file10q10312007.htm
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 September 30, 2007
OR
¨
|
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)
Delaware
|
|
36-3688459
|
(State
or Other Jurisdiction of Incorporation
or Organization)
|
|
(I.R.S.
EmployerIdentification
No.)
|
1001
Cambridge Drive, Elk Grove Village, Illinois
|
|
60007
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
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):
|
|
|
|
|
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.
|
|
|
Class
|
|
Outstanding
at October 30, 2007
|
Common
Stock, par value $0.001 per share
|
|
200,633,315
|
ISCO
INTERNATIONAL, INC.
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
2,782,761
|
|
|
$ |
2,886,476
|
|
Inventory
|
|
|
3,820,067
|
|
|
|
6,368,599
|
|
Accounts
receivable, net
|
|
|
889,908
|
|
|
|
2,554,716
|
|
Prepaid
expenses and other
|
|
|
80,485
|
|
|
|
168,741
|
|
Total
current assets
|
|
|
7,573,221
|
|
|
|
11,978,532
|
|
Property
and equipment
|
|
|
1,407,530
|
|
|
|
1,334,203
|
|
Less:
accumulated depreciation
|
|
|
(909,363 |
) |
|
|
(811,167 |
) |
Net
property and equipment
|
|
|
498,167
|
|
|
|
523,036
|
|
Restricted
certificates of deposit
|
|
|
170,648
|
|
|
|
162,440
|
|
Goodwill
|
|
|
13,370,000
|
|
|
|
13,370,000
|
|
Intangible
assets, net
|
|
|
848,617
|
|
|
|
841,187
|
|
Total
Assets
|
|
$ |
22,460,653
|
|
|
$ |
26,875,195
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$ |
224,087
|
|
|
$ |
1,172,844
|
|
Inventory-related
material purchase accrual
|
|
|
84,607
|
|
|
|
328,663
|
|
Employee-related
accrued liability
|
|
|
184,730
|
|
|
|
284,653
|
|
Accrued
professional services
|
|
|
46,000
|
|
|
|
93,000
|
|
Other
accrued liabilities and current deferred revenue
|
|
|
217,342
|
|
|
|
225,724
|
|
Current
Portion of LT Debt, including related interest, with related
parties
|
|
|
-
|
|
|
|
11,295,957
|
|
Total
Current Liabilities
|
|
|
756,766
|
|
|
|
13,400,841
|
|
Deferred
facility reimbursement
|
|
|
91,250
|
|
|
|
102,500
|
|
Deferred
revenue - non current
|
|
|
128,040
|
|
|
|
75,900
|
|
Notes
Payable, with related parties
|
|
|
15,363,070
|
|
|
|
5,000,000
|
|
Accrued
interest payable, with related parties
|
|
|
324,150
|
|
|
|
131,762
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock; 300,000 shares authorized; No shares issued and
outstanding
|
|
|
|
|
|
at September 30, 2007 and December 31, 2006
|
|
|
-
|
|
|
|
-
|
|
Common
stock ($.001 par value); 250,000,000 shares authorized;
200,508,315
|
|
|
|
|
|
|
|
|
and 189,622,133 shares issued and outstanding at September 30, 2007
and
|
|
|
|
|
|
|
|
|
December 31, 2006, respectively
|
|
|
200,508
|
|
|
|
189,622
|
|
Treasury
Stock
|
|
|
(64,260 |
) |
|
|
-
|
|
Additional
paid-in capital (net of unearned compensation)
|
|
|
175,086,385
|
|
|
|
172,379,842
|
|
Accumulated
deficit
|
|
|
(169,425,256 |
) |
|
|
(164,405,272 |
) |
Total
Shareholders' Equity
|
|
|
5,797,377
|
|
|
|
8,164,192
|
|
Total
Liabilities and Shareholders' Equity
|
|
$ |
22,460,653
|
|
|
$ |
26,875,195
|
|
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.
|
ISCO
INTERNATIONAL, INC.
