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EX-32.1 - CERTIFICATION - VIKING SYSTEMS INC | viking_10k-ex3201.htm |
EX-32.2 - CERTIFICATION - VIKING SYSTEMS INC | viking_10k-ex3202.htm |
EX-31.2 - CERTIFICATION - VIKING SYSTEMS INC | viking_10k-ex3102.htm |
EX-31.1 - CERTIFICATION - VIKING SYSTEMS INC | viking_10k-ex3101.htm |
EX-23.1 - CONSENT - VIKING SYSTEMS INC | viking_10k-ex2301.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009
OR
o TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE TRANSITION PERIOD FROM ________TO ________
COMMISSION FILE NUMBER
000-49636
(Exact
name of registrant as specified in its charter)
Delaware
|
86-0913802
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
134
Flanders Road,
Westborough,
MA, 01581
(Address of principal executive
offices)(Zip Code)
(508)
366-3668
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class:
|
Name
of each exchange on which registered
|
|
None
|
N/A
|
Securities
registered pursuant to Section 12(g) of the Act:
$.001
Par Value Common Stock
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant i s not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes o No x
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
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. (Check
one):
Large
accelerated filer o
|
Accelerated filer o |
Non-accelerated
filer o
|
Smaller reporting Company
x
|
(Do not check if a smaller
reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No x
The
aggregate market value of the voting stock, consisting solely of common stock,
held by non-affiliates of the registrant on June 30, 2009 was
approximately $236,364 (based on a total of 15,757,573 shares of the
registrant’s common stock held by non-affiliates on June 30, 2009, at the
closing price of $0.015 per share). Shares of voting stock held by each officer
and director have been excluded in that such persons may be deemed to be
affiliates. This assumption regarding affiliate status is not necessarily a
conclusive determination for other purposes.
The
number of outstanding shares of the registrant’s common stock on January 31,
2010 was 45,356,756.
DOCUMENTS
INCORPORATED BY REFERENCE: NONE
TABLE OF
CONTENTS
Page
|
|
PART
I
|
|
Item
1. Business
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1
|
Item
1A. Risk Factors
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7
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Item
2. Properties
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11
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Item
3. Legal Proceedings
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11
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Item
4. Submission of Matters to a Vote of Security Holders
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11
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PART
II
|
|
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
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12
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Item
6. Selected Financial Data
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12
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Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
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13
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Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
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16
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Item
8. Financial Statements
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17
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Item
9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
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37
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Item
9A(T). Controls and Procedures
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37
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Item
9B. Other Information
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37
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PART
III
|
|
Item
10. Directors, Executive Officers and Corporate Governance
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38
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Item
11. Executive Compensation
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40
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Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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43
|
Item
13. Certain Relationships and Related Transactions and Director
Independence
|
45
|
Item
14. Principal Accounting Fees and Services
|
46
|
Item
15. Exhibits
|
47
|
i
PART
I
ITEM
1. BUSINESS
General
We are a
leading worldwide developer, manufacturer and marketer of visualization
solutions for complex, minimally-invasive surgery. We partner with
medical device companies and healthcare facilities to provide surgeons with
proprietary visualization systems enabling minimally-invasive surgical
procedures, which reduce patient trauma and recovery time.
We sell
the current version of our proprietary visualization system, also called
our 3Di Vision System, under the Viking brand directly to hospitals and
outpatient surgical centers in the United States and outside the United States
through our distributor network. Our 3Di System is an advanced three
dimensional or 3D vision system used by surgeons for complex minimally invasive
laparoscopic surgery, with applications in urologic, gynecologic, bariatric,
cardiac, neurologic and general surgery.
We also
manufacture two dimensional or 2D, digital cameras that are sold to third-party
companies who sell to end users through their Original Design Manufacturer or
ODM, programs and Original Equipment Manufacturer or OEM,
programs.
Our
technology and know-how center on our core technical competencies in optics,
digital imaging, sensors, and image management. Our focus is to deliver advanced
visualization solutions to the surgical team, enhancing their capability and
performance in complex minimally invasive surgical procedures.
As of
December 31, 2009, we believe more than 100 of our proprietary 3D visualization
systems were in service worldwide. Moreover, we have sold more than 1,800
2D digital cameras to ODM/OEM partners, including Boston Scientific
Corporation and Medtronic, Inc. Our ODM products are jointly
designed with our partners to meet their exact specifications for their
particular market.
PRODUCT
AND TECHNOLOGY OVERVIEW
Our two
primary product lines are the 3Di Systems sold direct in the United States and
through our distributor network outside of the United States to hospitals and
out-patient surgical centers and a line of 2D digital cameras and components
sold to our ODM/OEM partners.
Viking
3Di Vision System
Successful
surgeries and positive patient outcomes depend on the surgical team having both
the correct surgical skills and the most conducive surgical environment. Our 3Di
System provides the surgeon with natural three dimensional depth perception
presented using advanced stereo optics with high-resolution.
There are
five key technology components that make up our currently offered 3Di
System:
●
|
Camera - Our 3Di digital
camera incorporates dual 3-Chip charge-coupled devices or CCDs into a
lightweight and ergonomic camera head featuring two convenient accessory
control buttons. The camera utilizes a proprietary optical system allowing
360° scope rotation while maintaining proper image orientation, which
delivers a high resolution image to each eye as viewed through the PHD.
This results in clear 3D vision of the most critical anatomical
structures. The 3-Chip, red, green and blue, stereo camera system is made
up of two components including a camera control unit and a camera
head.
|
●
|
Endosite Controller -
The Endosite controller is the data hub of the 3Di System. With the
capability to support up to two video sources, stereo or mono, the
Endosite converts any video signal to a digital XGA format and delivers
real-time clinical images to the surgical team wearing personal head
displays, or PHDs.
|
●
|
Personal Head Display -
The PHD is a comfortable and lightweight 3D personal monitor that
serves to improve operating room ergonomics and provide stereo
visualization. The technological advances of the liquid crystal displays
or LCDs are analogous to 3-Chip camera technology. The three-panel PHD
allows true 3D visualization by employing three individual LCDs for each
eye to display red, green and blue, resulting in vast improvements in
image contrast and brightness with superior color
reproduction.
|
●
|
Illumination - Our
300-watt Xenon light source provides brilliant light to any minimally
invasive procedure providing uncompromising illumination for proper tissue
distinction. Additional features include extended-use lamp life of 500
hours, an easy access lamp module and built-in safety
features.
|
●
|
StereoScopes -
StereoScopes in the 3Di System provide the advantage of a proprietary
optical path to transfer optimal image resolution and illumination.
Available in 10mm diameter, 0° and 30° angle of view configurations,
StereoScopes deliver a wide angle, fixed focal length scope to fit a large
range of procedures.
|
1
Visualization Solutions for OEM Customers
We also
supply 2D digital cameras and components for several procedure-specific medical
device manufacturers such as Medtronic, Boston Scientific, B. Braun Medical,
Inc., and Richard Wolf Medical Instruments Corporation . As the procedural
business of our customers continues to shift to minimally invasive techniques,
we intend to introduce new products, services and capabilities to respond to
this important business segment. We are committed to the growth of our OEM
business and believe our engineering capabilities and advanced technologies make
us an ideal partner of choice for companies operating in this
sector.
Sales to
individual customers exceeding 10% of revenues in the year ended December 31,
2009 were to four customers who accounted for 32%, 21%, 20% and 12% of revenues,
respectively
BUSINESS
AND MARKET OPPORTUNITY
FDA-Cleared,
Advanced and Affordable 3D Surgical Visualization Technology.
We
believe our technology is at the forefront of advanced 3D visualization
solutions for complex minimally invasive surgeries. As minimally invasive
surgeries gain popularity with both physicians and patients due to improved
outcomes, faster recovery times and lower post-operative care costs, surgeons
seek tools and techniques that make procedures faster and easier. We believe
that there are currently no comparable, FDA-cleared, 3D visualization systems on
the market at our price points.
Significant
Clinical and Workflow Benefits Associated with Improved Surgical
Visualization.
Our 3Di
System provides the surgical team significant clinical and workflow benefits not
currently available from 2D visualization systems. Our solution provides the
benefits of natural 3D vision by providing depth perception cues and a sense of
spatial relativity. The image is not a computer model or digital rendering; it
is stereoscopic vision that closely approximates the surgeon’s visual acuity in
open surgery. This is particularly important in complex and lengthy minimally
invasive procedures that require safe and precise navigation of a patient’s
anatomy. In addition, the 3D system provides a field of view that is more
immersive than traditional two dimensional views and is in alignment with
the surgeon’s orientation to his or her instruments.
Practical
Benefits of our 3Di System Expand Market Opportunities in an Environment that
Places a Premium on Innovative Technologies.
We
believe that the clinical benefits and potential applications of 3D
visualization technology provide us with attractive market opportunities. The
3Di System combines the visual benefits of an open procedure with the clinical
outcomes associated with minimally invasive surgery and enables more complicated
surgical procedures to be performed using less invasive techniques. It expands
the market or procedures available for use by these systems. Moreover, in
addition to our current procedural focus, there are several other procedural
specialties that offer significant expansion opportunities for the technology.
The expansion segments include:
●
|
Functional
Endoscopic Sinus Surgery
|
|
●
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Cardiothoracic
surgery
|
●
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Neuro
Endoscopy
|
|
●
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Pediatric
Endoscopy
|
●
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Minimally
invasive spine surgery
|
ODM/OEM
Business Provides Recurring Revenues
Our
ODM/OEM business has provided us with a recurring source of revenue and has been
a source of growth. We are the strategic visualization supplier and partner for
several leading procedure-specific medical device manufacturers such as B.
Braun, Richard Wolf, Boston Scientific, Medtronic and Biomet, Inc. We have sold
over four thousand 2D digital cameras, accessories and unique visualization
solutions to our ODM/OEM partners, and in 2009 and 2008 ODM/OEM sales accounted
for approximately $5,547,000 and $5,127,000 in revenue,
respectively.
MARKET
OPPORTUNITY
We
believe the primary market for our products is complex, minimally invasive
surgery, or MIS that relies heavily on the use of endoscopic instruments,
enabling instrumentation and visualization technologies. We believe that the key
growth drivers in MIS include the following:
●
|
Improved
patient outcomes;
|
|
●
|
Economic
benefits associated with shorter hospital
stays;
|
●
|
Proactive
and informed patients will continue to seek out minimally invasive
surgeries;
|
|
●
|
Patients
will make restorative health care choices to maintain a healthy lifestyle;
and
|
●
|
With
improved technologies, especially articulating instruments and downsized
instruments, more procedures will continue to be adapted to MIS
techniques.
|
2
We
believe that the clinical benefits and broad potential application of 3D
visualization technology provide us with an attractive, potentially high growth
market. The 3Di System combines the visual benefits with the opportunity for
rapid recovery associated with minimally invasive techniques. The technology
itself is believed to be a driver of expanding procedural
applications.
MARKET
SEGMENTATION, COMPETITION AND PRODUCT POSITIONING OF OUR 3Di SYSTEM
Although
competition exists for aspects of our visualization product line, we believe
that no single company offers a complete and independent 3D visualization and
information solution specifically directed at complex minimally invasive
procedures. In addition, we are not aware of any other true stand alone 3D
systems that have been cleared for marketing in surgical applications by the
FDA.
We
believe the current worldwide market for surgical vision systems is
approximately thirty thousand systems or $1 billion per year. Prices
of 2D vision systems range from $20,000 to $80,000. Over the
last few years the market has expanded by shifting most of the annual placements
to higher priced high definition vision systems. We believe that
recent 3D technology announcements and developments in the consumer non medical
market will accelerate adoption of high definition 3D vision systems in the
medical market. The number of minimally invasive surgical procedures performed
each year continues to grow. Additionally, trends aimed at improving
minimally invasive surgical procedures are resulting in demand for tools and
technologies that allow surgeons to reduce the size and number of ports utilized
to perform procedures. We believe that providing surgeons with
natural depth perception through a high definition 3D vision system is an
essential element in implementing improved surgical procedures. These
advancements in surgical procedures are aimed at improving the quality of
patient care and patient outcomes.
A
separate high end segment of the visualization technology market is fully
immersive 3D-vision-enabled robotics, in particular Intuitive Surgical’s daVinci
System, which generally sells for up to $1,500,000 per system and requires
disposables that cost the hospital up to an estimated $1,500 to $3,000 per
procedure. We do not compete in this segment. Although the robotic
technologies provided by companies such as Intuitive Surgical, Inc., with its
proprietary da Vinci system, incorporate 3D vision capabilities into their
systems, our products are not in direct competition with these products. Rather,
our strategy is to offer standalone 3D vision capability at a substantially
lower price. Depending on configuration, our current 3D system is priced at
approximately $100,000.
Our 3Di
solution provides a higher level of technical sophistication than 2D for MIS
procedures, without the high cost and technical complexity of a robotic
solution. Due to improvements in technology combined with the trends in 3D
adoption in the consumer market, we believe that the adoption rate of 3D vision
systems in the medical market will greatly accelerate upon commercial release of
our next generation 3D vision system. Contributing to such
expected increase in adoption is that we anticipate our next generation product
will have a lower cost and selling price than our current 3D system and
therefore be more competitively priced in relation to existing 2D high
definition systems. Only a 5% penetration of worldwide vision system
unit placements, or approximately 1,400 systems per year, could result in sales
for our 3D technology in excess of $100 million annually.
Currently,
Karl Storz GmbH, Stryker Corporation, Olympus, Inc., Conmed Corporation,
Richard Wolf and Smith & Nephew PLC are key suppliers of 2D
vision systems to the medical market.
OEM
MARKET DEVELOPMENT
We
anticipate the trend of converting open surgical procedures to minimally
invasive techniques will continue to grow at a double digit rate for the
foreseeable future. The common element of minimally invasive techniques is that
the surgeon must rely on a means other than direct visualization to operate
effectively. We believe we are uniquely positioned to provide a broad range of
direct visualization solutions to the OEM marketplace. We believe we will be
able to leverage our long-standing customer relationships and build our customer
list by adding stable, brand name companies as well as emerging companies
developing novel techniques to our customer list further enabling the conversion
to minimally invasive techniques with all types of visualization
solutions.
SALES
AND MARKETING
Our
global sales and marketing effort is designed to drive adoption and to develop a
premium Viking branded image for our products. We focus on implementing a
multi-tiered sales initiative, developing the market segments of interest and
building relationships with key opinion leaders and academic
centers.
In the
United States, we primarily sell directly through our Westborough, Massachusetts
location under the direction of a long-service senior sales executive and
support staff. This group develops customer contacts, demonstrates
equipment and follows up on sales made to assure customer
satisfaction. These efforts are supported by technical resources from
our Westborough, MA headquarters manufacturing facility. In
connection with the anticipated commercial release of our next generation system
we plan to increase our distribution capability in the United States by
indentifying distribution partners for various geographic regions within the
country.
3
Outside
the United States, we have agreements with distributors in Europe, Asia, the
Middle East, Australia and Canada. These sales are supported by a
senior sales executive based in the United States and our personnel in
Westborough, Massachusetts.
Our
marketing strategy includes exposure through trade shows, encouraging clinical
studies and publications, and working with prominent academic healthcare
institutions on new product development opportunities. Our marketing objective
is to create premium brand recognition for our solutions, which we believe will
support growth of 3D system placements.
To date,
we have experienced the most success in the specialty segments of urology,
bariatrics and laparoscopic gynecology. Using urology as an example, we believe
that the adoption drivers are compelling for a number of reasons, including the
following:
●
|
Minimally
invasive urological procedures are complex and, as demonstrated by the
adoption of surgical robotic systems, urological surgeons require 3D depth
perception to more safely and precisely navigate the anatomy of a
patient;
|
|
●
|
Urological
surgeons are influential in purchasing
decisions;
|
●
|
The
3Di System provides a much lower cost alternative to hospital
administration and is a more flexible alternative to a robot;
and
|
|
●
|
Procedures
in urology are well defined and we believe we can address the
visualization requirements for most urological
procedures.
|
OPERATIONS
Our
operations are located in Westborough, Massachusetts. Our President and CEO
oversees a staff of 22 full-time employees and several consultants. These
personnel staff our manufacturing, product development, quality assurance,
regulatory affairs , marketing, technical and sales support and administrative
functions.
Production
processes that are conducted at our Westborough facility include final assembly,
test and integration services of surgical video systems. Equipment used in the
production and engineering process consists of benches, custom fixtures, test
equipment and hand tools. We outsource all fabrication operations. There is
currently floor space capacity to build and ship planned OEM shipments, as well
a build over 500 3Di systems per year. Additional skilled labor is readily
available in the local market as production volume increases.
We
utilize sole source component technology from Matsushita Electric Industrial
Co., Ltd. (Panasonic), Toshiba Teli Corporation, Ltd. and Creative Display
Systems, LLC. We maintain a good relationship with all three suppliers and it
has been their policy to notify us well in advance of the end of life of a
particular component so that we are able to make the necessary final orders
and/or design modifications to support the replacement technology.
All
development projects are performed in compliance with FDA guidelines and the
Medical Device Directive, the regulatory requirements of the European Union for
medical devices. Our policies and procedures have been audited and found to be
compliant by the regulatory agencies for both the United States and Europe.
All products have been tested and approved to safety standards established by
the International Electrotechnical Commission, by Intertek ETL, a nationally
recognized testing laboratory in the United States.
With the
upgrade of our enterprise planning software and information technology
infrastructure completed during 2008, we believe the current systems and
facilities will accommodate our growth projected for the next several years. Our
Westborough facility is ISO 13485 certified and FDA compliant.
PRODUCT
DEVELOPMENT
Our
product development priorities include supporting the development phase of new
OEM customer programs, supporting the clinical expansion process, upgrading and
enhancing our core platform products, and developing new products to expand our
product line. We are dedicated to providing the highest quality and best video
image on the market, in addition to delivering that image in
3D. During 2009 and 2008 we incurred $556,336 and $757,186,
respectively on research and development related expenses. We recently hired a
Vice President of Research and Development, and anticipate a
significant increase in 2010 R&D spending as a result of our planned launch
of our next generation 3D vision system.
4
The
following initiatives are most important to our product development
roadmap:
“Viking”
Brand Product Development:
We are
currently designing our next generation 3D vision system and anticipate
commercial release of the product in the fourth quarter of 2010. We
intend this system to capture and display a true high definition
image. We intend to offer customers with two viewing
options; a 3D flat panel display as well as our current Personal Head Mounted
Display.
We also
continue to evaluate the technologies and refine the pathway for future
generations of our system. While we improve visualization, we intend
also to explore providing a complete advanced minimally invasive surgical
solution rather than a visualization only system.
