10QSB 1 iss6302006.txt FORM 10-QSB (6-30-2006) 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 June 30, 2006 [ ] 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. --------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 68-0232575 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1433 N. Market Blvd. #1, Sacramento, CA 95834 --------------------------------------------- (Address of principal executive offices) (916) 285-9943 -------------- (Issuer's telephone number) 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 [ ] No [ X ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the exchange Act). Yes [ ] No [ X ] The number of shares of common stock, $0.01, par value, outstanding on April 12, 2007 was 45,784,089. Transitional Small Business Disclosure format (check one). Yes [ ] No [ X ] Integrated Surgical Systems, Inc. Form 10-QSB for the quarter ended June 30, 2006 Table of Contents Page Part I. Financial Information Item 1. Financial Statements 2 Balance Sheet (unaudited) at June 30, 2006 2 Statements of Operations (unaudited) for the 3 three months ended June 30, 2006 and 2005 Statements of Operations (unaudited) for the 4 six months ended June 30, 2006 and 2005 Statements of Cash Flows (unaudited) for the 5 six months ended June 30, 2006 and 2005 Notes to Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis 7 Item 3. Controls and Procedures 10 Part II. Other Information Item 6. Exhibits 11 Signature Certifications Part I. Financial Information Item 1. Financial Statements (unaudited) Integrated Surgical Systems, Inc. Balance Sheet June 30, 2006 (Unaudited) Assets Current assets: Cash $ 107,301 Accounts receivable 16,666 Inventory 182,885 Other current assets 149,864 ------------ Total current assets 456,716 Other assets 15,000 ------------ Total assets $ 471,716 Liabilities and stockholders' deficit Current liabilities: Accounts payable $ 1,810,433 Accrued liabilities 1,239 Unearned income 1,153,583 ------------ Total current liabilities 2,965,255 Convertible preferred stock, $0.01 par value, 1,000,000 shares authorized; 168 shares issued and outstanding ($168,496 aggregate liquidation value) 168,496 ------------ Total liabilities 3,133,751 ------------ Stockholders' deficit: Common stock, $0.01 par value, 100,000,000 shares authorized; 45,084,089 shares issued and outstanding 450,841 Additional paid-in capital 61,924,486 Accumulated deficit (65,037,362) ------------ Total stockholders' deficit (2,662,035) ------------ $ 471,716 ============ See accompanying notes to financial statements. 2
Integrated Surgical Systems, Inc. Statements of Operations (Unaudited) Three months ended June 30, -------------------------------------- 2006 2005 ------------ ------------ Net revenue $ 199,284 $ 1,388,744 Cost of revenue 11,551 247,752 ------------ ------------ 187,733 1,140,992 ------------ ------------ Operating expenses: Selling, general and administrative 58,453 77,581 Research and development 3,176 140,795 Gain on forgiveness of debt (83,431) (362,881) ------------ ------------ (21,802) (144,505) ------------ ------------ Operating income 209,535 1,285,497 Other income net 63,370 -- Amortization of discount -- (31,379) Derivative liability income -- 271,646 Interest (expense) net -- (3,344) ------------ ------------ Net income $ 272,905 $ 1,522,420 ============ ============ Basic net income per common share $ 0.01 $ 0.03 ============ ============ Diluted net income per common share $ * $ 0.02 ============ ============ Shares used in computing basic net income per share 45,084,089 45,084,089 ============ ============ Shares used in computing diluted net income per share 86,382,128 61,464,188 ============ ============ * Less than $.01, per share See accompanying notes to financial statements. 3 Integrated Surgical Systems, Inc. Statements of Operations (Unaudited) Six months ended June 30, -------------------------------------- 2006 2005 ------------ ------------ Net revenue $ 2,455,334 $ 3,091,295 Cost of revenue 413,606 462,628 ------------ ------------ 2,041,728 2,628,667 ------------ ------------ Operating expenses: Selling, general and administrative 786,626 550,693 Research and development 161,515 275,349 Gain on forgiveness of debt (83,431) (362,881) ------------ ------------ 864,710 463,161 ------------ ------------ Operating income 1,177,018 2,165,506 Other income net 68,395 -- Amortization of discount -- (31,379) Derivative liability income -- 31,379 Interest income (expense) net -- (6,760) ------------ ------------ Net income $ 1,245,413 $ 2,158,746 ============ ============ Basic net income per common share $ 0.03 $ 0.05 ============ ============ Diluted net income per common share $ 0.01 $ 0.04 ============ ============ Shares used in computing basic net income per share 45,084,089 45,084,089 ============ ============ Shares used in computing diluted net income per share 94,742,271 61,075,039 ============ ============ See accompanying notes to financial statements. 