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EX-32 - EXHIBIT 32.2 - OPHTHALMIC IMAGING SYSTEMSex32-f10k12312009.htm
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EX-10.31 - EXHIBIT 10.31 - OPHTHALMIC IMAGING SYSTEMSex10-31_f10k12312009.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 No. 1-11140

OPHTHALMIC IMAGING SYSTEMS
Exhibit 10.28
(Exact name of registrant as specified issuer in its charter)

California
 
94-3035367
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
221 Lathrop Way, Suite I, Sacramento, CA
 
95815
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: (916) 646-2020
 
Securities registered under Section 12(b) of the Act: None
 
Securities registered under Section 12(g) of the Act: Common Stock, no par value
 
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1934. Yes   o    No  x
 
Indicate by checkmark whether the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Exchange Act.   Yes   o    No  x
 
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes      o                  No  o
 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.  o
 
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  o
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer   o (Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   o No x
 
The aggregate market value of voting stock (which consists solely of shares of common stock) held by non-affiliates of the registrant (excludes outstanding shares beneficially owned by directors and officers and treasury shares) June 30, 2009 was approximately $3,321,445 based upon the closing price of the common stock as quoted by Nasdaq OTC Bulletin Board.
 
As of March 12, 2010, there were 26,500,059 shares of common stock issued and outstanding.
 

 
 

 

OPHTHALMIC IMAGING SYSTEMS
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
 
TABLE OF CONTENTS
 
PART I
 
Item 1.
1
Item 1A.
10
Item 1B.
16
Item 2.
16
Item 3.
16
Item 4.
16
 
PART II
 
Item 5.
17
Item 6.
19
Item 7.
19
Item 7A.
36
Item 8.
36
Item 9.
37
Item 9A(T).
37
Item 9B.
38
 
PART III
 
Item 10.
39
Item 11.
42
Item 12.
46
Item 13.
47
Item 14.
48
Item 15.
48
 
 
 

 
 

 

PART I
 
Business
 
Ophthalmic Imaging Systems (the “Company,” “OIS,” “we,” “us,” or “our”) was incorporated under the laws of the State of California on July 14, 1986. We are headquartered in Sacramento, California and engaged in the business of designing, developing, manufacturing and marketing digital imaging systems and informatics solutions. Since our inception, we have developed products that primarily addressed the needs of the ophthalmic angiography markets, both fluorescein and indocyanine green. The current flagship products in our angiography line are our WinStation digital imaging systems and EyeScan systems. These systems are targeted primarily at retinal specialists and general ophthalmologists for use in the diagnosis and treatment of retinal diseases and other ocular pathologies.  OIS also provides PACS (“Picture Archiving and Communication Systems”) and Electronic Medical Records (“EMR”) and Practice Management (“PM”) software to such eye-care providers. In addition, though our wholly-owned subsidiary Abraxas Medical Solutions Inc., a Delaware corporation (“Abraxas”) we provide EMR and PM to the following ambulatory-care specialties: obstetrics/gynecology (“OB/GYN”), orthopedics and primary care.
 
Our objective is to become a leading provider of a diverse range of complimentary ophthalmic products and services for the ocular healthcare industry. We are currently focusing our development efforts on products for the ocular healthcare market, as well as features and enhancements to our existing products. We are also applying our technology in the ophthalmic imaging field toward the development of new ocular imaging devices and exploration of telemedicine/managed care applications targeted at the general ophthalmology and optometry markets.  We believe that as the U.S. healthcare system moves toward managed care, the needs of managed care providers are changing the nature of demand for medical imaging equipment and services. New opportunities in telemedicine (the electronic delivery and provision of health care and consultative services to patients through integrated health information systems and telecommunications technologies), combined with lower cost imaging devices and systems, are emerging to assist physicians and managed care organizations in delivering high quality patient care while reducing costs.
 
During 2004, we entered the Ophthalmic PACS software market. PACS enables medical staff to access new and archived images remotely, thus, improving the method in which to diagnose patients. The ability to instantaneously share information between locations allows specialists to manage more patients in separate locations quickly and efficiently. The PACS system can be completely integrated with our customers’ existing infrastructure, including image acquisition, image analysis, short and long-term storage, archiving, disaster recovery, viewing and monitoring. The current flagship product in our PACS product line is our SymphonyTM software.
 
In January 2008, we acquired the rights to EMR and PM Software as developed by AcerMed, Inc. (“AcerMed”).  Our EMR and PM Software were designed to automate the clinical, administrative, and financial operations of a medical office. This means that paper charting can be virtually eliminated and clinical charting would be done using, for example, a wireless computer pen tablet at the point of care.
 
On October 21, 2009, we purchased substantially all the assets of MediVision, Medical Imaging Limited, formerly our parent Company (the “MediVision Asset Purchase”).  (For additional details of the MediVision Asset Purchase, see Item 8. Financial Statements and Supplementary Data, Note 6. Related party transactions, MediVision Asset Purchase).  Such assets included certain European operations as conducted by CCS Pawlowski GmbH, a branch office in Belgium, agreements under which MediVision contracted with third parties for distribution and other services, and rights to intellectual property.  This acquisition will provide OIS with access to new customers and regional control over operations in the European market.  In addition, we hired most of MediVision’s R&D employees in early 2009 and moved them to our offices in the United States and Israel.
 
In November 2009, OIS EyeScan received FDA 510(k) clearance.  OIS EyeScan is a portable imaging device that enables practices to capture images of both the anterior and posterior segment of the eye.  OIS EyeScan diversifies our product portfolio by adding a low cost product with more functionality than our existing image capture solutions.
 

 
1

 
 
Products
 
OIS Products
 
WinStationTM Systems
 
Our WinStation systems and products, categorized by resolution, are primarily used by retina specialists and general ophthalmologists to capture color images of the retina and to perform a diagnostic procedure known as fluorescein angiography. This procedure is used to diagnose and monitor pathology and provide important information in making treatment decisions. Fluorescein angiography is performed by injecting a fluorescent dye into the bloodstream. As the dye circulates through the blood vessels of the eye, the WinStation system, connected to a medical image capture device called a fundus camera, takes detailed images of the patient’s retina. These digital images provide a “road map” for treatment.
 
Over the past 40 years, fluorescein angiography has been performed using photographic film, which requires special processing and printing. Currently fundus cameras offer an option for integration with a digital imaging system. Our digital WinStation systems allow for immediate diagnosis and treatment of the patient. Images are automatically transferred to a database and permanently stored and archived. We also offer a variety of networking and printer options.
 
Our WinStation systems are also used by ophthalmologists to perform indocyanine green (“ICG”) angiography. ICG angiography is a diagnostic test procedure used for patients with Age-related Macular Degeneration, a leading cause of blindness afflicting over 8 million people in the United States. ICG angiography, used for approximately 5% of patient angiography, is a dye procedure that can only be performed using a digital imaging system such as our WinStation Systems.
 
Digital Slit Lamp Imager (DSLI) and WinStation for Slit Lamps
 
DSLI and WinStation for Slit Lamps are used by a majority of eye care practitioners, including most ophthalmologists and optometrists, with an emphasis on imaging the front of the eye. Slit lamps are imaging devices used in virtually all ophthalmic and optometric practices. The DSLI adapts to most slit lamp models and is capable of real-time video capture, database management and archiving.
 
OIS EyeScan
 
The OIS EyeScan is a portable imaging device that enables practices to capture images of both the anterior and posterior segment of the eye.  The OIS EyeScan captures live video and 5.3 megapixel images from the following imaging modules: Color Retina, Fluorescein Angiography, Optic Nerve Head Stereo Imaging, Red Reflex Imaging Module, Corneal Fluorescence, Tear Film Analysis.
 
Symphony and Symphony Web
 
Symphony and Symphony Web are our Ophthalmic PACS products. The OIS Symphony Image Management System automatically imports images and diagnostic reports from the diagnostic devices within the practice into a single system.  OIS Symphony System allows patient images and diagnostic reports captured from different devices to be viewed side-by-side on one screen with reviewing tools that are proprietary to OIS.
 
OIS Symphony Web enables OIS to deliver all of the OIS Symphony functionality to a web-based client.
 
OIS EMR and OIS PM
 
With OIS’ ophthalmic EMR solution, practices can make the transition to a paperless office using software that manages all aspects of the practice.  OIS EMR and OIS PM were created using a single software platform and database. OIS EMR/PM solution enables users to move back and forth between various applications with a single click and for information to be natively present in each application, eliminating duplicate entry or lost data.
 
 
2

 
Abraxas Products
 
Abraxas’ proprietary software uses the latest technology to automate the workflow of a medical practice consisting of clinical, financial and administrative tasks, all using a single database. Abraxas’ software modules include:
 
Abraxas EMR
 
EMR can be populated with Clinical Pathways that are specific to a particular medical specialty. Following these Clinical Pathways, documenting a patient encounter can be as easy as "point and click" on a wireless touch-tablet computer. Alternatively, voice recognition, handwriting, handwriting recognition or typing can be used for charting. Clinicians can have access to the patient's prior chart notes, test results, clinical information, medical images and other information. They can write electronic prescriptions or electronically enter orders for radiology, lab work and other procedures. Certain lab results will come back to the system electronically and populate patients’ data. This eliminates the hassle of finding, pulling, carrying, filing and often times losing traditional paper charts.
 
Abraxas PM
 
Various codes for differing types of office visits are recommended based on the documentation and charges generated at the time of charting, therefore, data entry for billing purposes can be eliminated. PM allows for preprocessing of claims and editing for American National Standards Institute (ANSI) compliance prior to submission to minimize payer rejections. This results in quicker turnover of accounts receivable and, thus, a more efficient collections process which, in turn, may improve cash flow. Staff members can review detailed management and financial reports and access on-screen accounts receivable reports with filtering based on a wide range of criteria. These filters allow for identification of problem accounts.
 
Abraxas Scheduling
 
Patient and resource scheduling is also available and built around the needs of busy practices. This software allows users to view on-screen the schedules of one or multiple physicians at any time, reserve time frames for specific appointment reasons and color code them for on-screen identification, and keep track of patients’ scheduling history.
 
Markets
 
Having reviewed various third party sources, including reports by the National Physician’s Census and data provided by the American Osteopathic Association, we believe there are approximately 18,000 ophthalmologists in the United States and approximately 28,000 ophthalmologists practicing medicine in our target countries outside the United States. This group has been traditionally divided into two major groups: anterior segment (front of the eye) and posterior segment (back of the eye). Within these groups there are several sub-specialties including medical retina, retina and vitreous, glaucoma, neurology, plastics, pediatric, cataract, cornea and refractive surgery. There are also approximately 35,000 practicing optometrists in the United States.
 
WinStation and Symphony
 
The WinStation market consists of current fundus camera owners and potential purchasers of fundus cameras suitable for interfacing with our digital imaging system products. We believe there are now over 9,000 fundus cameras in clinical use in the United States and an additional 12,000 in the international market. It is estimated that new fundus camera sales fluctuate between approximately 800 and 1,200 units per year, worldwide, at an average per unit selling price of approximately $24,000 for a non-integrated unit. Of total cameras worldwide, including new and previously owned, a significant number are suitable to be interfaced with our digital imaging systems.
 
Currently, we know of 5 manufacturers of fundus cameras. These manufacturers produce a total of 24 models, 8 current and 16 legacy models for each of which we have designed optical and electronic interfaces.
 
 
3

 
The Symphony and Symphony Web products are marketed to the same target market as WinStation customers.
 
OIS EyeScan
 
The OIS EyeScan system is targeted primarily at eye care professionals that want to capture images digitally on anterior (front) and posterior (back) of the eye. As described above, we believe that there are approximately 18,000 eye care specialist in the United States and approximately 28,000 eye care specialist practicing medicine in our target countries outside the United States. In addition, there are also approximately 35,000 practicing optometrists in the United States. We currently know of 3 manufacturers of imaging systems which are similar to the EyeScan
 
EMR and PM Software
 
The primary target market for OIS EMR and PM software is ophthalmologists with various specialties, as described above, numbering approximately 18,000 in the United States.
 
In order to increase our research and development and marketing effectiveness, Abraxas focuses primarily on the following types of office based physicians: obstetrics and gynecology, and orthopedic. Having reviewed various third-party sources, including reports by the National Physician's Census, we believe there are approximately 35,000 office-based obstetrics and gynecology physicians, and approximately 19,000 office-based orthopedic physicians in the United States. Abraxas' secondary market is primary care of which there are approximately 235,000 office-based primary care physicians in the United States as reported by the National Physician's Census.
 
EMR software is used to automate the clinical workflow of medical offices and PM software is used to automate the financial and administrative tasks of medical offices. Medical practices in the United States began automating their practice management decades ago. By the late 1990’s, PM software had become widely accepted. The market for EMR, on the other hand, has started to increase as a result of various financial incentives and governmental forces.
 
Currently, the EMR industry has no dominant leader. It includes both large publicly traded companies and small privately held companies.
 
OIS Sales, Marketing and Distribution
 
We utilize a direct and indirect sales force to distribute our products throughout the United States, Europe, and various other countries. As of December 31, 2009, our U.S. sales and marketing organization consisted of two distribution channels. The first is an ophthalmology channel that reports to the VP of Sales for North America and is comprised of Sales Managers, Technical Support Specialists and Product Specialists, among others, who are located throughout the United States.  These employees provide marketing, sales, maintenance, installation and training services.  The second channel is dedicated to Optometry sales and consists of various Sales Managers, among others.  Each of the two channels is supported by inside sales representatives that are outsourced from well-known providers of sales outsourcing, whose function it is to drive broader penetration into both markets.   In Europe we have several sales representatives and product specialists.  These employees provide marketing, sales, maintenance, installation and training services.
 
Until October 21, 2009, upon completion of the MediVision Asset Purchase, we were parties to several agreements with MediVision, pursuant to which MediVision distributed our WinStation and Symphony Products in Europe, Africa, Israel and India. Products were sold to MediVision at a volume driven discount which was uniformly applicable to all of our distributors, including MediVision. Below is the volume discount table that was available to our distributors for 2009.
 

 
4

 


 
Annual amounts purchased
Discount
$    0           - $  199,999
0%
$   200,000 - $  299,999
10%
$   300,000 - $  399,999
20%
$   400,000 - $  499,999
30%
$   500,000 and above
40%
 
In 2009, until the completion of the MediVision Asset Purchase, and for the year ended December 31, 2008, MediVision purchased products of approximately $225,000 and $597,000, respectively. Sales derived from product shipments to MediVision are recorded at transfer pricing which is based on similar volume discounts that are available to other resellers or distributors of our products.
 
