file10q051408.htm
UNITED
STATES
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 March 31,
2008
OR
[ ]
TRANSITION REPORT PURSUANT TO 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.
(Exact
name of registrant as specified in its charter)
|
|
|
DELAWARE
|
|
36-3688459
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
Number)
|
|
|
1001
CAMBRIDGE DRIVE
ELK
GROVE VILLAGE, ILLINOIS
|
|
60007
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(847) 391-9400
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [X] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one):
|
|
|
|
|
Large
accelerated filer [ ]
|
|
Accelerated
filer [ ]
|
|
|
Non-accelerated
filer [ ] (Do not
check if a smaller reporting company)
|
|
Smaller reporting company [ X]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No
[X]
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
|
|
Outstanding
at April 30, 2008
|
Common
Stock, par value $0.001 per share
Preferred
Stock Purchase Rights
|
|
223,232,483
|
ISCO
INTERNATIONAL, INC.
|
|
(Unaudited)
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Assets:
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
$
|
392,367
|
|
$
|
1,789,953
|
|
Inventory,
net
|
|
3,253,763
|
|
|
3,043,230
|
|
Accounts
Receivable, net
|
|
2,215,553
|
|
|
2,311,110
|
|
Prepaid
Expenses and Other
|
|
207,740
|
|
|
149,659
|
|
Total
Current Assets
|
|
6,069,423
|
|
|
7,293,952
|
|
Property
and Equipment
|
|
2,383,889
|
|
|
1,437,030
|
|
Less:
Accumulated Depreciation and Amortization
|
|
(1,666,189)
|
|
|
(940,328)
|
|
Net
Property and Equipment
|
|
717,700
|
|
|
496,702
|
|
Restricted
Certificates of Deposit
|
|
130,170
|
|
|
129,307
|
|
Other
Assets
|
|
-
|
|
|
587,824
|
|
Goodwill
|
|
19,565,091
|
|
|
13,370,000
|
|
Intangible
Assets, net
|
|
2,898,711
|
|
|
850,811
|
|
Total
Assets
|
$
|
29,381,272
|
|
$
|
22,728,596
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Accounts
Payable
|
$
|
1,057,752
|
|
$
|
904,910
|
|
Inventory-related
Material Purchase Accrual
|
|
319,420
|
|
|
240,126
|
|
Employee-related
Accrued Liability
|
|
342,597
|
|
|
331,522
|
|
Accrued
Professional Services
|
|
81,674
|
|
|
106,921
|
|
Other
Accrued Liabilities and current Deferred Revenue
|
|
433,231
|
|
|
452,581
|
|
Current
Portion of LT Debt, including Related Interest, with Related
Parties
|
|
501,528
|
|
|
-
|
|
Total
Current Liabilities
|
|
2,736,202
|
|
|
2,036,060
|
|
|
|
|
|
|
|
|
Deferred
Facility Reimbursement
|
|
83,750
|
|
|
87,500
|
|
Deferred
Revenue - non current
|
|
197,521
|
|
|
104,940
|
|
Notes
and Related Accrued Interest with Related Parties
|
|
17,715,117
|
|
|
15,939,229
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
Preferred
Stock; 300,000 shares authorized; No shares issued and
outstanding
|
|
|
|
|
|
at
March 31, 2008 and December 31, 2007
|
|
-
|
|
|
-
|
|
Common
Stock ($.001 par value); 500,000,000 shares authorized;
223,082,483
|
|
|
|
|
|
|
and
202,259,359 shares issued and outstanding at March 31, 2008
and
|
|
|
|
|
|
|
December
31, 2007, respectively
|
|
228,008
|
|
|
202,260
|
|
Additional
Paid-in Capital
|
|
182,193,520
|
|
|
175,281,340
|
|
Treasury
Stock
|
|
(112,050)
|
|
|
(95,050)
|
|
Accumulated
Deficit
|
|
(173,660,796)
|
|
|
(170,827,683)
|
|
Total
Shareholders' Equity
|
|
8,648,682
|
|
|
4,560,867
|
|
Total
Liabilities and Shareholders' Equity
|
$
|
29,381,272
|
|
$
|
22,728,596
|
|
See the accompanying Notes
which are an integral part of the Condensed Consolidated Financial
Statements.
ISCO
INTERNATIONAL, INC.
