UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2003
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______ to ________
Commission file number: 1-12471
INTEGRATED SURGICAL SYSTEMS, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 68-0232575
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1850 Research Park Drive, Davis, California 95616-4884
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(Address of principal executive offices)
(530) 792-2600
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(Issuer's telephone number)
N/A
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(Former name, former address and formal fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: The number of shares of the issuer's
common stock outstanding as of November 7, 2003 was 43,478,469.
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
Integrated Surgical Systems, Inc. and Subsidiaries
Form 10-QSB
For the quarter ended September 30, 2003
Table of Contents
Page
Part I. Financial Information
Item 1. Financial Statements (unaudited) 3
Consolidated Balance Sheet at September 30, 2003 3
Consolidated Statements of Operations for
the three months ended September 30, 2003 and 2002 4
Consolidated Statements of Operations for
the nine months ended September 30, 2003 and 2002 5
Consolidated Statements of Cash Flows for
the nine months ended September 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 12
Item 3. Controls and Procedures 16
Part II. Other Information
Item 2. Changes in Securities 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Certifications 19
Part I. Financial Information
Item 1. Financial Statements
Integrated Surgical Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
September 30, 2003
(Unaudited)
Assets
Current assets:
Cash $ 75,778
Accounts receivable, less allowance
for doubtful accounts of $67,404 666,677
Inventories 1,313,663
Other current assets 221,907
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Total current assets 2,278,025
Property and equipment, net 94,952
Leased equipment, net 99,777
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$ 2,472,754
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Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 2,372,786
Accrued payroll and related expense 948,532
Accrued liabilities 391,734
Unearned income 2,814,710
Other current liabilities 432,042
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Total current liabilities 6,959,804
Commitments and contingencies
Convertible preferred stock, $0.01 par value,
1,000,000 shares authorized;
218 shares issued and outstanding
($218,496 aggregate liquidation value) 218,496
Stockholders' deficit:
Common stock, $0.01 par value,
100,000,000 shares authorized;
43,478,469 shares issued and outstanding 434,785
Additional paid-in capital 61,866,581
Accumulated other comprehensive loss (1,284,769)
Accumulated deficit (65,722,143)
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Total stockholders' deficit (4,705,546)
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$ 2,472,754
============
See accompanying notes.
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Integrated Surgical Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three months ended
September 30,
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2003 2002
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Net revenue $ 539,406 $ 1,273,104
Cost of revenue 704,710 511,474
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(165,304) 761,630
Operating expenses:
Selling, general and administrative 571,132 730,813
Research and development 454,650 545,732
Amortization of intangibles -- 78,338
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1,025,782 1,354,883
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Operating loss (1,191,086) (593,253)
Other income (expense), net: 134,779 (4,071)
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Net loss $ (1,056,307) $ (597,324)
============ ============
Basic and diluted net loss per common share $ (0.02) $ (0.02)
============ ============
Shares used in computing basic
and diluted net loss per share 43,478,469 38,719,316
============ ============
See accompanying notes.
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Integrated Surgical Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Nine months ended
September 30,
----------------------------
2003 2002
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Net revenue $ 5,501,202 $ 2,973,663
Cost of revenue 3,840,847 1,237,324
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1,660,355 1,736,339
Operating expenses:
Selling, general and administrative 1,942,115 2,406,231
Research and development 1,191,062 1,995,751
Amortization of intangibles -- 497,858
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3,133,177 4,899,840
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Operating loss (1,472,822) (3,163,501)
Other income, net: 231,669 155,504
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Net loss $ (1,241,153) $ (3,007,997)
============ ============
Basic and diluted net loss per common share $ (0.03) $ (0.08)
============ ============
Shares used in computing basic
and diluted net loss per share 42,681,766 38,448,332
============ ============
See accompanying notes.
