ISCO International, Inc. Form 10-Q 03/31/2007
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Form
10-Q
(Mark
One)
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934.
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For
the quarterly period ended March 31, 2007.
¨
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
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For
the transition period from
to
Commission
file number: 001-22302
ISCO
INTERNATIONAL, INC.
(Name
of Registrant as Specified in Its Charter)
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Delaware
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36-3688459
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(I.R.S.
Employer
Identification
No.)
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1001
Cambridge Drive, Elk Grove Village, Illinois
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60007
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(847)
391-9400
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
x No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. ¨ Yes
x No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
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Class
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Outstanding
at April 30, 2007
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Common
Stock, par value $0.001 per share
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190,600,000
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1
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Item 1.
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1
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1
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2
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3
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4
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Item 2.
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10
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Item 3.
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12
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Item 4.
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13
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14
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Item 1.
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14
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Item 1A.
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14
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Item 5.
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14
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Item 6.
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14
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(Unaudited)
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March
31,
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December
31,
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2007
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2006
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Assets:
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Current
Assets:
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Cash
and Equivalents
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$
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2,177,587
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$
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2,886,476
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Inventory
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6,299,186
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6,368,599
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Accounts
Receivable, net
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624,830
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2,554,716
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Prepaid
Expenses and Other
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106,223
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168,741
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Total
Current Assets
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9,207,826
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11,978,532
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Property
and Equipment
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1,353,960
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1,334,203
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Less:
Accumulated Depreciation
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(846,545)
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(811,167)
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Net
Property and Equipment
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507,415
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523,036
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Restricted
Certificates of Deposit
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163,940
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162,440
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Goodwill
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13,370,000
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13,370,000
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Intangible
assets, net
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839,482
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841,187
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Total
Assets
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$
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24,088,663
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$
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26,875,195
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Liabilities
and Stockholders' Equity:
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Current
Liabilities:
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Accounts
Payable
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$
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331,668
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$
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1,172,844
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Inventory-related
material purchase accrual
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78,091
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328,663
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Employee-related
accrued liability
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153,593
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284,653
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Accrued
professional services
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76,000
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93,000
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Other
accrued liabilities and current deferred revenue
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286,572
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225,724
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Current
Portion of LT Debt, including related interest, with related
parties
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11,489,852
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11,295,957
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Total
Current Liabilities
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12,415,776
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13,400,841
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Deferred
facility reimbursement
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98,750
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102,500
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Deferred
revenue - non current
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128,920
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75,900
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Notes
and related accrued interest with related parties
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5,193,200
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5,131,762
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Stockholders'
equity:
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Preferred
stock; 300,000 shares authorized; No shares issued and outstanding
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at March 31, 2007 and December 31, 2006
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-
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-
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Common
stock ($.001 par value); 250,000,000 shares authorized;
190,598,157
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and 189,622,133 shares issued and outstanding at March 31, 2007
and
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December 31, 2006, respectively
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190,598
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189,622
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Additional
paid-in capital (net of unearned compensation)
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172,864,096
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172,379,842
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Accumulated
deficit
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(166,802,677)
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(164,405,272)
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Total
Shareholders' Equity
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6,252,017
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8,164,192
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Total
Liabilities and Shareholders' Equity
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$
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24,088,663
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$
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26,875,195
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See
the
accompanying Notes which are an integral part of the Condensed Consolidated
Financial Statements.
NOTE:
The
condensed consolidated balance sheet as of December 31, 2006 has been
derived from the audited financial statements for that date, but does not
include all of the information and accompanying notes required by accounting
principles generally accepted in the United States of America for complete
financial statements.