CCS Pawlowski GmbH
 
CCS Pawlowski GmbH, a German corporation (“CCS”), was a subsidiary of MediVision which owned 63% of CCS’ ownership interests.  We acquired this ownership interest in the MediVision Asset Purchase.  (For additional details, see Item 8.  Financial Statements and Supplementary Data, Note. 6. Related Party Transactions,, MediVision Asset Purchase.)
 
During the years ending December 31, 2009 and 2008, CCS was the exclusive distributor of certain of our products in Germany and Austria. Products were sold to CCS at a volume driven discount which was uniformly applicable to all of our distributors, including CCS. Below is the volume discount table that was available to our distributors for 2009. CCS will continue to be our exclusive distributor of certain products in Germany and Austria.
 
Annual amounts purchased
Discount
  $   0            -  $  199,999  
0%
$   200,000 - $  299,999
10%
$   300,000 - $  399,999
20%
$   400,000 - $  499,999
30%
   $   500,000 and above   
40%

During 2009, prior to the MediVision Asset Purchase, we sold products to CCS of approximately $113,000 compared to products sold to CCS during the full year 2008 of $226,000. At December 31, 2008, we had $50,365 of amounts due from CCS.  In 2009, after completion of the MediVision Asset Purchase all inter-company amounts with CCS were eliminated upon consolidation.
 
Abraxas Sales and Marketing
 
Abraxas utilizes a direct sales force in marketing and selling its products throughout the United States. At December 31, 2009, Abraxas’ sales and marketing organization consisted of one sales manager, five territory sales representatives, two marketing personnel, and eight product specialists. These personnel provide marketing, sales, maintenance, installation and training services.
 
OIS Europe Sales and Marketing
 
OIS Europe utilizes a direct sales force in marketing and selling its products throughout Europe. At December 31, 2009, OIS Europe’s sales and marketing organization consists of one sales representative and one product specialists. These personnel provide marketing sales, maintenance, installation and training services. In addition to our direct sales force in Europe, we have distribution agreements with distributors throughout Europe to sell and market our products.
 
 
5

 
CCS Sales and Marketing
 
CCS utilizes a direct sales force in marketing and selling its products throughout Europe. At December 31, 2009, CCS’ and marketing organization consists of 2 sales representative and 2 product specialists. These personnel provide marketing sales, maintenance, installation and training services.
 
OIS Manufacturing and Production
 
We are primarily a systems integrator with proprietary software, optical interfaces and electronic fundus camera interfaces. The manufacturing of certain components are subcontracted to outside vendors and assembled by OIS. We use outside vendors to minimize production time and reduce capital requirements. We store and assemble the manufactured components in our 13,552 square foot facility located in Sacramento, California.
 
We have been audited by the Food and Drug Administration (the “FDA”) as recently as May 2007 and there were no findings made. We also have Form 510(k)‘s, a pre-marketing notification filed with the FDA which provides certain safety and effectiveness information, on file for our digital angiography products.
 
Abraxas’ Operations
 
Abraxas is a software developer that operates in its 4,883 square foot facility located in Irvine, California.
 
OIS Components, Raw Materials and Suppliers
 
As a systems integrator, a significant number of the major hardware components in our products are procured from sole source vendors. Whenever possible, however, we seek multiple vendors from which to procure our components. Moreover, we work closely with our principal component suppliers, such as Dell Computer, MegaVision, Canon and our other vendors to maintain dependable working relationships and to continually integrate into the manufacturing of our products, whenever feasible, the most current, proven, pertinent technologies. But, as with any manufacturing concern dependent on subcontractors and component suppliers, significant delays in receiving products or unexpected vendor price increases could adversely affect our business.
 
OIS Warranties
 
We generally provide a 12-month limited warranty for parts, labor and shipping charges in connection with the sale of our hardware products. Peripheral products such as monitors, printers and computers also carry the original manufacturer’s warranty.
 
In the North American market, in order to ensure quality control and the proper functioning of our products on-site at a doctor’s office, we generally install the system and train the doctor and the doctor’s staff for a fee. Customers are not required to purchase such services in connection with the purchase of our products. We also offer service plans for sale to our customers as a supplement to the original manufacturer’s warranties.
 
OIS Competition
 
The healthcare industry is characterized by extensive research and development efforts and rapid technological change. Competition for products that can diagnose and evaluate eye disease is intense and expected to increase.
 
With respect to our WinStation products, we are aware of two primary competitors in the United States, which produce and deliver digital fundus imaging systems in volume, Topcon and Zeiss. In addition, there are a few other small competitors. Both Topcon and Zeiss, however, manufacture fundus cameras and produce angiography products that interface mostly with their own fundus cameras. In contrast, our products interface with different models of fundus cameras from a wide variety of manufacturers. Three other companies are known to have systems primarily in the international market, and the U.S. market to a limited extent, each with a small market share.
 
 
6

 
We are aware of five primary competitors for the DSLI, namely Veatch, MVC, Kowa, Helioasis and Lombart. Additionally, there are several other companies, which manufacture similar systems, but these systems currently have minimal market presence.
 
We are aware of three primary competitors for the EyeScan imaging capturing system, namely Zeiss, Topcon and Kowa.
 
We are aware of two primary competitors for the Ophthalmic PACS that develop similar solutions.
 
OIS does not consider many of the companies currently offering some type of EMR or PM products as competitors, as they sell to hospitals and to certain medical specialties that are not in OIS’ current target market. OIS is aware of some competitors for its EMR and PM products in ophthalmology, primarily NextGen, which provide solutions for the multi-specialty medical market, and a few smaller competitors, primarily HCIT, Eye Doc and Compulink, which provide the EMR and or PM solutions predominantly to the ocular healthcare market.
 
Although we continue to work to develop new and improved products, many companies are engaged in research and development of new devices and alternative methods to diagnose and evaluate eye disease. Introduction of such devices and alternative methods could hinder our ability to compete effectively and could have a material adverse effect on our business, financial condition and results of operations. Many of our competitors and potential competitors have substantially greater financial, manufacturing, marketing, distribution and technical resources than us.
 
Abraxas Competition
 
Abraxas does not consider many of the companies currently offering some type of EMR or PM products as competitors, as they sell to hospitals, large clinics, surgery centers and other facilities, and to certain medical specialties that are not in Abraxas’ current target market. Abraxas is aware of some competitors for its EMR and PM products, primarily Allscripts/Misys Healthcare Systems, Sage Software, and NextGen, which provide solutions for the multi-specialty medical market. Others, mainly Digi-Chart and Greenway provide the EMR and PM solutions predominantly to the obstetrics and gynecology market, while other companies specialize in the orthopedic market or the primary care market.
 
The acquisition of EMR, PM and Scheduling has allowed us to broaden our product offerings to the primary care, obstetrics and gynecology, and orthopedic. However there is no guarantee that our sales efforts will be successful. Additional research and development efforts, long sales cycles, new sales training requirements and potential resistance to the initial high cost of the EMR, PM or Scheduling software may hinder our success in selling these products.
 
OIS Europe Competition
 
We are aware of 3 primary competitors for market share in Europe, namely Zeiss, Topcon and, Canon. Additionally, there are several other companies, which manufacture similar systems, but these systems currently have minimal market presence.
 
CCS Sales and Competition
 
We are aware of 5 primary competitors for market share in Germany, namely Zeiss, Topcon, Scholz, Canon, Imedos. Additionally, there are several other companies, which manufacture similar systems, but these systems currently have minimal market presence.
 

 
7

 

OIS Research and Development
 
During 2009, OIS focused our recent research and development efforts on new digital image capture products. Our net research and development expenditures in the years ended December 31, 2009 and 2008, excluding our subsidiaries, were approximately $1,956,000 and $2,219,000, respectively. In 2008, we capitalized $504,711 of the costs associated with the development of web-based software.
 
Prior to July 2009, MediVision performed our research and development services whereby MediVision billed us, on a monthly basis, at cost plus 12%. These research and development services included direct labor, consultants’ fees, travel expenses and the applicable portion of general and administrative expenses.  During the years ended December 31, 2009 and 2008, we paid approximately $294,000 and $1,888,000, respectively, to MediVision for research and development services.
 
In 2009, we hired all of MediVision’s research and development staff and moved them to our offices in the United States and Israel, thereby streamlining our research and development efforts. Prior to this, MediVision and other outsourced consultants conducted most of our research and development.  (See Item 1. Business, OIS Sales, Marketing and Distribution.).
 
Abraxas Research and Development
 
Abraxas’ research and development team is located in Irvine, California. Abraxas continues to focus its research and development efforts on the adaptation of its software to the target market as described above. Our net research and development expenditures in the years ending December 31, 2009 and 2008 were approximately $1,073,000 and $0 respectively. In 2008, we capitalized $1,721,000 of the costs associated with the development of our EMR software. During the first three months of 2009, we began to sell this software and amortize these costs.
 
Abraxas also capitalized the EMR, PM and Scheduling software it acquired from AcerMed.
 
Patents, Trademarks and Other Intellectual Property
 
On June 15, 1993, we were issued United States Letters Patent No. 5,220,360 for "Apparatus and Method for Topographical Analysis of the Retina." This patent relates to the Glaucoma-ScopeR apparatus, and methods used by the apparatus for topographically mapping the retina and comparing the mapping to previous mappings.
 
We currently have patent applications outstanding with the U.S. Patent and Trademark Office and for the European patent authorities under PCT treaty for “A Device, Method and System for Automatic Montage of Segmented Retinal Images” and a “Method for Stabilizing a Sequence Angiographic Images” and for an “Integrated retinal imager and method.”
 
We have registered trademarks for “AutoMontage,” “OIS Symphony,” “Ophthalmology Office” and “IRI.”
 
We have copyrights for “WinStation Version 5,” “WinStation Version 6” and “WinStation XP, Version 10.”
 
In 2007, we entered into a licensing agreement pursuant to which we were granted the right to commercialize background technology and a family of patents for an ocular imaging device, integrate it into our existing and/or future products and retain exclusive rights of use, marketing and sale thereof worldwide.
 
Further, although we believe that our products do not and will not infringe on patents or violate proprietary rights of others, it is possible that our existing rights may not be valid or that infringement of existing or future patents, trademarks or proprietary rights may occur or be claimed to occur by third parties.
 

 
8

 

In the event that any of our products infringe patents, trademarks or proprietary rights of others, we may be required to modify the design of such products, change the names under which the products or services are provided or obtain licenses. There can be no assurance that we will be able to do so in a timely manner, upon acceptable terms and conditions, or at all. The failure to do any of the foregoing could have a material adverse effect on our business. There can be no assurance that our patents or trademarks, if granted, would be upheld if challenged or that competitors might not develop similar or superior processes or products outside the protection of any patents issued to us. In addition, there can be no assurance that we will have the financial or other resources necessary to enforce or defend a patent or trademark infringement or proprietary rights violation action. Moreover, if our products infringe patents, trademarks or proprietary rights of others, we could, under certain circumstances, become liable for damages, which also could have a material adverse effect on our business.
 
We also rely on trade secrets, know-how, continuing technological innovation and other unpatented proprietary technology to maintain our competitive position. Certain of the proprietary software, optical interfaces and synchronization modules of our digital imaging systems are largely proprietary and constitute trade secrets, but the basic computer hardware and video components are purchased from third parties. No patent applications have been filed with respect thereto. If challenged, we anticipate aggressively defending our unpatented proprietary technology, although there is no assurance that others will not independently develop substantially equivalent proprietary information or techniques, or otherwise gain access to our trade secrets or disclose such technology, or that we can meaningfully protect our rights to our unpatented trade secrets and other proprietary technology.
 
We seek to protect our unpatented proprietary technology, in part, through proprietary confidentiality and nondisclosure agreements with employees, consultants and other parties. Our confidentiality agreements with our employees and consultants generally contain standard industry provisions requiring such individuals to assign to us, without additional consideration, any inventions conceived or reduced to practice by them while employed or retained by OIS, subject to customary exceptions. There can be no assurance, however, that proprietary information agreements with employees, consultants and others will not be breached, that we will have adequate remedies for any breach or that our trade secrets will not otherwise become known to or independently developed by competitors.
 
Government Regulation
 
The marketing and sale of our products are subject to certain domestic and foreign governmental regulations and approvals. Pursuant to Section 510(k) of the Federal Food, Drug and Cosmetic Act (“FDCA”), we are required to file, and have submitted, a pre-marketing notification with the FDA which provides certain safety and effectiveness information concerning our diagnostic imaging systems. The FDA has approved our pre-marketing notification submittals, thereby granting us permission to market our products, subject to the general controls and provisions of the FDCA. The classification of our products require, among other things, annual registration, listing of devices, good manufacturing practices, labeling and prohibition against misbranding and adulteration. Further, because we are engaged in international sales, our products must satisfy certain manufacturing requirements and may subject us to various filing and other regulatory requirements imposed by foreign governments as a condition to the sale of such products.
 
We have registered our manufacturing facility with both the FDA and certain California authorities as a medical device manufacturer and operate such facility under FDA and California requirements concerning Quality System Requirements (“QSR”). As a medical device manufacturer, we are required to continuously maintain our QSR compliance status and to demonstrate such compliance during periodic FDA and California inspections. If the facilities do not meet applicable QSR regulatory requirements, we may be required to implement changes necessary to comply with such regulations.
 
Although the FDA has made findings which permit us to sell our products in the marketplace, such findings do not constitute FDA approval of these devices and we cannot predict the effect that future legislation or regulatory developments may have on our operations. Additional regulations, reconsideration of approvals granted under current regulations, or a change in the manner in which existing statutes and regulations are interpreted or applied may have a material adverse impact on our business, financial condition and results of operations. Moreover, new products and services developed by us, if any, may also be subject to the same or other various federal and state regulations, in addition to those of the FDA.
 
 
9

 
An FDA inspection of our Sacramento, California facility was conducted in May 2007. There were no findings during the inspection.
 
A California Department of Health inspection of our Sacramento, California facility was conducted in August 2009.  There were 3 violations found during the inspection.  A corrective action plan was implemented to correct those issues and no further action was taken by the Department of Health.
 
Under the recently approved stimulus package, The American Recovery and Reinvestment Act of 2009, physicians who implement a certified EMR software program and become meaningful users between 2010 and 2012 will each be eligible for $44,000 in incentive payments and physicians who become meaningful users between 2012 and 2014 will be eligible for lower payments.  Physicians who have not become meaningful users by 2014 will not qualify for any payments. In addition, beginning in 2016, Medicare reimbursement will begin to decrease for clinics that do not meet the above criteria. We anticipate this legislation will have positive effects on our revenues as physicians adopt EMR software programs at higher rates than they do currently. We expect to see this positive trend begin in mid-2010 and beyond.
 
