SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

______________________ 

FORM 10-Q 

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

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)

  

 

 

 

            Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                Yes        X                      No         

         Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the

Exchange Act).                                                                   Yes__________   No_____X______ 

            The registrant had 11,201,196 shares of common stock outstanding as of July 11, 2003.

 

 

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. 

INDEX TO FORM 10-Q

Three and Six Months Ended June 30, 2003

 

PART I - FINANCIAL INFORMATION			Page
	Item 1 -	Consolidated Financial Statements
		Consolidated Balance Sheets	2
		Consolidated Statements of Operations	3
		Consolidated Statements of Cash Flows	5
		Consolidated Statements of Comprehensive Income	6
		Notes to Consolidated Financial Statements	7
	Item 2 -	Management's Discussion and Analysis of      Financial Condition and Results of Operations	14
	Item 3 -	Quantitative and Qualitative Disclosure
		About Market Risk	24
	Item 4 -	Controls and Procedures	24
PART II - OTHER INFORMATION
	Item 1 -	Legal Proceedings	25
	Item 4 -	Submission of Matters to a Vote of Security Holders	25
	Item 6 -	Exhibits and Reports on Form 8-K
		(a) Exhibits	25
		(b) Reports on Form 8-K	25
SIGNATURE			26

PART I
FINANCIAL INFORMATION

 

Item 1.  Consolidated Financial Statements

 

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS 

Assets 

	At June 30, 2003 (unaudited)		At December 31, 2002
Current assets:
Cash and cash equivalents	$ 1,290,830		$ 2,336,973
Accounts receivable, net of allowance for doubtful   accounts of $271,466 in 2003 and $298,324 in 2002	3,817,800		4,312,965
Inventories	5,802,096		5,423,684
Prepaid expenses and other current assets	519,530		330,245
Investments available for sale	574,203		847,816
Deferred tax asset	998,663		998,663
Total current assets	13,003,122		14,250,346
Property and equipment, at cost, net of accumulated depreciation   of $5,338,144  in 2003 and $5,050,140 in 2002	3,314,644		2,896,008
Goodwill	188,911		188,911
Software development costs, net of accumulated amortization of   $1,545,007 in 2003 and 2002	2,187,299		1,907,782
Deferred tax asset	7,904,655		7,280,718
Loan to related party	--		125,000
Other assets	478,313		574,729
Total assets	$27,076,944		$27,223,494

 

Liabilities And Shareholders' Equity 

Current liabilities:
Short-term borrowings	$  2,000,000	$  1,000,000
Current portion of long-term debt	1,465,397	1,383,192
Accounts payable	2,397,671	2,654,076
Accrued expenses	1,879,895	1,857,164
Deferred income - service contracts and other	1,140,788	910,515
Total current liabilities	8,883,751	7,804,947
Long term debt	1,098,109	1,862,276
Deferred income - service contracts and other	149,746	206,982
Total liabilities	10,131,606	9,874,205
Shareholders' equity:
Common stock, $.01 par value; Authorized: 50,000,000 shares     Shares issued and outstanding:  2003 - 11,196,820 and 2002 - 10,844,990	111,967	108,448
Additional paid-in capital	42,459,659	41,891,355
Unearned compensation	(89,090)	(16,378)
Accumulated other comprehensive loss	(204,632)	(40,464)
Accumulated deficit	(25,332,566)	(24,593,672)
Total shareholders' equity	16,945,338	17,349,289
Total liabilities and shareholders' equity	$27,076,944	$27,223,494
_______________ The accompanying notes are an integral part of these consolidated financial statements.

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) 

For the three months ended June 30,
	2003	2002

Sales of IVD systems	$   821,421	$1,299,940
Sales of IVD supplies and services	4,181,661	4,232,330
Sales of small instruments and supplies	1,438,398	1,283,950
Royalties and licensing revenues	__89,353	_  175,946
Net revenues	6,530,833	6,992,166
Cost of goods - IVD systems	684,134	683,010
Cost of goods - IVD supplies and services	1,623,168	1,583,896
Cost of goods - small instruments and supplies	733,282	648,484
Cost of goods sold	3,040,584	2,915,390
Gross margin	3,490,249	4,076,776
Marketing and selling	1,220,789	1,115,531
General and administrative	1,271,129	1,207,503
Research and development, net	1,333,301	1,089,775
Total operating expenses	3,825,219	3,412,809
Operating income (loss)	(334,970)	663,967
Other income (expense):
Interest income	10,006	13,835
Interest expense	(92,450)	(126,959)
Other income	38	1,276
	________	________
Income (loss) before income taxes	(417,376)	552,119
Income tax provision (benefit)	(166,951)	220,848
Net income (loss)	$(250,425)	$331,271
Net income (loss) per common share  - basic	$(0.02)	$0.03
- diluted	$(0.02)	$0.03
Weighted average number of common shares outstanding - basic	11,102,144	10,397,125
- diluted	11,102,144	11,734,898

