Document/Exhibit Description Pages Size
1: 10KSB Annual Report -- Small Business 40 268K
2: EX-3.1 Articles of Incorporation 4 17K
3: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) 2± 9K
4: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) 2± 9K
5: EX-32.1 Certification per Sarbanes-Oxley Act (Section 906) 1 6K
6: EX-32.2 Certification per Sarbanes-Oxley Act (Section 906) 1 6K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
-----------
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2007
[ ] 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.
--------------------------------------------
(Name of small business issuer in its charter)
Delaware 68-0232575
------------------------------ ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1433 N Market Blvd, Suite 1
Sacramento, California 95834
-------------------------------------- --------
(Address of principal executive Offices) (Zip Code)
(916) 285-9943
-------------------------
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.01 par value
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The issuer's revenue for fiscal year 2007 was $1,015,668.
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant on March 24, 2008 was $1,373,100. This calculation is based upon the
price of the Common Stock of the Registrant (as quoted on the Pink Sheets) of
$0.30 per share on that date.
Transitional Small Business Disclosure Format. (Check one): Yes[ ] No[X]
Integrated Surgical Systems, Inc.
Form 10-KSB
For the fiscal year ended December 31, 2007
Table of Contents
Part I. Page
----
Item 1. Description of Business 3
Item 2. Description of Property 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote
of Security Holders 4
Part II.
Item 5. Market for Common Equity and Related
Stockholder Matters and Small Business Issuer 4
Purchases of Equity Securities
Item 6. Management's Discussion and Analysis or
Plan of Operation 6
Item 7. Financial Statements 10
Item 8. Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure 10
Item 8A. Controls and Procedures 11
Item 8B. Other Information 12
Part III.
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance With Section
16(a) of the Exchange Act 12
Item 10. Executive Compensation 16
Item 11. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters 18
Item 12. Certain Relationships and Related Transactions 18
Item 13. Exhibits 19
Item 14. Principal Accountant Fees and Services 20
Signatures 21
2
Part I
Special Note on Reverse Stock Split
Effective as of 5:00 p.m. Eastern Time on July 26, 2007, Integrated Surgical
Systems, Inc. (Company) completed a 1 for 10 reverse stock split of the issued
and outstanding common stock, par value $0.01 per share. All share numbers and
all exercise and conversion prices in this report are presented as adjusted for
the reverse stock split.
Item 1. Description of Business
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. The Company's products were
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.
On June 28, 2007, upon the sale of substantially all of its assets, the Company
became inactive. As a result, all the Company's operations through June 28, 2007
have been classified as discontinued operations. On June 28, 2007, the
stockholders approved the future liquidation of the Company if the Company is
unable to complete an acquisition or similar transaction within one year from
the sale of the assets. The Board of Directors has the authority to delay,
revoke or abandon any decision to dissolve without further stockholder action.
Description of the sales transaction
On August 4, 2006, the Company and Novatrix Biomedical, Inc., the purchaser of
the Company's assets, ("Novatrix") entered into a loan agreement (the "Loan
Agreement"). The Loan Agreement provided that upon entering into the asset
purchase agreement, Novatrix will meet its obligations to the Company by
providing the balance of any loans due to the Company to fund the Company's
working capital in equal amounts for the purpose of developing the ROBODOC and
ORTHODOC products. In addition, the Loan Agreement provided that upon the
approval by the Company's stockholders of the asset sale, all of the Company's
obligations under the Loan Agreement would be forgiven.
On August 4, 2006, the Company entered into an Asset Purchase Agreement with
Novatrix, as amended, pursuant to which it agreed to sell substantially all of
its assets to Novatrix (the "Asset Purchase Agreement"). As consideration for
the sale, Novatrix agreed to pay $4,000,000 for the assets.
On June 28, 2007, the Company completed the sale of substantially all of its
assets in exchange for $4,000,000 in cash, plus the cancellation of the note
payable in the amount of $3,700,000 and accrued interest thereon of $234,462.
The gain on sale of assets consisted of:
Proceeds
Cash $ 4,000,000
Cancellation of indebtedness 3,934,462
-----------
Total proceeds 7,934,462
Net book value of assets sold (801,007)
Employee retention incentives (486,385) (a)
Present value of net future lease payments (250,376) (b)
Legal expenses (20,557)
-----------
Gain on sale of assets (c) $ 6,376,137
===========
3
In connection with the sale:
(a) Certain employees of the Company received payments to remain with the
Company until the closing date to effect an orderly transfer of assets
to the purchaser.
(b) Novatrix, the purchaser of the Company's assets, has agreed to
sublease the Company's premises for one year. The Company has accrued
the present value of the rent for the balance of the lease term, net
of the rent to be received under the sublease. Novatrix is expected to
occupy the premises for the remainder of the lease term; however,
there is no assurance that it will do so.
(c) Before the utilization of the Company's net operating loss
carryforwards for Federal and State Purposes, the Company's income
taxes on the gain were approximately $30,000.
Employees
On December 31, 2007, the Company had no employees.
Item 2. Description of Property
The Company leases an 11,200 square foot site at 1433 N. Market Blvd., Suite 1,
Sacramento, California, 95834 with three years remaining on the lease. Novatrix,
the purchaser of Company's assets, has sub-leased and currently occupies the
aforesaid site formerly occupied by the Company. This sublease will expire on
June 30, 2008.
Item 3. Legal Proceedings
The Company is not involved in any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II.
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information for Common Stock
The Company's stock is quoted on the Pink Sheets, under the trading symbol
"ISSM." The following table sets forth the high and low bid prices, as reported
by the NASDAQ on-line web site www.NASDAQ. com, for shares of the Company's
common stock for the periods indicated. Such prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
Common Stock
(ISSM)
-----------------------
Fiscal Year Ended High Low
----------------- ---- ---
December 31, 2007
-----------------
First Quarter $0.400 $0.190
Second Quarter $0.570 $0.250
Third Quarter $0.550 $0.140
Fourth Quarter $0.400 $0.160
Fiscal Year Ended
-----------------
December 31, 2006
-----------------
First Quarter $0.100 $0.015
Second Quarter $0.090 $0.030
Third Quarter $0.250 $0.020
Fourth Quarter $0.800 $0.070
4
Holders
As of March 24, 2008, there were 275 holders of record of the common stock.
Dividends
The Company has never paid dividends on its common stock and its present policy
is to retain anticipated future earnings for use in its business.
Recent Sale of Unregistered Securities
During the twelve-month period ended December 31, 2007, the Company did not
issue any unregistered securities.
Equity Compensation Plans
The following table provides information as of the fiscal year ended December
31, 2007 with respect to the Company's compensation plans (including individual
compensation arrangements).
[Enlarge/Download Table]
EQUITY COMPENSATION PLAN INFORMATION TABLE
(a) (b) (c)
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column (a))
Equity compensation plans
approved by security holders
63,050 $3.04 120,904 (1)
Equity compensation plans not
approved by security holders 30,000 (2) $0.63 -0-
------ ----- -------
Total 93,050 $2.26 120,904
====== ===== =======
(1) Includes the Company's 1998 Stock Option Plan and its 2000 Stock Award
Plan.
(2) Consists of: (i) 30,000 warrants for consulting which expire in July 2014
and have an exercise price of $0.625 per share.
5
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis relates to the operations of Integrated
Surgical Systems, Inc. and should be read in conjunction with its financial
statements, including the notes thereto, appearing elsewhere in this report.
Overview
Integrated Surgical Systems, Inc. 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. Historically, the Company's product revenue consisted of sales of
the Company's 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. The Company developed specialized operating software for several
implant manufacturing companies. These implant manufacturers contracted with the
Company for the development of software for particular lines of new prosthesis
to be used with the ROBODOC System.
Although the Company did not receive clearance to market the ROBODOC(R) System
(ROBODOC) in the U.S., the Company was permitted to export the system provided
certain requirements were 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 FDA export approval. The
Company sold its robotic systems to international distributors, who in turn
resold the product in their respective territories. The Company's international
distributors were KTEC in Japan, ROCOM Frontier in Korea and Paramount Impex in
India.
On June 28, 2007, the Company completed the sale of substantially all of
its assets in exchange for $4,000,000 in cash, plus the cancellation of the note
payable in the amount of $3,700,000 and accrued interest thereon of $234,462.
After the sale of substantially all of its assets, the Company became inactive.
It is no longer engaged in any business activities related to its former
business as described above.
Results of Operations (2007 vs. 2006)
For the year ended December 31, 2007, net income from discontinued operations
was $5,072,000 or $1.11 basic earnings per share and $0.96 diluted earnings per
share, and net loss from continuing operations was $146,000 or $0.03 loss per
basic and $0.03 loss per diluted loss per share. The total net income for the
year ended December 31, 2007, was $4,927,000 or $1.08 income per basic share and
$0.93 income per diluted share. Total net income for the year ended December 31,
2006, was $1,588,000 or $0.35 income per basic share and $0.25 income per
diluted share and consisted entirely of discontinued operations.
