10-Q 1 v326718_10q.htm FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2012

 

or

 

¨ TRANSITION REPORT PURSUANT TO 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 registrant as specified in its charter)

 

Delaware   68-0232575
(State or Other Jurisdiction of Incorporation or Organization)   (IRS Employer Identification No.)
     
401 Wilshire Blvd., Suite 1020    
Santa Monica, California   90401
(Address of Principal Executive Offices)   (Zip Code)

 

(310) 526-5000

(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 þ or No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ or No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer ¨
   
Non-accelerated filer ¨   (Do not check if a smaller reporting company) Smaller reporting company þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes þ or No ¨

 

As of November 12, 2012 there were 8,318,073 shares of the registrant’s common stock outstanding.

  

 
 

 

Integrated Surgical Systems, Inc.

Form 10-Q

for the three months ended September 30, 2012

 

Table of Contents

 

      Page
Part I. Financial Information    
       
  Item 1. Financial Statements   3
         
    Balance Sheets at September 30, 2012 (unaudited) and December 31, 2011   3
         
    Statements of Operations and Comprehensive Income (Loss) (unaudited) for the nine months ended September 30, 2012 and 2011   4
         
    Statements of Operations and Comprehensive Income (Loss) (unaudited) for the three months ended September 30, 2012 and 2011   5
         
    Statements of Cash Flows (unaudited) for the nine months ended September 30, 2012 and 2011   6
         
    Statement of Changes in Stockholders’ Equity (unaudited) for the nine months ended September 30, 2012   7
         
    Notes to Financial Statements (unaudited)   8
         
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   15
         
  Item 3. Quantitative and Qualitative Disclosures About Market Risk   17
         
  Item 4. Controls and Procedures   17
         
Part II. Other Information    
       
  Item 1. Legal Proceedings   18
         
  Item 6. Exhibits   18
         
Signatures   19

 

2
 

 

Part I.  FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Integrated Surgical Systems, Inc.

Balance Sheets

(Unaudited)

 

   September 30,   December 31, 
   2012   2011 
Assets          
           
Current assets:          
Cash and cash equivalents  $802,797   $422,984 
Investments in available-for-sale securities   2,020,542    2,491,773 
Other current assets   27,094    21,868 
Total current assets   2,850,433    2,936,625 
           
Other assets:          
Investment in ClearSign   -    1,000,000 
           
Total Assets  $2,850,433   $3,936,625 
           
Liabilities and stockholders’ equity          
           
Current liabilities:          
Accounts payable  $13,951   $5,451 
Accrued stock compensation   15,625    15,625 
Income taxes payable   7,213    - 
Conversion feature liability   114,019    81,101 
Total current liabilities   150,808    102,177 
           
Commitments and contingencies          
           
Redeemable convertible preferred stock, $0.01 par value, 1,000,000 shares authorized; 168 shares issued and outstanding ($168,496 aggregate liquidation value)   168,496    168,496 
           
Stockholders’ equity:          
Common stock, $0.01 par value, 100,000,000 shares authorized; 8,239,947 and 8,028,779 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively   82,399    80,287 
Additional paid-in capital   64,337,314    64,292,551 
Accumulated deficit   (61,870,295)   (60,681,860)
Accumulated other comprehensive loss   (18,289)   (25,026)
Total stockholders’ equity   2,531,129    3,665,952 
Total liabilities and stockholders’ equity  $2,850,433   $3,936,625 

 

See accompanying notes to financial statements.

  

3
 

 

Integrated Surgical Systems, Inc.

Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

 

   Nine Months ended
September 30,		 
   2012   2011 
         
Operating expenses          
           
General and administrative expenses  $203,189   $197,218 
           
Loss from operations   (203,189)   (197,218)
           
Other income (expense)          
Interest and dividend income, net   49,011    63,592 
Change in fair value of conversion feature   (32,918)   (61,665)
Gain on distribution of investment in ClearSign   811,713    - 
Realized losses on available-for-sale securities   (1,231)   (1,778)
           
Income (loss) before provision for income taxes   623,386    (197,069)
           
Provision for income taxes   8,013    800 
           
Net income (loss)  $615,373   $(197,869)
           
Other comprehensive income          
Unrealized gains (losses) on available-for-sale securities   6,737    (17,133)
           
Comprehensive income (loss)  $622,110   $(215,002)
           
Basic earnings (loss) per common share  $0.08   $(0.03)
           
Diluted earnings (loss) per common share  $0.07   $(0.03)
           
Weighted average number of shares outstanding:          
Basic   8,155,137    7,912,108 
Diluted   9,146,290    7,912,108 

 

See accompanying notes to financial statements.

 

 

4
 

 

Integrated Surgical Systems, Inc.

Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

 

   Three Months ended
September 30,		 
   2012   2011 
         
Operating expenses          
           
General and administrative expenses  $54,934   $53,739 
           
Loss from operations   (54,934)   (53,739)
           
Other income (expense)          
Interest and dividend income, net   19,815    24,450 
Change in fair value of conversion feature   335    2,879 
Realized losses on available-for-sale securities   (89)   (925)
           
Loss before provision for income taxes   (34,873)   (27,335)
           
Provision for income taxes   -    - 
           
Net loss  $(34,873)  $(27,335)
           
Other comprehensive income          
Unrealized loss on available-for-sale securities   (5,580)   (11,384)
           
Comprehensive loss  $(40,453)  $(38,719)
           
Basic earnings (loss) per common share  $0.00   $(0.00)
           
Diluted earnings (loss) per common share  $0.00   $(0.00)
           
Weighted average number of shares outstanding:          
Basic   8,229,757    7,969,761 
Diluted   8,229,757    7,969,761 

 

See accompanying notes to financial statements.

 

5
 

 

Integrated Surgical Systems, Inc.

Statements of Cash Flows

(Unaudited)

 

   Nine Months ended
September 30,		 
   2012   2011 
         
Cash flows from operating activities          
Net income (loss)  $615,373   $(197,869)
Adjustments to reconcile net income (loss) to net cash used in operating activities          
Change in fair value of conversion feature   32,918    61,665 
Stock-based compensation   46,875    53,125 
Realized losses on available-for-sale securities   1,231    1,778 
Gain on distribution of investment in ClearSign   (811,713)   - 
Changes in operating assets and liabilities          
Other current assets   (5,228)   22,878 
Accounts payable   8,500    10,400 
Accrued stock compensation   -    (9,375)
Income taxes payable   7,213    - 
Rent deposit   -    (8,175)
Net cash used in operating activities   (104,831)   (65,573)
           
Cash flows from investing activities          
Purchases of available-for-sale securities   (1,492,106)   (899,305)
Proceeds received from sales of available-for-sale securities   -    192,650 
Proceeds received from maturities of available-for-sale securities   1,976,750    2,505,174 
Investment in ClearSign   -    (1,000,000)
Net cash provided by investing activities   484,644    798,519 
           
Net increase in cash and cash equivalents   379,813    732,946 
           
Cash and cash equivalents at beginning of period   422,984    40,361 
           
Cash and cash equivalents at end of period  $802,797   $773,307 
           
Supplemental cash flow disclosure:          
Income taxes paid  $800   $800 
Supplemental non-cash disclosure          
Unrealized gain (loss) on available-for-sale securities  $6,737   $(17,133)
Dividend of investment in ClearSign common stock  $1,803,808   $- 

 

See accompanying notes to financial statements.

 

6
 

 

Integrated Surgical Systems, Inc.

Statement of Changes in Stockholders’ Equity

(Unaudited)

 

  Common Stock   Additional
Paid-in		   Accumulated
Other
Compre-
hensive		   Accumulated   Compre-
hensive		   Total
Stockholders'		 
  Shares   Amount   Capital   Income   Deficit   Income   Equity 
                             
Balance at December 31, 2011   8,028,779   $80,287   $64,292,551   $(25,026)  $(60,681,860)  $-   $3,665,952 
                                    
Stock-based compensation   211,168    2,112    44,763    -    -    -    46,875 
Dividends                       (1,803,808)        (1,803,808)
Comprehensive income                                   
Net income   -    -    -    -    615,373    615,373    - 
Other comprehensive income                                   
Net unrealized gain on investments in securities   -    -    -    6,737    -    6,737    - 
Comprehensive income   -    -    -    -    -   $622,110    622,110 
                                    
Balance at September 30, 2012   8,239,947   $82,399   $64,337,314   $(18,289)  $(61,870,295)      $2,531,129 

 

See accompanying notes to financial statements

 

7
 

  

Integrated Surgical Systems, Inc.

 

Notes to Financial Statements (unaudited)

 

1.  Organization and Operations

 

Integrated Surgical Systems, Inc. (the “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.  On June 28, 2007, the Company completed the sale of substantially all of its operating assets.  After completion of the sale, the Company became inactive, and it is no longer engaged in any business activities related to its former business described above. The Company’s current operations are limited to raising additional funds to be used to maintain the Company’s public company status and to complete a business combination or strategic alliance, if suitable candidate(s) are identified.

 

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 of America for interim financial statements and with the rules and regulations under Regulation S-X of the Securities and Exchange Commission for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements presentation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position as of September 30, 2012 and the results of operations for the nine months and three months then ended and cash flows for the nine months then ended have been included. These financial statements should be read in conjunction with the financial statements of the Company and the Company’s management discussion and analysis included in the Company’s Form 10-K for the year ended December 31, 2011. Interim results are not necessarily indicative of the results for a full year.

 

Use of estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 for the reporting period.  Actual results could differ from those estimates.

 

8
 

 

Cash and cash equivalents

 

Cash and cash equivalents include checking and money market accounts held in two financial institutions. The Company has a checking account at one institution with a balance of approximately $22,000 at September 30, 2012. The funds in this account are fully guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) as of September 30, 2012. The Company has a money market account in a brokerage account with a second financial institution, with a money market cash balance of approximately $780,000 at September 30, 2012. Assets in this brokerage account are protected by the Securities Investor Protection Corporation (“SIPC”) up to $500,000.  The Company had uninsured cash and cash equivalents of approximately $280,000 at September 30, 2012.

