UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-12471
INTEGRATED SURGICAL SYSTEMS, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 68-0232575
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Wilshire Blvd., Suite 401 90401
Santa Monica, California
-------------------------------------- --------
(Address of principal executive Offices) (Zip Code)
(310) 526-5000
--------------------------------------------------
(Registrant's telephone number, including area code)
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
Indicate by check mark if the registrant is a well-know seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company,
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by checkmark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant on March 23, 2009 was $2,092,970. This calculation is based upon
the price of the Common Stock of the Registrant (as quoted on the Pink Sheets)
of $0.28 per share on that date.
As of March 23, 2009, the Registrant had 7,474,894 shares of common stock
outstanding.
Integrated Surgical Systems, Inc.
Form 10-K
For the fiscal year ended December 31, 2008
Table of Contents
Part I. Page
- ------- ----
Item 1. Business 4
Item 1A. Risk Factors 5
Item 1B. Unresolved Staff Comments 5
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
Part II.
- --------
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer 5
Purchases of Equity Securities
Item 6. Selected Financial Data 6
Item 7. Management Discussion and Analysis of Financial Condition and Results of 6
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 10
Item 8. Financial Statements and Supplementary Data 10
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure 10
Item 9A(T). Controls and Procedures 11
Item 9B. Other Information 12
Part III.
- ---------
Item 10. Directors, Executive Officers and Corporate Governance
12
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related 16
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence 17
Item 14. Principal Accounting Fees and Services 17
Part IV.
--------
Item 15. Exhibits and Financial Statement Schedules 18
Signatures 24
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. ("we," "us," "our" or the "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. 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. This vote gave the Board of Directors the authority to
delay, revoke or abandon any decision to dissolve without further stockholder
action. It is the decision of the Board of Directors that it is in the best
interests of the Company's stockholders to delay any decision to liquidate.
Description of the sale 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 Company's 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
===========
4
In connection with the sale:
(a) Certain employees of the Company received payments to remain with the
Company until the closing date to better assure an orderly transfer of
assets to the purchaser.
(b) Novatrix, the purchaser of the Company's assets, agreed to sublease
the Company's premises for one year. The Company accrued the present
value of the rent for the balance of the lease term, net of the rent
to be received under the sublease. On June 13, 2008, the two parties
entered into another sublease agreement to allow Novatrix to occupy
the premises for the remainder of the lease term.
(c) The Company recorded income taxes on the gain of approximately
$30,000. Employees On December 31, 2008, the Company had no employees.
Employees
- ---------
On December 31, 2008, the Company had no employees.
Item 1A. Risk Factors
Not required for smaller reporting company.
Item 1B. Unresolved Staff Comments
None.
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 two 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 expires with the
termination of the Company's lease on December 31, 2010.
Item 3. Legal Proceedings
On January 8, 2009, a complaint was filed in Superior Court of California,
County of Sacramento in which the Company was named as a co-defendant in a
matter involving an automobile accident. The plaintiffs are seeking damages for
pain & suffering, emotional distress, past and future medical expenses and past
and future loss of earnings totaling approximately $30,000,000. The Company
believes the demands are totally without merit and intends to vigorously defend
the complaint. To the best of the Company's knowledge, there are no other
proceedings or litigation currently threatened or proceeding against us or
involving us.
From time to time, the Company may be party to other claims and litigation
arising in the ordinary course of business. The Company does not believe that
any adverse final outcome of any of these matters, whether or not covered by
insurance, would have a material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market Information for Common Stock
5
The Company's common stock is quoted on the Pink Sheets, under the trading
symbol "ISSM.PK." The following table sets forth the high and low bid prices for
the past two fiscal years,, 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, 2008
-----------------
First Quarter $0.350 $0.250
Second Quarter $0.500 $0.300
Third Quarter $0.470 $0.310
Fourth Quarter $0.450 $0.230
Fiscal Year Ended
-----------------
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
Holders
As of March 23, 2009, there were 274 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.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of the fiscal year ended December
31, 2008 with respect to the Company's compensation plans (including individual
compensation arrangements).
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 61,000 $1.92 98,046 (1)
Equity compensation plans not
approved by security holders 130,000 (2) $0.44 -0-
----------- ----- -----------
Total 191,000 $0.91 98,046
======= ===== =======
(1) Includes the Company's 2000 Stock Award Plan.
6
(2) Consists of: (i) 30,000 warrants for consulting which expire in July 2014
and have an exercise price of $0.625 per share; (ii) 100,000 stock options
granted to directors which expire in August 2013 for $0.38 per share.
Item 6. Selected Financial Data
Not applicable.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis relates to the operations of Integrated
Surgical Systems, Inc. and should be read in conjunction with its financial
statements, including the notes thereto, appearing elsewhere in this report.
This discussion may contain certain forward-looking statements based on current
expectations that involve risks and uncertainties. Actual results and timing of
certain events may differ significantly from those projected in such
forward-looking statements due to a number of factors, including those set forth
elsewhere in this report. Except as otherwise indicated, all amounts are
reported in U.S. dollars ($).
Overview
Integrated Surgical Systems, Inc. was incorporated in the State of 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 (Fiscal Year 2008 vs. Fiscal Year 2007)
For the year ended December 31, 2008 ("Fiscal Year 2008",) total net loss was
$175,000 or a basic and diluted loss of $0.03 per share and consisted of a net
loss of $170,000 from continuing operations and a net loss of $5,000 from
discontinued operations. Total net income for the year ended December 31, 2007
("Fiscal Year 2007"), was $4,927,000 or $1.08 income per basic share and $0.93
income per diluted share. Total net income for the Fiscal Year 2007 consisted of
net income of $5,072,000 from discontinued operations or basic net income of
$1.11 per share and diluted net income of $0.96 per share offset by a net loss
7
from continuing operations of $146,000 or a basic and diluted net loss of $0.03
per share. Discontinued operations During the first six months of the year ended
December 31 2007 before the sale of substantially all of its assets, the Company
had net income of $5,072,000 from discontinued operations which consisted of a
net gain on sale of substantially all of its assets to Novatrix of $6,376,000
offset by income tax on the sale of $30,000 and a loss of $1,274,000 from
operations of discontinued segment. The Company had no activity from
discontinued operations for the Fiscal Year 2008.