Insurance
 
We maintain general commercial casualty and property insurance coverage for our business operations, as well as directors and officers insurance and product liability insurance. During 2009, we did not receive any product liability claims and are unaware of any threatened or pending claims. To the extent that product liability claims are made against us in the future, such claims may have a material adverse impact on our business.
 
Employees
 
As of December 31, 2009, we have 98 employees, 3 of whom are part-time. 54 of our employees are employed by OIS and 27 of our employees are employed by Abraxas. We also engage the services of consultants from time to time to assist us on specific projects in the areas of research and development, software development, regulatory affairs and product services, as well as general corporate administration. Certain of these consultants periodically sub-contract engineers as independent consultants for specific projects.
 
We have no collective bargaining agreements covering any of our employees.  In addition, we have never experienced any material labor disruption and we are unaware of any current efforts or plans to organize our employees. We consider our relationship with our employees to be good.
 
Risk Factors
 
Current economic conditions may adversely affect our industry, business, financial position and results of operations and could cause the market value of our common stock to decline.
 
The global economy is currently undergoing a period of unprecedented volatility and the future economic environment may continue to be less favorable than that of recent years. It is uncertain how long the economic downturn that the U.S. economy has entered will last. The economic downturn has resulted in, and could lead to, further reduced spending specifically related to physicians’ equipment and software. Our products require a large initial outlay of funds, which physicians in the current economic climate are hesitant to do. Also, the credit markets are currently experiencing unprecedented contraction. If current pressures on credit continue or worsen, future debt financing may not be available to us when required or may not be available on acceptable terms, and as a result we may be unable to grow our business, take advantage of business opportunities, respond to competitive pressures or satisfy our obligations under our indebtedness.
 

 
10

 

If we are unable to obtain additional capital, we may be required to eliminate certain operations.
 
Our operations require substantial funds for, among other things, continuing research and development and manufacturing and marketing of our existing products. We may need to seek additional capital, possibly through public or private sales of our securities in order to fund our operations. However, we may not be able to obtain additional funding in sufficient amounts or on acceptable terms when needed. Insufficient funds may require us to delay, scale back or eliminate certain or all of our research and development programs or license from third parties products or technologies that we would otherwise seek to develop ourselves. Any of these may adversely affect our continued operations.
 
If we fail to develop and successfully introduce new and enhanced products that address rapid technological changes in our markets and meet the needs of our customers, our business may be harmed.
 
Our industry is characterized by extensive research and development, rapid technological change, frequent innovations and new product introductions, changes in customer requirements and evolving industry standards. Demand for our products could be significantly diminished by new technologies or products that replace them or render them obsolete, which would have a material adverse effect on our business, financial condition and results of operations.
 
Our future success depends on our ability to anticipate our customers’ needs and develop products that address those needs. This will require us to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. We have incurred substantial research and development expenditures in the past and plan to continue to do so in the future. Over the last three fiscal years, our research and development expenses have been in the range of 18% to 21% of our net revenues. Although we have spent considerable resources on research and development, we may still be unable to introduce new products or, if we do introduce a new product, such product or products may not achieve sufficient market acceptance. Failure to successfully identify new product opportunities and develop and bring new products to market in a timely and cost effective manner may lead to a reduction in sales and adversely affect our business.
 
The markets in which we sell our products are intensely competitive and increased competition could cause reduced sales levels, reduced gross margins or loss of market share.
 
Competition for products that diagnose and evaluate eye disease is intense and is expected to increase. Although we continue to work on developing new and improved products, many companies are engaged in research and development of new devices and alternative methods to diagnose and evaluate eye disease. Many of our competitors and potential competitors have substantially greater financial, manufacturing, marketing, distribution and technical resources than us. Any business combinations or mergers among our competitors, forming larger competitors with greater resources, or the acquisition of a competitor by a major medical or technology corporation seeking to enter this business, could result in increased competition. Introduction of new devices and alternative methods could hinder our ability to compete effectively and could have a material adverse effect on our business, financial condition and results of operations.
 
We may experience a decline in the selling prices of our products as competition increases, which could adversely affect our operating results.
 
As competing products become more widely available, the average selling price of our products may decrease. Trends toward managed care, health care, cost containment and other changes in government and private sector initiatives in the United States and other countries in which we do business are placing increased emphasis on the delivery of more cost-effective medical therapies which could adversely affect prices of our products. If we are unable to offset the anticipated decrease in our average selling prices by increasing our sales volumes, our net sales will decline. To compete we must continue to reduce the cost of our products. Further, as average selling prices of our current products decline, we must develop and introduce new products and product enhancements with higher margins. If we cannot maintain our net sales and gross margins, our operating results could be seriously harmed, particularly if the average selling prices of our products decreases significantly.
 
 
11

 
Our products are subject to U.S., E.U. and international medical regulations and controls, which impose substantial financial costs on us and which can prevent or delay the introduction of new products.
 
Our ability to sell our products is subject to various federal, state and international rules and regulations. In the United States, we are subject to inspection and market surveillance by the FDA, to determine compliance with regulatory requirements. The regulatory process is costly, lengthy and uncertain. Any delays in obtaining or failure to obtain regulatory approval of any of our products could cause a loss of sales or incurrence of additional expenses, which could adversely affect our business.
 
The purchase of AcerMed software and the formation of Abraxas may not generate any significant future revenue for us.
 
In January 2008, we purchased substantially all of the assets of AcerMed, Inc., a leading software developer for Electronic Medical Records (EMR) and Practice Management software. Through the acquisition, we gained the rights to software applications that automate the clinical, administrative, and the financial operations of a medical office. Due to the acquisition of Abraxas, NextGen Healthcare Information Systems, Inc., a supplier of EMR and PM software, chose to discontinue its relationship with OIS. Long sales cycles, new sales training requirements and potential resistance to the initial high cost of the software may be among the factors contributing to us not being successful in selling these products.
 
The purchase of substantially all the assets of MediVision may not generate any significant future revenue for us.
 
On October 21, 2009 we purchased substantially all the assets of MediVision. Such assets included the European operations which consisted of MediVision’s business as conducted by CCS Pawlowski GmbH, its branch office in Belgium, certain agreements under which MediVision contracted with third parties for distribution and other services, and rights to intellectual property which resulted from MediVision’s research and development activities performed in Israel.  We may experience difficulty integrating MediVision’s operations with our own and we may have challenges in achieving strategic objectives and other benefits expected from the MediVision Asset Purchase.  Such difficulties may divert our attention and resources from our operations and other initiatives, potentially impair the acquired assets or result in the potential loss of key employees of MediVision.
 
Our international sales are a growing portion of our business; accordingly, we may increasingly become subject to the risks of doing business in foreign countries.
 
Our international business exposes us to certain unique and potentially greater risks than our domestic business and our exposure to such risks may increase if our international business continues to grow, as we anticipate. Our international business is sensitive to changes in the priorities and budgets of international customers, which may be driven by changes in worldwide economic conditions and regional and local economic factors.
 
Our international sales are also subject to local government laws and regulations and practices which may differ from U.S. Government regulation, including regulations relating to import-export control, investments, exchange controls and varying currency and economic risks.  We are also exposed to risks associated with using foreign representatives and consultants for international sales and operations and teaming with international consultants and partners in connection with international operations. As a result of these factors, we could incur losses on such operations which could negatively impact our results of operations and financial condition.
 
We depend on skilled personnel to effectively operate our business in a rapidly changing market, and if we are unable to retain existing or hire additional personnel, our ability to develop and sell our products could be harmed.
 

 
12

 

Our success depends to a significant extent upon the continued service of our key senior management, sales and technical personnel, any of whom could be difficult to replace. Competition for qualified employees is intense, and our business could be adversely affected by the loss of the services of any of our existing key personnel. We cannot assure that we will continue to be successful in hiring and retaining properly trained personnel. Our inability to attract, retain, motivate and train qualified new personnel could have a material adverse effect on our business.
 
We may not be able to protect our proprietary technology, which could adversely affect our competitive advantage.
 
We rely on a combination of patent, copyright, trademark and trade secret laws, non-disclosure and confidentiality agreements and other restrictions on disclosure to protect our intellectual property rights. We cannot assure that our patent applications will be approved, any patents that may be issued will protect our intellectual property, any issued patents will not be challenged by third parties or any patents held by us will not be found by a judicial authority to be invalid or unenforceable. Other parties may independently develop similar or competing technology or design around any patents that may be issued to or held by us. We cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Moreover, if we lose any key personnel, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees.
 
The long sales cycles for our products may cause us to incur significant expenses without offsetting revenues.
 
Customers typically expend significant effort in evaluating, testing and qualifying our products before making a decision to purchase them, resulting in a lengthy initial sales cycle. While our customers are evaluating our products we may incur substantial sales, marketing and research and development expenses to customize our products to the customer’s needs. We may also expend significant management efforts, increase manufacturing capacity and order long-lead-time components or materials. Even after this evaluation process, a potential customer may not purchase our products. As a result, these long sales cycles may cause us to incur significant expenses without ever receiving revenue to offset those expenses.
 
If we fail to accurately forecast components and materials requirements for our products, we could incur additional costs and significant delays in shipments, which could result in the loss of customers.
 
We must accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials. Lead times for components and materials that we order vary significantly and depend on factors including the specific supplier requirements, the size of the order, contract terms and current market demand for components. If we overestimate our component and material requirements, we may have excess inventory, which would increase our costs, impair our available liquidity and could have a material adverse effect on our business, operating results and financial condition. If we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt and delay delivery of our products to our customers. Any of these occurrences would negatively impact our net sales, business and operating results and could have a material adverse effect on our business, operating results and financial condition.
 
Our dependence on sole source suppliers exposes us to possible supply interruptions that could delay or prevent the manufacture of our systems.
 
Certain of the components used in our products are purchased from single sources. While we believe that most of these components are available from alternate sources, an interruption of these or other supplies could have a material adverse effect on our ability to manufacture some of our systems.
 
Some of our medical customers’ willingness to purchase our products depends on their ability to obtain reimbursement for medical procedures using our products and our revenues could suffer from changes in third-party coverage and reimbursement policies.
 
 
13

 
Our medical segment customers include doctors, clinics, hospitals and other health care providers whose willingness and ability to purchase our products depends in part upon their ability to obtain reimbursement for medical procedures using our products from third-party payers, including private insurance companies, and in the U.S. from health maintenance organizations, and federal, state and local government programs, including Medicare and Medicaid. Third-party payers are increasingly scrutinizing health care costs submitted for reimbursement and may deny coverage and reimbursement for the medical procedures made possible by our products. Failure by our customers to obtain adequate reimbursement from third-party payers for medical procedures that use our products or changes in third-party coverage and reimbursement policies could have a material adverse effect on our sales, results of operations and financial condition.
 
We have limited product liability insurance and if we are held liable in a products liability lawsuit for amounts in excess of our insurance coverage, we could be rendered insolvent.
 
There can be no assurance that we will not be named as a defendant in any litigation arising from the use of our products. Although we have our own product liability insurance policy with a limit of $4 million, should such litigation ensue and we are held liable for amounts in excess of such insurance coverage, we could be rendered insolvent. In addition, there can be no assurance that product liability insurance will continue to be available to us or that the premiums therefore will not become prohibitively expensive.
 
If our facilities were to experience a catastrophic loss, our operations would be seriously harmed.
 
Our facilities could be subject to a catastrophic loss such as fire, flood or earthquake. A substantial portion of our manufacturing activities and many other critical business operations are located near major earthquake faults in California, an area with a history of seismic events. Our corporate headquarters is also in a possible flood zone. Any such losses at our facilities could disrupt our operations, delay production, shipments and revenue and result in large expenses to repair or replace the facility. Any such loss could have a material adverse effect on our sales, results of operations and financial condition.
 
Any failure to meet our debt obligations could harm our business, financial condition and results of operations.
 
As of December 31, 2009, we had debt outstanding of $3,130,227 consisting of $1,338,001 in outstanding loans from institutional investors, $1,650,000 in bank notes, and $142,226 of notes for capital leases and auto loans. If our cash flow and capital resources are insufficient to fund our debt obligations, we may be forced to sell assets, seek additional equity or debt capital or restructure our debt. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely harm our ability to incur additional indebtedness on acceptable terms. Our cash flow and capital resources may be insufficient to pay interest and principal on our debt in the future. If that should occur, our capital raising or debt restructuring measures may be unsuccessful or inadequate to meet our scheduled debt service obligations, which could cause us to default on our obligations and further impair our liquidity.
 
Risks Related to Our Common Stock
 
We may experience volatility in our stock price, which could negatively affect your investment, and you may not be able to resell your shares at or above the offering price.
 
The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including: quarterly variations in operating results; changes in financial estimates by securities analysts; changes in market valuations of other similar companies; announcements by us or our competitors of new products or of significant technical innovations, contracts, acquisitions, strategic partnerships or joint ventures; additions or departures of key personnel; any deviations in net sales or in losses from levels expected by securities analysts; and future sales of common stock.
 
 
14

 
In addition, the stock market has recently experienced extreme volatility that has often been unrelated to the performance of particular companies. These market fluctuations may cause our stock price to fall regardless of our financial performance.
 
Because our securities trade on the OTC Bulletin Board, your ability to sell your shares in the secondary market may be limited.
 
The shares of our common stock have been listed and principally quoted on the Nasdaq OTC Bulletin Board under the trading symbol “OISI” since May 28, 1998. As a result, it may be more difficult for an investor to dispose of OIS’ securities or to obtain accurate quotations on their market value. Furthermore, the prices for OIS’ securities may be lower than might otherwise be obtained.
 
Moreover, because OIS’ securities currently trade on the OTC Bulletin Board, they are subject to the rules promulgated under the Securities Exchange Act of 1934, as amended, which impose additional sales practice requirements on broker-dealers that sell securities governed by these rules to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual individual income exceeding $200,000 or $300,000 jointly with their spouses). For such transactions, the broker-dealer must determine whether persons that are not established customers or accredited investors qualify under the rule for purchasing such securities and must receive that person’s written consent to the transaction prior to sale. Consequently, these rules may adversely affect the ability of purchasers to sell OIS’ securities and otherwise affect the trading market in OIS’ securities.
 
Because OIS’ shares are deemed “penny stocks,” you may have difficulty selling them in the secondary trading market.
 