OEM
Product Development
For the
OEM market, we have developed improved 2D high definition products to enhance
image quality. In the fourth quarter of 2009 we also completed
development work of a 3DHD visualization system for a robotic surgical company
under a development contract that provided us approximately $800,000 of total
revenue beginning in late 2007 and ending in 2009. It is the parties’
stated intentions that this development agreement will lead to a multi-year
supply agreement whereby we manufacture and supply products to the other
party. No assurance can be made that we will enter into a supply
agreement as a result of this engineering contract.
INTELLECTUAL
PROPERTY
Our
technology base was built through internal research and development and by
license and acquisition. We hold fourteen patents and non-exclusive license
rights to four U.S. patents and four international patents.
On August
5, 2008, we licensed our patent portfolio to Intuitive Surgical, Inc. pursuant
to an exclusive license agreement (the “License Agreement”). The
License Agreement provides Intuitive Surgical with perpetual, exclusive rights
to use all of our then held patents in the medical robotics field, as defined in
the License Agreement. We maintained the right to sell
non-stereoscopic products and our current stereoscopic products that utilize the
licensed patents in the medical robotics field. We received $1
million for the license.
QUALITY
ASSURANCE AND REGULATORY AFFAIRS
All of
the medical devices we develop are regulated by the FDA in the United States.
The nature of the FDA requirements applicable to medical devices depends on
their classification by the FDA. Our current products are classified as Class II
medical devices. A device classified as a Class II device usually requires, at a
minimum, FDA 510(k) clearance. The 3Di System was cleared to be marketed in the
United States via 510(k) number K021290 on June 28, 2002.
Our
regulatory function is managed internally and supported by a regulatory affairs
consultant with over 15 years of experience in the medical device industry. The
consultant also acts as our management representative as required by the Medical
Device Directive. Additionally, we have two full-time employees performing
quality control functions. Also, to comply with quality requirements, we
rely on our suppliers’ quality systems and ISO registrations as well as
historical data to support our material acceptance.
We use
the following criteria to prioritize and guide the decision making process in
our Quality organization:
●
|
Patient
and user safety;
|
●
|
Comply
with all applicable U.S. and international standards for medical device
manufacture;
|
●
|
Highest
quality product based on the product specification;
and
|
●
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On-time
delivery.
|
Our
Westborough, MA facility was the subject of a routine surveillance audit by the
FDA in February 2003. No adverse findings were noted. To ensure our compliance
with ISO standards, “Notified Body” inspections of our facility occur
annually. Our last Notified Body review was in June 2009 and resulted
in a recommendation that we maintain our certification.
5
Governmental
Regulation of Medical Devices
The
manufacture and sale of medical devices intended for commercial distribution are
subject to extensive governmental regulation in the United States. Medical
devices are regulated in the United States primarily by the FDA and, to a lesser
extent, by certain state agencies. Generally, medical devices require
pre-market clearance or pre-market approval prior to commercial
distribution. In addition, certain material changes or modifications to,
and changes in the intended use of, medical devices also are subject to FDA
review and clearance or approval. The FDA regulates the research, testing,
manufacture, safety, effectiveness, labeling, storage, record keeping, promotion
and distribution of medical devices in the United States and the export of
unapproved medical devices from the United States to other countries.
Non-compliance with applicable requirements can result in failure of the
government to grant pre-market clearance or approval for devices, withdrawal or
suspension of approval, total or partial suspension of production, fines,
injunctions, civil penalties, refunds, recall or seizure of products and
criminal prosecution.
Device
Classes
In the
United States, medical devices are classified into one of three classes, Class
I, II or III, on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness. Our current products are
classified as Class II devices.
Class I
devices are subject to general controls, such as establishment registration and
product listing, labeling, adulteration and misbranding provisions and medical
device reporting requirements and, unless exempt, to pre-market notification and
adherence to “good manufacturing practice” standards. Class II devices are
subject to general controls and special controls, such as performance standards,
post-market surveillance, patient registries and FDA guidelines.
Generally, Class III devices are those that must receive pre-market approval by
the FDA to ensure their safety and effectiveness. Examples of Class III
products include life-sustaining, life-supporting and implantable or new devices
which have not been found to be substantially equivalent to legally marketed
devices. Class III devices ordinarily require clinical testing to ensure
safety and effectiveness and FDA clearance prior to marketing and
distribution. The FDA also has the authority to require clinical testing
of Class I and Class II devices. A pre-market approval application must be
filed if a proposed device is not substantially equivalent to a legally marketed
predicate device or if it is a Class III device for which the FDA has called for
such application. A pre-market approval application typically takes
several years to be approved by the FDA.
Device
Approval
Generally,
before a new device can be introduced into the market in the United States, the
manufacturer or distributor must obtain FDA clearance of a 510(k) notification
or submission and approval of a pre-market approval application. If a
medical device manufacturer or distributor can establish that a device is
“substantially equivalent” to a legally marketed Class I or Class II device, or
to a Class III device for which the FDA has not called for a pre-market
approval, the manufacturer or distributor may market the device upon receipt of
an FDA order determining such a device substantially equivalent to a predicate
device. The 510(k) notification may need to be supported by appropriate
performance, clinical or testing data establishing the claim of substantial
equivalence. The FDA requires a rigorous demonstration of substantial
equivalence.
Following
submission of the 510(k) notification, the manufacturer or distributor may not
place the device into commercial distribution until an FDA substantial
equivalence order permitting the marketing of a device is received by the person
who submitted the 510(k) notification. At this time, the FDA typically
responds to the submission of a 510(k) notification within 90 to 200 days.
An FDA letter may declare that the device is substantially equivalent to a
legally marketed device and allow the proposed device to be marketed in the
United States. The FDA, however, may determine that the proposed device is
not substantially equivalent or require further information, including clinical
data, to make a determination regarding substantial equivalence. Such
determination or request for additional information will delay market
introduction of the product that is the subject of the 510(k)
notification.
Investigational
Device Exemption Application
All
clinical investigations involving the use of an unapproved or uncleared device
on humans to determine the safety or effectiveness of the device must be
conducted in accordance with the FDA’s investigational device exemption
regulations. If the device presents a “significant risk,” the manufacturer
or distributor of the device is required to file an investigational device
exemption application with the FDA prior to commencing human clinical
trials. This application must be supported by data, typically the result
of animal and bench testing. If the application is approved by the FDA,
human clinical trials may begin at a specific number of investigational sites
with a maximum number of patients, as approved by the FDA. If the device
presents a “non-significant risk,” approval by an institutional review board
prior to commencing human clinical trials is required, as well as compliance
with labeling, record keeping, monitoring and other requirements. However,
the FDA can disagree with a non-significant risk device finding.
Any
products which we manufacture or distribute are subject to continuing regulation
by the FDA, which includes record keeping requirements, reporting of adverse
experience with the use of the device, “good manufacturing” requirements and
post-market surveillance, and may include post-market registry and other actions
deemed necessary by the FDA. A new 510(k), pre-market approval or
pre-market approval supplement is also required when a medical device
manufacturer makes a change or modification to a legally marketed device that
could significantly affect the safety or effectiveness of the device, or where
there is a major change or modification in the intended use of the device or a
new indication for use of the device. When any change or modification is
made to a device or its intended use, the manufacturer is expected to make the
initial determination as to whether the change or modification is of a kind that
would necessitate the filing of a new 510(k), pre-market approval or pre-market
approval supplement.
6
Foreign Requirements
The sale
of medical device products outside of the United States is subject to foreign
regulatory requirements that vary from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA clearance, and requirements for licensing may
differ from FDA requirements. Our failure to comply with regulatory
requirements would jeopardize our ability to market our products. The
current regulatory environment in Europe for medical devices differs
significantly from that in the United States. Since June 1998, all medical
devices sold in the European Union must bear the CE mark. Devices are now
classified by manufacturers according to the risks they represent with a
classification system giving Class III as the highest risk devices and Class I
as the lowest. Once the device has been classified, the manufacturer can
follow one of a series of conformity assessment routes, typically through a
registered quality system, and demonstrate compliance to a “European Notified
Body.” After that, the CE mark may be applied to the device. Maintenance
of the system is ensured through annual on-site audits by the notified body and
a post-market surveillance system requiring the manufacturer to submit serious
complaints to the appropriate governmental authority.
Employees
As
February 1, 2010, we have 23 full time employees. None of our
employees are represented by a collective bargaining agreement, nor have we
experienced work stoppages. We believe our relations with our employees are
good.
ITEM
1A. RISK FACTORS
Forward
Looking Statements
This
annual report on Form 10-K contains and incorporates by reference certain
“forward-looking statements” with respect to results of our operations and
businesses. All statements, other than statements of historical facts, included
in this annual report on Form 10-K, including those regarding market trends, our
financial position, business strategy, projected costs, and plans and objectives
of management for future operations, are forward-looking statements. In general,
such statements are identified by the use of forward- looking words or phrases
including, but not limited to, “intended,” “will,” “should,” “may,” “expects,”
“expected,” “anticipates,” and “anticipated” or the negative thereof or
variations thereon or similar terminology. These forward-looking statements are
based on our current expectations. Although we believe that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to be correct and our actual results
could differ materially. These forward-looking statements represent our judgment
as of the date of this annual report on Form 10-K. We disclaim, however, any
intent or obligation to update our forward-looking statements, except as
required by law.
Risks
Related to Our Business
The
report from our independent auditors includes a going concern explanatory
paragraph.
The
report from our independent registered public accounting firm,
Squar, Milner, Peterson, Miranda & Williamson, LLP, dated February 22, 2010
includes a going concern explanatory paragraph which states factors relating to
the Company’s net losses and working capital concerns as discussed in Note 2 to
the financial statements raise substantial doubt the Company’s ability to
continue as a going concern. We will need to generate significant
additional revenue in order to achieve profitability and we may
require additional financing during 2010. The going concern
explanatory paragraph in the independent auditor’s report emphasizes the
uncertainty related to our business as well as the level of risk associated with
an investment in our common stock.
We
require financing and our inability to raise additional capital on
acceptable terms in the future may have a material adverse effect on our
business and financial condition.
In
January 2010, we entered into an equity line of credit with Dutchess Opportunity
Fund II, LP (Dutchess) that provides that Dutchess is committed to purchase from
us, from time to time, up to $5,000,000 of our common stock over the course of
thirty-six months. We may draw on the facility from time to time, as
and when we determine appropriate in accordance with the terms and conditions of
the related investment agreement (“Investment Agreement”. )We believe that it is
likely that we will need to access our equity line or seek additional financing
in order to fund our operations and carry out our business plan for the next
twelve months. The overall weakness of the economy and increased financial
instability of many borrowers has resulted in a general tightening of capital
availability. Many lending and investing institutions that have
traditionally been sources of capital have experienced significant losses and a
lack of liquidity. These conditions may adversely impact our ability to raise
capital. There can be no assurance that additional capital will be
available on acceptable terms, or at all. Other than our equity line, we do not
have any arrangements with any bank or financial institution to provide
additional financing and there can be no assurance that any such arrangement, if
required or otherwise sought, would be available on terms deemed to be
commercially acceptable and in our best interests. Also, if we raise additional
funds by selling equity or equity-based securities, the percentage ownership of
our existing stockholders will be reduced and such equity securities may have
rights, preferences or privileges senior to those of the holders of our common
stock. Any inability to obtain additional cash as needed could have a material
adverse effect on our financial position, results of operations and ability to
continue operations.
7
As part
of managing our business, we frequently forecast our future cash flow and cash
position. Such projections include assumptions regarding fulfillment
of existing orders, receipt and fulfillment of future orders and ultimately the
receipt of cash. These forecasts also include assumptions regarding
the timing of payments related to existing and future liabilities and inventory
procurement. If forecasted orders do not materialize or existing
orders were cancelled or reduced, this could have a material adverse impact on
our projected cash position and our ability to continue our
operations.
The
recent deterioration of the economy and credit markets may adversely affect our
future results of operations.
Our
operations and performance depend to some degree on general economic conditions
and their impact on our customers’ finances and purchase decisions. As a
result of recent economic events, potential customers may elect to defer
purchases of capital equipment items, such as the products we manufacture and
supply. Additionally, the credit markets and the financial services
industry recently experienced a period of upheaval characterized by the
bankruptcy, failure, collapse or sale of various financial institutions and an
unprecedented level of intervention from the United States government. While the
ultimate outcome of these events cannot be predicted, it may have a material
adverse effect on our customers’ ability to fund their operations thus adversely
impacting their ability to purchase our products or to pay for our products on a
timely basis, if at all. These and other economic factors could have a material
adverse effect on demand for our products, the collection of payments for our
products and on our financial condition and operating results.
We
will likely face significant competition which could adversely affect our
revenues, results of operations and financial condition.
The
market for medical products and services is highly competitive and new offerings
and technologies are becoming available regularly. Many of our competitors
are substantially larger and more experienced than we are. In
addition, they have longer operating histories and have materially greater
financial and other resources than we do. If we cannot compete in the
marketplace, we may have difficulty selling our products and generating
revenues. Additionally, competition may drive down the prices of our
products, which could adversely affect our cost of goods sold and our
profitability, if any. We cannot guarantee that we will compete
successfully against our potential competitors.
We
depend upon our executive officers and key personnel.
Our
performance depends substantially on the performance of our executive officers
and other key personnel. Our future success will depend to a large
extent on retaining our employees and our ability to attract, train, retain and
motivate sufficient qualified employees to fill vacancies created by attrition
or expansion of our operations. The loss of the services of any of
our executive officers or key personnel could have a material adverse effect on
our business, revenues, and results of operations or financial
condition.
Competition
for talented personnel is intense, and we may not be able to continue to
attract, train, retain or motivate other highly qualified technical and
managerial personnel in the future. In addition, market conditions may require
us to pay higher compensation to qualified management and technical personnel
than we currently anticipate. Any inability to attract and retain
qualified management and technical personnel in the future could have a material
adverse effect on our business, prospects, financial condition, and/or results
of operations.
We
rely on a small number of customers and cannot be certain they will consistently
purchase our products in the future.
Sales to
individual customers exceeding 10% of revenues in the year ended December 31,
2009 were to four customers who accounted for 32%, 21%, 20% and 12% of revenues,
respectively. Sales to individual customers exceeding 10% or more of
revenues in the year ended December 31, 2008 were to three customers who
accounted for 30%, 19% and 11% of revenues, respectively. No other
customer accounted for more than 10% of our revenues during those
periods. In the future, a small number of customers may continue to
represent a significant portion of our total revenues in any given period. We
cannot be certain that such customers will consistently purchase our products at
any particular rate over any subsequent period. A loss of any of these
customers could adversely affect our financial performance.
8
We
are subject to significant domestic and international regulations and may not be
able to obtain necessary regulatory clearances to sell our
products.
The
manufacture and sale of medical devices intended for commercial distribution are
subject to extensive governmental regulation. Our failure to comply with
regulatory requirements would jeopardize our ability to market our
products. Noncompliance with applicable requirements can result in failure
of the regulatory agency to grant pre-market clearance or approval for devices,
withdrawal or suspension of approval, total or partial suspension of production,
fines, injunctions, civil penalties, refunds, recall or seizure of products and
criminal prosecution. Medical devices are regulated in the United States
primarily by the FDA and, to a lesser extent, by state agencies. Sales of
medical device products outside the United States are subject to foreign
regulatory requirements that vary from country to country. Generally,
medical devices require pre-market clearance or pre-market approval prior to
commercial distribution. A determination that information available on the
medical device is not sufficient to grant the needed clearance or approval will
delay market introduction of the product. In addition, material changes or
modifications to, and changes in intended use of, medical devices also are
subject to FDA review and clearance or approval. The FDA regulates the
research, testing, manufacture, safety, effectiveness, labeling, storage, record
keeping, promotion and distribution of medical devices in the United States and
the export of unapproved medical devices from the United States to other
countries. The time required to obtain approvals required by foreign
countries may be longer or shorter than that required for FDA clearance, and
requirements for licensing may differ from FDA requirements. The current
regulatory environment in Europe for medical devices differs significantly from
that in the United States.
We
must be able to adapt to rapidly changing technology trends and evolving
industry standards or we risk our products becoming obsolete.
The
medical device market in which we compete is characterized by intensive
development efforts and rapidly advancing technology. Our future success
will depend, in large part, upon our ability to anticipate and keep pace with
advancing technology and competing innovations. We may not be successful
in identifying, developing and marketing new products or enhancing our existing
products. We believe that a number of large companies, with significantly
greater financial, manufacturing, marketing, distribution and technical
resources and experience than ours, are focusing on the development of
visualization products for minimally invasive surgery.
Our
operating results may be adversely affected by the level of reimbursements for
surgical procedures using our products.
The level
of payments for the surgical procedures, in which our products are involved,
either by Medicare or private insurance companies may have a significant impact
on future operating results. We could be adversely affected by changes in
payment policies of government or private health care payers, particularly to
the extent any such changes affect payment for the procedure in which our
products are intended to be used. It is a continuing trend in United
States health care for such payments to be under continual scrutiny and downward
pressure. We believe that reimbursement in the future will be subject to
increased restrictions, both in the United States and in foreign markets and
that the overall escalating cost of medical products and services has led to and
will continue to lead to increased pressures on the health care industry, both
foreign and domestic, to reduce the cost of products and services, including
products which we offer.
We expect
that our products typically will be used by hospitals and surgical centers,
which bill various third-party payers, such as governmental programs and private
insurance plans, for the health care services provided to their patients.
Third-party payers carefully review and increasingly challenge the prices
charged for medical products and services or negotiate a flat rate fee in
advance. Payment rates from private companies also vary depending on the
procedure performed, the third-party payer, the insurance plan and other
factors. Medicare compensates hospitals at a predetermined fixed amount
for the costs associated with an in-patient hospitalization based on the
patient’s discharge diagnosis and compensates physicians at a pre-determined
fixed amount based on the procedure performed, regardless of the actual costs
incurred by the hospital or physician in furnishing the care and unrelated to
the specific devices or systems used in that procedure. Medicare and other
third-party payers are increasingly scrutinizing whether to cover new products
and the level of payment for new procedures. The flat fee reimbursement
trend is causing hospitals to control costs strictly in the context of a managed
care system in which health care providers contract to provide comprehensive
health care for a fixed cost per person. We are unable to predict what
changes will be made in the reimbursement methods utilized by such third-party
payers.
If we
obtain the necessary foreign regulatory registrations or approvals, market
acceptance of our products in international markets would be dependent, in part,
upon the acceptance by the prevailing health care financing system in each
country. Health care financing systems in international markets vary
significantly by country and include both government sponsored health care
programs and private insurance. We cannot assure you that these financing
systems will endorse the use of our products.