Continuing operations
For the Fiscal Year 2008, we had a net loss from continuing operations of
$170,000 or a $29,000 higher loss than the net loss from continuing operations
of $146,000 for the Fiscal Year 2007. The net loss from continuing operations
for the Fiscal Year 2007 was for the six month period beginning in July 2007
after the sale of substantially all of the Company's assets. The increase in
loss for the Fiscal Year 2008 compared to the Fiscal Year 2007 is due to an
increase in expenses of $43,000 offset by an increase in net interest income of
$20,000. The increase in expenses is due in part to an increase in consulting
and professional services of $105,000 to $161,000 which includes the cost for
twelve months for external auditors, accounting, administration and income tax
preparation. The Company has no employees so it relies on outside contractors to
perform basic and necessary services. Directors expense increased $71,000 to
$103,000 for Fiscal Year 2008, including stock-based compensation, as it
included twelve months of expense and two additional directors who were
appointed to the Board in April, 2008. Other increases in expense for Fiscal
Year 2008 included an increase in legal fees of $33,000 to $100,000 and an
increase in insurance of $41,000 to $67,000, each primarily due to a full year
of activity for Fiscal Year 2008 versus six months for Fiscal Year 2007.
Increases in expenses were partially offset by a decrease in deferred rent
liability of $212,000 due to a sublease agreement for the premises the Company
is obligated to lease through December 31, 2010.
Liquidity
We believe that existing cash and cash equivalents of $3.3 million as of
December 31, 2008 will provide us with sufficient working capital for us to meet
our operating plan for Fiscal Year 2009. The Board has retained its Directors,
including a director as its Chief Executive Officer, another director as its
Chief Financial Officer and another director as its Secretary, 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 do not have an estimate as to when we will identify a
qualified merger, acquisition or strategic alliance candidate. There is no
assurance that such opportunities will be available, or if available, upon
favorable terms. If we are unsuccessful with respect to a suitable opportunity
we may, if agreed to by a vote by stockholders, liquidate the Company and
distribute all our remaining assets, which consist primarily of cash, to our
stockholders.
Cash used in continuing operating activities for the Fiscal Year 2008 was
$350,000 which primarily consisted of an operating loss from continuing
operations of $170,000, a decrease in deferred rent of $217,000 and a decrease
in income taxes payable of $31,000 partially offset by non-cash stock-based
compensation of $53,000. Cash used in discontinued operations was $5,000 which
consisted of income taxes paid for fiscal year 2007.
Capital Resources
On March 23, 2009, there were 7,474,894 shares of the Company's common stock
outstanding, as listed on the Pink Sheets at $0.28 a share, giving the Company a
market capitalization of $2.1 million. Securities traded at less than $5.00 and
not traded on a national securities exchange or quoted on Nasdaq are called
"penny stocks". The Securities and Exchange Commission rules require brokers to
8
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-K and have been prepared in accordance with generally
accepted accounting principles 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 of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications have been made to prior years' financial statement
presentation to conform to the current year presentation.
Financial Instruments
The Company has a portfolio of investments in available-for-sale debt
securities. Management determines the appropriate classification of the
securities at the time they are acquired and evaluates the appropriateness of
such classifications at each balance sheet date. These fixed income debt
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value, and unrealized holding gains and losses, net of the
related deferred tax effect, if any, are reported in other comprehensive income
as a separate component of stockholders' equity.
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.
Recent Accounting Pronouncements
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
non-controlling 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
9
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.
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements", ("SFAS 157") defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 applies to other accounting pronouncements that require the use of fair
value measurements. A fair value measurement assumes that the transaction to
sell an asset or transfer a liability occurs in the principal market for the
asset or liability, or, in the absence of a principal market, the most
advantageous market for the asset or liability.
SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement 115", ("SFAS 159")
permits an entity to elect to measure various financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected should be reported in earnings at each subsequent reporting date.
Effective January 1, 2008, the Company adopted both SFAS 157 and SFAS 159
without any effect.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the non-controlling
interest in a subsidiary (previously referred to as minority interests). SFAS
160 also requires that a retained non-controlling 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
non-controlling interests as a separate component of stockholders' equity. The
Company would also be required to present any net income allocable to
non-controlling 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 non-controlling
interests of any non wholly-owned businesses acquired in the future.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the GAAP
hierarchy). SFAS 162 will become effective 60 days following the SEC's approval
of the Public Company Oversight Board amendments to AU Section 411, "The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting Principles."
The Company does not currently expect the adoption of SFAS 162 to have a
material effect on its results of operations and financial condition.
Management does not believe that any other recently issued, but not yet
effective accounting pronouncements, if adopted, would have a material effect on
the accompanying financial statements.
Risk Factors and Cautionary Statement Regarding Forward-Looking Information
The Company cautions that this Form 10-K 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-K 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.
10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The information that appears following Item 15 of this Annual Report on Form
10-K is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
(a) Resignation of Independent Registered Public Accounting Firm
None.
(b) Engagement of New Independent Registered Public Accounting Firm
Effective May 8, 2007, Raich Ende was appointed as the Company's independent
registered 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.
Effective July 16, 2008, SingerLewak LLP was appointed as the Company's
independent registered public accounting firm to audit the Registrant's
financial statements. Singer Lewak was not consulted on any matter described in
Item 304(a)(2)(i) or Item 304(a)(2)(ii) of Regulation S-K prior to July 16,
2008.
(c) Termination of Independent Registered Public Accounting Firm
On July 15, 2008, the Company dismissed Raich Ende as its registered certified
public accounting firm. The decision to change accountants was approved by the
Company's board of directors. No report on the Company's financial statements
prepared by Raich Ende contained any adverse opinion or disclaimer of opinion,
or was qualified or modified as to uncertainty, audit scope, or accounting
principles. During the time Raich Ende served as the Company's independent
registered public accounting firm, there were no disagreements between Raich
Ende and the Company on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. Raich Ende
submitted a letter to the Securities and Exchange Commission stating Raich Ende
agrees with the above statements. A copy of the letter, dated July 18, 2008, was
filed as an exhibit to the Company's Current Report on Form 8-k filed on July
21, 2008.
