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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
Commission file number 1-12471
INTEGRATED SURGICAL SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
Delaware 68-0232575
(State of incorporation) (IRS Employer Identification Number)
1850 Research Park Drive, Davis, CA 95616-4884
(Address of principal executive offices) (Zip Code)
(530) 792-2600
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
On August 1, 2002 the issuer had 38,825,469 shares of common stock, $.01 par
value, outstanding.
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Integrated Surgical Systems, Inc.
Form 10-QSB
For the quarter ended June 30, 2002
Table of Contents
Page
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Part I. Financial Information
Item 1. Financial Statements (unaudited) 2
Consolidated Balance Sheet at June 30, 2002 2
Consolidated Statements of Operations for the
three months ended June 30, 2002 and 2001 3
Consolidated Statements of Operations for the
six months ended June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 7
Part II. Other Information
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signature 10
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Integrated Surgical Systems, Inc.
Consolidated Balance Sheet
June 30, 2002
(Unaudited)
Assets
Current assets:
Cash $ 146,503
Accounts receivable less allowance for doubtful accounts of $109,747 1,451,102
Inventory 2,111,408
Other current assets 254,843
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Total current assets 3,963,856
Net property and equipment 374,924
Leased equipment, net 222,563
Intangible assets, net 78,338
Other assets 10,176
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$ 4,649,857
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Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 2,153,025
Accrued payroll and related expense 677,780
Accrued liabilities 160,875
Unearned income 3,884,503
Other current liabilities 428,391
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Total current liabilities 7,304,574
Note payable 97,577
Commitments and contingencies
Convertible preferred stock, $0.01 par value, 1,000,000 shares authorized;
312 shares issued and outstanding ($312,056 aggregate liquidation value) 312,056
Stockholders' deficit:
Common stock, $0.01 par value, 100,000,000 shares authorized;
38,311,464 shares issued and outstanding 383,115
Additional paid-in capital 61,794,241
Accumulated other comprehensive loss (1,167,791)
Accumulated deficit (64,073,915)
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Total stockholders' deficit (3,064,350)
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$ 4,649,857
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See accompanying notes.
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Integrated Surgical Systems, Inc.
Consolidated Statements of Operations
(Unaudited)
Three months ended June 30,
----------------------------
2002 2001
(Restated)
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Net revenue $ 791,824 $ 2,240,432
Cost of revenue 337,235 923,741
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454,589 1,316,691
Operating expenses:
Selling, general and administrative 829,732 981,178
Research and development 744,214 987,497
Amortization of intangibles 209,760 209,760
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1,783,706 2,178,435
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Operating loss (1,329,117) (861,744)
Other income (expense), net: 182,416 (60,632)
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Net loss $ (1,146,701) $ (922,376)
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Basic and diluted net loss per common share $ (0.03) $ (0.03)
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Shares used in computing basic net loss per share 38,311,464 36,295,748
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See accompanying notes.
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Integrated Surgical Systems, Inc.
Consolidated Statements of Operations
(Unaudited)
Six months ended June 30,
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2002 2001
(Restated)
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Net revenue $ 1,700,559 $ 3,576,973
Cost of revenue 725,850 1,104,247
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974,709 2,472,726
Operating expenses:
Selling, general and administrative 1,675,418 2,180,956
Research and development 1,450,019 1,851,262
Amortization of intangibles 419,520 419,520
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3,544,957 4,451,738
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Operating loss (2,570,248) (1,979,012)
Other income (expense), net: 159,575 (243,207)
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Net loss $ (2,410,673) $ (2,222,219)
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Basic and diluted net loss per common share $ (0.06) $ (0.06)
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Shares used in computing basic net loss per share 38,310,594 34,504,403
============ ============
See accompanying notes.
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Integrated Surgical Systems, Inc.
Consolidated Statements Cash Flows (Unaudited)
Increase (Decrease) in Cash
Six months ended June 30,
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2002 2001
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Cash flows from operating activities:
Net loss $(2,410,673) $(2,222,219)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 299,591 255,708
Amortization of intangible assets 419,520 419,520
Stock compensation 508 54,797
Changes in operating assets and liabilities:
Accounts receivable (839,219) (195,792)
Inventory (197,616) 876,302
Other current assets (14,281) 54,208
Accounts payable 318,496 377,694
Accrued payroll and related expenses 81,907 27,540
Accrued liabilities (66,730) (97,676)
Unearned income 1,665,052 432,096
Other current liabilities (79,960) (182,223)
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Net cash used in operating activities (823,405) (200,045)
Cash flows from investing activities:
Principal payments received on sales-type lease 44,295 43,914
Purchases of property and equipment (19,992) --
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Net cash provided by investing activities 24,303 43,914
Cash flows from financing activities:
Payments on bank loan -- (41,041)
Payment of short-term note payable -- (200,000)
Proceeds from the issuance of short-term note payable -- 200,000
Proceeds from sale of common stock and warrants -- 632,000
Proceeds from officer advance and deferred salaries 283,683 --
Payment on officer advance (20,000) --
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Net cash provided by financing activities 263,683 590,959
Effect of exchange rate changes on cash (118,452) (173,368)
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Net increase (decrease) in cash (653,871) 261,460
Cash at beginning of period 800,374 276,322
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Cash at end of period $ 146,503 $ 537,782
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Supplemental disclosure of non-cash activity:
Supplemental disclosure of non-cash investing activity:
Transfer of inventory to leased equipment: $ 76,700 $ --
See accompanying notes.