4 Integrated Surgical Systems, Inc. Statements Cash Flows (Unaudited) Six months ended June 30, --------------------------------- 2006 2005 ----------- ----------- Cash flows from operating activities: Net income $ 1,245,413 $ 2,158,746 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation -- 5,414 Inventory reserve -- 100,000 Amortization of discount -- 31,379 Gain on forgiveness of debt (83,431) (362,881) Derivative liability income -- (31,379) Gain on property and equipment (5,000) -- Changes in operating assets and liabilities: Accounts receivable 21,289 (4,387) Inventory 119,590 86,776 Other current assets (113,397) (23,081) Accounts payable 44,743 (149,997) Accrued payroll and related expenses (816,429) (111,300) Accrued liabilities (105,336) (163,376) Unearned income (221,930) (2,859,896) ----------- ----------- Net cash provided by (used in) operating activities 85,512 (1,323,982) ----------- ----------- Cash flows from investing activities: Proceeds on sale of property and equipment 5,000 -- ----------- ----------- Net cash provided by investing activities 5,000 -- ----------- ----------- Cash flows from financing activities: Payments of note payable (142,000) -- ----------- ----------- Net cash used in financing activities (142,000) -- ----------- ----------- Net decrease in cash (51,488) (1,323,982) Cash at beginning of period 158,789 1,324,403 ----------- ----------- Cash at end of period $ 107,301 $ 421 =========== =========== See accompanying notes to financial statements. 5
Integrated Surgical Systems, Inc. Notes to Financial Statements (unaudited) 1. Organization and Operations Integrated Surgical Systems, Inc. (Company) was incorporated in Delaware in 1990 to design, manufacture, sell and service image-directed, computer-controlled robotic software and hardware products for use in orthopedic surgical procedures. The Company's products are sold through international distributors to hospitals and clinics in European Union member countries and Australia, Canada, India, Israel, Japan, Korea, New Zealand, Switzerland and South Africa. Subsequent to March 31, 2005 the Company ceased operations, three of its four directors resigned, and all employees were terminated. The officers of the Company were evaluating the options available to the Company. 2. Significant Accounting Policies Basis of presentation The accompanying unaudited financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and with the rules and regulations of the Securities and Exchange Commission for 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 accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. These financial statements should be read in conjunction with the financial statements of the Company together with the Company's management discussion and analysis in the Company's Form 10-KSB for the year ended December 31, 2005. Interim results are not necessarily indicative of the results for a full year. Certain amounts for prior years have been reclassified to conform to 2006 financial statement presentations. The financial statements include all the accounts of the Company. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Pronouncements Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements. 3. Going Concern The accompanying unaudited financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of June 30, 2006, the Company had an accumulated deficit of $65,037,362 and negative working capital of $2,508,539. The report of the independent registered public accounting firm on the Company's December 31, 2005 financial statements includes an explanatory paragraph indicating there is substantial doubt about the Company's ability to continue as a going concern. The Company believes that it has a current plan to address these issues in order to enable the Company to continue operations. This plan includes obtaining additional equity or debt financing, increasing product sales in existing markets, increasing sales of system upgrades, and further reductions in operating expenses as necessary. Although the Company believes that the plan 6 will be realized, there is no assurance that these events will occur. In the event that the Company is unsuccessful in realizing the benefits of such plan, it is possible that the Company will seek bankruptcy protection. These 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 of the Company to continue as a going concern. Item 2. Management's Discussion and Analysis Forward-Looking Statements The discussion in this Quarterly Report on Form 10-QSB contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about the software industry and certain assumptions made by the Company's management. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "could," "would," "may" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents the Company files from time to time with the SEC, particularly the Company's Annual Report on Form 10-KSB, Quarterly Reports on Form 10-QSB and any Current Reports on Form 8-K. The following discussion should be read in conjunction with the unaudited financial statements and notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-QSB and with the audited Financial Statements and Notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005 as filed with the SEC. Overview We were incorporated in Delaware in 1990 to design, manufacture, sell and service image-directed, computer-controlled robotic software and hardware products for use in orthopedic surgical procedures. Although we have not received clearance to market the ROBODOC(R) System (ROBODOC) in the U.S., we are permitted to export the system provided certain requirements are met. Products approved for use by European Union member countries and Australia, Canada, India, Israel, Japan, Korea, New Zealand, Switzerland and South Africa, do not require U.S. FDA export approval. We sell our robotic systems to international distributors, who in turn resell the product in their territories. Our international distributors are KTEC in Japan, ROCOM Frontier in Korea and Paramount Impex in India. In November 2005, we received an advance for a Robodoc system from our Korean distributor and this system was shipped in January 2006. In February 2006, we received an advance