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Integrated Surgical Systems, Inc. and Subsidiaries
Consolidated Statements Cash Flows (Unaudited)
Nine months ended September 30,
--------------------------------
2003 2002
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Cash flows from operating activities:
Net loss $(1,241,153) $(3,007,997)
Adjustments to reconcile net loss to net cash provided by (used in)
Operating activities:
Depreciation 218,944 231,445
Amortization of intangible assets -- 497,858
Stock compensation, non-employees -- 26,207
Release of note payable related to loan (109,262) --
Changes in operating assets and liabilities:
Accounts receivable 912,800 (800,704)
Inventories 477,130 30,557
Other current assets 89,533 (28,565)
Accounts payable 20,520 52,879
Accrued payroll and related expenses 244,309 62,742
Accrued liabilities 102,909 (69,777)
Unearned income (820,690) 2,122,844
Other current liabilities 31,414 (76,980)
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Net cash used in operating activities (73,546) (959,491)
Cash flows from investing activities:
Principal payments received on sales-type lease -- 44,628
Purchases of property and equipment (17,708) (20,527)
Disposals of property and equipment -- 93,438
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Net cash provided by (used in) investing activities (17,708) 117,539
Cash flows from financing activities:
Proceeds from officer advances and deferrals of salaries and
unreimbursed travel expenses 483,825 285,445
Payments on officer advances, deferred salaries and
unreimbursed travel expenses (295,514) (146,539)
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Net cash provided by financing activities 188,311 138,906
Effect of exchange rate changes on cash (103,348) 30,593
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Net decrease in cash (6,291) (672,453)
Cash at beginning of period 82,069 800,374
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Cash at end of period $ 75,778 $ 127,921
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Supplemental disclosure of non-cash investing activity:
Transfer of inventory to leased equipment: -- $ 76,700
Conversion of preferred stock: $ 32,000 --
See accompanying notes.
-6-
Integrated Surgical Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2003
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included.
The cash position of Integrated Surgical Systems, Inc. (the "Company") is
inadequate and the Company has not yet identified sources of sufficient cash to
assure continuing operations. At November 7, 2003, the Company was in violation
of certain covenants contained in financing arrangements with vendors. The
Company is working to address this shortfall by attempting to negotiate cash
advances for undelivered systems, accelerate payment terms of other contracts
and obtain 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 seek bankruptcy
protection.
The report of the Company's independent auditors on the 2002 audited
consolidated financial statements included an explanatory paragraph 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 products in existing markets, increasing sales of system
upgrades, obtaining new equity investments and reducing operating expenses - can
only be realized to the extent that the Company generates sufficient cash flow
to meet its obligations. In the event that the Company is unsuccessful, it is
possible that the Company will cease operations or seek bankruptcy protection.
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 nine month period ending September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-KSB for the year ending December 31, 2002.
2. Contingent Matters
On September 30, 2003, the Tribunal de Commerce in Lyon, France (the "Tribunal")
placed Integrated Surgical Systems S.A., a wholly-owned subsidiary of the
Company organized under the laws of France and operating in France and elsewhere
in Europe (the "French subsidiary"), under administration by persons appointed
by the Tribunal. The Tribunal acted after a hearing in which the Company and the
French subsidiary discussed the ability of the French subsidiary to meet its
obligations over the next four months and the Company's unwillingness to further
fund the operations of the French subsidiary due to the fact that the French
subsidiary has consistently failed to generate sufficient revenues so as to not
require funding from the Company. The Tribunal authorized the appointees to
manage the French subsidiary during the four month period, including
authorization for the transfer of all funds held in the French subsidiary's bank
accounts and all monies received by the French subsidiary during the four month
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period to a new bank account controlled by the appointees. The Tribunal directed
the Company and the French subsidiary to develop plans concerning the future of
the French subsidiary.
On October 30, 2003, representatives of the Company met with the Tribunal de
Commerce in Lyon, France in a scheduled meeting to review the status of the
French subsidiary. At this meeting, the Tribunal determined that the French
subsidiary is meeting the forecasted goals presented to the Tribunal on
September 30, 2003, and scheduled the next review meeting for December 16, 2003.
The Company is investigating various options for conducting its European
operations in the future rather than having its European operations controlled
by the French subsidiary. The Company presently can not determine the ultimate
outcome of the proceedings before the Tribunal, the effect of any outcome on the
business and financial condition of the Company nor the effect of any of the
various options being formulated for conducting its European operations in the
future, any of which could have a material adverse impact on the consolidated
financial position, cash flows, and results of operations.