     _______________
     The accompanying notes are an integral part of these consolidated financial statements.

 

 INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

 

For the six months ended June 30,
	2003	2002

Sales of IVD systems	$   1,405,713	$2,434,920
Sales of IVD supplies and services	8,311,877	8,223,646
Sales of small instruments and supplies	2,728,427	2,818,907
Royalties and licensing revenues	__218,956	_  255,919
Net revenues	12,664,973	13,733,392
Cost of goods - IVD systems	1,490,375	1,367,520
Cost of goods - IVD supplies and services	3,097,764	3,105,057
Cost of goods - small instruments and supplies	1,419,139	1,372,905
Cost of goods sold	6,007,278	5,845,482
Gross margin	6,657,695	7,887,910
Marketing and selling	2,189,707	2,020,676
General and administrative	3,048,129	2,387,312
Research and development, net	2,487,325	2,100,145
Total operating expenses	7,725,161	6,508,133
Operating income (loss)	(1,067,466)	1,379,777
Other income (expense):
Interest income	23,038	28,985
Interest expense	(187,099)	(308,131)
Other income	38	1,276
	________	________
Income (loss) before income taxes	(1,231,489)	1,101,907
Income tax provision (benefit)	(492,596)	440,763
Net income (loss)	$(738,893)	$661,144
Net income (loss) per common share  - basic	$(0.07)	$0.06
- diluted	$(0.07)	$0.06
Weighted average number of common shares outstanding - basic	11,028,098	10,362,743
- diluted	11,028,098	11,572,186

     _______________
     The accompanying notes are an integral part of these consolidated financial statements.

 

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

 

		For the six months ended June 30,
		2003		2002
Operating activities:
Net income (loss)		$(738,893)		661,144
Adjustments to reconcile net income (loss) to net cash provided (used) by operations:
Deferred taxes		(514,492)		405,171
Depreciation and amortization		417,137		486,764
Common stock and stock option compensation amortization		38,053		32,812
Changes in assets and liabilities:
Accounts receivable, net - trade and other		469,030		268,284
Service contracts, net		199,171		(32,526)
Inventories		(378,412)		(104,062)
Prepaid expenses and other current assets		(189,285)		(122,474)
Other assets		21,987		(161,329)
Accounts payable		(256,405)		(290,462)
Accrued expenses		48,974		(114,267)
Net cash provided (used) by operating activities		(883,135)		1,029,055
Investing activities:
Acquisition of property and equipment		(706,637)		(780,779)
Loan to related party		125,000		(125,000)
Software development costs		(279,517)		(436,442)
Net cash used by investing activities		(861,154)		(1,342,221)
Financing activities:
Borrowings under line of credit		4,500,000		2,000,000
Repayments of line of credit		(3,500,000)		(1,500,000)
Borrowings under term loan		--		1,500,000
Repayments of term loan		(153,169)		(2,449,999)
Repayment of notes payable		(583,500)		(583,500)
Payments of capital lease obligations		(26,243)		(16,715)
Issuance of common stock for cash		461,058		271,992
Net cash provided (used) in financing activities		698,146		(778,222)
Net decrease in cash and cash equivalents		(1,046,143)		(1,091,388)
Cash and cash equivalents at beginning of period		2,336,973		2,312,451
Cash and cash equivalents at end of period		$1,290,830		$1,221,063
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock, options and warrants in exchange for                      services		110,765		--
Supplemental disclosure of cash flow information:
Cash paid for interest		$    105,134		$    165,393
Cash paid for income taxes		41,215		54,559

 ______________________
The accompanying notes are an integral part of these consolidated financial statements.

 

 INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

	For the three months ended June 30,
	2003		2002
Net income (loss)	$(250,425	)	$331,271
Unrealized gain (loss) on investments, net of taxes	127,172		124,724
Comprehensive income (loss)	$(123,253	)	$455,995

 

	For the six months ended June 30,
	2003		2002
Net income (loss)	$(738,893	)	$661,144
Unrealized gain (loss) on investments, net of taxes	(164,168	)	60,121
Comprehensive income (loss)	$(903,061	)	$721,265

 __________________
The accompanying notes are an integral part of these consolidated financial statements.

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 

1.   Formation and Business of the Company.  

      International Remote Imaging Systems, Inc., (collectively "IRIS" or the "Company") was incorporated in California in 1979 and reincorporated during 1987 in Delaware. International Remote Imaging Systems, Inc. and its subsidiaries design, develop, manufacture and market in vitro diagnostic ("IVD") equipment, including IVD imaging systems based on patented and proprietary automated intelligent microscopy ("AIM") technology, as well as special purpose centrifuges and other small instruments for automating microscopic procedures performed in clinical laboratories. 

2.   Summary of Significant Accounting Policies. 

Basis of Presentation of Unaudited Interim Financial Statements: 

      In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position of the Company as of June 30, 2003 and 2002 and the results of its operations for the three and six month periods then ended. These financial statements should be read in conjunction with the financial statements and notes included in the Company's latest annual report on Form 10-K. Interim results are not necessarily indicative of results for a full year. 

Use of Estimates: 

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting periods.             The significant estimates in the preparation of the consolidated financial statements relate to the assessment of the carrying value of accounts receivables, inventories, purchased intangibles, estimated provisions for warranty costs and deferred tax assets. Actual results could materially differ from those estimates. 

Principles of Consolidation: 

      The consolidated financial statements include the accounts of International Remote Imaging Systems, Inc. and its wholly-owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. 

Stock Based Compensation: 

      The Company has adopted the disclosure only provisions of SFAS No. 148, "Accounting for Stock-Based Compensation." SFAS 148 defines a fair value based method of accounting for an employee stock option. Fair value of the stock option is determined considering factors such as the exercise price, the expected life of the option, the current price of the underlying stock and its volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the option. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period. Pro forma disclosures for entities that elect to continue to measure compensation cost under the intrinsic method provided by Accounting Principles Board Opinion No. 25 must include the effects of all awards granted. The Company accounts for stock-based awards to non-employees in accordance with SFAS 148. An expense is recognized for common stock, warrants or options issued or re-priced, for services rendered by non-employees based on the estimated fair value of the security exchanged. 

      IRIS has adopted the disclosure only provisions of SFAS 148. If compensation expense for the stock options had been determined using "fair value" at the grant date for awards in the second quarter and first six months of 2003 and 2002, consistent with the provisions of SFAS 148, the Company's net income (loss) and income (loss) per share would have been reduced to the pro forma amounts indicated below:

	For the Three Months Ended June 30,
	2003	2002
Net income (loss), as reported	$ (250,425)	$ 331,271
Deduct: total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects	106,094	111,113
Pro forma net income (loss)	(356,519)	220,158
Income (loss) per basic share as reported	(0.02)	0.03
Income (loss) per basic share pro forma	(0.03)	0.02
Income (loss) per diluted share as reported	(0.02)	0.03
Income (loss) per diluted share pro forma	(0.03)	0.02

 

	For the Six Months Ended June 30,
	2003	2002
Net income (loss), as reported	$ (738,893)	$ 661,144
Deduct: total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects	328,657	181,199
Pro forma net income (loss)	(1,067,550)	479,945
Income (loss) per basic share as reported	(0.07)	0.06
Income (loss) per basic share pro forma	(0.10)	0.05
Income (loss) per diluted share as reported	(0.07)	0.06
Income (loss) per diluted share pro forma	(0.10)	0.04

 

      Stock based employee compensation expense included in reported income, net of related tax effects was $10,618 and $8,787 in the second quarter of 2003 and 2002, respectively, and $22,832 and $19,687 in the first six months of 2003 and 2002, respectively. 

      The pro forma calculations above are for informational purposes only. Future calculations of the pro forma effects of stock options may vary significantly due to changes in the assumptions described above as well as future grants and forfeitures of stock options. 

