flows for the three months ended March 31, 2009 and 2008 have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by U.S. GAAP for complete financial statements. It is suggested that these condensed financial statements be read in conjunction with the audited financial statements and notes thereto included in Ophthalmic Imaging Systems’ (the “Company’s”) Annual Report for the year ended December 31, 2008 on Form 10-K. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations for the periods presented. The results of operations for the period ended March 31, 2009 are not necessarily indicative of the operating results expected for the full year.
Note 2. | Net (Loss) Earnings Per Share |
Basic (loss) earnings per share (“EPS”) is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other arrangements to issue common stock, such as stock options, warrants and convertible notes, 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 EPS.
|
| Unaudited |
| ||||
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| Three Months Ended |
| ||||
|
| March 31, |
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|
| 2009 |
| 2008 |
| ||
|
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|
|
|
|
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Numerator for basic and diluted |
| $ | (1,107,949 | ) | $ | (334,651 | ) |
|
|
|
|
|
|
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|
Denominator for basic and |
|
|
|
|
|
|
|
Weighted average shares |
|
| 16,866,831 |
|
| 16,866,831 |
|
Basic and diluted net loss per share |
| $ | (0.07 | ) | $ | (0.02 | ) |
|
|
|
|
|
|
|
|
The amount of anti-dilutive shares for the three months ended March 31, 2009 and 2008 are 281,524 and 236,554, respectively.
5
Notes to Condensed Consolidated Financial Statements
Three Month Periods ended March 31, 2009 and 2008
(Unaudited)
Note 3. | Related Party Transactions |
MediVision
MediVision is our parent company that owned, as of March 31, 2009, 9,380,843 shares of our common stock, or 55.6%. In addition, we are parties to several agreements with MediVision, pursuant to which MediVision performs the following services:
• | Distributes our Winstation and Symphony Products in Europe, Africa, Israel and India. Products are 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. |
Annual amounts purchased | Discount |
$ 0 - $ 199,999 | 0% |
$ 200,000 - $ 299,999 | 10% |
$ 300,000 - $ 399,999 | 20% |
$ 400,000 - $ 499,999 | 30% |
$ 500,000 and above | 40% |
• | Performs Research and Development. For research and development services, MediVision bills 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. |
Guarantee
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. The Debenture is secured by a first lien on all of our assets. MediVision pledged 1,451,795 shares of our common stock to induce us to secure the Debenture. The amount owed to United Mizrahi Bank by MediVision and secured by us as of March 31, 2009 and May 14, 2009 was approximately $1,700,000.
Loans
Pursuant to the License and Distribution Agreement, as amended, dated June 28, 2006, we agreed to loan MediVision up to $1,600,000 in principal for engineering the Electro-Optical Unit. The loan incurs interest of 8% per annum and repayment will commence on May 1, 2010. Repayments will be made in 36 equal payments, payable on the first of each month. The monthly payment will be calculated based on the amount of principal outstanding on April 30, 2010. Upon a default under the License and Distribution Agreement, as amended, or the related promissory note or security agreement, the principal and interest outstanding on the loan will become immediately due and payable. If MediVision defaults on its repayment obligation, we may seek repayment by foreclosing on the shares pledged as collateral or, alternatively, we have the option to receive a portion of MediVision’s ownership interest in any patent rights relating to the Electro-Optical Unit. The largest aggregate amount of principal outstanding under this License and Distribution Agreement during the quarter ended March 31, 2009 and as of May 14, 2009 was $1,600,000. MediVision did not make any payments on the principal or interest outstanding during fiscal 2008.
On January 30, 2008, we entered into a Loan and Security Agreement with MediVision whereby we agreed to lend to MediVision up to $200,000 upon their request for working capital. From January 30, 2008 through December 31, 2008, we entered into a series of addendums to the Loan and Security Agreement to provide additional financing for working capital. As of December 31, 2008, we agreed to loan MediVision up to $1,200,000 of principal. The interest on this note accrues at 8% per annum and is secured by MediVision’s shares in our common stock. The largest aggregate amount of principal outstanding under this Loan and Security Agreement during the quarter ended March 31, 2009 and as of May 14, 2009 was $1,200,000.
6
Notes to Condensed Consolidated Financial Statements
Three Month Periods ended March 31, 2009 and 2008
(Unaudited)
Note 3. | Related Party Transactions (continued) |
Under the License and Distribution Agreement and the Loan and Security Agreement, MediVision has pledged as collateral an aggregate amount of 2,341,657 shares of our common stock owned by MediVision, and 63% of CCS shares also owned by MediVision.
Merger
On March 20, 2008, we entered into a definitive merger agreement (the “Merger Agreement”) with MV Acquisitions Ltd., an Israeli company and a wholly-owned subsidiary (“Merger Sub”), and MediVision, pursuant to which Merger Sub will merge with and into MediVision (the “Merger”), with MediVision as the surviving entity. On March 16, 2009, we entered into a Termination Agreement with MediVision pursuant to which the Merger Agreement was terminated. We capitalized the direct costs associated with the Merger. At December 31, 2008, these costs accumulated to $1,047,047. (For a more detailed explanation of the treatment of these merger related costs, see Financial Accounting Pronouncement FAS 141(R) in the New Accounting Pronouncements section within the Management Discussion and Analysis section below).