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Integrated Surgical Systems Inc.
Notes to Consolidated Financial Statements (unaudited)
June 30, 2002
1. Basis of presentation. The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In our opinion, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The Company's cash position is below required working capital limits and the
Company had not yet identified sources of sufficient cash to assure continuing
operations. At August 1, 2002, the Company had not yet identified guaranteed
sources of sufficient cash to meet the August 15, 2002 payroll and was in
default of certain financing arrangements with vendors.
The Company is working to address this shortfall by attempting to negotiate cash
advances for undelivered systems, accelerated payment terms of other contracts,
additional salary deferrals from employees and new equity investment. However,
the Company can offer no assurance that attempts to strengthen cash flows will
be successful. Unless the Company can secure sufficient funds on a timely basis
to satisfy short-term operating requirements, the Company may have to cease
operations or file for bankruptcy.
The reports of the Company's independent auditors in the 2001 and 2000
consolidated financial statements included explanatory paragraphs stating that
there is substantial doubt with respect to the Company's ability to continue
operating as a going concern. The Company's plan to address this issue -
increasing sales of our products in existing markets, increasing sales of system
upgrades and reducing operating expenses - can only be realized to the extent
that the Company generates sufficient cashflow to meet obligations. In the event
that the Company is unsuccessful, it is possible that the Company will cease
operations or file for bankruptcy. The consolidated financial statements do not
include any adjustments to reflect the uncertainties related to the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from an inability on the Company's part to continue
as a going concern.
Operating results for the six month period ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2002. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Integrated Surgical Systems,
Inc. annual report on Form 10-KSB for the year ended December 31, 2001.
2. Inventories. At June 30, 2002, the components of inventory were:
Raw materials $ 410,474
Work-in-process 595,375
Finished goods 887,661
Deferred product development contract costs 217,898
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$2,111,408
3. Stockholders' equity. No shares of stock were issued by the Company during
the period of April 1, 2002 through June 30, 2002.
4. Net loss per share. At June 30, 2002, outstanding options to purchase
1,655,517 shares of common stock (with exercise prices ranging from $0.06 to
$8.63), 9,447,604 outstanding warrants to purchase 16,023,324 shares of common
stock (with exercise prices from $0.01 to $8.34), and 9,751,750 shares of common
stock issuable upon conversion of Series G and H convertible preferred stock
could potentially dilute basic earnings per share in the future and have not
been included in the computation of diluted net loss per share because to do so
would have been antidilutive for the periods presented. The exercise price and
the ultimate number of shares of common stock issuable upon conversion of the
warrants are subject to adjustments based upon the occurrence of certain future
events.
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5. Accumulated other comprehensive loss.
Three months ended June 30 Six months ended June 30
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2002 2001 2002 2001
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Net Loss $(1,146,701) $ (922,376) $(2,410,673) $(2,222,219)
Other comprehensive loss:
Foreign currency translation (37,481) (78,146) 120,646 (415,918)
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Comprehensive loss $(1,184,182) $(1,000,522) $(2,290,027) $(2,638,137)
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6. Recent accounting pronouncements.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets", on January 1, 2002. Under SFAS No.
142, goodwill and indefinite lived intangible assets are no longer amortized but
are reviewed annually, or more frequently if impairment indicators arise, for
impairment. Intangible assets whose lives are not indefinite are amortized over
their useful lives, and reviewed for impairment in accordance with SFAS No. 121.
The adoption of SFAS No. 142 on January 1, 2002 had no impact on the Company's
consolidated financial position or results of operations.
The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", on January 1, 2002. SFAS No. 144, which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", provides a single accounting model for long-lived
assets to be disposed of. Although retaining many of the fundamental recognition
and measurement provisions of SFAS No. 121, SFAS No. 144 significantly changes
the criteria that would have to be met to classify an asset as held-for-sale.
The distinction is important because assets held-for-sale are stated at the
lower of their fair values or carrying amounts and depreciation is no longer
recognized. The adoption of SFAS No. 144 on January 1, 2002 had no impact on the
Company's consolidated financial position or results of operations.