The Securities and Exchange Commission has adopted regulations which generally define a “penny stock” to be any equity security that has a market price (as therein defined) less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. Additionally, if the equity security is not registered or authorized on a national securities exchange that makes certain reports available, the equity security may also constitute a “penny stock.” As OIS’ common stock falls within the definition of penny stock, these regulations require the delivery by the broker-dealer, prior to any transaction involving OIS’ common stock, of a risk disclosure schedule explaining the penny stock market and the risks associated with it. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for OIS’ common stock. The ability of broker-dealers to sell OIS’ common stock and the ability of shareholders to sell OIS’ common stock in the secondary market would be limited. As a result, the market liquidity for OIS’ common stock would be severely and adversely affected. OIS can provide no assurance that trading in OIS’ common stock will not be subject to these or other regulations in the future, which would negatively affect the market for OIS’ common stock.
 
OIS has additional securities available for issuance, including preferred stock, which if issued could adversely affect the rights of the holders of OIS’ common stock.
 
OIS’ articles of incorporation authorize the issuance of 100,000,000 shares of common stock and 20,000,000 shares of preferred stock. The common stock and the preferred stock can generally be issued as determined by OIS’ board of directors without shareholder approval.
 
Any issuance of preferred stock could adversely affect the rights of the holders of common stock by, among other things, establishing preferential dividends, liquidation rights or voting powers. Accordingly, shareholders will be dependent upon the judgment of OIS’ management in connection with the future issuance and sale of shares of OIS’ common stock and preferred stock, in the event that buyers can be found therefor. Any future issuances of common stock or preferred stock would further dilute the percentage ownership of OIS held by the public shareholders. Furthermore, the issuance of preferred stock could be used to discourage or prevent efforts to acquire control of OIS through acquisition of shares of common stock.
 
 
 
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Unresolved Staff Comments
 
Not applicable.
 
Properties
 
We lease our facility space in Sacramento California under a cancelable operating lease that expires in June 2012. This facility consists of 13,552 square feet of office, manufacturing and warehouse space. We pay minimum monthly lease payments for this property of $11,926.  Abraxas leases facility space in Irvine, California under a noncancelable lease which will expire in May 2011.  This facility consists of 4,888 square feet of office space.  We pay $11,065 per month for this office space.
 
Management believes our leased facilities are suitable and adequate to meet our current needs.
 
Legal Proceedings
 
On May 11, 2007, we filed a civil action in the Superior Court of California for the County of Sacramento against our former president Steven Verdooner. We subsequently moved for and were granted an order amending the complaint to add claims against defendants Opko Health, Inc. and the Frost Group, LLC. The complaint against Mr. Verdooner alleged claims of, among other things, breach of fiduciary duty, intentional interference with contract, and intentional interference with prospective economic advantage, and it also alleged claims against Opko Health and the Frost Group, of interference and with aiding and abetting Mr. Verdooner’s interference and breach of his fiduciary duty.
 
On May 3, 2009, we entered into a Confidential Settlement and Mutual Release Agreement (the “Settlement Agreement”) by and between us, Steven Verdooner, OPKO Health, Inc. and The Frost Group, LLC (collectively “Defendants”).
 
Pursuant to the Settlement Agreement, we agreed to dismiss, with prejudice, the lawsuit between us and the Defendants.  We also agreed to release the Defendants from any claims that could have been brought in the foregoing lawsuit, whether known or unknown.  The Defendants paid us the full amount of the settlement of $1,200,000 on May 13, 2009.
 
We and the Defendants entered into the Settlement Agreement to avoid the expense and uncertainty of litigation and without making any admission of liability or concession of wrongdoing.
 
Reserved.
 

 
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PART II
 
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our shares of common stock, no par value, have been listed and principally quoted on the Nasdaq OTC Bulletin Board under the trading symbol “OISI” since May 28, 1998 and prior to that on the Nasdaq Small-Cap Market. The following table sets forth the high and low sales prices for our common stock as reported on the Nasdaq OTC Bulletin Board. These prices reflect inter-dealer prices, without retail markup, markdown or commissions, and may not represent actual transactions.
 
 
Year Ended December 31, 2009
 
Year Ended December 31, 2008
 
Low
 
High
 
Low
 
High
First Quarter
$0.15
 
$0.34
 
$0.32
 
$0.70
Second Quarter
$0.24
 
$0.45
 
$0.30
 
$0.44
Third Quarter
$0.38
 
$0.59
 
$0.27
 
$0.45
Fourth Quarter
$0.48
 
$1.57
 
$0.11
 
$0.38
 
On March 12, 2010, the closing price for our common stock, as reported by the Nasdaq OTC Bulletin Board, was $1.31 per share and there were approximately 94 shareholders of record.
 
Dividend Policy
 
We have not paid any cash dividends since our inception and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We expect to retain our earnings, if any, to provide funds for the expansion of our business. Future dividend policy will be determined periodically by the Board of Directors based upon conditions then existing, including our earnings and financial condition, capital requirements and other relevant factors.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
The following table sets forth certain information, as of December 31, 2009, with respect to our equity compensation plans:
 
EQUITY COMPENSATION PLAN INFORMATION
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
 
2,057,590
(1)
 
$0.76
 
23,074
(2)
Equity compensation plans not approved by security holders
 
1,527,336
(3)
 
$0.39
 
11,163
(4)
Total
 
3,584,926
   
$0.60
 
34,237
 

(1)
Represents 577,831 options granted under our 2003 Stock Option Plan, 750,000 options granted under our 2005 Stock Option Plan, and 729,759 options granted under our 2009 Stock Option Plan.
 
 
 
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(2)
Represents 20,241 shares available for grant under the 2009 Stock Option Plan and 2,833 shares available for grant under the 2003 Stock Option Plan to our employees, directors, and consultants. Upon the expiration, cancellation or termination of unexercised options, shares subject to options under the plan will again be available for the grant of options under the applicable plan.
(3)
Includes 1,223,836 shares subject to options granted under the 2000 Stock Option Plan (the “2000 Plan”), an option to purchase 123,500 shares of our common stock which was issued to Alon Baraket for acting as the placement agent in the sale and issuance of securities to AccelMed, and an option to purchase 180,000 shares of our common stock which was issued to Noam Allon for consulting services during 2009.  (For material terms of the 2000 Stock Option Plan and other individual stock awards, see Item. 8, Financial Statements, Notes to Consolidated Financial Statements, Note 8. Share-based Compensation.)
(4)
Represents 11,163 shares available for future grant under the 2000 Plan to our employees and directors, consultants, and non-employees. Upon the expiration, cancellation or termination of unexercised options, shares subject to options under the 2000 Plan will again be available for the grant of options under the applicable plan.
 
Recent Sales of Unregistered Securities
 
On December 23, 2009, we granted Noam Allon, a consultant to OIS’ subsidiary, OIS Global, options to purchase 180,000 shares of common stock. The options vest in 4 equal semi-annual installments beginning on June 23, 2010, are exercisable at $0.84 per share and expire on December 23, 2019. We relied upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended (“Section 4(2)”) in connection with this issuance.
 
On November 18, 2009, we granted Gil Allon, our CEO, options to purchase 242,141 shares of common stock. The options vest in 4 equal semi-annual installments beginning on May 18, 2010, are exercisable at $0.65 per share and expire on November 18, 2019. We relied upon the exemption from registration under Section 4(2) in connection with this issuance.
 
On November 18, 2009, we granted Ariel Shenhar, our CFO, options to purchase 318,285 shares of common stock. The options vest in 4 equal semi-annual installments beginning on May 18, 2010, are exercisable at $0.65 per share and expire on November 18, 2019. We relied upon the exemption from registration under Section 4(2) in connection with this issuance.
 
On June 24, 2009, we issued to AccelMed 9,633,228 shares and a warrant to purchase up to 3,211,076 shares for an aggregate purchase price of $3,999,972.  The warrant is exercisable at $1.00 per share and expires on June 24, 2012.  We relied on exemptions from registration under Section 4(2) and Rule 506 of the Securities Exchange Act of 1934, as amended, in connection with this issuance.
 
On June 24, 2009, we issued to Alon Baraket, the broker for our financing agreement with AccelMed, options to purchase 123,500 shares of common stock. The options vest immediately on June 24, 2009, are exercisable at $0.01 per share and expire on June 24, 2019. We relied upon the exemption from registration under Section 4(2) in connection with this issuance.
 
On January 6, 2009, we granted Gil Allon, our CEO, options to purchase 272,500 shares of common stock in lieu of 20% of his annual salary for fiscal 2009. The options vest in 12 equal monthly installments beginning on January 31, 2009, are exercisable at $0.16 per share and expire on January 6, 2019. We relied upon the exemption from registration under Section 4(2) in connection with this issuance.
 
On January 6, 2009, we granted Ariel Shenhar, our CFO, options to purchase 265,000 shares of common stock in lieu of 20% of his annual salary for fiscal 2009. The options vest in 12 equal monthly installments beginning on January 31, 2009, are exercisable at $0.16 per share and expire on January 6, 2019. We relied upon the exemption from registration under Section 4(2) in connection with this issuance.
 
 
 
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On January 1, 2008, we granted Mike Bina, the President of Abraxas, options to purchase 212,933 shares of Abraxas common stock.  The options are exercisable at $.01 per share, expire on January 1, 2019, and vest beginning January 1, 2008, semi-annually over three years as follows:  20%, 20%, 17.5%, 17.5%, 12.5% and 12.5%.
 
On January 1, 2008, we granted Ali Zarazvand, the Chief Technology Officer of Abraxas, options to purchase 109,693 shares of Abraxas common stock.  The options are exercisable at $.01 per share, expire on January 1, 2019, and vest beginning January 1, 2008, semi-annually over three years as follows:  20%, 20%, 17.5%, 17.5%, 12.5% and 12.5%.
 
On December 19, 2007, we granted Gil Allon, our CEO, options to purchase 260,000 shares of common stock for services rendered during 2007.  The options vest in 6 equal installments every 6 months beginning on June 19, 2008.  Options to purchase 130,000 shares are exercisable at $0.82 per share and the remaining 130,000 at $1.05 per share.  All of the options expire on December 19, 2015.  We relied upon the exemption from registration under Section 4(2) in connection with this issuance.

On December 19, 2007, we granted Ariel Shenhar, our CFO, options to purchase 230,000 shares of common stock for services rendered during 2007.  The options vest in 6 equal installments every 6 months beginning on June 19, 2008.  Options to purchase 115,000 shares are exercisable at $0.82 per share and the remaining 115,000 at $1.05 per share.  All of the options expire on December 19, 2015.  We relied upon the exemption from registration under Section 4(2) in connection with this issuance.

 
Selected Financial Data
 
Not applicable.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
We make forward-looking statements in this report, in other materials we file with the Securities and Exchange Commission (the “SEC”) or otherwise release to the public, and on our website. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained in this Item 7, “Management’s Discussion and Analysis or Plan of Operation,” regarding our future plans, strategies and expectations are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions.  You are cautioned not to place undue reliance on these forward-looking statements because these forward-looking statements are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Thus, our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions generally and the medical instruments market specifically, legislative or regulatory changes that affect our business, including changes in healthcare regulation, the availability of working capital, the introduction of competing products, and other risk factors described herein. These risks and uncertainties, together with the other risks described from time -to -time in reports and documents that we filed with the SEC should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
 

 
19

 

Overview
 
To date, we have designed, developed, manufactured and marketed ophthalmic digital imaging systems and informatics solutions and have derived substantially all of our revenues from the sale of such products. The primary target market for our digital angiography systems and informatics solutions has been retinal specialists and general ophthalmologists. In January 2008, we purchased EMR, PM and scheduling software to be sold to the following ambulatory-care specialties: ophthalmology, OB/GYN, orthopedics and primary care.
 
There can be no assurance that we will be able to achieve or sustain significant positive cash flows, revenues or profitability in the future.
 
2009 Highlights
 
MediVision Asset Purchase
 
On October 21, 2009, we purchased substantially all the assets of MediVision. Such assets included the European operations which consisted of MediVision’s business as conducted by CCS Pawlowski GmbH, its branch office in Belgium, certain agreements under which MediVision contracted with third parties for distribution and other services, and rights to intellectual property which resulted from MediVision’s research and development activities performed in Israel. This acquisition will provide OIS with access to new customers and regional control over operations in the European market.  In early 2009, we also hired MediVision’s R&D staff and moved them to our offices in the United States and Israel. This transition will increase the efficiency of our research and development efforts and help us reduce our costs.
 
 
AccelMed Stock Purchase
 
On June 24, 2009, U.M. AccelMed, Limited Partnership, an Israeli limited partnership (“AccelMed”), became our largest shareholder with 9,633,228 shares of our common stock or 36.4%.  AccelMed acquired these shares on June 24, 2009 pursuant to a Purchase Agreement between us and AccelMed. Under the Purchase Agreement, we authorized the issuance and sale of up to an aggregate of 13,214,317 shares of our common stock and warrants to purchase up to an aggregate of 4,404,772 shares of our common stock in two installments. On the date of the Purchase Agreement, we completed the first installment (the “1st Installment”), under which issued to AccelMed 9,633,228 shares and a warrant to purchase up to 3,211,076 shares for an aggregate purchase price of $3,999,972.  The 1st Installment warrant is exercisable at $1.00 per share and expires on June 24, 2012. For the 2nd installment, we agreed to issue 3,581,089 shares of common stock and a warrant to purchase up to an aggregate of 1,193,696 shares of common stock, for an aggregate purchase price of $1,999,967. Subject to certain conditions, including, without limitation, the achievement of certain financial milestones, the completion of the 2nd Installment will occur within 14 days of the date of our filing with the SEC our Form 10-Q for the quarter ended March 31, 2010 or on a later date as may be agreed to in writing by the parties. If certain conditions are not met, the 2nd installment is optional. The funds from the first installment provided OIS with capital resources which will allow us to expand our operations and fund research and development and marketing.
 
New Accounting Pronouncements
 
FASB Accounting Standards Update No. 2010-08, Technical Corrections to Various Topics.
 
In February 2010, the FASB issued Accounting Update No. 2010-8, Technical Corrections to Various Topics, to eliminate inconsistencies and to clarify guidance on various Codification Topics. Except for certain amendments to Topic 815 and the nullification of paragraph 852-740-45-2, the Accounting Standards Update No. 2010-08 will be effective for the first reporting period beginning after its issuance. Management is currently evaluating the potential impact of Update No. 2010-08 on our consolidated financial results.
 

 
20

 

FASB Accounting Standards Update No. 2010-06, Fair Value Measurement and Disclosures.
 