Intercompany Transactions
Pursuant to a Research and Development Services Agreement dated January 1, 2004, we agreed to pay 112% of research and development costs incurred in connection with MediVision’s development of WinStation software, which is used to diagnose and treat retinal diseases and other ocular pathologies. We also agreed not to receive research and development services relating to the WinStation software from other parties without MediVision’s prior written consent. The initial term of the Services Agreement is for two years, to be automatically renewed for additional 12 month periods. The Services Agreement may be terminated by either party upon 6 months prior written notice. Certain terms of the Services Agreement survive termination, including, among others: (1) for 24 months after termination, MediVision agrees to not engage or participate in any business, anywhere in the world, that competes directly with the WinStation or OIS, (2) for 18 months after termination, OIS agrees to not engage or participate in any business, anywhere in the world, that competes directly with MediVision, and (3) for 12 months, generally, neither party may employ any employees, contractors, or directors of the other party or interfere with the other party’s existing business or customer contracts. During the quarter ended March 31, 2009, under this Services Agreement, we paid MediVision $260,898 for research and development services.
Pursuant to a Distribution Agreement, as amended, dated January 1, 2004, we appointed MediVision to be our exclusive distributor of certain products in Europe, Africa, Israel and India (the “MV Territory”). Under the agreement, MediVision must purchase the specified quota of the products as listed in the agreement. If MediVision fails to satisfy its quota obligation, this constitutes a breach and we may terminate the exclusivity provision. In satisfying the quota, MediVision purchases are aggregated with CCS’s purchases. CCS is a German subsidiary of MediVision. The initial term of the Distribution Agreement was for two years, which automatically renews in one-year periods. Either party may terminate the Distribution Agreement with at least 6 months prior written notice. The amount of products MediVision may purchase on credit for distribution under this agreement is limited to $450,000. During the quarter ended March 31, 2009, MediVision purchased approximately $66,000 ($119,000 combined with CCS purchases). For the sale of WinStation products under this Distribution Agreement, MediVision receives a tiered volume discount based on the amount ordered. The 2009 volume discounts are summarized in the table below. These volume discounts apply uniformly to all distributors of our WinStation products.
Annual amounts purchased | Discount |
$ 0 - $ 199,999 | 0% |
$ 200,000 - $ 299,999 | 10% |
$ 300,000 - $ 399,999 | 20% |
$ 400,000 - $ 499,999 | 30% |
$ 500,000 and above | 40% |
| (1) | This same volume discount structure is available to all OIS distributors who deal in WinStation products. |
7
Notes to Condensed Consolidated Financial Statements
Three Month Periods ended March 31, 2009 and 2008
(Unaudited)
Note 3. | Related Party Transactions (continued) |
Under a License and Distribution Agreement, as amended, dated June 28, 2006, MediVision appointed us to be its exclusive distributor of a new digital imaging system, the Electro-Optical Unit, in the Americas and the Pacific Rim (excluding China and India). In return, we paid $273,808. We also agreed to pay cash advances totaling $460,000 based on, among other things, the completion of certain phases of development of the Electro-Optical Unit. The advanced funds will be recovered as we purchase Electro-Optical Units in the future. As of December 31, 2008, we paid MediVision an aggregate of $460,000 in cash advances. Cash payments made under this agreement for exclusive distribution rights have been capitalized and will be amortized over the term of the agreement upon the sale of the first unit. We also granted MediVision a license to use our OIS WinStation software and any other applicable OIS system and the accompanying intellectual property rights therein. The initial term of the agreement is for ten years, which will be automatically renewed in one-year periods. Either party may terminate the agreement with at least 6 months prior written notice, provided that, we meet the purchase quota. Originally, we agreed on specified quotas which mandated that we purchase a minimum number of the Electro-Optical Units each year. On December 31, 2007, we amended the agreement to terminate the mandatory quota.
As of March 31, 2009, we recorded approximately $450,000 and $3,080,000 due from MediVision for accounts receivable and notes receivable, respectively.
Sales to MediVision during the quarters ended March 31, 2009 and 2008 totaled approximately $66,000 and $104,000, respectively. Sales derived from product shipments to MediVision are made at transfer pricing which is based on similar volume discounts that would be available to other resellers or distributors of our products.
As of March 31, 2009, MediVision held 9,380,843 shares of our common stock or 56% of our outstanding common stock. Of these amounts, MediVision has pledged to us an aggregate of 3,793,452 shares of our common stock, as well as the 63% of shares of CCS that they own, as of March 31, 2009.
Research and Development
During the quarters ended March 31, 2009 and 2008, we paid approximately $261,000 and $441,000, respectively, to MediVision for research and development services.