(UNAUDITED)
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Three
Months Ended
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Three
Months Ended
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March
31, 2007
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March
31, 2006
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Net
sales
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$
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953,248
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$
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1,325,589
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Costs
and expenses:
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Cost
of sales
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709,655
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830,435
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Research and development
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621,055
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463,524
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Selling and marketing
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583,244
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630,905
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General and administrative
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1,199,647
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940,648
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Total
costs and expenses
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3,113,601
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2,865,512
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Operating
loss
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(2,160,353)
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(1,539,923)
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Other
income (Expense):
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Interest income
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18,280
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31,135
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Interest expense
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255,333
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191,250
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Total
other expense, net
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(237,053)
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(160,115)
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Net
loss
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$
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(2,397,406)
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$
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(1,700,038)
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Basic
and diluted loss per share
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$
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(0.01)
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$
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(0.01)
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Weighted
average number of common shares outstanding
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190,055,707
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183,570,258
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See
the
accompanying Notes which are an integral part of the Condensed Consolidated
Financial Statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(UNAUDITED)
ISCO
INTERNATIONAL
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CONSOLIDATED
STATEMENTS OF CASH FLOWS
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Three
Months Ended
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Three
Months Ended
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March
31, 2007
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March
31, 2006
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OPERATING
ACTIVITIES
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Net
loss
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$
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(2,397,406)
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$
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(1,700,038)
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Adjustments
to reconcile net loss to net cash used in operating
activities:
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Depreciation
and amortization
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46,995
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32,580
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Non-cash
compensation charges
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485,228
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220,931
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Changes
in operating assets and liabilities
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1,183,713
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34,971
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Net
cash used in operating activities
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(681,470)
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(1,411,556)
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INVESTING
ACTIVITIES
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Decrease/
(Increase) in restricted certificates of deposit
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(1,500)
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42,180
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Payment
of patent costs
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(11,412)
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(7,124)
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Acquisition
of property and equipment, net
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(14,506)
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(76,292)
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Net
cash used in investing activities
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(27,418)
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(41,236)
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FINANCING
ACTIVITIES
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Exercise
of stock options
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-
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163,100
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Net
cash provided by financing activities
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-
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163,100
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(Decrease)/Increase
in cash and cash equivalents
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(708,888)
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(1,289,692)
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Cash
and cash equivalents at beginning of period
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2,886,476
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3,486,430
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Cash
and cash equivalents at end of period
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$
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2,177,588
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$
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2,196,738
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See
the
accompanying Notes which are an integral part of the Condensed Consolidated
Financial Statements.
(UNAUDITED)
Note
1 - Basis of Presentation
The
condensed consolidated financial statements include the accounts of ISCO
International, Inc. and its wholly owned subsidiaries, Spectral Solutions,
Inc.
and Illinois Superconductor Canada Corporation (collectively referred to as
the
“Company”, or “we”, “our” or “us”). All significant intercompany balances and
transactions have been eliminated in consolidation.
The
accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America (“US GAAP”) for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by US GAAP for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation of results for the interim periods have been included.
These financial statements and notes included herein should be read in
conjunction with the Company’s audited financial statements and notes for the
year ended December 31, 2006 included in the Company’s Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The results of
operations for the interim periods presented are not necessarily indicative
of
the results to be expected for any subsequent quarter of, or for, the entire
year ending December 31, 2007. For further information, refer to the
financial statements, including the notes thereto, included in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2006.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board issued SFAS No. 157,
"Fair Value Measurements" ("SFAS 157"). This statement defines fair value as
used in numerous accounting pronouncements, establishes a framework for
measuring fair value in generally accepted accounting principles ("GAAP") and
expands disclosure related to the use of fair value measures in financial
statements. SFAS 157 does not expand the use of fair value measures in financial
statements, but standardizes its definition and guidance in GAAP. SFAS 157
is
effective for fiscal years beginning after November 15, 2007. We plan to adopt
the provisions of SFAS 157 on January 1, 2008. We are evaluating the potential
impact of SFAS 157, but at this time do not anticipate that it will have an
impact on our financial statements when adopted.
In
July
2006, FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). FIN 48
clarifies the accounting and reporting for uncertainties in income tax
positions. FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years ending
after December 15, 2006. We adopted FIN 48 as of January 1, 2007, as required.
See Footnote 7 for a more detailed discussion of FIN 48.
Note
2 - Realization of Assets
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. However, the Company
has sustained substantial losses from operations in recent years, and such
losses have continued through the year ended December 31, 2006 and more
recent quarter ended March 31, 2007. In addition, the Company has used, rather
than provided, cash in its operations. Consistent with these facts, Grant
Thornton, LLP, the Company’s independent registered public accounting firm,
included the comment published in our Annual Report on Form 10K as of and for
the year ended December 31, 2006, that there is substantial doubt about the
Company’s ability to continue as a going concern.
