SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Form
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934.
|
For
the quarterly period ended June 30, 2007.
¨
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934.
|
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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Registrant’s
Telephone Number, Including Are Code (847) 391-9400
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):
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Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer x
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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 July 30, 2007
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Common
Stock, par value $0.001 per share
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199,931,440
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|
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i
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1
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1
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1
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2
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3
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4
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5
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11
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14
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14
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15
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15
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15
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15
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16
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June
30,
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December
31,
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2007
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2006
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(unaudited)
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Assets:
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Current
Assets:
|
|
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Cash
and equivalents
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$
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2,292,831
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$
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2,886,476
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Inventory
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4,767,113
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6,368,599
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Accounts
receivable, net
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1,986,813
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2,554,716
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Prepaid
expenses and other
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63,357
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168,741
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Total
current assets
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9,110,114
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11,978,532
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Property
and equipment
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1,396,841
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1,334,203
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Less:
accumulated depreciation
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(887,423)
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(811,167)
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Net
property and equipment
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509,418
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523,036
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Restricted
certificates of deposit
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168,338
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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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846,611
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841,187
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Total
Assets
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$
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24,004,481
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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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336,125
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$
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1,172,844
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Inventory-related
material purchase accrual
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56,800
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328,663
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Employee-related
accrued liability
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374,124
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284,653
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Accrued
professional services
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67,000
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93,000
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Other
accrued liabilities
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317,561
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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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-
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11,295,957
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Total
Current Liabilities
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1,151,610
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13,400,841
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Deferred
facility reimbursement
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95,000
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102,500
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Deferred
revenue - non current
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110,440
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75,900
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Notes
Payable, with related parties
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15,179,864
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5,000,000
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Accued
interest payable, with related parties
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258,644
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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 June 30, 2007 and December 31, 2006
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-
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-
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Common
stock ($.001 par value); 250,000,000 shares authorized; 199,931,440
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and 189,622,133 shares issued and outstanding at June 30, 2007
and
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|
|
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December 31, 2006, respectively
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199,931
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189,622
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Treasury
Stock
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(64,260)
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-
|
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Additional
paid-in capital (net of unearned compensation)
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174,707,969
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172,379,842
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Accumulated
deficit
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(167,634,717)
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|
(164,405,272)
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Total
Shareholders' Equity
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|
7,208,923
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|
8,164,192
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Total
Liabilities and Shareholders' Equity
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$
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24,004,481
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$
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26,875,195
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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.
See
the
accompanying Notes which are an integral part of the Condensed Consolidated
Financial Statements.
CONDENSED
CONSOLIDATED
STATEMENTS OF
OPERATIONS
(UNAUDITED)
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Three
Months Ended
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Six
Months Ended
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June
30,
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June
30,
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2007
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2006
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2007
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2006
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Net
sales
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$
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3,422,707
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$
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3,446,280
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$
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4,375,956
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$
|
4,771,869
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Costs
and expenses:
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|
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Cost
of sales
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1,702,715
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2,058,819
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2,412,370
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2,889,254
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|
Research
and development
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|
661,707
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474,415
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1,282,762
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|
937,939
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Selling
and marketing
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671,062
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852,192
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1,254,306
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1,483,097
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General
and administrative
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981,732
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1,118,432
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2,181,379
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2,059,080
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Total
costs and expenses
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4,017,216
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4,503,858
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7,130,817
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7,369,370
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Operating
loss
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(594,509)
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(1,057,578)
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(2,754,861)
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(2,597,501)
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Other
income (Expense):
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Interest
income
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17,926
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20,878
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36,205
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52,013
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Interest
expense
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255,456
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194,087
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510,789
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385,337
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Total
other expense, net
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(237,530)
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(173,209)
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(474,584)
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(333,324)
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Net
Loss
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$
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(832,039)
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$
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(1,230,787)
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$
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(3,229,445)
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$
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(2,930,825)
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|
|
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|
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Basic
and diluted loss per share
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$
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(0.00)
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$
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(0.01)
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$
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(0.02)
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$
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(0.02)
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|
|
|
|
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Weighted
average number of common
|
|
|
|
|
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shares
outstanding
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191,240,000
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|
184,411,485
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190,659,000
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|
183,993,196
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|
See
the
accompanying Notes which are an integral part of the Condensed Consolidated
Financial Statements.