3. Stock Based Compensation
The Company uses the intrinsic value method in accounting for its employee stock
options because, as discussed below, the alternative fair value accounting
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under the intrinsic value method, when the
exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Option valuation models were developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected life of the option. Because the Company's
employee stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimates, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
For the three and nine months ending September 30, 2003 and 2002, respectively,
the fair value of the Company's stock-based awards to employees was estimated
using the following weighted-average assumptions: risk-free interest rates of
3.0% and 3.5%; dividend yield of 0%; volatility factors of the expected market
price of the common stock of 0.945 and 0.955; and an expected life of the option
of 4 years.
The following table sets forth the pro forma net loss of the Company after
considering the effect to stock-based employee compensation:
Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
----------- ----------- ----------- ------------
Net loss, as reported $(1,056,307) $ (597,324) $(1,241,153) $(3,007,997)
Add: stock-based employee compensation
included in reported net loss -- -- -- --
Less: stock-based employee compensation
expense, determined under fair value
method for all awards (28,700) (9,432) (90,056) (53,513)
----------- ----------- ----------- -----------
Pro forma net loss $(1,085,007) $ (606,756) $(1,331,209) $(3,061,510)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted net loss per share, as reported $ (0.02) $ (0.02) $ (0.03) $ (0.08)
=========== =========== =========== ===========
Basic and diluted net loss per share, pro forma $ (0.02) $ (0.02) $ (0.03) $ (0.08)
=========== =========== =========== ===========
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4. Inventories
At September 30, 2003, the components of inventories were:
Raw materials $ 457,697
Work-in-process 474,497
Finished goods 361,576
Deferred product development contract costs 19,893
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$1,313,663
==========
5. Note Payable
As of June 30, 2003, the Company had an interest free loan from a grant
organization for the development of a new neurological system with an
outstanding balance of approximately $113,000. If the Company sells either a
license for the related technology, the prototype developed, or articles
manufactured specifically for the research project, 50% of the revenue must be
paid to the grant organization in the subsequent year, up to the balance of the
loan amount outstanding. No such sales were recorded during the nine months
ending September 30, 2003.
In the three months ending September 30, 2003, the Company recognized
approximately $109,000 in other income related to the loan being forgiven by the
French national agency who initially issued the loan to the Company in 1997.
Under the terms of the loan, which was established for the development of a new
neurological system, the balance could be forgiven upon review by the French
Agency. In August of 2003, the French Agency completed its review of the loan
balance and determined that the remaining balance of $109,000 would be forgiven.
6. Warranty
The Company offers a one-year warranty for parts and labor on all ROBODOC and
NeuroMate systems commencing upon the completion of training and installation,
except when the sales contract requires formal customer acceptance. The Company
provides for the estimated cost of product warranties at the time revenue is
recognized, based on historical results. The 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 these estimates, revisions to the
estimated warranty liability would be required. The Company periodically
assesses the adequacy of its recorded warranty liabilities and adjusts the
amounts as necessary.
Changes in the Company's product liability for warranties included in accrued
liabilities during the period are as follows:
December 31, 2002 balance $ 8,000
Warranties issued during the period 65,000
Settlements made during the period (19,000)
Changes in liability for pre-existing warranties during
period, including expirations --
----------
September 30, 2003 balance $ 54,000
==========
7. Stockholders' Equity
During the three month period ended September 30, 2003, the Company issued no
shares of common stock. During the nine month period ended September 30, 2003,
32 shares of convertible preferred stock were converted into 1,500,000 shares of
common stock at an average conversion price of $0.021 per share. The issuance of
these shares were exempt from the registration requirements of the Securities
Act under Sections 3(a)(9) and 4 (2).
-9-
8. Net Loss Per Share
Basic net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
and potential common shares outstanding during the period if their effect is
dilutive. Employee stock options, warrants and preferred stock to purchase
approximately 8,213,000 shares of the Company's common stock for the three
months ended September 30, 2003 and 9,219,000 shares of the Company's common
stock for the nine months ended September 30, 2003 were outstanding, but were
not included in the computation of diluted loss per share because the effect
would be anti-dilutive.