 

Stock-Based Compensation

 

Compensation costs for stock, warrants or options issued to employees and non-employees are based on the fair value method and accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, “ Compensation – Stock Compensation .”  The value of warrants and options are calculated using a Black-Scholes Model, using the market price of the Company’s common stock on the date of issuance for the employee options and the date of commitment for non-employee options, an expected dividend yield of zero, the expected life of the warrants or options and the expected volatility of the Company’s common stock.  The Company expects the options to fully vest and the forfeiture rate to be zero.

 

Investment in Available-for-Sale Securities

 

The Company has a portfolio of investments in available-for-sale debt securities, which consist of fixed income debt securities and equity securities, which are accounted for in accordance with FASB ASC 320, “Investments - Debt and Equity Securities.”  Management determines the appropriate classification of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date.  Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, if any, are reported as other comprehensive income, a separate component of stockholders’ equity.

 

Fair Value Measurement

 

FASB ASC 820 “Fair Value Measurements and Disclosures” clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, FASB ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

 

  · Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

  · Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.

 

  · Level 3 - Unobservable inputs which are supported by little or no market activity.

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

In accordance with FASB ASC 820, the Company measures its cash equivalents, investments in available-for-sale securities, derivative liability and investment in ClearSign at fair value. The Company’s cash equivalents and investments in available-for-sale securities are classified within Level 1 by using quoted market prices. The Company’s derivative liability is classified within Level 3.

 

The carrying value of other current assets and liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments.

 

FASB ASC 825 “Financial Instruments” permits entities to choose to measure at fair value many financial instruments and certain other items that had previously not been required to be measured at fair value. Subsequent changes in fair value for designated items are required to be reported in earnings in the current period. FASB ASC 825 also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value.

  

9
 

 

Income Taxes

 

Deferred income taxes have been provided for temporary differences between financial statement and income tax reporting under the liability method, using expected tax rates and laws that are expected to be in effect when the differences are expected to reverse.  A valuation allowance is provided when realization is not considered more likely than not.

 

The Company applies the provisions of FASB ASC 740, “Income Taxes.”  ASC 740 clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with ASC 740, “Income Taxes,” and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

The Company’s policy is to classify expenses as a result of income tax assessments as interest expense for interest charges and as penalties in general and administrative expenses for penalty assessments.

 

Cost-Basis Method Valuation

 

The Company’s non-marketable equity investment was previously recorded using the cost-basis method of accounting, and was classified as a long-term asset on the accompanying balance sheet as permitted by FASB ASC 325, “Cost Method Investments”, as the Company owned less than 20% of the voting securities and did not have the ability to exercise significant influence over operating and financial policies of the entity. During the nine months ended September 30, 2012, the Company distributed a majority of this investment to its stockholders and reclassified the remaining shares as available-for-sale securities. During the same period, the investee’s stock became publicly traded and its fair value became readily available. Therefore, as of September 30, 2012, the shares held by the Company have been accounted for in accordance with FASB ASC 320, “Investment – Debt and Equity Securities”.   See Note 5, “Investment in ClearSign” for more information.

 

Recently Adopted Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2011-04, “Fair Value Measurement” (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This guidance amends the disclosure requirements related to recurring and nonrecurring fair value measurements and includes the following provisions:  application of the concepts of highest and best use and valuation premise, introduction of an option to measure groups of offsetting assets and liabilities on a net basis, incorporation of certain premiums and discounts in fair value measurements, and the measurement of fair value of certain instruments classified in shareholders’ equity. In addition, the amended guidance includes several new fair value disclosure requirements, including, among other things, information about valuation techniques and unobservable inputs used in Level 3 fair value measurements and a narrative description of Level 3 measurements’ sensitivity to changes in unobservable inputs. The guidance became effective for the reporting period beginning January 1, 2012.  The Company expects that adoption of this new guidance will not have a material impact on the Company’s financial statements.

 

In June 2011, the FASB issued Accounting Standards Update 2011-05, “Comprehensive Income” (Topic 220): Presentation of Comprehensive Income. This amended guidance eliminates the option for reporting entities to present components of other comprehensive income in the statement of stockholders’ equity. Instead, this amended guidance now requires reporting entities to present all non-owner changes in stockholders’ equity either as a single continuous statement of comprehensive income or as two separate but consecutive statements. The guidance became effective for the reporting period beginning December 15, 2011.  Early adoption is permitted. The Company adopted this accounting standard for the reporting period ending December 31, 2011 and it did not have a material impact on the Company’s financial statements. Subsequently in December 2011, the FASB issued Accounting Standards Update No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income” (“ASU No. 2011-12”), which indefinitely defers the requirement in ASU No. 2011-05 to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in these standards do not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income, or change the option for an entity to present components of other comprehensive income gross or net of the effect of income taxes. The amendments in ASU No. 2011-12 are effective for interim and annual periods beginning after December 15, 2011 and are to be applied retrospectively. The adoption of the provisions of ASU No. 2011-12 did not have a material impact on the Company’s financial position or results of operations.

  

Recently Announced Accounting Pronouncements

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

  

10
 

 

3.  Earnings (Loss) Per Share

 

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period plus dilutive common stock equivalents, using the treasury stock method.