(UNAUDITED)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
sales
|
|
$ |
1,924,401
|
|
|
$ |
6,433,439
|
|
|
$ |
6,300,357
|
|
|
$ |
11,205,308
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,220,913
|
|
|
|
3,850,012
|
|
|
|
3,633,283
|
|
|
|
6,739,266
|
|
Research
and development
|
|
|
721,241
|
|
|
|
452,435
|
|
|
|
2,004,003
|
|
|
|
1,390,374
|
|
Selling
and marketing
|
|
|
554,494
|
|
|
|
989,329
|
|
|
|
1,808,800
|
|
|
|
2,472,426
|
|
General
and administrative
|
|
|
1,003,762
|
|
|
|
1,093,684
|
|
|
|
3,185,141
|
|
|
|
3,152,764
|
|
Total
Costs and Expenses
|
|
|
3,500,410
|
|
|
|
6,385,460
|
|
|
|
10,631,227
|
|
|
|
13,754,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(Loss) Income
|
|
|
(1,576,009 |
) |
|
|
47,979
|
|
|
|
(4,330,870 |
) |
|
|
(2,549,522 |
) |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
34,182
|
|
|
|
45,872
|
|
|
|
70,387
|
|
|
|
97,885
|
|
Interest
(expense)
|
|
|
(248,712 |
) |
|
|
(261,007 |
) |
|
|
(759,501 |
) |
|
|
(646,344 |
) |
Other
income (expense), net
|
|
|
(214,530 |
) |
|
|
(215,135 |
) |
|
|
(689,114 |
) |
|
|
(548,459 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(1,790,539 |
) |
|
$ |
(167,156 |
) |
|
$ |
(5,019,984 |
) |
|
$ |
(3,097,981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$ |
(0.01 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
200,154,000
|
|
|
|
186,105,594
|
|
|
|
193,433,000
|
|
|
|
184,705,066
|
|
See
the
accompanying Notes which are an integral part of the Condensed Consolidated
Financial Statements.
ISCO
INTERNATIONAL, INC.
Nine
Months ended September 30, 2007
(UNAUDITED)
|
|
Common
|
|
Common
|
|
Treasury
|
|
Additional
|
|
Accumulated
|
|
|
|
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Paid-In
|
|
Deficit
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Amount
|
|
Capital
|
|
|
|
Total
|
|
Balance
as of December 31, 2006
|
|
189,622,133
|
$
|
189,622
|
$
|
|
$
|
172,379,842
|
$
|
(164,405,272)
|
$
|
8,164,192
|
|
Exercise
of stock options and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vesting of restricted shares
|
|
2,892,849
|
|
2,893
|
|
|
|
(2,893)
|
|
|
|
-
|
|
1.5M
accrued interest converted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
equity
|
|
8,333,333
|
|
8,333
|
|
|
|
1,491,667
|
|
|
|
1,500,000
|
|
Treasury
stock
|
|
(340,000)
|
|
(340)
|
|
(64,260)
|
|
|
|
|
|
(64,600)
|
|
Equity
compensation expense
|
|
|
|
|
|
|
|
1,217,769
|
|
|
|
1,217,769
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
(5,019,984)
|
|
(5,019,984)
|
|
Balance
at September 30, 2007
|
|
200,508,315
|
$
|
200,508
|
$
|
(64,260)
|
$
|
175,086,385
|
$
|
(169,425,256)
|
$
|
5,797,377
|
|
See
the
accompanying Notes which are an integral part of the Condensed Consolidated
Financial Statements.
ISCO
INTERNATIONAL, INC.
(UNAUDITED)
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,019,984 |
) |
|
$ |
(3,097,981 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
138,488
|
|
|
|
105,990
|
|
Non-cash
compensation charges
|
|
|
1,217,769
|
|
|
|
1,026,423
|
|
Changes
in operating assets and liabilities
|
|
|
3,750,119
|
|
|
|
(2,535,432 |
) |
Net
cash provided by (used in) operating activities
|
|
|
86,392
|
|
|
|
(4,501,000 |
) |
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
(Increase)/Decrease
in restricted certificates of deposit
|
|
|
(8,208 |
) |
|
|
80,414
|
|
Payment
of patent costs
|
|
|
(47,722 |
) |
|
|
(32,547 |
) |
Acquisition
of property and equipment, net
|
|
|
(69,577 |
) |
|
|
(120,939 |
) |
Net
cash used in investing activities
|
|
|
(125,507 |
) |
|
|
(73,072 |
) |
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from Section 16b recovery
|
|
|
-
|
|
|
|
3,124
|
|
Proceeds
from debt issuance
|
|
|
-
|
|
|
|
5,000,000
|
|
Exercise
of stock options/vesting of restricted stock grants
|
|
|
-
|
|
|
|
257,900
|
|
Treasury
stock purchased
|
|
|
(64,600 |
) |
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
(64,600 |
) |
|
|
5,261,024
|
|
|
|
|
|
|
|
|
|
|
(Decrease)/Increase
in cash and cash equivalents
|
|
|
(103,715 |
) |
|
|
686,952
|
|
Cash
and cash equivalents at beginning of period
|
|
|
2,886,476
|
|
|
|
3,486,430
|
|
Cash
and cash equivalents at end of period
|
|
$ |
2,782,761
|
|
|
$ |
4,173,382
|
|
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.