We
may be subject to product liability claims and have limited insurance
coverage.
By
engaging in the medical devices business, we will face an inherent business
risk of exposure to product liability claims in the event that the use of our
products results in personal injury or death. Also, in the event that any
of our products proves to be defective, we may be required to recall or redesign
such products. We will need to maintain adequate product liability
insurance coverage. If we are able to maintain insurance, of which there
can be no assurance, our coverage limits may not be adequate to protect us from
any liabilities we might incur in connection with the development, manufacture
and sale of our products. Product liability insurance is expensive and in
the future may not be available to us on acceptable terms, if at all. A
successful product liability claim or series of claims brought against us in
excess of our insurance coverage or a product recall would negatively impact our
business.
9
Risks
Related to Our Equity Line
We
have registered the resale of 15,000,000 shares of common stock which may be
issued under our equity line. The resale of such shares could depress
the market price of our common stock and you may not be able to sell your
investment for what you paid for it.
We have
registered the resale of 15,000,000 shares of common stock in connection with
our equity line. We may issue up to that number of shares to the investor
pursuant to the equity line. The sale of these shares into the public
market by the investor could depress the market price of our common stock and
you may not be able to sell your investment for what you paid for
it.
Existing
stockholders could experience substantial dilution upon the issuance of common
stock pursuant to the equity line.
Our
equity line contemplates our issuance of up to 15,000,000 shares of our common
stock, subject to certain restrictions and obligations. If the terms
and conditions of the equity line are satisfied, and we choose to exercise our
Put rights to the fullest extent permitted and sell 15,000,000 shares of our
common stock to the investor, our existing stockholders’ ownership will be
diluted by such sales. Consequently, the value of your investment may
decrease.
The
equity line investor will pay less than the then-prevailing market price for our
common stock under the equity line.
The
common stock to be issued pursuant to the equity line will be purchased at a 4%
discount to the volume weighted average price, VWAP, of our common stock during
the five consecutive trading day period beginning on the trading day immediately
following the date of delivery of a put notice by us to the counter party,
subject to certain exceptions. The counter party has a financial
incentive to sell our common stock upon receiving the shares to realize the
profit equal to the difference between the discounted price and the market
price. If the investor sells the shares, the price of our common
stock could decrease.
We
may not be able to access sufficient funds under the equity line when
needed.
Our
ability to put shares and obtain funds under the equity line is limited by the
terms and conditions in the Investment Agreement, including restrictions on when
we may exercise our put rights, restrictions on the amount we may put to the
investor at any one time, which is determined in part by the trading volume of
our common stock, and a limitation on the investor’s obligation to purchase if
such purchase would result in them beneficially owning more than 4.99% of our
common stock. Accordingly, the equity line may not be available to satisfy all
of our funding needs.
Risks
Related to Our Common Stock
Investors
who purchase shares of our common stock should be aware of the possibility of a
total loss of their investment.
An
investment in our common stock involves a substantial degree of risk.
Before making an investment decision, you should give careful
consideration to the risk factors described in this section in addition to the
other information contained in this annual report. The risk factors
described herein, however, may not reflect all of the risks associated with our
business or an investment in our common stock. You should invest in our
Company only if you can afford to lose your entire investment.
Our
current management holds significant control over our common stock and they may
be able to control our Company indefinitely.
Our
management has significant control over our voting stock which may make it
difficult to complete some corporate transactions without their support and may
prevent a change in control. As of January 31, 2010, our directors
and executive officers as a whole, beneficially own approximately
14,397,727 shares or 31.7% of our outstanding common stock, and
assuming that the warrants and options (exercisable as of 60 days from January
31, 2010) were exercised, may beneficially own approximately 27,688,519 shares
or 47.2% of our outstanding common stock. Certain of our
officers and directors disclaim beneficial ownership of certain shares included
in the description above. The above-described significant stockholders may have
considerable influence over the outcome of all matters submitted to our
stockholders for approval, including the election of directors. In addition,
this ownership could discourage the acquisition of our common stock by potential
investors and could have an anti-takeover effect, possibly depressing the
trading price of our common stock.
“Penny
stock” rules may make buying or selling our securities difficult, which may
make our stock less liquid and make it harder for investors to buy and sell our
securities.
Our
common stock currently trades on the Over-the-Counter Bulletin
Board. If the market price per share of our common stock is less than
$5.00, the shares may be “penny stocks” as defined in the Securities Exchange
Act of 1934, as amended, referred to as the Exchange Act. As a
result, an investor may find it more difficult to dispose of or obtain accurate
quotations as to the price of these securities. In addition, “penny
stock” rules adopted by the SEC under the Exchange Act subject the sale of these
securities to regulations which impose sales practice requirements on
broker-dealers. For example, broker-dealers selling penny stocks
must, prior to effecting the transaction, provide their customers with a
document that
discloses the risks of investing in penny stocks.
10
Furthermore,
if the person purchasing the securities is someone other than an accredited
investor or an established customer of the broker-dealer, the broker-dealer must
also approve the potential customer’s account by obtaining information
concerning the customer’s financial situation, investment experience and
investment objectives. The broker-dealer must also make a
determination whether the customer has sufficient knowledge and experience in
financial matters to be reasonably expected to be capable of evaluating the risk
of transactions in penny stocks. Accordingly, the SEC’s rules may limit the
number of potential purchasers of shares of our common
stock. Moreover, various state securities laws impose restrictions on
transferring “penny stocks,” and, as a result, investors in our securities may
have their ability to sell their securities impaired.
If
an active, liquid trading market for our common stock does not develop, you may
not be able to sell your shares quickly or at or above the price you paid for
it.
Although
our common stock currently trades on the Over-the-Counter Bulletin Board, an
active and liquid trading market for our common stock has not yet and may not
ever develop or be sustained. You may not be able to sell your shares
quickly or at or above the price you paid for our stock if trading in our stock
is not active.
We
do not expect to pay dividends in the foreseeable future.
We do not
anticipate paying cash dividends on our common stock in the foreseeable future.
Any payment of cash dividends will depend on our financial condition, results of
operations, capital requirements and other factors and will be at the discretion
of our board of directors.
ITEM
2. DESCRIPTION OF PROPERTY
We lease
an 18,210 square foot facility in Westborough, Massachusetts. This
facility houses our corporate headquarters, manufacturing, and research and
development. The lease expires on September 30,
2010. Under this lease we are committed to make payments totaling
approximately $184,000 in 2010. We believe that this facility will be adequate
to meet our needs through the contractual term of the lease and we believe that
we will be able to renew, extend or obtain additional space, as needed, on
commercially reasonable terms when our lease ends.
ITEM
3. LEGAL PROCEEDINGS
We are
not a party to any legal proceedings.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no matters submitted to a vote of our security holders during the fourth
quarter of the fiscal year ended December 31, 2009.
11
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our
common stock is quoted on the OTCBB under the symbol “VKNG.OB.” The
following table sets forth the high and low bid closing prices for our common
stock for each quarter during the last two fiscal years. The prices reported
below reflect inter-dealer prices and are without adjustments for retail
markups, markdowns or commissions, and may not necessarily represent actual
transactions.
High
|
Low
|
|||||||||
Fiscal
Year Ended December 31, 2008
|
||||||||||
First
Quarter
|
$ | 0.75 | $ | 0.25 | ||||||
Second
Quarter
|
$ | 0.51 | $ | 0.25 | ||||||
Third
Quarter
|
$ | 0.49 | $ | 0.26 | ||||||
Fourth
Quarter
|
$ | 0.30 | $ | 0.15 | ||||||
Fiscal
Year Ended December 31, 2009
|
||||||||||
First
Quarter
|
$ | 0.20 | $ | 0.06 | ||||||
Second
Quarter
|
$ | 0.06 | $ | 0.015 | ||||||
Third
Quarter
|
$ | 0.02 | $ | 0.003 | ||||||
Fourth
Quarter
|
$ | 1.05 | $ | 0.003 | ||||||
Fiscal
Year Ending December 31, 2010
|
||||||||||
First
Quarter (through Feb. 10)
|
$ | 0.305 | $ | 0.20 |
Shares
Issued in Unregistered Transactions
We did
not issue any shares of common stock in unregistered transactions
during the quarter ended December 31, 2009.
Holders
As of
December 31, 2009, there were approximately 111 stockholders of record of our
common stock.
Dividends
We did
not pay any dividends during the year ended December 31, 2009.
We have
not paid any cash dividends on our common stock since our inception and do not
anticipate or contemplate paying dividends in the foreseeable
future.
Equity
Compensation Plan Information
Information
with respect to shares of our common stock that may be issued under our equity
compensation plans is set forth in Item 12 of this annual report entitled
“Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
ITEM
6. SELECTED FINANCIAL DATA
As a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in
item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
obligations and therefore are not required to provide the information requested
by this Item.
12
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion of our financial condition and results of operations should
be read in conjunction with our Financial Statements and Notes thereto, and the
other financial information included elsewhere in this annual report on Form
10-K. This Management’s Discussion and Analysis of Financial Condition and
Results of Operations contains descriptions of our expectations regarding future
trends affecting our business. The following discussion sets forth certain
factors we believe could cause actual results to differ materially from those
contemplated by the forward-looking statements.
Overview
We are a
worldwide developer, manufacturer and marketer of visualization solutions for
complex minimally invasive surgery. We partner with medical device
companies and healthcare facilities to provide surgeons with proprietary
visualization systems enabling minimally invasive surgical procedures, which
reduce patient trauma and recovery time.
We
manufacture two dimensional or2D, digital cameras that are sold to third-party
companies who sell to end users through their Original Design Manufacturer, or
ODM, programs and Original Equipment Manufacturer, or OEM,
programs.
We sell
our proprietary visualization system, or our3Di Vision System, under the
Viking brand directly to hospitals and outpatient surgical centers in the United
States and outside the United States through our distributor
network.
Liquidity and Capital Resources
We have
financed our operations since inception principally through private sales of
equity securities and convertible debt. From January 1, 2004 through December
31, 2009, we raised net proceeds of $10,750,000 through the sale of common and
preferred stock in private placements and approximately $13,600,000 through the
issuance of convertible notes and debentures. As of December 31, 2009, we had
cash and cash equivalents of $721,121.
Net cash
provided by operating activities for the year ended December 31, 2009 was
$609,776. Net cash used in operating activities during the year ended December
31, 2008 was $2,615,399. This improvement in cash flows from operating
activities was attributable primarily to a smaller loss for the year ended
December 31, 2009 combined with net cash generation during 2009 from the
combined changes in inventory, accounts receivable, accounts payable, accrued
expenses, and deferred revenue compared with net cash consumed in those
combined changes during 2008.
Net cash
used in financing activities was $46,411 during the year ended December 31, 2009
compared with net cash provided by financing activities of $2,547,823
during the year ended December 31, 2008. The net cash provided by financing
activities in 2008 resulted from the sale of common stock in connection with our
Recapitalization Plan. We completed no such financing activities during
2009.
We
believe that it is likely that we will need to raise additional capital to
execute our business plan and continue our operations for the next twelve
months. In January 2010, we entered into an equity line of credit agreement,
referred to as the Investment Agreement, with Dutchess Opportunity Fund that
provides that Dutchess is committed to purchase from us, from time to time, up
to $5,000,000 of our common stock over the course of thirty-six
months. We may draw on the facility from time to time, as and when we
determine appropriate in accordance with the terms and conditions of the
Investment Agreement. While we continue to pursue other sources of capital, we
anticipate utilizing $2 million to $3 million of the equity line of credit to
fund the development and launch of our “Next Generation” 3DHD
system, anticipated 2010 operating losses and working capital
needs.
Other
than our equity line, we do not have any arrangements with any bank, financial
institutions or investors to provide additional financing and there can be no
assurance that any such arrangement, if required or otherwise sought, would be
available on terms deemed to be commercially acceptable and in our best
interests. If we are not able to draw on the equity line, or we fail to
secure other financing and we are not generating positive cash flow, we will
consider other options, including curtailing operations.
Results
of Operations
Sales. We had sales of $7,218,994
for the year ended December 31, 2009 and $6,426,996 for the year ended December
31, 2008, representing an increase of approximately 12%. The increase
in sales during 2009 was primarily due to increased sales of approximately
$715,000 of a proprietary visualization system designed for and distributed by
one specific customer as they elected to increase inventory levels of such
product. Additionally, we experienced increased sales our 2D cameras
to other OEM customers as well as an increase of approximately
$372,000 related to our Viking Branded products, primarily increased sales of
our 3D vision systems. Partially offsetting these increases in
revenue was a decrease in revenue recognized associated with a third party
development contract for 3D vision products. Revenue under such
arrangement is recognized using the percent completion method. Due to
the contract completion in 2009, revenue recognized related to this arrangement
decreased approximately $572,000 during 2009 as compared with 2008.
13
Sales to
individual customers exceeding 10% or more of revenues in the year ended
December 31, 2009 were to four customers who accounted for 32%, 21%, 20% and 12%
of revenues, respectively. Sales to individual customers exceeding
10% or more of revenues in the year ended December 31, 2008 were to three
customers who accounted for 30%, 19% and 11% of revenues,
respectively.
Gross Profit.
For the
year ended December 31, 2009, gross profit amounted to $1,901,450, or 26% of
revenue compared with $645,141, or 10% of revenue, for 2008. Gross
profit was adversely impacted during 2008 due to the recording of approximately
$312,000 of inventory reserves for slow moving and obsolete inventory. Excluding
the charge for slow moving and obsolete inventory, gross margin was
approximately 16% of revenue for the year ended December 31,
2008. The increases in gross margin percentage for 2009 is due to a
favorable sales mix of higher margin products as well as higher production
volumes resulting in lower per unit manufacturing costs.
Operating
Expenses. We incurred total operating expenses of $3,232,969,
for the year ended December 31, 2009 compared with $5,279,068 for the year
ended December 31, 2008. Excluding non-cash stock-based compensation
expense, total operating expenses for 2009 and 2008 were $2,640,619 and
$4,192,678, respectively. This represents a decrease of
37% in operating expenses. This decrease in total operating
expenses for both periods is due largely to our continued cost reduction efforts
as described below.
Sales and
Marketing Expense. Sales and marketing expenses were $885,064 for the
year ended December 31, 2009 and $1,598,753 for the year ended December 31,
2008. This represents a decrease of $713,689 or 45%. This
decrease is primarily due to reductions in our marketing efforts, reduction in
sales related headcount, and lower depreciation expense related to demonstration
equipment. Additionally 2008 contains approximately $250,000 of bad debt expense
related to accounts where collection of amounts invoiced is considered doubtful
while 2009 contained net bad debt expense of $51,532.
Research and
Development Expense. We had research and development expenses
of $556,336 for the year ended December 31, 2009 and $757,186 for the year ended
December 31, 2008, representing a decrease of $200,850. The reduction in
research and development expense occurred primarily due to the reduction of
personnel focused on research and development
activities.
General and
Administrative Expense. General and administrative expenses
include costs for administrative personnel, legal and accounting expenses and
various public company expenses. General and administrative expenses were
$1,791,569 for the year ended December 31, 2009 and $2,923,129 for the year
ended December 31, 2008, representing a decrease of
$1,131,560. General and administrative expenses for the years ended
December 31, 2009 and 2008 included non-cash stock-based compensation expense of
$592,350 and $1,086,390 respectively. Excluding such charges, general
and administrative expense decreased $637,520, or 35% in 2009 as compared
with 2008. Legal and audit expense decreased approximately
$309,184 as compared with the prior year.
Other Income and
Expenses. During the year ended December 31, 2009, other income and
expense totaled to income of $257,200 compared with a net charge of
$1,118,130 for 2008. During 2009 we recorded $125,000 of
license fee income related to the granting of a license to use one of our
patents in the nonmedical markets. During 2009 we also recorded a
$133,073 gain on the settlement of a liability recorded in previous period.
During 2008, we recorded a charge of $2,703,776 related to the recapitalization
transaction. This charge was partially offset by a $1,000,000 license
fee recorded in the third quarter of 2008 and the first quarter 2008 reversal of
approximately $271,000 related to accrued fees associated with our failure to
file a registration statement for common stock and warrants issued during
2006. Additionally, during the first quarter of 2008, we recorded a
non-cash gain on derivative liability of $307,061 related to the decrease in
value of our derivative instruments.
14
Operating
Loss Before Non-Cash Charges
Management
assesses operational performance and improvement by measuring and reporting the
Company’s operating loss before noncash charges. Management believes this
non-GAAP metric is useful in understanding the Company’s ability to generate
cash, before consideration of working capital or capital expenditure
needs.
A
reconciliation of net loss in accordance with generally accepted accounting
principles (“GAAP”) to the non-GAAP measure of operating loss before non-cash
charges is as follows:
Year
Ended
December
31
|
||||||||
2009
|
2008
|
|||||||
Net
loss, as reported
|
$
|
(1,074,319
|
)
|
$
|
(5,752,057
|
)
|
||
Adjustments:
|
||||||||
Total
other (income)/expense
|
(257,200
|
)
|
1,118,130
|
|||||
Operating
loss, as reported
|
(1,331,519
|
)
|
(4,633,927
|
)
|
||||
Non-cash
stock option expense
|
592,350
|
1,086,390
|
||||||
Depreciation,
amortization and other non cash charges
|
257,834
|
493,508
|
||||||
Operating
loss before non-cash charges
|
$
|
(481,335
|
)
|
$
|
(3,054,029
|
)
|
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors.
Contractual
Obligations and Commitments
We have
obligations pertaining to the operating lease for our Westborough, MA facility
through September 30, 2010. Under this lease we are committed to make payments
totaling approximately $184,000 in 2010.
We have a
royalty agreement with a medical device company. The royalty agreement requires
payments of 4% of sales that use the licensed intellectual property. As of
December 31, 2009 and 2008, we had accrued royalties related to this agreement
of $36,300 and $26,300, respectively. During 2008 and 2009, we did not pay any
royalties under this agreement.
Use
of Estimates and Critical Accounting Policies
Our
Management's Discussion and Analysis of Financial Condition and Results of
Operations discuss our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States.
The
preparation of our financial statements requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, management evaluates its estimates and
assumptions, including those related to inventory, income taxes, long lived
asset valuation, revenue recognition, and stock based compensation. Management
bases its estimates and judgments on historical experience of operations and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Management
believes the following critical accounting policies, among others, will affect
its more significant judgments and estimates used in the preparation of our
Financial Statements.
Inventory.
Parts and supplies inventories are stated at the lower of cost or market.