 

Common stock equivalents for convertible preferred stock of 991,153 shares were included in the calculation of earnings (loss) per share for the nine month period ended September 30, 2012 and excluded from the three month period ended September 30, 2012. Common stock equivalents for convertible preferred stock of 660,769 shares were excluded from the calculation of loss per share for the nine month and three month periods ended September 30, 2011 because they were not dilutive; these shares would have been dilutive if the Company had not had a net loss for the those periods.

 

A warrant for 30,000 shares, and stock options of 100,000 were excluded from the calculation of income per share for the nine months and loss per share three months ended September 30, 2012, and a warrant for 30,000 shares, and stock options of 158,000 were excluded from the calculation of loss per share for the nine months and three months ended September 30, 2011, respectively, because their effect was anti-dilutive.

 

4.  Investments in Available-for-Sale Securities

 

The following is a summary of the Company’s investments in available-for-sale fixed-income securities as of September 30, 2012:

 

  Cost   Unrealized
Gains		   Unrealized
Losses		   Fair Value 
U.S. federal agency securities  $19,604   $295   $-   $19,899 
Municipal securities   59,619    -    (60)   59,559 
Certificates of deposit   1,200,163    8,346    (13,657)   1,194,852 
Corporate debt securities   751,540    3,624    (34,227)   720,937 
Equity securities – ClearSign common stock   7,905    17,390    -    25,295 
   $2,038,831   $29,655   $(47,944)  $2,020,542 

 

The following is a summary of the Company’s investments in available-for-sale securities as of December 31, 2011:

 

  Cost   Unrealized
Gains		   Unrealized
Losses		   Fair Value 
U.S. federal agency securities  $15,153   $411   $-   $15,564 
Certificates of deposit   1,725,402    11,154    (13,970)   1,722,586 
Corporate debt securities   776,244    1,222    (23,843)   753,623 
   $2,516,799   $12,787   $(37,813)  $2,491,773 

 

The Company’s investment portfolio had a net realized loss of $1,231 and $1,778 for the nine months ended September 30, 2012 and 2011, respectively. The Company’s investment portfolio had a net realized loss of $89 and $925 for the three months ended September 30, 2012 and 2011, respectively.

 

The cost and fair value of investments in available-for-sale securities, by contractual maturity, as of September 30, 2012, were as follows:

 

  Cost   Fair Value 
Due within one year  $1,551,670   $1,505,567 
Due after one year through three years   197,466    200,961 
Due after three years   281,790    288,719 
No maturity   7,905    25,295 
   $2,038,831   $2,020,542 

 

Expected maturities will differ from contractual maturities because the issuers of certain debt securities have the right to call or prepay their obligations without any penalties. Accordingly, the Company has classified the entire fair value of its investments in available-for-sale securities as current assets in the accompanying balance sheets.

 

11
 

 

5.  Investment in ClearSign

 

On April 20, 2011, the Company purchased 363,636 shares of common stock of ClearSign Combustion Corporation, a privately-held Washington corporation (“ClearSign”), for an aggregate purchase price of $1,000,000, or $2.75 per share, in connection with ClearSign’s private offering of up to $3,000,000 of its common stock (the “ClearSign Offering”). Due to a 1.25-for-one stock split, which occurred subsequent to this purchase, the Company held 454,545 shares of common stock of ClearSign. ClearSign is an early-stage clean energy company focused on developing technology to increase energy efficiency in most types of industrial combustion systems.  Prior to September 30, 2012, this investment had been accounted for using the cost method, as the Company owned less than 20% of the voting securities and did not have the ability to exercise significant influence over operating and financial policies of the entity.  

  

ClearSign filed a registration statement on Form S-1 (as amended) for the initial public offering of its common stock that was declared effective April 24, 2012. On April 25, 2012, ClearSign Combustion Corporation (“ClearSign”) completed an initial public offering selling 3,000,000 shares of its common stock at $4.00 per share, and trading under the symbol CLIR on NASDAQ.  The shares of common stock of ClearSign previously acquired in a private placement by the Company were registered for resale or distribution as part of the offering

 

On April 24, 2012, the Company’s board of directors declared a dividend to the shareholders of the Company, of an aggregate of 450,000 shares of common stock of ClearSign. The dividend was at the rate of 0.05513475 shares of ClearSign for each share of common stock of the Company, which equates to one share of common stock of ClearSign for approximately 18.137 shares of the Company’s common stock. The record date of the dividend was May 9, 2012, and the payment date of the dividend was May 23, 2012. A total of 450,952 shares of ClearSign were distributed, including 952 rounding shares. During the nine months ended September 30, 2012, the Company recorded a gain of $811,713 equal to the increase in the fair value of the ClearSign investment which had been distributed, or $1,803,808, as measured on April 25, 2012 less the cost basis of the investment.

 

The Company retained 3,593 shares of ClearSign common stock, having a fair value of $25,295. An unrealized gain of $17,390 and $934 was recorded during the nine months and three months ended September 30, 2012, respectively. This investment is included in investments in available-for-sale securities.

 

6.  Redeemable Convertible Preferred Stock

 

The Company’s Certificate of Incorporation authorized 1,000,000 shares of undesignated, serial preferred stock. Preferred stock may be issued from time to time in one or more series. The Board of Directors is authorized to determine the rights, preferences, privileges, and restrictions granted to and imposed upon any wholly unissued series of preferred stock and designation of any such series without any further vote or action by the Company’s stockholders.