for another Robodoc system from our Korean distributor and this system was shipped in March 2006. On August 8, 2006, we filed Form 8-K with the SEC disclosing that we had entered into a $4 million asset purchase agreement to sell substantially all of our assets to Novatrix Biomedical, Inc. in consideration of $4 million as well as a loan agreement with Novatrix pursuant to which Novatrix would loan us an aggregate of $6 million in two tranches of $2.7 million upon the execution of the agreement, and an additional $3.3 million in two tranches upon certain milestones with Novatrix. As required by the loan agreement, we have reached a settlement with over 80% of our outstanding creditors in exchange for 17.6 cents for each dollar owed. The loan agreement further provides that in the event that approval by our stockholders of the asset sale does not occur by June 30, 2007, we will be required to grant an exclusive license in the Asian markets of our ROBODOC Surgical System software to Novatrix in exchange for a one-time royalty payment of $100,000. 7 Product revenue consists of sales of our principal orthopedic 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. We develop specialized operating software for several implant manufacturing companies. These implant manufacturers' contract with us for the development of software for particular lines of new prosthesis to be used with the ROBODOC system. We currently have warranty reserves of $173,000 on products delivered in Q1 of 2006. Results of operations We generated net income for the second quarter of 2006 of $273,000 or $0.01 per basic share and less than one cent per dilutive share, compared to net income of $1,522,000 or $0.03 per basic share and $0.02 per dilutive share for the second quarter of 2005. We generated net income for the first half of 2006 of $1,245,000 or $0.03 per basic share and $0.01 per dilutive share compared to net income for the first half of 2005 of $2,159,000 or $0.05 per basic and $0.04 per dilutive share. Net revenue Net revenue of $199,000 in Q2 2006 decreased 86% when compared to $1,389,000 in the second quarter of 2005, primarily resulting from the lack of development revenue in the second quarter of 2006 compared to $1,232,000 in the second quarter of 2005. Net revenue of $2,455,000 in the first half of 2006 decreased 21% when compared to $3,091,000 in the first half of 2005. ROBODOC Systems sales during the first half of 2006 accounted for 84% of the revenue for that six month period, compared to no system sales and development revenue which equals 90% of the total revenue during the first six months of 2005. Cost of revenue Cost of revenue of $12,000 in Q2 2006 decreased 95% when compared to $248,000 in the second quarter of 2005 and was 6% of revenue compared to 18% of revenue in the second quarter of 2005 and is directly related to the limited revenue in Q2 2006. Cost of revenue of $414,000 in the first half of 2006 decreased 11% when compared to $463,000 in the first half of 2005 and was 17% of revenue compared to 15% of revenue in the first half of 2005, as the gross sales price of the two ROBODOC Systems sold in the current year were at a higher price as they were sold directly to the hospitals and a sales commission was paid to our distributor and charged to selling, general and administrative expense. These ROBODOC Systems sales differed from our normal process of selling systems directly to our distributor at a lower price without commission being paid. The costs of development revenue on a percentage basis are generally less than that of other sales. Gross margin Gross margin of $188,000 decreased 84% during Q2 of 2006 when compared to $1,141,000 in the second quarter of 2005 and were 94% of revenue compared to 82% of revenue in the second quarter of 2005 as 89% of the revenues in Q2 2005 were from higher margins on development revenues compared to other sales in Q2 2006. Gross margin of $2,042,000 decreased 22% during the first half of 2006 when compared to $2,629,000 in the first half of 2005 and were 83% of revenue compared to 85% of revenue in the first half of 2005. The gross price of the ROBODOC Systems sold in the current year were at a higher price, as they were sold directly to the hospital and a sales commission was paid to our distributor and charged to selling, general and administrative expenses, while 90% of the revenues in the first half of 2005 were from higher margins on development revenues. 8 Operating expenses Selling, general and administrative expenses of $58,000 decreased 26% during the second quarter of 2006 when compared to $78,000 in the second quarter of 2005 and were 29% of revenue compared to 6% of revenue in the second quarter of 2005. Selling, general and administrative expenses of $787,000 increased 43% during the first half of 2006 when compared to $551,000 in the first half of 2005 and were 32% of revenue compared to 18% of revenue in the first half of 2005. Selling, general and administrative expense in the first half 2006 included $600,000 to our distributor as commission expense. Without this commission, selling, general and administrative expense would only have been $187,000, or 8% of revenue for the first half of 2006 due to our limited head count. Research and development of $3,000 decreased 98% during the second quarter of 2006 when compared to $141,000 in the second quarter of 2005 due to our lack of cash required to maintain our level of research and development. Research and development of $162,000 decreased 41% during the first half of 2006 when compared to $275,000 in the first half of 