(UNAUDITED)
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
|
March
31, 2008
|
|
|
March
31, 2007
|
|
Net
sales
|
|
$
|
2,757,165
|
|
$
|
953,248
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,545,301
|
|
|
709,655
|
|
Research
and development
|
|
|
1,590,377
|
|
|
621,055
|
|
Selling
and marketing
|
|
|
936,378
|
|
|
583,244
|
|
General
and administrative
|
|
|
1,248,587
|
|
|
1,199,647
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
5,320,643
|
|
|
3,113,601
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(2,563,478)
|
|
|
(2,160,353)
|
|
Other
income (Expense):
|
|
|
|
|
|
|
|
Interest
income
|
|
|
7,781
|
|
|
18,280
|
|
Interest
expense
|
|
|
(277,416)
|
|
|
(255,333)
|
|
|
|
|
|
|
|
|
|
Total
other expense, net
|
|
|
(269,635)
|
|
|
(237,053)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,833,113)
|
|
$
|
(2,397,406)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.01)
|
|
$
|
(0.01)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
221,701,062
|
|
|
190,056,000
|
|
See the
accompanying Notes which are an integral part of the Condensed Consolidated
Financial Statements.
ISCO
INTERNATIONAL, INC.
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
|
March
31, 2008
|
|
|
March
31, 2007
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,833,113)
|
|
$
|
(2,397,405)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
133,861
|
|
|
46,995
|
|
Equity
based compensation charges
|
|
|
187,928
|
|
|
485,228
|
|
Changes
in operating assets and liabilities
|
|
|
1,346,490
|
|
|
1,183,712
|
|
Net
cash used in operating activities
|
|
|
(1,164,834)
|
|
|
(681,470)
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
Increase
in restricted certificates of deposit
|
|
|
(863)
|
|
|
(1,500)
|
|
Payment
of patent costs
|
|
|
(8,050)
|
|
|
(11,412)
|
|
Acquisition
of property and equipment, net
|
|
|
(13,407)
|
|
|
(14,506)
|
|
Acquisition
of Clarity
|
|
|
(8,943,432)
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(8,965,752)
|
|
|
(27,418)
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
6,750,000
|
|
|
-
|
|
Proceeds
from note payable |
|
|
1,500,000 |
|
|
|
|
Proceeds
from loan |
|
|
500,000 |
|
|
|
|
Treasury
stock purchased
|
|
|
(17,000)
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
8,733,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
(Decrease)/Increase
in cash and cash equivalents
|
|
|
(1,397,586)
|
|
|
(708,888)
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,789,953
|
|
|
2,886,476
|
|
Cash
and cash equivalents at end of period
|
|
$
|
392,367
|
|
$
|
2,177,588
|
|
See the
accompanying Notes which are an integral part of the Condensed Consolidated
Financial Statements.
(UNAUDITED)
Note
1 – Organization
ISCO
International (including its subsidiary Clarity Communication Systems Inc.
[“Clarity”], together the “Company”) addresses RF (Radio Frequency) and radio
link optimization issues, including interference issues, within wireless
communications, as well as provides product and service offerings based on
Push-To-Talk (“PTT”) and Location-Based Services (“LBS”), including a
proprietary combination of the two technologies in its Where2Talk (“W2T”)
solution. Two inactive subsidiaries, Spectral Solutions, Inc. and Illinois
Superconductor Canada Corporation, were terminated during early 2008 as the
Company’s new subsidiary, Clarity, was acquired pursuant to the merger
that closed during January 2008. The Company uses unique products,
including ANF (Adaptive Interference Management, or AIM, family of solutions),
RF², and other solutions, as well as service expertise, in improving the RF
handling of a wireless system, particularly the radio link (the signal between
the mobile device and the base station). A subset of this capability is
mitigating the impact of interference on wireless communications systems. These
solutions are designed to enhance the quality, capacity, coverage and
flexibility of wireless telecommunications services. The Company has
historically marketed its products to cellular, PCS and wireless
telecommunications service providers and OEM’s located both in the United States
and in international markets.
Note
2 – Basis of Presentation
The
condensed consolidated financial statements include the accounts of ISCO
International, Inc. and its wholly owned subsidiary, Clarity Communications,
Inc. (collectively referred to as the “Company”, or “we”, “our” or “us”). All
significant intercompany balances and transactions have been eliminated in
consolidation. The two inactive subsidiaries were included in these
results in a similar fashion, up until the time of their
termination. The termination of these subsidiaries had no impact upon
the consolidated financial results.