ISCO
INTERNATIONAL, INC.
Six
Months ended June 30, 2007
(UNAUDITED)
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Common
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Common
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Treasury
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Additional
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Accumulated
|
|
|
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|
Stock
|
|
Stock
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|
Stock
|
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Paid-In
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|
Deficit
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|
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Shares
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Amount
|
|
Amount
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Capital
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|
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Total
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Balance
as of December 31, 2006
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|
189,622,133
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$
|
189,622
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$
|
|
$
|
172,379,842
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$
|
(164,405,272)
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$
|
8,164,192
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|
Exercise
of stock options and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vesting of restricted shares
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2,315,974
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2,316
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|
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|
(2,316)
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|
|
-
|
|
1.5M
accrued interest converted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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8,333,333
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8,333
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1,491,667
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1,500,000
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Treasury
stock
|
|
(340,000)
|
|
(340)
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|
(64,260)
|
|
|
|
|
|
(64,600)
|
|
Equity
compensation expense
|
|
|
|
|
|
|
|
838,776
|
|
|
|
838,776
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|
Net
loss
|
|
|
|
|
|
|
|
|
|
(3,229,445)
|
|
(3,229,445)
|
|
Balance
at June 30, 2007
|
|
199,931,440
|
$
|
199,931
|
$
|
(64,260)
|
$
|
174,707,969
|
$
|
(167,634,717)
|
$
|
7,208,923
|
|
See
the
accompanying Notes which are an integral part of the Condensed Consolidated
Financial Statements.
ISCO
INTERNATIONAL, INC.
|
|
Six
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2007
|
|
|
June
30, 2006
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net
loss
|
$
|
(3,229,445)
|
|
$
|
(2,930,875)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
99,983
|
|
|
68,260
|
|
Non-cash
compensation charges
|
|
838,775
|
|
|
631,423
|
|
Changes
in operating assets and liabilities
|
|
1,859,328
|
|
|
(805,167)
|
|
Net
cash used in operating activities
|
|
(431,359)
|
|
|
(3,036,359)
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
(Increase)/Decrease
in restricted certificates of deposit
|
|
(5,898)
|
|
|
42,180
|
|
Payment
of patent costs
|
|
(32,150)
|
|
|
(16,887)
|
|
Acquisition
of property and equipment, net
|
|
(59,638)
|
|
|
(95,003)
|
|
Net
cash used in investing activities
|
|
(97,686)
|
|
|
(69,710)
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
Short
swing profit recovery
|
|
-
|
|
|
3,124
|
|
Proceeds
from loan
|
|
-
|
|
|
5,000,000
|
|
Exercise
of stock options
|
|
-
|
|
|
173,801
|
|
Treasury
stock purchased
|
|
(64,600)
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
(64,600)
|
|
|
5,176,925
|
|
|
|
|
|
|
|
|
(Decrease)/Increase
in cash and cash equivalents
|
|
(593,645)
|
|
|
2,070,856
|
|
Cash
and cash equivalents at beginning of period
|
|
2,886,476
|
|
|
3,486,430
|
|
Cash
and cash equivalents at end of period
|
$
|
2,292,831
|
|
$
|
5,557,286
|
|
Note:
During June 2007, $1.5 million of accrued interest was converted to equity
and
$1.7 million was reclassified from accrued interest into notes payable
in a
non-cash transaction described in Note 6.
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 (“FASB”) 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 six months ended June 30, 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 10-K 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 first
six
months of 2007 showed an additional net loss of $3 million. The Company has
implemented strategies to reduce its cash used in operating activities. The
Company’s strategies include 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 has 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.
To
date,
the Company has financed its operations primarily through public and private
equity and debt financings. The Company believes that it has sufficient capital
to operate its business through 2007 and into 2008. Additional capital may
be
required, however, to support any significant quarterly revenue increases
during
2007 in the form of working capital, as well as in any greater than expected
expansion of the Company’s business and product offering that are expected to
provide additional revenue opportunities, whether as a result of internal
growth
or acquisition. Until recently, more than $11 million had been due in August
2007. However, on June 26, 2007, the Company and its lenders, Manchester
Securities Corporation ("Manchester") and Alexander Finance, L.P. ("Alexander"
and together with Manchester, the "Lenders"), including their affiliates,
entered into a restructuring of the Company’s line of credit arrangements as
more fully described in Notes 5 and 6.