2005 and were 7% of revenue compared to 9% of revenue in the first half of 2005, as the first half of 2005 reported 5 months of operations and the first half of 2006 reported limited activity. Liquidity and Capital Resources Our cash position is inadequate, and although we have identified potential sources of cash for future operations, there cannot be any assurance that we will receive these cash amounts, or that these cash amounts will be sufficient to assure continuing operations. The report of independent auditors on our December 31, 2005 financial statements included an explanatory paragraph indicating there is substantial doubt about our ability to continue as a going concern. We believe that we have a current plan to address these issues and enable us to continue operations. This plan includes obtaining additional equity or debt financing, increasing product sales in existing markets, increasing sales of system upgrades, and further reductions in operating expenses as necessary. Although we believe that the plan will be realized, there is no assurance that these events will occur. In the event that we are unsuccessful in realizing the benefits of such plan, it is possible that we will seek bankruptcy protection. The June 30, 2006 unaudited 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 our inability to continue as a going concern. At June 30, 2006, our "quick ratio" (cash and accounts receivable divided by current liabilities), a conservative liquidity measure designed to predict our ability to pay bills, was only 0.04. It has been difficult for us to meet obligations, including payroll, as they come due, and we expect this situation to continue through 2006. Net cash provided by operating activities was $86,000 for the six months ended June 30, 2006, resulted primarily from net income of $1,245,000 and a decrease in inventory of $120,000, offset in part by decreases in accounts payable and related expenses of $816,000, unearned revenue of $222,000, an increase in other current assets of $114,000 and the gain on forgiveness of debt of $83,000. The increase in other current assets was primarily due to advance payment to vendors required as a result of our history of slow vendor payments. The decrease in accrued payroll and other related expenses was primarily from payments made for past due payrolls from prior years and related accrued benefits. The decrease in unearned income primarily is from the recognition of revenue on development projects and the recognition of income on servicing contracts. We expect to derive most of the cash required to support our operations in 2006 through sales of the ROBODOC Systems and collection of accounts receivable, as well as through additional financing. It is critical for us to maintain operations as a going concern in 2006. There can be no assurance that we can continue to convert inventory, collect receivables or raise additional funds on acceptable terms, if at all. 9 At June 30, 2005, we have amounts due to our executive officers of approximately $21,000 in the aggregate, deferred salaries and unreimbursed travel expenses. Approximately $19,000 is included in accounts payable, and is due to Ramesh C. Trivedi, our president and chief executive officer. Approximately $2,000 is included in expense, and accounts payable, due to Leland Witherspoon, our vice president of research and development. We anticipate that we will incur operating losses in the next twelve months. We do not have any material commitments for capital expenditures. There are no seasonal aspects to our business. We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, liquidity or capital resources that are material to our investors. Critical Accounting Policies and Estimates The preparation of our unaudited financial statements requires us 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, we evaluate the estimates, including those related to bad debts, inventories, warranties, contingencies and litigation. We base these estimates on historical experience and on other assumptions believed 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. We have discussed our critical accounting policies with our independent accountants. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements: We recognize revenue from sales of our products 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 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. We periodically evaluate the need for allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of our ability to make payments, additional allowances may be required. Item 3. Controls and Procedures (a) Under the supervision and with the participation of management, including our President and Chief Executive Officer and Chief Financial Officer, an evaluation was made of the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. 10 (b) There has been no significant changes in our internal control over financial reporting during the quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Part II. Other Information Item 6. Exhibits (a)Exhibits 31.1 Certification Pursuant to Exchange Act Rule 13a-14(a) of Ramesh Trivedi 31.2 Certification Pursuant to Exchange Act Rule 13a-14(a) of David Adams 32.1 Certification Pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of Ramesh Trivedi 32.2 Certification Pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of David Adams 11 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTEGRATED SURGICAL SYSTEMS, INC. By: /s/ DAVID H. ADAMS ---------------------------------------- David H. Adams, Chief Financial Officer April 13, 2007 12