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, 2007 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, 2008. For further information, refer to the
financial statements, including the notes thereto, included in the Company’s
Annual Report on Form 10-K, as amended, for the fiscal year ended
December 31, 2007.
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 adoption of
SFAS 159 did not have a material impact on the Company's 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 adopted the
provisions of SFAS 157 as of January 1, 2008. The adoption of SFAS 157 did
not have a material impact on its consolidated financial
statements.
Relative
to SFAS 157, the FASB issued FASB Staff Positions (FSP) 157-1 and 157-2. FSP
157-1 amends SFAS 157 to exclude SFAS No. 13, “Accounting for Leases,” (SFAS 13)
and its related interpretive accounting pronouncements that address leasing
transactions, while FSP 157-2 delays the effective date of the application of
SFAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis.
We
adopted SFAS 157 as of January 1, 2008, with the exception of the application of
the statement to non-recurring nonfinancial assets and nonfinancial liabilities.
Non-recurring nonfinancial assets and nonfinancial liabilities for which we have
not applied the provisions of SFAS 157 include those measured at fair value in
goodwill impairment testing, indefinite lived intangible assets measured at fair
value for impairment testing, asset retirement obligations initially measured at
fair value, and those initially measured at fair value in a business
combination.
Valuation Hierarchy. SFAS 157
establishes a valuation hierarchy for disclosure of the inputs to valuation used
to measure fair value. This hierarchy prioritizes the inputs into three broad
levels as follows. Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities. Level 2 inputs are quoted prices
for similar assets and liabilities in active markets or inputs that are
observable for the asset or liability, either directly or indirectly through
market corroboration, for substantially the full term of the financial
instrument. Level 3 inputs are unobservable inputs based on our own assumptions
used to measure assets and liabilities at fair value. A financial asset or
liability’s classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value
measurement.
Note
3 - 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, 2007 and more
recent quarter ended March 31, 2008. In addition, the Company has used, rather
than provided, cash in its operations. Consistent with these facts, in the
Company’s most recent annual report filed on Form 10-K and subsequently amended,
includes a comment from the Company’s independent registered public
accounting firm 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, 2007, 2006, and 2005, the Company incurred net
losses of $6.4 million, $4.4 million, and $3.0 million, respectively. The
quarter ended March 31, 2008 showed an additional net loss of $2.8 million. The
Company has implemented strategies to reduce its cash used in operating
activities. The Company’s strategy included the consolidation of its
manufacturing and research and development facilities and a targeted reduction
of the employee workforce, increasing the efficiency of the Company’s processes,
focusing development efforts on products with a greater probability of
commercial sales, reducing professional fees and discretionary expenditures, and
negotiating favorable payment arrangements with suppliers and service providers.
More importantly, the Company configured itself along an outsourcing model, thus
allowing for relatively large, efficient production without the associated
overhead. The combination of these factors has been effective in improving
financial performance from a net loss as high as $28 million during 2001 while
enabling it to deliver significant quantities of solutions, these measures have
not yielded profitability. 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, ISCO International, Inc. acquired Clarity
Communication Systems, Inc. during January 2008. While the Company
believes this acquisition will bring additional revenues and substantial
synergies, this combination also adds costs and therefore financial pressure to
the organization.
The
continuing development of our product lines and operations, any potential merger
and acquisition activity, as well as any required defense of our intellectual
property, will require an immediate commitment and/or availability of funds. The
actual amount of our future funding requirements will depend on many factors,
including: the amount and timing of future revenues, the level of product
marketing and sales efforts to support our commercialization plans, the
magnitude of our research and product development programs, our ability to
improve or maintain product margins, and the costs involved in protecting our
patents or other intellectual property. We intend to look into
augmenting our existing capital position by continuing to evaluate potential
short-term and long-term sources of capital whether from debt, equity, hybrid,
or other methods. The primary covenant in our existing debt arrangement involves
the right of the lenders to receive debt repayment from the proceeds of new
financing activities. This covenant may restrict our ability to obtain
additional financing or to apply the proceeds of a financing event toward
operations until the debt is repaid in full.
Note 4-
Business Combinations
During January 2008, the Company completed its
acquistion of Clarity Communications, Inc, for a total of $8.9M (which includes
repayment of Clarity's indebtednes, transaction expenses and stock
issuances).
