filing10k123107.htm
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM
10-K
(Mark One)
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the fiscal year ended
December 31, 2007
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission File Number
001-22302
ISCO
INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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36-3688459
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(State
or other jurisdiction of incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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1001
Cambridge Drive, Elk Grove Village, Illinois
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60007
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (847) 391-9400
Securities
registered pursuant to Section 12(b) of the Act:
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Common Stock, Par Value $0.001
Per Share
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American Stock Exchange
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(Title
of each class)
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(Name
of each exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes ¨
No x
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in the definitive proxy or information statements
incorporated by reference in Part III of this on Form 10-K or any amendment to
this on Form 10-K. ¨
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
definitions of “large accelerated filer”, “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated file
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Accelerated
filer
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Non-accelerated
file
(do
not check if a Smaller reporting company)
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨
No x
As of
June 30, 2007, the aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant was approximately $20 million based on
the last sale price of the common stock on such date as reported on the American
Stock Exchange. This calculation excludes more than 90 million shares held
by directors, executive officers, and two holders of more than 10% of the
registrant’s common stock.
As of
March 1, 2008, there were approximately 222 million shares of the
registrant’s common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
As stated
in Part III of this Annual Report on Form 10-K, portions of the registrant’s
definitive proxy statement for the registrant’s 2008 Annual Meeting of
Stockholders, expected to be held during June 2008, are incorporated by
reference in Part III of this Annual Report on Form 10-K.
ISCO
INTERNATIONAL, INC.
ANNUAL
REPORT ON FORM 10-K FOR
THE
YEAR ENDED DECEMBER 31, 2007
Because
we want to provide investors with more meaningful and useful information, this
Annual Report on Form 10-K (“Form 10-K”) 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, 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
Annual Report on Form 10-K or to reflect the occurrence of unanticipated events.
HISTORY
We were
founded in 1989 by ARCH Development Corporation, an affiliate of the University
of Chicago, to commercialize superconductor technologies initially developed by
Argonne National Laboratory. We were incorporated as Illinois Superconductor
Corporation in Illinois on October 18, 1989 and reincorporated in Delaware
on September 24, 1993. In 2001, we shifted our focus from solely a
superconductive filter (high-temperature superconductor product line referred to
as “HTS”) provider to a customer-driven provider of more specialized Radio
Frequency (“RF”) management solutions, with a particular focus on interference
management, changing our name to ISCO International, Inc. We continue to broaden
our solutions with an increasingly comprehensive approach toward optimization of
the full radio link of a number of diverse wireless networks. Our facilities and
principal executive offices are located at 1001 Cambridge Drive, Elk Grove
Village, Illinois 60007 and our telephone number is (847) 391-9400. We
maintain a website at http://www.iscointl.com . The
information contained therein is not incorporated into this annual
report.
On
January 3, 2008, we completed the acquisition of Clarity Communication Systems
Inc., a private company based in Aurora, IL (“Clarity”) pursuant to our
Agreement and Plan of Merger (the “Merger Agreement”). Clarity is now
a wholly-owned subsidiary of our Company. Clarity provides value
added mobile device applications, including a proprietary combination of
Push-To-Talk and Location-Based Services called Where2Talk. We
reference the acquisition of Clarity as a further step in our evolution toward
providing value added applications via software, but Clarity was not part of
ISCO during the fiscal year ended December 31, 2007 and therefore Clarity’s
financial results are not reflected in the financial statements included in this
annual report except as described in Note 14 – Subsequent Events, or otherwise
as clearly indicated. Clarity maintains a website at http://www.claritycsi.com. The
information contained therein also is not incorporated into this annual
report.
BUSINESS
STRATEGY
Our
strategic goal is to become the leading supplier of RF management solutions and
other value-added functionality to wireless operators. We seek to accomplish our
goal by:
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Marketing
our products aggressively to leading wireless
operators;
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Providing
customers comprehensive radio link management infrastructure-based
solutions for wireless networks;
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Continuing
to build on our strong intellectual property position selectively,
emphasizing speed to market; and
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Outsourcing
product manufacturing and reducing product
cost.
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We focus
on winning the support of the world’s leading wireless operators for our RF
management solutions. We believe that our AIM (Adaptive Interference Management)
and RF² (Radio Frequency Fidelity) product families, as well as professional
service support and other products, make us a preeminent RF management
specialist in the market. We have taken steps to expand into a digital delivery
platform for our AIM technologies, evolving what was once an analog platform
Adaptive Notch Filter (ANF) to a partially digital version to a fully digital
solution, and expect this trend to continue. We believe that the ability to
solve interference problems using the delivery size, capabilities and cost
benefits of a digital platform will greatly enhance our addressable market
within the field of wireless telecommunications. We
currently outsource production of our products. We believe that this model will
allow us to maintain or achieve targeted product gross margins, minimize capital
needs while reducing product costs, and maintain a very high quality level. We
also believe that offering the lowest product cost will further strengthen our
ability to achieve our strategic objectives.
RF
MANAGEMENT ISSUES, INCLUDING INTERFERENCE, AND WIRELESS SYSTEMS
RF
management issues are a growing problem limiting cell site coverage, capacity
and range, as well as mobile transmit power and related battery-life issues. RF
Link (or “Link”) problems cause dropped calls, poor call quality, and other
service problems that lead to subscriber dissatisfaction and turnover (churn).
Interference enters a carrier’s operating frequencies from such sources as: home
electronic devices including portable phones, two-way radios used by commercial
enterprises and governmental agencies, air-to-ground radio, police, fire and
emergency services radio, military radio, wireless data networking systems,
television and radio broadcasts, radar and other cellular networks. Interference
is also created by electrical sources used to power cellular base station
equipment. Interference may begin within a particular frequency or migrate from
another frequency. Increased usage of co-location (multiple providers and/or
multiple architectures from a single vendor using the same towers), increased
sensitivity of non-voice applications, and the continued surge in wireless
traffic result in increasing the impact of interference on wireless networks.