Recent Accounting Pronouncements: 

      In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities."  SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The Company does not believe that the adoption of SFAS 149 has a material effect on the Company's financial position or results of operations. 

      In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Company does not currently have any such financial instruments and so is not currently affected by SFAS 150. 

Reclassifications: 

      Certain reclassifications have been made to the 2002 financial statements to conform to the 2003 presentation. 

3.      Comprehensive Income.  

      The Company's components of comprehensive income are net income (loss) and unrealized losses on investments.  The income tax effect allocated to the unrealized losses on available for sale securities for the three and six months ended June 30, 2003 was a provision of $84,781 and a benefit of $109,445, respectively. 

      The following is a reconciliation of accumulated other comprehensive income (loss) balance for the three and six months ended June 30, 2003:

	Three months	Six months
Beginning balance	$(331,804)	$(40,464)
Current period change	127,172	(164,168)
Ending balance	$(204,632)	$(204,632)

4.      Inventories.

      Inventories are carried at the lower of cost or market on a first-in, first-out basis and consist of the following:

 

		At June 30, 2003			At December 31, 2002
Finished goods			$1,655,355		$1,972,320
Work-in-process			444,561		167,839
Raw materials, parts and sub-assemblies			4,635,079		4,081,424
			6,734,995		6,221,583
Reserved for obsolescence			(932,899	)	(797,899	)
Net inventories			$5,802,096		$5,423,684

                                                           

5.    Related Party Transaction 

       In April 2002, the Company made a $125,000 loan to Dr. John A. O'Malley, then the Chairman, CEO and President of the Company (and currently, the Chairman of the Board of the Company), in accordance with his employment agreement.  The loan bore interest at the rate of five percent per annum and had a term of five years.  In June 2003, Dr. O'Malley repaid the loan in full, including interest.

 

6.    Short-Term Borrowings and Notes Payable. 

       The Company has an $8.0 million credit facility with California Bank and Trust, which consists of a $500,000 term loan, a $1.0 million term loan and a $6.5 million revolving line of credit. The $500,000 term loan is payable in 60 equal monthly installments. The $1.0 million term loan carried interest only for the first 12 months, followed by 48 months of equal principal payments plus interest, commencing in March, 2003. The $6.5 million credit line matures in June 2004.  Borrowings under the line of credit are limited to a percentage of eligible receivables and inventory. The entire credit facility bears interest at the lender's prime rate (4.0% at June 30, 2003), or LIBOR rate plus 2.0%. 

       The Company was not in compliance with certain of its debt covenants; however California Bank and Trust has issued a waiver and executed a forbearance agreement with the Company relieving it of compliance with these certain debt covenants through September 30, 2003. As part of that agreement, the Company has agreed to maintain a minimum excess borrowing availability of $1.0 million under its line of credit. 

      At June 30, 2003, the outstanding amounts under the Company's credit facility consist of $358,000 under the first term loan, $896,000 under the second term loan and $2.0 million under the revolving line of credit. An additional $791,000 was available under the line of credit at that date, after allowing for the $1.0 million minimum excess borrowing availability requirement mentioned above. 

      At June 30, 2003, the outstanding principal balance on the unsecured Subordinated Note Payable was $1.4 million.  The note is payable in monthly installments of approximately $97,000 plus interest on the unpaid balance. The note bears interest at the prime rate (4.0% on June 30, 2003) plus 2.0% and matures on July 31, 2004.

 

7.   Capital Stock. 

Stock and Stock Option Issuances: 

      During the six months ended June 30, 2003, the Company (i) issued 344,517 shares of common stock from the exercise of options, (ii) issued options to purchase 215,000 shares of common stock under the Company's stock option plans, (iii) issued options to purchase 290,000 shares of common stock under special inducement grants and (iv) cancelled options to purchase 55,334 shares of common stock.  At June 30, 2003, options to purchase 2,780,859 shares of common stock were issued and outstanding under the Company's stock options plans and special inducement grants. The outstanding options expire by the end of 2012.  The exercise price for these options ranges from $0.69 to $4.38 per share. At the Company's annual meeting in June 2003, shareholders approved a 1.0 million share increase in the number of shares available for future grants under the Company's 1998 Stock Option Plan. At June 30, 2003, there were 1,003,568 shares of common stock available for the gran ting of future options under all of the Company's stock option plans.  