Note
3 - Net Loss Per Share
Note
4 - Inventories
Inventories
consisted of the following:
|
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
Raw
materials
|
|
$
|
2,220,000
|
|
$
|
2,675,000
|
|
Work
in process
|
|
|
1,364,000
|
|
|
2,332,000
|
|
Finished
product
|
|
|
1,183,000
|
|
|
1,362,000
|
|
Total
|
|
$
|
4,767,000
|
|
$
|
6,369,000
|
|
Cost
of
product sales for the six months ended June 30, 2007, and the twelve months
ended December 31, 2006 included 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 $300,000 and $325,000 as of June 30,
2007 and December 31, 2006, respectively.
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.
As
of
June 30, 2007, a total of 4,872,000 stock options were outstanding under
the
Company’s equity compensation plans. Stock-based compensation expense recognized
during the second quarter of 2007 and 2006 included compensation expense
for
stock options granted prior to, but not yet fully vested as of, June 30,
2007
and 2006, respectively. Such amounts were none and $17,000, 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 during the first six months of 2006, respectively. 40,000 performance-based
shares vested during the second quarter 2007.
The
following table summarizes the restricted stock award activity during the
first
six months of 2007.
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
Grant Date
|
|
|
|
|
Shares
|
|
|
Fair
Value (per share)
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2006
|
|
|
8,714,000
|
|
|
0.35
|
|
Granted
|
|
|
2,667,000
|
|
|
0.27
|
|
Forfeited
or canceled
|
|
|
(505,000)
|
|
|
0.35
|
|
Vested
|
|
|
(2,316,000)
|
|
|
0.35
|
|
Outstanding,
June 30, 2007
|
|
|
8,560,000
|
|
|
0.32
|
|
The
total
fair value of restricted shares vested during the three and six month periods
ended June 30, 2007 was $455,000 and $812,000, respectively. Total non-cash
equity compensation expense recognized during the three and six month periods
ended June 30, 2007 were $354,000 and $839,000, respectively. Non-cash
equity expense for the three and six month periods ended June 30, 2007
included $455,000 and $812,000 for vested restricted share grants and ($101,000)
and $27,000, respectively, for the straight-line amortization of restricted
share grants that did not vest during the three and six month periods ended
June 30, 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 the 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, a two-year grant to the CEO of 2 million time-vest restricted
shares and 4 million performance-vest restricted shares, 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 32,011,468. 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 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 were a few of the reasons behind this change in
view.
The Board 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 six months of 2007, the Board granted 2,235,000 RSGs to the Company’s
employees, most of which are scheduled to vest over a four year period.
On
June
26, 2007, as part of the debt restructuring that is detailed in Note 6, $1.5
million of accrued interest was converted into ISCO common stock at $0.18
per
share. See note 6 for additional discussion.
On
June
28, 2007, the Company, on the recommendation and approval of the Compensation
Committee of the Company’s Board of Directors, determined to make certain
changes to the terms of separate restricted stock agreements (the “Agreements”)
with each of John Thode, the Company’s President and Chief Executive Officer,
and Dr. Amr Abdelmonem, the Company’s Chief Technology Officer. These changes
were made to ease end-of-year administrative burdens and compliance with
tax
withholding requirements. The changes included: 1) changing the date on which
shares of restricted stock will vest to December 23, 2007, instead of December
31, 2007 as originally provided (in each case, subject to continued service
through that date); and 2) waiving the requirements of Section 9(g) of each
Agreement with respect to cash withholding requirements so that each officer
can
satisfy withholding requirements with respect to shares vesting on June 30,
2007
and December 23, 2007 by delivering a portion of those shares to the Company
in
accordance with the terms of the Plan; and 3) the Compensation Committee
authorized management to take any actions it may deem necessary or advisable
to
prevent any unintended and/or adverse consequences that may result from the
application of recent legislation concerning the taxation of deferred
compensation to the Company’s plans, compensation arrangements and agreements,
provided that such actions do not materially increase any obligation of the
Company. Pursuant to these changes, upon the share vesting on June 30, 2007,
ISCO International, Inc. withheld 145,000 shares from Amr Abdelmonem and
195,000
shares from John Thode as treasury stock.