With the proliferation of data applications and the limitations on tower
availability and related budgets, wireless operators are finding that their own
preferred technology combinations for their cell sites are creating interference
with each other. Wireless operators also create self interference during the
planned re-mining of existing spectrum with 3G/4G broadband
technologies.
We
believe the proliferation of wireless devices and high data rate services will
exacerbate the amount of interference bombarding carriers’ operating
frequencies. Conventional cellular base station equipment does not effectively
cope with interference issues. More importantly, the wireless telecommunications
industry is undergoing significant transformation as it attempts to integrate
existing infrastructure and technologies with newer 3G equipment. Additionally,
recent merger activity is forcing merged companies to integrate disparate
technology platforms, sometimes using two and three different architectures in
the same site in order to handle planned traffic. We believe this trend will
continue. Our products are designed to address this expanding market
need.
In the
face of expanding subscriber bases, increased minutes of cell phone use, demand
for high data rate services, the ease of customer churn (changing providers) due
to number portability, restricted capital budgets and intense competition, the
provisioning and optimization of wireless system infrastructure is a major
challenge for operators. As a result of these industry conditions, wireless
equipment manufacturers, including independent wireless technology companies and
large original equipment manufacturers (OEM’s) are working intensely to develop
technologies that provide operators the tools necessary to monetize the growing
demand for wireless services.
Using our
solutions to tightly integrate disparate technologies while simultaneously
optimizing the radio link, including the mitigation of interference, operators
can capture additional capacity and utilization, expand cell site range and
coverage, reduce dropped calls, and significantly improve overall call quality.
High speed data applications have placed a tremendous additional strain on
wireless networks. Higher data rates require much cleaner signals than
traditional voice-oriented networks to support the data throughput required for
many of the highest average revenue per unit applications (including VoIP,
music, television and video). As a result, we believe the value proposition and
payback of our solutions are improving with increasing demand for high speed
data, which we believe will result in increased demand for our solutions.
Network capacity, quality and throughput are today the critical competitive
differentiators in commercial wireless networks. All of our products improve one
or more of these performance factors.
We
estimate the economic payback to operators as a result of the use of our
solutions should typically occur in less than one year, sometimes well under one
year, depending on traffic levels and overall link quality. We believe our
solutions often present the best overall value of all alternatives available in
many applications.
Target
Market
We
believe demand for our products will be primarily driven by the following
factors:
1.
Existing networks are straining under heavy traffic. According to many sources,
the annual growth rate in wireless telecommunications remains substantial on
many fronts. Roughly one billion handsets are sold annually, worldwide, and the
variety of devices, networks and applications continues to expand.
2. The
ongoing transition from predominantly voice based networks to data based
networks will continue to drive demand for infrastructure enhancements to
achieve data and error rates required to support near real time data
applications (including VoIP, music, television and video).
3.
Interference and coverage issues are primary causes of poor call quality,
dropped calls and poor data throughput. We believe that as a result of
increasing use of devices such as cellular phones, wireless data networking
equipment, and wireless consumer appliances, wireless network operators are
coming to view interference and coverage management technologies as necessary to
protect against their customer bases “churning” to other carriers, especially
since the full implementation of number portability (the ability to retain one’s
phone number when changing wireless operators - historically a barrier to
changing providers).
4. We
believe that newer, data-driven wireless networks and expansion into higher
frequencies will require smaller operating cells and more base stations than
existing cellular networks in order to cover the same geographic area. This is
based, in part, on the requirement for a higher quality radio link in order to
enable full 3G throughputs required by the most popular applications, as well as
inherent limitation of RF transmissions in higher frequencies. High frequency RF
signals require more transmission points for equivalent coverage than signals of
lower frequency. Since most 3G technologies are deployed at high frequencies, an
operator has to add a significant number of additional cells to match coverage
and in-building penetration capabilities they achieved with their 2G
deployments. To minimize the capital investment and maximize the performance and
customer satisfaction of their data-driven networks, operators are compelled to
look at technology options to overcome these inherent obstacles.
5. The
wireless telecommunications industry is undergoing significant transformation
due to industry consolidation. The primary competitive driver is to reduce the
cost bases, both capital and recurring costs, mostly achieved by reducing the
number of cells required to support the combined customer base and to increase
penetration such as by providing better in-building coverage. This creates
demanding requirements to integrate disparate technologies, frequency spectrums,
and legacy platforms while at the same time enabling the integrations of
advanced technologies and services. Our products enable this integration while
simultaneously optimizing the RF performance of the overall system.
In
summary, we believe we have differentiated technologies in radio link management
and optimization and are customer-driven to closely align our solutions to their
specific needs thereby maximizing our value-add to our customers. Our goal is to
continue to position ourselves as a leader in this segment of the wireless
industry.
TECHNOLOGY
OVERVIEW
Our core
expertise is the application of technology and experience to RF systems, and we
are beginning to implement RF solutions utilizing digital technologies. The
components in the receiver front-end are designed to acquire the desired
information-bearing signal and pass it through to the digital portion of the
system, where it is processed digitally and the user information is extracted.
Typically, a portion of the signal is lost as it passes through the RF
components. Further, undesired interference (in band and out of band) also leaks
into the system due to imperfections in the characteristics of the RF
devices.
The use
of our solutions for wireless RF systems is based on creating RF systems which
block or mitigate the impact of interference, optimize signal processing within
the radio path while introducing very little signal loss or
degradation.
Our two
current primary product families are: (i) Adaptive Interference Management
(AIM), including our Adaptive Notch Filter (ANF ™) technology, dynamically and
adaptively identifying and eliminating direct in-band interference in the radio
link of a wide-band system such as CDMA or UMTS; (ii) Radio Link Radio
Frequency Fidelity (RF² ™), which includes ultra linear low-noise amplifier
receivers, multi-couplers, filters and duplexers that enable full and integrated
upgrades of legacy systems to 3G technologies resulting in a significant overall
improvement in system performance, such as both a reduction in dropped calls and
increased data throughput. These products are designed for efficient production,
emphasizing solid-state electronics over mechanical devices with moving
parts.