In
view
of the matters described in the preceding paragraph, recoverability of a major
portion of the recorded asset amounts shown in the accompanying balance sheet
is
dependent upon continued operations of the Company, which in turn is dependent
upon the Company’s ability to meet its financing requirements on a continuing
basis, to maintain present financing, and to succeed in its future operations.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
The
Company has incurred, and continues to incur, losses from operations. For the
years ended December 31, 2006, 2005, and 2004, the Company incurred net
losses of $4 million, $3 million, and $7 million, respectively. The quarter
ended March 31, 2007 showed an additional net loss of $2 million. The
Company has implemented strategies to reduce its cash used in operating
activities. The Company’s strategy included the consolidation of its
manufacturing and research and development facilities and a targeted reduction
of the employee workforce, increasing the efficiency of the Company’s processes,
focusing development efforts on products with a greater probability of
commercial sales, reducing professional fees and discretionary expenditures,
and
negotiating favorable payment arrangements with suppliers and service providers.
More importantly, the Company configured itself along an outsourcing model,
thus
allowing for relatively large, efficient production without the associated
overhead. The combination of these factors has been effective in bringing the
Company closer to profitability (from a net loss as high as $28 million during
2001) while enabling it to deliver significant quantities of solutions.
Beginning in 2005, the Company began to invest in additional product development
(engineering) and sales and marketing resources as it began to increase its
volume of business. While viewed as a positive development, these expenditures
have added to the funding requirements listed above.
We
believe that we have sufficient funds to operate our business until $11 million
of our debt becomes due in August 2007. That debt is held by our two largest
shareholders, including affiliates. While we expect to refinance this debt,
no
such refinancing has occurred as of the reporting date, therefore, the ability
to refinance our debt and maintain adequate working capital is necessary for
us
to continue as a going concern. Additionally, we project increases in working
capital requirements in order to pursue significant business opportunities
during 2007 and beyond, and also expect to spend additional financial resources
in the expansion of our business and product offerings. As such, we may require
additional capital prior to August 2007. We intend to look into augmenting
our
existing capital position by continuing to evaluate potential short-term and
long-term sources of capital whether from debt, equity, hybrid, or other
methods. The primary covenant in our existing debt arrangement involves the
right of the lenders to receive debt repayment from the proceeds of new
financing activities. This covenant may restrict our ability to obtain
additional financing or to apply the proceeds of a financing event toward
operations until the debt is repaid in full.
Note
3 - Net Loss Per Share
Basic
and
diluted net loss per share is computed based on the weighted average number
of
common shares outstanding. Common shares issuable upon the exercise of options
are not included in the per share calculations since the effect of their
inclusion would be antidilutive.
Note
4 - Inventories
Inventories
consisted of the following:
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March
31, 2007
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December
31, 2006
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Raw
materials
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$
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2,587,000
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$
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2,675,000
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Work
in process
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1,989,000
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2,332,000
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Finished
product
|
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1,723,000
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1,362,000
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Total
|
|
$
|
6,299,000
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$
|
6,369,000
|
|
Cost
of
product sales for the three months ended March 31, 2007, and the twelve
months ended December 31, 2006 include approximately $0 and $165,000,
respectively, of costs in excess of the net realizable value of inventory
(including obsolete materials).
Inventory
balances are reported net of a reserve for obsolescence. This reserve is
computed by taking into consideration the components of inventory, the recent
usage of those components, and anticipated usage of those components in the
future. This reserve was approximately $325,000 as of both March 31, 2007
and December 31, 2006.
Note
5 - Stock Options and Warrants
Effective
January 1, 2006, we adopted SFAS No. 123(R), “Share Based Payments,” as
described in Note 7, in the Notes to the Consolidated Financial
Statements.
At
March 31, 2007, a total of 4,912,000 stock options were outstanding under
the Company’s equity compensation plans. Stock-based compensation expense
recognized during the first quarter of 2007 and 2006 included compensation
expense for stock options granted prior to, but not yet fully vested as of,
March 31, 2007 and 2006, respectively. Such amounts were none and $61,000,
respectively.
Restricted
Share Rights
Restricted
share grants offer employees the opportunity to earn shares of the Company’s
stock over time. These grants generally vest over two years to four years for
employees and one year for non-employee directors. The Company recognizes the
issuance of the shares related to these stock-based compensation awards and
the
related compensation expense on a straight-line basis over the vesting period.
Included within these grants are also performance-based shares, that is, shares
that vest based on accomplishing particular objectives as opposed to vesting
over time. No performance-based shares were vested during the first quarter
2007
or 2006, respectively.
The
following table summarizes the restricted stock award activity during the first
quarter of 2007.