In January 2010, the FASB issued Accounting Update No. 2010-06, Fair Value Measurement and Disclosures, to improve disclosures about Fair Value Measurements. The amendments in this Update will require new disclosures related to the transfer in and out of Level 1 and 2, and require that a reporting company present Level 3 activity on a gross basis rather than one net number. In addition, the amendments in this Update clarify existing disclosures related to the level of disaggregation and disclosures about inputs and valuation techniques.  Update No. 2010-06 will be effective for reporting periods beginning after December 15, 2009. Management is currently evaluating the potential impact of Accounting Standards Update No. 2010-06 on our consolidated financial results.
 
FASB Accounting Standards Update No. 2010-04, Accounting for Various Topics, Technical Corrections to SEC Paragraphs.
 
In January 2010, the FASB issued Accounting Update No. 2010-4, Accounting for Various Topics, Technical Corrections to SEC Paragraphs, to update SEC staff announcements for codification references. The adoption of Accounting Standards Update No. 2010-04 will not have a material impact on our consolidated financial statements.
 
FASB Accounting Standards Update No. 2010-01, Accounting for Distributions to Shareholders with Components of Stock and Cash.
 
In January 2010, the FASB issued Accounting Update No. 2010-01, Accounting for Distributions to Shareholders with Components of Stock and Cash, to clarify the accounting for a distribution to shareholders that offers the ability to elect to receive their entire distribution in cash or shares. Accounting Standards Update No. 2010-06 will be effective for reporting periods beginning after December 15, 2009. Management is currently evaluating the potential impact of Accounting Standards Update No. 2010-01 on our consolidated financial results.
 
FASB Accounting Standards Update No. 2009-14, Certain Revenue Arrangements That Include Software Elements, a Consensus of the FASB Emerging Issues Task Force.
 
In October 2009, the FASB issued Accounting Standards Update No. 2009-14, Certain Revenue Arrangements That Include Software Elements, a Consensus of the FASB Emerging Issues Task Force, to amend guidance used to allocate and measure revenues by an enterprise that sells or leases tangible products in an arrangement that contains software that is more than incidental to the tangible product as a whole. The amendments in the Update require that hardware components of a tangible product containing software elements always be excluded from the software revenue guidance. The Update provides additional guidance on how to determine which software, if any, related to the tangible products also would be excluded from the scope of the software revenue guidance. Update No. 2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. Management is currently evaluating the potential impact of Accounting Standards Update No. 2009-14 on our consolidated financial results.
 
FASB Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force.
 
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force, to amend guidance which establishes a selling price hierarchy for determining the selling price of a deliverable in a multiple-deliverable revenue arrangement. The amendments in this Update also will replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenues is based on entity-specific assumptions rather than assumptions of marketplace participation.  In addition, the amendment revises certain disclosure requirements.  Update No. 2009-13 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. Management is currently evaluating the potential impact of Accounting Standards Update No. 2009-14 on our consolidated financial results.
 
 
 
21

 
 
FASB Accounting Standards Update No. 2009-01, Generally Accepted Accounting Principles.
 
In October 2009, the FASB issued Accounting Standards Update No. 2009-01, Generally Accepted Accounting Principles, to amend the FASB Accounting Standards Codification for the issuance of the FASB Statement No. 168, FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards Codification will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On its effective date, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. The adoption of Accounting Standards Update No. 2009-01 will not have a material impact on our consolidated financial statements.
 
FASB Accounting Standards Codification Topic 855, Subsequent Events.
 
On June 30, 2009, we adopted Topic 855, Subsequent Events which is generally based on Financial Accounting Standard 165, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, Topic 855 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of Topic 855 did not have a material impact on our consolidated financial statements.
 
FASB Accounting Standards Codification Topic 810, Consolidation, Subtopic 10 Overall, Section 65, Transition Related to FASB Statement No. 160 Noncontrolling Interest in Consolidated Financial Statements – an amendment to ARB No.51.
 
Topic 810, Consolidation, is based on Statement of Financial Accounting Standard No. 160, Noncontrolling Interest in Consolidated Financial Statements – an amendment of ARB 51, which we adopted on January 1, 2009. Topic 810, Consolidation, establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This Topic defines a noncontrolling interest, previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. Topic 810, Consolidation, requires, among other things, that a noncontrolling interest be included in the consolidated statement of financial position within equity separate from the parent’s equity, consolidated net income to be reported at amounts inclusive of both the parent’s and noncontrolling interest’s shares and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all on the consolidated statement of operations; and if a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value. The adoption of Topic 810, Consolidation, did have a material impact on our consolidated financial results as related to the MediVision Asset Purchase which was completed on October 21, 2009.  (For additional details, see Item 8. Financial Statements and Supplementary Data, Note 6. Related Party Transactions,, MediVision Asset Purchase.)
 
FASB Accounting Standards Codification Topic 810, Consolidation.
 
Topic 810 Consolidation, is generally based on Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R), which was issued in June 2009, which among other things requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity; to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and, to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. Topic 810, Consolidation, became effective on January 1, 2010. Management is currently evaluating the potential impact of this Topic on our consolidated Financial Statements.
 
 
 
22

 
 
FASB Accounting Standards Codification Topic 350, Intangibles -- Goodwill and Other.
 
Topic 350, Intangibles – Goodwill and Other, is generally based on Financial Staff Position (“FSP) 142-3 Determination of the Useful Life of Intangible Asset, which was issued by the FASB in April 2008, which among other things, amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Topic 350. The intent of the Topic is to improve the consistency between the useful life of a recognized intangible asset under Topic 350 and the period of expected cash flows used to measure the fair value of the asset, under Topic 805 Business Combinations which is generally based on SFAS 141R, Business Combinations, and other GAAP principles.  The provisions of Topic 350 are effective for fiscal years beginning after December 15, 2008. Topic 350 is effective for our fiscal year beginning January 1, 2009.  The adoption of Topic 350 did not have a material impact on our consolidated financial statements. 
 
FASB Accounting Standards Codification Topic 805, Business Combinations.
 
Topic 805, Business Combinations, is generally based on Financial Accounting Standards No. 141 (revised 2007), Business Combinations, issued by the FASB in December 2007, which among other things, establishes principles and requirements regarding the method in which the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired business, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination, and (iv) requires costs incurred to effect an acquisition to be recognized separately from the acquisition. Topic 805 is effective for all business combinations for which the acquisition date is on or after January 1, 2009. Earlier adoption is prohibited. This standard changes the accounting treatment for business combinations on a prospective basis. We believe that the adoption of Topic 805 has had a material impact on our financial position and results of operations as disclosed below.
 
On March 20, 2008, we entered into a definitive merger agreement (the “Merger Agreement”) with MV Acquisitions Ltd., an Israeli company and a wholly-owned subsidiary (the “Merger Sub”), and MediVision, pursuant to which the Merger Sub would have merged with and into MediVision with MediVision as the surviving entity. On March 16, 2009, we entered into a Termination Agreement with MediVision pursuant to which the Merger Agreement was terminated.
 
We capitalized $519,820 and $527,327 in 2008 and 2007, respectively, for a total of $1,047,047 of costs related to the proposed merger with MediVision. In accordance with FASB Topic 805, Business Combinations, we must expense these costs. To comply with Topic 805 we have retroactively calculated our consolidated balance sheet as of December 31, 2008 and our consolidated statement of operations and consolidated cash flow statements for the year ended December 31, 2008. Our consolidated balance sheet as of December 31, 2008 and consolidated statement of operations and consolidated cash flow statement for the year ended December 31, 2008 report merger-related costs as expenses for comparative purposes. Beginning in 2009, we have expensed, within general and administrative expenses in our consolidated statement of operations, any new merger-related costs. The pro forma impact of this adjustment to our 2008 consolidated financial statements as of and for the year ended December 31, 2008 is $519,720, respectively, as shown below:
 
Statement of Operations:
   
FY 2008
 
FY 2008 Revised
For Topic 805
 
Net revenues
   
$
12,491,117
 
$
12,491,117
 
Cost of sales
     
5,768,483
   
5,768,483
 
Gross profit
   
$
6,722,634
 
$
6,722,634
 
Total operating expenses
     
7,804,968
   
8,324,688
 
Net loss
   
$
(2,465,805
)
$
(2,985,524
)
Basic loss per share
   
$
(0.15
)
$
(0.18
)
Balance Sheet:
               
Total Assets 
   
$
13,671,756
 
$
12,624,709
 
Total Liabilities
   
$
6,178,256
 
$
6,178,255
 
Total Stockholders’ Equity
   
$
7,493,500
 
$
6,446,454
 
Total Liabilities and Stockholders’ Equity
   
$
13,671,756
 
$
12,624,709
 

 
23

 
Critical Accounting Policies
 
Our consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principals (“GAAP”). The information contained in the financial statements is primarily financial information based on effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset or relieving a liability.
 
Management is also required to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. In addition, GAAP itself may change from one previously acceptable method to another. Although the economics of our transactions would not change, the timing of the recognition of such events for accounting purposes may change.
 
We re-evaluate our estimates and assumptions that we use in our financial statements on an ongoing and quarterly basis. We adjust these estimates and assumptions as needed and as circumstances change. If circumstances change in the future, we will adjust our estimates and assumptions accordingly. At the present time, we cannot definitively determine whether our assumptions and estimates will change in the future. Based on history, however, it is likely that there will be changes in some of our estimates and assumptions.
 
Revenue Recognition
 
Our revenue recognition policies comply with applicable accounting rules and regulations including FASB Accounting Standards Codification Topic 985, Software, and Topic 605, Revenue, Subtopic 25 Multiple-Element Arrangements. Under Topic 605, Subtopic 25, the multiple components of our revenue are considered separate units of accounting in that revenue recognition occurs at different points of time for (1) product shipment, (2) installation and training services, and (3) service contracts based on performance or over the contract term as we incur expenses related to the contract revenue.
 
Revenue for products is recognized when title passes to the customer, which is upon shipment, provided there are no conditions to acceptance, including specific acceptance rights. If we make an arrangement that includes specific acceptance rights, revenue is recognized when the specific acceptance rights are met. In addition, consideration received from our customer agreements is fixed and no specific refund rights are included in the arrangement and, thus, such consideration is reliably measurable. We defer 100% of the revenue from sales shipped during the period that we believe may be uncollectible.
 
Installation revenue is recognized when the installation is complete. Separate amounts are charged and assigned in the customer quote, sales order and invoice for installation and training services. These amounts are determined based on fair value, which is calculated in accordance with industry and competitor pricing of similar services and adjustments according to market acceptance. There is no price reduction in the product price if the customer chooses not to have us complete the installation.
 
 
 
24

 
 
Extended product service contracts are offered to our customers and are generally entered into prior to the expiration of our one year product warranty. The revenue generated from these transactions is recognized over the contract period, normally one to four years.
 
We do not have a general policy for cancellation, termination or refunds associated with the sale of our products and services.  All items are on one quote/purchase order with payment terms specified for the whole order.
 
Tax Provision
 
Deferred taxes are calculated using the liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
 
We calculate a tax provision quarterly and determine the amount of our deferred tax asset that will more-likely-than-not be used in the future.  In doing so, we determine the amount of our unlimited and capped NOL amounts we will more likely than not be able to use and the deferred tax asset amount related to the temporary differences of our balance sheet accounts.
 
FASB Accounting Standards Codification Topic No. 740, Taxes, provides the accounting for uncertainty in income taxes recognized in a company’s financial statements.  Topic No. 740 also prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. In addition, Topic No. 740, provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We apply FASB Accounting Standards Codification Topic No. 740 to all of our tax positions.
 
We do not currently allocate our taxes between us and our subsidiary, Abraxas, due to the immaterial impact of Abraxas on our tax provision.
 
Warranty Reserve
 
Our warranty reserve contains two components, a general product reserve recorded on a per product basis and specific reserves recorded as we become aware of system performance issues. The product reserve is calculated based on a fixed dollar amount per product shipped each quarter.  Specific reserves usually arise from the introduction of new products. When a new product is introduced, we reserve for specific problems arising from potential issues, if any. As issues are resolved, we reduce the specific reserve. These types of issues can cause our warranty reserve to fluctuate outside of sales fluctuations.
 
We estimate the cost of the various warranty services by taking into account the estimated cost of servicing routine warranty claims in the first year, including parts, labor and travel costs for service technicians. We analyze the gross profit margin of our service department, the price of our extended warranty contracts, factor in the hardware costs of the various systems, and use a percentage to calculate the cost per system to use for the first year manufacturer’s warranty.
 
In 2009, the general warranty reserve increased from $67,000 to $98,599 due to the increase in product shipments compared to the amount of replacements, repairs or upgrades performed.
 
In 2008, the general warranty reserve decreased from $128,250 to $67,000 due to the decrease in product shipments and the amount of replacements, repairs or upgrades performed.
 

 
25

 

Securities Purchase Agreement
 
On June 24, 2009, we entered into a Purchase Agreement AccelMed.  Pursuant to the terms of the Purchase Agreement, we completed the 1st installment on June 24, 2009, whereby we issued and sold to AccelMed 9,633,228 shares of our common stock and a warrant to purchase up to 3,211,076 shares, at an exercise price of $1.00 per share, for an aggregate purchase price of $3,999,972.  This Purchase Agreement required that we deliver shares as part of a physical settlement, thus, we classified this Purchase Agreement as a permanent equity transaction.
 
The 1st Installment was recorded as an increase in cash and equity of $3,999,972.  We treated the warrants issued in the 1st Installment as a reduction to our common stock and an increase to additional paid-in-capital.  (For additional details, see Item 8. Financial Statements and Supplementary Data, Note 6. Related Party Transactions, U.M. AccelMed, Limited Partnership).
 
Convertible Debt and Warrants
 
On October 29, 2007, we issued convertible notes (the “Notes”) which are convertible into shares of our common stock and warrants (the “Warrants”) to The Tail Wind Fund Ltd. and Solomon Strategic Holdings, Inc. (together with The Tail Wind Fund Ltd., the “Holders”) to purchase an aggregate of 616,671 shares of our common stock at an exercise price of $1.87 per share.  These warrants expire on December 10, 2012.
 
On June 24, 2009, we entered into an Extension Agreement (the “Extension Agreement”) by and between us and the Holders.  Pursuant to the Extension Agreement, with respect to the Notes, the Holders agreed to extend the principal payments due thereon for 18 months, such that the next principal payment with respect to the Notes will be due December 31, 2010, and extend the maturity date of the Notes to October 31, 2011.  As consideration for these extensions and waivers, we issued warrants (the “New Warrants”) to the Holders to purchase an aggregate of 500,000 shares of our common stock.  These New Warrants have an exercise price of $1 per share and expire on June 24, 2012. Pursuant to certain anti-dilution provisions in the Notes and Warrants, which were triggered as a result of the sale of securities under the Purchase Agreement with AccelMed, the conversion and exercise prices changed from $1.64 to $1.1375 per share for the Notes and $1.87 to $1.2970 per share for the Warrants.  Based on these changes, the Holders may receive up to an additional 431,700 and 272,421 shares of common stock under the Notes and Warrants, respectively. On March 18, 2010 the Holders converted $150,000 of the Convertible Notes principle balance into 131,868 shares of our common stock. Additionally, on March 24, 2010 the Holders converted $100,000 of the principal balance on the Convertible Note into 87,912 shares of our common stock. (For additional details, see Item 8. Financial Statements and Supplementary Data, Note. 5. Notes Payable.)
 