Cost is determined using the standard cost method which approximates actual
cost. Work-in-process and finished goods are stated at the lower of the
accumulated manufacturing costs or market. We
reduce the stated value of our inventory for obsolescence or impairment in an
amount equal to the difference between the cost of the inventory and the
estimated market value, based upon assumptions about future demand and market
conditions. If actual future demand or market conditions are less favorable than
those projected by management, additional reductions in stated value may be
required.
Income Taxes.
In determining the carrying value of our net deferred tax assets, we must
assess the likelihood of sufficient future taxable income in certain tax
jurisdictions, based on estimates and assumptions, to realize the benefit of
these assets. If these estimates and assumptions change in the future, we may
record a reduction in the valuation allowance, resulting in an income tax
benefit in our Statements of Operations. Management evaluates the realizability
of the deferred tax assets and assesses the valuation allowance
quarterly.
15
We are
primarily subject to U.S. federal and state income tax. Tax years subsequent to
December 31, 2004 remain open to examination by U.S. federal and state tax
authorities. In addition, our policy is to recognize interest and penalties
related to income tax matters in income tax expense. As of December 31, 2009, we
had no accruals for interest or penalties related to income tax
matters.
Impairment
of Long Lived Assets and Intangible Assets with Finite Lives
Property
and equipment and intangible assets with finite lives are amortized using the
straight line method over their estimated useful lives. These assets
are assessed for potential impairment when there is evidence that events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Conditions that would indicate impairment and trigger an
assessment include, but are not limited to, a significant adverse change in the
legal factors or business climate that could affect the value of an asset, an
adverse action or assessment by a regulator or a current expectation that, more
likely than not, a
long-lived asset will be sold or otherwise disposed of significantly before the
end of its previously estimated useful life. If, upon assessment, the carrying
amount of an asset exceeds its estimated fair value, an impairment charge is
recognized for the amount by which the carrying amount of the asset exceeds its
estimated fair value of the asset
Revenue
Recognition. Our revenues are derived from the sale of surgical
visualization technology products to end users, distributors and original
equipment manufacturers. Revenue from the sale of products is recognized when
evidence of an arrangement exists, the product has been shipped, the selling
price is fixed or determinable, collection is reasonably assured and
when both title and risk of loss transfer to the customer, provided that no
significant obligations remain. If installation is included as part of the
contract, revenue is not recognized until installation has occurred, or until
any remaining installation obligation is deemed to be perfunctory.
For the
sale of products and services as part of a multiple-element arrangement, we
allocate revenue from multiple-element arrangements to the elements based on the
relative fair value of each element. For sales of extended warranties with a
separate contract price, Viking defers revenue equal to the separately stated
price. Revenue associated with undelivered elements is deferred and recorded
when delivery occurs.
Stock-Based
Compensation The measurement and recognition of compensation expense for
all share-based payment awards to employees and directors is based on estimated
fair values. The Company uses the Black-Scholes option valuation model to
estimate the fair value of its stock options at the date of grant. The
Black-Scholes option valuation model requires the input of subjective
assumptions to calculate the value of stock options. The Company uses historical
data among other information to estimate the expected price volatility, the
expected annual dividend, the expected option life and the expected forfeiture
rate.
Recent
Accounting Pronouncements
See Note
18 of Notes to Financial Statements in Item 8 for a full description of
recent accounting pronouncements including the respective expected dates of
adoption and effects on the financial statements
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in
Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
obligations and therefore are not required to provide the information requested
by this Item.
16
ITEM 8. FINANCIAL
STATEMENTS
Index to Financial
Statements
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
18
|
Balance
Sheets at December 31, 2009 and 2008
|
19
|
Statements
of Operations for the years ended December 31, 2009 and
2008
|
20
|
Statements
of Stockholders’ Equity (Deficit) for the years ended December 31, 2009
and 2008
|
21
|
Statements
of Cash Flows for the years ended December 31, 2009 and
2008
|
22-23
|
Notes
to Financial Statements
|
24-36
|
17
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Viking
Systems, Inc.
We have
audited the accompanying balance sheets of Viking Systems, Inc. as of
December 31, 2009 and 2008, and the related statements of operations,
stockholders’ equity (deficit), 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 the financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company was not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that were 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 presentation of the financial
statements. We believe that our audits provide a reasonable basis for
our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Viking Systems, Inc. as of December
31, 2009 and 2008, 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.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has incurred significant net losses during the
years ended December 31, 2009 and 2008 and has insufficient working capital as
of December 31, 2009 to fund its planned operations during 2010. These factors
raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans as to these matters are described in Note 2. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/
SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP
San
Diego, California
February
22, 2010
18
VIKING
SYSTEMS, INC.
Balance
Sheets
December
31, 2009 and 2008
Assets
|
||||||||
2009
|
2008
|
|||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
721,121
|
$
|
168,767
|
||||
Accounts
receivable, net
|
455,488
|
837,229
|
||||||
Inventories
|
1,537,851
|
2,104,764
|
||||||
Prepaid
expenses and other current assets
|
67,103
|
151,048
|
||||||
Total
current assets
|
2,781,563
|
3,261,808
|
||||||
Property
and equipment, net
|
31,101
|
223,609
|
||||||
Intangible
assets, net
|
140,000
|
210,000
|
||||||
Total
assets
|
$
|
2,952,664
|
$
|
3,695,417
|
||||
Liabilities
and Stockholders' Equity
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$
|
919,807
|
$
|
1,432,460
|
||||
Accrued
expenses
|
770,136
|
794,219
|
||||||
Deferred
revenue
|
359,027
|
51,254
|
||||||
Capital
lease obligations – current
|
-
|
31,821
|
||||||
Total
current liabilities
|
2,048,970
|
2,309,754
|
||||||
Commitments
and contingencies (Note 17)
|
||||||||
Stockholders’
Equity:
|
||||||||
Preferred
Stock, 25,000,000 shares authorized; No shares outstanding at December 31,
2009 and December 31, 2008
|
-
|
-
|
||||||
Common
stock, $0.001 par value, 400,000,000 shares authorized; and 45,356,765 and
42,715,110 issued and outstanding at December 31, 2009
and December 31, 2008, respectively
|
45,356
|
42,715
|
||||||
Additional
paid-in capital
|
27,156,316
|
26,566,607
|
||||||
Accumulated
deficit
|
(26,297,978
|
)
|
(25,223,659
|
)
|
||||
Total
stockholders' equity
|
903,694
|
1,385,663
|
||||||
Total
liabilities and stockholders' equity
|
$
|
2,952,664
|
$
|
3,695,417
|
See
accompanying notes to the financial statements.
19
VIKING
SYSTEMS, INC.
Statements
of Operations
Years
Ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
Sales,
net
|
$
|
7,218,994
|
$
|
6,426,996
|
||||
Cost
of sales
|
5,317,544
|
5,781,855
|
||||||
Gross
profit
|
1,901,450
|
645,141
|
||||||
Operating
expenses:
|
||||||||
Selling
and marketing
|
885,064
|
1,598,753
|
||||||
Research
and development
|
556,336
|
757,186
|
||||||
General
and administrative
|
1,791,569
|
2,923,129
|
||||||
Total
operating expenses
|
3,232,969
|
5,279,068
|
||||||
Operating
loss
|
(1,331,519
|
)
|
(4,633,927
|
)
|
||||
Other
income (expense):
|
||||||||
Interest
income
|
1,193
|
20,650
|
||||||
Interest
expense
|
(4,125
|
)
|
(4,860
|
)
|
||||
License
fee
|
125,000
|
1,000,000
|
||||||
Gain
on settlement of liability
|
133,073
|
-
|
||||||
Loss
on recapitalization transaction
|
-
|
(2,703,776
|
)
|
|||||
Other
income
|
2,059
|
273,097
|
||||||
Loss
on disposal of property and equipment
|
-
|
(10,302
|
)
|
|||||
Gain
on derivative liability
|
-
|
307,061
|
||||||
Total
other income (expense)
|
257,200
|
(1,118,130
|
)
|
|||||
Net
loss applicable to common shareholders
|
$
|
(1,074,319
|
)
|
$
|
(5,752,057
|
)
|
||
Net
loss per common share - basic and diluted
|
$
|
(0.02
|
)
|
$
|
(0.14
|
)
|
||
Weighted
average shares outstanding - basic and diluted
|
43,000,963
|
42,231,808
|
See
accompanying notes to the financial statements.
20
VIKING
SYSTEMS, INC.
Statements
of Stockholders’ Equity (Deficit)
Years
Ended December 31, 2009 and 2008
Common
Stock
|
Additional
Paid-in
|
Accumulated
|
||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||
Balance
December 31, 2007
|
1,398,704 | $ |
1,399
|
$ |
8,034,205
|
$ |
(19,471,602
|
) | $ | (11,435,998 | ) | |||||||||
Issuance
of common stock for exchange of debentures
|
22,400,020
|
22,400
|
3,978,244
|
-
|
4,000,644
|
|||||||||||||||
Issuance
of common stock for exchange of preferred stock
|
4,197,849
|
4,198
|
8,810,043
|
-
|
8,814,241
|
|||||||||||||||
Issuance
of common stock, net
|
14,560,037
|
14,560
|
2,528,585
|
-
|
2,543,145
|
|||||||||||||||
Non-cash
exchange of warrants at recapitalization
|
-
|
-
|
2,039,705
|
-
|
2,039,705
|
|||||||||||||||
Reclassification
of warrants from derivative liability to equity at
recapitalization
|
-
|
-
|
42,044
|
-
|
42,044
|
|||||||||||||||
Stock-based
compensation
|
-
|
-
|
1,086,390
|
-
|
1,086,390
|
|||||||||||||||
Issuance
of stock for services
|
158,500
|
158
|
47,391
|
-
|
47,549
|
|||||||||||||||
Net
loss
|
-
|
-
|
-
|
(5,752,057
|
)
|
(5,752,057
|
)
|
|||||||||||||
Balance
December 31, 2008
|
42,715,110
|
42,715
|
26,566,607
|
(25,223,659
|
)
|
1,385,663
|
||||||||||||||
Stock-based
compensation
|
-
|
-
|
592,350
|
-
|
592,350
|
|||||||||||||||
Issuance
of common stock in connection with cashless exercise of
warrants
|
2,641,655
|
2,641
|
(2,641
|
)
|
-
|
-
|
||||||||||||||
Net
loss
|
-
|
-
|
-
|
(1,074,319
|
)
|
(1,074,319
|
)
|
|||||||||||||
Balance
December 31, 2009
|
45,356,765
|
$
|
45,356
|
$
|
27,156,316
|
$
|
(26,297,978
|
)
|
$
|
903,694
|
See
accompanying notes to the financial statements.
21
VIKING
SYSTEMS, INC.
Statements
of Cash Flows
Years
Ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$
|
(1,074,319
|
)
|
$
|
(5,752,057
|
)
|
||
Adjustment
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
257,834
|
485,959
|
||||||
Common
stock issued for services
|
-
|
7,549
|
||||||
Stock-based
compensation expense
|
592,350
|
1,086,390
|
||||||
Gain
on settlement of liability
|
(133,073
|
)
|
-
|
|||||
Loss
on recapitalization transaction
|
-
|
2,703,776
|
||||||
Loss
on disposal of property and equipment
|
-
|
10,302
|
||||||
Gain
on derivative liability
|
-
|
(307,061
|
)
|
|||||
Change
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
381,741
|
534,684
|
||||||
Inventories
|
582,598
|
(273,886
|
)
|
|||||
Prepaids
and other assets
|
98,535
|
21,788
|
||||||
Accounts
payable
|
(379,580
|
)
|
(396,371
|
)
|
||||
Accrued
expenses
|
(24,083
|
)
|
(555,395
|
)
|
||||
Deferred
revenue
|
307,773
|
(181,077
|
)
|
|||||
Net
cash provided by (used in) operating activities
|
609,776
|
(2,615,399
|
)
|
|||||
Cash
flows from investing activities:
|
||||||||
Purchases
of property and equipment
|
(11,011
|
)
|
(80,755
|
)
|
||||
Net
cash used in investing activities
|
(11,011
|
)
|
(80,755
|
)
|
||||
Cash
flows from financing activities:
|
||||||||
Net
proceeds from issuance of common stock
|
-
|
2,589,907
|
||||||
Payments
for stock issuance costs
|
(14,590
|
)
|
-
|
|||||
Payments
on capital leases
|
(31,821
|
)
|
(42,084
|
)
|
||||
Net
cash (used in) provided by financing activities
|
(46,411
|
)
|
2,547,823
|
|||||
Net
increase (decrease) in cash and cash equivalents
|
552,354
|
(148,331
|
)
|
|||||
Cash
and cash equivalents at beginning of year
|
168,767
|
317,098
|
||||||
Cash
and cash equivalents at end of year
|
$
|
721,121
|
$
|
168,767
|
||||
Supplemental
disclosure of cash flow information:
|
||||||||
Cash
paid during the period for:
|
||||||||
Interest
|
$
|
3,815
|
$
|
4,860
|
||||
Income
taxes
|
$
|
2,824
|
$
|
2,720
|
See
accompanying notes to the financial statements.
22
VIKING
SYSTEMS, INC.
Statements
of Cash Flows
Continued
Non-cash,
investing and financing activities:
During
the year ended December 31, 2009, the Company:
|
●
|
Issued
2,641,655 shares of common stock in connection with the cashless exercise
of 3,508,360 warrants.
|
During
the year ended December 31, 2008, the Company:
●
|
Issued
22,400,020 shares of common stock in exchange for all outstanding
convertible debentures and related accrued interest and liquidated
damages.
|
●
|
Issued
4,197,849 shares of common stock in exchange for all outstanding Preferred
Stock and related accrued dividends, interest on unpaid dividends and
liquidated damages.
|
●
|
Issued
warrants to purchase 11,200,011 shares of the Company’s common stock to
the former convertible debenture holders in exchange for their then
outstanding warrants to purchase 443,141 shares of common
stock.
|
●
|
Issued
warrants to purchase 2,098,927 shares of the Company’s common stock to the
former Preferred Stockholders in exchange for their then outstanding
warrants to purchase 666,667 shares of common
stock.
|
●
|
Issued
158,500 shares of common stock in settlement of amounts owed for
professional services valued at $47,549, of which $40,000 was accrued at
December 31, 2007 and $7,549 was expensed in
2008.
|
See
accompanying notes to the financial statements.
23
VIKING
SYSTEMS, INC.
Notes
to Financial Statements
1.
|
Organization
and Basis of Presentation
|
Organization
and Business
Viking
Systems, Inc., (“Viking” or the “Company”) was organized as a corporation in the
state of Nevada on May 28, 1998, for the purpose of providing training and
curriculum for the information technology industry. During 2001, Viking changed
its business focus to the development of software applications, hardware sales
and leasing, and training and support. As of December 31, 2002, Viking
discontinued its operations. During 2004, Viking purchased the assets
of the visualization technology business of Vista Medical Technologies Inc.
(“Vista”), a Delaware Corporation, involved in the development, manufacture, and
sale of visualization devices for the medical market. The assets acquired from
Vista formed the new business direction of Viking in 2004 and are
integral to the current ongoing business.
Basis of
Presentation
The
accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue
and expenses. Management bases its estimates on historical experience
and on various other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Reverse
Stock Split
Effective
January 4, 2008, the Company completed a 1 for 50 reverse stock
split. All common stock share data, including warrants and stock
options to purchase common stock have been restated for all periods presented to
give effect to the reverse stock split. Additionally per share prices
and number of shares related to convertible securities have also been
restated. Per share amounts, including loss per share, have been
increased by a factor of 50 and shares have been divided by 50.
Subsequent
Events Evaluation
Management
has reviewed and evaluated material subsequent events from the balance sheet
date of December 31, 2009 through the financial statements issue date of
February 22, 2010. Other than as disclosed in Note 19, no subsequent events have
been identified for disclosure or that would require adjustment to the December
31, 2009 financial statements.
2.
|
Liquidity
and Going Concern
|
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates, among other things, the realization of assets and the
satisfaction of liabilities in the ordinary course of business. For
the year ended December 31, 2009 and 2008, the
Company recorded net losses of $1,074,319 and 5,752,057,
respectively. As of December 31, 2009, the Company had $721,121 of
cash and cash equivalents and a net working capital balance of
$732,593.
Management
believes that the Company’s existing cash resources, combined with projected
cash flows from operations are not likely be sufficient to execute its business
plan and continue operations for the next twelve months. Management
has taken steps to increase certain of the Company’s operating expenses in 2010
as it believes that such increases are necessary for the Company to achieve
profitability and positive cash flow in the future. As discussed in Note
19, in January 2010, we entered into an Investment Agreement that provides
that the investor is committed to purchase from us, from time to time,
up to $5,000,000 of our common stock over the course of thirty-six
months. We may draw on the facility from time to time, as and when we
determine appropriate in accordance with the terms and conditions of the
Investment Agreement. While we continue to pursue other sources of capital, we
anticipate utilizing $2 million to $3 million of the equity line to fund the
development and launch of the Company’s “Next Generation” 3DHD
system, anticipated 2010 operating losses and working capital
needs.
Other
than the Investment Agreement, we do not have any arrangements with any bank,
financial institutions or investors to provide additional financing and there
can be no assurance that any such arrangement, if required or otherwise sought,
would be available on terms deemed to be commercially acceptable and in our best
interests. If we are not able to draw sufficient amounts on the Investment
Agreement, or we fail to secure other financing and we are not generating
positive cash flow, we may be forced to significantly reduce planned
expenditures or consider other options. The financial statements do not
include any adjustments that might be necessary should we be unable to continue
as a going concern.
3.
|
Summary
of Significant Accounting Policies
|
Cash
and Cash Equivalents
Viking
considers all highly liquid instruments with an original maturity of three
months or less to be cash equivalents.
24
VIKING
SYSTEMS, INC.
Notes
to Financial Statements
Continued
Financial
Instruments
The
Company’s financial instruments as of December 31, 2009 and 2008 consist
primarily of cash and cash equivalents, accounts receivable and accounts
payable. The recorded values of cash and cash equivalents, accounts receivable
and accounts payable approximate their fair values based on their short-term
nature.
Concentration
Risk
Financial
instruments which potentially subject Viking to concentration of credit
risk consist primarily of accounts receivable, cash and cash equivalents. In the
normal course of business, Viking provides credit terms to its customers.
Accordingly, Viking performs ongoing credit evaluations of its customers
and maintains allowances for possible losses which, when realized, have been
within the range of management’s expectations. Viking had accounts
receivable due from two customers representing greater than 10% of total
accounts receivable at December 31, 2009 amounting to $124,000, and
$259,000. Viking had accounts receivable due from three customers
representing greater than 10% of total accounts receivable at December 31, 2008
amounting to $285,789, $175,000 and $134,000.