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|
Weighted
|
|
|
|
|
|
Average
Grant Date
|
|
|
|
Shares
|
|
Fair
Value (per share)
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2006
|
|
8,714,000
|
|
0.35
|
|
Granted
|
|
1,500,000
|
|
0.33
|
|
Forfeited
or canceled
|
|
(339,000)
|
|
0.38
|
|
Vested
|
|
(976,000)
|
|
0.37
|
|
Outstanding,
March 31, 2007
|
|
8,899,000
|
|
0.34
|
|
The
total
fair value of restricted shares vested during the three months ended
March 31, 2007 and 2006 was $383,000 and $105,000, respectively. Total
non-cash equity compensation expense recognized during the first quarter
2007
was $485,000, including the $383,000 for vested restricted share grants and
$102,000 for the straight-line amortization of restricted share grants that
did
not vest during the first quarter 2007.
On
August 19, 1993, the Board of Directors (“Board”) adopted the 1993 Stock
Option Plan for employees, consultants, and directors who were not also
employees of the Company (outside directors). This plan reached its ten-year
expiration during 2003. During the 2003 annual meeting of shareholders, the
Company’s shareholders approved a new 2003 Equity Incentive Plan to take the
place of the expiring 1993 plan. Unissued options from the 1993 plan were used
to fund the 2003 plan. During the 2005 annual meeting of shareholders, the
Company’s shareholders approved 12 million additional shares of stock to be
included in the 2003 Plan, and clarified the ability for the 2003 Plan to
utilize up to 5 million unused shares originally allocated to the 1993
Plan. The maximum number of shares issuable under these plans is 26,011,468.
These Plans are collectively referred to as the “Plan”.
For
employees and consultants, the Plan provides for granting of restricted shares
of stock, Incentive Stock Options (ISOs) and Nonstatutory Stock Options
(“NSOs”). In the case of ISOs, the exercise price shall not be less than 100%
(110% in certain cases) of the fair value of the Company’s common stock, as
determined by the Compensation Committee or full Board as appropriate (the
“Committee”), on the date of grant. In the case of NSOs, the exercise price
shall be determined by the Committee, on the date of grant. The term of options
granted to employees and consultants will be for a period not to exceed 10
years
(five years in certain cases). Options granted under the Plan default to vest
over a four-year period (one-fourth of options granted vest after one year
from
the grant date and the remaining options vest ratably each month thereafter),
but the vesting period is determined by the Committee and may differ from the
default period. In addition, the Committee may authorize option and restricted
stock grants with vesting provisions that are not based solely on employees’
rendering of additional service to the Company.
For
outside directors, the Plan provides that each outside director will be
automatically granted NSOs on the date of their initial election to the Board.
On the date of the annual meeting of the stockholders of the Company, each
outside director who is elected, reelected, or continues to serve as a director,
shall be granted additional NSOs, except for those outside directors who are
first elected to the Board at the meeting or three months prior. The options
granted vest ratably over one or two years, based on the date of grant, and
expire after ten years from the grant date. Beginning in 2006, the Compensation
Committee of the Board approved grants of Restricted Stock to be used as
compensation for outside directors in lieu of NSO’s.
Beginning
in 2006, the Board, at the recommendation of the Compensation Committee of
the
Board, began providing restricted stock grants ("RSGs") in lieu of stock
options within both employee and non-employee compensation programs. The impact
of the new accounting standard, industry trends, and the ability to use fewer
shares to achieve intended results are a few of the reasons behind this change
in view. The Board has also expressed an intention to continue to utilize
performance-based equity incentives for more cases of equity compensation than
in years past.
During
the first three months of 2007, the Board granted 1,500,000 RSGs to the
Company’s employees, most of which are scheduled to vest over a four year
period.
Note
6 - Debt and Financial Position
Uncommitted
Line of Credit (2002 Credit Line)
As
of the
reporting date, we have drawn $8.5 million of debt financing under a credit
line, as described below. During October 2002, we entered into an uncommitted
line of credit with our two largest shareholders, an affiliate of Elliott
Associates, L.P. (Manchester Securities Corporation) and Alexander Finance,
L.P.
This line initially provided up to $4 million to us. This line was uncommitted,
such that each new borrowing under the facility would be subject to the approval
of the lenders. Borrowings on this line bore an initial interest rate of 9.5%
and were collateralized by all the assets of the Company. Outstanding loans
under this agreement would be required to be repaid on a priority basis should
we receive new funding from other sources. Additionally, the lenders were
entitled to receive warrants to the extent funds were drawn down on the line.