Discontinued operations
Net revenue included in discontinued operations
Net revenue from discontinued operations was $1,016,000 for the year ended
December 31, 2007 was down 61% when compared to $2,594,000 for the year ended
December 31, 2006. During the first six months of the fiscal year 2007 before
the sale of assets the Company completed and sold one module upgrade for
$100,000 for a ROBODOC as compared to the two ROBODOC Systems sales in fiscal
year 2006 for $2,070,000. Revenue from service contracts, parts and consumables
also decreased $394,000 from $524,000 during the winding down of our operations
as well as the recognition of revenue on two development projects which totaled
$786,000.
The decrease in revenue of $1,578,000 in 2007 from 2006 is presented in the
following table:
6
2007 2006 Increase (Decrease)
-------------------------- -------------------------- --------------------------
Units Units Units
Sold Revenues Sold Revenues Sold Revenues
----------- ----------- ----------- ----------- ----------- ----------
ROBODOC Systems -- $ -- 2 $ 2,070,000 (2) $(2,070,000)
ROBODOC Modules 1 100,000 -- -- (1) 100,000
----------- ----------- ----------- ----------- ----------- -----------
Total Systems and Modules 1 $ 100,000 2 $ 2,070,000 (1) $(1,970,000)
=========== =========== =========== ===========
Service contracts, parts
and consumables 129,585 523,585 (394,000)
Development revenues 786,083 -- 786,083
----------- ----------- ----------
Total Revenues $ 1,015,668 $ 2,593,585 $(1,577,917)
=========== =========== ===========
Cost of revenue from discontinued operations
Cost of revenue of $352,000 in 2007 decreased 37% when compared to $555,000 in
2006; however, the costs increased as a percent of revenue to 35% in 2007 when
compared to 21% of revenue in 2006. This increase in cost as a percentage of
revenue is directly related to a larger portion of fixed cost to variable cost
than was present in 2006 and the lack of revenue in 2007. In 2007, we had little
or no variable production cost while the plant overhead remained constant.
Gross margin from discontinued operations
Gross margin of $663,000 in 2007 decreased 67% when compared to $2,038,000 in
2006 and was 65% of revenue compared to 79% of revenue in 2006. This decrease in
gross margin as a percentage of revenues is directly related to the change in
the mix of revenue and the mix of cost of goods sold which had a much higher
fixed cost ratio than the prior year.
Operating gains/expenses from discontinued operations
The Company had discontinued operating gain of $4,437,000 in 2007 compared to
discontinued operating expense of $441,000 in 2006. In 2007 operating gains were
made up of selling, general and administrative expenses of $828,000, research
and development of $677,000 offset by the gain on sale of assets of $6,376,176.
Selling, general and administrative expenses of $828,000 decreased 44% in 2007
when compared to $1,490,000 in 2006. Selling, general and administrative
expenses in 2007 covered operations through June 28, 2007 and included $484,000
in retention bonuses to our employees. Without these bonuses, selling, general
and administrative expense would only have been $344,000. As of June 28, 2007,
the Company sold substantially all of its assets and all its employees were
terminated.
Research and development expenses of $677,000 for the period of January 1, 2007
through June 28, 2007 increased $233,000 from the full twelve-month period of
January 1, 2006 through December 31, 2006.
7
The gain on sale of assets was calculated as follows:
Cash $ 4,000,000
Cancellation of indebtedness 3,934,462
-----------
Total proceeds 7,934,462
Net book value of assets sold (801,007)
Employee retention incentives (486,385)
Present value of net future lease payments (250,376)
Legal expenses (20,557)
-----------
Gain on sale of assets $ 6,376,137
===========
In June 2006, the Company was required by the Loan Agreement to reach a
settlement with at least 80% of its outstanding creditors in exchange for 17.6
cents for each dollar owed. During the third fiscal quarter of 2006, the Company
reached agreements with 98% of its creditors, settled $1,669,000 of outstanding
debt and recorded a gain on forgiveness of debt of $1,493,000.
Other income and expense from discontinued operations - net
The Company, through June 28, 2007, recorded net other expenses of $116,000, of
which $110,000 was interest expense. In 2006, other expense was primarily
$104,000 in interest expense from the Company's note outstanding, partially
offset by $95,000 of miscellaneous income.
Continuing operations
For the year ended December 31, 2007, we had a net loss from continuing
operations of $146,000 which consisted of $199,000 of selling, general and
administrative expenses, partially offset by $54,000 interest income. Expenses
were made up of the following approximate expenses:
Consulting $ 56,000
Legal 67,000
Insurance 26,000
Directors expense 32,000
Miscellaneous 18,000
------------
$ 199,000
============
Liquidity
We believe that existing cash of $3.1 million as of December 31, 2007 will
provide us with sufficient working capital for us to meet our operating plan for
fiscal year 2008. The Board has retained both of its outside Directors, its
Chief Financial Officer and its Secretary as part time consultants to assist
with our continuing obligations under the Federal securities laws and to assist
with our plan to evaluate various merger, acquisition or strategic alliance
opportunities. We anticipate that it will take up to twelve months to conclude
this process. There is no assurance that such opportunities will be available,
or if available, on favorable terms. If we are unsuccessful with respect to a
suitable opportunity within twelve months of the closing of the Novatrix
transaction, we may liquidate the Company and distribute all our remaining
assets, primarily cash, to our stockholders or alternatively, in the Board's
discretion, continue to seek strategic opportunities and delay or abandon the
liquidation proposal.
Cash used in continuing operating activities for the year ended December 31,
2007 was $357,000 which primarily consisted of an operating loss of $146,000 and
an increase in other current assets of $51,000 (prepaid Director and Officers
insurance), partially offset by non cash amortization of deferred compensation
and stock based compensation of $21,000 and a decrease in accrued liabilities of
$182,000.
8
The components of the gain are as follows:
Proceeds
Cash $ 4,000,000
Cancellation of indebtedness 3,934,462
-----------
Total proceeds 7,934,462
Net book value of assets sold (801,007)
Employee retention incentives (486,385)
Present value of net future lease payments (250,376)
Legal expenses (20,557)
-----------
Gain on sale of assets $ 6,376,137
===========
The increase in cash from discontinued financing activities of $1,000,000
resulted from the advance received from Novatrix.
The Company has the following contractual obligations and commercial commitments
at December 31, 2007:
Total >1 year 1-3 years >3 years
----- -------- --------- --------
Facility operating leases $293,700 $92,475 $193,050 $8,175
Capital Resources
On March 24, 2008, there were 4.6 million shares of the Company's common stock
outstanding, as listed on the Pink Sheets at $0.30 a share, giving the Company a
market capitalization of $1.4 million. Securities traded at less than $5.00 and
9
not traded on a national securities exchange or quoted on Nasdaq are called
"penny stocks". The Securities and Exchange Commission rules require brokers to
provide specified information to purchasers of penny stocks, and these
disclosure requirements and the requirement that brokers must make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction in
advance may have the effect of reducing trading activity in the common stock and
making it more difficult for investors to sell the shares of the Company's
stock.
In addition, the liquidity of our Common Stock may be adversely affected by the
reduced number of shares outstanding after the reverse stock split, and the
reverse stock split increased the number of stockholders who own "odd lots,"
which consist of blocks of fewer than 100 shares. Stockholders who hold odd lots
may be required to pay higher brokerage commissions when they sell their shares
and may have greater difficulty in making sales.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of the financial condition and results of
operations is based upon the Company's audited financial statements included
elsewhere in this Form 10-KSB and have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
Company believes the following critical accounting policies affect the Company's
more significant judgments and estimates used in the preparation of the
financial statements:
The Company has discussed its critical accounting policies with the Board.
Actual results may differ from these estimates under different assumptions or
conditions.
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.Significant estimates made by management had
included revenue recognition, allowances for inventory and warranty liability.
Financial Instruments
The Company considers the carrying amounts of financial instruments, including
cash, accounts payable and accrued expenses to approximate their fair values
because of their relatively short maturities.
Revenue Recognition
Revenue had been recognized when evidence of an arrangement exists, delivery has
occurred or services have been rendered, the price is fixed or determinable and
collectability was reasonably assured.
Revenue for product sales was generally recognized upon completion of training
and installation of the equipment at the end-user's site, except when the sales
contract requires formal customer acceptance. Equipment sales with contractual
customer acceptance provisions were recognized as revenue upon written
notification of customer acceptance, which generally occurred after the
completion of training and installation. Revenue related to maintenance and
warranty service/ contracts were recognized ratably over the duration of the
contracts.
Warranty/Service Contracts
The Company had offered a one-year warranty for parts and labor on all ROBODOC
Systems commencing upon the completion of training and installation or customer
acceptance. Generally, the Company's customers purchased a service contract,
which included warranty coverage (parts and labor), unspecified product
maintenance updates, customer support services and various consumables required
during surgical procedures. Revenue from service contracts had been initially
deferred and then recognized ratably over the term of the agreements. Annually,
service contracts were renewable at the customers' option. The warranty
obligations were 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 were required. The
Company periodically assessed the adequacy of its recorded warranty liabilities
and adjusts the amounts as necessary.