Viking maintains
its cash and cash equivalents in deposit accounts some of which
may at times be uninsured or may exceed the current Federal Deposit
Insurance Corporation insurance limits. Viking has
not experienced any losses in such accounts.
Accounts
Receivable
Accounts
receivable are carried at original invoice amount less an estimate made for
doubtful receivables based on a review of all outstanding amounts on a monthly
basis. Specific reserves are estimated by management based on certain
assumptions and variables, including the customer’s financial condition, age of
the customer’s receivables, and changes in payment histories. As of December 31,
2009 and December 31, 2008 an allowance in the amount of $171,576 was considered
necessary.
Inventories
Parts and
supplies inventories are stated at the lower of cost or market. Cost is
determined using the standard cost method. Work-in-process and finished goods
are stated at the lower of the accumulated manufacturing costs or market. Viking reduces
the stated value of its inventory for obsolescence or impairment in an amount
equal to the difference between the cost of the inventory and the estimated
market value, based upon assumptions about future demand and market conditions.
If actual future demand or market conditions are less favorable than those
projected by management, additional reductions in stated value may be
required.
Impairment
of Long Lived Assets and Intangible Assets with Finite Lives
Property
and equipment and intangible assets with finite lives are amortized using the
straight line method over their estimated useful lives. These assets
are assessed for potential impairment when there is evidence that events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Conditions that would indicate impairment and trigger an
assessment include, but are not limited to, a significant adverse change in the
legal factors or business climate that could affect the value of an asset, an
adverse action or assessment by a regulator or a current expectation that, more
likely than not, a
long-lived asset will be sold or otherwise disposed of significantly before the
end of its previously estimated useful life. If, upon assessment, the carrying
amount of an asset exceeds its estimated fair value, an impairment charge is
recognized for the amount by which the carrying amount of the asset exceeds its
estimated fair value of the asset
Property
and Equipment
Property
and equipment are recorded at cost, less accumulated depreciation. Depreciation
is calculated using the straight-line method over the useful lives of the
assets, which range from one to four years. Expenditures for maintenance and
repairs are expensed when incurred and betterments are capitalized. Gains
and losses on sale of property and equipment are reflected in
operations.
Derivative
Financial Instruments
The
Company does not use derivative instruments to hedge exposures to cash flow,
market or foreign currency risk. Terms of convertible debt and equity
instruments are reviewed to determine whether or not they contain embedded
derivative instruments that require separate
accounting from the host contract as derivative liabilities. The fair
value of derivative liabilities is revalued at each reporting date, with
corresponding changes in fair value recorded in current period operating
results.
Freestanding
warrants issued by the Company in connection with the issuance or sale of debt
and equity instruments are considered to be derivative instruments, and are
evaluated to determine whether the fair value of warrants issued is required to
be classified as equity or as a derivative liability.
25
VIKING
SYSTEMS, INC.
Notes
to Financial Statements
Continued
Revenue
Recognition
The
Company’s revenues are derived from the sale of surgical visualization
technology products to end users, distributors and original equipment
manufacturers. Revenue from the sale of products is recognized when evidence of
an arrangement exists, the product has been shipped, the selling price is fixed
or determinable, collection is reasonably assured and when both title and risk
of loss transfer to the customer, provided that no significant obligations
remain. If installation is included as part of the contract, revenue is not
recognized until installation has occurred, or until any remaining installation
obligation is deemed to be perfunctory.
For the
sale of products and services as part of a multiple-element arrangement, the
Company allocates revenue from multiple-element arrangements to the elements
based on the relative fair value of each element. For sales of extended
warranties with a separate contract price, Viking defers revenue equal to the
separately stated price. Revenue associated with undelivered elements is
deferred and recorded when delivery occurs.
For
development contracts, the Company recognizes revenue using the
percentage-of-completion method based on contract costs incurred to date
compared with total estimated contract costs.
Shipping
and Handling Costs
Shipping
and handling costs are classified as selling and marketing
expenses. For the years ended December 31, 2009 and 2008, shipping
and handling expense was $21,819 and $83,053, respectively.
Income
Taxes
Viking accounts
for income taxes using the asset and liability method. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
recognized against deferred tax assets when it is more likely than not that the
assets will not be realized.
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Loss
Per Common and Common Equivalent Share
The
computation of basic and diluted loss per common share is computed using the
weighted average number of common shares outstanding during the
year.
Due to
the net losses for the year ended December 31, 2009 and 2008, potentially
dilutive securities have been excluded in the calculation of diluted loss per
share because their inclusion would be anti-dilutive. Accordingly, basic and
diluted loss per share are the same for each respective year.
The
following potentially dilutive common shares were excluded from the calculation
of diluted net loss per common share because their effect was anti-dilutive for
the periods presented:
Year Ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
Warrants
|
24,406,171
|
27,985,020
|
||||||
Stock
Options
|
7,125,420
|
6,354,440
|
||||||
Total
|
31,531,591
|
34,339,460
|
26
VIKING
SYSTEMS, INC.
Notes
to Financial Statements
Continued
Stock-Based
Compensation
The
Company uses the Black-Scholes option valuation model to estimate the fair value
of its stock options at the date of grant. The Black-Scholes option valuation
model requires the input of subjective assumptions to calculate the value of
stock options. The Company uses historical data among other information to
estimate the expected price volatility, the expected annual dividend, the
expected option life and the expected forfeiture rate. The grant date estimated
fair value is recognized over the period during which an employee is required to
provide service in exchange for the award, which is generally the option vesting
period.
Reclassifications
Certain
reclassifications have been made to prior years’ financial statements to conform
to the current year presentation. These reclassifications had no effect on
previously reported results of operations or accumulated deficit.
4.
|
Inventories
|
Inventories
consist of the following at December 31:
2009
|
2008
|
|||||||||
Inventories:
|
||||||||||
Parts
and supplies
|
$
|
970,662
|
$
|
1,208,720
|
||||||
Work-in-progress
|
325,136
|
426,779
|
||||||||
Finished
goods
|
692,068
|
945,816
|
||||||||
Valuation
reserve
|
(450,015
|
)
|
(476,551
|
)
|
||||||
$
|
1,537,851
|
$
|
2,104,764
|
5.
|
Property
and Equipment
|
Property
and equipment consists of the following at December 31:
2009
|
2008
|
|||||||||
Equipment
|
$
|
831,215
|
$
|
947,451
|
||||||
Furniture
and fixtures
|
133,026
|
133,026
|
||||||||
964,241
|
1,080,477
|
|||||||||
Less
accumulated depreciation
|
(933,140
|
)
|
(856,868
|
)
|
||||||
$
|
31,101
|
$
|
223,609
|
Depreciation
expense was $187,834 and $415,959 for the years ended December 31, 2009 and
2008, respectively. During 2008, the Company disposed of certain
fixed assets with a cost of approximately $122,000 with accumulated depreciation
of $111,000, resulting in a loss of approximately $11,000. During
2009 and 2008 demonstration equipment with a net book value of $15,685 and
$15,020, respectively, was reclassified from property and equipment to inventory
and subsequently sold.
6.
|
Intangible
Assets
|
Intangible
assets consist of the following at December 31:
2009
|
2008
|
|||||||||
Patents
and other assets
|
$
|
350,000
|
$
|
350,000
|
||||||
Less
accumulated amortization
|
(210,000
|
)
|
(140,000
|
|||||||
$
|
140,000
|
$
|
210,000
|
In
November 2006, as part of a Technology Transfer and Settlement Agreement, the
Company paid $350,000 for the ownership of intellectual property including
fourteen patents and non-exclusive license rights to four U.S. patents and four
international patents.
27
VIKING SYSTEMS, INC.
Notes
to Financial Statements
Continued
These
assets are being amortized over five years using the straight line
method. Amortization expense amounted to $70,000 for both 2009 and
2008. The estimated amortization expense for the future years is
$70,000 for 2010 and 2011.
During
2009, the Company licensed one of its patents to a third party through December
2009. The license is for use outside the medical products
field. The third party had previously licensed this patent through
December 2006. The license fee of $125,000 is included in other
income for the year ended December 31, 2009.
On August
5, 2008, the Company licensed its patent portfolio to Intuitive Surgical, Inc.
pursuant to an exclusive license agreement (the “License
Agreement”). The License Agreement provides Intuitive Surgical with
perpetual, exclusive rights to use all of the Company’s then held patents in the
medical robotics field, as defined in the License Agreement. The
Company maintained the right to sell non-stereoscopic products and our current
stereoscopic products that utilize the licensed patents in the medical robotics
field. The Company received $1 million for the license. The license
fee was recorded in other income and expense for the year ended December 31,
2008.
7.
|
Accrued
expenses
|
Accrued
expenses consist of the following at December 31:
2009
|
2008
|
|||||||||
Employee
and director compensation
|
$
|
421,247
|
$
|
433,371
|
||||||
Registration
delay fees
|
161,574
|
161,574
|
||||||||
Professional
and consulting fees
|
87,427
|
88,918
|
||||||||
Other
accrued expenses
|
99,888
|
110,356
|
||||||||
$
|
770,136
|
$
|
794,219
|
8.
|
Deferred
Revenue
|
As of
December 31, 2009 and 2008, Viking had deferred revenue of $359,027 and $51,254,
respectively, which consisted of sales for which all elements of the agreements
were not completed and for service plan agreements that are deferred until the
service period has occurred.
9.
|
Income
Taxes
|
The
components of the 2009 and 2008 provision for federal and state income tax
benefit (expense) are summarized below:
2009
|
2008
|
|||||||||
Current
|
||||||||||
Federal
|
$
|
-
|
$
|
-
|
||||||
State
|
(2,800
|
)
|
(2,500
|
)
|
||||||
Deferred
|
||||||||||
Federal
|
-
|
-
|
||||||||
State
|
-
|
-
|
||||||||
$
|
(2,800
|
)
|
$
|
(2,500
|
)
|
28
VIKING
SYSTEMS, INC.
Notes
to Financial Statements
Continued
The
difference between income taxes at statutory rates and the amount presented in
the financial statements is a result of the following:
2009
|
2008
|
|||||||||
Expected
income tax benefit at statutory rate
|
$
|
429,800
|
$
|
2,300,800
|
||||||
Non-deductible
derivatives
|
-
|
123,000
|
||||||||
Meals
and entertainment
|
(3,000
|
)
|
(10,000
|
)
|
||||||
Non-deductible
elements of loss on Recapitalization
|
-
|
(2,913,000
|
)
|
|||||||
Minimum
state taxes
|
(1,800
|
)
|
(1,700
|
)
|
||||||
Non
deductible stock options
|
(216,000
|
)
|
(268,000
|
)
|
||||||
Return
to provision difference
|
35,000
|
78,000
|
||||||||
Delay
fee reversal and non-deductible liquidated damages
|
-
|
109,000
|
||||||||
Change
in valuation allowance (1)
|
(246,800
|
)
|
579,400
|
|||||||
$
|
(2,800
|
)
|
$
|
(2,500
|
)
|
(1)
|
The
removal of the valuation allowance related to the net operating losses and
research and development credits is not included in the change in the
valuation allowance.
|
Deferred
income tax benefit reflects the impact of timing differences between amounts of
assets and liabilities for financial reporting purposes and amounts as measured
by income tax laws. Deferred tax assets are as follows at December
31,
2009
|
2008
|
|||||||||
Basis
difference in fixed assets
|
$
|
131,000
|
$
|
117,000
|
||||||
Accrued
liabilities
|
112,000
|
102,000
|
||||||||
Stock
options
|
345,000
|
324,000
|
||||||||
Inventory
reserve
|
180,000
|
191,000
|
||||||||
Bad
debt reserve
|
69,000
|
69,000
|
||||||||
Intangible
asset basis difference
|
49,000
|
32,000
|
||||||||
Less
valuation allowance
|
(886,000
|
)
|
(835,000
|
)
|
||||||
$
|
-
|
$
|
-
|
In July
2006, the FASB issued guidance relating to uncertain tax positions which
clarifies the accounting for income taxes by prescribing a minimum probability
threshold that a tax position must meet before a financial statement benefit is
recognized. The minimum threshold is defined as a tax position that is more
likely than not to be sustained upon examination by the applicable taxing
authority, including resolution of any related appeals or litigation processes,
based on the technical merits of the position. The tax benefit to be recognized
is measured as the largest amount of benefit that is greater than fifty percent
likely of being realized upon ultimate settlement. The Company adopted this
guidance on income taxes at the beginning of fiscal year 2007. Upon
adoption, the Company had no unrecognized tax benefits, and there were no
material changes during the years ended December 31, 2009 and 2008.
As of
December 31, 2009 the Company had not yet completed its analysis of the
deferred tax assets for its net operating losses of approximately $18 million
and research and development credits of approximately $348,000 generated through
2009. The future utilization of the Company’s net operating loss and
research and development credit carryforwards to offset future taxable income
may be subject to an annual limitation as a result of ownership changes that may
have occurred previously or that could occur in the future. The Company
has not yet determined whether such an ownership change has
occurred. In order to make this determination, the Company will need
to complete a Section 382 analysis regarding the limitation of the net
operating loss and research and development credits. Until this analysis has
been performed the Company has removed the deferred tax assets associated with
these carryforwards from its deferred tax asset schedule and has recorded a
corresponding decrease to their valuation allowance.
The
Company recognizes interest and/or penalties related to uncertain
tax positions in income tax expenses. To the extent accrued interest
and penalties do not ultimately become payable, amounts accrued will be reduced
and reflected as a reduction of the overall income tax provision in the period
that such determination is made. There was no interest or penalties related to
income tax matters during the years ended December 31, 2009 and
2008.
29
VIKING
SYSTEMS, INC.
Notes
to Financial Statements
Continued
The
Company reduces its deferred tax assets by a valuation allowance if, based
on the weight of available evidence, it is not more likely than not that all or
a portion of the deferred tax assets will be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary difference become deductible.
Management has provided a valuation allowance in the amount of $886,000 as of
December 31, 2009 due to the uncertainty of the future realization of the
deferred tax asset.
10.
|
Operating
Leases
|
Viking
leases its Westborough, MA facility and certain office equipment under
non-cancelable operating lease agreements. Future minimum lease payments on this
lease as of December 31, 2009 amount to $184,000 in 2010. Rent
expense was $245,835 for each of the years ended December 31, 2009 and
2008.
11.
|
Recapitalization
|
On
January 4, 2008, the Company completed execution of a Recapitalization Plan (the
“Recapitalization Plan”). This Recapitalization Plan was developed
during the fourth quarter of 2007. In November 2007, Viking received approval,
subject to finalization of certain terms and execution of final
documentation, from 100% of the holders of its Series B Variable Dividend
Convertible Preferred Stock (the “Preferred Stock”) and Viking’s 8% Secured
Convertible Debentures due February 23, 2009 (the “Debentures”), of the
Recapitalization Plan. The Recapitalization Plan called for an
additional investment of between $2.5 and $3.0 million in the common stock of
Viking (the “New Investment”) and a redistribution of Viking’s common
stock among the current holders of Viking’s common stock, Preferred Stock,
Debentures and the investors providing the New Investment.
In
consummating the Recapitalization Plan, the redistribution of Viking’s capital
was accomplished on January 4, 2008, through the following: (i) a 1:50 “reverse
split” of Viking’s common stock, (ii) entry of Viking into a Recapitalization
Agreement with the applicable holders, pursuant to which the holders of the
Preferred Stock and Debentures exchanged their respective Viking securities
(including warrants that were issued in connection with the Preferred Stock and
the Debentures) for shares of Viking’s common stock and warrants which may be
exercised for common stock; and (iii) entry of Viking into a Securities Purchase
Agreement with those parties making the New Investment of $2.6 million pursuant
to which they were issued shares of Viking’s common stock and warrants which may
be exercised for shares of Viking’s common stock. As part of the
recapitalization, Viking executed the Securities Purchase Agreement and
completed a sale of 14,560,037 shares of our common stock for $0.178571 per
share or aggregate consideration of $2,600,000.
Following
the consummation of the Recapitalization Plan, the equity ownership of the
Company was as follows:
POST-RECAPITALIZATION
EQUITY (excluding warrants)
|
||||||||
Stockholder by
type
|
Ownership
of
Outstanding
Common
Stock
|
Percent
Ownership
Common
Stock
|
||||||
Pre-Recapitalization
common stockholders
|
1,398,704
|
3.3%
|
||||||
Pre-Recapitalization
preferred stockholders
|
4,197,849
|
9.9%
|
||||||
Pre-Recapitalization debenture
holders
|
22,400,020
|
52.6%
|
||||||
New
investment ($2.6 million)
|
14,560,037
|
34.2%
|
||||||
Total—all
holders
|
42,556,610
|
100.0%
|
In
connection with the Recapitalization Plan, the total outstanding debentures of
$7,976,533 face amount with a carrying value of $2,144,238 at December 31, 2007,
plus all related interest and liquidated damages, were exchanged for 22,400,020
shares of common stock. Additionally, warrants to purchase 443,141
shares of the Company’s common stock issued with the Debentures were exchanged
for warrants to purchase 11,200,011 shares of the Company’s common
stock. The warrants have an exercise price of $0.18 and a five year
term.
In
addition, all of the Company’s outstanding Preferred Stock, 7,789 shares with a
carrying value of $8,814,241 at December 31, 2007, plus all related liquidated
damages, were exchanged for 4,197,849 shares of the Company’s common
stock. No gain was recorded on the exchange of the Preferred Stock as the
book value was reclassified to common stock (par value totaling $4,198) and the
remainder of $8,810,043 reclassified to additional paid-in
capital. Additionally, warrants to purchase 666,667 shares of the
Company’s common stock issued in connection with Preferred Stock were exchanged
for warrants to purchase 2,098,927 shares of the Company’s common
stock. The warrants have an exercise price of $0.18 and a five year
term.
30
VIKING
SYSTEMS, INC.
Notes
to Financial Statements
Continued
On
January 4, 2008, pursuant to a Securities Purchase Agreement, the Company
completed a sale of 14,560,037 shares of its common stock for $0.178571 per
share or aggregate consideration of $2,600,000, of which the Company received
proceeds of $2,600,000. Pursuant to the Securities Purchase Agreement, the
Company issued to the investors providing the New Investment warrants to
purchase up to 14,560,037 shares of common stock. The warrants have a term of
five years and are exercisable for shares of common stock at a price of $0.18
per share.
The
purchasers of the common stock pursuant to the Securities Purchase Agreement
were three institutional investors and William C. Bopp, Chairman of
the Company’s Board of Directors, who paid $1,750,000 for 9,800,024 shares of
common stock and warrants that may be exercised for 9,800,024 shares of common
stock.