Item 9A(T). 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, 2008, 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.
11
Changes in Internal Controls over Financial Reporting
Management has not identified any matters that constitute material weaknesses
(as defined under the Public Company Accounting Oversight Board Auditing
Standard No. 5) in our internal controls over financial reporting. Two deficiencies
identified by our prior 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.
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.
Limitation of Effectiveness of Cash
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 effective as of December 31, 2008.
This Audit Report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our independent
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management's report in
this Annual Report.
Item 9B. Other Information
None
Part III
Item 10. Directors, Executive Officers and Corporate Governance
The following is a listing of officers and Directors of the Company:
12
--------------------------- -------------- ------------------------------------------------- ---------------------
Name Age at Position with the Company Period
12-31-2008
--------------------------- -------------- ------------------------------------------------- ---------------------
Peter B. Mills 53 Director Sep 2006 - Present
Chief Executive Officer, President, Chairman of Jul 2007 - April 2008
the Board
--------------------------- -------------- ------------------------------------------------- ---------------------
Michael J. Tomczak 53 Director Sep 2006 - Present
CFO July 2008 - Present
--------------------------- -------------- ------------------------------------------------- ---------------------
Christopher A. Marlett 44 Director, CEO Apr 2008 - Present
--------------------------- -------------- ------------------------------------------------- ---------------------
Robert M. Levande 59 Director Apr 2008 - Present
Secretary July 2008 - Present
--------------------------- -------------- ------------------------------------------------- ---------------------
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 in 1991, 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.
Christopher A. Marlett was appointed to serve as a Director and the Chief
Executive Officer of the Company in April 2008. Mr. Marlett is co-founder,
chairman and CEO, since 1997, of MDB Capital Group LLC ("MDB",) an investment
banking firm focused on equity financings and capital formation for
growth-oriented, micro-cap companies. He holds a Bachelor of Science degree in
Business Administration from the University of Southern California.
Robert M. Levande was appointed to serve as Director in April 2008 and as
Secretary in July 2008. Mr. Levande has been managing director at MDB since May
2003. From April 2002 to April 2003, he was a managing director of Gilford
Securities, Inc. and investment firm. Previously, Mr. Levande founded and has
served as president of the Palantair Group, Inc., a private consulting firm
specializing in providing strategic advice to entrepreneurs in the medical
technology industry. From 1972 to 1998, he held various managerial positions
with Pfizer, Inc., including vice president-business analysis & development of
its medical technology group and senior vice president of a subsidiary,
Howmedica, Inc. Mr. Levande was a director of Orthovita, Inc. from 2001 to 2007.
Mr. Levande received his Bachelor of Science degree from the Wharton School of
Finance and Commerce of the University of Pennsylvania and his Masters of
Business Administration degree from Columbia University.
13
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,
2008, except that Christopher A. Marlett, Chief Executive Officer of the
Company, filed one late report on Form 4 relating to a change in his beneficial
ownership.
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 four 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, 401 Wilshire Blvd, Suite 1020, Santa Monica, CA 90401.
Item 11. Executive Compensation
The following table sets forth, for the fiscal years ended December 31, 2008 and
2007, the compensation awarded to, earned by or paid to the Company's Chief
Executive Officer and Chief Financial Officer. There were no executive officers
whose total salary and bonus exceeded $100,000 for the year ended December 31,
2008 (collectively, the "Named Executive Officers").
14
Summary Compensation Table
Annual Compensation
-------------------
Option Non-Equity
Name and Awards Incentive Plan All Other
Principal Position Year Salary (1) (2) Compensation Compensation (1)
------------------ ---- ---------- --- ------------ ----------------
Christopher A. Marlett 2008 $- NA $- $-
Chief Executive Officer 2007 NA NA NA NA
Michael J. Tomczak 2008 $- NA $- $-
Chief Financial Officer 2007 NA NA NA NA
(1) Mr. Marlett and Mr. Tomczak are not employees and receives no salary
or other compensation for their duties as officers of the Company. Mr.
Tomczak is a partner in a firm which provided accounting services to
the Company during the year ended December 31, 2008, for a fee of
$2,000 per month.
(2) Does not include stock options granted at an exercise price of $0.38
per share as compensation for Mr. Marlett and Mr. Tomczak's position
as directors of the Company.
Employment Agreements
There are no current employment agreements.
Outstanding Equity Awards at Fiscal Year-End
The following table provides information concerning shares of our common stock
covered by exercisable and unexercisable options held by the Named Executive
Officers on December 31, 2008:
--------------------------------------------------------------------------------
Option Awards
--------------------------------------------------------------------------------
(1) Equity Incentive
Plan
Number of Number of Awards:
Securities Securities Number of
Underlying Underlying Securities
Unexercised Unexercised Underlying Option
Options Options Unexercised Exercise
(#) (#) Unearned Options Price Option
Name Exercisable Unexercisable (#) ($) Expiration Date
- ------------------ ------------ --------------- ------------------- ----------- ---------------
Christopher A. - 25,000 - $0.38 8/15/2013
Marlett
- -----------------------------------------------------------------------------------------------
Michael J. Tomczak 3,000 - - $0.40 11/1/2011
25,000 - - $0.3275 8/13/2012
25,000 - $0.38 8/15/2013
- -----------------------------------------------------------------------------------------------
(1) Granted to Mr. Marlett and Mr. Tomczak as compensation for their positions
as directors and will become fully-vested on 8/15/2009
15
Director Compensation
Stock Option
Name of Director Fees (1) Awards (2) Awards(3) Total
- ---------------- -------- ---------- -------- -----
Peter B. Mills $25,000 $ -- $ 6,678 $31,678
Michael J. Tomczak $25,000 $ -- $ 6,678 $31,678
Christopher A. Marlett $ -- $17,033 $ 2,823 $19,856
Robert M. Levande $ -- $17,033 $ 2,823 $19,856
(1) The Company compensated its non-employee Directors $6,250 per quarter
during fiscal year 2008. Messrs. Mills and Tomczak were directors for
the entire year and were paid their compensation in cash.
(2) Messrs. Marlett and Levande became directors in April, 2008 and
elected to receive their $6,250 in the form of common shares of the
Company with the number of shares to be determined by dividing the
compensation earned by the closing price of the Company's stock as of
the end of day March 31, 2009. An amount of $17,033 was included in
the Statement of Operations for the year ended December 31, 2008, as a
general and administrative expense for each of the director's stock
awards.