Note
6 - Debt and Financial Position
2007
Convertible Debt that replaced the 2002 Credit Line
On
June
26, 2007, as previously referenced in Notes 2 and 5, the Company, Manchester
Securities Corporation ("Manchester"), Alexander Finance, L.P. ("Alexander"
and
together with Manchester, and the affiliates of both entities, the "Lenders"),
entered into an agreement to restructure the $11.7 million of credit line
debt
and accrued interest which was to mature August 2007.
The
Company issued amended and restated Notes (the "Amended and Restated Notes")
in
aggregate principal amount, including accrued interest on the maturing notes,
of
approximately $10.2 Million to replace all of the maturing credit line notes
and
reflect the amendments to the Loan Documents, including: (i) the extension
of
the termination dates and maturity dates for all the maturing notes that
were
set to mature August 1, 2007 to a new maturity date of August 1, 2009; (ii)
the
reduction of the interest rate on each of the maturing notes from 9% to 7%
per
annum; (iii) provision for the conversion of the aggregate principal amount
outstanding on each of the maturing notes at the election of the Lenders,
together with all accrued and unpaid interest thereon into shares (the
"Conversion Shares") of the Company's common stock ("Common Stock"), par
value
$0.001 per share, at an initial conversion price of $0.20 per share. In
addition, pursuant to the amendments to the Loan Documents, each of the Lenders
immediately converted $750,000 in principal amount and accrued interest
outstanding under the aforementioned notes each Lender held prior to the
Restructuring into shares (the "Initial Conversion Shares") of Common Stock
at a
conversion price of $0.18, the 10 day volume weighted average closing price
of
the Company's Common Stock on the American Stock Exchange ("AMEX") as of
June
21, 2007.
Before
the Lenders may exercise their respective rights to convert the Amended and
Restated Notes into the Conversion Shares, the Company is required to seek
the
approval of its stockholders to (i) increase the number of authorized shares
of
Common Stock available for issuance under its Certificate of Incorporation,
as
amended and (ii) issue the Conversion Shares pursuant to AMEX rules as well
as
to obtain the approval of AMEX to list the Initial Conversion Shares and
the
Conversion Shares on AMEX. The Company is required to obtain these approvals
within one year of the issuance date of the Amended and Restated Notes. In
the
event that these required approvals are not obtained by that time, then the
interest rate on the Amended and Restated Notes will increase to a rate of
15%
per annum. If the Initial Conversion Shares and Conversion Shares are not
registered under the Registration Rights Agreement, as described below, by
the
15 month anniversary of the issuance date of the Amended and Restated Notes,
then the then-current interest rate will increase by a rate of 1% per annum
each
month thereafter until the Initial Conversion Shares and Conversion Shares
are
registered, up to the default rate of the lower of 20% per annum or the highest
amount permitted by law.
Assuming
the Amended and Restated Notes are not converted until maturity, approximately
58.5 million shares of Common Stock would be required to be issued upon
conversion, for both principal and interest.
2006
Convertible Debt
During
June 2006 the Company entered into a Securities Purchase Agreement (the
“Agreement”) and convertible notes (the “2006 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
(replaced by the 2007 Convertible Debt) referenced above.
The
2006
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 the Company’s common stock at a rate of $0.33 per share,
subject to certain anti-dilution adjustments. The Lenders have the right
to
convert the 2006 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 2006 Notes in full in cash at any time beginning two years after
the
date of the Agreement (June 2008). The conversion rate of the 2006 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 2006 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 the Company’s 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. The Company filed a registration statement covering the resale
of
the shares of common stock issuable upon conversion of the 2006 Notes with
the
Securities and Exchange Commission. Concurrently with the execution of the
Agreement, the Lenders waived their right under the 2002 Credit Line to receive
the financing proceeds from the issuance of the Notes, allowing the Company
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 2006 Notes are held for the full four year term, 18.5 million shares
of
common stock would be required upon settlement, for both principal and interest.