Loss
on Recapitalization
In
connection with the January 4, 2008 Recapitalization, the Company recorded a
non-cash charge of $2,703,776. The Company determined the fair value
of the common stock issued in exchange for the Debentures based on the $0.18
price for common shares sold as part of the Recapitalization. The
charge comprises the following;
Year
Ended
|
||||||||
December
31, 2008
|
||||||||
Debentures
then outstanding
|
$
|
7,976,533
|
||||||
Less
unamortized debt discount
|
(5,832,295
|
)
|
||||||
Net
carrying value at time of recapitalization
|
2,144,238
|
|||||||
Fair
value of common stock exchanged for Debentures
|
4,000,644
|
|||||||
Loss
on conversion of debentures into common stock
|
$
|
(1,856,406
|
)
|
|||||
Write-off
unamortized debt issue costs
|
(80,738
|
)
|
||||||
Estimated
fair value of warrants issued to Debenture and Preferred Stockholders in
excess of estimated fair value of warrants
cancelled
|
(2,039,705
|
)
|
||||||
Accrued
obligations extinguished/forgiven in connection with
Recapitalization:
|
||||||||
Debenture
interest
|
|
$
|
302,306
|
|||||
Liquidated
damages
|
849,178
|
|||||||
Interest
on unpaid Preferred Stock dividends
|
121,589
|
|||||||
Total
gain from extinguished obligations
|
1,273,073
|
|||||||
Total
loss on Recapitalization transaction
|
$
|
(2,703,776
|
)
|
12.
|
Related
Party Transactions
|
During
the year ended December 31, 2008, the following related party transactions
occurred.
William
C. Bopp, Chairman and then CEO and Winder Hughes, then member of the Company’s
board of directors, participated in the Recapitalization Plan. Mr. Hughes
participation was through an investment fund that he manages, Focus
Fund.
Exchange
Transaction Summary:
|
Debentures
Exchanged
|
Common
|
New
|
|||||||||||||||||
Face
|
Carrying
|
Stock
|
Warrants
|
Warrants
|
||||||||||||||||
Related
Party
|
Amount
|
Value
|
Issued
|
Exchanged
|
Issued
|
|||||||||||||||
William
C. Bopp, Chairman
|
$ | 1,400,000 | $ | 259,300 | 3,931,536 | 3,888,889 | 1,965,768 | |||||||||||||
Winder
Hughes, former Director
|
$ | 1,000,000 | $ | 247,231 | 2,808,240 | 2,777,777 | 1,404,120 |
New
Investment Summary:
|
Common
|
|||||||||||||||||||
Amount
|
Stock
|
Associated
|
||||||||||||||||||
Related
Party
|
Invested
|
Purchased
|
Warrants
|
|||||||||||||||||
William
C. Bopp, Chairman
|
$ | 1,750,000 | 9,800,024 | 9,800,024 | ||||||||||||||||
Winder
Hughes, former Director
|
$ | 250,000 | 1,400,004 | 1,400,004 |
31
VIKING SYSTEMS,
INC.
Notes
to Financial Statements
Continued
13.
|
Stock-Based
Compensation
|
Common
Stock Options
During
the quarter ended March 31, 2008, shareholders approved the Viking
Systems, Inc. 2008 Equity Incentive Plan (the “2008 Equity Plan”), and the
Viking Systems, Inc. 2008 Non-Employee Directors’ Stock Option Plan (the
“Directors’ Plan,” ). Additionally, in December 2009, the board of directors
approved an amendment to the 2008 Equity plan to increase the number of shares
available under such plan by 2,800,000 shares. The maximum number of
shares that may be issued pursuant to the 2008 Equity Plan is 9,520,000 shares
plus such number of shares that are issuable pursuant to awards outstanding
under the 2004 Plan as of the effective date and which would have otherwise
reverted to the share reserve of the 2004 Plan. We have reserved a total of
1,500,000 shares of our common stock for issuance under the Directors’
Plan. During the year ended December 31, 2009, 2,800,000 options were
granted under the 2008 Equity Plan and 150,000 options were granted under the
Directors’ Plan. During the year ended December 31, 2008, 6,715,000
stock options were granted under the 2008 Equity Plan and 150,000 stock options
were granted under the Directors’ Plan. At December 31, 2009,
2,685,000 shares remain available for grant under the 2008 Equity
Plan.
The
Company measures the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the award. That cost
is recognized over the period during which an employee is required to provide
service in exchange for the award - the requisite service period. The Company
determines the grant-date fair value of employee share options using the
Black-Scholes option-pricing model.
During
the year ended December 31, 2009 and 2008, the Company recorded $592,350 and
$1,086,390 respectively, in non-cash stock-based compensation expense. As of
December 31, 2009, there was approximately $558,408 in total unrecognized
compensation costs related to unvested options, which is expected to be
recognized over a weighted average period of approximately 3.71
years.
During
the year ended December 31, 2009, 2,950,000 stock options were granted with a
weighted average exercise price of $0.011 per share based on the quoted market
price on the day of grant. The valuation of stock options granted during the
year ended December 31, 2009 as determined using the Black-Scholes valuation
model was approximately $26,000. The fair value of stock options granted during
the year ended December 31, 2009 was estimated using the Black-Scholes model
with the following assumptions: volatility ranging from 135%-191%, life of 5-7
years, risk-free interest rate of 3.3%, and expected dividend yield of 0%. The
fair value of stock options granted during the year ended December 31, 2008 was
$1,781,596 as estimated using the Black-Scholes model with the following
assumptions: volatility of 133%, life of 5-7 years, risk-free interest rate
of 3.33%, and expected dividend yield of 0%. Volatility is based on the
historical volatility of the Company's common stock. The life of employee stock
options is based on the average of the vesting period and contractual life. The
risk free interest rate is based on U.S. Treasury constant maturity rate for the
expected life of the stock option.
During
the year ended December 2009, William Bopp, Chairman and then CEO surrendered
all 2,100,000 of his outstanding stock options. In connection with
the surrender of these stock options the Company recognized the remaining
non-cash stock option compensation of $169,495 related to these stock options.
During the year ended 2008 under the 2004 Plan, six employees surrendered 79,000
previously issued stock options and 596,400 options previously granted were
forfeited. In connection with the surrender of stock options during the
first quarter of 2008, the Company recognized the remaining non-cash stock
option compensation of $410,258 related to these stock
options.
A summary
of stock option activity for the two years ended December 31, 2009 is
as follows:
Shares
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
Weighted
Average
Remaining
Contractual
Life
|
|||||||||||||
Options
outstanding December 31, 2007
|
154,840
|
$
|
18.50
|
|
$ |
7.63
|
||||||||||
Granted
|
6,875,000
|
0.33
|
||||||||||||||
Cancelled and
expired
|
(596,400
|
)
|
0.52
|
|||||||||||||
Surrendered
|
(79,000
|
)
|
13.18
|
|||||||||||||
Options
outstanding December 31, 2008
|
6,354,440
|
0.58
|
-
|
9.11
|
||||||||||||
Granted
|
2,950,000
|
0.011
|
||||||||||||||
Cancelled
and expired
|
(79,020
|
)
|
0.16
|
|||||||||||||
Surrendered
|
(2,100,000
|
)
|
0.33
|
|||||||||||||
Options
outstanding December 31, 2009
|
7,125,420
|
$
|
0.41
|
$
|
8.75
|
|||||||||||
Options
exercisable December 31, 2009
|
2,482,136
|
$
|
0.94
|
$
|
-
|
8.04
|
32
VIKING SYSTEMS, INC.
Notes
to Financial Statements
Continued
A summary
of non-vested stock option activity for the year ended December 31, 2009 is as
follows:
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
|||||||||
Non-vested
options beginning January 1, 2009
|
5,511,600
|
$
|
0.34
|
|||||||
Granted
|
2,950,000
|
0.011
|
||||||||
Vested
|
(3,087,066
|
)
|
0.34
|
|||||||
Exercised
|
-
|
-
|
||||||||
Forfeited
and surrendered
|
(731,250
|
)
|
0.33
|
|||||||
Non-vested
options at December 31, 2009
|
4,643,284
|
$
|
0.14
|
Those
options exercisable at December 31, 2009 range in price from $0.26 to
$30.00. The weighted average grant date fair value for options
granted for during 2009 and 2008 amounted to $0.011 and $0.33,
respectively.
14.
|
Stock
Warrants and Derivative Liability
|
The
following table summarizes warrants to purchase common stock outstanding for the
two years ended December 31, 2009:
Shares
|
Range
of
Exercise
Price
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
|
|||||||||||||
Warrants
outstanding December 31, 2007
|
1,299,252
|
$
|
6.00-37.50
|
$
|
8.21
|
5.12
|
||||||||||
Expired
|
(62,500
|
)
|
$
|
0.35
|
$
|
0.35
|
||||||||||
Cancelled
in Recapitalization
|
(1,109,808
|
)
|
$
|
6.00
|
$
|
6.00
|
||||||||||
Exchanged/issued
for cancelled warrants
|
13,298,938
|
$
|
0.18
|
$
|
0.18
|
|||||||||||
Issued
in connection with Recapitalization sale of common stock
|
14,560,037
|
$
|
0.18
|
$
|
0.18
|
|||||||||||
Outstanding
December 31, 2008
|
27,985,919
|
4.0
|
||||||||||||||
Expired
|
(71,389
|
)
|
0.35
|
|||||||||||||
Exercised
(A)
|
(3,508,360
|
)
|
0.18
|
|||||||||||||
Outstanding
December 31, 2009
|
24,406,170
|
$
|
0.18-$0.75
|
$
|
0.18
|
3.0
|
(A)
|
The
warrants issued in 2008 allow for cashless exercise based on the volume
weighted average market price the day before exercise if the underlying
shares are not covered by an effective registration
statement. The Company does not have an effective registration
statement covering these shares. During 2009, the Company issued 2,641,655
shares of common stock in connection with the cashless exercise of
3,508,360 warrants.
|
During
the first quarter of 2008, the Company recorded a non-cash gain of $307,061
related to the decrease in value of the Company’s instruments
classified as derivatives liabilities from January 1, 2008 to January 4, 2008
when all such derivatives were cancelled in connection the Recapitalization
Plan.
The
accounting classification criteria were assessed in relation to the new warrants
issued in connection with the Recapitalization. Management determined that
equity classification of the warrants was appropriate. The estimated fair value
of the new warrants of $2,039,705, along with the remaining carrying value of
the old warrants of $42,044 were recorded as an increase to additional paid-in
capital.
33
VIKING
SYSTEMS, INC.
Notes
to Financial Statements
Continued
15.
|
Common
Stock Issued and Issuable For
Services
|
During
2008, the Company issued a total of 158,500 shares of common stock in settlement
of amounts owed for professional services. Total expense recognized was
$47,550, with $40,000 accrued and recognized during 2007 and the remaining
$7,550 recorded during 2008.
16.
|
Major
Customers Suppliers, Segment and Related
Information
|
During
the year ended December 31, 2009, Viking had sales to four customers that
accounted for 32%, 21%, 20% and 12%, respectively, of total sales. These
customers owed the Company $6,000, $259,000, and $124,000 and $0,
respectively at December 31, 2009. During the year ended December 31, 2008,
Viking had sales to three customers that accounted for 30%, 19% and 11%,
respectively, of total sales. These customers owed the Company $134,000,
$286,000, and $175,000 at December 31, 2008.
Suppliers
The
Company utilizes components and sub-assemblies produced by outside suppliers,
some of which are sourced from a single supplier. We maintain a good
relationship with our sole source suppliers and it has been their policy to
notify us well in advance of the end of life of a particular component so that
we are able to make the necessary final orders and/or design modifications to
support the replacement technology. However, if shortages of critical
components occur, or quality problems arise, then production schedules could be
significantly delayed or costs significantly increased, which could in turn have
a material adverse effect on the Company’s financial condition, results of
operation and cash flows.
Segment
and Related Information
The
Company presents its business as one reportable segment due to the similarity in
nature of products sold and customer markets. The Company’s chief operating
decision making officer reviews financial information on our visualization
products on a consolidated basis. The Company is the business of designing
manufacturing and selling visualization systems for the medical market for use
in minimally invasive surgical procedures. Substantially all of the Company’s
revenues are derived from sales of visualization systems and related
services.
The
following table summarizes revenues by geographic region. Revenues are
attributed to countries based on customer location.
Years
Ended December 31,
|
2009
|
2008
|
||||||||
Revenues
|
||||||||||
United
States
|
$ | 3,280,585 | $ | 3,034,432 | ||||||
Other
|
3,938,409 | 3,392,564 | ||||||||
Total
Revenues
|
$ | 7,218,994 | $ | 6,426,996 |
17.
|
Commitments
and Contingencies
|
In the
normal course of business, the Company is party to a variety of agreements
pursuant to which it may be obligated to indemnify the other party. It is not
possible to predict the maximum potential amount of future payments under these
types of agreements due to the conditional nature of the Company’s obligations
and the unique facts and circumstances involved in each particular agreement.
Historically, payments made by the Company under these types of agreements have
not had a material effect on its business, results of operations or financial
condition.
In
conjunction with the conversion of $4,750,000 of convertible notes into common
stock in 2006, Viking agreed to file a registration statement covering the
shares of common stock issued upon such conversion and covering the warrants
originally issued with those notes. Such shares and warrants were not
registered. Effective June 2006, Viking offered to pay to note holders, who
elect to receive it, a registration delay fee of one percent per month of their
initial principal balance. At December 31, 2007, the Company had accrued
$434,214 related to this matter. Effective February 15, 2008, the Securities and
Exchange Commission made revisions to its rules regarding the trading of
restricted securities. Additionally, certain holders of the convertible notes
did not respond to the Company’s 2006 proposal to pay a delay fee related to
this proposed filing. The Company has reversed amounts accrued
related to parties that did not respond to the 2006 proposal and ceased accruing
further delay fees effective February 15, 2008. At December 31, 2009
and 2008, the Company has accrued $161,574 related to this matter.
34
VIKING SYSTEMS, INC.
Notes
to Financial Statements
Continued
Viking
has also entered into a royalty agreement with a medical device company. The
royalty agreement requires payments of 4% of sales that use their intellectual
property. As of December 31, 2009 and 2008, Viking had accrued royalties related
to this agreement of approximately $36,000 and $26,000, respectively. During
2009 and 2008, Viking did not pay any royalties under this
agreement.
18.
|
Recent
Accounting Pronouncements
|
Adopted
Accounting Pronouncements
As of
September 2009, the Company adopted Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC” or the “Codification”) 105-10
(formerly FASB Statement No. 168 “FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles). This standard establishes only two levels of U.S. generally
accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The
Codification became the single source of authoritative,
nongovernmental GAAP, except for rules and interpretive releases of the
SEC, which are sources of authoritative GAAP for SEC registrants. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification became nonauthoritative. ASC 105-10 does not change previously
issued GAAP, but reorganizes GAAP into Topics. In circumstances where
previous standards require a revision, the FASB will issue an Accounting
Standards Update (“ASU”) on the Topic. Our adoption of ASC 105-10 did
not have any impact on the Company’s financial statements.
In June
2008, the FASB ratified the consensus reached on the Emerging Issues Task Force
(“EITF”) abstract titled “Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock”. As codified in ASC 815-40,
“Derivatives and Hedging-Contracts in Entity’s Own Equity” this guidance provides a
new two-step model to be applied in determining whether a financial instrument
or an embedded feature is indexed to an issuer’s own stock and thus able to
qualify for the scope exception under ASC 815-10-15-2. The adoption of this
guidance effective January 1, 2009 did not have a material impact on the
Company’s financial statements.
In
February 2008, the FASB issued updated guidance as codified in ASC 820-10, “Fair
Value Measurements and Disclosures”, that delayed
the effective date of fair value measurements accounting for all non-financial
assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), until the beginning of the first quarter of fiscal 2009. These
include goodwill and other non-amortizable intangible assets. The adoption of
this guidance effective January 1, 2009, did not have any impact on the
Company’s financial statements.
In April
2008, the FASB issued updated guidance regarding the determination of the useful
life of intangible assets. As codified in ASC 350-30-35, “Intangibles-Goodwill
and Other”, this
guidance amends the factors considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under intangibles accounting. It also requires expanded disclosure related to
the determination of intangible asset useful lives. The adoption of
this guidance effective January 1, 2009 did not have any impact on the Company’s
financial statements.
In April
2009, the FASB issued updated guidance, as codified in ASC 820-10-65, “Fair Value Measurements and
Disclosures” , for
estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased in accordance with fair value
accounting. This guidance also includes identifying circumstances
that indicate a transaction is not orderly, and emphasizes that even if there
has been a significant decrease in the volume and level of activity for the
asset or liability and regardless of the valuation technique(s) used, the
objective of a fair value measurement remains the same. The adoption of this
guidance during the quarter ended June 30, 2009 did not have a material effect
on the Company’s financial statements.
In April
2009, the FASB issued updated guidance, as also codified in ASC 825-10-65, “Fair
Value Measurements and Disclosures” which requires increased disclosures about
fair value of financial instruments for interim reporting periods of publicly
traded companies as well as in annual financial statements. The adoption of this
guidance during the quarter ended June 30, 2009 did not have a material effect
on the Company’s financial statements.
In May
2009, the FASB issued updated guidance, codified as ASC 855-10, “Subsequent
Events”, that
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. This guidance modifies the names of the two types of
subsequent events either as recognized subsequent events (previously referred to
in practice as Type I subsequent events) or non-recognized subsequent events
(previously referred to in practice as Type II subsequent events). In addition,
this guidance requires the disclosure of the date through which subsequent
events have been evaluated. The adoption of this guidance during the quarter
ended June 30, 2009 did not have any impact on the Company’s financial
statements.
35
VIKING
SYSTEMS, INC.
Notes
to Financial Statements
Continued
New
Accounting Pronouncements
In
September 2009, the FASB issued ASU. 2009-13, “Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task Force” (“ASU
2009-13”). ASU 2009-13 updates the existing multiple-element revenue
arrangements guidance currently included under ASC 605-25 and
primarily provides two significant changes: 1) eliminates the need for
objective and reliable evidence of the fair value for the undelivered element in
order for a delivered item to be treated as a separate unit of accounting, and
2) eliminates the residual method to allocate the arrangement consideration. In
addition, this guidance expands the disclosure requirements for revenue
recognition. ASU 2009-13 will be effective for the first annual reporting period
beginning on or after June 15, 2010, with early adoption permitted provided
that the revised guidance is retroactively applied to the beginning of the year
of adoption. The Company is currently assessing the future impact of this new
accounting update to its financial statements.
19.
|
Subsequent
Event
|
On
January 7, 2010, the Company, entered into the Investment Agreement with
Dutchess Opportunity Fund II, LP. Pursuant to the Investment
Agreement, the Dutchess committed to purchase up to $5,000,000 of the Company’s
common stock over thirty-six months.