(3) Messrs. Mills and Tomczak each have stock options outstanding at
December 31, 2008 of 53,000 shares and Messrs. Marlett and Levande
each have stock options outstanding at December 31, 2008 of 25,000
shares. Amounts of $6,678 and $2,823 were included in the Statement of
Operations for the year ended December 31, 2008, as a general and
administrative expense for each of Messrs. Mills and Tomczak and
Messrs. Marlett and Levande for their respective option grants.
Item 12. 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, 2008 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.
Amount and Percentage of
Nature Common Stock
of Beneficial Beneficially
Name (3) Ownership (1) Owned (2)
- -------- ------------- --------------
Christopher A. Marlett 1,655,082 22.1%
Robert M. Levande 16,551 *
Michael J. Tomczak 28,000 (4) *
Peter B. Mills 28,000 (5) *
All Directors and officers as a group (2 persons) 1,727,633 23.1%
- ---------------------
* 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 sixty (60) days pursuant to
options, warrants, conversion privileges or other rights.
16
(2) Based on 7,474,894 shares of common stock outstanding as of December
31, 2008.
(3) Address is c/o Integrated Surgical Systems, Inc., 401 Wilshire Blvd.,
Suite 1020, Santa Monica, 90401.
(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 and 25,000 shares of stock options exercisable at $0.38 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 and 25,000 shares of stock options exercisable at $0.38 per
share.
Securities Authorized for Issuance Under Equity Incentive Plans
The Company has provided in the "Equity Compensation Plans" of Item 11 of this
Annual Report on Form 10-K certain information with respect to securities
authorized for issuance under the Company's equity plans.
Item 13. Certain Relationships and Related Transactions
Michael J. Tomczak is a partner in an accounting firm that has provided
accounting services for the Company since July 2008. The Company pays this firm
$2,000 per month for these services. During the year ended December 31, 2008,
the Company recorded $13,486 as general & administrative expense on its
Statement of Operations.
As of September 12, 2008 the Company executed and extension to it November 28,
2007 Advisory Services Agreement with MDB Capital Group LLC (MDB.) The Company
also has a money market account with MDB, invested in short-term federal
securities, with a balance of approximately $2,880,000 at December 31, 2008.
This extension expired on December 31, 2008. Christopher A. Marlett is the Chief
Executive Officer and a director of the Company and the Chief Executive Officer
and chairman of MDB. Robert Levande is Secretary and a director of the Company
and a managing director of MDB. The only amount paid by the Company to MDB has
been a $25,000 advance payment against reimbursable expenses in December 2007.
The advance payment is reported as an other current asset on the Company's
Balance Sheet.
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 Firms for each of the last two fiscal
years for the categories of services indicated.
Category 2008 2007
-------- ---- ----
$112,400 $ 55,200
Audit Fees (1)
Audited Related Fees(2) none none
Tax fees (3) 5,100 16,000
All Other Fees none none
-------- --------
$117,500 $ 71,200
======== ========
17
(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 -K for fiscal year 2008 and 10-KSB for
fiscal years 2007 and 2006 the review of the Company's quarterly
financial statements on Form 10-Q for periods during 2008 and Form
10-QSB for periods during 2007 and 2006 and services that are normally
provided by the Independent Registered Public Accounting Firm in
connection with the statutory and regulatory filings or engagements.
(2) Includes audit services provided in connection with accounting
consultations and internal control reviews.
(3) Consists of professional services rendered for tax compliance, tax
advice, and tax planning.
Item 15. Exhibits and Financial Statement Schedules
1. Financial Statements
Reference is made to the Financial Statements filed under Item 8, Part II
hereof.
2. Financial Statement Schedules
Reference is made to the Final Statements filed under Item 8, Part II hereof.
3. Exhibits
The following exhibits are filed pursuant to Item 601 of Regulation S-K. The
numbers set forth below opposite the description of each exhibit correspond to
the Exhibit Table of Item 601 of Regulation S-K.
Exhibit Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Registrant, as amended. (7)
3.2 By-laws of the Registrant, as amended. (1)
3.2
3.3 Certificate of Designations for Series G Convertible Preferred Stock. (3)
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 Form of Stock Purchase Agreement between investors and Company, dated April 18, 2008 (9)
4.5 Specimen Warrant Certificate (included as Exhibit A to Exhibit 4.2 herein). (2)
4.6 1998 Stock Option Plan. (5)
4.7 Employee Stock Purchase Plan. (5)
4.8 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)
4.9 Stockholders' Agreement between the Founders of the Registrant and IBM, dated February 6, 1991 as
amended. (2)
4.10 Common Stock Purchase arrant issued by the Registrant to IBM, dated December 21, 1995 (included as
Exhibit I to Exhibit 10.5 herein). (2)
18
Exhibit Description
- ------- -----------
4.11 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)
4.12 Form of warrant issued to purchasers of Series G Convertible Preferred Stock. (3)
4.13 Form of Registration Rights Agreement for Series G Convertible Preferred Stock financing. (3)
4.14 2000 Stock Award Plan. (2)
4.15 2000 Long Term Performance Plan. (2)
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.(8)
10.8 Loan Agreement and Secured Promissory Note by and between Novatrix Biomedical, Inc. and the Registrant,
dated August 4, 2006. (8)
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 (11)
16.2 Letter on change in certifying accountant, dated as of July 18, 2008 (12)
23.0 Consent of Raiche Ende Malter & Co. LLP, independent registered public accounting firm*
23.1 Consent of Singer Lewak LLP, independent registered public accounting firm*
31.1 Certification Pursuant to Exchange Act Rule 13a-14(a) of Christopher A. Marlett *
31.2 Certification Pursuant to Exchange Act Rule 13a-14(a) of Michael J. Tomczak*
32.1 Certification Pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of Christopher A. Marlett*
32.2 Certification Pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of Michael J. Tomczak*
- --------------
* 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.
(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 Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007.
(8) Incorporated by reference to the Registrant's Interim Report on Form 10-Q for the quarterly period ended June 30, 2008.
(9) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed on July 5, 2007.