ISCO
INTERNATIONAL, INC.
(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
February 2007, the Financial Accounting Standards board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 159. “The Fair Value
Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”) provides
the option to report certain financial assets and liabilities at fair value,
with the intent to mitigate volatility in financial reporting that can occur
when related assets and liabilities are recorded on different bases. This
statement is effective for us beginning January 1, 2008. The company does not
expect SFAS 159 to have a material impact on our consolidated financial
statements.
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 as of 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 nine months ended September 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
nine
months of 2007 showed an additional net loss of $5 million. The Company
implemented strategies during 2002 and subsequently maintained 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.
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. In addition,
particularly during the fourth quarter 2007, the Company expects to incur
significant professional service fees in conjunction with its proposed
acquisition of Clarity Communication Systems Inc. (“Clarity”) as described in
more detail herein.
To
date,
the Company has financed its operations primarily through public and private
equity and debt financings. Additional capital will be required as part of
the
costs anticipated with the proposed acquisition of Clarity, and potentially
to
support working capital requirements. As a condition to closing the proposed
acquisition of Clarity, we will be required to obtain $1.5 million in financing
to fund the initial operations of the combined entity, which we expect to
obtain
through one of our existing lenders and on terms substantially similar to
our
current debt arrangements. 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
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:
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
Raw
materials
|
|
$ |
1,614,000
|
|
|
$ |
2,675,000
|
|
Work
in process
|
|
|
1,079,000
|
|
|
|
2,332,000
|
|
Finished
product
|
|
|
1,127,000
|
|
|
|
1,362,000
|
|
Total
|
|
$ |
3,820,000
|
|
|
$ |
6,369,000
|
|
Cost
of
product sales for the nine months ended September 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 $447,000 and $325,000 as of September
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
September 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 third quarter of 2007 and 2006 included compensation
expense for stock options granted prior to, but not yet fully vested as of,
September 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 and third
quarter 2007 or during the first nine 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
nine months of 2007.
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
Grant Date
|
|
|
|
Shares
|
|
|
Fair
Value (per share)
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2006
|
|
|
8,714,000
|
|
|
|
0.35
|
|
Granted
|
|
|
3,577,000
|
|
|
|
0.25
|
|
Forfeited
or canceled
|
|
|
(915,000 |
) |
|
|
0.33
|
|
Vested
|
|
|
(2,893,000 |
) |
|
|
0.34
|
|
Outstanding,
September 30, 2007
|
|
|
8,483,000
|
|
|
|
0.31
|
|
The
total fair value of restricted shares vested during the three and
nine month periods ended September 30, 2007 was $165,000 and $976,000,
respectively. Total non-cash equity compensation expense recognized during
the
three and nine month periods ended September 30, 2007 were $379,000 and
$1,218,000, respectively. Non-cash equity expense for the three and nine
month
periods ended September 30, 2007 included $165,000 and $976,000 for vested
restricted share grants and $214,000 and $242,000 respectively, for the
straight-line amortization of restricted share grants that did not vest during
the three and nine month periods ended September 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 nine months of 2007, the Board granted 3,000,000 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.
During
October 2007, Mr. Thode terminated employment with the Company. Consequently,
the 500,000 shares that would have vested during December 2007 and two million
performance-based shares that would have been considered based on the Company’s
performance during 2007, as authorized during the annual meeting of shareholders
during 2006, were forfeit during the fourth quarter 2007.