In 2008, MediVision and other outsourced consultants conducted most of our research and development. MediVision performed our research and development pursuant to a Research and Development Services Agreement dated January 1, 2004. Under this agreement, MediVision agreed to use its best efforts to develop the WinStation software in accordance with our specifications included therein. We, in turn, agreed to pay, in monthly payments, 112% of MediVision’s research and development costs incurred in connection with developing the WinStation software. The initial term of the agreement is for two years, to be automatically renewed for additional 12 month periods unless terminated by either party upon 6 months prior written notice. The agreement is exclusive in that during the effective period we may not receive research and development services relating to the WinStation software from other parties without MediVision’s prior written consent. Also under the agreement, MediVision must obtain our written approval prior to incurring any new research and development expenses in connection with the development of WinStation software. Moreover, the parties agreed to render to each other, all reasonable assistance in obtaining any regulatory approvals required in connection with the WinStation software or any other results of the research and development services performed under the agreement. The parties also agreed that upon termination, (1) for 12 months, each party must maintain insurance reasonable to cover its liabilities, (2) for 24 months, MediVision agrees to not engage or participate in any business, anywhere in the world, that competes directly with the WinStation or OIS, unless mutually agreed, (3) for 18 months, OIS agrees to not engage or participate in any business, anywhere in the world, that competes directly with MediVision, unless mutually agreed, and (4) for 12 months, generally, neither party may employ any employees, contractors, or directors of the other party or interfere with the other party’s existing business or customer contracts, unless mutually agreed.
In January 2009, we transitioned part of MediVision’s WinStation and Symphony research and development team to our corporate office in Sacramento, California to be OIS employees, and transferred the digital image capture products development to our new subsidiary, OIS Global in Israel, thereby streamlining our research and development efforts.
8
Notes to Condensed Consolidated Financial Statements
Three Month Periods ended March 31, 2009 and 2008
(Unaudited)
Note 3. | Related Party Transactions (continued) |
CCS Pawlowski
Under the Distribution Agreement with CCS, dated February 14, 2006, we appointed CCS as our exclusive distributor of certain products in Germany and Austria. Under the agreement, CCS must purchase the specified quota of Distribution Products. If CCS fails to satisfy its quota obligation, this constitutes a breach and OIS may terminate the exclusivity provision. The quota for 2009 is $390,000. All subsequent quotas will be agreed upon between the parties at the beginning of each year. If no quota is agreed upon, the preceding year’s quota will carry-forward. For the sale of certain products, CCS will receive a tiered volume discount based on the amount ordered. The discounts for 2009 are summarized in the table below. The initial term of the Distribution Agreement was for two years, which now automatically renews in one-year periods. Either party may terminate the agreement with at least 3 months prior written notice. Pursuant to a Distribution Agreement, during the quarters ended March 31, 2009 and 2008, we sold products to CCS of approximately $53,000 and $58,000.
Distribution Agreement with CCS – FY 2008 | |
Annual amounts purchased | Discount |
$ 0 - $ 199,999 | 0% |
$ 200,000 - $ 299,999 | 10% |
$ 300,000 - $ 399,999 | 20% |
$ 400,000 - $ 499,999 | 30% |
$ 500,000 and above | 40% |
At March 31, 2009, we had approximately $64,000 of amounts due from CCS, as compared to $47,000 due from CCS at March 31, 2008.
MediStrategy, Ltd.
In January 2004, we entered into a services agreement with MediStrategy Ltd. (“MS”), an Israeli company owned by Noam Allon, a former director who served on our board until December 2004 and brother of Gil Allon, our CEO. Under the terms of the agreement, MS provides business services to us primarily in the field in ophthalmology, which includes forming business relationships, identifying potential mergers and acquisitions, identifying and analyzing new complementary lines of business and finding potential business opportunities. All services provided by MS are performed solely by Noam Allon.
In consideration for the services provided, we agreed to pay MS a monthly sum of $4,000. In addition, MS is to be paid an annual performance bonus of up to $10,000 upon achievement of goals specified under the terms of the services agreement as determined by MS, Noam Allon, and our Chairman of the Board. During 2007, MS earned fees of $48,000 and a $10,000 bonus. $48,000 of these services was paid in 2008 and the bonus is accrued but not paid as of May 14, 2009. During 2008, MS earned fees of $48,000. These fees have been accrued, but not paid, as of May 14, 2009. As of January 1, 2009, we agreed to pay MS a monthly sum of $1,600. During the first quarter of 2009, MS earned fees of $4,800. These fees have been accrued, but not paid as of May 14, 2009.
Note 4. | Share-based Compensation |
At March 31, 2009, we have four 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. The majority of options granted under these agreements have a vesting period of three 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 can not be less than 85% of the fair market value on the date of grant.
On March 18, 2009, our board of directors approved the proposed 2009 stock option plan, subject to the approval of our shareholders.
9
Notes to Condensed Consolidated Financial Statements
Three Month Periods ended March 31, 2009 and 2008
(Unaudited)
Note 4. | Share-based Compensation (continued) |
A summary of the changes in stock options outstanding under our equity-based compensation plans during the three months ended March 31, 2009 is presented below:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value |
Outstanding at January 1, 2009 | 2,272,000 | $0.72 | 5.64 | -- |
Granted | 717,500 | $0.16 | 9.78 | $121,975 |
Exercised | -- | -- | -- | -- |
Forfeited/Expired | (298,000) | $0.57 | -- | -- |
Outstanding at March 31, 2009 | 2,691,500 | $0.58 | 5.75 | -- |
Exercisable at March 31, 2009 | 1,684,375 | $0.61 | 4.65 | -- |
We use the Black-Scholes-Merton option valuation model to determine the fair value of stock-based compensation under Statement of Financial Accounting Standards No. 123R, Share-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 our historical experience. Expected volatility is based upon the historical volatility of our 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. We use a dividend yield of zero in the Black-Scholes-Merton option valuation model as we do not anticipate paying cash dividends in the foreseeable future.