(10) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed on July 26, 2007.
(11) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed on May 10, 2007.
(12) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed on July 21, 2008.
19
SIGNATURES
Pursuant to the requirements of 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/ Christopher A. Marlett
-------------------------------------------------
Christopher A. Marlett
(Principal Executive Officer)
Dated: March 30, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated and on the dates indicated.
Signature Title
--------- -----
/s/ CHRISTOPHER A. MARLETT Chief Executive Officer and Director
- ---------------------------- (Principal Executive Officer)
Christopher A. Marlett
Date: March 30, 2009
/s/ MICHAEL J. TOMCZAK Chief Financial Officer and Director
- ---------------------------- (Principal Financial and Accounting Officer)
Michael J. Tomczak
Date: March 30, 2009
/s/ ROBERT M. LEVANDE Secretary and Director
- ----------------------------
Robert M. Levande
Date: March 30, 2009
/s/ PETER B. MILLS Director
- ----------------------------
Peter B. Mills
Date: March 30, 2009
20
Integrated Surgical Systems, Inc.
Index to Financial Statements
PAGE
----
Report of Raich Ende Malter & Co. LLP, Independent
Registered Public Accounting Firm, for the Year Ended
December 31, 2007 F - 2
Report of SingerLewan LLP, Independent Registered
Public Accounting Firm, for the Year Ended December 31, 2008 F - 3
Balance Sheets at December 31, 2008 and 2007 F - 4
Statements of Operations for the Years Ended
December 31, 2008 and 2007 F - 5
Statements of Stockholders' Equity
for the Years Ended December 31, 2008 and 2007 F - 6
Statements of Cash Flows for the Years Ended
December 31, 2008 and 2007 F - 7
Notes to Financial Statements F - 8
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,
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 balance sheet of Integrated Surgical Systems,
Inc. as of December 31, 2008, and the related statements of operations,
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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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, 2008, and the results of its operations and its cash
flows for the year then ended, in conformity with U.S. generally accepted
accounting principles.
We were not engaged to examine management's assessment of the effectiveness of
Integrated Surgical Systems, Inc.'s internal control over financial reporting as
of December 31, 2008, included in the Annual Report under Management's Report on
Internal Control Over Financial Reporting and, accordingly, we do not express an
opinion thereon.
Los Angeles, California
March 30, 2009
F-3
Integrated Surgical Systems, Inc.
Balance Sheets
As at December 31,
2008 2007
-----------------------------------
Current assets:
Cash and cash equivalents $ 3,322,358 $ 3,099,199
Investment in available-for-sale securities 1,116,151 --
Other current assets 62,822 51,333
-----------------------------------
Total current assets 4,501,331 3,150,532
Other assets -- 25,000
-----------------------------------
Total assets $ 4,501,331 $ 3,175,532
===================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 4,951 $ 4,951
Accrued liabilities 3,000 10,782
Accrued stock compensation 34,066 --
Income taxes payable 800 31,482
Deferred rent - current portion 22,379 41,966
-----------------------------------
Total current liabilities 65,196 89,181
Rent deposit 8,175 --
Deferred rent - noncurrent 23,185 220,824
-----------------------------------
Total liabilities 96,556 310,005
Convertible preferred stock, $0.01 par value,
1,000,000 shares authorized;
168 shares issued and outstanding ($168,496 aggregate
liquidation value) 168,496 168,496
Stockholders' equity:
Common stock, $0.01 par value, 100,000,000 shares authorized;
7,474,894 and 4,578,500 shares issued and outstanding at 74,749 45,785
December 31 2008 and 2007, respectively
Additional paid-in capital 64,101,448 62,419,665
Accumulated deficit (59,943,265) (59,768,419)
Accumulated other comprehensive income 3,347 --
-----------------------------------
Total stockholders' equity 4,236,279 2,697,031
-----------------------------------
Total liabilities and stockholders' equity $ 4,501,331 $ 3,175,532
===================================
See accompanying notes to financial statements.
F-4
Integrated Surgical Systems, Inc.
Statements of Operations
Year Ended December 31,
2008 2007
-------------------------------------
Continuing operations
General and administrative expenses $ 243,032 $ 199,300
Interest income, net 74,325 53,555
-------------------------------------
Loss from continuing operations before taxes (168,707) (145,745)
-------------------------------------
Income Taxes 800 --
-------------------------------------
Loss from continuing operations (169,507) (145,745)
Discontinued Operations:
Income (loss) from operations of discontinued
segment -- (1,273,836)
Net gain on sale of assets -- 6,376,137
Income tax expense (5,339) (30,000)
-------------------------------------
Gain (loss) from discontinued operations (5,339) 5,072,301
-------------------------------------
Net income (loss) $ 174,846 $ 4,926,556
=====================================
Basic net income (loss) per common share
Continuing operations $ (0.03) $ (0.03)
Discontinued operations $ -- $ 1.11
-------------------------------------
$ (0.03) $ 1.08
=====================================
Diluted net income (loss) per common share
Continuing operations $ (0.03) $ (0.03)
Discontinued operations $ -- $ 0.96
-------------------------------------
$ (0.03) $ 0.93
=====================================
Weighted average number of shares outstanding:
Basic 6,556,911 4,578,500
=====================================
Diluted 6,556,911 5,280,567
=====================================
See accompanying notes to financial statements.
F-5
Integrated Surgical Systems, Inc.
Statements of Stockholders' Equity
Accumulated
Additional Other Total
Common Stock Paid-in Comprehensive Accumulated Stockholders'
Shares Amount Capital Income Deficit (Deficit)/Equity
-----------------------------------------------------------------------------------------
Balance at December 31, 2006 4,578,500 $ 45,785 $ 62,398,269 $ -- $(64,694,975) $ (2,250,921)
Employee stock options -- -- 15,890 -- -- 15,890
Stock-based compensation -- -- 5,506 -- -- 5,506
Net income -- -- -- -- 4,926,556 4,926,556
----------------------------------------------------------------------------------------
Balance at December 31, 2007 4,578,500 45,785 62,419,665 -- (59,768,419) 2,697,031
Sale of common stock, net of 2,896,394 28,964 -- -- 1,691,742
offering costs 1,662,778
Stock-based compensation -- -- 19,005 -- -- 19,005
Unrealized gain on investment in -- -- -- 3,347 -- 3,347
securities
Net loss -- -- -- -- (174,846) (174,846)
----------------------------------------------------------------------------------------
Balance at December 31, 2008 7,474,894 $ 74,749 $ 64,101,448 $ 3,347 $(89,943,265) $ 4,236,279
========================================================================================
See accompanying notes to financial statements.