In
conjunction with the proposed acquisition of Clarity, it is contemplated that
a
portion of the stock to be offered as part of the transaction would be issued
through the Company’s 2003 Equity Incentive Plan, as amended. Therefore, we
intend to request that our shareholder approve an increase to the size of the
plan during a special meeting of shareholders, at which we intend to ask our
shareholders as well to approve the other elements of the transaction.
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 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 is
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 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.
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 September 30, 2007 for interest and
penalties.
Note
8 – Subsequent Events
As
a
subsequent event, we announced on October 15, 2007 that we had executed a
letter
of intent to acquire Clarity, and subsequently announced on November 13,
2007
that a definitive merger agreement had been reached. We communicated the
intent
to present the merger and all related elements to our shareholders for approval,
as well as the need to obtain certain regulatory approvals. Please see
Note 2 for a discussion on anticipated debt in conjuction with this
proposed merger. The outcome of this process is not guaranteed. We also
announced on October 15, 2007 the resignation of our Chief Executive Officer,
Mr. John Thode, indicating that Mr. Ralph Pini (Chairman of the Board) would
serve as interim CEO while a search for a replacement is conducted. In
conjuction with that change, we appointed Dr. George Calhoun interim Chairman
of
the Board while Mr. Pini serves in the interim CEO role.
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, including the current year). 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 addition of a new director (Mr. John Owings), and the retirement
of another 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.
During
October 2007, we announced that we signed a letter of intent to acquire Clarity.
We subsequently announced that a definitive merger agreement had been signed
with Clarity during November 2007. We have expressed an interest in broadening
our reach and quickly expanding our capabilities in telecommunications handset
software, an area in which Clarity excels. We believe a combined entity would
be
able to accelerate the expansion of our Adaptive Interference Management
(“AIM”)
platform from the base station (cell tower) into mobile devices and other
types
of wireless architectures. We view significant synergies in the combination
of
our product platforms, customer bases, and sales channels.
We
also
announced on October 15, 2007, the resignation of our Chief Executive Officer,
Mr. John Thode, indicating that Mr. Ralph Pini (Chairman of the Board) would
serve as interim CEO while a search for a replacement is
conducted. In conjunction with that change, we appointed Dr. George
Calhoun interim Chairman of the Board while Mr. Pini serves in the interim
CEO
role.
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
that
creates the more descriptive Adaptive Interference Management (“AIM”) product
platform. 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 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 September 30, 2007 and 2006
Our
net
sales decreased $4,509,000 or 70%, to $1,924,000 for the three months ended
September 30, 2007 from $6,433,000 for the same period in 2006, which we
attribute to the timing and magnitude of new customer orders and overall
business conditions in North America. Gross margins decreased to 37% from
40% for the same periods, primarily due to the lower volume. 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 September 30, 2007. This item did not exist at September
30,
2006. We, along with many in the industry, expected higher levels of customer
spending during the second half of 2007, as compared to the first half of 2007,
and more comparable with that of the prior year. We, like many similar entities,
found sales cycles longer and more difficult during the current period.
Based
on
our broad market expectations and including the approximately $1 million of
product backlog with which we enter the fourth quarter 2007, we expect revenue
during the fourth quarter 2007 to be greater that the third quarter 2007.
Cost
of
sales decreased by $2,629,000, or 68%, to $1,221,000 for the three months ended
September 30, 2007 from $3,850,000 for the same period in 2006. The decrease
in
cost of sales was primarily due to the reduction in sales volume, as gross
margin declined from 40% to 37% on reduced sales volume.
Our
research and development (“R&D”) expenses increased by $269,000 or 59%, to
$721,000 for the three months ended September 30, 2007, from $452,000 for
the same period in 2006. This increase was due in part 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 third 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 $435,000, or 44%, to $554,000 for the three
months ended September 30, 2007, from $989,000 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. Lower sales revenue also contributed
to this decrease. We expect selling and marketing expenses to increase during
the fourth quarter of 2007 as we look to add new customers and launch new
products, particularly the fully digital ANF product platform.