The
Clarity acquisition has been accounted for a business combination under
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations". The assets acquired and liabilities assumed have been recorded at
the date of acqusition at their respective fair value.
The
result of operations of Clarity are included in the accompanying consolidated
statements of operations for the three months ended March 31, 2008. The
total purchase for the acquisiton subject to the finalization of the working
capital adjustment as defined in the merger agreement, is $8.9M, and is broken
down as follows:
Stock issuance (25
million shares) |
$
6,750,000 |
Payment of Clarity's
indebtness (includes closing costs) |
1,593,000 |
Acquistion-related
transaction cost |
600,000 |
Total purchase price
|
$
8,943,000 |
The
above purchase price has been allocated to the tangible and intangible assets
acquired and liabilities assumed based on management's estimates of their
current fair values. Acquisition-related transaction costs include legal and
accounting fees and other external costs directly related to the Clarity
acquistion.
The purchase price
has been allocated as follows:
Acquired
cash |
|
$ |
62,000 |
|
Account
receivable, net |
|
|
425,000 |
|
Prepaids and
other current assets |
|
|
60,000 |
|
Fixed assets
and other long term assets |
|
|
289,000 |
|
Goodwill
|
|
|
6,195,000 |
|
Intangible
assets |
|
|
2,140,000 |
|
Account payable and
accrued liabilities |
|
|
(228,000 |
) |
Net assets
acquired |
|
$ |
8,943,000 |
|
Goodwill was determined based on the residual
difference between the purchase cost and the value assigned to tangible and
intangible assets and liabilities, and is not deductible for tax purposes. Among
the factors that contributed to a purchased price resulting in the recognition
of goodwill were Clarity's history of profitability prior to 2007, strong sales
force and overall employee base, and leadership position in the techonology
market.
Note
5- Goodwill and Intangible Assets
During
January 2008, the Company acquired Clarity Communications, Inc, by issuing
up to 40 million shares, including performance based-shares that may be earned
in the future, in the Company’s common stock in exchange for all
Clarity’s stock and satisfaction of employee rights and interests. The company
recorded $6.2 million in goodwill and $2.1 million in identifiable intangible
assets. Of the $2.1 million intangible assets acquired, $250,000 was assigned to
Push To Talk/Location Based Service technology with a useful life of 5 years,
$1.4 million was assigned to CLASS/RADiCL platforms with a useful life of 10
years, $300,000 was assigned to Alcatel-Lucent Relationship with a useful life
of 3 years, $130,000 was assigned to Other Customer Relationships with a useful
life of 5 years, and $60,000 was assigned to Non-competition agreements with a
useful life of 2 years.
Intangible
assets are included in the Company’s condensed consolidated balance sheets. The
intangible assets are being amortized over periods ranging from 2 to 10 years on
a straight-line basis. Amortization expense on intangible assets for the three
months ended March 31, 2008 was $ 86,500.
As
of the reporting date, the Company has also recorded goodwill resulting
from the acquisitions of Spectral Solutions, Inc. and the Adaptive Notch Filter
division of Lockheed Martin Canada, Inc., both during 2000 and subsequently
integrated into the Company. Beginning January 1, 2002, goodwill was no
longer to be amortized but rather to be tested for impairment on an annual basis
and between annual tests whenever there is an indication of potential
impairment. Impairment losses would be recognized whenever the implied fair
value of goodwill is determined to be less than its carrying value. SFAS 142
prescribes a two-step impairment test to determine whether the carrying value of
the Company’s goodwill is impaired. The first step of the goodwill impairment
test is used to identify potential impairment, while the second step measures
the amount of the impairment loss. Step one to this test requires the comparison
of the fair value of each reporting unit with its carrying amount, including
goodwill. As the Company is comprised of a single reporting unit, the question
of fair value is centered upon whether the market value, as measured by market
capitalization, of the Company exceeds shareholders’ equity. The excess of the
Company’s market capitalization over its carrying value of net
assets indicates that the goodwill of the Company’s sole reporting unit was
not impaired as of March 31, 2008 and December 31, 2007.