On October 23, 2009, in connection with the assumption of the United Mizrahi loan, we issued to United Mizrahi Bank a warrant (the “Warrant”) to purchase 350,000 shares of our common stock at an exercise price of $1.00 which will expire upon the earlier of October 23, 2012 or twelve months following the completion of (1) a primary public offering of our common stock (a “Public Offering”) or (2) (a) the sale of all or substantially all of our assets or (b) the merger or consolidation of the Company with or into another entity, pursuant to which 50% of the Company’s outstanding common stock is held by person(s) who prior to the transaction held, in aggregate, less than 5% (together, a “Liquidity Event,” and together with a Public Offering, an “Exit Event”); provided however, if the underwriter in a Public Offering or the purchasing person(s) in a Liquidity Event require that all our outstanding warrants and options, including the Warrant be exercised prior to or part of the Public Offering or Liquidity Event, as applicable, then the Warrant will terminate, subject to certain notice requirements, upon completion of such transaction.
 
 
The exercise price of the Warrant is $1.00, subject to the happening of certain events, including, but not limited to, the payment of a stock dividend or a stock split.  The Warrant also includes certain anti-dilution provisions if we issue or sell any equity securities or securities convertible into equity, options or rights to purchase equity securities at a per share selling price less than the exercise price, then the exercise price will be adjusted pursuant to a weighted-average formula. (For additional details, see Item 8. Financial Statements and Supplementary Data, Note 6. Related Party Transactions, Warrant to United Mizrahi Bank).
 

 
26

 
There were 4,950,168 warrants outstanding and exercisable as of December 31, 2009 with a weighted average remaining contractual life of 2.6 years, a weighted average exercise price of $1.05.  There is no intrinsic value of warrants outstanding at December 31, 2009. (For additional details, see Item 8. Financial Statements and Supplementary Data, Note. 11. Warrants)
 
Software Capitalization
 
In 2008, we capitalized our EMR and PM software that we acquired from AcerMed through the bankruptcy court.  This software was purchased with the intention that it would be sold, leased or marketed upon modification by our research and development team to our customers. The amount that we capitalized for this software was $570,077.  During the first three months of 2009, we began to sell this software and we began to amortize this asset using the straight-line method of amortization over the economic life of the asset, which we concluded to be three years.  Our EMR and PM software was amortized during the year ended December 31, 2009 by $190,024.
 
We also capitalized the development costs incurred to prepare this software for sale. Development costs were capitalized once technological feasibility was established. We determined that the software was technologically feasible because we had worked with a model/prototype that had been in the market before our acquisition. The amount of development that we capitalized in connection with this software is $1,150,831.  During the first three months of 2009, we began to sell this software and we began to amortize this asset using the straight-line method of amortization over the economic life of the asset, which we concluded to be three years.  The amount of this asset that was amortized during the year ended December 31, 2009 was $383,612.
 
In 2008, we also capitalized $504,711 of costs associated with the development of a web-based software once technological feasibility was established. During the first three months of 2009, we began to sell this software and so, we began to amortize this asset using the straight-line method of amortization over the economic life of the asset, which we concluded to be three years.  The amount of this asset that was amortized during the year ended December 31, 2009 was $168,236.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of OIS, Abraxas Medical Solutions, Inc., a Delaware, corporation (“Abraxas”), the 63% investment in CCS Pawlowski GmbH (“CCS”) a German Corporation, OIS Europe, a Belgian based branch of OIS, and OIS Global, an Israel based subsidiary of OIS. All significant intercompany balances and transactions have been eliminated in consolidation.
 
Foreign currencies
 
The Consolidated Financial Statements are presented in the reporting currency of Ophthalmic Imaging Systems, U.S. Dollars (“USD”). The functional currency for the Company’s wholly-owned subsidiary, OIS Europe and our 63% investment in CCS, is the European Union Euro (€).    Accordingly, the balance sheet of OIS Europe and CCS is translated into USD using the exchange rate in effect at the balance sheet date. Revenues and expenses are translated using the average exchange rates in effect during the period. Translation differences are recorded directly in shareholders’ equity as “foreign currency translation adjustment.” Gains or losses on transactions denominated in a currency other than the subsidiaries’ functional currency which arise as a result of changes in foreign exchange rates are recorded in the statement of operations. The statement of cash flows reflects the reporting currency equivalent of foreign currency cash flows using the exchange rates in effect at the time of the cash flow.
 
Segment Reporting
 
Our business consists of two operating segments: OIS and Abraxas, our wholly-owned subsidiary.  Our management reviews Abraxas’ results of operation separately from that of OIS. Our operating results for Abraxas exclude income taxes. The provision for income taxes is calculated on a consolidated basis, and accordingly, is not presented by segment. It is excluded from the measure of segment profitability as reviewed by our management. CCS does not meet the materiality requirements for segment reporting, and accordingly, CCS’ financial information is reported as Other in the following table.
 
 
27

 
We evaluate our reporting segments in accordance with According to FASB Accounting Standards Codification Topic 280, Segment Reporting. Our Chief Financial Officer (“CFO”) has been determined as the Chief Operating Decision Maker as defined by Topic 280. The CFO allocates resources to Abraxas based on its business prospects, competitive factors, net sales and operating results.
 
All significant intercompany balances and transactions have been eliminated in consolidation.
 
The following presents our financial information by segment for the years ending December 31, 2009, and 2008:
 
2009
 
OIS
 
Abraxas
 
Other
 
Total
Statement of Operations:
               
                 
Net revenues
 
$11,666,981
 
$1,752,474
 
$149,845
 
$13,569,300
Gross profit
 
6,812,957
 
401,459
 
112,605
 
7,327,021
Operating loss
 
(4,445,823)
 
(1,879,061)
 
(17,643)
 
(6,342,527)
Net loss (Consolidated)
             
(5,485,396)
                 
Balance Sheet:
               
Assets
 
10,848,803
 
1,592,057
 
596,517
 
13,037,377
 
Liabilities
 
6,960,164
 
511,580
 
124,871
 
7,596,615
Stockholders’ equity
 
$7,343,181
 
$(2,361,507)
 
$459,088
 
$5,440,762


 
2008
 
OIS
 
Abraxas
 
Other
 
Total
Statement of Operations:
               
                 
Net revenues
 
$12,192,867
 
$298,250
 
-
 
$12,491,117
Gross profit
 
6,872,733
 
(150,099)
 
-
 
6,722,634
Operating loss
 
(848,012)
 
(754,042)
 
-
 
(1,602,054)
Net loss (Consolidated)
             
(2,985,524)
                 
Balance Sheet:
               
Assets
 
10,720,591
 
1,904,118
 
-
 
12,624,709
                 
Liabilities
 
5,992,986
 
185,269
 
-
 
6,178,255
Stockholders’ equity
 
$7,231,300
 
$(784,846)
 
-
 
$6,446,454

Other
 
We expense all costs as incurred, including costs of services performed under extended warranty contracts. Estimates are used in determining the expected useful lives of depreciable assets.
 

 
28

 

Results of Operations
 
Selected Financial Data
 
   
YEARS ENDED DECEMBER 31,
 
   
2009
 
2008
 
2007
 
Statement of Operations:
                   
Net revenues
 
$
13,569,300
 
$
12,491,117
 
$
14,489,044
 
Cost of sales
   
6,242,279
   
5,768,483
   
6,265,695
 
Gross profit
   
7,327,021
   
6,722,634
   
8,223,349
 
Total operating expenses
   
13,669,548
   
8,324,688
   
7,338,224
 
(Loss) income from operations
   
(6,342,527
)
 
(1,602,054
)
 
885,125
 
Other income (expense), net
   
860,918
   
(84,470
 
141,104
 
Net (loss) income before provision for income tax expense  
   
(5,481,609
)
 
(1,686,524)
   
1,026,229
 
Provision for income tax expense  
   
(3,787
)
 
(1,299,000
)
 
(940)
 
Net (loss) income
 
$
(5,485,396
)
$
(2,985,524)
 
$
1,025,289
 
Less: Noncontrolling interest share
   
8,511
   
-
   
-
 
Net (loss) income attributable to Ophthalmic Imaging Systems
 
$
(5,476,885
)
$
(2,985,524
)
$
1,025,289
 
                     
Basic earnings per share
 
$
(0.25
)
$
(0.18)
 
$
0.06
 
Shares used in the calculation of basic loss per share
   
21,842,234
   
16,866,831
   
16,682,773
 
Diluted loss per share
   
N/A
   
N/A
 
$
0.06
 
Shares used in the calculation of diluted loss per share
   
               N/A
   
              N/A
   
18,023,500
 
         
Balance Sheet:
   
DECEMBER 31,
 
Assets:
 
2009
 
2008
 
2007
 
Cash and investments
 
$
5,406,239
 
$
2,224,625
 
$
7,630,284
 
Accounts receivable, net
   
2,710,987
   
1,698,093
   
2,535,843
 
Accounts receivable, related party
   
-
   
500,365
   
397,307
 
Note receivable, related party
   
-
   
2,878,234
   
1,146,872
 
Inventories, net
   
991,325
   
1,206,733
   
746,342
 
Other current assets
   
179,451
   
233,418
   
1,849,732
 
Total Current Assets
   
9,288,002
   
8,741,468
   
14,306,380
 
Licensing agreement
   
-
   
273,808
   
273,808
 
Prepaid products
   
-
   
560,000
   
460,000
 
Capitalized software development
   
767,220
   
1,150,831
   
-
 
AcerMed asset purchase
   
380,053
   
570,077
   
90,815
 
Capitalized imaging software
   
336,475
   
424,244
   
-
 
Goodwill
   
807,000
   
-
   
-
 
Customer relationship intangibles
   
481,364
   
-
   
-
 
Other intangibles
   
199,000
   
-
   
-
 
Other assets
   
778,263
   
904,281
   
1,028,565
 
Total Assets
 
$
13,037,377
 
$
12,624,709
 
$
16,159,568
 
 
 
 
 
29

 
 
 
         YEARS ENDED DECEMBER 31,  
     
2009
   
2008
   
2007
 
                     
Liabilities:
                   
Accounts payable
 
$
867,672
 
$
831,980
 
$
726,573
 
Accrued liabilities
   
1,718,991
   
1,174,229
   
1,492,747
 
Deferred extended warranty – current portion
   
1,632,494
   
1,522,308
   
1,347,045
 
Notes payable - current portion
   
34,048
   
1,611,063
   
1,029,643
 
Total Current Liabilities
   
4,253,205
   
5,139,580
   
4,596,008
 
Deferred extended warranty – non current portion
   
247,231
   
388,516
   
257,270
 
Notes payable – non-current portion
   
2,946,179
   
500,159
   
1,564,226
 
Other liabilities
   
150,000
   
150,000
   
150,000
 
Total Liabilities
 
$
7,596,615
 
$
6,178,255
 
$
6,567,504
 
                     
Ophthalmic Imaging Systems stockholders’ equity:
                   
                     
Common stock
   
20,089,592
   
16,504,773
   
16,474,720
 
Additional paid in capital
   
420,610
   
966
   
191,104
 
Accumulated deficit
   
(15,536,170
)
 
(10,059,285
)
 
(7,073,760
)
Cumulative translation
   
2,241
   
-
   
-
 
Total Ophthalmic Imaging Systems stockholders’ equity:
   
4,976,273
   
6,446,454
   
9,592,064
 
Noncontrolling interest
   
464,489
             
Total Stockholders’ Equity
 
$
5,440,762
 
$
6,446,454
 
$
9,592,064
 
Total Liabilities and Stockholders’ Equity
 
$
13,037,377
 
$
12,624,709
 
$
16,159,568
 

   
Years Ended December 31,
 
   
2009
 
2008
 
2007
 
Statement of Cash Flows Data:
                   
Net cash (used in) provided by operating activities
 
$
(62,003
)
$
(739,822
$
112,287
 
Net cash used in investing activities
   
(1,368,474
)
 
 (4,016,871
 
(1,447,691
)
Net cash provided by (used in) financing activities
   
4,608,088
   
(649,966
 
2,801,831
 
Effect of exchange rate changes on cash and cash equivalents
   
4,003
   
-
   
-
 
Net increase (decrease) in cash and cash equivalents
 
$
3,181,614
 
$
(5,405,659
$
1,466,427
 

 

 
30

 

Comparison of Year Ended December 31, 2009 to Year Ended December 31, 2008
 
Revenues
 
Our revenues for the year ended December 31, 2009 were $13,569,300 representing an increase of $1,078,183 or 9% as compared to revenues of $12,491,117 for the year ended December 31, 2008. The increase in revenues for 2009 resulted from an increase in total product sales of $1,055,767 and service sales of $22,416.  The increase in product sales is due to EMR/PM product revenue of $1,638,926, product revenue from our new subsidiaries, CCS and OIS Europe of $128,155, Symphony revenue of $501,800, offset by a decrease in WinStation revenue of $1,213,114.  The increase in service sales of $22,416 is due to an increase in service revenue from Abraxas of $84,074, service revenue for the fourth quarter of our new subsidiaries, CCS and OIS Europe of $22,323, offset by a decrease in service revenue from our WinStation and Symphony product line of $83,981.
 
Digital angiography systems and EMR and PM products accounted for approximately 73% and 71% of our total revenues during 2009 and 2008, respectively. Service revenue for the years ended 2009 and 2008 accounted for approximately 27% and 29% of our total revenues for the years ended 2009 and 2008, respectively.
 
Gross Margins
 
Gross margins remained flat at 54% during fiscal 2009 and 2008, respectively. We anticipate that our gross margins will increase if our product sales grow to cover our fixed personnel costs.
 
Sales and Marketing Expenses
 
Sales and marketing expenses accounted for 30% and 32% of revenues during fiscal 2009 and 2008, respectively. Sales and marketing expenses were $4,124,480 during fiscal 2009, representing an increase of $89,664 or 2% compared to sales and marketing expenses of $4,034,816 in fiscal 2008. The increase in sales and marketing expense was primarily the result of expansion of the sales and marketing department during the year.
 