General
and
administrative expenses decreased by $90,000, or 8%, to $1,004,000 for the
three
months ended September 30, 2007, from $1,094,000 for the same period in
2006. This decrease was attributable to a decrease in a number of areas of
cost
and not any one item in particular. Of the cost components that decreased,
favorable trends in the insurance industry were the largest driver of this
favorable change. We expect legal, accounting and financial service expenses
to
increase during the fourth quarter 2007 as result of the proposed Clarity
merger
Nine
Months Ended September 30, 2007 and 2006
Our
net
sales decreased $4,905,000, or 44%, to $6,300,000 for the nine months ended
September 30, 2007 from $11,205,000 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 42% 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 September
30, 2007. This item did not exist at September 30, 2006. We, along with many
in
the industry, expected customer spending to increase during the second half
of
2007, as compared to the first half of 2007. This was not evident during the
third quarter 2007, particularly the North American market, though we
expects improvement during the fourth quarter 2007, as compared to the
third quarter 2007, in part because of an approximately $1 million in order
backlog entering the fourth quarter 2007.
Cost
of
sales decreased by $3,106,000, or 46%, to $3,633,000 for the nine months ended
September 30, 2007 from $6,739,000 for the same period in 2006. The
decrease in cost of sales was due to the reduction in revenue,
above.
Our
R&D expenses increased by $614,000 or 44%, to $2,004,000 for the nine months
ended September 30, 2007, from $1,390,000 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 $663,000, or 27%, to $1,809,000 for the
nine
months ended September 30, 2007, from $2,472,000 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 (EVP Sales)
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 fourth quarter 2007, as compared
to the third quarter 2007 as we look to add new customers and launch new
products, particularly the fully digital ANF product platform.
General
and administrative expenses increased by $32,000 or 1%, to $3,185,000 for the
nine months ended September 30, 2007, from $3,153,000 for the same period
in 2006. This increase reflects overall cost controls and not any single line
item. We expect legal, accounting and financial expenses to increase
during the fourth quarter 2007 as a result of the proposed acquisition of
Clarity.
Liquidity
and Capital Resources
As
of
September 30, 2007, the Company’s cash and cash equivalents were $2.8
million, a decrease of $0.1 million from the balance at December 31, 2006
of $2.9 million.
During
the nine months of 2007, the Company utilized approximately $4.2 million in
cash
from the realization of receivables and inventory, net of additions, and paid
out approximately $1.1 million in cash toward the reduction in accrued expenses,
net of additions. The remainder was the approximately $3.0 million of business
expenses incurred during the period.
The
continuing development of, and expansion in, sales of our product lines, the
proposed transaction with Clarity and any other potential merger and acquisition
activity, as well as any required defense of our intellectual
property, will 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. Additional capital will be required as part of the costs
anticipated with the proposed acquisition of Clarity, and potentially to support
working capital requirements. As a condition to closing the proposed acquisition
of Clarity, we will be required to obtain $1.5 million in financing to fund
the
initial operations of the combined entity, which we expect to obtain through
one
of our existing lenders and on terms substantially similar to our current debt
arrangements. 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 herein.
Contractual
Obligations, Commitments, and Off Balance Sheet
Arrangements
The
following table lists the contractual obligations and commitments that existed
as of September 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
|
$
|
17,837,000
|
$
|
-
|
$
|
17,837,000
|
$
|
-
|
$
|
-
|
|
Operating
Lease Obligations
|
$
|
1,509,000
|
$
|
204,000
|
$
|
417,000
|
$
|
434,000
|
$
|
454,000
|
|
Total
|
$
|
19,346,000
|
$
|
204,000
|
$
|
18,254,000
|
$
|
434,000
|
$
|
454,000
|
|
Long
term debt obligations include the June 2007 restructuring event as described
in
Note 6.
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 September 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.
|
We
have
updated certain risk factors as disclosed in our Form 10-K for the fiscal
year
ended December 31, 2006. The complete list of risk factors are disclosed
in our
Form 10-K for the fiscal year ended December 31, 2006.