At September 30, 2003, the Company had outstanding options to purchase 2,541,367
shares of common stock (with exercise prices ranging from $0.025 to $8.50 per
share), outstanding warrants to purchase 7,834,159 shares of common stock (with
exercise prices from $0.01 to $8.34 per share), and 6,069,333 shares of common
stock issuable upon conversion of Series G convertible preferred stock. 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.
9. Accumulated Other Comprehensive Loss
Three months ended September 30, Nine months ended September 30,
------------------------------- -------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss $(1,056,307) $ (597,324) $(1,241,153) $(3,007,997)
Other comprehensive income (loss):
Foreign currency translation (8,587) 19,318 (66,862) 139,964
----------- ----------- ----------- -----------
Comprehensive loss $(1,064,894) $ (578,006) $(1,308,015) $(2,868,033)
=========== =========== =========== ===========
10. Income Taxes
The Company recorded no income tax expense during the three and nine month
periods ending September 30, 2003 and September 30, 2002. The Company had, at
December 31, 2002, a net operating loss carry-forward of approximately
$40,544,000 for federal income tax purposes which expires between 2005 and 2022,
a net operating loss carryforward of approximately $8,150,000 for state income
tax purposes which expires between 2004 and 2012, and a net operating loss
carryforward of approximately $1,541,000, for foreign income tax purposes of
which approximately $347,000 expires between 2003 and 2007. The Company had, at
December 31, 2002, research and development credit carry-forwards of
approximately $1,256,000 and $1,017,000 for federal and state income tax
purposes, respectively.
Under certain provisions of the Internal Revenue Code of 1986, as amended, a
portion of the federal net operating loss carry-forward may be subject to an
annual utilization limitation as a result of a change in ownership of the
Company.
11. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and associated asset retirement costs. The new rules
apply to legal obligations associated with the retirement of long-lived assets
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that result from the acquisition, construction, development and (or) normal
operation of a long-lived asset. The Company adopted SFAS No. 143 on January 1,
2003, and the adoption did not have an impact on the consolidated financial
position, cash flows or results of operations.
In May 2003, FASB issued Statement of Financial Accounting Standards No. (SFAS
150), "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." SFAS 150 requires certain financial instruments that
embody obligations of the issuer and have characteristics of both liabilities
and equity to be classified as liabilities. Many of these instruments previously
were classified as equity or temporary equity and, as such, SFAS 150 represents
a significant change in practice in the accounting for a number of mandatorily
redeemable equity instruments and certain equity derivatives that frequently are
used in connection with share repurchase programs. SFAS 150 is effective for all
financial instruments created or modified after May 31, 2003, and to other
instruments at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS 150 did not have a material impact on the
Company's consolidated financial position, cash flows or results of operations.
In January 2003, FASB issued Interpretation Number 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires that unconsolidated
variable interest entities be consolidated by their primary beneficiaries. A
primary beneficiary is the party that absorbs a majority of the entity's
expected losses or residual benefits. The effective date for FIN 46 was deferred
until December 31, 2003. The Company is continuing to assess the impact of FIN
46.
In November 2002, the EITF reached a consensus on Issue 00-21,
"Multiple-Deliverable Revenue Arrangements" ("EITF 00-21"). EITF 00-21 addresses
how to account for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The consensus mandates
how to identify whether goods or services or both that are to be delivered
separately in a bundled sales arrangement should be accounted for separately
because they are "separate units of accounting." The guidance can affect the
timing of revenue recognition for such arrangements, even though it does not
change rules governing the timing or pattern of revenue recognition of
individual items accounted for separately. The final consensus will be
applicable to agreements entered into in fiscal years beginning after June 15,
2003, with early adoption permitted. Additionally, companies will be permitted
to apply the consensus guidance to all existing arrangements as the cumulative
effect of a change in accounting principle in accordance with APB Opinion No.
20, "Accounting Changes." The adoption of EITF 00-21 did not have a material
impact on the Company's consolidated financial position, cash flows or results
of operations.
-11-
Item 2. Management's Discussion and Analysis or Plan of Operation
Overview
The following discussion and analysis relates to the consolidated operations of
the Company and should be read in conjunction with the unaudited consolidated
financial statements of the Company, including the notes thereto, appearing
elsewhere in this report and the Company's audited consolidated financial
statement for the year ended December 31, 2002, including notes thereto,
contained in the Company Annual Report on Form 10-KSB.