We recorded an incremental expense of $9,060 for stock-based compensation during the three months ended March 31, 2009.
As of March 31, 2009, we had $34,994 of total unrecognized expense related to non-vested stock-based compensation, which is expected to be recognized through 2010. The total fair value of options vested during the three months ended March 31, 2009 was $9,060.
In calculating compensation related to stock option grants for the three months ended March 31, 2009, 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: dividend yield none; expected volatility of 59.94%, risk-free interest rate of 2.52%, and expected term of 10 years. 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.
Abraxas
On January 1, 2008, we granted Mike Bina, the President of Abraxas, options to purchase 212,933 shares of Abraxas common stock. The options are exercisable at $0.01 per share, expire on January 1, 2019, and vest beginning January 1, 2008, semi-annually over three years as follows: 20%, 20%, 17.5%, 17.5%, 12.5% and 12.5%. These options are still outstanding.
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Note 4. | Share-based Compensation (continued) |
A summary of the changes in stock options outstanding under our equity-based compensation plans during the three months ended March 31, 2009 is presented below:
On January 1, 2008, we granted Ali Zarazvand, the Chief Technology Officer of Abraxas, options to purchase 109,693 shares of Abraxas common stock. The options are exercisable at $0.01 per share, expire on January 1, 2019, and vest beginning January 1, 2008, semi-annually over three years as follows: 20%, 20%, 17.5%, 17.5%, 12.5% and 12.5%. These options are still outstanding.
Together Messrs. Bina and Zarazvand were granted options to purchase an aggregate of 322,626 shares of common stock of Abraxas, which currently represents 25% of the shares outstanding.
Note 5. | Warranty Obligations |
We generally offer a one-year warranty to our customers. Our warranty requires us to repair or replace defective products during the warranty period. At the time product revenue is recognized, we record a liability for estimated costs that may be incurred under our warranties. The costs are estimated based on historical experience and any specific warranty issues that have been identified. The amount of warranty liability accrued reflects our best estimate of the expected future cost of honoring our obligations under the warranty plans. We periodically assess the adequacy of our recorded warranty liability and adjust the balance as necessary.
The following provides a reconciliation of changes in our warranty reserve:
|
| Unaudited |
| ||||
|
| 2009 |
| 2008 |
| ||
Warranty balance at beginning of period |
| $ | 67,000 |
| $ | 128,250 |
|
Reductions for warranty services provided |
|
| (22,500 | ) |
| (39,063 | ) |
Changes for accruals in current period |
|
| 32,750 |
|
| 20,000 |
|
|
|
|
|
|
|
|
|
Warranty balance at end of period |
| $ | 77,250 |
| $ | 109,187 |
|
Note 6. | 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 Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”). Our Chief Financial Officer (“CFO”) has been determined as the Chief Operating Decision Maker as defined by SFAS 131. 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.
11
Note 6. | Segment Reporting (continued) |
The following presents our financial information by segment for the three months ended March 31, 2009.
Results of Operations
Selected Financial Data-
| Three months ended March 31, 2009 | Three months ended March 31, 2008 | |||||
Statement of Income: |
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|
|
|
|
| |
Net revenues: |
|
|
|
|
|
| |
OIS | $ | 2,281,469 | $ | 3,105,555 | |||
Abraxas | 128,062 | 42,137 | |||||
|
|
|
|
|
|
| |
Gross Profit: |
|
|
|
|
|
| |
OIS | 1,320,774 | 1,661,327 | |||||
Abraxas | 3,761 | (57,467 | ) | ||||
|
|
|
|
|
|
| |
Operating Loss: |
|
|
|
|
|
| |
OIS | (346,326 | ) | (112,739 | ) | |||
Abraxas | (715,560 | ) | (187,403 | ) | |||
| (1,107,949 | ) | (334,651 | ) | |||
|
|
|
|
|
|
| |
Assets: |
|
|
|
|
|
| |
OIS | 9,211,276 | 14,773,332 | |||||
Abraxas | 1,889,724 | 1,084,030 | |||||
|
|
|
|
|
|
| |
Liabilities: |
|
|
|
|
|
| |
OIS | 5,432,238 | 6,382,793 | |||||
Abraxas | 333,864 | 209,588 | |||||
|
|
|
|
|
|
| |
Stockholders’ Equity: |
|
|
|
|
|
| |
OIS | 6,778,677 | 9,458,885 | |||||
Abraxas | (1,443,779 | ) | (193,904 | ) | |||
|
|
|
|
|
|
|
12
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
We make forward-looking statements in this report, in other materials we file with the Securities and Exchange Commission (the “SEC”) or otherwise release to the public, and on our website. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media, and others. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding our future plans, strategies, and expectations are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended, and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You are cautioned not to place undue reliance on these forward-looking statements because these forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions generally and the medical instruments market specifically, legislative or regulatory changes that affect us, including changes in healthcare regulation, the availability of working capital, and the introduction of competing products. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the Securities and Exchange Commission should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
13
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 2008, we purchased EMR and PM software to be sold to the following ambulatory-care specialties: ophthalmology, OB/GYN, orthopedics and primary care.