Risks
of future acquisitions
In
the future, we may pursue acquisitions to obtain products,
services and technologies that we believe would complement or enhance our
current product or services offerings. On November 13, 2007, we announced
the
signing of a definitive merger agreement to acquire Clarity Communication
Systems Inc. There is no assurance that the proposed merger will be
consummated, and if the proposed merger is consummated, there is no assurance
that we will be able to successfully integrate the Clarity
business. At the present time, no other definitive agreements or
similar arrangements exist with respect to any other acquisition. An
acquisition, such as the merger with Clarity, may not produce the revenue,
earnings or business synergies as anticipated and may attach significant
unforeseen liabilities, and an acquired product, service or technology might
not
perform as expected. Our management could spend a significant amount of time
and
effort in identifying and completing the acquisition and may be distracted
from
the operations of the business. In addition, management would probably have
to
devote a significant amount of resources toward integrating the acquired
business with the existing business, and that integration may not be
successful. The process is resource intensive, both in time and
financial resources, and thus incorporates a cost to the
company.
The
merger is subject to conditions to closing that could result in the merger
being
delayed or not consummated, which could negatively our stock price and future
business and operations
The
merger is subject to conditions to closing as set forth in the merger agreement,
including obtaining the approval of our stockholders. If any of the conditions
to the merger are not satisfied or, where permissible, not waived, the merger
will not be consummated. Failure to consummate the merger could negatively
impact our stock price, future business and operations, and financial condition.
Any delay in the consummation of the merger or any uncertainty about the
consummation of the merger may adversely affect the future business, growth,
revenue and results of operations of our company or the combined company.
Failure
to complete the merger could negatively impact the market price of our common
stock and our future business and financial results.
If
the
merger is not completed for any reason, our ongoing business may be adversely
affected and will be subject to a number of risks, including:
|
•
|
|
the
market price of our common stock might decline to the extent that
the
current market price reflects a market assumption that the merger
will be
completed; and
|
|
•
|
|
our
unreimbursed costs incurred related to the merger must be paid
even if the
merger is not completed.
|
If
we fail to obtain necessary funds for our operations, we may be unable to
maintain or improve on our technology position and unable to develop and
commercialize our products
To
date,
we have financed our operations primarily through public and private equity
and
debt financings, and most recently through several financings with affiliates
of
our two largest shareholders. As a condition to closing the proposed acquisition
of Clarity, we will be required to obtain $1.5 million in financing to fund
the
initial operations of the combined entity, which we expect to obtain through
one
of our existing lenders and on terms substantially similar to our current
debt
arrangements. Additionally, we may have additional working capital
requirements that may require additional financial resources. As such, we
will
require additional capital. 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 new sources of financing
and/or
to apply the proceeds of a financing event toward operations until the debt
is
repaid in full.
Our
continued existence is therefore dependent upon our continued ability to
raise
funds through the issuance of our equity securities or borrowings. Our plans
in
this regard are to obtain other debt and equity financing until such time
as
profitable operation and positive cash flow are achieved and maintained.
Although we believe, based on the fact that we have raised funds through
sales
of common stock and from borrowings over the past several years, that we
will be
able to secure suitable additional financing for our operations, there can
be no
guarantee that such financing will continue to be available on reasonable
terms,
or at all. As a result, there is no assurance that we will be able to continue
as a going concern.
The
actual amount of 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 research and product development programs, the ability to improve
or maintain product margins, the completion of the proposed merger with Clarity,
Clarity’s successful integration into our business as well as any other merger
and acquisition activity, and the costs involved in protecting patents or
other
intellectual property.
Management
of our growth
Growth
may cause a significant strain on our management, operational, financial
and
other resources. The ability to manage growth effectively may require us
to
implement and improve our operational, financial, manufacturing and management
information systems and expand, train, manage and motivate employees. These
demands may require the addition of new management personnel and the development
of additional expertise by management. Any increase in resources devoted
to
product development and marketing and sales efforts could have an adverse
effect
on financial performance in future fiscal quarters. If we were to receive
substantial orders, we may have to expand current facilities, which could
cause
an additional strain on our management personnel and development resources.
The
failure of the management team to effectively manage growth could have a
material adverse effect on our business, operating results and financial
condition. In addition, the proposed acquisition of Clarity will
require substantial attention and resources in order to integrate Clarity’s
operations into our business.