When elements of a sale, such as products, services, etc. were combined in a
single arrangement, or in related arrangements with the same customer, the
Company had allocated revenue to each element based on its relative fair value,
provided that such element met the criteria for treatment as a separate unit of
accounting. The price charged when the element was sold separately generally
determines fair value. In the absence of fair value for an undelivered element,
the arrangement had been accounted for as a single unit of accounting, resulting
in a delay of revenue recognition for the delivered elements until the
undelivered elements are fulfilled.
10
The Company had developed specialized operating software for several implant
manufacturing companies. These implant manufacturers' contracted with the
Company for the development of particular lines of new prosthesis software to be
used with the ROBODOC System. These contracts had been accounted for using
either the completed contract or percentage-of-completion method. Product
development revenues for contracts recorded using the completed contract method
were recognized when development is complete under the terms of the contract,
and the customer has accepted the product. The direct cost, primarily labor, of
product development contracts were deferred until the development revenue is
recognized. Losses on contracts were accrued in the period that such losses were
determined under the percentage of completion method. Under the
percentage-of-completion method, revenue was recognized as work is performed,
based on the relationship between actual costs incurred and total estimated
costs at completion. Revenues were adjusted prospectively for revisions in
estimated total contract costs when identified. Losses, if any, were recognized
in full when identified.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 157 "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair
value, establishes a framework for measuring fair value, and enhances
disclosures about fair value measurements. SFAS 157 applies to other accounting
pronouncements that require the use of fair value measurements. SFAS 157 is
effective for interim and annual financial statements issued for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact
of adopting SFAS 157 on its financial condition, results of operations and cash
flows.
In February 2007, the FASB issued SFAS 159 "The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of FASB Statement 115"
("SFAS 159"). SFAS 159 permits an entity to elect to measure various financial
instruments and certain other items at fair value. It provides entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 requires that a business entity report
unrealized gains and losses, on items for which the fair value option has been
elected, in earnings at each subsequent reporting date. SFAS 159 is effective as
of the beginning of the first annual period beginning after November 15, 2007.
The Company is currently assessing the impact of adopting SFAS 159 on its
financial condition, results of operations and cash flows.
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141(R), "Business Combinations" ("SFAS 141R"), which replaces SFAS No. 141,
"Business Combinations." SFAS 141R establishes principles and requirements for
determining how an enterprise recognizes and measures the fair value of certain
assets and liabilities acquired in a business combination, including
noncontrolling interests, contingent consideration, and certain acquired
contingencies. SFAS 141R also requires acquisition-related transaction expenses
and restructuring costs be expensed as incurred rather than capitalized as a
component of the business combination. SFAS 141R will be applicable
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. SFAS 141R would have an impact on accounting for any
businesses acquired after the effective date of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary (previously referred to as minority interests). SFAS
160 also requires that a retained noncontrolling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. Upon
adoption of SFAS 160, the Company would be required to report any noncontrolling
interests as a separate component of stockholders' equity. The Company would
also be required to present any net income allocable to noncontrolling interests
and net income attributable to stockholders of the Company separately in its
consolidated statements of income. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. SFAS 160 requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests. All other requirements of SFAS 160
shall be applied prospectively. SFAS 160 would have an impact on the
presentation and disclosure of the noncontrolling interests of any non
wholly-owned businesses acquired in the future.
Management does not believe that any other recently issued, not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying financial statements.
Risk Factors and Cautionary Statement Regarding Forward-Looking Information
The Company cautions that this Form 10-KSB contains "forward-looking
statements," within the meaning of the Private Securities Litigation Reform Act
of 1995, that involve risks and uncertainties. The Company's plans, strategies,
objectives, expectations and intentions are subject to change at any time at the
discretion of management and the Board of Directors. The plans and results of
operations will be affected by the Company's ability to manage any growth and
working capital and the ability to finance future operations, none of which is
assured. Certain risk factors are discussed elsewhere in this Form 10-KSB and
also from time to time in the Company's filings with the Securities and Exchange
Commission. The Company undertakes no obligation to update such factors in the
future.
Item 7. Financial Statements
The financial statements follow Item 14 of this report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
11
(a) Resignation of Independent Registered Public Accounting Firm
On May 7, 2007, the Registrant received a letter from Most & Company, LLP
("Mostco") stating that Mostco has combined its practice into Raich Ende Malter
& Co. LLP ("Raich Ende"). Mostco has therefore effectively resigned as the
independent certified public accounting firm for the Registrant.
Mostco's audit reports on the Registrant's financial statements for the past two
years did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles, other than an explanatory paragraph as to the Registrant's ability
to continue as a going concern.
There have not been any disagreements between Mostco and the Registrant on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure. The Registrant has requested that Mostco furnish a
letter to the Securities and Exchange Commission stating whether or not Mostco
agrees with the above statements. A copy of Mostco's letter, dated May 7, 2007,
was filed as an exhibit to the Form 8-K, filed on May 10, 2007.
(b) Engagement of New Independent Registered Public Accounting Firm
Effective May 8, 2007, Raich Ende was appointed as the Company's independent
certified public accounting firm to audit the Registrant's financial statements.
Raich Ende was not consulted on any matter described in Item 304(a)(2) of
Regulation S-B prior to May 7, 2007.
Item 8A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has established and maintains a system of disclosure controls and
procedures designed to provide reasonable assurance that information required to
be disclosed by us in the reports filed or submitted by us under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and include controls and procedures designed to provide reasonable
assurance that information required to be disclosed by us in those reports is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer (our principal executive officer and
principal financial officer, respectively), as appropriate to allow timely
decisions regarding required disclosure. As of December 31, 2007, our
management, including our Chief Executive Officer and our Chief Financial
Officer, conducted an evaluation of our disclosure controls and procedures.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective to
provide reasonable assurance that the information required to be disclosed by us
in the reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms.
All disclosure control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
Changes in Internal Controls over Financial Reporting
We have identified certain matters that constitute material weaknesses (as
defined under the Public Company Accounting Oversight Board Auditing Standard
No. 2) in our internal controls over financial reporting. The material
weaknesses that we have identified relate to the fact that our overall
financial reporting structure, internal accounting information systems and
current staffing levels are not sufficient to support our financial reporting
requirements. These deficiencies, which we are working to remedy, are
principally attributable to our lack of staffing subsequent to the sale of
substantially all of our assets in June 2007.
Two deficiencies identified by our auditors in early 2007 related to weaknesses
in inventory accounting controls, and weakness in the general ledger due to an
antiquated software system. The inventory control is no longer relevant because
the inventory has been sold, and the weakness in the general ledger has been
remedied because the company is switching over to a modern accounting system in
the form of QuickBooks.
12
Management's Report on Internal Control Over Financial Reporting
Management is responsible for the fair presentation of the financial statements
of Integrated Surgical Systems, Inc. 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 Securities
Exchange Act of 1934, as amended. 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.
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. Further, the benefits of controls must be considered relative to their
cost. 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. These
inherent limitations include the realities that judgments in decision making can
be faulty, and that breakdowns can occur because of simple errors or mistakes.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people or by management override of the
control. The design of any system controls is also based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Because of the inherent limitations in a cost-effective
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 our business, financial condition and results of
operations.
Management conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control-
Integrated Framework, management concluded that our internal control over
financial reporting was partially ineffective as of December 31, 2007 for the
reasons set forth above in "Changes in Internal Controls over Financial
Reporting."
Item 8B. Other Information
None
Part III
Item 9. Directors, Executive Officers, Promoters, Control Persons;
and Corporate Governance; Compliance with Section 16(a)
of the Exchange Act
The Company's executive officers were terminated on June 28, 2007 when the
Company sold substantially all of its assets and ceased operations.
The following is a listing of officers and Directors of the Company:
---------------------------- ------------ ------------------------------------------------- ---------------------
Name Age at Position with the Company Period
12-31-2007
---------------------------- ------------ ------------------------------------------------- ---------------------
Current Directors & Officers
----------------------------
------------ ------------------------------------------------- ---------------------
Peter B. Mills 52 Director Sep 2006 - Present
Chief Executive Officer, President, Chairman of Jul 2007 - Present
the Board
--------------------------- ------------ ------------------------------------------------- ---------------------
Michael J. Tomczak 52 Director Sep 2006 - Present
--------------------------- ------------ ------------------------------------------------- ---------------------
Charles J. Novak 60 CFO, VP of Finance & Admin., Secretary, VP of Jul 2002 - Sep 2006
Finance & Administration Oct 2006 - Jun 2007
Secretary Jul 2007 - Present
--------------------------- ------------ ------------------------------------------------- ---------------------
David H. Adams 63 Controller Apr 2003 - Sep 2006
CFO and Chief Accounting Officer Oct 2006 - Jun 2007
CFO Jul 2007 - Present
--------------------------- ------------ ------------------------------------------------- ---------------------
Former Officers &
Directors
--------------------------- ------------ ------------------------------------------------- ---------------------
Ramesh C. Trivedi 68 CEO, President, Chairman of the Board Nov 1995 - Jul 2007
--------------------------- ------------ ------------------------------------------------- ---------------------
Leland W. Witherspoon 56 CTO, VP of Research & Development Apr 1997 - Jun 2007
--------------------------- ------------ ------------------------------------------------- ---------------------
13
Biographical Information on Officers, Directors and Control Persons
Peter B. Mills was appointed to serve as a Director of the Company in September
2006 and President, Chief Executive Officer, and Chairman of the Board in July
2007 Mr. Mills is Vice President of Sales at Speck Design, a leading product
design firm with offices in Palo Alto, California and Shanghai, China. He has
spent 15 years selling sophisticated industrial robotics and automation systems
with Adept Technology, the leading U.S. manufacturer of industrial robots, and
Hewlett-Packard Company. He has also served as the Vice President of Sales at
Softchain, an enterprise supply chain software company acquired in 2001. Mr.