RF²
(Radio link Radio Frequency Fidelity)
We
introduced our RF² products in September 2003, we began to add new products to
our RF² family in 2004, and added a significant number of products in 2005 and
2006. The RF² product family is comprised of solutions that focus on optimizing
RF handling in order to improve system performance, integrate the disparate
technologies utilized by operators, and enable next generation 3G upgrades. The
RF² product family is designed to improve capacity and coverage in cellular base
stations through state of the art low noise RF amplification, filtering, and
combining and integration technologies.
The basic
RF² product is a radio link solution designed and priced for network-wide
deployment, improving system coverage integrity, in-building penetration, and
voice/data capacity. This leads to improvement in wireless user perception of
quality by reducing failed connection attempts and dropped calls, and improving
handset battery life.
Our RF²
products are easy to install, maintenance-free, and often present a performance
benefit over alternative solutions in terms of tighter integration into/with
existing equipment, continued ability to utilize diagnostics and monitoring
equipment, and higher performance. Additionally, our RF² solutions have been
shown to deliver results generally comparable to HTS-based solutions without a
cryogenic cooler or other moving parts, and with a tighter integration and much
lower cost. We believe that the ease of integration and higher value compete
strongly with other solutions.
RF²
Competition
OEM
competition includes solutions such as adding a carrier to the cell sites (to
increase capacity), cell splitting, or even adding an entirely new base station
so as to add capacity and coverage. After-market competition includes repeaters,
TMA’s (tower-mounted amplifiers), GMA’s (ground-mounted amplifiers) and HTS
receiver front ends, as well as duplexers and other non-integrated solutions. We
believe these products may generally improve the coverage of the network, but
lack the value of our fully integrated link management solutions.
Adaptive
Interference Management (“AIM” which is based on the Adaptive Notch Filter, ANF,
platform)
Our
patented AIM platform identifies and suppresses in-band interference in the
radio link of a wide-band system such as CDMA or UMTS. If interference is not
eliminated, the radio link of the system may be reduced, possibly to the point
of not allowing any calls on the entire channel. The AIM solution continuously
monitors the power spectral density across the carriers (channels) in use and
identifies narrow-band interference. The severity of multiple in-band
interferers is prioritized, and through software control, the AIM solution
dynamically inserts a highly selective filter to eliminate multiple interferers
with minimal impact on the desired broadband signal. The objective of the AIM
system is for operators to realize significant gains in performance in coverage,
capacity and data throughput. An entire network of AIM hardware can be managed
via the web-based management software that supports the hardware. We believe our
patented AIM technology is the only in-band dynamically controlled interference
management solution commercially available to the marketplace
today.
Our
products, including projected expansions and improvements of product lines, are
focused on CDMA and other wide-band spread spectrum systems (W-CDMA), including,
for example, upgrades of GSM systems to UMTS and similar 3G technology. During
2006 we launched our first ANF solution that protects PCS (1900 MHz). We
expanded this and other ANF platforms with a digital front end and modular
design for easy adaptation to customer requirements. This new platform has
significantly expanded our addressable market and will also serve as an enabler
to a larger suite of dynamically adaptable RF multiplexer
solutions.
We have
also developed a network-wide, web-based network management tool (web monitor),
allowing our customers to perform management functions for all AIM units
throughout the system. This tool with a graphical user interface allows the
service provider to control, configure, and monitor the AIM units remotely from
the network management center. This includes:
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Remote
configuration of parameters within all AIM
units;
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Remote
monitoring of alarm status for all AIM
units;
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Observation
of interference and notch activity from all AIM units;
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The
ability to view on-line event data and reports based on measured
performance data.
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We have
industry leading expertise in the optimization of networks. To facilitate rapid
penetration of AIM, we offer professional services to the service providers’
engineering teams to identify and quantify interference, and, its effects on
network performance. We have developed several custom software and hardware
tools to perform interference analysis and interference audit. iSMART
(Interference from System Metric Analysis Rules Tool) is a software tool that
enables a service provider to identify potential AIM candidate sectors/cell
sites by analyzing the system performance metrics data generated in their
network. Automated Test Equipment, ANF-on-wheels and AIM Web Monitor is a
software/hardware system that allows us to perform interference audits at cell
sites of service providers regardless of the frequency band of operation. This
service helps quantify interference and identify new markets (frequency bands)
with high interference.
We
recently added a digital front-end to our AIM products, and then extended into a
fully digital version for 2008. We believe a fully digital AIM
solution would integrate well into operator plans and provide the economics to
allow far greater penetration into customer networks, as well as access to
wireless applications outside of traditional cellular (e.g., WiFi and WiMax
architectures), as well as mobile devices such as handsets.
AIM
competition
We
believe our patented AIM technology is the only in-band dynamically controlled
interference management solution commercially available to the marketplace
today. We hold proprietary technology on AIM, particularly the underlying ANF
platform. We do, however, face competition as described below.
Direct
Competition — After-Market Vendors
Fixed-frequency
notch filters are the main form of direct competition. However, these will only
work in a static interference environment, and hence do not satisfy the need for
dynamic interference detection and elimination as observed in a vast majority of
in-band interference scenarios. Smart antennas were also developed with the
intent of in-band interference mitigation. However, we believe these solutions
have limited applicability and effectiveness in eliminating in-band
interference, particularly in a CDMA-based network, and are typically
substantially more expensive (in addition to being less effective) than our AIM
solution. We have also seen startup companies attempt to provide
somewhat similar types of solutions in the wireless space. Typically
these entities have little or no revenue and often are focused on beginning in
the OEM channel, a path to market we believe is difficult prior to making the
case for the solution with the end customer operator.