At March 31, 2009, we had stockholders’ equity of $5,354,506 and our current assets exceeded our current liabilities by $2,119,768.
The following discussion should be read in conjunction with the unaudited interim financial statements and the notes thereto which are set forth in Item 1, “Financial Statements (unaudited).” In the opinion of management, the unaudited interim period financial statements include all adjustments, which are of a normal recurring nature, that are necessary for a fair presentation of the results of the periods. There can be no assurance that we will be able to achieve or sustain significant positive cash flows, revenues, or profitability in the future.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The financial information contained in the financial statements is, to a significant extent, financial information 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 that we use 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 (1) Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition in Financial Statements,” (2) American Institute of Certified Public accountants, Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” (3) SOP 98-9, “Modification of SOP 97-2”, with Respect to Certain Transactions, and (4) Emerging Issues Task Force Issue 00-21, “Revenue Arrangements with Multiple Deliverables.”
Under EITF 00-21, 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 the product shipment 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.
14
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 on a 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 Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), is an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“SFAS 109”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS 109. FIN 48 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, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We apply FIN 48 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.
15
In 2009, the general warranty reserve increased from $67,000 to $77,250 due to the increase in product shipments versus the amount of replacements, repairs or upgrades performed.
In 2008, the general warranty reserve decreased from $128,250 to $67,000 due to the decrease in product shipments and the amount of replacements, repairs or upgrades performed.
Convertible Debt and Warrants
On October 29, 2007, we issued warrants 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. We also have 313,000 warrants outstanding as of March 31, 2009 with exercise prices ranging between $1.40 and $1.83 per share. These warrants expired on April 27, 2009.
There were 929,671 warrants outstanding and exercisable as of March 31, 2009 with a weighted average remaining contractual life of 2.48 years, a weighted average exercise price of $1.79. There is no intrinsic value of warrants outstanding at March 31, 2009.
According to EITF 00-27, the effective conversion price based on the proceeds received for or allocated to the convertible instrument should be used to compute the intrinsic value, if any, of the embedded conversion option. As a result of this consensus, an issuer should first allocate the proceeds received in a financing transaction that includes a convertible instrument to the convertible instrument and any other detachable instruments included in the exchange (such as detachable warrants) on a relative fair value basis. Then, the Issue 98-5 model should be applied to the amount allocated to the convertible instrument, and an effective conversion price should be calculated and used to measure the intrinsic value, if any, of the embedded conversion option. We adjust for the changes in the Black-Scholes-Merton option valuation model at each reporting period.
The impact of this adjustment to our 2009 financial statements is an increase to interest expense of $36,201, an increase to the discount /premium on the note of $29,258 and an increase to additional paid in capital of $6,942.
Software Capitalization
We capitalize software development costs in accordance with applicable accounting rules and regulations, including Statement of Financial Accounting Standards No. 86 Accounting forthe Costs of Computer Software to be Sold, Leased, or Otherwise Marketed (“SFAS 86”).
In 2008, we capitalized our EMR and PM software that we acquired from AcerMed through the bankruptcy court. SFAS 86 requires that purchased computer software to be sold, leased or otherwise marketed must be capitalized when the software is acquired. 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 in accordance with Statement of Financial Accounting Standards No. 142 Goodwill and other Intangible Assets (“SFAS 142”), we began to amortize this asset over the economic life of the asset, which we concluded to be three years. There is no pattern that is apparent in the decline of the economic usefulness of the asset and, therefore, we are amortizing the asset using the straight-line method of amortization. The amount of this asset that was amortized during the three months ended March 31, 2009 is $47,506.
In accordance with SFAS 86, we also capitalized the research and development costs incurred to prepare this software for sale. Pursuant to SFAS 86, research and development costs are to be capitalized once technological feasibility is established. We believed 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 research and 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 in accordance with Statement of Financial Accounting Standards No. 142 Goodwill and other Intangible Assets (“SFAS 142”), we began to amortize this asset over the economic life of the asset, which we concluded to be three years. There is no pattern that is apparent in the decline of the economic usefulness of the asset and, therefore, we are amortizing the asset using the straight-line method of amortization. The amount of this asset that was amortized during the three months ended March 31, 2009 is $95,903.
16
In 2008, we also capitalized the costs associated with the development of a web-based software. According to SFAS 86, technological feasibility is established upon completion of a detailed program design of the finished product or, in its absence, upon completion of a working model. We had both a working prototype and a program design of the finished product at the time and therefore, we capitalized $504,711 of costs incurred in connection with the development of this software. During the first three months of 2009, we began to sell this software, and in accordance with Statement of Financial Accounting Standards No. 142 Goodwill and other Intangible Assets (“SFAS 142”), we began to amortize this asset over the economic life of the asset, which we concluded to be three years. There is no pattern that is apparent in the decline of the economic usefulness of the asset and, therefore, we are amortizing the asset using the straight-line method of amortization. The amount of this asset that was amortized during the three months ended March 31, 2009 is $42,059.