Mills has significant experience with respect to the design and manufacturing
needs of a variety of industries including medical devices, disk drives,
consumer products, food packaging, printers, computers and networking, and
semiconductor equipment. He has extensive international business experience in
Japan, Singapore, and Korea. Mr. Mills earned an MBA from Harvard Business
School and an A.B. in engineering, cum laude, from Dartmouth College.
Michael J. Tomczak was appointed to serve as a Director of the Company in
September 2006. Mr. Tomczak is currently a partner with Tomczak & Co. CPA LLP,
which primarily provides consulting and bookkeeping services to small
businesses. He served as Vice President, Chief Financial Officer and Secretary
for the Company from 1991 until 1997. Mr. Tomczak served as Retail Technology
International, Inc.'s (RTI) Chief Executive Officer and President from 2002
until its sale to Island Pacific, Inc in 2004 and was co-owner during that same
time period. RTI was a developer of point-of-sale software and Island Pacific is
a developer of retail management software. Mr. Tomczak was also Chairman of
RTI's Board of Directors during that same period and had previously served as
RTI's Chief Financial Officer from 2001. Upon the sale of RTI to Island Pacific,
he became its President and Chief Operating Officer until 2005. Mr. Tomczak was
a member of Island Pacific's Board of Directors from 2004 until 2005. Prior to
joining the Company, Mr. Tomczak served as Director of Ernst & Young's
Sacramento office's Entrepreneurial Services Group. Mr. Tomczak holds a Bachelor
of Business Administration degree from Western Michigan University and is a
Certified Public Accountant.
Ramesh C. Trivedi had been the Company's President and Chief Executive Officer
and Chairman of the Board from November 1995 through July 2007. Prior to that
time, Dr. Trivedi was a principal of California Biomedical Consultants, an
international consulting firm, and he served as the President and Chief
Executive Officer of DigiRad Corporation, a medical imaging company. Dr. Trivedi
received his Ph.D. in chemical engineering from Lehigh University, and holds an
MBA from Pepperdine University.
Charles J. Novak had been the Company's Chief Financial Officer, Secretary and
Vice President of finance and Administration from July 2002 through September
2006, the Company's Secretary and Vice President of Finance and Administration
from October 2006 through June 2007, and the Company's Consulting Secretary from
July 2007 to the present. From September 2001 to December 2001, Mr. Novak was
the Vice President of Finance and Administration and Chief Financial Officer for
Realty Plus Online, a real estate software transaction system company. From
January 2001 to September 2001, he was the Vice President of Finance and
Administration and Chief Financial Officer for WebRaiser Technologies, Inc., an
14
integration and professional services firm. From February 1999 to January 2001,
Mr. Novak was the Director of Operations for MRI Sierra International Group,
Inc., an executive search firm. From September 1995 to February 1999, he was the
assistant corporate controller for USCS International, Inc., a supplier of
customer management software and open billing solutions. Prior to that, Mr.
Novak served in executive management positions for Describe, Inc. and HealthTek,
Inc. and he served in various management positions with the Hewlett-Packard
Company. Mr. Novak earned his BS in Accounting from Lewis University in
Lockport, Illinois. Since July 2007, Mr. Novak has been acting as the Company's
Secretary on the consulting basis.
David H. Adams had been the Company's Controller from April 2003 through
September 2006,the Company's Chief Financial Officer from October 2006 to the
present. From 2003 to 2004 Mr. Adams was Chief Financial Officer of Velocity
Mobile a provider of cellular phone equipment and services. From 2000 to 2003
Mr. Adams was Chief Financial Officer of Unify Corporation, a software
development company with international subsidiaries. Prior to that Mr. Adams was
Chief Financial Officer of Commerce Security Bank. Mr. Adams earned his BA in
Accounting from Humboldt State University. Since July 2007, Mr. Adams has been
acting as the CFO of the Company on a consulting basis.
Leland W. Witherspoon had been the Company's Chief Technology Officer and Vice
President of Research & Development from April 1997 through June 2007. From 1992
to 1997, Mr. Witherspoon was Director of product research and development for
Sorin Biomedicals, Inc., a developer and manufacturer of cardiopulmonary and
cardiovascular hardware and software products. Prior to that time, he served in
various technical and management positions for Pfizer/Shiley, Xerox Medical
Systems and IBM. Mr. Witherspoon received his Bachelor of Science from
Rensselaer Polytechnic Institute.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Officers, Directors, and persons who own more than ten percent of a registered
class of the Company's equity securities within specified time periods to file
certain reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, Directors and ten- percent stockholders are
required by regulation to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on a review of copies of the reports the Company
received and written representations from persons concerning the necessity to
file these reports, the Company is not aware of any failure to file reports or
report transactions in a timely manner during the fiscal year ended December 31,
2007.
Committees of the Board Of Directors
Prior to June 2, 2005, the Company had an audit committee and a compensation
committee. From June 3, 2005 through September 19, 2006, the Company functioned
with only one Director and had no committees. Since September 2006, the Company
has appointed two new Directors and has no committees.
Terms of Office
The Directors of the Company are appointed for a one-year term to hold office
until the next annual meeting of stockholders of the Company and until their
successors have been duly elected and qualified, unless removed from office in
accordance with the Company's by-laws. The Board of Directors appoints the
officers at its annual meeting immediately following the shareholders annual
meeting and such officers hold office until removed from office by the Board of
Directors.
Code of Ethics
A Code of Ethics that applies to the Company executive officers as well as to
all employees was approved and adopted by the Board of Directors on April 8,
2004 and it is attached to the Company's 10-KSB for the fiscal year ended
December 31, 2003. Copies of the Code of Ethics may be obtained free of charge
by written request to Integrated Surgical Systems, Inc. attention Chief
Financial Officer, 1433 N. Market Blvd, Suite 1, Sacramento, CA., 95834.
15
Item 10 Executive Compensation
The following table sets forth, for the fiscal years ended December 31, 2007 and
2006, the compensation awarded to, earned by or paid to the Company's Chief
Executive Officer and each of the other executive officers whose total salary
and bonus exceeded $100,000 for the year ended December 31, 2007 (collectively,
the "Named Executive Officers").
Summary Compensation Table
Annual Compensation
-------------------
Non-Equity
Name and Option Incentive Plan All Other
Principal Position Year Salary (1) Awards Compensation Compensation (2)
------------------ ---- ---------- ------ ------------ ----------------
Ramesh C. Trivedi 2007 $165,416 0 $200,000 $-0-
President and Chief 2006 241,060 32,200 -0- 11,774
Executive Officer
Leland W. Witherspoon 2007 85,409 0 81,300 -0-
Vice President, Research 2006 142,828 22,540 -0- -0-
and Engineering
Charles J. Novak 2007 86,257 12,060 62,500 -0-
Vice President, Finance & 2006 99,251 0 -0- -0-
Administration
David H. Adams 2007 83,292 2,500 20,000 -0-
Chief Financial Officer 2006 89,835 3,220 -0- -0-
(1) The 2007 salary information represents a partial year as all of the
employees were terminated June 30, 2007.
(2) Represents expense allowances for Dr. Trivedi as approved by the Board of
Directors.
Employment Agreements
There are no current employment agreements.
16
Outstanding Equity Awards at Fiscal Year-End
The following table provides information concerning shares of our common stock
covered by exercisable and unexercisable options held by the Named Executive
Officers on December 31, 2007:
Equity
Incentive
Plan
Awards:
Number of Number of Number of
Securities Securities Securities
Underlying Underlying Underlying
Unexercised Unexercised Unexercised Option Option
Options Options Unearned Exercise Expiration
Options Price Date
(#) (#) (#) ($)
Name Exercisable Unexercisable
------------------- ------------ --------------- ------------ ---------- ------------
Peter B. Mills 3,000 none 3,000 $0.40 11/01/2011
------------------- ------------ --------------- ------------ ---------- ------------
Mike J. Tomczak 3,000 none 3,000 $0.40 11/01/2011
------------------- ------------ --------------- ------------ ---------- ------------
Peter B. Mills none 25,000 (a) 25,000 $0.3275 8/13/2012
------------------- ------------ --------------- ------------ ---------- ------------
Mike J. Tomczak none 25,000 (a) 25,000 $0.3275 8/13/2012
------------------- ------------ --------------- ------------ ---------- ------------
(a) Become fully vested on 8/13/2008
Director Compensation
The Company compensated its non-employee Directors $1,875 per quarter for the
first and second quarters of 2007 and $6,250 for the third and forth quarter of
2007 for serving on the Company's Board of Directors and periodically grants
options to purchase shares of the Company's common stock.