Direct
Competition — OEMs
Digital-signal-processing
based solutions may be under development by the various OEMs. Even if the
manufacturers do develop such a solution for in-band interference, we believe
that they would have limited dynamic range and hence would only be able to
mitigate low-power interference. Most importantly they would likely not be
available for deployment on the hundreds of thousands of legacy cell sites
currently in service.
Indirect
Competition — OEMs
Indirect
competition does not directly address the problem of in-band interference, but
could be viewed as a method for circumventing the problem. Examples include
adding a carrier (channel) to a cell site (to increase capacity), cell
splitting, or even adding an entirely new base station. These methods seek to
overcome the effects of the interference by a brute force of added capacity and
higher signal-to-noise in a problematic location. However, we believe these
solutions to be relatively costly and do not guarantee adequate increased
performance due to absolute limiting effects of in-band interference in certain
situations.
Indirect
Competition — After-Market Vendors
Other
forms of indirect competition include repeaters and TMA’s. As with the OEM-based
solutions, we do not believe these directly address the problem of in-band
interference. There are several entities attempting to develop and market
digital solutions that address part of the problem that our AIM solutions
address, but we believe they operate in a very different fashion and will not
achieve the same benefits. Additionally, they are typically entities without
significant current revenue streams or operator access. We have the benefit of
an existing customer base and the ability to work with our customers in tightly
matching next generation solutions with their needs.
Product
Benefits
Our
products are designed to address the high performance RF needs of domestic and
international commercial wireless telecommunication systems by providing the
following advantages:
Enable Deployment
of Data Networks. Beginning in 2005, our solutions have been utilized
with data network deployments. These deployments require upgrades and changes to
existing infrastructure. Our products have proven effective in helping customers
in this area. It is generally expected that data networks will continue to be
widely deployed both in the United States and internationally.
Technology
Integration due to Expansion or Consolidation. The wireless
telecommunications industry is undergoing significant transformation due to
industry consolidation. The primary competitive driver is to reduce the cost
bases, both capital and reoccurring costs, mostly achieved by reducing the
number of cells required to support the combined customer base. This creates
demanding requirements to integrate disparate technologies, frequency spectrums,
and legacy platforms while at the same time enabling the integrations of
advanced technologies and services. Our products enable this integration while
simultaneously optimizing the RF performance of the overall system.
Greater Network
Capacity and Utilization. Our solutions can increase capacity and
utilization by up to 70% or more. In some cases, capacity increases because
channels which were previously unusable due to interference are recovered. In
other cases, system utilization increases because of lower levels of blocked or
dropped calls, and increases in the ability of the system to permit weak signals
to be processed with acceptable call quality.
Improved Base
Station Range. Our RF systems have been shown to extend the radio link
range of a wireless system by up to 50%. Greater range can reduce a service
operator’s capital expenditure per customer in lower density areas by filling in
coverage gaps in existing systems or by reducing the number of required cell
sites for new system deployments.
Improved
Flexibility in Locating Base Stations. Our RF products can allow wireless
telecommunications service providers to co-locate base stations near other RF
transmitters. Our products allow the cell site radio to better tolerate RF
interference while reducing out-of band signals that could interfere with other
nearby wireless telecommunication operators.
Improved Call
Quality - Fewer Dropped Calls and Failed Connection Attempts. Our
products improve call quality by reducing dropped and blocked calls. During
commercial installations, our RF products have demonstrated drastic reduction in
dropped calls, by as much as 50% or more. Our products similarly reduce the
number of ineffective connection attempts and dead zones within
networks.
Reduced Mobile
Transmit Power. By improving the radio link, reducing the system’s noise
floor and mitigating the destructive impact of interference, our solutions
greatly reduce required mobile transmit power. This improves battery life, among
other benefits.
CLARITY
BUSINESS
History
Clarity
was founded in 1998 by its former President and Chief Executive Officer, James
Fuentes. Mr. Fuentes acquired licenses to technology assets from
Lucent Technologies (now Alcatel-Lucent Technologies) and built a company on
providing highly effective, low cost handset applications for mobile devices in
the wireless telecommunications sector. Building on success in
creating over the air functionality applications for mobile devices, Clarity
leveraged its proprietary product and development methodologies into new
applications, including Push-To-Talk (PTT) and Location-Based Services
(LBS). Today Clarity offers a unique product that combines both
technologies into a single application – Where2Talk. Clarity’s
facilities are located at 2640 White Oak Circle, Aurora, IL
60502. The website is http://www.claritycsi.com
.. The information contained therein is not incorporated into this
report.
Business
Strategy and Technology Summary
Our
strategic goal is to become a leader in creating mobile device applications for
the wireless telecommunications industry. We have platform assets in
the very young fields of PTT and LBS, but the core competency lies in the
methodology for developing and delivering applications in this
environment. The Clarity Application Server Suite (CLASS) is a
product foundation of both hardware and middleware for developing high
availability applications that meet the exacting standards of the
telecommunications industry. CLASS offers a reusable platform for
many of the elements of a completed product. In addition, the Rapid
Application Deployment in Client Languages (RADiCL) is a foundation for mobile
device applications themselves. This open architecture supports third
party plug-in applications as needed in the development process, and isolates
device hardware from the execution environment, thus enabling more rapid
application development and easier porting between devices.
We expect
to leverage these design assets to quickly allow for new application
development, and thus able to quickly adapt to changing technologies,
environments, and customer requirements. We believe that it can
deliver highly valuable solutions to both OEMs and operators.
As our
Clarity business primarily sells software (excluding very limited hardware
support in the form of preconfigured network servers as needed), we have little
current need for extensive manufacturing capabilities. Instead, our
Clarity products are preloaded on handsets or provided via
download. As such, the Clarity business does not typically carry any
meaningful amount of inventory, nor has the business been forced to invest in
significant manufacturing assets.
Industry
Demands and Clarity Solutions
The
demand for faster, more robust applications within mobile devices has been
growing substantially, and is expected to continue for the foreseeable
future. Mobile devices offer tremendous convenience in delivering
value added applications. The number of mobile devices shipped
annually has been quoted by industry experts to exceed one billion units per
year, and the growth of various technologies for delivering services to such
devices (traditional wireless such as cellular and including next generation
data application architectures such as WCDMA, WiFi, WiMax, and others) has
created a very large and dynamic industry.