The Company designs, manufactures, sells and services image-directed,
computer-controlled robotic software and hardware products for use in
orthopaedic and neurosurgical procedures.
The Company's revenue consists of product revenue, specialized product
development revenue and parts and service revenue.
Product revenue consists of revenues generated from sales of the Company's
principal orthopaedic product, the ROBODOC(R) Surgical Assistant System
("ROBODOC"), which integrates the ORTHODOC(R) Presurgical Planner ("ORTHODOC")
with a computer-controlled robot for use in joint replacement surgeries. Also
included in product revenue is revenues generated from sales of the
NeuroMate(TM) System ("NeuroMate"), which consists of a computer-controlled
robotic arm, head stabilizer, presurgical planning workstation and proprietary
software used to position and precisely hold critical tools during stereotactic
brain surgery.
The Company develops specialized operating software for several implant
manufacturing companies. These implant manufacturers contract with the Company
for the development of particular lines of new prosthesis software to be used
with the ROBODOC system.
The Company's customers purchase warranty coverage (parts and labor) as well as
surgical disposables through annual service and maintenance agreements. The
Company's technical staff trains medical professionals in the use of the
products and provides field service.
Results of Operations
For the three months ending September 30, 2003, the Company maintained its
fiscal 2003 trend of reduced operating expenses when compared to the three
months ending September 30, 2002. Net revenue for the three months ending
September 30, 2003 decreased when compared to the three months ending September
30, 2002, resulting in an operating loss of approximately $1,191,000 and net
loss of $1,056,000 as compared to an operating loss of $593,000 and net loss of
$597,000, respectively, for the prior year's comparable period. In the nine
months ending September 30, 2003, net revenue increased and operating expenses
were reduced when compared to the nine months ending September 30, 2002, with an
operating loss of $1,473,000 and net loss of $1,241,000 as compared to an
operating loss of $3,164,000 and net loss of $3,008,000, respectively, for the
prior year's comparable period.
Net revenue of $539,000 for the three months ending September 30, 2003,
decreased approximately 58% or $734,000 when compared to $1,273,000 for the
three months ending September 30, 2002. Net revenue of $5,501,000 for the nine
months ending September 30, 2003 increased 85% or $2,528,000 when compared to
$2,974,000 for the nine months ending September 30, 2002. There can be no
assurance that the Company will be able to maintain such revenue levels in
future periods.
Net revenue for the three month period ending September 30, 2003 includes a
product development project completed in the period as compared to one ROBODOC
system recognized (in Korea) for the three month period ending September 30,
2002. Net revenue for the nine month period ending September 30, 2003 includes
four ROBODOC systems, three NeuroMate systems and two product development
-12-
projects recognized as compared to one ROBODOC system and one NeuroMate system
recognized for the nine month period ending September 30, 2002. As of September
30, 2003, the Company's unearned income is comprised of one ROBODOC system,
undelivered system modules, product development projects and ongoing installed
base service contracts.
Gross margin decreased from approximately 60% for the three months ending
September 30, 2002 to negative 31% for the three months ending September 30,
2003. The decrease was due to the product mix favoring the stronger margins of
system parts and service revenue for the three month period ending September 30,
2002 compared to lower margins realized for the three month period ending
September 30, 2003 as a result of idle facility costs. Gross margin decreased
from 58% for the nine months ending September 30, 2002 to 30% for the nine
months ending September 30, 2003 due to the change in product mix favoring the
stronger margins of system parts and service revenue for the nine month period
ending September 30, 2002 over the lower margins realized in system sales and
idle facility costs for the nine month period ending September 30, 2003.
Total operating expenses have continued to decline as a result of the Company's
cost reduction program. Selling and general administrative expenses are
comprised of salaries, commissions, travel expenses and costs associated with
trade shows as well as the finance, legal and human resources departments and
professional support fees for these functions. Selling and general
administrative expenses for the three month period ending September 30, 2003
decreased approximately 22% to $571,000 compared to $731,000 for the three month
period ending September 30, 2002. Selling and general administrative expenses
for the nine month period ending September 30, 2003 decreased 19% to $1,942,000
from $2,406,000 for the nine month period ending September 30, 2002. The
decrease in selling and general administrative expenses was primarily due to
decreased staffing and staffing related expenses in the three month period
ending September 30, 2003.