17
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information concerning the beneficial
ownership of the Company's common stock as of December 31, 2007 by (i) each
person known by the Company to be the owner of more than 5% of the outstanding
common stock, (ii) each Director, (iii) each executive officer named in the
Summary Compensation Table above and (iv) all Directors and officers as a group.
Percentage of
Amount and Nature Common Stock
of Beneficial Beneficially
Name (3) Ownership (1) Owned (2)
-------- ----------------- -------------
Michael J. Tomczak 4,500 (4) *
Peter B. Mills 3,000 (5) *
All Directors and officers as a group (2 persons) 7,500 *
--------------------------------------------------------------------------------------------------
* Less than one percent.
(1) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated, subject to community property
laws, where applicable. Includes any securities that such person has the
right to acquire within 60 days pursuant to options, warrants, conversion
privileges or other rights.
(2) Based on 4,578,500 shares of common stock outstanding as of December 31,
2007.
(3) Address is c/o Integrated Surgical Systems, Inc., 1433 N. Market Blvd.,
Suite 1, Sacramento, California 95834.
(4) Includes 3,000 shares that Mr. Tomczak may acquire upon exercise of stock
options exercisable within 60 days at an exercise price of $0.40 per share.
(5) Includes 3,000 shares that Mr. Mills may acquire upon exercise of stock
options exercisable within 60 days at an exercise price of $0.40 per share.
Securities Authorized for Issuance Under Equity Incentive Plans
The Company has provided in the "Equity Compensation Plans" section of Item 5 of
this Annual Report on Form 10-KSB certain information with respect to securities
authorized for issuance under the Company's equity plans.
Item 12. Certain Relationships and Related Transactions
See also "Item 5 - Market for Common Equity and Related Stockholder Matters -
Recent Sale of Unregistered Securities" and "Item 10 - Executive Compensation -
Employment Agreements."
Item 13. Exhibits
Exhibit Description
------- -----------
3.1 Composite of Restated Certificate of Incorporation of the Registrant, as amended. *
3.2 Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant,
dated July 24, 2007. (8)
3.3 By-laws of the Registrant, as amended. (1)
3.4 Certificate of Designations for Series G Convertible Preferred Stock. (3)
18
4.1 Form of warrant issued to the underwriters for the Registrant's initial public offering in November
1996. (2)
4.2 Form of Warrant Agreement relating to the Registrant's Redeemable Common Stock Purchase Warrants. (2)
4.3 Specimen Common Stock Certificate. (2)
4.4 Specimen Warrant Certificate (included as Exhibit A to Exhibit 4.2 herein). (2)
4.5 1998 Stock Option Plan. (5)
4.6 Employee Stock Purchase Plan. (5)
4.7 Common Stock Purchase Warrant issued by the Registrant to International Business Machines Corporation
("IBM"), dated February 6, 1991, as amended (included as Exhibit J to Exhibit 10.5 herein). (2)
4.8 Stockholders' Agreement between the Founders of the Registrant and IBM, dated February 6, 1991 as
amended. (2)
4.9 Common Stock Purchase Warrant issued by the Registrant to IBM, dated December 21, 1995 (included as
Exhibit I to Exhibit 10.5 herein). (2)
4.12 Registration Rights Agreement among the Registrant, IBM, John N, Kapoor Trust ("Kapoor"), EJ Financial
Investments V, L.P. ("EJ Financial"), Keystone, Sutter Health and Sutter Health VP, dated as of December
21, 1995 (included as Exhibit G to Exhibit 10.5 herein). (2)
4.23 Form of warrant issued to purchasers of Series G Convertible Preferred Stock. (3)
4.31 Form of Registration Rights Agreement for Series G Convertible Preferred Stock financing. (3)
4.37 2000 Stock Award Plan
4.38 2000 Long Term Performance Plan.
10.1 Loan and Warrant Purchase Agreement between the Registrant and IBM, dated as of February 6, 1991. (2)
10.2 License Agreement between the Registrant and IBM, dated February 4, 1991. (2)
10.3 Investors Agreement among the Registrant, IBM, Wendy Shelton-Paul Trust, William Bargar, Brent
Mittelstadt, Peter Kazanzides, Kapoor, Sutter Health, Sutter Health VP, and EJ Financial, dated as of
December 21, 1995. (2)
10.4 Employment Agreement between the Registrant and Ramesh Trivedi, dated December 8, 1995. (2)
10.5 License Agreement between the Registrant and IBM, dated February 4, 1991. (2)
10.6 Preferred Stock Purchase Agreement for Series G Convertible Preferred Stock. (3)
10.7 Asset Purchase Agreement by and between Novatrix Biomedical, Inc. and the Registrant, dated August 4,
2006.(7)
10.8 Loan Agreement and Secured Promissory Note by and between Novatrix Biomedical, Inc. and the Registrant,
dated August 4, 2006. (7)
10.9 Security Agreement by and between Novatrix Biomedical, Inc. and the Registrant, dated August 4, 2006.
(7)
14.1 Code of Ethics (6)
16.1 Letter on Change in Certifying Accountant, dated as of May 8, 2007 (9)
31.1 Certification Pursuant to Exchange Act Rule 13a-14(a) of Peter Mills *
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 Peter Mills*
32.2 Certification Pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of David Adams*
-----------------------------------------------------------------------------------------------------------------------
* Filed Herewith
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2002.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-48040) declared effective on October 31,
2000.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-40710), declared effective on July 28, 2000.
19
(4) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-9207), declared effective on November 20,
1996.
(5) Incorporated by reference to the Registrant's Annual Report on Form 10- KSB
for the fiscal year ended December 31, 1997.
(6) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2003.
(7) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed on July 5, 2007.
(8) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed on July 26, 2007.
(9) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed on May 10, 2007.
Item 14. Principal Accountant Fees and Services
Audit Fees
All audit related fees are approved by the Board of Directors. The Board of
Directors has considered whether the provisions of such services, including
non-audit services, by the Company's Independent Registered Public Accounting
Firm is compatible with maintaining their independence and has concluded that it
is.
The following table sets forth the Company's aggregate fees billed by its
Independent Registered Public Accounting Firm for each of the last two fiscal
years for the categories of services indicated.
Category 2007 2006
-------- ---- ----
Audit Fees (1) $55,188 $ 65,000
Audited Related Fees(2) None None
Tax fees (3) 16,000 15,000
All Other Fees None None
------- --------
$71,188 $ 80,000
======= ========
(1) Consists of the Company estimates of the aggregate fees billed by its
Independent Registered Public Accounting Firm for professional services
rendered in connection with the audit of the Company's annual financial
statements on Form 10-KSB and the review of the Company's quarterly
financial statements on Form 10-QSB and services that are normally provided
by the Independent Registered Public Accounting Firm in connection with the
statutory and regulatory filings or engagements.
(2) Audit services in connection with accounting consultations and internal
control reviews.
(3) Consists of professional services rendered for tax compliance, tax advice,
and tax planning.
20
Signatures
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/ PETER B. MILLS
-------------------------------------
Peter B. Mills, President
(Principal Executive Officer)
By: /s/ DAVID H. ADAMS
-------------------------------------
David H. Adams
(Principal Financial and
Accounting Officer)
Dated: April 2, 2008
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant on April 2,
2008 in the capacities indicated.
Signature Title
/s/ PETER B. MILLS Chief Executive Officer, President and Director
------------------------- (Principal Executive Officer)
Peter B. Mills
/s/ DAVID H. ADAMS Chief Financial Officer
------------------------- (Principal Financial and Accounting Officer)
David H. Adams
/s/ MICHAEL J. TOMCZAK Director
-------------------------
Michael J. Tomczak
21
Index to Financial Statements
PAGE
Reports of Independent Registered Public Accounting Firms F - 2
Balance Sheet at December 31, 2007 F - 4
Statement of Operations for the Years Ended
December 31, 2007 and 2006 F - 5
Statement of Convertible Preferred Stock and Stockholders'
Equity for the Years Ended December 31, 2007 and 2006 F - 6
Statement of Cash Flows for the Years Ended December 31, 2007
and 2006 F - 7
Notes to Financial Statements F - 8
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Integrated Surgical Systems, Inc.
We have audited the accompanying balance sheet of Integrated Surgical
Systems, Inc. as of December 31, 2007 and the related statements of operations,
convertible preferred stock and stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Integrated Surgical Systems,
Inc. as of December 31, 2007, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ Raich Ende Malter & Co. LLP
-------------------------------
Raich Ende Malter & Co. LLP
New York, New York
March 31, 2008
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Integrated Surgical Systems, Inc.