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 2007 financial statements, nor have
there been any material changes in unrecognized tax benefits during
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 are open (1992-2006) 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 June 30, 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
improved margins. In addition, because we have built upon and expanded upon
our
earlier developed technology, based on substantial input from customers,
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). 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 from 2004 levels. 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 the remainder of 2007. We also
announced the retirement of one director (Mr. Tom Powers) when his term expired
during June 2007, as well as the departure 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 half of 2007. We expect
software-related revenue as a percentage of our total revenue to increase
over
time as we implement our fully digital product platform.
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 June 30, 2007 and 2006
Our
net
sales decreased $23,000, or 1%, to $3,423,000 for the three months ended
June 30, 2007 from $3,446,000 for the same period in 2006, which we
attribute to the timing of closing new customer orders and the deferral of
certain software-related revenue. Gross margins increased to 50% from 40%
for
the same periods, primarily due to the benefit of cost reduction activities
in
the manufacturing process (design improvements and material costs). 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 June 30, 2007. This item did not exist at June
30,
2006. We, along with many in the industry, expect customer spending to increase
during the second half of 2007, as compared to the first half of
2007.
Cost
of
sales decreased by $356,000, or 17%, to $1,703,000 for the three months ended
June 30, 2007 from $2,059,000 for the same period in 2006. The decrease in
cost of sales was primarily due to the benefit of cost reduction activities
associated with product design improvements and materials utilized in
production.
Our
research and development (“R&D”) expenses increased by $188,000, or 39%, to
$662,000 for the three months ended June 30, 2007, from $474,000 for the
same period in 2006. This increase was due to increased spending associated
with
the addition of a significant number of products to our RF² and dANF product
families, but primarily to the investment we are making in a fully digital
ANF
product platform. We expect to continue to invest more in R&D during the
remainder of 2007 than we did during the comparable period of 2006, likely
at a
rate similar to the second quarter of 2007, 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 $181,000, or 21%, to $671,000 for the
three
months ended June 30, 2007, from $852,000 for the same period in 2006. The
decrease in expense was attributable to higher personnel in this area during
2006 as we had an overlap of personnel when Mr. Wetterling and others joined
the
Company and their predecessors were here simultaneously, and when we were
completing an extensive marketing analysis. We expect selling and marketing
expenses to increase during the second half of 2007 as we look to add new
customers and launch new products, particularly the digital ANF product
platform.
General
and administrative expenses decreased by $136,000, or 12%, to $982,000 for
the
three months ended June 30, 2007, from $1,118,000 for the same period in
2006. This decrease was attributable to a decrease in non-cash equity
compensation charges as compared to the prior period. Other than fluctuations
in
non-cash equity compensation charges, general and administrative costs are
expected to increase slightly during the rest of the year due to anticipated
non-recurring professional fees.
Six
Months Ended June 30, 2007 and 2006
Our
net
sales decreased $396,000, or 8%, to $4,376,000 for the six months ended
June 30, 2007 from $4,772,000 for the same period in 2006, which we
attribute to the timing of closing new customer orders and the deferral of
certain software-related revenue. Gross margins increased to 45% from 40%
for
the same periods, primarily due to the benefit of cost reduction activities
in
product design and materials. 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 June
30,
2007. This item did not exist at June 30, 2006. We, along with many in the
industry, expect customer spending to increase during the second half of
2007,
as compared to the first half of 2007.
Cost
of
sales decreased by $477,000, or 17%, to $2,412,000 for the six months ended
June 30, 2007 from $2,889,000 for the same period in 2005. The decrease in
cost of sales was due in part to the decrease in revenue and in part to the
benefit of cost reduction activities in the manufacturing process (approximately
45% gross margin during 2007 vs. 40% during 2006).
Our
R&D expenses increased by $345,000, or 37%, to $1,283,000 for the six months
ended June 30, 2007, from $938,000 for the same period in 2006. This
increase was due to increased spending associated with the addition of a
significant number of products to our RF² and dANF product families, but
primarily to the investment we are making in a fully digital ANF product
platform. We expect to continue to invest more in R&D during the remainder
of 2007 than we did during the comparable period of 2006, likely at a rate
similar to this second quarter 2007, 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 $229,000, or 15%, to $1,254,000 for the
six
months ended June 30, 2007, from $1,483,000 for the same period in 2006.
The decrease in expense was attributable to higher personnel in this area
during
2006 as we had an overlap of personnel when Mr. Wetterling and others joined
the
Company and their predecessors were here simultaneously, and when we were
completing an extensive marketing analysis. We expect selling and marketing
expenses to increase during the second half of 2007 as we look to add new
customers and launch new products, particularly the digital ANF product
platform.