F-6
Integrated Surgical Systems, Inc.
Statements of Cash Flows
For the Year Ended December 31,
2008 2007
----------------------------------
Continuing operations
Cash flows from continuing operating activities $ (169,507) $ (145,745)
Loss from continuing operations
Adjustments to reconcile net loss from continuing operations to
cash used in continuing operating activities:
Stock-based compensation 19,005 21,396
Stock compensation 34,066 --
Changes in assets and liabilities
Other current assets 13,511 (51,333)
Other assets -- (25,000)
Accrued liabilities (7,782) --
Other current liabilities -- (444,408)
Income taxes payable (30,682) --
Rent deposit received 8,175 --
Deferred rent payable (217,226) 262,790
----------------------------------
Cash used in continuing operating activities (350,440) (382,300)
----------------------------------
Cash flows from continuing investing activities
Purchase of fixed income securities (1,112,804) --
----------------------------------
Cash provided by (used in) continuing investing activities (1,112,804) --
Cash flows from continuing financing activities
Proceeds from sale of common stock 1,750,000 --
Offering costs (58,258) --
----------------------------------
Cash provided by continuing financing activities 1,691,742 --
Cash provided by continuing operations 228,498 --
----------------------------------
Discontinued operations
Net cash used in discontinued operating activities 5,339 (2,320,400)
Net cash provided by discontinued investing activities -- 3,474,631
Net cash provided by discontinued financing activities -- 1,000,000
----------------------------------
Net cash provided by discontinued operations 5,339 2,154,231
----------------------------------
Net increase in cash 223,159 1,771,931
Cash at beginning of period 3,099,199 1,327,268
----------------------------------
Cash at end of period $ 3,322,358 $ 3,099,199
==================================
Supplemental disclosures of cash flow information:
Income taxes paid $ 35,339 $ --
Unrealized gain on available-for-sale securities $ 3,347 $ --
See accompanying notes to financial statements.
F-7
Integrated Surgical Systems, Inc.
Notes to Financial Statements
1. Organization and Operations
Integrated Surgical Systems, Inc. (the "Company") was incorporated in Delaware
in 1990 to design, manufacture, sell and service image-directed,
computer-controlled robotic software and hardware products for use in orthopedic
surgical procedures. The Company's products were authorized to be 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 from January 1, 2007
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 of the sale of its assets. At the same time, our
stockholders granted the Board of Directors authority to abandon any decision to
liquidate without further stockholder action if it determines the liquidation is
not in the best interests of the Company or our stockholders. The Board of
Directors decided it is in the best interest of the Company and its stockholders
to not liquidate.
2. Basis of Presentation
The accompanying financial statements reflect the operating results and
financial position of the Company in accordance with accounting principles
generally accepted in the United States of America.
3. Significant Accounting Policies
Use of estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications:
Reclassifications have been made to prior years' financial statement
presentation to conform to the current year presentation. Deferred offering
costs have been reclassed to other assets.
F-8
Cash and cash equivalents:
Such assets include savings account, checking account and money market account
held in three financial institutions. The Company has a checking account and
savings accounts at one institution with combined balances of approximately
$391,000 at December 31, 2008. The Company has a savings account in another
financial institution with a balance of $48,000 at December 31, 2008. These
accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up
to $250,000 per institution. The Company has a money market account in a
brokerage account with a third financial institution, invested in short-term
federal securities, with a balance of approximately $2,883,000 at December 31,
2008. The funds in the money market at this institution are guaranteed by the
Securities Investor Protection Corporation (SIPC) up to $500,000. The Company
had total uninsured funds at December 31, 2008 of $2,524,000.
Investment in Available-for-Sale Securities:
The Company has a portfolio of investments, which is accounted for in accordance
with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." in available-for-sale debt securities. Management determines the
appropriate classification of the securities at the time they are acquired and
evaluates the appropriateness of such classifications at each balance sheet
date. These fixed income debt securities are classified as available-for-sale.
Available-for-sale securities are stated at fair value, and unrealized holding
gains and losses, net of the related deferred tax effect, if any, are reported
as other comprehensive income, a separate component of stockholders' equity.
Stock-Based Compensation:
Compensation costs for stock, warrants or options issued to employees and
non-employees are based on the fair value method and accounted for in accordance
with SFAS No. 123 (R) "Share-Based Payment.". 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 issuance, an expected dividend yield of zero, the expected
life of the warrants or options and the expected volatility of our common stock.
The Company expects the options to fully vest and the forfeiture rate to be
zero.
Stock-based costs with future service periods are recognized as options vest
over its service period.
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 $0 and $677,403 for the years ended
December 31, 2008 and 2007, respectively.
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.
F-9
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
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 de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.
The Company's policy is to classify expenses as a result of income tax
assessments, as interest expense for interest charges and as penalties in
general and administrative expenses for penalty assessments.
New Accounting Pronouncements
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
non-controlling 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.
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements", ("SFAS 157") defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 applies to other accounting pronouncements that require the use of fair
value measurements. A fair value measurement assumes that the transaction to
sell an asset or transfer a liability occurs in the principal market for the
asset or liability, or, in the absence of a principal market, the most
advantageous market for the asset or liability. The Company has elected a
deferral of full implementation of SFAS 157 in accordance with Statement of
Financial Accounting Standards Board Staff Position No. 157-2 which defers the
effective date of SFAS No. 157 for non-financial assets and non-financial
liabilities that are not recognized or disclosed at fair value in the financial
statements on a recurring basis.
SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement 115", ("SFAS 159")
permits an entity to elect to measure various financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected should be reported in earnings at each subsequent reporting date.