 

As of September 30, 2012 and December 31, 2011, the Company’s only outstanding series of convertible preferred stock is the Series G Convertible Preferred Stock (“Series G”).

 

The Series G stock has a stated value of $1,000 per share, and is convertible into common stock at a conversion price equal to 85% of the lowest sale price of the common stock on its listed market over the five trading days preceding the date of conversion ("Beneficial Conversion Feature"), subject to a maximum conversion price. The number of shares of common stock that may be converted is determined by dividing the stated value of the number of shares of Series G to be converted by the conversion price. The Company may elect to pay the Series G holder in cash at the current market price multiplied by the number of shares of common stock issuable upon conversion.

 

For the period ended September 30, 2012 and the year ended December 31, 2011, no shares of Series G were converted into shares of common stock. At September 30, 2012 and December 31, 2011, the outstanding Series G shares were convertible into a minimum of 991,153 and 825,961 shares of common stock, respectively.

 

Upon a change in control, sale of or similar transaction, as defined in the Certificate of Designation for the Series G, each holder of the Series G has the option to deem such transaction as a liquidation and may redeem his or her shares at the liquidation value of $1,000, per share, for an aggregate amount of $168,496.  The sale of all the assets on June 28, 2007 triggered the preferred stockholders’ redemption option.  As such redemption is not in the control of the Company, the Series G stock has been accounted for as if it was redeemable preferred stock and is classified on the balance sheet between liabilities and stockholders’ equity.

 

The conversion feature of the preferred stock is considered a derivative according to ASC 815 “Derivatives and Hedging”, therefore, the fair value of the derivative is reflected in the financial statements as a liability, which was determined to be $114,019 as of September 30, 2012, and has been included as “conversion feature liability” on the accompanying balance sheets. As of December 31, 2011, the fair value of the derivative was determined to be $81,101.

 

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7.  Stock-based Compensation

 

On August 15, 2008, the Company granted 25,000 non-qualified stock options to each of its four directors.  These options had a vesting period of one year from the date of grant, and they became fully vested and exercisable on August 15, 2009.  These options expire on August 15, 2013 and have an exercise price of $0.38 per share.  As of September 30, 2012 and December 31, 2011, 100,000 options remain outstanding under this grant.

 

The Company currently has no stock option plans with outstanding options issued to its officers, employees, directors and consultants. The 1998 Stock Option Plan (“1998 Plan”) was established to grant up to 85,000 non-qualified options through May 12, 2008 to employees and other individuals providing services to the Company. Options under the 1998 Plan vested from one year to four years from the date of grant, and vested options must be exercised within 30 days of an employee’s termination. As of September 30, 2012, zero options remained outstanding and vested under the 1998 Plan and as of December 31, 2011, 50,000 options remain outstanding and vested under the 1998 Plan.

 

FASB ASC 718 “Compensation-Stock Compensation” requires entities to estimate the number of forfeitures expected to occur and record expense based upon the number of awards expected to vest.   The outstanding stock options under the 1998 Plan have been fully vested and related expenses were fully amortized for the nine months and three months ended September 30, 2012.

 

For the nine months and three months ended September 30, 2012, option activity was as follows:

 

  Shares   Weighted-
Average
Exercise
Price		   Remaining
Contractual
Term		   Aggregate
Fair Value		 
Outstanding at beginning of period   150,000   $0.36    0.79   $43,335 
Granted   -    -           
Expired and forfeited   (50,000)   0.3275           
Exercised   -    -           
Outstanding at end of period   100,000   $0.38    0.88   $30,120 
                     
Exercisable at September 30, 2012   100,000   $0.38    0.88   $30,120 

 

As of September 30, 2012, a summary of options outstanding under the Company’s 1998 Plan and other non-qualified stock options was as follows:

 

Range of
Exercise
Price		   Weighted-Average Remaining
Contractual Life (Years)		   Number
Outstanding		   Weighted-
Average
Exercise
Price		   Number
Exercisable		   Weighted-
Average
Exercise
Price		 
 0.3800    0.88    100,000   $0.38    100,000   $0.38 

  

In addition, the Company has outstanding 30,000 warrants issued in lieu of consulting fees, which expire in July 2014 and have an exercise price of $0.63 per share.

 

The Company agreed to compensate two of its directors by issuing common stock for services rendered in 2012 and 2011. Both directors are affiliated with the advisory services firm that is currently providing investment banking services to the Company.  Beginning in the second quarter of 2011 and continuing through 2012, the Company agreed to provide one-half of the compensation of a third director in common stock.  The number of shares issued to each director was determined based upon the equivalent cash compensation accrued divided by the closing price of the Company’s common stock on the date that the compensation is fully earned each quarter, which is the last day of such quarter. The Company recorded accrued stock-based compensation of $15,625 as of December 31, 2011 for three directors.  

 

On January 25, 2012, the Company issued 26,042 shares of common stock to each of two directors, and 13,022 shares to another director as compensation for the three months ended December 31, 2011.  These shares, totaling 65,106, were valued at a per share price of $0.24, or a total value of $15,625.