Research and development expenses are comprised of the engineering and related
costs associated with the development of innovative image-directed
computer-controlled robotic products for surgical applications, along with
specialized operating software and hardware systems to support these products,
quality assurance and testing. Research and development expenses decreased
approximately 17% to $455,000 during the three month period ending September 30,
2003 as compared to $546,000 for the three month period ending September 30,
2002. Research and development expenses decreased 40% to $1,191,000 during the
nine month period ending September 30, 2003 as compared to $1,996,000 for the
nine month period ending September 30, 2002. The decrease in the three month
period ending September 30, 2003 is due to decreased staffing and staffing
related expenses. The decrease in the nine month period ending September 30,
2003 is due to decreased staffing and staffing related expenses and
approximately $125,000 final grant payment received in April 2003 from the
National Institute for Standards and Technology of the United States Department
of Commerce ("NIST"). Under the terms of the NIST grant, the Company was
entitled to reimbursement for certain of the expenses incurred in connection
with the development of its revision hip surgery product. As of September 30,
2003, the Company had received a cumulative total of approximately $1,221,000 in
funding from NIST since 1995. All expenses related to the grant have been
submitted and paid, thereby closing the grant.
Other income, net of approximately $135,000 for the three months ending
September 30, 2003 when compared to other loss, net of approximately $4,000 for
the three months ending September 30, 2002, changed primarily due to
approximately $109,000 recognized in 2003 in other income related to a loan
being forgiven by the French national agency who initially issued the loan to
the Company in 1997. Under the terms of the loan, which was established for the
development of a new neurological system, the balance could be forgiven upon
review by the French Agency. Other income, net of approximately $232,000 when
compared to other income, net of approximately $156,000 for the nine months
ending September 30, 2003 and 2002, respectively, changed due to the loan being
forgiven and a favorable currency exchange rate of the Euro related to the
Company's business in Europe and one month of sublease rent income related to
the Company's Davis, California facility in 2003 compared to a slightly more
favorable rate and six months sublease rent income related to the Company's
Davis, California facility in 2002.
-13-
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
arrangements with multiple elements are divided into separate units of
accounting if certain criteria are met, including whether the delivered
item has value to the customer on a stand-alone basis and whether there is
objective and reliable evidence of the fair value of the undelivered items.
The Company uses the residual method to allocate the arrangement
consideration. Under the residual method, the amount of consideration
allocated to the delivered item equals the total arrangement consideration
less the aggregate fair value of the undelivered item.
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.
The Company offers a one-year warranty for parts and labor on all ROBODOC
and NeuroMate systems commencing upon the completion of training and
installation, except when the sales contract requires formal customer
acceptance. The Company provides for the estimated cost of product
warranties at the time revenue is recognized, based on historical results.
The 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 these estimates, revisions to the estimated warranty
liability would be required. The Company periodically assesses the adequacy
of its recorded warranty liabilities and adjusts the amounts as necessary.
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.
-14-
Liquidity and Capital Resources
The cash position of the Company is inadequate and the Company has not yet
identified sources of sufficient cash to assure continuing operations. At
September 30, 2003, the Company had a working capital deficit of $4,681,779. At
November 7, 2003, the Company was in violation of certain covenants contained in
financing arrangements with vendors.
The Company is working to address this shortfall by attempting to negotiate cash
advances for undelivered systems, accelerate payment terms of other contracts
and obtain 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 seek bankruptcy
protection.
The report of the Company's independent auditors on the Company's 2002 audited
consolidated financial statements included an explanatory paragraph 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 seek bankruptcy protection. 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 September 30, 2003 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 .11. 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 2003.
Net cash used in operating activities was approximately $74,000 for the nine
months ended September 30, 2003. This primarily resulted from a decrease in
accounts receivable of $913,000, a decrease in inventory of $477,000, an
increase of $265,000 in accounts payable and accrued payroll and related
expenses, offset primarily by the net loss for this period and a decrease in
unearned income of $821,000. The increase in accounts payable and accrued
payroll is directly related to delayed vendor payments and deferred payments to
employees. The Company expects to derive most of the cash required to support
operations through continued sales of the ROBODOC and NeuroMate Systems.
