Undervalued and Breaking New Ground: Viking Systems (OTC:VKNG)

It's rare to find a profitable small cap biotech company, much less one that has been flying under the radar screen and has so many positive features that can help propel its share price upward quickly.

We have uncovered one that meets those requirements and then some. The company even has a forward looking news development, a solid management team, very few outstanding shares, a well protected patented technology that is being embraced by the medical community, and as we came to find out this weekend, the shares have been under tremendous shorting pressure. That means the recent price movement- based on surprisingly few shares traded- may lead to a wave of short sellers trying to buy the stock in order to cover and limit their losses, pushing the price higher.

We believe the company's shares are still highly undervalued and that the small cap biotech community may get excited about this company as news spreads and the name becomes more familiar. This is particulalry true given the unexpected rise in share price seen by another company proposing better medical imaging, Imaging3, Inc. (OTC:IMGG). Upon closer inspection, in fact, one can easily argue that this stock presents speculators more grounded and compelling reasons to put their investment dollars to work here.

Viking Systems, Inc. (OTC:VKNG) is breaking new ground as a publicly owned designer, manufacturer and marketer of high-performance laparoscopic vision systems. The Company's flagship product is the 3Di Vision System, an advanced three-dimensional (3D) vision system used by surgeons for minimally invasive surgery (MIS). For the first time, surgeons are now offered 3D visualization, voice-activated access to clinical information and complete freedom of movement during these types of procedures.  Surgeons love the features and the ability to perform complex procedures more confidently than ever, thus allowing more patients to realize the benefits of minimally invasive techniques.

Viking also manufactures advanced two-dimensional (2D) vision systems for targeted configurations and channels, as well as 2D cameras and components, sold through strategic partner and OEM programs.

The Company is currently developing a portfolio of targeted technologies and services that serve the current and emerging needs of the minimally invasive surgical space.

According to a recent report, the company achieved a major milestone in October when their "Next Generation" 3DHD camera system was demonstrated to the surgical community utilizing a prototype Sony 3DHD flat panel display at the American College of Surgeon's 95th annual Clinical Congress in Chicago. The described reaction of the medical community was very positive and the level of interest shown by all surgical specialties was substantial. Attendees waited their turn to see the interactive 3DHD demonstration and appeared delighted with what they experienced.

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"While 2D high definition cameras now represent the vast majority of placements in the approximately $1 billion surgical video systems market, it is now clear that 3DHD is the next advancement in endoscopic surgical vision," said Jed Kennedy, Viking's president and chief operating officer.

Viking and Sony are planning a similar demonstration later this week at MEDICA, the world's largest medical device trade show, which kicks off in Dusseldorf, Germany on November 18th. The show is expecting close to 140,000 trade visitors.

An even more intriguing news development later this month, involves the delivery of a "designed to specification" prototype high definition 3DHD visualization system by Viking Systems to "a manufacturer of surgical robotic systems as part of a development agreement." While the name of that manufacturer has not been disclosed by Viking, our research leads us to believe that entity is Sunnyvale, California based Intuitive Surgical- the same company that manufactures the da Vinci Robotic Surgical System which has expanded its installed base to more than 900 academic and community hospital sites, while sustaining growth in excess of 25% annually. At the end trading on Friday, shares of Intuitive Surgical, Inc.(NASDAQ:ISRG) closed at $274.52 per share. While there can be no assurance that a supply agreement will be awarded upon the completion of the development contract, Viking believes that the new product has several unique features that will address specific market needs and that the company is well positioned to support any production needs for the system.

The following clauses stand out when one looks at the actual agreement:

B. Whereas, VIKING possesses rights to patents relating to devices used in surgery, including laparoscopic/endoscopic vision systems for minimally invasive surgeries;

C. Whereas, ISI desires to obtain from VIKING and VIKING wishes to grant to ISI an exclusive license under all of VIKING’s Licensed Patents and Applications limited to the Medical Robotics Field; and

D. Whereas, VIKING desires to obtain from ISI and ISI wishes to grant back to VIKING a nonexclusive license under the Licensed Patents and Applications for certain products in the Medical Robotics Field;

In addition to this agreement, the company has major contracts/partnerships (still intact) with B. Braun Medical Inc, Richard Wolf GmbH, Boston Scientific (trades on the NYSE at over $8.00 per share under the ticker of BSX), Medtronic (trades on the NYSE at over $36.00 per share under the ticker of MDT) and Biomet, Inc. along with others.

U.S. Army Orders Viking's 3D Systems

In October 2009, the Company received the largest order in its history for its proprietary 3Di vision systems. This order, totaling approximately $900,000, was from the U.S. Army for deployment of one of their complete 3Di systems at each of seven regional Army Medical Centers throughout the United States. Viking  anticipates having all seven systems installed and operational before the end of the year. This is a follow-on order to the single system already in place at Walter Reed Army Medical Center in Washington, DC.

Extremely Low Float

Confirmed earlier by the company, only 4-5 million freely trading shares are available!  The company completed a reverse split, which took many of its shares off the market and sudden popular interest in the company would cause prices to rise dramatically. We all saw Vermillion, Inc's (OTC:VRMLQ) share price rise very rapidly and agressively recently due in large part to it's extremely low float.

Share Structure Per Transfer Agent as of 4 Nov 09:
Authorized Shares (AS) = 400,000,000 Shares
Outstanding Shares (OS) =  42,715,110 Shares
Restricted Shares = 31,779,522 Shares
Float = 10,935,588 Shares

There are no Preferred Shares issued.

Again, when you compare the Market Cap of this company (currently at $24 million with actual reported revenues of $9 million) it is not unrealistic to expect a market cap of $36 million at 4x revenues.  To put things into perspective, Imaging3, Inc.(OTC:IMGG)  has a $385 Million Cap (14x the market cap of Viking systems) and they only have revenue of $2 million.

As indicated below, Insiders have bought VKNG shares as high as .36 per share.   




Management and Governance

When Viking Systems was recapitalized on January 4, 2008, William C. Bopp, currently chairman and chief executive officer, signed a two year employment agreement. At the end of 2009, it is the intention of the Board of Directors to promote and appoint John "Jed" Kennedy, currently president and chief operating officer, to the position of president and chief executive officer. It is anticipated that Mr. Bopp will continue to serve as Chairman of the Board of Directors. Mr. Bopp said, "This transition recognizes the contributions of Mr. Kennedy to the success of Viking Systems to date and the Board's confidence in his leadership ability for the future."

The company's CEO shows us a very strong background and leadership skills that confirm his ability to put strong companies together. He was the CFO and VP of ALARIS Medical Systems, Inc, which was acquired for approximately $2.0 billion by Cardinal Health, Inc. (NYSE:CAH) in July 2004, and Mr. Bopp assisted for an additional year with the integration of ALARIS into Cardinal Health before retiring in 2005. Mr. Bopp was formerly executive vice president and chief financial officer of C.R. Bard, Inc. (NYSE:BCR).