The
Company may draw on the facility from time to time, as and when it determines
appropriate in accordance with the terms and conditions of the Investment
Agreement. The purchase price shall be set at 96% of the volume
weighted average price (VWAP) of the Company’s common stock during
the 5 consecutive trading day period beginning on the trading day immediately
following the date of delivery of the applicable put notice. The
amount that the Company is entitled to Put in any one notice shall be equal to
either 1) 200% of the average daily volume of the common stock for the 3 trading
days prior to the applicable Put Notice Date, multiplied by the average of the 3
daily closing prices immediately preceding the Put Date or 2)
$100,000. Dutchess will not be obligated to purchase shares if
their total number of shares beneficially held at that time would exceed 4.99%
of the number of shares of the Company’s common stock as determined in
accordance with Rule 13d-1 of the Securities Exchange Act of 1934, as
amended. In addition, the Company is not permitted to draw on the
facility unless there is an effective registration statement to cover the resale
of the shares.
Pursuant to the terms of a Registration
Rights Agreement dated January 7, 2010 between the Company and the Dutchess, the
Company is obligated to file a registration statement with the SEC to register
the resale by the Investor of 15,000,000 shares of the common stock underlying
the Investment Agreement on or before 21 calendar days of the date of the
Registration Rights Agreement. The Company filed the required
registration statement and it was declared effective on February 12,
2010.
36
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
Management’s
Report on Disclosure Controls and Procedures
We seek
to improve and strengthen our control processes to ensure that all of our
controls and procedures are adequate and effective. We believe that a control
system, no matter how well designed and operated, can only provide reasonable,
not absolute, assurance that the objectives of the controls system are met. In
reaching a reasonable level of assurance, management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. In addition, the design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, a control may
become inadequate because of changes in conditions, or the degree of compliance
with policies or procedures may deteriorate. No evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company will be detected.
As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange
Act. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that, as of the end of the period covered by
this annual report, our disclosure controls and procedures were effective
at the reasonable assurance level discussed above.
There
were no changes in our internal controls over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rules
13a-15 or 15d that occurred during the last quarter that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our Chief
Executive Officer and our Executive Vice President and Chief Financial Officer
are responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for our Company. Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Our management
conducted an assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2009 based on criteria established in
“Internal Control—Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this assessment, our
management concluded that, as of December 31, 2009, our internal control over
financial reporting was effective.
This
annual report does not include an attestation report of our registered
independent public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered
independent public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.
ITEM
9B. OTHER INFORMATION
None.
37
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Identification
of Directors and Executive Officers
As
of February 15, 2010, the current directors and executive officers of
Viking who will serve until the next annual meeting of shareholders or until
their successors are elected or appointed and qualified, are set forth
below:
Name
|
Age
|
Position
|
|
John
“Jed” Kennedy
|
52
|
President
and Chief Executive Officer
|
|
William
C. Bopp
|
66
|
Chairman
of the Board
|
|
William
Tumber
|
75
|
Director,
Audit Committee and Compensation Committee Chairman
|
|
Robert
Mathews
|
46
|
Executive
Vice President and Chief Financial
Officer
|
Background
information about Viking Systems’ officers and directors is as
follows:
John
“Jed” Kennedy
Effective
January 4, 2010, Mr. John Kennedy was appointed by the board of directors to the
position of President and Chief Executive Officer of Viking Systems,
Inc. Mr. Kennedy formerly served as President and Chief Operating
Officer of our Company, as well as a member of our board of directors since
October 2007. Prior to October 2007, Mr. Kennedy was the President of
the Vision Systems Group at Viking Systems. Mr. Kennedy joined Vista Medical
Technologies, Inc. in January 1997 as Vice President of Research and
Development. He was appointed Vice President/General Manager of Westborough
Operations in January 2000 before being appointed Executive Vice President and
COO in December 2000. Prior to joining Vista Medical Technologies, Inc., Mr.
Kennedy held various positions in Manufacturing, Quality Engineering and Product
Development at Smith & Nephew Endoscopy from 1984 through January 1997. From
1996 through January 1997, he was the Group Director of Product Development
responsible for managing all Divisional Product Development activities. From
1993 through 1996, Mr. Kennedy was Director of Research and Development and was
responsible for the management of four technology product development groups.
Prior to 1984, he held various engineering positions at Honeywell’s
Electro-Optics and Avionics divisions. Mr. Kennedy received a B.S. in
Manufacturing Engineering from Boston University in 1979.
William
C. Bopp
Effective
January 3, 2010, Mr. William C. Bopp resigned as Chief Executive Officer of
Viking Systems, Inc. He had served in that position since January
2008. Mr. Bopp remains Chairman of the Board of
Directors. Mr. Bopp has served as Chairman of the Board since October
11, 2007. Prior to joining Viking, Mr. Bopp was a private investor.
Previously, he served as Senior Vice President and Chief Financial Officer at
Alaris Medical Systems, Inc., a developer, manufacturer and marketer of infusion
devices and related disposable products. Mr. Bopp joined Alaris in March 1999,
as Vice President and Chief Financial Officer. He was elected to the position of
Senior Vice President and Chief Financial Officer in November 1999. Alaris was
acquired for approximately $2.0 billion by Cardinal Health, Inc. in July 2004,
and Mr. Bopp assisted for an additional year with the integration of Alaris into
Cardinal Health before retiring in 2005. Mr. Bopp was formerly Executive Vice
President and Chief Financial Officer of C.R. Bard, Inc. Since 1980, he held
positions of increasing responsibility with Bard, currently a $2.0 billion
developer, manufacturer and marketer of health care products. From 1995 through
1998, he also served as a member of the board of directors of Bard and a member
of the Board’s Finance Committee. Mr. Bopp is a graduate of Harvard College,
Cambridge, MA, and completed his MBA in Finance, from the Harvard Business
School.
William
Tumber
Mr.
Tumber was appointed to our board of directors in February 2008. From
2000 to 2004, Mr. Tumber served on the board of directors of Alaris Medical
Systems, Inc., a manufacturer of infusion devices and related disposables which
was acquired in 2004 for $2 billion by Cardinal Health, Inc. Previously, during
his 20 years with medical device company C. R. Bard, Inc., Mr. Tumber held
divisional positions including VP of Human Resources, VP of Manufacturing,
Division President, as well as serving as Corporate Group Vice President
responsible for all of Bard’s surgical businesses. He retired from Bard in 1999.
Before joining Bard, Mr. Tumber worked at General Electric for over 20
years. While at General Electric, he held a variety of positions of
increasing responsibility which included technical recruiting, human resources,
and Plant Manager of a 300-person electronic assembly facility.
38
Robert
Mathews
Mr.
Mathews joined our Company as Executive Vice President and Chief Financial
Officer in June 2007. Prior to joining our Company, he was Senior
Vice President and Chief Financial Officer at Cardinal Health’s Clinical
Technologies and Services (CTS) segment, where he was responsible for the global
finance function across all of CTS businesses from 2004 to 2005. Before joining
Cardinal Health, Mr. Mathews was with Alaris Medical System from 1996 to 2004,
where he served as Vice President of Finance, Chief Accounting Officer, and
an executive committee member. Mr. Mathews began his career at Price
Waterhouse Coopers, where he worked from 1987 to 1996. Mr. Mathews
earned his Bachelor of Science degree from San Diego State University where he
majored in business administration with an emphasis in accounting.
Director
Independence
We
utilize the NASDAQ independence rules for determining which of our directors are
independent. The Board has determined that one of its three members is
independent pursuant to NASDAQ Rule 4200(15). The independent director is Mr.
Tumber. Currently, Mr. Tumber is the sole member of both the Audit Committee and
the Compensation Committee.
Other
Involvement in Certain Legal Proceedings
None of
our directors or executive officers have been involved in any
bankruptcy or criminal proceedings, nor have there been any judgments
or injunctions brought against any of our directors or executive officers during
the last five years that we consider material to the evaluation of the ability
and integrity of any director or executive officer.
Code
of Ethics
We
previously adopted a code of ethics that applies to all officers, directors and
employees of Viking , a copy of which was filed as Exhibit 14 to Form 10-KSB for
the year ended December 31, 2002. A copy of our Code of Ethics may be
viewed on our website at www.vikingsystems.com
and can be obtained free of charge by contacting our office, c/o Viking Systems,
Inc., 134 Flanders Road, Westborough, MA, 01581.
On March
28, 2008 we adopted the “Viking Systems, Inc. Code of Ethics for Financial
Professionals” that applies to our principal executive officer and all
finance and accounting employees. This policy was filed as Exhibit 14.1 to Form
10-KSB for the year ended December 31, 2007. We intend to satisfy the disclosure
requirements under Item 5.05 of Form 8−K regarding an amendment to, or waiver
from, a provision of our Code of Ethics for Financial
Professionals, if any, by posting such information on our website.
Committees
of the Board of Directors
Our board
of directors has an audit committee and a compensation committee, each of which
has the composition and responsibilities described below:
Audit Committee. The audit
committee provides assistance to the board of directors in fulfilling its legal
and fiduciary obligations in matters involving our accounting, auditing,
financial reporting, internal control and legal compliance functions by
approving the services performed by our independent accountants and reviewing
their reports regarding our accounting practices and systems of internal
accounting controls. The audit committee also oversees the audit efforts of our
independent accountants and takes those actions as it deems necessary to satisfy
itself that the accountants are independent of management. The audit committee
currently consists of William Tumber (Chairman) whom is an independent member of
our board of directors.
Compensation Committee. The
compensation committee determines our general compensation policies and the
compensation provided to our directors and officers. The compensation committee
also reviews and determines bonuses for our officers and other employees. In
addition, the compensation committee reviews and determines equity-based
compensation for our directors, officers, employees and consultants and
administers our stock option plans. Mr. William Tumber is the current Chairman
and sole member of the Compensation Committee.
Nominating Committee. We do
not currently have a standing nominating committee. The board of
directors has determined that, due to its current size, formation of a separate
nominating committee would not be an efficient use of resources. The
board intends to form a Nominating Committee in the future. All
directors currently participate in consideration of directors
nominees. The board will consider suggestions from stockholders for
names of possible future nominees delivered in writing and received one hundred
and twenty (120) days in advance of our Annual Meeting of Stockholders. Such
recommendations should provide all information relating to such person that the
stockholder desires to nominate that is required to be disclosed in solicitation
of proxies pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended.
Communications with Board Members
We have
not adopted a formal process by which stockholders may communicate with the
board of directors. Stockholders may contact our CEO at
jkennedy@vikingsystems.com.
39
Compliance with Section 16(a)
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
and executive officers, and persons who beneficially own more than 10% of a
registered class of our equity securities, to file reports of beneficial
ownership and changes in beneficial ownership of our securities with the SEC on
Forms 3 (Initial Statement of Beneficial Ownership), 4 (Statement of Changes of
Beneficial Ownership of Securities) and 5 (Annual Statement of Beneficial
Ownership of Securities). Directors, executive officers and beneficial owners of
more than 10% of our common stock (collectively, the “Reporting Persons”) are
required by SEC regulations to furnish us with copies of all Section 16(a) forms
that they file. Based upon reports provided to us, we believe that, during the
year ended December 31, 2009, Reporting Persons met all applicable Section 16(a)
filing requirements.
ITEM
11. EXECUTIVE COMPENSATION
EXECUTIVE
COMPENSATION
Summary
Compensation
The
following table sets forth information concerning annual and long-term
compensation provided to our Chief Executive Officer and each of the Company’s
other most highly compensated executive officers who were serving as executive
officers at December 31, 2009 . The compensation described in this
table does not include medical, group life insurance, or other benefits which
are available generally to all of our salaried employees.
Summary
Compensation Table for the Fiscal Years Ended December 31, 2009 and December 31,
2008
Name
and Principal Position
|
Year
|
Salary
($)
|
Option
Awards
($) (3)
|
Bonus
($)
|
Total
($)
|
|
|
|
|
|
|
William
C. Bopp, Chairman and former Chief
|
2009
|
0
|
271,192
|
0
|
271,192
|
Executive
Officer (1)
|
2008
|
32,250
|
271,192
|
0
|
303,442
|
|
|
|
|
|
|
John
Kennedy, President, Chief
|
2009
|
240,000
|
66,031
|
0
|
306,031
|
Executive
Officer and Director (2)
|
2008
|
247,668
|
65,325
|
0
|
312,993
|
|
|
|
|
|
|
Robert
Mathews, Executive VP and
|
2009
|
210,000
|
66,325
|
0
|
276,325
|
Chief Financial
Officer
|
2008
|
210,000
|
368,431
|
0
|
578,431
|
(1)
|
Mr.
Bopp was appointed Chairman of our board of directors on October 11,
2007. He was appointed to serve as our Chief Executive Officer
on January 4, 2008 and served as our Chief Executive Officer until January
3, 2010. His annual salary was set at
$39,000. Effective November 2, 2008, Mr. Bopp agreed to reduce
his annual salary to $1.
|
(2)
|
Mr.
Kennedy has served as a Director since October 11, 2007. He was
appointed to serve as our President and Chief Operating Officer on October
12, 2007. Prior to his appointment as President and Chief
Operating Officer, Mr. Kennedy served as the President of our Vision
Systems Group. During 2008, Mr. Kennedy’s annual salary was
increased to $240,000, retroactive to his promotion date of October 12,
2007. Effective January 4, 2010, Mr. Kennedy has been appointed
by our Board as President and Chief Executive Officer and his annual
salary increased to $260,000.
|
(3)
|
The
amounts in this column represent the dollar amount recognized for
financial statement reporting purposes with respect to the fiscal year in
accordance with generally accepted accounting principles. See Note 13 of
the Notes to our Financial Statements contained elsewhere in this Form
10-K for a discussion of all assumptions made by us in determining values
of our equity awards.
|
Employment
Agreements with Our Named Executive Officers
On
January 4, 2008, we entered into an employment agreement with our then Chief
Executive Officer, William C. Bopp. Under the terms of Mr. Bopp’s
employment agreement, as amended, he received annual compensation of $1,
along with benefits comparable to those provided to our other
executives. Mr. Bopp was granted a stock option under our 2008 Equity
Incentive Plan which has a term of ten years and may be exercised to
acquire 2,100,00 shares of our common stock. Mr. Bopp surrendered all
2,100,000 of his outstanding stock options in October 2009. Mr. Bopp resigned as
Chief Executive Officer January 3, 2010.
On August
6, 2008, we entered into change of control agreements with John Kennedy, our
then President and Chief Operating Officer and Robert Mathews, our Executive
Vice President and Chief Financial Officer. The
agreements, which are substantially the same, provide each officer with certain
separation benefits in the event of a change of control of our Company. Under
each agreement, if at any time during the two year period following a
change of control, as defined in the agreement, the officer is terminated other
than for cause or if the agreement is terminated by the officer for good reason,
as defined in the agreement, the officer will receive separation pay equal to
one year’s base salary and bonus, and other health and welfare benefits for 18
months.
40
Option
Grants to Our Named Executive Officers for the year ended December 31,
2009
All
Other
|
||||||||||||
Option
Awards:
|
Grant
Date
|
|||||||||||
#
of shares
underlying
|
Exercise
Price
|
Fair
Value
of
|
||||||||||
Name
|
Grant date
|
Options(1)
|
($/sh)
|
Award
($)(2)
|
||||||||
Jed
Kennedy, President, Chief Operating Officer and
Director
|
7/01/2009
|
|
|
700,000
|
|
|
0.015
|
|
$
|
8,374
|
|
|
|
10/16/2009
|
|
|
2,100,000
|
|
|
0.0076
|
|
$
|
13,427
|
(1)
|
Options
expire ten years after grant date. Stock options granted to Mr.
Kennedy during 2009 vest 25% one year following grant date and 6.25% per
quarter thereafter.
|
(2)
|
The
value of an option award is based on the fair value as of the grant date
of such award determined pursuant to generally accepted accounting
principles. See Note 13 of the Notes to our Financial Statements contained
elsewhere in this Form 10-K for a discussion of all assumptions made by us
in determining the value of equity
awards.
|
Outstanding
Equity Awards at Fiscal Year-End
The
following table sets forth information regarding outstanding equity awards held
by our named executive officers as of December 31, 2009.
Outstanding
Equity Awards at Fiscal Year-End Table for the Fiscal Year Ended December 31,
2009
Name
|
#
of Securities
Underlying
Unexercised
Options
(#
exercisable)
|
#
of Securities
Underlying
Unexercised
Options
(#
unexercisable)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
||||||||||||
William
C. Bopp, Chairman and Chief Executive Officer
|
0
|
0
|
-
|
-
|
||||||||||||
John
“Jed” Kennedy, President, Chief Operating Officer and
Director
|
0
|
2,100,000
|
(1)
|
0.0076
|
10/16/2019
|
|||||||||||
0
|
700,000
|
(1)
|
0.015
|
7/01/2019
|
||||||||||||
500,000
|
500,000
|
0.33
|
2/26/2018
|
|||||||||||||
Robert
Mathews, Executive VP and Chief Financial Officer
|
750,000
|
250,000
|
0.33
|
2/26/2018
|
(1)
|
See
note 1 to table above entitled“Option Grants to Our Named
Executive Officers” regarding vesting of these stock option
grants.
|
41
Director
Compensation
The
following table sets forth information concerning the compensation provided
to each person who served as a member of our board of directors during the
fiscal year ended December 31, 2009, other than those persons who are also named
executive officers included in the Summary Compensation Table
above.
Director
Compensation Table for the Fiscal Year Ended December 31, 2009
Name
|
Fees
Earned
or
Paid
in
Cash
($)
|
Stock
Awards
($)
|
Total
|
|||||||||
J.
Winder Hughes (1)
|
|
$
|
9,000
|
|
|
$
|
1,524
|
|
|
$
|
10,524
|
|
William
Tumber (2)
|
|
$
|
21,000
|
|
|
$
|
7,790
|
|
|
$
|
28,790
|
______________
(1)
|
Mr.
Hughes served as a director of our Company from October 11, 2007 to
November 2, 2009.
|
(2)
|
William
Tumber has served as a director of our Company since February 27,
2008.
|
Narrative
to Director Compensation
Non
Employee Directors’ Cash Compensation
Effective
February 2008, our board of directors approved the following cash compensation
structure: $1,500 quarterly retainers, $3,000 for attendance at each board
meeting, $1,000 for telephonic attendance at board meetings and $500 for each
committee meeting attended. Additionally, the Audit Committee and
Compensation Committee chairpersons will receive quarterly fees of $1,500 and
$1,000, respectively.