 

On April 4, 2012, the Company issued 27,174 shares of common stock to each of two directors, and 13,588 shares of common stock to another director, as compensation for the three months ended March 31, 2012. These shares, totaling 67,936, were valued at a per share price of $0.23, or a total of $15,625.

 

On July 12, 2012, the Company issued 31,250 shares of common stock to each of two directors, and 15,626 shares of common stock to another director, as compensation for the three months ended June 30, 2012. These shares, totaling 78,126, were valued at a per share price of $0.20, or a total of $15,625.

 

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On October 31, 2012, the Company issued 31,250 shares of common stock to each of two directors, and 15,626 shares of common stock to another director, as compensation for the three months ended September 30, 2012. These shares, totaling 78,126, were valued at a per share price of $0.20, or a total of $15,625.

 

8.   Income Taxes

 

The Company accounts for income taxes under FASB ASC 740 “Accounting for Income Taxes.”  Deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the Company’s financial statements and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Federal and state income tax returns of the Company for the years ended December 31, 2011, 2010, 2009 and 2008 are subject to review by the taxing authorities.

 

The Company has evaluated and concluded that there are no uncertain tax positions requiring recognition in the Company’s financial statements for the nine months and three months ended September 30, 2012 and 2011.  The provision for income tax expense for the nine months ended September 30, 2012 was $8,013, and for the nine months ended September 30, 2011 was $800. The Company expects to utilize its net operating loss and tax credit carryforwards to offset income taxes that would otherwise be due on its net earnings for 2012. The provision for income tax expense for the nine months ended September 30, 2012 includes a provision for alternative minimum tax.

 

As of September 30, 2012, and December 31, 2011, the Company had deferred tax assets primarily consisting of its net operating loss carryforwards.  However, because of the cumulative losses in several consecutive years, the Company has recorded a full valuation allowance such that its net deferred tax asset is zero.

 

The Company must also make judgments as to whether the deferred tax assets will be recovered from future taxable income. To the extent that the Company believes that recovery is not likely, it must establish a valuation allowance.  A valuation allowance has been established for deferred tax assets which the Company does not believe meet the “more likely than not” criteria.  The Company’s judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other factors.  If the Company’s assumptions and consequently its estimates change in the future, the valuation allowances it has  established may be increased or decreased, resulting in a respective increase or decrease in income tax expense.

 

9.   Related Party Transactions

 

The Company entered into an Investment Banking Advisory Services agreement in November 2007 with MDB Capital Group, LLC (“MDB”), and the parties extended this agreement indefinitely in April 2009.  The agreement may be terminated by either party upon 30-days written notice. The Company has not paid, nor is it currently obligated to pay, any fees to MDB pursuant to this agreement.

 

The Company has a securities investment account with MDB, consisting of (a) available-for-sale investments totaling $2,020,542, that include short-term federal securities of $19,899, certificates of deposit, municipal securities and corporate bonds totaling $1,975,348, and equity securities of $25,295 at September 30, 2012, and (b) available-for-sale investments totaling $2,491,773, that included short-term federal securities of $15,564 and certificates of deposit and corporate bonds totaling $2,476,209, at December 31, 2011.

 

Mr. Christopher Marlett, the Chief Executive Officer and director of the Company, is also the Chief Executive Officer of MDB. Mr. Gary Schuman, who is the Chief Financial Officer of the Company, is also the Chief Financial Officer and Chief Compliance Officer of MDB.  The Company reimburses MDB for Mr. Schuman’s services in the amount of $3,000 per month, totaling $27,000 for the nine months and $9,000 for the three months ended September 30, 2012 and 2011.  Mr. Robert Levande, who is an officer and director of the Company, is also a senior managing director of MDB.

 

MDB acted as placement agent in connection with the ClearSign Offering discussed in Note 5, and in consideration for its services was issued 109,091 shares of ClearSign’s common stock (in lieu of a cash fee of 10% of the gross proceeds of the ClearSign Offering) and a 5-year warrant to purchase 109,091 shares of ClearSign’s common stock at an exercise price of $2.75 per share.  As described above, Messrs. Marlett and Levande, each an officer, director and stockholder of the Company, are also the Chief Executive Officer and Senior Managing Director, respectively, of MDB.

 

In addition, at the close of the offering, MDB received 363,636 shares of ClearSign in consideration of other consulting services provided by MDB unrelated to its role as a placement agent.

 

ClearSign completed its initial public offering of common stock on April 25, 2012. MDB was the sole underwriter for the initial public offering and received compensation of $1,207,500 and a warrant to purchase 345,000 shares of ClearSign’s common stock in connection with the public offering.

 

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10. Commitments and Contingencies

 

From time to time, the Company may be subject to other claims and litigation arising in the ordinary course of business.  The Company is not currently a party to any legal proceedings that it believes would reasonably be expected to have a material adverse effect on the Company’s business, financial condition or results of operations.

 

11. Subsequent Event

 

On October 31, 2012, the Company issued 31,250 shares of common stock to each of two directors, and 15,626 shares of common stock to another director, as compensation for the three months ended September 30, 2012. These shares, totaling 78,126, were valued at a per share price of $0.20, or a total of $15,625.