The
Company’s other intangible assets are derived from patents and trademarks which
represent costs, primarily legal fees and expenses, incurred in order to prepare
and file patent applications related to various aspects of the Company’s
technology and to its current and proposed products. Patents and trademarks are
recorded at cost and are amortized using the straight-line method over the
shorter of their estimated useful lives or 17 years. The recoverability of the
carrying values of patents and trademarks is evaluated on an ongoing basis by
Company management. Factors involved in this evaluation include whether the item
is in force, whether it has been directly threatened or challenged in litigation
or administrative process, continued usefulness of the item in current and/or
expected utilization by the Company in its solution offerings, perceived value
of such material or invention in the marketplace, availability and utilization
of alternative or other technologies, the perceived protective value of the
item, and other factors. Patent and trademarks were reported net of accumulated
amortization of approximately $845,000 and $851,000 at March 31, 2008 and
December 31, 2007, respectively.
Note 6
- 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 7
- Inventories
Inventories
consisted of the following:
|
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
Raw
materials
|
|
$
|
1,550,000
|
|
$
|
1,696,000
|
|
Work
in process
|
|
|
910,000
|
|
|
655,000
|
|
Finished
product
|
|
|
794,000
|
|
|
692,000
|
|
Total
|
|
$
|
3,254,000
|
|
$
|
3,043,000
|
|
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 $370,000 and $325,000 as of
March 31, 2008 and December 31, 2007, respectively.
Note 8
- Stock Options and Warrants
At
March 31, 2008, a total of 2.9 million stock options were outstanding under
the Company’s equity compensation plans. No options were granted during the
first quarter of 2008 or 2007.
Restricted
Share Rights
Restricted
share grants offer employees the opportunity to earn shares of the Company’s
stock over time. For grants that occurred during the periods ended March 31,
2008 and 2007, respectively, we expect that the typical vesting period for
employees will be 2-4 years while the vesting period of non-employee directors
will be linked to the one year service period (directors are elected annually by
our shareholders). We recognize 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, or on a accelerated basis in those
cases where the actual vesting is faster than the proportional straight line
value. 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 2008.
The
following table summarizes the restricted stock award activity during the first
quarter of 2008.
|
|
|
|
Weighted
|
|
|
|
|
|
Average
Grant Date
|
|
|
|
Shares
|
|
Fair
Value (per share)
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2007
|
|
3,557,000
|
|
0.29
|
|
Granted
|
|
5,941,000
|
|
0.17
|
|
Forfeited
or canceled
|
|
(1,164,000)
|
|
0.26
|
|
Vested
|
|
(823,000)
|
|
0.26
|
|
Outstanding,
March 31, 2008
|
|
7,511,000
|
|
0.20
|
|
The total
fair value of restricted shares vested during the three months ended
March 31, 2008 and 2007 was $217,000 and $383,000, respectively. Total
non-cash equity compensation expense recognized during the first quarter 2008
was $188,000, including the $217,000 for vested restricted share grants and
$(29,000) for the straight-line amortization of restricted share grants that did
not vest during the first quarter 2008.
Note 9
– Debt and Financial Position
On March
20, 2008 the Company entered into an agreement with its Lenders (as defined
below) to assign, or factor, certain of its trade
receivables. If the company requests such a transaction and the
lenders agree, monies will be advanced to the company based on the company’s
trade receivables assigned to the Lenders. Under the assignment
agreements, as the assigned accounts are collected by the Company (approximately
30 days from the date of the invoice), the Company will promptly pay the lenders
the amount of the collected account, plus interest at an implied annual rate of
10%. In connection with the Assignment Agreement, the Company and its Lenders
agreed to $500,000 advance with funding to occur on March 20, 2008. Future
transactions would be subject to the desire of both the Company and
Lenders. An additional $500,000 was borrowed under this arrangement
on April 2, 2008. The first $500,000 borrowed was repaid, with
approximately $6,000 of accrued interest, on May 1, 2008.
2007
Convertible Debt that replaced the 2002 Credit Line
On June
26, 2007, 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. 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.
During
January 2008, and associated with the Clarity acquisition, Alexander purchased
an additional $1.5 million of the Amended and Restated Notes. Before
Alexander may exercise its rights to convert the additional $1.5 million of
Amended and Restated Notes into the Conversion Shares, the Company is required
to obtain approval of its stockholders and obtain the approval of AMEX to list
the additional Conversion Shares on AMEX. The Company is required to obtain
these approvals within one year of the issuance date of these Notes. In the
event that these required approvals are not obtained by that time, then the
interest rate on these Notes will increase to a rate of 15% per annum. If these
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,
the then-current interest rate will increase by a rate of 1% per annum each
month thereafter until these Conversion Shares are registered, up to the default
rate of the lower of 20% per annum or the highest amount permitted by
law.