With the
proliferation of data applications, consumers grow increasingly reliant on their
mobile devices for a variety of tasks. From child protection to fleet
tracking, LBS services can improve our lives, safety and
efficiency. We therefore offer the Whereabouts application, which
allows real time tracking of devices that are set up on the
system. Until now, customers have been forced to choose between
carrying around an additional GPS (global positioning system) device and paying
an additional cost or accepting limited features being offered through less
robust offerings. Today we offer the capability of using the GPS
device imbedded in the mobile device with the connection and reporting tools
already imbedded in that device as an optional service. We believe
this convenience will provide substantial value to customers.
Despite
Nextel’s previous success (Nextel is now part of Sprint) with respect to PTT
features, the market has been slow to provide substantial PTT features through
mobile devices in any scale. We believe that a limitation of
deploying PTT more broadly is less an issue of competition among rival companies
offering PTT applications than an issue of operator acceptance and end user
demand, particularly a concern about potential costs to overall operator
networks. In response to our perception that end user demand is
unsatisfied, we offer the InTouch solution. The InTouch platform
interfaces with the existing packet data network, without requiring a costly
overhaul, and thus allows PTT to be added at little cost and with limited
maintenance requirements.
We
realized that the combination of these technologies might be precisely what the
market wanted, creating the Where2Talk platform. Combining PTT and
LBS technologies, Where2Talk allows for a geographically-based call to be
conducted from the handset. This feature allows a person at a console
to locate emergency workers in the vicinity of an event using advanced mapping
technologies, which then can be quickly connected and organized. The
initial deployment of this solution is expected to occur during the second
quarter 2008 with
the Department of Homeland Security (“DHS”), and we believe this feature has
significant application throughout the field of public safety as well as in
commercial applications.
Competitive
Landscape and Barriers
Push-to-Talk
(PTT)
Nextel
(now Sprint) proved value in providing PTT to consumers, and the basic
technology is broadly available. However, relatively few PTT
applications are currently offered to consumers. We view the primary
limitation in providing PTT to consumers is from the network operators
themselves who would have to support such a system. We offer a
solution to this problem by providing a fully hosted service, in which we
maintain the network servers required for the applications to function and
connect to the mobile devices using VOIP (voice over internet
protocol). Larger operators may choose not to allow applications
outside of their immediate control and thus may not enable PTT features via this
hosted approach.
Location-Based
Services (LBS)
The
primary suppliers of LBS services are specific devices that are used within the
vehicle to provide real time LBS applications (such as maps, directions, and
fleet tracking). There have recently been increases in limited mobile
device applications offering some form of LBS-based features, but the industry
remains relatively young. The primary barrier to providing LBS
applications on a mobile device is to prove a need for the application and then
prove that the application will not otherwise interfere with the network or
device. This can be a time-consuming process, particularly for a
small company.
Combined
Solution
We do not
believe there are significant combinations of the LBS and PTT technologies in
the market today. DHS indicated that it selected Clarity for its 2008
trial because DHS could not find another solution in the marketplace that
offered this combination of technologies in a single
platform. Proving a new technology to the wireless telecommunications
industry can be a very long process that may never succeed, particularly for a
small company. We believe that we need to parlay success from early
adopters and look for opportunities to partner with other entities to maximize
the opportunity for this type of platform to be adopted.
COMPANY
HIGHLIGHTS
Sales
and Marketing
We (ISCO)
have historically focused our sales and marketing effort on U.S. wireless
service providers for retrofit applications. To date, we have sold our products
to many of the largest cellular operators in the United States as well as to
mid-size and smaller U.S. wireless operators. Going forward, we
expect to continue to serve this customer base but look to aggressively expand
our customer base internationally.
We look
to expand with international customers, marketing both our existing products and
presenting the benefits of our interference-management technology in the design
and early stage deployments of new systems. Targeted regions have included
India, China and other parts of the Far East as well as several countries within
Latin America and Europe. We have engaged professional representatives in these
areas to facilitate entry into the markets and follow-on services. Such
representatives typically help by providing customer contacts and relationships,
in marketing, field support, and distribution. Recently we have
joined with a large telecom equipment supplier in India by bidding in a joint
project in that country.
Sales to
three customers accounted for 99% and 98%of our total revenues for 2007 and
2006, respectively. During both 2007 and 2006 the top three customers were
Verizon Wireless, Alltel Corporation, and Bluegrass Cellular Corporation,
respectively. In addition, a significant amount of our technical and managerial
resources have been focused on working with these and a limited number of other
operators and OEMs.
With
respect to Clarity, it has traditionally focused its efforts on the needs of the
OEM channel, but during 2007 has expanded into broadening its customer
base. Examples of this expansion include providing hosted PTT
solutions to several small operators, as well as the enterprise and public
safety markets served by W2T and network access benefits. Clarity similarly has
significant customer concentration, with nearly 100% of 2006 revenues coming
from Alcatel-Lucent Technologies, Autodesk, and Lockheed
Martin. Alcatel-Lucent Technologies, Autodesk, and the City of
Chicago were the top three customers for 2007, contributing approximately 93% of
revenue for the year.
Manufacturing
We
outsource our manufacturing processes in order to provide predictable product
yields and easy expansion to meet increased customer demand. Toward that end, we
currently produce all of our products through third party manufacturers. We
believe there are multiple sources available for manufacturing and foresee no
problem continuing to apply our outsourcing strategy. Our internal manufacturing
and test capability can be found in Elk Grove Village, IL.
Research
and Development
Our
R&D efforts have been focused on developing and improving RF products for
wireless telecommunications systems. As a result of such efforts, product
performance has been improved, product size has been reduced, production costs
have been lowered, product functionality has been increased, and product
packaging has been streamlined. We are currently developing related products
that are synergistic with our core offerings and which utilize our core
technical competencies in the radio link management arena, allowing us to
deliver our solutions to more customers.