We have audited the accompanying statements of operations, convertible
preferred stock and stockholders' deficit and cash flows of Integrated Surgical
Systems, Inc. for the year ended December 31, 2006. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of its operations and cash flows of
Integrated Surgical Systems, Inc. for the year ended December 31, 2006, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Most & Company LLP
----------------------
Most & Company, LLP
New York, New York
February 9, 2007
F - 3
Integrated Surgical Systems, Inc.
Balance Sheet
December 31, 2007
Assets
Current assets:
Cash $ 3,099,199
Other current assets 51,333
------------
Total current assets
3,150,532
Deferred offering costs 25,000
------------
Total assets $ 3,175,532
============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 4,951
Accrued liabilities 10,782
Income taxes payable 31,482
Deferred rent - current portion 41,966
------------
Total current liabilities 89,181
Deferred rent - noncurrent 220,824
------------
Total liabilities 310,005
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 478,501
------------
Stockholders' equity:
Common stock, $0.01 par value, 100,000,000 shares authorized;
4,578,500 shares issued and outstanding 45,785
Additional paid-in capital 62,427,375
Deferred Compensation (7,710)
Accumulated deficit (59,768,419)
------------
Total stockholders' equity 2,697,031
------------
Total liabilities and stockholders' equity $ 3,175,532
============
See accompanying notes to financial statements.
F - 4
Integrated Surgical Systems, Inc.
Statement of Operations
Years Ended December 31,
2007 2006
----------- -----------
Continuing operations
General and administrative expenses $ (199,300) $ --
Interest income, net 53,555 --
----------- -----------
Loss from continuing operation (145,745) --
----------- -----------
Discontinued Operations:
Income from discontinued operations including
gain of $6,376,137 on sale of assets 5,102,301 --
Income tax expense (30,000)
----------- -----------
Income from discontinued operations 5,072,301 1,587,800
----------- -----------
Net income available to common stockholders $ 4,926,556 $ 1,587,800
=========== ===========
Basic net income per common share
Continuing operations $ (0.03) $ --
Discontinued operations 1.11 0.35
----------- -----------
$ 1.08 $ 0.35
=========== ===========
Diluted net income per common share
Continuing operations $ (0.03) $ --
Discontinued operations 0.96 0.25
----------- -----------
$ 0.93 $ 0.25
=========== ===========
Weighted average number of shares outstanding:
Basic 4,578,500 4,532,125
=========== ===========
Diluted 5,280,567 6,379,669
=========== ===========
See accompanying notes to financial statements.
F - 5
Integrated Surgical Systems, Inc.
Statement of Convertible Preferred Stock and Stockholders' Equity
Convertible Preferred Stock
Additional
Paid-in Common Stock
Shares Amount Capital Total Shares Amount
------ ------ ------- ----- ------ ------
Balance at December 31, 2005 168 $ 2 $ 168,494 $ 168,496 4,508,500 $ 38,785
Stock compensation,
non-employee -- -- -- -- 70,000 7,000
Employee stock option -- -- -- -- -- --
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2006 168 2 168,494 168,496 4,578,500 45,785
Employee stock option -- -- -- -- -- --
Amortization of deferred -- -- -- -- -- --
compensation
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2007 168 $ 2 $ 168,494 $ 168,496 4,578,500 $ 45,785
============ ============ ============ ============ ============ ============
Additional Total
Paid-in Accumulated Deferred Stockholders'
Capital Deficit Compensation Deficit
------- ------- ------------ -------
Balance at December 31, 2005 $ 62,336,542 $(66,282,775) -- $ (3,907,448)
Stock compensation,
non-employee -- -- -- 7,000
Employee stock option 61,727 -- -- 61,727
Net income -- 1,587,800 -- 1,587,800
------------ ------------ ------------ ------------
Balance at December 31, 2006 62,398,269 (64,694,975) -- (2,250,921)
Employee stock option 29,106 -- $ (13,216) 15,890
Amortization of deferred -- -- 5,506 5,506
compensation
Net income -- 4,926,556 -- 4,926,556
------------ ------------ ------------ ------------
Balance at December 31, 2007 $ 62,427,375 $(59,768,419) $ (7,710) $ 2,697,031
============ ============ ============ ============
See accompanying notes to financial statements.
F - 6
Integrated Surgical Systems, Inc.
Statement of Cash Flows
Years ended December 31,
2007 2006
----------- -----------
Continuing Operations
Cash flow from continuing operating activities
Net loss from continuing operations ($ 145,745)
Adjustments to reconcile net loss from continuing operations to
net cash used in continuing operating activities:
Amortization of deferred compensation 5,506
Stock based compensation-employees 15,890
Changes in operating assets and liabilities
Other current assets (51,333)
Accrued liabilities (181,618)
-----------
Net cash used in continuing operations (357,300)
Cash flow from continuing investing activities
Deferred offering expenses (25,000)
-----------
Net cash used by continuing operations (382,300)
-----------
Discontinued operations
Net cash used in discontinued operating activities (2,320,400) ($1,385,575)
----------- -----------
Cash flow from discontinued investing activities
Proceeds from sales of assets ( net of employee
retention incentives of $486,385 and
legal expenses of $20,557) 3,493,058
Proceeds from sales of assets 5,000 5,000
Purchases of property and equipment (23,427) (8,946)
----------- -----------
Net cash provided by (used in) discontinued investing 3,474,631 (3,946)
activities
----------- -----------
Net cash provided by (used in) discontinued financing activities
Proceeds from loan from purchaser 1,000,000 2,700,000
Payments of note payable -- (142,000)
----------- -----------
Net cash provided by discontinued financing activities 1,000,000 2,558,000
----------- -----------
Net cash provided by discontinued activities 2,154,231 1,168,479
----------- -----------
Increase in cash 1,771,931 1,168,479
Cash at beginning of period 1,327,268 158,789
----------- -----------
Cash at end of period $ 3,099,199 $ 1,327,268
=========== ===========
See accompanying notes to financial statements
F - 7
Integrated Surgical Systems, Inc.
Notes to Financial Statements
Note 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 were 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.
On June 28, 2007, upon the sale of substantially all of its assts, the Company
became inactive. As a result, all of the Company's operations through June 28,
2007, have been classified as discontinued operations.
Note 2. Significant Accounting Policies
Basis of Presentation
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.
Significant estimates made by management had included revenue recognition,
allowances for inventory and warranty liability.
Financial Instruments
The Company considers the carrying amounts of financial instruments, including
cash, accounts payable and accrued expenses to approximate their fair values
because of their relatively short maturities.
Revenue Recognition
Revenue had been recognized when evidence of an arrangement exists, delivery has
occurred or services have been rendered, the price is fixed or determinable and
collectability was reasonably assured.
Revenue for product sales was generally recognized upon completion of training
and installation of the equipment at the end-user's site, except when the sales
contract requires formal customer acceptance. Equipment sales with contractual
customer acceptance provisions were recognized as revenue upon written
notification of customer acceptance, which generally occurred after the
completion of training and installation. Revenue related to maintenance and
warranty service/ contracts were recognized ratably over the duration of the
contracts.
Warranty/Service Contracts
The Company had offered a one-year warranty for parts and labor on all ROBODOC
Systems commencing upon the completion of training and installation or customer
acceptance. Generally, the Company's customers purchased a service contract,
which included warranty coverage (parts and labor), unspecified product
maintenance updates, customer support services and various consumables required
during surgical procedures. Revenue from service contracts had been initially
deferred and then recognized ratably over the term of the agreements. Annually,
service contracts were renewable at the customers' option. The warranty
obligations were 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 were required. The
Company periodically assessed the adequacy of its recorded warranty liabilities
and adjusts the amounts as necessary.
When elements of a sale, such as products, services, etc. were combined in a
single arrangement, or in related arrangements with the same customer, the
Company had allocated revenue to each element based on its relative fair value,
provided that such element met the criteria for treatment as a separate unit of
accounting. The price charged when the element was sold separately generally
determines fair value. In the absence of fair value for an undelivered element,
the arrangement had been accounted for as a single unit of accounting, resulting
in a delay of revenue recognition for the delivered elements until the
undelivered elements were fulfilled.
F - 8
The Company had developed specialized operating software for several implant
manufacturing companies. These implant manufacturers' contracted with the
Company for the development of particular lines of new prosthesis software to be
used with the ROBODOC System. These contracts had been accounted for using
either the completed contract or percentage-of-completion method. Product
development revenues for contracts recorded using the completed contract method
were recognized when development is complete under the terms of the contract,
and the customer has accepted the product. The direct cost, primarily labor, of
product development contracts were deferred until the development revenue is
recognized. Losses on contracts were accrued in the period that such losses were
determined under the percentage of completion method. Under the
percentage-of-completion method, revenue was recognized as work is performed,
based on the relationship between actual costs incurred and total estimated
costs at completion. Revenues were adjusted prospectively for revisions in
estimated total contract costs when identified. Losses, if any, were recognized
in full when identified.