Assuming
these additional Amended and Restated Notes are not converted until maturity,
approximately 8.4 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. 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, approximately 18.5 million
shares of common stock would be required upon settlement, for both principal and
interest.
Note
10 – Income Taxes
The
Company adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes, on January 1, 2007. Previously, the Company had accounted for tax
contingencies in accordance with Statement of Financial Accounting Standards 5,
Accounting for
Contingencies. As required by FIN 48, which clarifies Statement 109,
Accounting for Income
Taxes, the Company recognizes the financial statement benefit of a tax
position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions
meeting the more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit that has a greater
than 50 percent likelihood of being realized upon ultimate settlement with the
relevant tax authority. At the adoption date, the Company applied FIN 48 to all
tax positions for which the statute of limitations remained open. As a result of
the implementation of FIN 48, there was no effect on the Company’s financial
statements as of January 1, 2008 and there have been no material changes in
unrecognized tax benefits since January 1, 2008 through March 31,
2008.
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 as the losses have not been
utilized by the Company.
The
Company is currently not aware of any current or threatened examination by any
jurisdiction. The Company has elected to classify interest and
penalties related to unrecognized tax benefits as a component of income tax
expense, if applicable. No accrual is required as of January 1, 2008 and March
31, 2008 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, as amended, for the year ended
December 31, 2007, which could cause our actual results, performance or
achievements for 2008 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
employed an outsourced manufacturing model wherein we sometimes supply raw
materials to external parties and products are then completed, and in other
cases purchase the material and labor from the outsourced
manufacturer. This system allows us to more completely outsource
procurement in the future if we choose to do so. Manufacturing partners then
produce to specification with Company personnel on hand to assist with quality
control. Our products are designed for efficient production in this manner,
emphasizing solid-state electronics over mechanical devices with moving parts.
The cost benefits associated with these developments, coupled with enhanced
product functionality, have allowed us to realize good margins and efficiently
managed overhead costs. Extensions of developed technology, based on substantial
input from customers, have allowed us to launch the RF² product family and
consider additional solutions while generally controlling total R&D
cost. As we move toward digital hardware and software-based
solutions, and with the addition of Clarity, we expect to increase the relative
component of royalty and other non-product sales revenue streams.
We
acquired Clarity in January 2008 in a merger transaction in which we acquired
all of the outstanding stock of Clarity, and Clarity became a wholly-owned
subsidiary. Clarity provides value added mobile device features
including a push-to-talk platform, location-based services, and a proprietary
combination called Where2Talk ("W2T"). Additionally, we believe that
our Adaptive Interference Management ("AIM") platform will be compelling in a
digital hardware application, but potentially reach a far broader audience if it
could be delivered solely in software. Such an adaptation would open
additional markets such as mobile devices, small cell sites and repeaters, WiFi
nodes, WiMax, and other architectures. Clarity provides engineering
resources that may be able to accomplish this objective. We have
begun integrating the companies.
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. We
believe that spectrum re-mining in Europe will soon be a very significant event
in the RF conditioning and management space, with operators deploying UMTS in
conjunction with existing GSM networks, which we believe will create challenges
for these operators. We believe these operators may find significant
benefit from deploying our AIM solution. We see other areas as
likewise benefiting from our RF management solutions, including active
engagements in Latin America and Asia.
We
announced several significant recent events during 2008, including the merger
with Clarity, the addition of CEO Gordon Reichard, Jr., and the addition of
Torbjorn Folkebrant, formerly of Ericsson, to our Board of
Directors. We have also seen reports of possible operator spending
reductions in North America, with relatively higher spending outside North
America. Market diversification is one of the primary reasons why we
have been more active in exploring international opportunities.
We
are pursuing digital technologies, evidenced by the deployment of our digital
(front end) AIM solution platform during 2006, subsequent extensions of that
platform including a fully digital AIM platform, and the addition of
software-provider Clarity. We believe that producing solutions on a
digital platform will allow us to extend coverage in the wireless
telecommunications realm, both in more aspects of the cellular market and beyond
the cellular market, and thus greatly increase our available market. The Company
was founded in 1989 by ARCH Development Corporation, an affiliate of the
University of Chicago, to commercialize superconductor technologies initially
developed by Argonne National Laboratory. The Company was incorporated in
Illinois on October 18, 1989 and reincorporated in Delaware on
September 24, 1993. Its facilities and principal executive offices are
located at 1001 Cambridge Drive, Elk Grove Village, IL 60007 and telephone
number is (847) 391-9400.