Our total
R&D expenses during 2007 and 2006 were approximately $2,802,000 and
$2,012,000, respectively. These expenses do not include any Clarity
R&D expenses.
Intellectual
Property and Patents
We regard
certain elements of our product design, fabrication technology and manufacturing
process as proprietary and protect our rights in them through a combination of
patents, trade secrets and non-disclosure agreements. We also have obtained
exclusive and non-exclusive licenses for technology developed with or by our
research partners, which have included Argonne National Laboratory, Northwestern
University and Alcatel-Lucent Technologies. We believe that our success will
depend in part upon the protection of our proprietary information, our patents
and licenses of key technologies from third parties, and our ability to operate
without infringing on the proprietary rights of others.
HTS
Technology
We spent
many years developing HTS applications, resulting in a number of products,
processes and materials related to HTS. This experience has helped us offer our
current set of state of the art solid-state solutions, such that the underlying
technology is being utilized in the marketplace today and may be even more fully
utilized in the future.
There are
two ways of designing an HTS component - “thin-film” and “thick-film”
techniques. We have technologies in both aspects that may have application to
specific, but currently limited markets. We are prepared to address those
segments should the opportunity present itself, but currently have chosen to
focus on higher value-added, solid state solutions appropriate for the wireless
telecommunications application.
Patents
We have
applied for patents for inventions developed internally and acquired patents,
through assignment of a license from the Canadian government, in connection with
the purchase of the Adaptive Notch Filtering business unit of Lockheed Martin
Canada. One of our patents is jointly owned with Alcatel-Lucent Technologies.
Furthermore, we expect to pursue foreign patent rights on certain inventions and
technologies critical to our products, and expand our portfolio of patents and
other intellectual property related to the Clarity acquisition. Please refer to
Note 2 of our Financial Statements for a discussion of patent useful lives and
amortization.
Government
Regulations
Although
we believe that our wireless telecommunications products themselves are not
licensed or governed by approval requirements of the Federal Communications
Commission (“FCC”), the operation of base stations is subject to FCC licensing
and the radio equipment into which our products would be incorporated is subject
to FCC approval. Base stations and the equipment marketed for use therein must
meet specified technical standards. Our ability to sell our RF products is
dependent on the ability of wireless base station equipment manufacturers and of
wireless base station operators to obtain and retain the necessary FCC approvals
and licenses. In order to be acceptable to base station equipment manufacturers
and to base station operators, the characteristics, quality, and reliability of
our base station products must enable them to meet FCC technical standards.
We may
use certain hazardous materials in our research, development and any
manufacturing operations. As a result, we may be subject to stringent federal,
state and local regulations governing the storage, use and disposal of such
materials. It is possible that current or future laws and regulations could
require us to make substantial expenditures for preventive or remedial action,
reduction of chemical exposure, or waste treatment or disposal. We believe we
are in material compliance with all environmental regulations and to date we
have not had to incur significant expenditures for preventive or remedial action
with respect to the use of hazardous materials, nor do we have reason to believe
that we should expect to incur such costs in the future.
Employees
As of
January 1, 2008, we had a total of 35 employees, 9 of whom hold advanced
degrees. Of the employees, 5 are engaged in manufacturing and production, 15 are
engaged in research, development and engineering, 9 are engaged in marketing and
sales, and 6 are engaged in finance and administration. We also periodically
employ other consultants and independent contractors on as as-needed basis. None
of our employees are covered by a collective bargaining agreement. We believe
that our relationship with our employees is good.
Following
the acquisition of Clarity, we had a total of 73 total employees. Of
these, approximately 5 are engaged in manufacturing and production, 46 in
research, development and engineering, 13 in marketing and sales, and 9 in
finance and administration. Similarly, none of this larger employee
set is covered by a collective bargaining agreement and we believe our
relationship is good.
The
following factors, in addition to other information contained herein, should be
considered carefully in evaluating us and our business.
RISKS
RELATED TO THE OPERATIONS AND FINANCING OF THE COMPANY
We
have a history of losses that raises doubts about our ability to continue as a
going concern
We were
founded in October 1989 and through 1996 we were engaged principally in research
and development, product testing, manufacturing, marketing and sales activities.
Since 1996, we have been actively selling products to the marketplace and we
continue to develop new products for sale. We have incurred net losses since
inception. As of December 31, 2007, our accumulated deficit was
approximately $171 million. We have only recently begun to generate revenues
from the sale of our AIM (ANF) and RF² products, having sold more in the past
two years than in the fourteen years of company history prior to 2005. Although
we showed a substantial improvement in revenues during the past three years as
compared with all prior years of the Company’s history, and we have indicated
the expectation of continued improvement prospectively, it is nonetheless
possible that we may continue to experience net losses, such as the loss
incurred during 2007, and cannot be certain if or when we will become
profitable. Additionally, we acquired Clarity Communication Systems
Inc. (Clarity) during January 2008. While we believe this acquisition
will bring additional revenues and substantial synergies, this combination also
adds costs to the organization. As a standalone entity, Clarity
posted consistent profits until 2007, when it began to change its sales model,
and suffered a substantial loss (approximately $3 million).
These
conditions raise substantial doubt about our ability to continue as a going
concern. The accompanying consolidated financial statements have been prepared
assuming we will continue as a going concern and do not include any adjustments
relating to the recoverability of reported assets or liabilities should we be
unable to continue as a going concern.
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. Our roughly $16 million in debt is held by our two
largest shareholders, including affiliates, and is due in 2009 and 2010. The
ability to either repay or refinance our debt, and to maintain adequate working
capital, is necessary for us to continue as a going concern. Additionally, we
project increases in working capital requirements in order to pursue significant
business opportunities during 2008 and beyond, and also expect to spend
additional financial resources in the expansion of our business and product
offering. As such, we will require additional capital during 2008. 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. In addition, in
connection with the acquisition of Clarity and related closing costs, we
borrowed an additional $1.5 million from one of these lenders during January
2008.