The warrants bore a strike price of $0.20 per share of common stock and were
to
expire on April15, 2004. The credit line was to mature and be due, including
accrued interest thereon, on March 31, 2004. Due to a subsequent agreement
between the parties no warrants were issued with subsequent
borrowings.
According
to existing accounting pronouncements and SEC guidelines, we allocated the
proceeds of these borrowings between their debt and equity components. As
a
result of these borrowings during 2002, we recorded a non-cash charge of
$1.2
million through the outstanding term of the warrants (April, 2004). $250,000
and
$862,000 of that amount were recorded during 2004 and 2003, respectively.
These
warrants were valued at $1.2 million of the $2 million debt instrument based
on
a Black-Scholes valuation that included the difference between the value
of our
common stock and the exercise price of the warrants on the date of each warrant
issuance and a 30% discounted face value of the notes, leaving the remaining
$0.8 million as the underlying value of the debt. This $1.2 million was
amortized over the vesting period of the warrants (six quarters from the
fourth
quarter 2002 through the first quarter 2004).
During
October 2003, we entered into an agreement with our lenders to supplement the
credit line with an additional $2 million, $1 million of which was drawn
immediately and $1 million subsequently drawn upon our request and subject
to
the approval of the lenders. This supplemental facility bore a 14% rate of
interest and was due October 31, 2004. The term of the previous credit line
was
not affected by this supplement, and as such the $4 million borrowed under
that
line, plus accrued interest, remained due March 31, 2004.
During
February 2004, the credit line was extended to a due date of April 2005, with
interest after the initial periods to be charged at 14%. No warrants or other
inducements were issued with respect to this extension. Additionally, lenders
exercised their 10 million warrants during February 2004, agreeing to let us
use
the funds for general purposes as opposed to repaying debt.
During
July 2004, we and our lenders agreed to increase the aggregate loan commitments
under the credit line from $6,000,000 to $6,500,000. Simultaneously, we drew
the
remaining $1,500,000 of the financing.
During
November 2004, we and our lenders agreed to increase the line of credit to
up to
an additional $2 million to an aggregate loan commitment of $8,500,000, $1
million of which was drawn immediately by us with the remaining $1 million
drawable upon our request and subject to the approval of the lenders, which
occurred during January 2005.
During
February 2005, the credit line was extended until April 2006. Interest during
the extension period was to be charged at 9%. No warrants or other inducements
were issued with respect to this extension.
On
August
2, 2005, we and our lenders agreed to extend the due date from April 2006 until
August 2007, and the lenders also agreed to waive our obligation to repay its
debt with proceeds from an equity financing transaction with its lenders,
including affiliates, in August 2005. No warrants or other inducements were
issued as a result of this transaction.
2006
Convertible Debt
During
June 2006 we entered into a Securities Purchase Agreement (the “Agreement”) and
convertible notes (the “Notes”) with Alexander Finance, L.P., and Manchester
Securities Corporation L.P. (together, the “Lenders”), pursuant to which the
Lenders have agreed, to each loan us $2,500,000, or an aggregate of $5,000,000,
in convertible debt. The Lenders, including affiliates, are our two largest
shareholders and the lenders of the 2002 Credit Line referenced above. The
transaction was structured as a private placement of securities pursuant to
Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”)
and Rule 506 promulgated thereunder.
The
Notes
will mature on June 22, 2010 and bear an interest rate of 5% due at maturity.
Both the principal amount and any accrued interest on the Notes are convertible
into our common stock at a rate of $0.33 per share, subject to certain
anti-dilution adjustments. The Lenders have the right to convert the Notes,
both
principal and accrued interest, into shares of common stock at the rate of
$0.33
per share at any time. We have the right to redeem the Notes in full in cash
at
any time beginning two years after the date of the Agreement (June 2008). The
conversion rate of the Notes will be subject to customary anti-dilution
protections, provided that the number of additional shares of common stock
issuable as a result of changes to the conversion rate will be capped so that
the aggregate number of shares of common stock issuable upon conversion of
the
Notes will not exceed 19.99% of the aggregate number of shares of common stock
presently issued and outstanding.
The
Notes
are secured on a first priority basis by all of our intangible and tangible
property and assets. Payment of the Notes is guaranteed by our two inactive
subsidiaries, Spectral Solutions, Inc. and Illinois Superconductor Canada
Corporation. The Agreement contains customary representations, warranties and
covenants. We filed a registration statement covering the resale of the shares
of common stock issuable upon conversion of the Notes with the Securities and
Exchange Commission Concurrently with the execution of the Agreement, the
Lenders have waived their right under the 2002 Credit Line to receive the
financing proceeds from the issuance of the Notes, allowing us to use the funds
for product development or general working capital purposes. No fees were paid
to any financial advisor, placement agent, broker or finder in connection with
the transactions contemplated by the Agreement and the Notes.