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

The discussion in this Quarterly Report on Form 10-Q contains forward-looking statements. Such forward-looking statements are based on current expectations, estimates and projections and certain assumptions made by management of Integrated Surgical Systems, Inc. (the “Company”). Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “could,” “would,” “may,” “on target,” “envisions,” 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 Securities and Exchange Commission (“SEC”), particularly the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q 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-Q and with the audited financial statements and Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations that are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 as filed with the SEC.

 

Overview

 

The Company was incorporated in Delaware in 1990 and was founded to design, manufacture, sell and service image-directed, computer-controlled robotic software and hardware products for use in orthopedic surgical procedures. On June 28, 2007, the Company completed the sale of substantially all of its operating assets.  After completion of the sale, the Company became inactive, and it is no longer engaged in any business activities related to its former business described above. The Company’s current operations are limited to raising additional funds to be used to maintain the Company’s public company status and to complete a business combination or strategic alliance, if suitable candidate(s) are identified.

 

On April 20, 2011, the Company purchased 363,636 shares of common stock of ClearSign Combustion Corporation, a privately-held Washington corporation (“ClearSign”), for an aggregate purchase price of $1,000,000, or $2.75 per share, in connection with ClearSign’s private offering of up to $3,000,000 of its common stock (the “ClearSign Offering”). Due to a 1.25-for-one stock split, which occurred subsequent to this purchase, the Company held 454,545 shares of common stock of ClearSign.  ClearSign is an early-stage clean energy company focused on developing technology to increase energy efficiency in most types of industrial combustion systems.  ClearSign filed a registration statement on Form S-1 (as amended) for the initial public offering of its common stock that was declared effective April 24, 2012. On April 25, 2012, ClearSign Combustion Corporation (“ClearSign”) completed an initial public offering selling 3,000,000 shares of its common stock at $4.00 per share, and trading under symbol CLIR on the NASDAQ.  The shares of common stock of ClearSign previously acquired in a private placement by the Company were registered as part of the offering.

 

On April 24, 2012, the Company’s board of directors declared a dividend to the shareholders of the Company, of an aggregate of 450,000 shares of common stock of ClearSign. The dividend was at the rate of 0.05513475 shares of ClearSign for each share of common stock of the Company, which equates to one share of common stock of ClearSign for approximately 18.137 shares of the Company’s common stock. The record date of the dividend was May 9, 2012, and the payment date of the dividend was May 23, 2012. See Note 5 of the accompanying financial statements.

 

As of September 30, 2012, the Company had no employees.

 

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Results of Operations

 

Nine months Ended September 30, 2012 and 2011

 

For the nine months ended September 30, 2012 and 2011, the Company had net income of $615,373 and a net loss of $197,869, respectively. The increase in net income was due primarily to the recording of a gain on the Company’s investment in ClearSign of approximately $811,700. General and administrative expenses were $203,189 and $197,218 for the nine months ended September 30, 2012 and 2011, respectively. Legal fees decreased by approximately $4,700 for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 due primarily to efforts to reduce costs. Outside services expense increased from approximately $8,900 in the nine months ended September 30, 2011 to approximately $18,300 in the nine months ended September 30, 2012 due to costs associated with the issuance of a dividend and financial reporting. Net interest income was approximately $48,900 and $63,500, for the nine months ended September 30, 2012 and 2011, respectively. Change in fair value of conversion feature was approximately $32,900 for the nine months ended September 30, 2012, due to the change in fair value of the conversion feature of the Company’s convertible preferred stock; the change in value was approximately $61,700 for the same period in 2011.

 

Three Months Ended September 30, 2012 and 2011

 

For the three months ended September 30, 2012 and 2011, the Company had a net loss of $34,873 and $27,335, respectively. General and administrative expenses were $54,934 and $53,739 for the three months ended September 30, 2012 and 2011, respectively.  The increase in general and administrative expenses from 2011 to 2012 was primarily due to an increase in legal fees of approximately $2,200 offset by a decrease in accounting fees and outside services expenses of approximately $1,000. The Company has no employees, so it relies on outside contractors to perform basic and necessary services. The change in fair value of conversion feature was approximately $300 and $2,900 in the three months ended September 30, 2012 and 2011, respectively.

  

Liquidity and Capital Resources

 

The Company believes that existing cash, cash equivalents, and short-term available-for-sale securities will provide sufficient working capital for the Company to meet its operating plan for next twelve months.   The Board of Directors has retained its directors, including a director as its Chief Executive Officer, another director as its Secretary, and the Chief Financial Officer of a related party as the Company’s Chief Financial Officer, to assist with its continuing obligations under the federal securities laws and to assist with the Company’s plan to evaluate various merger, acquisition, or strategic alliance opportunities.  The Company does not have an estimate as to when it will identify a qualified merger, acquisition, or strategic alliance candidate.  There is no assurance that such opportunities will be available, or if available, upon favorable terms.  If the Company is unsuccessful in completing a suitable merger, acquisition or strategic alliance, then the Board of Directors may liquidate the Company and distribute all its remaining assets, which consist primarily of cash and available-for-sale securities, to its stockholders.