Risk
of dilution
If
stockholders approve the issuances of common stock pursuant to the proposed
merger with Clarity and in connection with our June 2007 debt restructuring,
and
if we issue the full number of shares issuable pursuant to these two
transactions, we will be issuing up to 40 million additional shares of common
stock, or approximately 20% of the total number of shares currently outstanding
as October 30, 2007. As a result, these issuances will be dilutive to
existing stockholders and may have an adverse effect on the market value
of our
common stock.
Retention
of Key Personnel
Our
success depends on our ability to
attract and retain the appropriate personnel needed to operate our
business. We have announced the departure of our CEO during October
2007 and subsequent search process employed for a new CEO, with Mr. Ralph
Pini,
who had been Chairman of the Board until this change, serving as interim
CEO on
a temporary basis. Our success depends, in part, on finding an
appropriate person to fill this necessary role within our Company.
Additionally,
the value of the Clarity
acquisition to our shareholders rests in large part on the continuity of
the key
personnel within the Clarity organization. While we believe we have
devised appropriate incentives to retain Clarity’s employees, there can be no
guarantee that they will choose to remain with the Company after the merger
completes, should it complete, which may have an adverse impact on our
operations and financial condition.
Item
5 – Other Information
On
June
26, 2007, we filed a Current Report on Form 8-K (the “8-K”) to report the
restructuring of our outstanding debt. The amendment to the loan
documents, the amended and restated notes, and the registration rights agreement
referenced in the 8-K are being filed as exhibits to this Quarterly Report
on
Form 10-Q.
Item
6. Exhibits
Exhibits:
A list of exhibits is set forth in the Exhibit Index found on page 19 of
this
report.
EXHIBIT
INDEX
Exhibit
Number
|
|
Description
of Exhibit
|
10.1
|
|
Amendment
to Loan Documents dated June 26, 2007 between ISCO International,
Inc.,
Manchester Securities Corporation, Alexander Finance, L.P., ISCO
International, Inc. , Spectral Solutions, Inc. and Illinois Superconductor
Corporation
|
|
|
10.2
|
|
Amended
and Restated 7% Senior Secured Convertible Note by and between
ISCO
International, Inc. and Manchester Securities Corporation, dated
June 26,
2007, in the amount of $2,520,441.39
|
|
|
10.3
|
|
Amended
and Restated 7% Senior Secured Convertible Note by and between
ISCO
International, Inc. and Manchester Securities Corporation, dated
June 26,
2007, in the amount of $1,522,687.06
|
|
|
|
10.4
|
|
Amended
and Restated 7% Senior Secured Convertible Note by and between
ISCO
International, Inc. and Manchester Securities Corporation, dated
June 26,
2007, in the amount of $147,240.00
|
|
|
|
10.5
|
|
Amended
and Restated 7% Senior Secured Convertible Note by and between
ISCO
International, Inc. and Manchester Securities Corporation, dated
June 26,
2007, in the amount of $1,121,625.00
|
|
|
|
10.6
|
|
Amended
and Restated 7% Senior Secured Convertible Note by and between
ISCO
International, Inc. and Alexander Finance, LLC, dated June 26,
2007, in
the amount of $1,622,405.00
|
|
|
|
10.7
|
|
Amended
and Restated 7% Senior Secured Convertible Note by and between
ISCO
International, Inc. and Alexander Finance, LLC, dated June 26,
2007, in
the amount of $1,314,300.00
|
|
|
|
10.8
|
|
Amended
and Restated 7% Senior Secured Convertible Note by and between
ISCO
International, Inc. and Alexander Finance, LLC, dated June 26,
2007, in
the amount of $1,375,000.00
|
|
|
|
10.9
|
|
Amended
and Restated 7% Senior Secured Convertible Note by and between
ISCO
International, Inc. and Alexander Finance, LLC, dated June 26,
2007, in
the amount of $550,000.00
|
|
|
|
10.10
|
|
Registration
Rights Agreement dated June 26, 2007, by and among ISCO International,
Inc., Manchester Securities Corp. and Alexander Finance,
L.P.
|
|
|
|
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.
|
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 14th day of November
2007.
|
|
|
ISCO
International, Inc.
|
|
|
By:
|
|
/s/
Ralph Pini
Ralph
Pini
Interim
Chief Executive Officer
(Principal
Executive Officer)
|
|
|
By:
|
|
/s/
Frank Cesario
Frank
Cesario
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|