Assuming
the Notes are held for the full four year term, 18,505,719 shares of common
stock would be required upon settlement, for both principal and interest. This
amount is approximately 10% of the then approximately 186 million shares of
common stock currently issued and outstanding. As of March 31, 2007, the
Lenders, including their affiliates, owned approximately 43% of the Company’s
outstanding shares. As a result of this transaction, the combined holdings
of
the Lenders would be approximately 48% of the Company’s outstanding common
stock.
Note
7 - Income Taxes
The
Company adopted the provisions of FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007. Previously, the Company
had
accounted for tax contingencies in accordance with Statement of Financial
Accounting Standards 5, Accounting for Contingencies. As required by FIN
48,
which clarifies Statement 109, Accounting for Income Taxes, the Company
recognizes the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax authority.
At
the adoption date, the Company applied FIN 48 to all tax positions for which
the
statute of limitations remained open. As a result of the implementation of
FIN
48, there was no effect on the Company’s financial statements as of January 1,
2007 and there have been no material changes in unrecognized tax benefits
since
January 1, 2007 through March 31, 2007.
The
Company is subject to income taxes in the U.S. federal jurisdiction and various
states jurisdictions. Tax regulations within each jurisdiction are subject
to
the interpretation of the related tax laws and regulations and require
significant judgment to apply. As the Company has sustained losses since
inception, a large number of tax years (1992-2006) are open as the losses
have
not been utilized by the Company.
The
Company is currently not aware of any current or threatened examination by
any
jurisdiction. The Company has elected to classify interest and penalties
related
to unrecognized tax benefits as a component of income tax expense, if
applicable. No accrual is required as of January 1, 2007 and March 31, 2007
for
interest and penalties.
Forward
Looking Statements
Because
we want to provide investors with more meaningful and useful information,
this
Quarterly Report on Form 10-Q contains, and incorporates by reference, certain
forward-looking statements that reflect our current expectations regarding
its
future results of operations, performance and achievements. We have tried,
wherever possible, to identify these forward-looking statements by using
words
such as “anticipates,” “believes,” “estimates,” “expects,” “designs,” “plans,”
“intends,” “looks,” “may,” and similar expressions. These statements reflect our
current beliefs and are based on information currently available to us.
Accordingly, these statements are subject to certain risks, uncertainties
and
contingencies, including the factors set forth under Item 1A, Risk Factors
of our Annual Report on Form 10-K for the year ended December 31, 2006,
which could cause our actual results, performance or achievements for 2007
and
beyond to differ materially from those expressed in, or implied by, any of
these
statements. You should not place undue reliance on any forward-looking
statements. Except as otherwise required by federal securities laws, we
undertake no obligation to release publicly the results of any revisions
to any
such forward-looking statements that may be made to reflect events or
circumstances after the date of this prospectus or to reflect the occurrence
of
unanticipated events.
General
We
have
shifted from manufacturing in-house to an outsourced manufacturing model wherein
we supply parts and raw materials to third parties, who then complete the
products to our specifications. This system has allowed us to begin to outsource
procurement and realize additional manufacturing efficiencies. Our products
are
designed for efficient production in this manner, emphasizing solid-state
electronics over mechanical devices with moving parts. The decrease in cost
associated with these developments, coupled with enhanced product functionality,
have significantly reduced overhead costs since 2002 and allowed us to realize
consistently improved margins. In addition, because we have built upon and
expanded upon our earlier developed technology, based on substantial input
from
customers, to launch the RF² product family and consider additional solutions,
we have generally controlled total research and development (“R&D”) costs.
Wireless
telecommunications has undergone significant merger activity in recent years,
a
trend which we believe will continue. These activities often result in operators
with disparate technologies and spectrum assets, and the need to integrate
those
assets. In addition, the deployment of data applications is adding to the
industry requirement to integrate disparate technologies into base stations
and
other fixed points of access, resulting in the need to manage multiple wireless
signals and keep them from interfering with each other. We are focused on
providing solutions that address these types of requirements. During 2006 and
2007 (year to date), we bid on substantially larger business opportunities
than
we had in recent years. These proposals often are accompanied by long approval
cycles and we may bear up-front product development costs. We believe the
potential benefits to outweigh these costs, and expect to continue to bid on
these types of business opportunities.