Results
of Operations
Three
Months Ended March 31, 2008 and 2007
Our net
sales increased $1,804,000 or 189%, to $2,757,000 for the three months ended
March 31, 2008 from $953,000 for the same period in 2007, which we
attribute largely to the 2007 backlog of customer orders and to the additional
revenue from Clarity. Gross margins increased to 44% from 26% for the
same periods, due partly to volume-related efficiencies and partly to the
benefits of providing additional higher margin software-related revenue, due
both to the sales of more digital-based ISCO equipment during the period and to
the addition of Clarity. 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 $0.5 million at March 31, 2008, up
from $0.3 million at March 31, 2007. If not for this increase, gross margin
would have been higher during the period.
Cost of
sales increased by $835,000 or 118%, to $1,545,000 for the three months ended
March 31, 2008 from $710,000 for the same period in 2007. The increase in
cost of sales was due to the increase in sales volume, offset in part by the
improvement in gross margin.
Our
research and development expenses increased by $969,000, or 156%, to $1,590,000
for the three months ended March 31, 2008, from $621,000 for the same
period in 2007. This increase is due to the acquisition of
Clarity. We expect to continue to invest more in R&D during 2008
than we did during 2007, though not quite at the level experienced during the
first quarter 2008, as we expand our existing product families and develop new
products that would be applicable in wireless technologies beyond cellular
telecommunications.
Selling
and marketing expenses increased by $353,000, or 61%, to $936,000 for the three
months ended March 31, 2008, from $583,000 for the same period in
2007. Again, the increased was due to the acquisition of
Clarity.
General
and administrative expenses increased by $129,000 or 12%, to $1,249,000 for the
three months ended March 31, 2008, from $1,120,000 for the same period in
2007. This increase was due to the acquisition of Clarity, offset, in part, by a
decrease in compensation-related charges from grants of restricted stock.
Liquidity
and Capital Resources
At March
31, 2008, our cash and cash equivalents, excluding restricted certificates of
deposit, were approximately $0.4 million, a decrease of approximately $1.4
million from the December 31, 2007 balance of approximately $1.8 million.
This decrease was mainly due to costs associated with the Clarity acquisition
and subsequent costs of the combined business operation, over and above the $1.5
million borrowed to pay off Clarity’s $1.2 million credit line and $0.4 million
of Clarity closing costs as required by the Merger Agreement..
To date,
the Company has financed its operations primarily through public and private
equity and debt financings. The continuing operations of our combined entity
will require an immediate commitment and/or availability of funds, as will the
continuing development of our product lines, any potential merger and
acquisition activity, and any required defense of our intellectual property. The
actual amount of our immediate and 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. The trade receivable
factoring arrangement with Lenders provided significant flexibility in this
area, but this arrangement is very short term in nature, and may only be
utilized at the discretion of both the Company and its Lenders. While
the Company has historically been successful in raising money as needed through
debt and/or equity offerings, there can be no guarantee that it will be able to
do at any point in the future.
Contractual
Obligations and Commitments
The
following table lists the contractual obligations and commitments that existed
as of March 31, 2008:
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
|
$
|
18,216,645
|
|
$
|
501,528
|
|
$
|
17,715,117
|
|
$
|
|
|
|
-
|
|
Operating
Lease Obligations
|
$
|
1,405,000
|
|
$
|
204,000
|
|
$
|
421,000
|
|
$
|
476,000
|
|
$
|
304,000
|
|
Total
|
$
|
19,621,645
|
|
$
|
705,528
|
|
$
|
18,136,117
|
|
$
|
476,000
|
|
$
|
304,000
|
|
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements.
|
(a)
|
An
evaluation was performed under the supervision and with the participation
of the Company’s management, including its Chief Executive Officer, or
CEO, and Chief Financial Officer, or CFO, of the effectiveness of the
Company’s disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended (the “Exchange Act”) as of March 31, 2008. Based on
that evaluation, the Company’s management, including the CEO and CFO,
concluded that the Company’s disclosure controls and procedures are
effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act, is
recorded, processed, summarized and reported as specified in Securities
and Exchange Commission rules and
forms.
|
|
(b)
|
There
were no significant changes in the Company’s internal control over
financial reporting identified in connection with the evaluation of such
controls that occurred during the Company’s most recent fiscal quarter
that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial
reporting.
|
None.