Principals of Consolidation
The consolidated financial statements include the accounts of OIS, Abraxas Medical Solutions, Inc., a wholly-owned subsidiary (“Abraxas”) of OIS, and OIS Global, a wholly-owned subsidiary of OIS. All significant intercompany balances and transactions have been eliminated in consolidation.
Abraxas
In January 2008, we purchased substantially all of the assets of AcerMed, Inc., a leading software developer for EMR and PM software. The acquisition was through our wholly-owned subsidiary, Abraxas Medical Solutions, Inc. AcerMed has been recognized as a leader in providing comprehensive and advanced EMR and PM software solutions for a wide range of medical practices, from sole practitioners to multi-site, multi-specialty group practices nationwide. Through the acquisition, we gained the rights to software applications that 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, for example, using a wireless computer pen tablet at the point of care.
In 2008, Abraxas launched new software versions which feature enhanced memory, improved efficiency, and numerous other modifications and technological updates to the existing software. In the fourth quarter of 2008 Abraxas introduced software for the OB/GYN, Orthopedic and Primary Care markets. OIS introduced OIS EMR and OIS PM software solutions for the ophthalmic market (powered by Abraxas) at the American Academy of Ophthalmology in October 2008. Thus far, Abraxas has established relationships with market leaders including First Data Bank, LabCorp, Quest Diagnostics and SureScripts RxHub. By aligning with these companies, Abraxas is able to build a broader drug knowledgebase, laboratory interface, and electronic prescription. Abraxas has also secured several certifications and partner agreements, including certification by the Commission for Healthcare Information Technology (CCHIT) in ambulatory EMR/HER software; a certified partner of Microsoft ®; gold member of Healthcare Information and Management Systems Society (HIMSS); joined the Electronic Health Records Vendors Association (EHRVA) and partnered with Emdeon for EDI transactions. Additionally, Abraxas signed a declaration of support with the American Academy of Family Physician’s (AAFP) Center for health information technology, supporting its “Partners for Patients” (P4P) program. These reflect that Abraxas’ software has met certain industry standards and offer additional credibility to customers.
OIS Global
On December 16, 2008, we formed a subsidiary, OIS Global, in Israel. During the three months ending March 31, 2009, we hired eight employees from MediVision to perform research and development on our behalf. OIS Global began performing research and development on our behalf on March 1, 2009. The costs incurred for that month was approximately $80,000.
New Accounting Pronouncements
| Financial Accounting Pronouncement FAS 142-3 |
In April 2008, the FASB issued Financial Staff Position (“FSP”) No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP No. 142-3”). FSP No FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”) The intent of the position is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and otherGAAP principles. The provisions of FSP No. FAS 142-3 are effective for fiscal years beginning after December 15, 2008. FSP No. FAS 142-3 is effective for our fiscal year beginning January 1, 2009. The adoption of FSP No. FAS 142-3 did not have a material impact on our consolidated financial statements.
| Financial Accounting Pronouncement FAS 141(R) |
In December 2007, FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations ("SFAS 141(R)"), which among other things, establishes principles and requirements regarding the method of which the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired business, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination and (iv) requires costs incrred to effect an acquisition to be recognized separately from the acquisition. SFAS 141(R) is effective for all business combinations for which the acquisition date is on or after Januarty 1, 2009. Earlier adoption is prohibited. This standard will change the accounting treatment for business combinations on a prospective basis. We believe that the adoption of FASB 141(R) has had a material impact on our financial position and results of operations as disclosed below.
17
On March 16, 2009, we entered into a Termination Agreement with MediVision pursuant to which the Merger Agreement was terminated.
For the fiscal year ended December 31, 2007 and the three months ended March 31, 2008, we have expensed $527,327 and $56,851 of merger-related costs that were capitalized for comparative purposes, respectively. The effect of these two adjustments to our consolidated financial statements as of March 31, 2008 is shown below:
| Three months ended | Three months ended | |||||
Statement of Operations: |
|
|
|
|
|
| |
Net revenues | $ | 3,147,692 | $ | 3,147,692 | |||
Cost of sales | 1,543,832 | 1,543,832 | |||||
Gross profit | $ | 1,603,860 | $ | 1,603,860 | |||
Total operating expenses | 1,847,151 | 1,904,002 | |||||
Net income (loss) | $ | (277,800 | ) | $ | (334,651 | ) | |
Basic earnings (loss) per share | $ | (0.02 | ) | $ | (0.02 | ) | |
Balance Sheet: |
|
|
|
|
|
| |
Total Assets | $ | 16,441,540 | $ | 15,857,362 | |||
Total Liabilities | $ | 6,592,381 | $ | 6,592,381 | |||
Total Stockholders’ Equity | $ | 9,849,159 | $ | 9,264,981 | |||
Total Liabilities and Stockholders’ Equity | $ | 16,441,540 | $ | 15,857,362 |
Results of Operations
Revenues
Our revenues for the three months ended March 31, 2009 were $2,409,531, representing a 23% decrease from revenues of $3,147,692 for the three months ended March 31, 2008. The decrease in revenues between the quarters is due to a decrease of product sales in the three months ended March 31, 2008 of approximately $835,000, offset by an increase in service revenue of approximately $97,000.