General
and administrative expenses increased by $122,000, or 6%, to $2,181,000 for
the
six months ended June 30, 2007, from $2,059,000 for the same period in
2006. This increase was attributable to an increase in non-cash equity
compensation charges as compared to the prior period. Other than fluctuations
in
non-cash equity compensation charges, general and administrative costs are
expected to increase slightly during the rest of the year due to anticipated
non-recurring professional fees.
Liquidity
and Capital Resources
As
of
June 30, 2007, the Company’s cash and cash equivalents were $2.3 million, a
decrease of $0.6 million from the balance at December 31, 2006 of $2.9
million.
During
the first six months of 2007, the Company utilized approximately $2.2 million
in
cash from the realization of receivables and inventory, net of additions,
and
paid out approximately $0.9 million in cash toward the reduction in accrued
expenses, net of additions. The remainder was the approximately $1.8 million
of
business expenses incurred during the period.
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.
To
date,
we have financed our operations primarily through public and private equity
and
debt financings. While we believe that we have sufficient financial resources
to
operate our business normally through 2007 and into 2008, potential increases
in
working capital requirements resulting from larger quarterly revenues during
2007 and beyond, and also the potential deployment of additional financial
resources in the expansion of our business and product offering (internally
through organic growth and/or externally via acquisition) that are expected
to
provide additional revenue opportunities, may result in a need for additional
capital. On June 26, 2007, we agreed, with our lenders, to restructure the
credit line debt due in August 2007 to August 2009, as described in Note
6
herein.
Contractual
Obligations, Commitments, and Off Balance Sheet
Arrangements
The
following table lists the contractual obligations and commitments that existed
as of June 30, 2007:
Contractual
Obligations
|
Payments
Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 1
|
|
|
|
|
|
More
than
|
|
Year
|
|
Total
|
|
Year
|
|
1-3
Years
|
|
3-5
Years
|
|
5
Years
|
|
Long
Term Debt Obligations
|
$
|
17,757,193
|
$
|
-
|
$
|
17,757,193
|
|
-
|
|
-
|
|
Operating
Lease Obligations
|
$
|
1,559,000
|
$
|
203,000
|
$
|
416,000
|
$
|
432,000
|
$
|
508,000
|
|
Total
|
$
|
19,316,193
|
$
|
203,000
|
$
|
18,173,193
|
$
|
432,000
|
$
|
508,000
|
|
We
do 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 June 30, 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 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.
|
There
have been no material changes to prior disclosures in our 2006 Annual Report
on
Form 10K.
At
our
annual meeting of shareholders held on June 16, 2007, the following
proposals were approved by the margins indicated:
|
|
|
Number
of Shares
|
|
|
|
|
Voted
For
|
|
Withheld
|
|
1
|
To
elect directors to the Board of Directors for a term of one (1) year
and until his successor is
|
|
|
|
|
|
|
duly
elected and qualified.
|
|
|
|
|
|
|
Mr. John
Thode
|
|
161,755,904
|
|
5,046,778
|
|
|
Mr. Jim
Fuentes
|
|
162,058,873
|
|
4,743,809
|
|
|
Dr. Amr
Abdelmonem
|
|
161,539,830
|
|
5,262,852
|
|
|
Dr. George
Calhoun
|
|
161,103,240
|
|
5,699,442
|
|
|
Mr. Mike
Fenger
|
|
161,996,895
|
|
4,805,787
|
|
|
Mr. Ralph
Pini
|
|
162,061,593
|
|
4,741,089
|
|
|
|
|
Number
of Shares
|
|
|
|
|
|
|
|
|
|
Voted
For
|
|
Against
|
|
Abstain
|
|
|
|
|
|
|
|
|
|
|
2
|
To
approve the appointment of Grant Thornton LLP as the independent
auditors
|
|
|
|
|
|
|
|
|
of
the Company’s financial statements for the fiscal year
ending
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
163,070,806
|
|
2,880,629
|
|
851,247
|
|
Exhibits:
A list of exhibits is set forth in the Exhibit Index found on page 21 of
this
report.
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 13th day of August
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)
|