The
wireless telecommunications industry is subject to risks beyond our control
that
can negatively impact customer capital spending budgets (as occurred during
2003) and/or spending patterns (as occurred during 2004 and to a lesser extent
on a quarterly basis after 2004 and through the first quarter 2007). In
addition, a large portion of our debt ($11.3 million) matures in August 2007
and
must be refinanced. For these and other reasons, our financial statements have
been prepared assuming we will continue as a going concern.
From
a
company-specific view, we have invested in measured infrastructure growth to
allow for potentially substantial revenue expansion. This has caused spending
to
increase during the past three years, which has resulted in increased revenue
during that time. We believe that we now have the infrastructure largely in
place to allow for such potential revenue expansion, and therefore as a general
guideline do not expect fixed costs to rise, except for some R&D associated
with product initiatives, during 2007. We also announced the impending
retirement of one director (Mr. Tom Powers) when his term expires during June
2007, as well as the loss of another director (Dr. Martin Singer) during March
2007. Our Governance Committee has an ongoing program designed to identify
and
retain qualified external directors on our Board.
We
are
pursuing digital technologies, evidenced by the deployment of our digital
(front
end) ANF solution platform during 2006, subsequent extensions of that platform,
and our expectation to complete a fully digital ANF platform during 2007.
We
believe that by producing solutions in digital format, we will extend coverage
across additional wireless telecommunications spectrum and technologies as
well
as start to address new opportunities in the non-cellular market. If we are
successful in this effort, we expect to open a much broader addressable market
and thus have the opportunity to enjoy substantially larger revenues. Digitizing
the ANF platform has already led to a new revenue stream from software, as
evidenced by our deferred software-related revenue beginning during the fourth
quarter 2006 and growing during the first quarter 2007.
The
Company was founded in 1989 by ARCH Development Corporation, an affiliate
of the
University of Chicago, to commercialize superconductor technologies initially
developed by Argonne National Laboratory. The Company was incorporated in
Illinois on October 18, 1989 and reincorporated in Delaware on
September 24, 1993. Its facilities and principal executive offices are
located at 1001 Cambridge Drive, Elk Grove Village, IL 60007 and telephone
number is (847) 391-9400.
Results
of Operations
Three
Months Ended March 31, 2007 and 2006
Our
net
sales decreased $372,000, or 28%, to $953,000 for the three months ended
March 31, 2007 from $1,326,000 for the same period in 2006, which we
attribute to customer spending patterns during the quarter and the deferral
of
certain software-related revenue. Gross
margins decreased to 26% from 38% for the same periods, due largely to
volume-related differences and the deferral of higher margin software-related
revenue associated with our dANF platform. Cumulative deferred software revenue,
the amount of revenue that will be recognized in future periods related to
currently installed equipment and related software, increased to $0.3 million
at
March 31, 2007. This item did not exist at March 31, 2006. We anticipate that
revenue during the second quarter 2007 will exceed revenue posted during the
first quarter 2007 due to existing and anticipated future
orders.
We entered the second quarter 2007 with no substantial order backlog, consistent
with the last two quarters of 2006 and the first quarter of 2007.
Cost
of
sales decreased by $121,000, or 15%, to $710,000 for the three months ended
March 31, 2007 from $830,000 for the same period in 2006. The decrease in
cost of sales was due to the decrease in sales volume and the accounting impact
of revenue deferral highlighted above.
Our
research and development expenses increased by $158,000, or 34%, to $621,000
for
the three months ended March 31, 2007, from $464,000 for the same period in
2006. This increase is due to increased spending associated with the addition
of
a significant number of products to our RF² and dANF product families, but
primarily the the investment we are making in a fully digital ANF product
platform. We expect to continue to invest more in R&D during 2007 than we
did during 2006, likely similar to this first quarter, as we expand both our
existing product families and develop new products that would be applicable
in
wireless technologies beyond cellular telecommunications.
Selling
and marketing expenses decreased by $48,000, or 8%, to $583,000 for the three
months ended March 31, 2007, from $631,000 for the same period in 2006. The
sales commission program is linked to achievement of our annual revenue
plan. As such, sales commission expense was lower in conjunction with reduced
revenue.
General
and administrative expenses increased by $259,000, or 28%, to $1,200,000 for
the
three months ended March 31, 2007, from $941,000 for the same period in
2006. This increase was due to increased compensation-related charges from
grants of restricted stock.