Warrants: 

      During the six months ended June 30, 2003, the Company issued warrants to purchase 34,722 shares of common stock. As of June 30, 2003, the following warrants to purchase common stock were outstanding and exercisable: 

Number of Shares	Per Share Price		Expiration Date
853,040	$1.90		July 31, 2004
50,000	2.13		October 31, 2005
45,045	2.22		October 1, 2006
34,722	1.92		October 1, 2007

 

8.   Income Taxes. 

      The income tax provision for the six month period ended June 30, 2003 was a benefit of $492,596 as compared to an expense of $440,763 for the comparable period last year. The income tax provision differs from the federal statutory rate due primarily to state income taxes and permanent differences between income reported for financial statement and income tax purposes. 

      Realization of deferred tax assets associated with Net Operating Losses (NOL) and tax credit carry forwards is dependent upon generating sufficient taxable income prior to their expiration.  Management believes that there is a risk that certain of these NOL and credit carryforwards may expire unused and accordingly, has established a valuation reserve against them.  Although realization is not assured for the remaining deferred tax assets, management believes it is more likely than not that they will be realized through future taxable income or alternative tax strategies.  However, the net deferred tax assets could be reduced in the near term if management's estimates of taxable income during the carryforward period are significantly reduced or alternative tax strategies are not available.  The Company will continue to review its valuation allowances and make adjustments, if necessary.  Should the Company undergo an ownership change as defined in Section 382 of the Internal Revenue Code, the Company's NOL generated prior to the ownership change would be subject to an annual limitation.  If this occurred, a further adjustment of the valuation allowance would be necessary.

 

9.   Earnings Per Share (EPS). 

      The computation of per share amounts for the three and six months ended June 30, 2003 and 2002 is based on the average number of common shares outstanding for the period.  Options and warrants to purchase 3,763,666 and 357,430 shares of common stock outstanding during the three months and six months ended June 30, 2003 and 2002, respectively, were not considered in the computation of diluted EPS because their inclusion would have been antidilutive.  

      The following is a reconciliation of shares used in computing basic and diluted earnings per share amounts.

	Three Months Ended
	June 30, 2003	June 30, 2002
Weighted average number of shares - basic	11,102,144	10,397,125
Effects of Dilutive Securities       Options       Warrants       Preferred Stock	_________	675,876 423,525      238,372
Weighted average number of shares - diluted	11,102,144	11,734,898

	Six Months Ended
	June 30, 2003	June 30, 2002
Weighted average number of shares - basic	11,028,098	10,362,743
Effects of Dilutive Securities       Options       Warrants       Preferred Stock	_________	608,577 349,846      251,020
Weighted average number of shares - diluted	11,028,098	11,572,186

10.  Segment and Geographic Information. 

      The Company's operations are organized on the basis of products and related services and under SFAS No.131 operates in two segments: (1) urinalysis and (2) small instruments. 

      The urinalysis segment designs, develops, manufactures and markets IVD imaging systems based on patented and proprietary AIM technology for automating microscopic procedures for urinalysis.  The segment also provides ongoing sales of supplies and service necessary for the operation of installed urinalysis workstations. In the United States, these products are sold through our direct sales force; internationally, these products are sold through distributors. 

      The small instruments segment designs, develops, manufactures and markets a variety of benchtop centrifuges, small instruments and supplies. These products are used primarily for manual specimen preparation and dedicated applications in coagulation, cytology, hematology and urinalysis. These products are sold worldwide through distributors. 

      The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies" included in the Company's report on Form 10-K for the year ended December 31, 2002. The Company evaluates the performance of its segments and allocates resources to them based on earnings before income taxes, excluding corporate charges ("Segment Profit"). 

      The tables below present information about reported segments for the three and six month periods ended June 30, 2003 and 2002:

 

      Three Months Ended June 30, 2003: 

	Urinalysis	Small Instruments	Unallocated Corporate Expenses	Total
Revenues	$5,092,435	$1,438,398	--	$6,530,833
Interest income	$9,868	$138	--	$10,006
Interest expense	$2,162	--	$90,288	$92,450
Depreciation and amortization	$190,347	$21,636	$19,104	$231,087
Segment profit (loss)	$60,599	$203,933	$(681,908)	$(417,376)
Segment assets	$15,949,708	$2,223,918	$8,903,318	$27,076,944
Investment in long-lived assets