F-10
Effective January 1, 2008, the Company adopted SFAS 157 and SFAS 159 without any
effect. As permitted by SFAS 159 we have elected to not use the fair value
option to measure our available-for-sale securities and will continue to report
under SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." We have made this election because the nature of our assets and
liabilities are not of such complexity that they would benefit from a change in
valuation to fair value.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the non-controlling
interest in a subsidiary (previously referred to as minority interests). SFAS
160 also requires that a retained non-controlling 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
non-controlling interests as a separate component of stockholders' equity. The
Company would also be required to present any net income allocable to
non-controlling 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 non-controlling
interests of any non wholly-owned businesses acquired in the future.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative and
Hedging Activities." SFAS 161 amends and expands the disclosure requirements
related to derivative instruments and hedging activities. SFAS 161 requires
qualitative disclosures about credit-risk-related contingent features in
derivative agreements. The provisions of SFAS 161 are effective for fiscal years
beginning after December 15, 2008. The Company does not currently expect the
adoption of SFAS 161 to have a material effect on its results of operations and
financial condition.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the GAAP
hierarchy). SFAS 162 will become effective 60 days following the SEC's approval
of the Public Company Oversight Board amendments to AU Section 411, "The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting Principles."
The Company does not currently expect the adoption of SFAS 162 to have a
material effect on its results of operations and financial condition.
F-11
Management does not believe that any other recently issued, but not yet
effective accounting pronouncements, if adopted, would have a material effect on
the accompanying financial statements.
4. Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period.
Diluted net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding during the
period plus dilutive common stock equivalents, using the treasury stock method.
For the year ended December 31, 2007 dilutive common stock equivalents were
convertible preferred stock of 660,769 shares. Convertible preferred stock of
707,966 shares would have been dilutive if the Company did not have a net loss
for the year ended December 31, 2008.
A warrant for 30,000 shares and stock options of 162,950 and 63,050 were
excluded from the calculation of loss per share for the years ended December 31,
2008 and 2007, respectively, because their effect was anti-dilutive.
5. 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
the remainder of the lease term (Note 13). 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.
F-12
(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.
6. Investment in Available-for-Sale Securities
The following is a summary of the Company's investment in available-for-sale
securities as of December 31, 2008:
Unrealized Unrealized
Cost Gains Losses Fair Value
===========================================================
U.S. federal agency
securities $1,112,804 $ 3,409 $ (62) $1,116,151
The cost and fair value of investment in available-for-sale debt securities, by
contractual maturity, as of December 31, 2008, are as follows:
Fair
Cost Value
-------------------------------------
Due within one year $ -- $ --
Due after one year through three years 877,007 880,289
Due after three years 235,797 235,862
Mortgage-backed securities -- --
---------- ----------
$1,112,804 $1,116,151
========== ==========
Expected maturities will differ from contractual maturities because the issuers
of certain debt securities have the right to call or prepay their obligations
without any penalties. The Company intends to be opportunistic with the purchase
and sale of its debt securities and expects all the securities to be sold or
called during the year ended December 31, 2009. Therefore, the Company has
classified the entire fair value of its investment in available-for-sale debt
securities as current assets in the accompanying balance sheets.
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.
On April 25, 2008, the Company sold an aggregate of 2,896,394 shares of common
stock at $0.6042 per share, for an aggregate purchase price of $1,750,000. The
Company incurred $58,258 of expenses in connection with the offering. Certain of
the investors are directors and affiliated with the Company's advisory services
firm that has provided investment banking services.
F-13
8. 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, 2008 and 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 price equal to 85% of the lowest sale price of
the common stock on its listed market over the five trading days preceding the
date of conversion ("Beneficial Conversion Feature"), subject to a maximum
conversion price. The number of shares of common stock that may be converted is
determined by dividing the stated value of the number of shares of 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, 2008 and 2007, no shares of Series G were
converted into shares of common stock. At December 31, 2008 and 2007, the
outstanding Series G shares could have been converted into a minimum of 707,966
and 660,769 shares of common stock, respectively.
Upon a change in control, sale of or similar transaction, as defined, each
holder of the Series G has the option to deem such transaction as a 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.
9. Stock-based compensation
The Company currently has a stock option plan 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 prices of non-statutory stock options may not be less than 85%
F-14
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.
SFAS 123(R) requires entities to estimate the number of forfeitures expected to
occur and record expense based upon the number of awards expected to vest. Prior
to adoption of SFAS No. 123(R), the Company accounted for forfeitures as they
occurred, as permitted under SFAS No. 123. The cumulative effect of adopting the
method change of estimating forfeitures is not material to the Company's
financial statements for the year ended December 31, 2008.
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, 2008 the plan had expired
therefore, no options were available for future grant. At 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, excluding officers and
directors, 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, 2008 and 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 year ended December 31, 2008, option activity was as follows:
Weighted-Average
Shares Remaining Aggregate
Exercise Price Contractual Term Fair Value
------------ ------------------------ ---------------------- ---------------------
Outstanding at beginning of year 63,050 $ 3.04
Granted 100,000 $ 0.38
Expired and forfeited 2,050 $ 36.21
Exercised - $ -
------------ ------------------------ ---------------------- ---------------------
Outstanding at end of year 161,000 $ 0.97 4.09 $43,335
============
Exercisable at end of year 61,000 $ 1.92 1.26 $13,215
============
F-15
The Company expects options for 100,000 shares of common stock will vest during
the year ended December 31, 2009.
For the year ended December 31, 2008, there were options for 100,000 shares of
common stock that were granted outside of either of the Company's stock option
plans.
The weighted-average grant-date fair vale of options granted during the years
2008 and 2007 were $0.30 and $0.26, respectively. The Company's stock options
have no intrinsic value as of December 31, 2008 and 2007.
For the years ended December 31, 2008 and 2007, the Company recorded stock-based
compensation expense, related to its stock options, of $ 19,005 and $ 21,396
respectively, which is included in general and administrative expenses.