General and Administrative Expenses
 
General and administrative expenses as a percentage of revenues remained flat at 17% during fiscal 2009 and 2008, respectively. Expenses were $2,255,389 during fiscal 2009, representing an increase of $185,177 or 9% compared to expenses of $2,070,212 during fiscal 2008. The increase is primarily due to an increase of bad debt expense related to customers of approximately $239,000, an increase of general and administrative expenses related to the acquisition of the CCS and OIS Europe operations of approximately $62,000, offset by a decrease in legal expenses of approximately $493,000.
 
Impairment related to the debt of MediVision of $4,436,187 during fiscal 2009 was comprised of accounts receivable and notes receivable from MediVision of $450,000 and $3,152,379, respectively, $560,000 in prepaid assets for funds advanced to MediVision in anticipation of the completion of the Electro-optical Unit and $273,808 that we paid to MediVision for exclusivity rights to sell the Electro-optical Unit in the U.S.  Based upon revised estimates and the timing of the shifting of business focus from the Electro-optical Unit to other products through the end of 2010, management decided to impair the aggregate balance of intercompany indebtedness from MediVision.
 
Research and Development Expenses
 
Research and development expenses accounted for 21% of revenues during fiscal 2009 and 18% during fiscal 2008. Expenses were $2,853,492 during 2009, representing an increase of $633,832 or 29% compared to expenses of $2,219,660 during 2008. The increase in research and development is due to the capitalization of $1,150,831 of research and development expenses performed by Abraxas during fiscal 2008 offset by the decrease in research and development performed by MediVision of $439,168 and Abraxas of $77,831 during fiscal 2009.
 

 
31

 

Other Income (Expense), net
 
Other income (expense) was $860,918 during 2009 compared to $(84,922) during 2008. The increase of $945,840 in other income was primarily due to a legal settlement between OIS and a former employee of $1,200,000 offset by an increase in interest expense of $70,474 from the convertible notes outstanding, combined with a decrease in interest income of $171,436 resulting from reduction of interest earned on notes receivable which were impaired during 2009.
 
Income Taxes
 
The income tax expense for the year ended December 31, 2009 consisted of the following:
 
   
Federal
 
State
 
Total
 
2009
                   
Current
 
$
   
$
3,787
 
$
3,787
 
Deferred
   
(1,974,000
)
 
(280,000
)
 
(2,254,000
)
Change in valuation allowance
   
1,974,000
   
280,000
   
2,254,000
 
Total income tax expense
 
$
-
 
$
3,787
 
$
3,787
 

 
In 2009, we determined that it is not more-likely-than-not that we will be able to use any of our deferred tax asset in the future. We analyzed our operating results from 2008, 2009, and projected operating results for 2010, combined with the downward turn in the economy, and determined that it is not more-likely-than-not that we will be able to use our deferred tax asset in the future. 
 
The Company’s effective tax rate for the years ended December 31, 2009 and 2008 was 0% and (112%), see Item 8. Financial Statements and Supplementary Data, Note 9. Income Taxes, for the reconciliation of the statutory rate to the effective tax rate.
 
Net Loss
 
We reported a net loss of $5,476,885 or $0.25 basic loss per share during 2009 compared to net loss of $2,985,524 or $0.18 basic loss per share during 2008.
 
Export Sales
 
Revenues from sales to customers located outside of the United States accounted for approximately 9% and 7% of our net sales for 2009 and 2008, respectively.
 
Comparison of Year Ended December 31, 2008 to Year Ended December 31, 2007
 
Revenues
 
Our revenues for the year ended December 31, 2008 were $12,491,117 representing a decrease of $1,997,927 or 14% as compared to revenues of $14,489,044 for the year ended December 31, 2007. The decreased revenues for 2008 resulted from decreased product sales of $2,644,447, including installation, offset by increased service revenues of $646,520. The decrease in product sales is primarily due to the decrease of our main WinStation systems and installation of approximately $1,927,000. Digital angiography systems and EMR and PM products accounted for approximately 71% and 79% of our total revenues during 2008 and 2007, respectively. The decrease in our product sales is primarily due to personnel changes in our sales and marketing departments and, more recently, changes in the global economy. Service revenue for the years ended 2008 and 2007 accounted for approximately 29% and 21% of our total revenues for the years ended 2008 and 2007, respectively. The increased service revenue is primarily due to the increase in our extended service contracts due to an increase in our customer base and more customers understanding the benefits of purchasing extended warranty contracts. Our remaining service revenue which has remained constant consists of non-warranty repairs and parts, and technical support phone billings for customers not under warranty.
 
 
 
32

 
 
Gross Margins
 
Gross margins decreased to 54% from 57% in fiscal 2008 versus 2007, respectively, primarily due to the decrease in sales of our EMR and PM products which have related fixed direct labor costs. We anticipate that our gross margins will increase if our product sales grow to cover the fixed personnel costs.
 
Sales and Marketing Expenses
 
Sales and marketing expenses accounted for 29% and 24% of revenues during fiscal 2008 and 2007, respectively. Sales and marketing expenses were $4,034,816 during fiscal 2008, representing an increase of $539,890 or 15% compared to sales and marketing expenses of $3,494,926 in fiscal 2007. The increase in sales and marketing expenses were primarily the result of filling vacant sales positions during the year in OIS of approximately $178,000, the addition of Abraxas sales and marketing expenses of $438,000, offset by restructuring of the marketing department at OIS of ($66,000).
 
General and Administrative Expenses
 
General and administrative expenses accounted for 17% and 15% of revenues in fiscal 2008 and 2007, respectively. Expenses were $2,070,212 during fiscal 2008, representing a decrease of $141,866 or 6% compared to expenses of $2,212,078 during fiscal 2007. The decrease is primarily due to an increase in the general and administrative allocation of OIS to other departments of approximately $154,000, a decrease in OIS bonus expense related to writing off of executive bonuses that were accrued in 2007 but not approved for payment in 2008 of $143,000, a decrease in investor relations and business development expenses of approximately $101,000, offset by an increase in legal expenses of approximately $132,000 and the addition of Abraxas’ general and administrative expenses of $166,000.
 
Research and Development Expenses
 
Research and development expenses accounted for 18% of revenues during fiscal 2008 and 11% during fiscal 2007. Expenses were $2,219,660 during 2008, representing an increase of $588,440 or 36% compared to expenses of $1,631,220 during 2007. This increase was due to the increase in our research and development efforts on new digital image capture products. In the future, we expect our research and development expenditures to increase with the addition of Abraxas’s research and development expenses to be offset by a reduction in the research and development expenses subcontracted from MediVision and other consultants. In 2008 and 2007, outside consultants and MediVision conducted most of our research and development.
 
Other Income (Expense), net
 
Other expense was ($84,922) during 2008 compared to other income of $141,104 during 2007. The increase of $226,026 in other expense was primarily due to an increase of interest expense of $92,628 from the convertible notes outstanding, combined with a decrease in interest income of $98,638 resulting from a combination of a decrease of our cash balance and a decrease in interest rates. (For details of the convertible notes, see Item 8. Financial Statements and Supplementary Data, Note 5. Notes Payable.
 

 
33

 

Income Taxes
 
The income tax expense for the year ended December 31, 2008 consisted of the following:
 
   
Federal
 
State
 
Total
 
2008
                   
Current
 
$
(43,000
)
$
-
 
$
(43,000
)
Deferred
   
(503,000
)
 
(81,000
)
 
(584,000
)
Change in valuation allowance
   
1,845,000
   
81,000
   
1,926,000
 
Total income tax
 
$
1,299,000
 
$
-
 
$
1,299,000
 

In 2008, we determined that we will not more-likely-than-not be able to use any of our deferred tax asset in the future. We analyzed our operating results from 2007, 2008 and projected operating results for 2009, combined with the downward turn in the economy and results of our largest annual tradeshow in the fourth quarter of 2008 and determined that it is not more-likely-than-not that we will be able to use our deferred tax asset in the future.  In 2007, we determined that we will use $2,334,000 of capped net operating losses in the future and projected taxable income in 2008. In 2007, we did not have enough information to determine whether we would use the remaining net operating losses of $539,855. We had no net operating loss carryforward for California state income tax purposes at December 31, 2007.
 
At December 31, 2008 and 2007, management reviewed recent operating results and projected future operating results, as well as the current conditions in the global economy and medical industry. On each of these dates, management determined whether it was more-likely-than-not that a portion of the deferred tax assets attributable to net operating losses would be realized. For a description of our analysis in determining our deferred tax asset, see “Critical Accounting Policies, Tax Provision” above.
 
Due to changes in ownership which occurred in prior years, Section 382 of the Internal Revenue Code of 1986, as amended, provides for significant limitations on the utilization of net operating loss carryforwards and tax credits. As a result of these limitations, a portion of these loss and credit carryovers may expire without being utilized.
 
Net (Loss) Income
 
We reported a net loss of ($2,985,524) or ($0.18) basic loss per share during 2008 compared to net income of $1,025,289 or $0.06 basic earnings per share during 2007.
 
Export Sales
 
Revenues from sales to customers located outside of the United States accounted for approximately 7% and 5% of our net sales for 2008 and 2007, respectively.
 
Balance Sheet
 
Our assets increased by $412,668 as of December 31, 2009 as compared to the December 31, 2008. This increase was primarily due to a increase in cash and equivalents of $3,181,614 as a result of the sale and issuance of our securities to AccelMed, an increase in accounts receivable of $1,012,894 as a result of an increase in sales, an increase in assets associated with businesses acquired of $1,500,000, offset by a decrease in notes and accounts receivable from related parties of $2,878,234 and $500,365, a decrease of licensing agreements and prepaid products associated with related parties of $273,808 and $560,000, a decrease in inventory of $215,408 due to higher sales than expected at the end of the year, amortization of prepaid financing fees of $66,585 and the amortization of capitalized  software development and research and development of $741,872.
 
Our liabilities increased by $1,418,359 mainly due to the $1,500,000 loan assumed in connection with the MediVision Asset Purchase which was completed during 2009.
 
 
 
34

 
 
Our stockholders’ equity decreased by $1,005,692 primarily due to the net loss from fiscal 2009 of ($5,476,885), offset by the net proceeds of the AccelMed stock purchase of $3,552,599, the increase in additional paid-in capital of $419,644 related to the warrants from the stock purchase and debt financing, an increase of $464,489 of noncontrolling interest related to the MediVision Asset Purchase.
 
Liquidity and Capital Resources
 
The Company maintains a $150,000 line of credit agreement with Wells Fargo Bank. The line is secured by a pledged deposit with the bank totaling $158,213 at December 31, 2009. Advances on the line bear interest at prime (3.25% at December 31, 2009) with interest due monthly. As of December 31, 2009 we borrowed $150,000 against the line of credit. The line matures on May 10, 2011.
 
Our operating activities used cash of $60,243 during 2009 as compared to $739,822 during 2008. The cash used by operations in 2009 was primarily due to the net loss of ($5,485,396), offset by the non-cash write-off of MediVision notes receivables of $3,152,042, related party receivable of $500,365, prepaid products of $560,000, the amortization of capitalize software of $168,236, the amortization of software licenses of $573,635, and  the change in customer deposits of $463,782.
 
Net cash used in investing activities was $1,368,474 during 2009 versus $4,016,871 during 2008. Our primary investing activities in 2009 consisted of costs related to the acquisition of substantially all the assets of MediVision, net of cash acquired, of $1,708,523 and capital asset acquisitions of $132,951, offset by the acquisition of the noncontrolling interests related to the MediVision acquisition of $473,000.
 
Cash provided by financing activities was $4,608,090 during 2009 as compared to cash used in financing activities of $648,966 during 2008. The cash provided by financing activities during 2009 was primarily from proceeds of $1,500,000 from new borrowings, $3,999,972 from the proceeds of sale of stock, offset by $732,984 of principal payments on notes receivable, and stock issuance costs of $158,898.
 
On December 31, 2009, our cash and cash equivalents were $5,406,239. Management anticipates that additional sources of capital beyond those currently available to it may be required to continue funding of research and development for new products and selling and marketing related expenses for existing products.
 
We will continue to evaluate alternative sources of capital to meet our cash requirements, including other asset or debt financing, issuing equity securities and entering into other financing arrangements. There can be no assurance, however, that any of the contemplated financing arrangements described herein will be available and can be obtained on terms favorable to us.
 
Seasonality
 
Our most effective marketing tool is the demonstration and display of our products at the annual meeting of the American Academy of Ophthalmology held during the fall of each year. A significant amount of our sales orders are generated during or shortly after this meeting. Accordingly, we expend a considerable amount of time and resources during the fourth quarter of our fiscal year preparing for this event.
 
Trends
 
The current recession in the United States has negatively impacted our sales revenue in 2009 and 2008 and may continue to do so in 2010. Our sales have been affected by the physicians’ hesitation to purchase capital equipment in the current economic climate. The American Recovery and Reinvestment Act of 2009 (“ARRA”) may have a positive impact on the sales of our EMR/PM products.  Other than this, we are unaware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on our financial condition, results from operations, or short or long-term liquidity.
 

 
35

 

Off- Balance Sheet Arrangements
 
None.
 
Quantitative and Qualitative Disclosures About Market Risk
 
Not applicable.
 
Financial Statements and Supplementary Data
 
Our consolidated financial statements for the year ended December 31, 2009 and 2008 are attached hereto.
 