Product sales accounted for approximately 60% and 73% of our revenue for the first quarters of 2009 and 2008, respectively. Service revenues for these products accounted for approximately 40% and 27% of our revenue for the first quarters of 2009 and 2008, respectively. The decrease in product sales is primarily due to the decrease in sales of our Winstation systems and installation, personnel changes in our sales and marketing departments and changes in the global economy. 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.
18
Revenues from sales of our products to related parties was approximately $119,000 and $162,000 during the three month periods ended March 31, 2009 and 2008, respectively.
Gross Margins
Gross margins were approximately 55% and 51% during the three month periods ended March 31, 2009 and 2008, respectively. Gross margins increased due to the increase in service revenue with fixed overhead costs.
Sales and Marketing Expenses
Sales and marketing expenses accounted for approximately 38% of total revenues during the first quarter of fiscal 2009 as compared to approximately 30% during the first quarter of fiscal 2008. Expenses decreased to $904,156 during the first quarter of 2009 versus $944,009 during the first quarter of 2008, representing a decrease of $39,853 or 4%. This decrease was mainly due to the turnover of sales representatives at OIS, offset by the hiring of new sales representatives at Abraxas.
General and Administrative Expenses
General and administrative expenses were $511,023 in the first quarter of fiscal 2009 and $523,016 in the first quarter of fiscal 2008, representing a decrease of $11,993 or 2%. Such expenses accounted for approximately 21% and 17% of revenues during the first quarters of 2009 and 2008, respectfully. The decrease was primarily due to lower overhead expenses such as rent and insurance expenses of approximately $60,000, lower payroll related expenses of approximately $80,000, offset by an increase in bad debt reserve of approximately $160,000.
Research and Development Expenses
Research and development expenses were $971,242 in the first quarter of fiscal 2009 and $436,977 in the first quarter of fiscal 2008, representing an increase of $534,265 or 122%. Such expenses accounted for approximately 40% of revenues during the first quarter of 2009 and 14% of revenues during the first quarter of 2008. During fiscal 2008, the research and development done by Abraxas was capitalized. Beginning January 1, 2009, we began to expense all of our research and development expenses related to Abraxas, as well as amortize the research and development we capitalized in 2008. (For a more detailed explanation of the amortization of our capitalized software, see Software Capitalization in the Critical Accounting Policies above). The amount of cost we capitalized during the three months ending March 31, 2008 was $230,238. The rest of the increase resulted from the increase in research and development done by Abraxas and OIS of approximately $298,305, the amortization of software & development capitalized in the past of $185,468, offset by a decrease in research and development done by MediVision of $179,746.
Our research and development expenses are derived primarily from our continued research and development efforts on new digital image capture products and our EMR and PM software.
Interest income and other expense, net
Interest income and other expense were $43,910 during the first quarter of fiscal 2009 versus $33,223 during the first quarter of fiscal 2008. The increase in expenses is primarily due to the interest expense related to our financing agreement with the Tail Wind Fund.
Income Taxes
Income tax expense was $2,153 during the first quarter of fiscal 2009 versus $1,286 during the first quarter of fiscal 2008.
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We calculate a tax provision quarterly and assess how much deferred tax asset is more likely than not to be used in the future. At this time, due to our current losses and the current state of the economy, we have established a 100% valuation allowance against our deferred tax asset.
Net loss
We recorded net loss of $1,107,949 or $0.07 per share basic earnings, for the quarter ended March 31, 2009 as compared to net loss of $334,651 or $0.02 per share basic earnings for the quarter ended March 31, 2008.
Balance Sheet
Our assets decreased by $1,439,483 as of March 31, 2009 as compared to December 31, 2008. This decrease was primarily due to a decrease in cash of $1,126,837, a decrease in inventory of $149,551, amortization of our EMR and PM software of $47,506 and amortization of capitalized software development related to our EMR and PM software of $95,903 and a decrease in accounts receivable of $116,376, offset by an increase in the note receivable from MediVision of $202,048.
Our liabilities decreased by $347,536 as of March 31, 2009 as compared to December 31, 2008 primarily due to a decrease in accounts payable of $360,568, a decrease in accrued payroll related items of $131,939 and a decrease in our notes payable of $197,213, offset by an increase in deferred warranty revenue of $438,053.
Our stockholders’ equity decreased by $1,091,947 as of March 31, 2009 as compared to December 31, 2008 primarily due to a net loss for the quarter.
Liquidity and Capital Resources
Our operating activities used cash of $714,324 during the three months ended March 31, 2009 as compared to cash used of $578,936 in the three months ended March 31, 2008. The cash used in operations during the first three months of 2009 was principally from our net loss of $1,107,949, offset by a decrease in inventory of $149,551, the amortization of capital software development related to our EMR and PM software of $47,506, the amortization of our EMR and PM software of $95,903, and the amortization of our web-based imaging software of $42,059.
Cash used in investing activities was $25,092 during the first three months of 2009 as compared to cash used of $903,048 during the first three months of 2008. The cash used of $25,092 was due to the investment in capital equipment such as computers and software used internally. We anticipate continued capital expenditures in connection with our ongoing efforts to upgrade our existing management information and corporate communication systems. We also anticipate that related expenditures, if any, will be financed from our cash flows from operations or other financing arrangements available to us, if any.