As of December 31, 2008, a summary of options outstanding was as follows:
Range of Weighted-Average Number Weighted-Average Number Weighted-Average
Exercise Price Remaining Contractual Outstanding at Exercise Price Exercisable at Exercise Price
Life (Years) 12/31/08 12/31/08
- --------------- ------------------------ ------------------- ------------------ ----------------- ----------------
0.00-9.99 4.2 158,000 $0.36 58,000 $0.34
10.00-30.99 1.1 1,500 29.17 1,500 29.17
31.00-37.00 0.2 1,500 36.04 1,500 36.04
--- ------- ----- ------ -----
4.3 161,000 $0.97 61,000 $1.92
=== ======= ===== ====== =====
The following is a summary of the status of the Company's non-vested shares as
of December 31, 2008, and changes during the year ended December 31, 2008:
Weighted-Average
Grant-Date Fair
Non-vested Shares Shares Value
- -------------------------------------------------------------------------
Non-vested at beginning of year 50,000 $0.26
Granted 100,000 0.30
Expired and Forfeited - -
Vested 50,000 0.26
- -------------------------------------------------------------------------
Non-vested at end of year 100,000 $0.30
Stock-based compensation expense of $26,000 will be recognized for non-vested
options at December 31, 2008 in the amount of $26,000 during the year ended
December 31, 2009.
F-16
The following weighted average assumptions were used for the Black-Scholes
valuation of the stock granted for the years ended December 31,:
2008 2007
------------------------
Risk-free interest rate 3.11% 4.58%
Expected life of options 5 years 5 years
Annualized volatility 108.95% 110.50%
Dividends - -
Discount for post-vesting restrictions - -
========================
During the year ended December 31, 2008, the Company granted non-qualified stock
options to each of its directors to purchase an aggregate of 100,000 shares of
common stock at an exercise price of $0.38. During the same period, the Company
finalized its plan to compensate two of its directors with common stock in lieu
of cash compensation. The number of shares to be issued as compensation will be
based upon the equivalent cash compensation accrued divided by the closing stock
price on March 31, 2009. The Company recorded stock-based compensation related
to this common stock for the year ended December 31, 2008 of $34,066. The
non-vested stock-based compensation for this common stock at December 31, 2008
was $12,500 which is expected to be recognized as stock-based compensation
expense in the first three months of fiscal year 2009.
10. Income Taxes
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
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 under recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.
The Company's policy is to classify assessments, if any, for tax related
interest as interest expenses and penalties as general and administrative
expenses.
As of December 31, 2008, the Company had net operating loss (NOL) carryforwards
of approximately $51,000,000 which expires between 2009 and 2028.
As of December 31, 2008, the Company had State NOL carryforwards of
approximately $1,000,000 which expires between 2015 and 2018.
As of December 31, 2008, realization of the Company's net deferred tax asset of
approximately $18,603,000 was not considered more likely than not, and
accordingly, a valuation allowance of $18,603,000 has been provided. For the
year ended December 31, 2008, the valuation allowance decreased by $1,003,000.
As of December 31, 2008, 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 and 2005 are subject to review by the taxing
authorities.
F-17
As of December 31, 2008 and 2007, significant components of deferred tax assets
consisted of the following:
2008 2007
--------------------------------
Net operating loss $ 17,317,000 $ 18,300,000
Research and development credit 1,243,000 1,200,000
Deferred rent 14,000 100,000
Stock-based compensation 29,000 6,000
------------ ------------
18,603,000 19,606,000
Less valuation allowance (18,603,000) (19,606,000)
------------ ------------
Net Deferred Tax $ -- $ --
============ ============
For the years ended December 31, 2008 and 2007, 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:
2008 2007
---------------------------
Federal expense expected at statutory rate $ (57,632) $ 1,666,000
State income taxes, net of Federal (9,249) 290,000
benefit
State alternative minimum tax -- 30,000
Other 654 200,000
Change in valuation allowance 67,027 (2,156,000)
----------- -----------
Effective Income Tax $ 800 $ 30,000
=========== ===========
11. Related Party Transactions
In July, 2008, the Company retained an accounting firm in which an officer and
director is a partner to perform accounting and administrative services. During
the year ended December 31, 2008, the Company paid this firm $13,486.
F-18
In September 2008, the Company extended its November, 2007 Investment Banking
Advisory Services agreement to December 31, 2008. The Company paid a
reimbursable expense advance of $25,000 in December 2007 as part of this
agreement. There have been no other payments or fees earned as a result of this
agreement. The Company also has a money market account with this financial
institution, invested in short-term federal securities, with a balance of
approximately $2,880,000 at December 31, 2008. The Chief Executive Officer and
director of the Company is the Chief Executive Officer and director of the
financial institution. Another officer and director of the Company is a managing
director of the same financial institution.
12. Fair Value Measurement
The Company has recorded a deferred rent liability in accordance with SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities", ("SFAS
146") and SFAS No. 157, "Fair Value Measurements", ("SFAS 157"). The change in
fair value of the deferred rent liability during the year ended December 31,
2008, was $217,226 resulting in a liability of $45,564. The amount of the
liability was calculated based on the net present value technique using an
interest rate of 4.58%. The interest rate is based upon the three-year
Treasury-Bill rate as of July 2007. The change was due to a new sublease
agreement with a company to rent office space from the Company.
13. Commitments and Contingencies
Product Liability Insurance
The Company is currently self-insured for product liability insurance. The
Company is not aware of any current product liability claims.
Lease
As of December 31, 2008, the Company was committed for future minimum rent under
the lease for their former manufacturing, warehouse and administrative space,
net of sublease income, plus subsidy payments by the Company to the sublessor,
through December 31, 2010. The present value of the future minimum rent under
the lease, net of sublease income, was charged to general and administrative
expenses in connection with the Company's continuing operations. The minimum
payments are as follows:
Sublease
net of sublease
subsidy
Lease payments Net
--------------------------------------------
2009 $ 95,175 $ 71,175 $ 24,000
2010 97,875 73,875 24,000
-------- -------- --------
$193,030 $145,050 $ 48,000
======== ======== ========
F-19
Other
The Company is subject to claims arising in the ordinary course of business. On
January 8, 2009, a complaint was filed in Superior Court of California, County
of Sacramento in which the Company was named as a co-defendant in a matter
involving an automobile accident. The plaintiffs are seeking damages for pain &
suffering, emotional distress, past and future medical expenses and past and
future loss of earnings totaling approximately $30,000,000. The Company believes
the demands are totally without merit and intends to vigorously defend the
complaint. There are no other current proceedings or litigation involving us
that we believe if judgment were rendered against us would have a material
adverse impact on our financial position, results of operations or cash flows.
F-20