There
have been no material changes to the risk factors described in our Annual Report
on Form 10-K, as amended, for the fiscal year ended December 31,
2007.
None.
Exhibits:
A list of exhibits is set forth in the Exhibit Index found on page 18 of this
report.
Pursuant
to the requirements 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.
|
|
|
ISCO International, Inc.
|
|
|
Date:
May 15, 2008
|
|
|
|
|
Mr.
Gordon Reichard, Jr.
|
|
|
President
and Chief Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
Frank
Cesario
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial and Accounting Officer)
|
EXHIBIT
INDEX
|
|
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
|
10.1
|
|
Amendment
to and Consent and Waiver Under the Loan Documents by and among ISCO
International, Inc., Spectral Solutions, Inc., Illinois Superconductor
Canada Corporation, Manchester Securities Corporation and Alexander
Finance, L.P. dated January 3, 2008, filed as exhibit 10.3 to ISCO
International, Inc.’s Current Report on Form 8-K filed on January 9,
2008
|
10.2
|
|
New
Amended and Restated 7% Senior Secured Convertible Note by and between
ISCO International, Inc. and Alexander Finance, LLC, dated January 3,
2008, in the amount of $1,500,000.00, filed as exhibit 10.4 to ISCO
International, Inc.’s Current Report on Form 8-K filed on January 9,
2008.
|
10.3
|
|
Registration
Rights Agreement by and between ISCO International, Inc. and Alexander
Finance, L.P. dated January 3, 2008, filed as exhibit 10.5 to ISCO
International, Inc.’s Current Report on Form 8-K filed on January 9,
2008.
|
10.4
|
|
Amendment
and Termination and Release of Guaranty by and between the Company,
Manchester Securities Corporation, Alexander Finance, L.P., Illinois
Superconductor Canada Corporation and Spectral Solutions, Inc., dated
January 31, 2008, filed as exhibit 10.1 to ISCO International, Inc.’s
Current Report on Form 8-K filed on January 31, 2008.
|
10.5
|
|
Fifth
Amended and Restated Security Agreement by and between the Company,
Clarity Communication Systems, Inc., Manchester Securities Corporation and
Alexander Finance, L.P., dated January 31, 2008, filed as exhibit 10.2 to
ISCO International, Inc.’s Current Report on Form 8-K filed on January 31,
2008.
|
10.6
|
|
Guaranty
of Clarity Communication Systems, Inc., by and between the Company,
Clarity Communication Systems, Inc., Manchester Securities Corporation and
Alexander Finance, L.P., dated January 31, 2008, filed as exhibit 10.3 to
ISCO International, Inc.’s Current Report on Form 8-K filed on January 31,
2008.
|
10.7*
|
|
Employment
Agreement by and between the Company and Amr Abdelmonem, dated February
19, 2008, filed as exhibit 10.1 to ISCO International, Inc.’s Current
Report on Form 8-K filed on February 22, 2008.
|
10.8*
|
|
Restricted
Stock Agreement by and between the Company and Amr Abdelmonem, dated
February 19, 2008, filed as exhibit 10.2 to ISCO International, Inc.’s
Current Report on Form 8-K filed on February 22, 2008.
|
10.9*
|
|
Employment
Agreement dated March 5, 2008 between ISCO International, Inc. and Mr.
Gordon E. Reichard, Jr., filed as exhibit 10.1 to ISCO International,
Inc.’s Current Report on Form 8-K filed on March 10,
2008.
|
10.10*
|
|
Restricted
Stock Agreement dated March 10, 2008 by and between ISCO International,
Inc. and Mr. Gordon E. Reichard, Jr., filed as exhibit 10.2 to ISCO
International, Inc.’s Current Report on Form 8-K filed on March 10,
2008.
|
10.11
|
|
Assignment
Agreement between ISCO International, Inc., Grace Investments, Ltd., and
Manchester Securities Corporation filed as exhibit 10.1 to ISCO
International, Inc’s Current Report on Form 8-K filed on March 25,
2008.
|
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
|
*
|
|
Management
contract or compensatory plan or arrangement required to be filed as an
exhibit on this Form 10-Q.
|