We used cash in financing activities of $387,421 during the first three months of fiscal 2009 as compared to cash used of $588,810 during the first three months of fiscal 2008. The cash used in financing activities during the first three months of 2009 was primarily from advances to related parties of $202,048 and principal payments on certain outstanding notes payable of $196,751.
On March 31, 2009, our cash and cash equivalents were $1,097,788. Management anticipates that additional sources of capital beyond those currently available to us may be required to continue funding for research and development of new products and the continuation of the investment in Abraxas.
On October 29, 2007, we issued (i) an aggregate of $2,750,000 in principal amount of 6.5% Convertible Notes Due April 30, 2010 (the “Notes”), which Notes are convertible into 1,676,829 shares of our common stock, no par value, and (ii) warrants to purchase an aggregate of 616,671 shares of our common stock at an exercise price of $1.87 per share. As of March 31, 2009, the amount due for these notes is $1,833,333. We anticipate that these notes will continue to be repaid from our cash flow from operations.
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We will continue to evaluate alternative sources of capital to meet our growth 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 will be available and, if available, can be obtained on terms favorable to us.
| Trends |
The current recession in the United States has negatively impacted our sales revenue in the three months ended March 31, 2009 and is expected to continue to do so. Our sales have been affected by customers’, primarily physicians, hesitation to purchase capital equipment in the current economic climate. Other than this, we are unaware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on our financial condition, results from operations, or short or long-term liquidity.
Subsequent Event
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. (“OPKO”) and The Frost Group, LLC (collectively “Defendants”). Mr. Verdooner was formerly our president.
Pursuant to the Settlement Agreement, we agreed to dismiss, with prejudice, the lawsuit between us and the Defendants, whereby we alleged claims of breach of fiduciary duty, breach of implied contract, intentional interference with contractual relations, intentional interference with prospective economic advantage, violation of section 502 of the Penal Code of California, aiding and abetting breach of fiduciary duty, and aiding and abetting interference with contractual relations. We also agreed to release the Defendants from any claims that could have been brought in the foregoing lawsuit, whether known or unknown. The Defendants agreed to pay us $1,200,000 by May 13, 2009.
We and the Defendants entered into the Settlement Agreement to avoid the expense and uncertainty of litigation and without making any admission of liability or concession of wrongdoing.
Off-Balance Sheet Arrangement
We have a Secured 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 Debenture, we guaranteed the payment of all the debts and liabilities of MediVision to United Mizrahi Bank. The Debenture is secured by a first lien on all of our assets. MediVision pledged 1,451,795 shares of our common stock to us in order to secure the Debenture. The amount owed to the financial institutions by MediVision and secured by us as of March 31, 2009 was approximately $1,700,000.
CONTROLS AND PROCEDURES |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of March 31, 2009, 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 its “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 issuer in the reports that it files or submits under the Exchange Act are 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
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accumulated and communicated to the issuer’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 that evaluation, these officers concluded that, as of March 31, 2009, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2009, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
LEGAL PROCEEDINGS |
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, we agreed to dismiss, with prejudice, the lawsuit between us and the Defendants, whereby we alleged claims of breach of fiduciary duty, breach of implied contract, intentional interference with contractual relations, intentional interference with prospective economic advantage, violation of section 502 of the Penal Code of California, aiding and abetting breach of fiduciary duty, and aiding and abetting interference with contractual relations. We also agreed to release the Defendants from any claims that could have been brought in the foregoing lawsuit, whether known or unknown The Defendants agreed to pay us $1,200,000 by May 13, 2009.
We and the Defendants entered into the Settlement Agreement to avoid the expense and uncertainty of litigation and without making any admission of liability or concession of wrongdoing.
UNREGISTERED SALES OF EQUITY SECURITIES |
On January 6, 2009, we granted Gil Allon, our CEO, options to purchase 272,500 shares of common stock in lieu of 20% of his annual salary for fiscal 2009. The options vest in 12 equal monthly installments beginning on January 31, 2009, are exercisable at $0.16 per share and expire on January 6, 2019. We relied upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended (“Section 4(2)”) in connection with this issuance.
On January 6, 2009, we granted Ariel Shenhar, our CFO, options to purchase 265,000 shares of common stock in lieu of 20% of his annual salary for fiscal 2009. The options vest in 12 equal monthly installments beginning on January 31, 2009, are exercisable at $0.16 per share and expire on January 6, 2019. We relied upon the exemption from registration under Section 4(2) in connection with this issuance.
On January 6, 2009, we granted Noam Allon, a consultant to OIS, options to purchase 180,000 shares of common stock in lieu of 20% of his compensation for fiscal 2009. The options vest in 12 equal monthly installments beginning on January 31, 2009, are exercisable at $0.16 per share and expire on January 6, 2019. We relied upon the exemption from registration under Section 4(2) in connection with this issuance.
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EXHIBITS AND REPORTS |
* | Filed herewith. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| OPHTHALMIC IMAGING SYSTEMS |
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Date: May 15, 2009 |
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| By: | /s/ Gil Allon | |
| Name: Title: | Gil Allon, Chief Executive Officer
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| By: | /s/ Ariel Shenhar | |
| Name: Title: | Ariel Shenhar, Chief Financial Officer
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