 

 
36

 


OPHTHALMIC IMAGING SYSTEMS
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2009 and 2008 and
For the Years Ended December 31, 2009 and 2008
Table of Contents

   
Page
     
Report of Independent Registered Public Accounting Firm
 
F-2
Consolidated Balance Sheets
 
F-3
Consolidated Statement of Operations
 
F-5
Consolidated Statement of Stockholders’ Equity
 
F-7
Consolidated Statement of Cash Flows
 
F-8
Notes to Consolidated Financial Statements
 
F-9

 

 
 
F-1

 
F-2
 

 
 
F-2

 

OPHTHALMIC IMAGING SYSTEMS
CONSOLIDATED BALANCE SHEETS


   
December 31,
 
   
2009
   
2008
 
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 5,406,239     $ 2,224,625  
Accounts receivable, net of allowance for doubtful
accounts of $434,949 and $210,146 as of
December 31, 2009 and 2008, respectively
    2,710,987       1,698,093  
Receivables from related parties
    -       500,365  
Notes receivable from related party
    -       2,878,234  
Inventories
    991,325       1,206,733  
Prepaid expenses and other current assets
    179,451       233,418  
Total current assets
    9,288,002       8,741,468  
                 
Restricted cash
    158,213       158,031  
Furniture and equipment, net
    481,394       409,280  
Licensing agreement
    -       273,808  
Prepaid products
    -       560,000  
Capitalized imaging software
    336,475       504,711  
Capitalized software development
    767,220       1,150,831  
AcerMed asset purchase
    380,053       570,077  
Goodwill
    807,000       -  
Customer relationship intangible assets
    481,364       -  
Other intangible assets
    199,000       -  
Prepaid financing
    22,195       88,780  
Other assets
    116,461       167,723  
Total assets
  $ 13,037,377     $ 12,624,709  
                 

(Continued)

 
 
F-3

 

OPHTHALMIC IMAGING SYSTEMS
CONSOLIDATED BALANCE SHEETS
(Continued)


   
December 31,
   
2009
 
2008
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Accounts payable
 
$
867,672
   
$
831,980
 
Accounts payable related party
   
41,847
     
--
 
Accrued liabilities
   
1,115,902
     
1,072,551
 
Deferred extended warranty revenue – current portion
   
1,632,491
     
1,522,308
 
Customer deposits
   
561,245
     
101,678
 
Notes payable - current portion
   
34,048
     
1,611,063
 
Total current liabilities
   
4,253,205
     
5,139,580
 
                 
Deferred extended warranty revenue, less current portion
   
247,231
     
388,516
 
Line of credit
   
150,000
     
150,000
 
Notes payable, less current portion
   
2,946,179
     
500,159
 
Total liabilities
   
7,596,615
     
6,178,255
 
                 
Commitments and contingencies
               
                 
Ophthalmic Imaging Systems stockholders’ equity:
               
Common stock, no par value, 100,000,000 shares authorized; 26,500,059 and 16,866,831 shares issued and outstanding at December 31, 2009 and 2008, respectively
   
20,089,592
     
16,504,773
 
Additional paid in capital
   
420,610
     
966
 
Accumulated deficit
   
(15,536,170
)
   
(10,059,285
)
Cumulative translation adjustment
   
2,241
     
-
 
Total Ophthalmic Imaging Systems’ stockholders’ equity
   
4,976,273
     
6,446,454
 
                 
Noncontrolling Interest
   
464,489
     
-
 
Total liabilities and stockholders’ equity
 
$
13,037,377
   
$
12,624,709
 
                 

The accompanying notes are an integral
part of these consolidated financial statements.

 
 
F-4

 

OPHTHALMIC IMAGING SYSTEMS
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31, 2009 and 2008

   
2009
 
2008
                 
Sales – products
 
$
9,530,555
   
$
7,990,300
 
Cost of sales – products
   
3,799,236
     
3,811,212
 
Cost of sales – amortization
   
741,871
     
-
 
Gross profit – products
   
4,989,448
     
4,179,088
 
                 
Sales – products to related parties
   
338,492
     
822,980
 
Cost of sales – products to related parties
   
201,093
     
444,186
 
Gross profit –products to related parties
   
137,399
     
378,794
 
                 
Sales – service
   
3,700,253
     
3,677,837
 
Cost of sales – service
   
1,500,079
     
1,513,085
 
Gross profit – service
   
2,200,174
     
2,164,752
 
                 
Net revenues
   
13,569,300
     
12,491,117
 
Cost of sales
   
6,242,279
     
5,768,483
 
Gross profit
   
7,327,021
     
6,722,634
 
                 
Operating expenses:
               
Sales and marketing
   
4,124,480
     
4,034,816
 
General and administrative
   
2,255,389
     
2,070,212
 
Impairment related to the debt of MediVision
   
4,436,187
     
-
 
Research and development
   
2,559,478
     
332,123
 
Research and development-related parties
   
294,014
     
1,887,537
 
                 
Total operating expenses
   
13,669,548
     
8,324,688
 
                 
Loss from operations
   
(6,342,527
)
   
(1,602,054
)
Other income (expense):
               
Interest expense
   
(215,729
)
   
(145,255
)
Other expense
   
(186,592
)
   
(173,890
)
Interest income
   
63,239
     
234,675
 
Other income-legal settlement
   
1,200,000
     
-
 
                 
Total other income (expense)
   
860,918
     
(84,470
)
                 
Net loss before provision for income tax expense
   
(5,481,609)
     
(1,686,524
)
                 
Provision for income tax expense
   
(3,787
   
(1,299,000
)
                 
Net loss
   
(5,485,396
)
   
(2,985,524
)
                 
Less: Noncontrolling interest’s share
   
8,511
     
-
 
                 
Net loss attributable to Ophthalmic Imaging Systems
 
$
(5,476,885
)
 
$
(2,985,524
)
                 
Basic loss per share
 
$
(0.25
)
 
$
(0.18
)
                 
Shares used in the calculation of basic loss per share
   
21,842,234
     
16,866,831
 

The amount of anti-dilutive shares for the twelve months ended December 31, 2009 and 2008 are 520,748 and 69,167, respectively.
 
 
The accompanying notes are an integral
part of these consolidated financial statements.

 
 
F-5

 

OPHTHALMIC IMAGING SYSTEMS
CONSOLIDATED STATEMENT OF OPERATIONS
As of and For the Years Ended December 31, 2009 and 2008




   
2009
 
2008
                 
Net loss attributable for Ophthalmic Imaging Systems
 
$
(5,476,885
)
 
$
(2,985,524
)
                 
Other comprehensive income 
               
Foreign currency translation
   
2,241
     
-
 
                 
Comprehensive net loss
 
$
(5,474,644
)
 
$
(2,985,524
)
                 


The accompanying notes are an integral
part of these consolidated financial statements.



 
 
F-6

 

OPHTHALMIC IMAGING SYSTEMS
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2009 and 2008


     
Ophthalmic Imaging Systems’ Shareholders’ Equity
             
     
Common Stock
   
Additional
Paid in
   
 
Accumulated
   
 
Cumulative
   
 
Non-Controlling
   
Total Stockholders’
 
     
Shares
   
Amount
   
Capital
   
Deficit
   
Translation
   
Interest
   
Equity
 
Balance, January 1, 2008
      16,866,831     $ 16,474,720     $ 191,104     $ (7,073,761 )               $ 9,592,063  
Stock based compensation
      —        30,053         —                         30,053  
Additional paid in capital – convertible note & warrants
                  (190,138 )            —             (190,138 )
Net loss
                        (2,985,524 )                 (2,985,524 )
                                                                 
Balance, December 31, 2008
      16,866,831       16,504,773       966       (10,059,285 )                 6,446,454  
                                                                 
Stock based compensation
            32,220                               32,220  
Stock issuance, net of $158,899 issuance cost and $288,473 warrant fair market value
      9,633,228       3,552,599       288,473                         3,841,072  
Additional paid in capital – convertible note & warrants
                  131,171                         131,171  
Noncontrolling interest
                                  $ 473,000       473,000  
Cumulative translation
                            $ 2,241             2,241  
Net loss
                        (5,476,885 )           (8,511 )     (5,485,396 )
Balance, December 31, 2009
      26,500,059     $ 20,089,592     $ 420,610     $ (15,536,170 )   $ 2,241     $ 464,489     $ 5,440,762  


The accompanying notes are an integral
part of these financial statements.
 

 
 
F-7

 

OPHTHALMIC IMAGING SYSTEMS
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2009 and 2008

   
2009
 
2008
Cash flows from operating activities:
               
Net loss
 
$
(5,485,396
)
 
$
(2,985,524
)
                 
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
   
237,224
     
187,796
 
Loss (gain) on disposal of asset
   
207
     
(2,114
)
Stock based compensation expense
   
32,220
     
30,053
 
Discount related to note payable
   
131,171
     
(23,817)
 
Change in accounts receivable
   
(1,043,376
)
   
832,268
 
Provision for bad debt
   
224,803
     
5,482
 
Change in accounts receivable – related parties
   
-
     
(103,059
)
Write-off of MediVision assets
   
3,152,042
     
-
 
Change in related party receivable
   
500,365
     
-
 
Change in prepaid products
   
560,000
     
-
 
Change in inventories
   
307,939
     
(460,391
)
Change in prepaid expenses and other current assets
   
53,967
     
274,314
 
Amortization of prepaid financing related to note payable
   
66,585
     
59,585
 
Amortization of Symphony Web software
   
168,236
     
-
 
AcerMed software license amortization
   
573,635
     
-
 
Change in other assets
   
49,317
     
10,187
 
Change in accounts payable
   
(13,968
)
   
105,407
 
Change in accounts payable – related parties
   
41,847
     
-
 
Change in accrued liabilities
   
(51,501
)
   
(364,762
)
Change in deferred extended warranty revenue
   
(31,102
)
   
306,509
 
Change in customer deposits
   
463,782
     
46,244
 
Change in deferred tax asset
   
-
     
1,342,000
 
Net cash used in operating activities
   
(62,003
)
   
(739,822)
 
                 
Cash flows from investing activities:
               
AcerMed asset purchase
   
-
     
(479,262
)
Advance to related parties
   
-
     
(1,731,362
)
Development of imaging software
   
-
     
(424,244
)
Software development capitalization
   
-
     
(1,150,831
)
Other capitalized software investments
   
-
     
(88,418
)
Licensing rights
   
-
     
(24,112
)
Patents
   
-
     
59,483
 
APA acquisition, net of cash acquired
   
(1,235,523
)
       
Acquisition of furniture and equipment
   
(132,951
)
   
(178,125
)
Net cash used in investing activities
   
(1,368,474
)
   
(4,016,871
)
                 
Cash flows from financing activities:
               
Principal payments on notes payable
   
(732,984
)
   
(648,966
)
Proceeds from note payable, United Mizrahi Bank
   
1,500,000
     
-
 
Proceeds from sale of stock, net of expenses
   
3,999,971
     
-
 
Stock issuance costs (payment of due diligence)
   
(158,899
)
   
-
 
Net cash provided by (used in) financing activities
   
4,608,088
     
(648,966)
 
                 
Effect of exchange rate changes on cash and cash equivalents
   
4,003
     
-
 
                 
Net increase (decrease) in cash and cash equivalents
   
3,181,614
     
(5,405,659
)
Cash and cash equivalents, beginning of the year
   
2,224,625
     
7,630,284
 
Cash and cash equivalents, end of the year
 
$
5,406,239
   
$
2,224,625
 
                 
Supplemental schedule of cash flow information:
               
Cash paid for taxes
 
$
12,405
   
$
5,619
 
Cash paid for interest
 
$
19,987
   
$
120,225
 

The accompanying notes are an integral
part of these consolidated financial statements.

 
 
F-8

 

OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Ophthalmic Imaging Systems (the “Company,” “OIS,” “we,” “us” or “our”) was incorporated under the laws of the State of California on July 14, 1986. We are headquartered in Sacramento, California and are engaged in the business of designing, developing, manufacturing and marketing digital imaging systems, image enhancement and analysis software and informatics solutions for use by practitioners in the ocular health field. Our products are used for a variety of standard diagnostic test procedures performed in most eye care practices.
 
Principals of Consolidation
 
In January 2008, the Company, through Abraxas Medical Solutions, Inc., a wholly-owned subsidiary (“Abraxas”), purchased substantially all of the assets of AcerMed, Inc., a leading software developer for Electronic Medical Records (EMR) and Practice Management (PM) software.
 
On October 21, 2009, the Company completed its Asset Purchase transaction with MediVision to purchase substantially all the assets of MediVision, which was completed on October 21, 2009. Such assets include the European operations which consisted of MediVision’s business as conducted by CCS Pawlowski GmbH (“CCS”) and its branch office in Belgium (the “OIS Europe”). Accordingly, the Company began consolidating the results of operations of CCS and OIS Europe as of October 21, 2009.
 
The consolidated financial statements include the accounts of OIS, Abraxas, the 63% investment in CCS, OIS Europe, and OIS Global. All significant intercompany balances and transactions have been eliminated in consolidation.
 
Foreign currencies
 
The consolidated financial statements are presented in the reporting currency of Ophthalmic Imaging Systems, U.S. Dollars (“USD”). The functional currency for the Company’s wholly-owned subsidiary, OIS Europe and its 63% investment in CCS, is the European Union Euro (€).    Accordingly, the balance sheet of OIS Europe and CCS is translated into USD using the exchange rate in effect at the balance sheet date. Revenues and expenses are translated using the average exchange rates in effect during the period. Translation differences are recorded directly in shareholders’ equity as “Foreign currency translation adjustment.” Gains or losses on transactions denominated in a currency other than the subsidiaries’ functional currency which arise as a result of changes in foreign exchange rates are recorded in the statement of operations. The statement of cash flows reflects the reporting currency equivalent of foreign currency cash flows using the exchange rates in effect at the time of the cash flow.
 
Segment Reporting
 
Our business consists of two operating segments: OIS and Abraxas, our wholly-owned subsidiary.  Our management reviews Abraxas’ results of operation separately from that of OIS. Our operating results for Abraxas exclude income taxes. The provision for income taxes is calculated on a consolidated basis, and accordingly, is not presented by segment. It is excluded from the measure of segment profitability as reviewed by our management. CCS does not meet the materiality requirements for segment reporting, and accordingly, CCS’ financial information is reported as Other in the following table.
 

 
 
 
F-9

 
OPHTHALMIC IMAGING SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

 
 
1.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
We evaluate our reporting segments in accordance with FASB Accounting Standards Codification Topic 280, Segment Reporting (“Topic 280”). Our Chief Financial Officer (“CFO”) has been determined as the Chief Operating Decision Maker as defined by Topic 280. The CFO allocates resources to Abraxas based on its business prospects, competitive factors, net sales and operating results.
 
All significant intercompany balances and transactions have been eliminated in consolidation.
 
The following presents our financial information by segment for the years ended December 31, 2009 and 2008:
 
                         
2009
 
OIS
   
Abraxas
   
Other
   
Total
 
Statement of Operations:
                       
                                 
Net revenues
  $ 11,666,981     $ 1,752,474     $ 149,845     $ 13,569,300  
                                 
Gross profit
    6,812,957       401,459       112,605       7,327,021  
                                 
Operating loss
    (4,445,823 )     (1,879,061 )     (17,643 )     (6,342,527 )
                                 
Net loss (Consolidated)
                            (5,485,396 )
                                 
Balance Sheet:
                               
                                 
Assets
    10,848,803       1,592,057       596,517       13,037,377  
                                 
Liabilities
    6,960,164       511,580       124,871       7,596,615  
                                 
Stockholders’ equity
  $ 7,343,181     $ (2,361,507 )   $ 459,088     $ 5,440,762  
                                 
2008
                               
Statement of Operations:
                               
                                 
Net revenues
  $ 12,192,867     $ 298,250       -     $ 12,491,117  
                                 
Gross profit
    6,872,733       (150,099 )     -       6,722,634