Shipping and Handling Costs
Costs related to shipping and handling were included in costs of revenues.
Research and Development
Research and development costs had been expensed as incurred. Grants received
from third parties for research and development activities had been recorded as
reductions of research and development expense over the term of the agreement as
the related activities were conducted.
Research and development expenses were $677,403 and $443,757 for the years
ended December 31, 2007 and 2006, respectively.
Stock-Based Compensation
Compensation costs for stock, warrants or options issued to employees and
non-employees are based on the fair value method. The value of warrants and
options are calculated using a Black-Scholes Model, using the market price of
our common stock on the date of valuation, an expected dividend yield of zero,
the remaining period or maturity date of the warrants or options and the
expected volatility of our common stock.
Stock-based costs with future service periods had been deferred as shareholders'
equity and amortized on the straight-line method over its service period.
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.
Effective January 1, 2007, the Company adopted the provisions of Financial
Accounting Standards Board (FASB) Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" (FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in the Company's financial statements in accordance with FASB Statement 109,
"Accounting for Income Taxes", and prescribes a recognition threshold and
F - 9
measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition.
The Company's policy is to classify income tax assessments, if any, for tax
related interest in interest expenses and for tax related penalties in general
and administrative expenses for penalty assessments.
Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net income by the weighted
average number of shares of basic 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 basic common stock outstanding during
the period plus dilutive common stock equivalents, using the treasury stock
method.
For the years ended December 31, 2007 and 2006, dilutive common stock
equivalents were convertible preferred stock of 702,067 and 1,847,544,
respectively.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 157 "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair
value, establishes a framework for measuring fair value, and enhances
disclosures about fair value measurements. SFAS 157 applies to other accounting
pronouncements that require the use of fair value measurements. SFAS 157 is
effective for interim and annual financial statements issued for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact
of adopting SFAS 157 on its financial condition, results of operations and cash
flows.
In February 2007, the FASB issued SFAS 159 "The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of FASB Statement 115"
("SFAS 159"). SFAS 159 permits an entity to elect to measure various financial
instruments and certain other items at fair value. It provides entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 requires that a business entity report
unrealized gains and losses, on items for which the fair value option has been
elected, in earnings at each subsequent reporting date. SFAS 159 is effective as
of the beginning of the first annual period beginning after November 15, 2007.
The Company is currently assessing the impact of adopting SFAS 159 on its
financial condition, results of operations and cash flows.
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141(R), "Business Combinations" ("SFAS 141R"), which replaces SFAS No. 141,
"Business Combinations." SFAS 141R establishes principles and requirements for
determining how an enterprise recognizes and measures the fair value of certain
assets and liabilities acquired in a business combination, including
noncontrolling interests, contingent consideration, and certain acquired
contingencies. SFAS 141R also requires acquisition-related transaction expenses
and restructuring costs be expensed as incurred rather than capitalized as a
component of the business combination. SFAS 141R will be applicable
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. SFAS 141R would have an impact on accounting for any
businesses acquired after the effective date of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary (previously referred to as minority interests). SFAS
160 also requires that a retained noncontrolling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. Upon
adoption of SFAS 160, the Company would be required to report any noncontrolling
F - 10
interests as a separate component of stockholders' equity. The Company would
also be required to present any net income allocable to noncontrolling interests
and net income attributable to stockholders of the Company separately in its
consolidated statements of income. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. SFAS 160 requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests. All other requirements of SFAS 160
shall be applied prospectively. SFAS 160 would have an impact on the
presentation and disclosure of the noncontrolling interests of any non
wholly-owned businesses acquired in the future.
Management does not believe that any other recently issued, not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying financial statements.
Note 3. Gain on Sale of Assets/Discontinued Operations
On June 28, 2007, the Company sold substantially all of its assets in exchange
for $4,000,000 in cash, plus the cancellation of a note payable in the amount of
$3,700,000 and accrued interest thereon of $234,462. The gain on sale of assets
consisted of the following:
Proceeds
Cash $ 4,000,000
Cancellation of indebtedness 3,934,462
-----------
Total proceeds 7,934,462
Net book value of assets sold (801,007)
Employee retention incentives (a) (486,385)
Present value of net future lease payments (b) (250,376)
Legal expenses (20,557)
-----------
Gain on sale of assets (c) $ 6,376,137
===========
In connection with the sale:
(a) Certain employees of the Company received payments to remain with the
Company until the closing date to affect an orderly transfer of assets
to the purchaser.
(b) The purchaser has agreed to sublease the Company's space for one year.
The Company has accrued the present value of the rent for the balance
of the lease term, net of the rent to be received under the sublease.
(c) Before the utilization of the Company's net operating loss
carryforwards for Federal and State purposes, the Company's income
taxes on the gain were approximately $30,000.
For the years ended December 31, 2007 and 2006, discontinued operations
included:
2007 2006
---------- ----------
Revenues $1,015,668 $2,593,584
========== ==========
Income from discontinued operations $5,072,301 $1,587,800
========== ==========
F - 11
Note 4. Notes Payable
Through June 28, 2007, the Company had borrowed $3,700,000 from the purchaser of
the assets, payable on demand with interest at the prime rate, plus 1%, per
annum. The notes were settled as proceeds from the sale of assets.
Note 5. Convertible Note Payable
In January 2006, an existing convertible note payable and warrants were
cancelled in exchange for the following payments:
December 9, 2005 $ 8,000
January 27, 2006 50,000
February 24, 2006 25,000
March 29, 2006 25,000
April 19, 2006 42,000
--------
$150,000
========
Note 6. Convertible Preferred Stock
The Company's Certificates 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 December 31, 2007, 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 conversion prices equal to 80% or 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
convertible preferred stock 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 issuable upon conversion.
The value that had been assigned to the Beneficial Conversion feature of the
Series G was based on the difference between the maximum conversion price and
quoted market price of the common stock on the date that the Series G was sold
(the "Discount"). The Discount was accreted using the straight-line method over
the conversion period. The Series G does not entitle holders to dividends or
voting rights, unless required by law.
For the years ended December 31, 2007 and 2006, no shares of Series G were
converted into shares of common stock. At December 31, 2007, the outstanding
Series G shares could have been converted into a minimum of 702,067 shares of
common stock, after giving effect to the 10 for 1 reverse stock split, based
upon its maximum conversion price of $0.24.
F -12
Upon a change in control or similar transaction, as defined, each holder of the
Series G has the option to deem such transaction as liquidation and may redeem
their shares at the liquidation value of $1,000, per share, for an aggregate
amount of $168,496. As such redemption is not in control of the Company, the
Series G preferred stock has been accounted for as if they were redeemable
preferred stock and are classified on the balance sheet between liabilities and
stockholders' equity.
Note 7. Common Stock
Effective July 26, 2007, the Company declared a 1-for-10 reverse stock split of
its outstanding shares of common stock. All share and per share amounts have
been restated for the split.
During 2006, the Company granted 70,000 shares of common stock to non-employees
in exchange for services valued at $7,000 and options to purchase 180,000 shares
(non-plan) and 11,700 shares (plan) of common stock to employees valued at
$61,727. The options are exercisable at $0.40, per share, through October 31,
2011, and were valued using a Black-Scholes model, assuming a risk free interest
rate of 5%, expected life of one year, and an expected volatility of 109.30%.
In January 2007, the Company granted options to purchase 20,000 shares
(non-plan) of common stock to an employee, exercisable at $0.40, per share,
through January 2012. The options were valued at $6,440 using a Black-Scholes
model assuming a risk free interest rate of 5.0%, average life of ten months,
and expected volatility of 109.30%.
In February 2007, the Company granted options to purchase 5,000 shares (plan) of
common stock to an employee, exercisable at $0.40, per share, through January
2012. The options were valued at $1,205 using a Black-Scholes model assuming a
risk free interest rate of 4.67%, average life of two years, and expected
volatility of 109.30%. With the sale of the assets of the Company, the employee
was terminated and the options became exercisable within ninety days of the
termination date. The options were not exercised, expired within the ninety days
and amortized over their revised oustanding period.
In April and May 2007, the Company granted options to purchase 30,000 shares
(non-plan) and 500 shares (plan) of common stock to employees. Options to
purchase 20,000 shares of common stock are exercisable at $0.35, per share,
through April 11, 2012, 10,000 shares of common stock are exercisable at $0.31,
per share, through April 29, 2012 and 500 shares of common stock are exercisable
at $0.31, per share, through April 30, 2007. The options were valued at $8,245
using a Black-Scholes model, assuming a risk free interest rate of 4.67%, 4.51%
and 4.54%, respectively, expected life of 7 months, 6 months and 24 months,
respectively, and an expected volatility of 109.84%. With the sale of the
assets of the Company, the employees were terminated and the options became
exercisable within 90 days of the termination date. The options were not
exercised, expired within the ninety days and amortized over their revised
outstanding period.