Liquidity
and Capital Resources
As
of
March 31, 2007, the Company’s cash and cash equivalents were $2.2 million,
a decrease of $0.7 million from the balance at December 31, 2006 of $2.9
million.
During
the first quarter 2007, the Company utilized approximately $2 million in
cash
from the realization of receivables and inventory, net of additions, and
paid
out approximately $1 million in cash toward the reduction in accrued expenses,
net of additions. The remainder was the $1.7 million of business expenses
incurred during the quarter.
The
continuing development of, and expansion in, sales of our product lines,
any
potential merger and acquisition activity, as well as any required defense
of
our intellectual property, may require a commitment of funds to undertake
product line development and to market and sell our RF products. The actual
amount of our future funding requirements will depend on many factors,
including: the amount and timing of future revenues, the level of product
marketing and sales efforts to support our commercialization plans, the
magnitude of our research and product development programs, our ability
to
improve or maintain product margins, and the costs involved in protecting
our
patents or other intellectual property.
We
believe that we have sufficient funds to operate our business until $11.3
million of our debt becomes due in August 2007. That debt is held by our two
largest shareholders, including affiliates. While we expect to refinance this
debt no such refinancing has occurred as of the reporting date, therefore,
the
ability to refinance our debt and maintain adequate working capital is necessary
for us to continue as a going concern. Additionally, we project increases in
working capital requirements in order to pursue significant business
opportunities during 2007 and beyond, and also expect to spend additional
financial resources in the expansion of our business and product offerings.
As
such, we may require additional capital prior to August 2007. We intend to
look
into augmenting our existing capital position by continuing to evaluate
potential short-term and long-term sources of capital whether from debt, equity,
hybrid, or other methods. The primary covenant in our existing debt arrangement
involves the right of the lenders to receive debt repayment from the proceeds
of
new financing activities. This covenant may restrict our ability to obtain
additional financing or to apply the proceeds of a financing event toward
operations until the debt is repaid in full.
Contractual
Obligations and Commitments
The
following table lists the contractual obligations and commitments that existed
as of March 31, 2007:
|
Payments
Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 1
|
|
|
|
|
|
|
|
|
More
than
|
|
Year
|
|
Total
|
|
|
Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
5
Years
|
|
Long
Term Debt Obligations
|
$
|
17,787,000
|
|
$
|
11,749,000
|
|
|
-
|
|
$
|
6,038,000
|
|
|
-
|
|
Operating
Lease Obligations
|
$
|
1,609,000
|
|
$
|
202,000
|
|
$
|
414,000
|
|
$
|
429,000
|
|
$
|
564,000
|
|
Total
|
$
|
19,396,000
|
|
$
|
11,951,000
|
|
$
|
414,000
|
|
$
|
6,467,000
|
|
$
|
564,000
|
|
Off
Balance Sheet Arrangements
We
do not have any off balance sheet arrangements.
The
Company does not have any material market risk sensitive
instruments.
|
(a)
|
An
evaluation was performed under the supervision and with the participation
of the Company’s management, including its Chief Executive Officer, or
CEO, and Chief Financial Officer, or CFO, of the effectiveness of
the
Company’s disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act
of
1934, as amended (the “Exchange Act”) as of March 31, 2007. Based on
that evaluation, the Company’s management, including the CEO and CFO,
concluded that the Company’s disclosure controls and procedures are
effective to ensure that information required to be disclosed by
the
Company in reports that it files or submits under the Exchange Act,
is
recorded, processed, summarized and reported as specified in Securities
and Exchange Commission rules and
forms.
|
|
(b)
|
There
were no significant changes in the Company’s internal control over
financial reporting identified in connection with the evaluation
of such
controls that occurred during the Company’s most recent fiscal quarter
that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial
reporting.
|
None.
There
have been no material changes to the risk factors described in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2006.
Exhibits:
A list of exhibits is set forth in the Exhibit Index found on page 16 of this
report.
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 14 day
of
May 2007.
|
|
|
ISCO
International, Inc.
|
|
|
By:
|
|
/s/
John Thode
|
|
|
Mr.
John Thode
|
|
|
President
and Chief Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
By:
|
|
/s/
Frank Cesario
|
|
|
Frank
Cesario
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial and Accounting Officer)
|
EXHIBIT
INDEX
|
|
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
|
31.1
|
|
Certification
by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
|
|
Certification
by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|