Continued conversion of the inventory balance into cash, as well as collection
of the account receivables, is critical to the Company's survival in 2003.
At September 30, 2003, the Company had amounts due to the executive officers of
the Company of approximately $571,000, in the aggregate, in the form of an
interest bearing advance, deferred salaries and unreimbursed travel expenses. Of
such amounts, $160,000, $263,000 and $60,000 are included in accrued payroll and
related expense, accounts payable and accrued liabilities, respectively, due to
Ramesh C. Trivedi, president and chief executive officer of the Company;
$35,000, $19,000 and $4,000 are included in accrued payroll and related expense,
accounts payable and accrued liabilities, respectively, due to Leland
Witherspoon, vice president of engineering of the Company; $20,000, $6,000 and
$4,000 are included in accrued payroll and related expense, accounts payable and
accrued liabilities, respectively, due to Charles J. Novak, chief financial
officer of the Company.
-15-
On September 30, 2003, the Tribunal de Commerce in Lyon, France (the "Tribunal")
placed Integrated Surgical Systems S.A., a wholly-owned subsidiary of the
Company organized under the laws of France and operating in France and elsewhere
in Europe (the "French subsidiary"), under administration by persons appointed
by the Tribunal. The Tribunal acted after a hearing in which the Company and the
French subsidiary discussed the ability of the French subsidiary to meet its
obligations over the next four months and the Company's unwillingness to further
fund the operations of the French subsidiary due to the fact that the French
subsidiary has consistently failed to generate sufficient revenues so as to not
require funding from the Company. The Tribunal authorized the appointees to
manage the French subsidiary during the four month period, including
authorization for the transfer of all funds held in the French subsidiary's bank
accounts and all monies received by the French subsidiary during the four month
period to a new bank account controlled by the appointees. The Tribunal directed
the Company and the French subsidiary to develop plans concerning the future of
the French subsidiary.
On October 30, 2003, representatives of the Company met with the Tribunal de
Commerce in Lyon, France in a scheduled meeting to review the status of the
French subsidiary. At this meeting, the Tribunal determined that the French
subsidiary is meeting the forecasted goals presented to the Tribunal on
September 30, 2003, and scheduled the next review meeting for December 16, 2003.
The Company is investigating various options for conducting its European
operations in the future rather than having its European operations controlled
by the French subsidiary. The Company presently can not determine the ultimate
outcome of the proceedings before the Tribunal, the effect of any outcome on the
business and financial condition of the Company nor the effect of any of the
various options being formulated for conducting its European operations in the
future. Although the consequences are unknown at this time, if a liquidation of
the subsidiary is required, it could have a material adverse impact on the
Company's financial position, results of operations, or cash flows.
On November 7, 2003 there were 43.5 million shares of common stock outstanding,
trading in the over-the-counter market at $0.060 per share, giving the Company a
market capitalization of $2.6 million. It is not likely, therefore, that the
Company will be able to raise significant funds in the equity markets.
The Company has the following contractual obligations and commercial commitments
at September 30, 2003:
Total < 1 year 1-3 years
----- -------- ---------
Facility operating leases $ 757,000 $509,000 $248,000
Equipment operating leases $ 16,000 $ 16,000 $ --
For further information, readers are referred to the Management's Discussion and
Analysis section included in the Company's Annual Report on Form 10-KSB for the
year ending December 31, 2002.
Item 3. Controls and Procedures
The Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design of the
Company's disclosure controls and procedures, as defined in Exchange Act Rules
13a-15(e) and 15d-15(e), as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective, in all material respects, to ensure that the information required to
be disclosed in the reports the Company files and submits under the Exchange Act
is recorded, processed, summarized and reported as and when required.
There have been no significant changes (including corrective actions with
regards to significant deficiencies and material weaknesses) in the Company's
internal controls or in other factors subsequent to the date the Company carried
out its evaluation that could significantly affect these controls.
-16-
Part II. Other Information
Item 2. Changes in Securities
During the second quarter of 2003, the Company issued a total of 1,500,000
shares of common stock to an accredited investor upon conversion of preferred
stock. The issuance and sale of these shares were exempt from the registration
requirements of the Securities Act under Sections 3(a)(9) and 4 (2).