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. 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, our expansion of our
international operations, the magnitude of research and product development
programs, the ability to improve or maintain product margins, the 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.
Risks
involved in acquisitions, including the risk that we may not successfully
integrate the Clarity business or realize the anticipated benefits from the
merger, which could adversely affect our business, financial condition and
results of operations
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, such as the recent acquisition of Clarity. There is no
assurance that we will be able to successfully integrate the Clarity business,
or any future acquired business, into our own. 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.
Failure
to attract and retain key personnel could have a material adverse effect on our
business
Our
success depends on our ability to attract and retain the appropriate personnel
needed to operate our business. During March 2008, we announced
the appointment of Gordon Reichard, Jr. as our new Chief Executive
Officer. Additionally, the value of the Clarity acquisition to our
stockholders rests in large part on the continuity of the key personnel from the
former Clarity organization remaining with us. While we believe we
have devised appropriate incentives to retain former Clarity employees, there
can be no guarantee that they will choose to remain with our
Company. Due to the specialized nature of the Clarity business, it
may be difficult to locate and hire qualified personnel. The loss of
services of any of our key personnel, including Mr. Reichard, or the failure to
attract and retain other key personnel, could have a material adverse effect on
our business, operating results and financial condition.
Our
Clarity business is dependent on the acceptance of push-to-talk and
location-based services and related applications
Increased
sales of our Clarity products are dependent on a number of factors, one of which
is the acceptance and demand for location-based features coupled with
push-to-talk services. Further, the spending patterns of wireless
operators and OEMs is beyond management’s control and depends on a variety of
factors, including access to financing, the status of federal, local and foreign
government regulation and deregulation, changing standards for wireless
technology, the overall demand for wireless services, competitive pressures and
general economic conditions. The expansion of wireless services and
applications, and related networks to support them, may take years to
complete. The magnitude and timing of capital spending by these
operators for constructing, rebuilding or upgrading their systems significantly
impacts the demand for Clarity products. Any decrease or delay in
capital spending patterns in the wireless telecommunications industry, whether
because of a general business slowdown or a reevaluation of the prospective
demand for data and other services, would delay the build-out of these networks
and may significantly harm our business prospects.
The
indemnification obligations under the Merger Agreement are limited, which means
we could have unreimbursed liabilities related to the acquisition
Our
Company, our officers, directors, employees, stockholders and other
related parties, will be entitled to indemnification in the event of losses
resulting from, among other things, breaches of Clarity’s representations and
warranties, failure to perform covenants under the Merger Agreement and Clarity
tax obligations solely and exclusively as provided in the Merger Agreement,
other than for fraud. Our Company and other indemnified parties will
not be entitled to indemnification until the cumulative amount of all losses
exceed $150,000, after which such party will only be entitled to any amounts
that exceed $150,000. In addition, the length of time in which our
Company and other indemnified parties have a right to bring an indemnification
claim and the amount to which a party may be indemnified are subject to certain
caps as set forth in the Merger Agreement. Further, indemnification
may be satisfied by withholding Time-Based Shares of Common Stock issuable in
connection with the merger, which would not provide us with any cash to either
pay or offset the liability that was the subject of the indemnification
claim. Unreimbursed liabilities related to our acquisition of Clarity
could have a material adverse effect on our business, operating results and
financial condition.
Failure
to manage our growth may have a material adverse effect on our
business
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 recent acquisition of
Clarity will require substantial attention and resources in order to integrate
Clarity’s operations into our business and distract management from other areas
of our business, and to develop revenue streams that support the costs of the
combined organization.
OTHER
BUSINESS RISKS
We
have limited experience in manufacturing, sales and marketing, and dependence on
third party manufacturers
For us to
be financially successful, we must develop a successful blend of direct sale and
royalty revenues derived from ISCO’s AIM technology as well as Clarity’s
solutions, and manufacture our other products in substantial quantities, at
acceptable costs and on a timely basis. To accomplish this
manufacturing objective, we must produce ourselves or enter into outsourcing
arrangements with qualified manufacturers that will allow us the same result.
Currently, our manufacturing requirements are met by third party contract
manufacturers. The efficient operation of our business will depend, in part, on
our ability to have these and other companies manufacture our products in a
timely manner, cost-effectively and in sufficient volumes while maintaining the
required quality. Any manufacturing disruption could impair our ability to
fulfill orders and could cause us to lose customers.
In the
event that we are unable to maintain manufacturing arrangements on acceptable
terms with qualified manufacturers then we would have to produce our products in
commercial quantities in our own facilities. Although to date we have produced
limited quantities of our products for commercial installations and for use in
development and customer field trial programs, production of large quantities of
our products at competitive costs presents a number of technological and
engineering challenges. We may be unable to manufacture such products in
sufficient volume. We have limited experience in manufacturing, and substantial
costs and expenses may be incurred in connection with attempts to manufacture
larger quantities of our products. We may be unable to make the transition to
large-scale commercial production successfully.
Our sales
and marketing experience to date is very limited. We may be required to further
develop our marketing and sales force in order to effectively demonstrate the
advantages of our products over other products. We also may elect to enter into
arrangements with third parties regarding the commercialization and marketing of
our products, and indeed have entered into a limited number of such
arrangements. If we enter into such agreements or relationships, we would be
substantially dependent upon the efforts of others in deriving commercial
benefits from our products. We may be unable to establish adequate sales and
distribution capabilities, we may be unable to enter into marketing arrangements
or relationships with third parties on financially acceptable terms, and any
such third party may not be successful in marketing our products. There is no
guarantee that our sales and marketing efforts will be successful.