7. Unaudited Interim Financial Information
During the fourth quarter of 2001, the Company discovered clerical errors which
arose in 2001 relating to the elimination of certain intercompany sales by the
Company's wholly-owned French subsidiary. In 2001, the Company recorded a fourth
quarter adjustment to reduce net revenue by approximately $516,000 and to reduce
cost of revenue by an equivalent amount. This adjustment related to an
equivalent amount of net revenue and cost of revenue for the first three
quarters of 2001 of approximately $299,000, $150,000 and $67,000 respectively,
which have been included in the 2001 restated consolidated statements of
operations for the three and six month periods ending June 30, 2001. The impact
of this adjustment had no effect on previously reported gross margin, operating
loss, net loss or net loss per share for the Company's 2001 interim periods or
the fourth quarter of 2001.
Item 2. Management's Discussion and Analysis
Results of Operations
Net revenue of $792,000 for the three months ending June 30, 2002 was $1,449,000
lower than the level achieved in the same period of 2001, resulting in net
revenue for the six months ending June 30, 2002 of $1,876,000 below the same
period in 2001. The Company has not recognized revenue for two systems shipped
in the first quarter of 2002 as installation and training were not complete, and
the Company has not recognized revenue for a third system that was ordered in
the first quarter of 2002 that has not yet been shipped.
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Gross margin was 57% for the three month period ending June 30, 2002 and 59% for
the three month period ending June 30, 2001. Gross margin was 57% for the six
month period ending June 30, 2002 and 69% for the six month period ending June
30, 2001. The higher margin in the first half of 2001 was due to the relatively
higher margin upgrades and increased services sold in the first quarter of 2001.
Total operating expenses have continued to decline as a result of the Company's
cost reduction program. Selling and general administrative expenses decreased
15% during the three month period ending June 30, 2002 as compared to the three
month period ending June 30, 2001. Research and development expenses decreased
25% during the three month period ending June 30, 2002 as compared to the three
month period ending June 30, 2001. Selling and general administrative expenses
decreased 23% during the six month period ending June 30, 2002 as compared to
the six month period ending June 30, 2001 and, research and development expenses
decreased 22% as compared to the same six month period ending June 30, 2002.
Other expense, net of $60,000 and $243,000 for the three month and six month
periods ending June 30, 2001 respectively, changed favorably to other income,
net of $182,000 and $160,000 for the corresponding periods of 2002. This
positive change from other expense, net to other income, net was directly
attributable to the favorable currency exchange rate of the euro related to the
Company's business in Europe.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of the financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these consolidated financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
estimates, including those related to bad debts, inventories, warranties,
contingencies and litigation. Estimates are based on historical experience and
on other assumptions that the Company believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of consolidated
financial statements:
The Company recognizes revenue from sales of systems upon the completion of
equipment installation and training at the end-user's site, except when the
sales contract requires formal customer acceptance. Equipment sales with
contractual customer acceptance provisions are recognized as revenue upon
written notification of customer acceptance, which generally occurs after the
completion of installation and training. Furthermore, due to business customs in
Japan and the Company's interpretation of Japanese law, all equipment sales to
Japan are recognized after customer acceptance, which generally occurs after the
completion of installation and training. Revenue related to maintenance and
service contracts is recognized ratably over the duration of the contracts.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of customers to make required payments. If the
financial condition of customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.
Where products are not covered by separate service agreements, the Company
provides for the estimated cost of product warranties at the time revenue is
recognized. The Company's warranty obligation is affected by product failure
rates, material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service
delivery costs differ from estimates, revisions to the estimated warranty
liability would be required.
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It is Company policy to write down inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected,
additional inventory write-downs may be required.
Property, plant and equipment and intangible assets are amortized over their
useful lives. Useful lives are based on estimates of the period that the assets
will generate revenue. Property and equipment and intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Liquidity and Capital Resources
The Company's cash position is below required working capital limits and the
Company had not yet identified sources of sufficient cash to assure continuing
operations. As of August 1, 2002, the Company had not yet identified guaranteed
sources of sufficient cash to meet the August 15, 2002 payroll and was in
default of certain financing arrangements with vendors.
The Company is working to address this shortfall by attempting to negotiate cash
advances for undelivered systems, accelerated payment terms of other contracts,
additional salary deferrals from employees and new equity investment. However,
the Company can offer no assurance that attempts to strengthen cash flows will
be successful. Unless the Company can secure sufficient funds on a timely basis
to satisfy short-term operating requirements, the Company may have to cease
operations or file for bankruptcy.