Item 5. Other Information
On September 30, 2003, the Tribunal de Commerce in Lyon, France (the "Tribunal")
placed Integrated Surgical Systems S.A., a wholly-owned subsidiary of the
Company organized under the laws of France and operating in France and elsewhere
in Europe (the "French subsidiary"), under administration by persons appointed
by the Tribunal. The Tribunal acted after a hearing in which the Company and the
French subsidiary discussed the ability of the French subsidiary to meet its
obligations over the next four months and the Company's unwillingness to further
fund the operations of the French subsidiary due to the fact that the French
subsidiary has consistently failed to generate sufficient revenues so as to not
require funding from the Company. The Tribunal authorized the appointees to
manage the French subsidiary during the four month period, including
authorization for the transfer of all funds held in the French subsidiary's bank
accounts and all monies received by the French subsidiary during the four month
period to a new bank account controlled by the appointees. The Tribunal directed
the Company and the French subsidiary to develop plans concerning the future of
the French subsidiary.
On October 30, 2003, representatives of the Company met with the Tribunal de
Commerce in Lyon, France in a scheduled meeting to review the status of the
French subsidiary. At this meeting, the Tribunal determined that the French
subsidiary is meeting the forecasted goals presented to the Tribunal on
September 30, 2003, and scheduled the next review meeting for December 16, 2003.
The Company is investigating various options for conducting its European
operations in the future rather than having its European operations controlled
by the French subsidiary. The Company presently can not determine the ultimate
outcome of the proceedings before the Tribunal, the effect of any outcome on the
business and financial condition of the Company nor the effect of any of the
various options being formulated for conducting its European operations in the
future.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
31.1 Certification of Ramesh C. Trivedi, pursuant to Exchange Act
Rule 13(a)-14(a).
31.2 Certification of Charles J. Novak, pursuant to Exchange Act
Rule 13(a)-14(a).
32.1 Certification of Ramesh C. Trivedi, pursuant to Exchange Act
Rule 13(a)-14(b).
32.2 Certification of Charles J. Novak, pursuant to Exchange Act
Rule 13(a)-14(b).
(b)Reports on Form 8-K
On October 10, 2003, the Company filed a Current Report Form 8-K (Date of
Report: September 30, 2003) concerning the placement of its wholly-owned
subsidiary in France, ISS S.A., under administration of the Tribunal de Commerce
in Lyon, France.
-17-
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: November 12, 2003 (Duly Authorized Officer)
-18-
EXHIBIT 31.1
I, Ramesh C. Trivedi, certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of Integrated
Surgical Systems, Inc. for the quarter ended September 30, 2003;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
(a) Designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under our supervision; to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth
quarter in the case of the annual report) that has materially affected, or is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of small business issuer's board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: November 12, 2003 /s/ RAMESH C. TRIVEDI
----------------------------
Ramesh C. Trivedi
Principal Executive Officer
EXHIBIT 31.2
I, Charles J. Novak, certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of Integrated
Surgical Systems, Inc. for the quarter ended September 30, 2003;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
(a) Designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under our supervision; to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth
quarter in the case of the annual report) that has materially affected, or is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of small business issuer's board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: November 12, 2003 /s/ CHARLES J. NOVAK
------------------------------------------
Charles J. Novak
Principal Financial and Accounting Officer
EXHIBIT 32.1
STATEMENT PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Ramesh C. Trivedi, Chief Executive Officer and President of Integrated
Surgical Systems, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) the Company's Quarterly Report on Form 10-QSB for the quarterly period
ended June 30, 2003 (the "Report"), which this statement accompanies, fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: August 8, 2003 /s/ Ramesh C. Trivedi
---------------------------------------
Ramesh C. Trivedi
Chief Executive Officer and President
-20-
EXHIBIT 32.2
STATEMENT PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Charles J. Novak, Chief Financial Officer of Integrated Surgical
Systems, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Company's Quarterly Report on Form 10-QSB for the quarterly period
ended September 30, 2003 (the "Report"), which this statement accompanies, fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: November 12, 2003 /s/ Charles J. Novak
----------------------------------------
Charles J. Novak
Chief Financial Officer