 

The Company anticipates that it will incur operating losses from operations in the next twelve months, until it enters into a suitable merger, acquisition or strategic alliance transaction or until its liquidation.

 

Cash used in operating activities for the nine months ending September 30, 2012 was approximately $105,000, which primarily consisted of operating income of approximately $615,000 and an increase in accounts payable of $8,500, an increase in accrued liabilities of approximately $7,200, a decrease in other current assets of approximately $5,200 and adjustments for non-cash expenses consisting of stock-based compensation of $47,000 and conversion feature liability of $33,000 related to the Company’s Series G Convertible Preferred Stock, offset by an adjustment for a non-cash gain in investment in ClearSign of approximately $812,000.

 

Cash provided by investing activities for the nine months ending September 30, 2012 of approximately $485,000 was from the purchase of available-for-sale securities of approximately $1,492,000, offset by the maturity or sale of available-for-sale securities of approximately $1,977,000.

 

The Company does not have any material commitments for capital expenditures.

 

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 unaudited financial statements included elsewhere in this Form 10-Q and has been prepared in accordance with accounting principles generally accepted in the United States of America as disclosed in the Company’s annual financial statements in its Form 10-K for the year ended December 31, 2011.  Interim results are not necessarily indicative of the results for a full year.

 

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The Company has discussed its critical accounting policies with the Board of Directors.

 

Estimates

 

The preparation of financial statements in conformity with GAAP 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.

 

Investments in Available-for-Sale Securities

 

The Company has a portfolio of investments in available-for-sale securities, which consist of fixed income securities and common stock of a publically traded company, which are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, “Investments - Debt and Equity Securities.”  Management determines the appropriate classification of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date.  Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, if any, are reported as other comprehensive income, a separate component of stockholders’ equity.

 

Financial Instruments

 

The Company considers the carrying amounts of financial instruments, including cash, other current assets and accounts payable to approximate their fair values because of the short term nature of those instruments.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Market risk represents the risk of loss that may impact the Company’s financial position, operating results or cash flows due to changes in U.S. interest rates.  The Company’s exposure to market risk is confined to its available-for-sale investments that it expects to hold less than one year. The goals of the Company’s cash investment policy are the security of the principal amount invested and fulfillment of liquidity needs.  The Company currently does not hedge interest rate exposure. Because of the short-term nature of its investments, the Company does not believe that an increase in market rates would have any material negative impact on the value of its investment portfolio.

 

As of September 30, 2012, the Company held approximately $803,000 in money market and checking accounts at two institutions.  The Company has a checking account at one institution with a balance of approximately $22,000 at September 30, 2012.  The funds in this account are fully insured by the Federal Deposit Insurance Corporation (“FDIC”) as of September 30, 2012.    The Company has a money market account in a brokerage account with a second financial institution, invested in short-term federal securities and corporate bonds, with a money market cash balance of approximately $780,000 at September 30, 2012. Assets in this brokerage account are protected by the Securities Investor Protection Corporation (“SIPC”) up to $500,000.  The Company had uninsured cash and cash equivalents of approximately $280,000 at September 30, 2012.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management has established and maintains a system of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). As of December 31, 2011, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Company’s disclosure controls and procedures.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of that date, the Company’s disclosure controls and procedures were effective.

 

Management’s Report on Internal Control Over Financial Reporting

 

Management is responsible for the fair presentation of the financial statements of the Company. Management is also responsible for establishing and maintaining a system of internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable.

 

Changes in Internal Controls over Financial Reporting

 

During the quarter ended September 30, 2012, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of management override or improper acts, if any, have been detected. Because of the inherent limitations in a control system, misstatements due to management override, error or improper acts may occur and not be detected.  Any resulting misstatement or loss may have an adverse and material effect on the Company’s business, financial condition and results of operations.

  

17
 

 

Part II. OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

From time to time, the Company may be subject to claims and litigation arising in the ordinary course of business.  The Company is not currently a party to any legal proceedings that it believes would reasonably be expected to have a material adverse effect on the Company’s business, financial condition or results of operations.

 

Item 6.  Exhibits

 

Exhibit
No.		   Description
3.1   Articles of Incorporation (1)
     
3.2   By-laws (1)
     
10.1   ClearSign Combustion Corporation Subscription Agreement, dated April 20, 2011, by and between Integrated Surgical Systems, Inc. and ClearSign Combustion Corporation (2)
     
31.1   Certification Pursuant to Exchange Act Rule 13a-14(a) of Christopher A. Marlett *
     
31.2   Certification Pursuant to Exchange Act Rule 13a-14(a) of Gary A. Schuman *
     
32.1   Certification Pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of Christopher A. Marlett  *
     
32.2   Certification Pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of Gary A. Schuman *

 

(1) Incorporated by reference to Form SB-2 filed on July 30, 1996 (file no. 333-09207)
(2) Incorporated by reference to Form 10-Q filed on May 16, 2011
* Filed herewith

  

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SIGNATURES

 

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  INTEGRATED SURGICAL SYSTEMS, INC.
   
  By: /s/ Gary A. Schuman
  Gary A. Schuman, Chief Financial Officer
   
Dated:  November 12, 2012  

  

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