The reports of our independent auditors on the Company's 2001 and 2000
consolidated financial statements included explanatory paragraphs stating that
there is substantial doubt with respect to the Company's ability to continue
operating as a going concern. The Company's plan to address this issue -
increasing sales of the Company's products in existing markets, increasing sales
of system upgrades and reducing operating expenses - can only be realized to the
extent that the Company can generate sufficient cash to meet obligations. In the
event that the Company is unsuccessful, it is possible that the Company will
cease operations or file for bankruptcy. The consolidated financial statements
do not include any adjustments to reflect the uncertainties related to the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from an inability on the Company's part to continue
as a going concern.
At June 30, 2002 the Company's "quick ratio" (cash and accounts receivable
divided by current liabilities), a conservative liquidity measure designed to
predict the Company's ability to pay bills, was only .22. It has been difficult
for the Company to meet obligations, including payroll, as they come due, and
the Company expects this situation to continue through 2002.
In April 2002, an officer of the Company advanced the Company $70,000, bearing
interest at 7.25% per annum, to meet payroll obligations. The Company paid
$20,000 against the principal and interest of this advance to the officer in
June 2002. At August 1, 2002, the Company had amounts due to an officer of the
Company of approximately $285,000. Of this amount, $50,000 related to salary
deferred in the fourth quarter of 2001, $50,000 related to an advance to meet
payroll obligations in the second quarter of 2002, included in accrued payroll
and related expense, and $185,000 related to unreimbursed travel expenses,
included in accounts payable.
Several payrolls during the quarter ending June 30, 2002 were late and several
senior management members volunteered to defer payment of their salary to make
cash available to pay employees. As a result, these members of the senior
management staff were receiving their salary as much as one month in arrears.
Deferred payroll and payroll related expenses to Company employees at June 30,
2002 was $177,000 of which $51,000 is still deferred as of August 1, 2002.
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Unearned income, payments for system sales on which revenue is not yet
recognized, and advance payments for service contracts with revenue recognized
ratably over the period of the contract, were the largest source of cash for the
three month and six month periods ending June 30, 2002 and represents 53% and
52%, respectively of the Company's liabilities at June 30, 2002.
The financial statements of Integrated Surgical Systems, S.A. ("ISS-SA"), the
Company's wholly-owned French subsidiary, for the six months ended June 30,
2002 have net assets of less than 50% of ISS-SA's capital stock. This equity
deficit is considered to be a sign of bankruptcy under French law. Unless this
situation is remedied before December 31, 2002, a third party or the French
courts could petition for correction or the dissolution of ISS-SA. The Company
plans to correct this equity deficiency by converting a portion of ISS-SA's
intercompany payables into equity of ISS-SA.
On August 1, 2002 there were 38.8 million shares of common stock outstanding,
trading in the over-the-counter market at $0.04 per share, giving the Company a
market capitalization of $1.6 million. It is not likely, therefore, that the
Company will be able to raise significant funds in the equity markets.
For further information, refer to our Management's Discussion and Analysis
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 2001.
Part II. Other Information
Item 5. Other Information
The Company's prior Chief Financial Officer, Patricia E. Pilz, resigned
effective June 14, 2002. Charles J. Novak was subsequently appointed as Chief
Financial Officer effective July 15, 2002.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
None.
(b)Reports on Form 8-K.
None.
SIGNATURE
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTEGRATED SURGICAL SYSTEMS, INC.
By: /s/ CHARLES J. NOVAK
------------------------------------------
Charles J. Novak
(Principal Financial and Accounting Officer)
Dated: August 13, 2002
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I, Ramesh C. Trivedi, Chief Executive Officer of Integrated Surgical
Systems, Inc., certify, pursuant to 18 U.S.C.ss. 1350, as enacted byss.906 of
the Sarbanes-Oxley Act of 2002, that:
(1) the Quarterly Report on Form 10-QSB for the quarterly period ended June
30, 2002 (the "Periodic Report") which this statement accompanies fully complies
with the requirements of Section 13(a) of the Securities Exchange Act of 1934;
and
(2) information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of
Integrated Surgical Systems, Inc.
Dated: August 13, 2002 By: /s/ RAMESH C. TRIVEDI
-------------------------------------------
Ramesh C. Trivedi
Chief Executive Officer
I, Charles J. Novak, Chief Financial Officer of Integrated Surgical
Systems, Inc., certify, pursuant to 18 U.S.C.ss.1350, as enacted by ss.906 of
the Sarbanes-Oxley Act of 2002, that:
(1) the Quarterly Report on Form 10-QSB for the quarterly period ended June
30, 2002 (the "Periodic Report") which this statement accompanies fully complies
with the requirements of Section 13(a) of the Securities Exchange Act of 1934;
and
(2) information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of
Integrated Surgical Systems, Inc.
Dated: August 13, 2002 By: /s/ CHARLES J. NOVAK
-------------------------------------------
Charles J. Novak
Chief Financial Officer
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