In December 2007, the Company granted options to purchase 50,000 shares (plan)
of common stock to directors, exercisable at $0.3275, per share, through August
13, 2012. The options were valued at $13,216, using a Black-Scholes model,
assuming a risk free interest rate of 4.58%, average expected life of one year,
and an expected volatility of 110.5%.
F - 13
As of December 31, 2007, the Company reserved 6,421,872 shares of common stock
for future issuance, as follows:
Options under plans 63,050
Warrants 30,000
Series G preferred stock 702,067
Proposed offering 5,626,755
---------
Total reserved shares 6,421,872
=========
Note 8. Stock Options
The Company has two stock option plans to attract, motivate and retain selected
officers, employees, directors and consultants under which incentive or
non-incentive options may be granted, generally for a term of ten years from the
date of grant. Exercise prices of incentive stock options may not be less than
100% and exercise price of non-statutory stock options may not be less than 85%
of the fair market value of the common stock on the date of the grant.
For persons owning 10% or greater of the voting power of all classes of the
Company's stock, the exercise price of the incentive or the non-qualified stock
options may not be less than 110% of the fair market value of the common stock
on the date of the grant.
Both plans are administered by the Company's board of directors.
Effective July 26, 2007, the Company declared a 1-for-10 reverse stock split of
its outstanding shares of common stock and all share and per share amounts have
been restated for the split.
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 vest variably
from one year to four years from the date grant and must be exercised within 30
days of employee termination. As of December 31, 2007, the 1998 plan had 22,857
options available for future grant.
The 2000 Stock Award Plan (2000 Plan) was established to grant up to 100,000
incentive options through December 11, 2010 to employees and other individuals
providing services to the Company. Options under the 2000 Plan vest variably
from one year to four years from the date grant and must be exercised within
three months of employee termination. As of December 31, 2007, the 2000 plan had
98,046 options available for future grant.
Under both plans, exercised, forfeited/expired or cancelled shares may be
reissued.
Options outstanding or options forfeited/expired may be from expired plans.
For the years ended December 31, 2007 and 2006, option activity under both plans
was as follows:
F - 14
2007 2006
Number of Weighted-Average Number of Weighted-Average
Shares Exercise Price Shares Exercise Price per
per Share Share
---------------------------------------------------------------------------
Outstanding at beginning of year 19,791 $ 18.24 14,132 $ 36.07
Granted 55,500 $ 0.32 11,700 $ 0.40
Cancelled (12,241) $ 13.6 (6,041) $ 25.41
Exercised -- $ 0.00 -- $ 0.00
------- -------
Outstanding at end of year 63,050 $ 2.74 19,791 $ 18.24
======= =======
Exercisable at end of year 13,050 $ 13.43 9,733 $ 38.70
======= =======
Available for future grants 120,904 167,204
======= =======
===================================================================================================================
For the years ended December 31, 2007 and 2006, non plan option activity was as follows:
2007 2006
Number of Weighted-Average Number of Weighted-Average
Shares Exercise Price Shares Exercise Price per
per Share Share
------------------------------------------------------------------------
Outstanding at beginning of year 180,000 $ 0.40 -- $ 0.00
Granted 50,000 $ 0.36 180,000 $ 0.40
Cancelled (230,000) $ .40 -- $ 0.00
Exercised -- $ 0.00 -- $ 0.00
------- -------
Outstanding at end of year -- $ 0.00 180,000 $ 0.40
======= =======
Exercisable at end of year -- $ 0.00 30,000 $ 0.40
======= =======
F - 15
As of December 31, 2007, a summary of options outstanding under the plans was as
follows:
Range of Weighted-Average Number Weighted-Average Number Weighted-Average
Exercise Remaining Contractual Outstanding at Exercise Exercisable at Exercise
Price Life (Years) 12/31/07 Price 12/31/07 Price
--------------- ------------------------- ------------------ ------------------ ------------------ -----------------
0.00-9.99 9.5 58,000 $0.34 8,000 $0.40
10.00-30.99 2.0 1,550 28.55 1,550 28.55
31.00-37.00 1.0 3,500 36.51 3,500 36.51
--- ------ ----- ------ ------
8.9 63,050 $3.04 13,050 $13.43
=== ====== ===== ====== ======
Note 9. Income Taxes
As of December 31, 2007, the Company had net operating loss (NOL) carryforwards
of approximately $46,000,000 to reduce future Federal taxable income through
2027. The Company has had ownership changes, as defined by the Internal Revenue
Service, which may defer or limit the use of the NOL's.
As of December 31, 2007, realization of the Company's net deferred tax asset of
approximately $19,606,000 was not considered more likely than not and,
accordingly, a valuation allowance of 19,606,000 has been provided. For the year
ended December 31, 2007, the valuation allowance decreased by $2,156,000.
As of December 31, 2007, the Company had a Federal research and development
credit carryover of approximately $1,200,000.
As of December 31, 2007, management has evaluated and concluded that there are
no significant uncertain tax positions requiring recognition in the Company's
financial statements. Federal and state income tax returns for the years ended
December 31, 2007, 2006, 2005 and 2004 are subject to review by the taxing
authorities.
As of December 31, 2007, deferred tax assets consisted of the following:
2007
------------
Net operating loss $ 18,300,000
Research and development credit 1,200,000
Deferred rent 100,000
Compensation 6,000
------------
19,606,000
Less valuation allowance (19,606,000)
------------
None
------------
F - 16
For the years ended December 31, 2007 and 2006, deferred income tax expense
(benefit) was as follows:
2007 2006
----------- ----------
Net operating loss ($ 1,557,000) ($ 218,000)
Research and development credit (191,000) --
Deferred income (379,000) (11,000)
Compensation (7,000) (271,000)
Inventory (122,000) (136,000)
Deferred rent 100,000 --
----------- ----------
(2,156,000) (636,000)
Less valuation allowance 2,156,000 636,000
----------- ----------
None None
=========== ==========
F - 17
For the years ended December 31, 2007 and 2006, the provision for income taxes
on the statement of operations differs from the amount computed by applying the
statutory Federal income tax rate to income before the provision for income
taxes, as follows:
2007 2006
----------- -----------
Federal expense expected at statutory rate $ 1,666,000 $ 540,000
State income taxes, net of Federal benefit 290,000 96,000
State alternative minimum tax 30,000
Other 200,000
Change in valuation allowance (2,156,000) (636,000)
----------- -----------
$ 30,000 None
=========== ===========
Note 10. Commitments and Contingencies
Product Liability Insurance
During the period June 2004 and September 2006, the Company was self-insured for
product liability insurance. In September 2006, the Company obtained product
liability insurance of $2,000,000. The Company is not aware of any current
product liability claims.
Lease
As of December 31, 2007, the Company was committed for future minimum rent under
the lease for their former manufacturing, warehouse and administrative space,
net of sublease income, through December 31, 2011. The present value of the
future minimum rent under the lease, net of sublease income, was charged to
discontinued operations in connection with the Company's operations. The
minimum payments including imputed interest are as follows:
For the year ended
December 31, Lease Sublease Net
----------------------------------------------------------------
2008 $ 92,475 $ 53,400 $ 39,075
2009 95,175 95,175
2010 97,875 97,875
2011 8,175 8,175
-------- -------- --------
$293,700 $ 53,400 $240,300
======== ======== ========
On February 21, 2008, the Company entered an agreement to pay the subtenant
$60,000 if the Company is released from the underlying lease.
F - 18
Other
The Company is subject to claims that arise in the normal course of business and
cannot predict their ultimate outcome, if any.
Note 11. Concentrations
The Company maintains cash in financial institutions in excess of insured
limits. In assessing its risk, the Company's policy is to maintain cash only
with reputable financial institutions.
Note 12. Unearned Income
On November 3, 2007, the Company settled a remaining service agreement with a
customer of $195,000 by a payment of $97,500 in cash and recognized a gain of
$97,500, which was included in discontinued operations.
The Company has met all its other obligations under maintenance and
warranty/service contracts and all remaining unearned income was included in
revenue.
Note 13. Advisory Services Agreement
On November 28, 2007, the Company entered into an Advisory Services Agreement
(Agreement) through June 29, 2008. During the period under the Agreement, the
advisor shall exclusively: (a) arrange for the sale by the Company of shares of
common stock in the amount to equal of at least 51% of the outstanding shares,
(b) introduce the Company to one or more operating business and assist with a
merger or acquisition and (c) provide additional advisory services to the
Company.
In event of an initial transaction introduced by the advisor, as defined, the
Company shall pay the advisor a fee equal to 2% of the gross transaction value,
as defined, and warrants to purchase shares of common stock equal to 5% of the
gross transaction value, exercisable at the per share price of the transaction,
for a period of five years. In event of an initial transaction not introduced by
the advisor, the fees shall equal to 1% and 2.5%.
In December 2007, the Company paid $25,000 against expenses of the advisory
services agreement and charged such amount to deferred offering costs.
F - 19
Dates Referenced Herein and Documents Incorporated by Reference
2 Subsequent Filings that Reference this Filing
↑Top
Filing Submission 0001050502-08-000097 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Tue., Apr. 23, 12:55:04.2pm ET 