Effective
October 1, 2008, our outside directors agreed to suspend cash compensation
through March 31, 2009 at which time the fees were reinstated.
Non
Employee Directors’ Stock Option Awards
Under the
2008 Non-Employee Directors’ Stock Option Plan that was adopted by our board of
directors on January 3, 2008, each person who is elected or appointed to be a
non-employee director for the first time after the effective date of the
directors’ plan will be granted an option to purchase 150,000 shares of common
stock upon such election or appointment. In addition, each non-employee director
who continues to serve as a non-employee director automatically will be granted
an option to purchase 75,000 shares of common stock on April 30 of each year
commencing in 2009. Provided, however; that if a person who is first
elected as a non-employee director after the effective date of the directors’
plan has not been serving as a non-employee director for the entire period since
the preceding annual meeting of stockholders (or, in the event no annual meeting
was held in the preceding year, the twelve month period prior to the April 30
annual grant date), then the number of shares subject to such annual grant shall
be reduced pro rata for each full quarter prior to the date of grant during such
period for which such person did not serve as a non- employee director. The
options will vest 100% on the one year anniversary of the date of grant provided
that the non-employee director continues to provide services to us or one of our
affiliates. Options granted under the directors’ plan will have an exercise
price equal to 100% of the fair market value of the common stock on the grant
date and a term of ten years. 150,000 options were granted to
directors during 2009.
42
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 information regarding shares of our common stock
beneficially owned as of January 31, 2010 by: (i) each of our
officers and directors; (ii) all officers and directors as a group; and (iii)
each person known by us to beneficially own five percent or more of the
outstanding shares of our common stock.
Name
|
Common
Stock
|
Common
Stock
Options
Exercisable
Within
60
Days
|
Common
Stock
Purchase
Warrant
Exercisable
Within
60 Days
|
Total
Stock
and
Stock
Based
Holdings (1)
|
%
Ownership(1)
|
|||||||||||||||
William
C. Bopp (2)
|
14,397,727
|
-
|
11,765,792
|
26,163,519
|
45.8%
|
|||||||||||||||
William
Tumber
|
-
|
150,000
|
-
|
150,000
|
0.3%
|
|||||||||||||||
John
Kennedy (3)
|
-
|
562,500
|
-
|
562,500
|
1.2%
|
|||||||||||||||
Robert
Mathews
|
-
|
812,500
|
-
|
812,500
|
1.8%
|
|||||||||||||||
All
officers and directors as a group ( 4 persons)
|
14,397,727
|
1,525,000
|
11,765,792
|
27,688,519
|
47.2%
|
|||||||||||||||
Midsummer
Investment Ltd. (4)
|
8,344,619
|
-
|
-
|
8,344,619
|
18.4%
|
(1)
|
For
purposes of this table “beneficial ownership” is determined in accordance
with Rule 13d-3 under the Securities Exchange Act of 1934, pursuant to
which a person or group of persons is deemed to have “beneficial
ownership” of any common shares that such person or group has the right to
acquire within 60 days after December 31, 2009. For purposes of computing
the percentage of outstanding common shares held by each person or group
of persons named above, any shares that such person or group has the right
to acquire within 60 days after December 31, 2009 are deemed outstanding
but are not deemed to be outstanding for purposes of computing the
percentage ownership of any other person or group. As of December 31,
2009, there were 45,356,765 shares of our common stock issued and
outstanding.
|
(2)
|
Mr.
Bopp served as our Chief Executive Officer from January 4, 2008 until
January 3, 2010 and he continues to serve as the Chairman of our Board of
Directors.
|
(3)
|
Mr.
Kennedy has been appointed by our Board as President and Chief Executive
Officer, effective January 4,
2010.
|
(4)
|
We
relied on a Schedule 13G filed with the SEC on December 14, 2009 by
Midsummer Investment Ltd for this information. Midsummer Investment
holds Common Stock Purchase Warrants previously purchased and originally
exercisable into 5,551,034 shares of Common Stock, in the aggregate.
However, the aggregate number of shares of Common Stock into which such
warrants are exercisable, and which Midsummer Investment has the right to
acquire beneficial ownership, is limited to the number of shares of Common
Stock that, together with all other shares of Common Stock beneficially
owned by Midsummer Investment does not exceed 4.99% of the total
outstanding shares of Common Stock. Accordingly, such warrants are
not currently exercisable into Common Stock unless and until the actual
shares of Common Stock held by any of Midsummer Investment or Midsummer
Capital is less than 4.99% of the total outstanding shares of Common
Stock. Midsummer Investment Ltd. has sole voting power of the
8,344,619 shares of common stock. Midsummer Capital is the
investment advisor to Midsummer Investment. By virtue of such
relationship, Midsummer Capital may be deemed to have dispositive power
over the shares owned by Midsummer Investment. Midsummer Capital disclaims
beneficial ownership of such shares. Mr. Michel Amsalem and Mr. Joshua
Thomas have delegated authority from the members of Midsummer Capital with
respect to the shares of Common Stock owned by Midsummer Investment.
Messrs. Amsalem and Thomas may be deemed to share dispositive power over
the shares of common stock held by Midsummer Investment. Messrs. Amsalem
and Thomas disclaim beneficial ownership of such shares of Common Stock,
and neither person has any legal right to maintain such delegated
authority. The Chief Compliance Officer of Midsummer Investment,
Alisa Butchkowski, has voting powers on all of the
securities.
|
43
Outstanding Options and Warrants
The only
outstanding options to purchase shares of our common stock are the options
granted to our employees, directors, and consultants. We had 7,125,420
outstanding options as of December 31, 2009.
As
of December 31, 2009, we had warrants outstanding which entitle the holders
to purchase 24,406,170 shares of our common stock at prices ranging from
$0.18 to $0.75 per share.
Equity
Compensation Plan Information
The
following table summarizes information about our equity compensation plans as of
December 31, 2009.
Plan
Category
|
Number
of
Securities
to
be Issued
Upon
Exercise
of
Outstanding
Options,
Warrants
and
Rights
(a)
|
Weighted-
Average
Exercise
Price
of
Outstanding
Options,
Warrants
and
Rights
(b)
|
Number
of
Securities
Remaining
Available
for
Future Issuance
Under
Equity
Compensation
Plans
(Excluding
Securities Reflected
in
Column (a)) (c)
|
|||||||||
Equity
Compensation plans approved by security holders
(1)
|
7,092,820
|
$
|
0.29
|
|
4,092,160
|
(3)
|
||||||
Equity
compensation plans not approved by security holders
(2)
|
32,600
|
$
|
28.07
|
-
|
||||||||
Total
|
7,125,420
|
$
|
0.41
|
4,092,160
|
(1)
|
Amounts
include outstanding options to employees, officers and directors under our
2008 Equity Plan and its predecessor plan (the 2004 Stock Incentive Plan)
and the 2008 Directors’ Plan and its predecessor plan (the 2004
Non-Employee Director Stock Ownership Plan). The amount in column (c)
includes 2,817,160 shares available for award under our 2008 Equity Plan
and its predecessor plan and 1,275,000 shares available for awards under
our 2008 Directors’ Plan. The 2008 Equity Plan provides for grants and
awards in the form of stock options, shares of restricted stock, and stock
appreciation rights.
|
(2)
|
Represents
stock options granted to non-employee consultants outside the Company’s
plans.
|
(3)
|
Includes
2,800,000 shares added to the plan in December 2009 that were not approved
by shareholders. In December 2009 the board of directors approved an
amendment to the 2008 Equity plan to increase the number of shares
available under such plan by 2,800,000
shares.
|
2008
Equity Incentive Plan
During
the first quarter of 2008, shareholders approved our 2008 Equity Incentive
Plan (the “2008 Equity Plan”). Additionally, in December 2009, the board of
directors approved an amendment to the 2008 Equity Plan to increase the number
of shares available by 2,800,000. The maximum number of shares that may be
issued pursuant to the 2008 Equity Plan is 9,520,000 shares plus such number of
shares that are issuable pursuant to awards outstanding under the 2004 Plan as
of the effective date and which would have otherwise reverted to the share
reserve of the 2004 Plan. During the year ended December 31, 2009 ,
2,800,000 shares were issued under the 2008 Equity Plan. Options
currently expire no later than 10 years from the grant date and generally vest
within five years. Proceeds received by us from exercises of stock options are
credited to common stock and additional paid-in capital.
44
All of
our key employees (and key employees of our subsidiaries and affiliates in which
we have a significant equity interest) are eligible to receive awards under the
2008 Equity Plan. This plan permits the granting of:
●
|
stock
options, including “incentive stock options” meeting the requirements of
Section 422 of the Internal Revenue Code and stock options that do not
meet these requirements (options that do not meet these requirements are
called “nonqualified stock
options”);
|
●
|
stock
appreciation rights, or SARs;
|
●
|
restricted
stock; and
|
●
|
stock.
|
At
December 31, 2009, a total of 2,817,160 shares of our common stock were
available for granting awards under the 2008 Equity Plan. The Compensation
Committee of the board of directors administers the 2008 Equity Plan. The
maximum term of any option granted under the Plan is limited to 10 years. The
exercise price per share under any stock option or the grant price of any SAR
cannot be less than the Fair Market Value that is defined in the
Plan.
We have
issued options to all employees. The number of stock options issued to our
officers and employees that remain outstanding at December 31, 2009 amounted to
6,865,420 shares.
Non-Employee
Director Plans
During
the first quarter of 2008, shareholders approved our 2008 Non-Employee
Directors’ Stock Option Plan, or the Directors’ Plan. We have reserved a total
of 1,500,000 shares of our common stock for issuance under the Directors’
Plan. During the year ended December 31, 2009, 150,000 shares were
issued under the Directors’ Plan and 75,000 nonvested shares were forfeited upon
resignation of a director.
Under the
Directors’ Plan, each person who is elected or appointed to be a non-employee
director for the first time after the effective date of the Directors’ Plan will
be granted an option to purchase 150,000 shares of common stock upon such
election or appointment. In addition, each non-employee director who
continues to serve as a non-employee director automatically will be granted an
option to purchase 75,000 shares of common stock on April 30 of each year
commencing in 2009. However, if a person who is first elected as a
non-employee director after the effective date of the Directors’ Plan has not
been serving as a non-employee director for the entire period since the
preceding annual meeting of stockholders (or, in the event no annual meeting was
held in the preceding year, the twelve month period prior to the April 30 annual
grant date), then the number of shares subject to such annual grant will be
reduced pro rata for each full quarter prior to the date of grant during such
period for which such person did not serve as a non-employee
director. All options will vest one hundred percent (100%) on the one
year anniversary of the date of grant provided that the non-employee director
continues to provide services to us or one of our
affiliates.
Options
granted under the Directors’ Plan will have an exercise price equal to 100% of
the fair market value of the common stock on the grant date and a term of 10
years. As long as a non-employee director continues to serve with us or
with an affiliate of ours, whether in the capacity of a director, an employee or
a consultant, the non-employee’s option will continue. Options will
terminate three months after his or her service terminates. However,
if such termination is due to the his or her disability, the exercise period
will be extended by 12 months unless the term of the option expires prior to
that date in accordance with the terms of the individual’s option
agreement. If such termination is due to the optionholder’s death or
if the optionholder dies within three months after his or her service
terminates, the exercise period will be extended by 18 months following death
unless the term of the option expires prior to that date in accordance with the
terms of the individual’s option agreement.
At
December 31, 2009, 232,600 stock options were outstanding under the directors’
plans.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
During
the year ended December 31, 2009, we did not have any related party transactions
that exceeded the lesser of $120,000 or one percent of the average of our total
assets at year end for the last two completed fiscal years.
45
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent
Auditors
Fees
billed by Squar, Milner, Peterson, Miranda & Williamson, LLP
Squar,
Milner, Peterson, Miranda & Williamson, LLP
|
2009
|
2008
|
||||||
(1)
Audit Fees
|
$
|
80,000
|
$
|
100,900
|
||||
(2)
Tax Fees
|
$
|
15,050
|
$
|
11,643
|
||||
(3)
All Other Fees
|
$
|
0
|
$
|
0
|
______________
(1)
|
Audit
fees billed to Viking by Squar, Milner, Peterson, Miranda &
Williamson, LLP were for all professional services performed in connection
with the audit of our annual financial statements, reviews of financial
statements included in our Forms 10-Q for those
periods.
|
(2)
|
Tax
services include fees for the preparation of federal and state tax
returns.
|
(3)
|
Squar,
Milner, Peterson, Miranda & Williamson, LLP did not bill us for
other services during 2009 and
2008.
|
All audit
and non-audit services and fees are pre-approved by the Audit Committee or by
the Chairman of the Audit Committee pursuant to delegated
authority.
Effective
May 6, 2003, the Securities and Exchange Commission adopted rules that require
that before independent auditors are engaged by us to render any auditing or
permitted non-audit related service, the engagement be:
●
|
approved
by our Audit Committee; or
|
●
|
entered
into pursuant to pre-approval policies and procedures established by the
Audit Committee, provided the policies and procedures are detailed as to
the particular service, the Audit Committee is informed of each service,
and such policies and procedures do not include delegation of the Audit
Committee’s responsibilities to
management.
|
Under the
direction of our Audit Committee Chairman our Audit Committee pre-approves all
services provided by our independent auditors. All of the above services and
fees were reviewed and approved by the Audit Committee either before or after
the respective services were rendered. The Audit Committee has considered the
nature and amount of fees billed by Squar, Milner, Peterson, Miranda and
Williamson, LLP and believes that the provision of services for activities
unrelated to the audit is compatible with maintaining the firm’s
independence.
46
Exhibit
|
|
Number
|
Exhibit
|
3.1
|
Certificate
of Incorporation dated June 8, 2006 (included as Exhibit 3.1 to the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2007, and incorporated herein by
reference).
|
3.2
|
Bylaws
(included as Exhibit 3.3 to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2007, and incorporated herein by
reference).
|
4.1
|
Certificate
of Preferences, Rights and Limitations of Series B Variable Dividend
Convertible Preferred Stock (included as Exhibit 4.01 to the Form 8-K
filed May 25, 2006, and incorporated herein by
reference).
|
10.1
|
Stock
Incentive Plan, dated March 31, 2004 (included as Exhibit 10.1 to the Form
8-K filed April 1, 2004, and incorporated herein by
reference).
|
10.2
|
2004
Non-Employee Director Stock Ownership Plan dated December 29, 2005
(included as Exhibit 10.2 to the Form 8-K filed April 1, 2004, and
incorporated herein by reference).
|
10.3
|
Executive
Change of Control Agreements between the Company and John Kennedy, and the
Company and Robert Mathews dated August 6, 2008 (included as exhibits 99.2
and 99.3 to the Form 8-K filed August 11, 2008, and incorporated herein by
reference).
|
10.4
|
Lease
between the Company and Robert F. Tambone as Trustee of MAT Realty Trust,
dated September 23, 2004 (included as Exhibit 10.1 to the Form 8-K filed
October 1, 2004, and incorporated herein by reference).
|
10.5
|
First
Amendment to Lease between the Company and Robert F. Tambone as Trustee of
MAT Realty Trust, dated February 5, 2007 (included as exhibit 10.18 to the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2006, and incorporated herein by
reference).
|
10.6
|
Recapitalization
Agreement between the Company and Securityholders, dated December 31, 2007
(included as exhibit 99.1 to the Form 8-K filed January 7, 2008, and
incorporated herein by reference).
|
10.7
|
Securities
Purchase Agreement between the Company and various investors, dated
January 4, 2008 (included as Exhibit 99.2 to the Form 8-K filed January 7,
2008, and incorporated herein by reference).
|
10.8
|
Executive
Employment Agreement between the Company and William C. Bopp, dated
January 4, 2008 (included as Exhibit 99.3 to the Form 8-K filed January 7,
2008, and incorporated herein by reference).
|
10.9
|
Amendment
to Executive Employment Agreement between the Company and William C. Bopp,
dated February 27, 2008 (included as Exhibit 99.2 to the Form 8-K filed
February 29, 2008, and incorporated herein by
reference).
|
10.10
|
Investment
Agreement by and between Viking Systems, Inc. and Dutchess Opportunity
Fund, II, LP, dated January 7, 2010 (included as Exhibit 10.1 to the Form
8-K filed January 7, 2010, and incorporated herein by
reference).
|
10.11
|
Registration
Rights Agreement by and between Viking Systems, Inc. and Dutchess
Opportunity Fund, II, LP, dated January 7, 2010 (included as Exhibit 10.2
to the Form 8-K filed January 7, 2010, and incorporated herein by
reference).
|
10.12
|
Viking
Systems, Inc.’s Amended 2008 Equity Incentive Plan (included as Exhibit
99.1 to the Form S-8 filed January 15, 2010, and incorporated herein by
reference).
|
10.13
|
Viking Systems, Inc.’s 2008 Non-Employee Directors' Stock Option Plan (included as Exhibit 99.2 to the Form S-8 filed May 14, 2008, and incorporated herein by reference). |
23.1
|
Consent
of Independent Registered Public Accounting Firm, Squar, Milner, Peterson,
Miranda & Williamson, LLP (incorporated
herein).
|
31.1
|
Certification
of Principal Executive Officer in accordance with 18 U.S.C. Section 1350,
as adopted by Section 302 of the Sarbanes- Oxley Act of
2002
|
31.2
|
Certification
of Principal Financial Officer in accordance with 18 U.S.C. Section 1350,
as adopted by Section 302 of the Sarbanes-Oxley Act of
2002
|
32.1
|
Certification
of Principal Executive Officer in accordance with 18 U.S.C. Section 1350,
as adopted by Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2
|
Certification
of Principal Financial Officer in accordance with 18 U.S.C. Section 1350,
as adopted by Section 906 of the Sarbanes-Oxley Act of
2002
|
47
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Viking
Systems, Inc.
|
||
Dated:
February 22, 2010
|
By: /s/ John
Kennedy
|
|
President
and Chief Executive Officer
|
||
(Principal
Executive Officer)
|
||
Dated:
February 22, 2010
|
By:
/s/ Robert
Mathews
|
|
Executive
Vice President and
Chief
Financial Officer
(Principal
Financial Officer)
|
In
accordance with the Securities Exchange Act, this report has been signed below
by the following persons on behalf of Viking Systems and in the capacities and
on the dates indicated.
Signature
|
Capacity
|
Date
|
/s/
John Kennedy
|
Director,
President and Chief Executive Officer
|
February
22, 2010
|
/s/
Robert Mathews
|
Executive
Vice President and Chief
Financial Officer
|
February
22, 2010
|
s/
William C. Bopp
|
Chairman
of the Board of Directors
|
February
22, 2010
|
/s/
William
Tumber
|
Director
|
February
22, 2010
|
48