Dependence
on a limited number of customers may have a material adverse effect on our
business
Sales to
our top three customers accounted for at least 97% of our total revenues for
2007 and 2006. During both years, our top three customers were
Verizon Wireless, Alltel Corporation, and Bluegrass Cellular
Corporation. In addition, a significant amount of our technical and
managerial resources have been focused on working with these and a limited
number of other operators and OEMs. The loss of any of these large
customers might have a material adverse effect on our business, operating
results, and financial condition.
Similarly,
Clarity also boasts a heavy customer concentration, with its top three customers
accounting for nearly 100% of its revenues for 2006 (Alcatel-Lucent
Technologies, Autodesk, and Lockheed Martin) and approximately 93% for 2007
(Alcatel-Lucent Technologies, Autodesk, and the City of Chicago). The
loss of any large customer might have a material adverse effect on Clarity’s
business, operating results, and financial condition, which would impact us as a
result of the merger.
We expect
that if our products achieve market acceptance, a limited number of wireless
service providers and OEMs will account for a substantial portion of revenue
during any period. Sales of many of our products depend in
significant part upon the decisions of prospective and current customers to
adopt and expand their use of these products. Wireless service
providers, wireless equipment OEMs and our other customers are significantly
larger than we are, and are able to exert a high degree of influence over
us. Customers’ orders are affected by a variety of factors such as
new product introductions, regulatory approvals, end user demand for wireless
services, customer budgeting cycles, inventory levels, customer integration
requirements, competitive conditions and general economic
conditions. The failure to attract new customers would have a
material adverse effect on our business, operating results and financial
condition.
We expect
that if our Clarity products achieve market acceptance, a limited number of
wireless service providers and OEMs will account for a substantial portion of
revenue during any period. Sales of many Clarity products depend in
significant part upon the decisions of prospective and current customers to
adopt and expand their use of these products. Wireless service
providers, wireless equipment OEMs and Clarity’s other customers are
significantly larger than we are, and are able to exert a high degree of
influence over us in negotiating customer contracts. Customers’
orders are affected by a variety of factors such as new product introductions,
regulatory approvals, end user demand for wireless services, customer budgeting
cycles, inventory levels, customer integration requirements, competitive
conditions and general economic conditions. The loss of any such
customer or the failure to attract new customers would have a material adverse
effect on our business, operating results and financial condition.
We
have lengthy sales cycles which could make revenues and earnings inconsistent
and difficult to trend
Prior to
selling products to customers, we may be required to undergo lengthy approval
and purchase processes. Technical and business evaluation by
potential customers can take up to a year or more for products based on new
technologies. The length of the approval process is affected by a
number of factors, including, among others, the complexity of the product
involved, priorities of the customers, budgets and regulatory issues affecting
customers. We may not obtain the necessary approvals or ensuing sales
of such products may not occur. The length of customers’ approval
process or delays could make our quarterly revenues and earnings inconsistent
and difficult to trend.
International
operations pose additional risks to our business
We are in
discussions and have agreements in place with companies in non-U.S. markets to
form manufacturing and product development joint ventures and other marketing,
distribution or consulting arrangements. We also have agreements with foreign
entities for international distribution as well as foreign sources of components
to be used in North America. These agreements and relationships help
us optimize our competitive position and cost structure. There are
many such entities that exist, domestically and internationally, that offer
similar capabilities, and thus could reduce risk exposure to the loss of such
foreign entities. Recently, we have begun to prioritize opportunities in Europe,
Asia and Latin America more aggressively, to complement our domestic business
model, which will subject our business, operating results and financial
condition to additional risks associated with international
operations.
We
believe that non-U.S. markets could provide a substantial source of revenue in
the future, and indeed will emphasize non-US markets during 2008 more than
in prior years. However, there are certain risks applicable to doing business in
foreign markets that are not applicable to companies doing business solely in
the U.S. For example, we may be subject to risks related to fluctuations in the
exchange rate between the U.S. dollar and foreign currencies in countries in
which we do business. Further, overseas activities are subject to
political and other factors that may adversely affect our ability to do business
in certain markets. In addition, we may be subject to the additional
laws and regulations of these foreign jurisdictions, some of which might be
substantially more restrictive than similar U.S. ones. Foreign jurisdictions may
also provide less patent protection than is available in the U.S., and we may be
less able to protect our intellectual property from misappropriation and
infringement in these foreign markets.
We
are dependant on limited sources of supply
Certain
parts and components used in our RF products are only available from a limited
number of sources. Our reliance on these limited source suppliers
exposes us to certain risks and uncertainties, including the possibility of a
shortage or discontinuation of certain key components and reduced control over
delivery schedules, manufacturing capabilities, quality and
costs. Any reduced availability of such parts or components when
required could materially impair the ability to manufacture and deliver products
on a timely basis and result in the cancellation of orders, which could have a
material adverse effect on our business, operating results and financial
condition.
In
addition, the purchase of certain key components involves long lead times and,
in the event of unanticipated increases in demand for our products, we may be
unable to manufacture products in quantities sufficient to meet customers’
demand in any particular period. We have few guaranteed supply
arrangements with our limited source suppliers, do not maintain an extensive
inventory of parts or components, and customarily purchase parts and components
pursuant to actual or anticipated purchase orders placed from time to time in
the ordinary course of business.
Related
to this topic, we produce substantially all of our products through third-party
contract manufacturers. Like raw materials, the elimination of any of
these entities or delays in the fulfillment process, for whatever reason, may
impact our ability to fulfill customer orders on a timely basis and may have a
material adverse effect on our business, operating results, or financial
condition.
To
satisfy customer requirements, we may be required to stock certain long
lead-time parts and/or finished product in anticipation of future orders, or
otherwise commit funds toward future purchase. The failure of such
orders to materialize as forecasted could limit resources available for other
important purposes or accelerate the requirement for additional
funds. In addition, such excess inventory could become obsolete,
which would adversely affect financial performance. Business
disruption, production shortfalls or financial difficulties of a limited source
supplier could materially and adversely affect us by increasing product costs or
reducing or eliminating the availability of such parts or
components. In such events, the inability to develop alternative
sources of supply quickly and on a cost-effective basis could materially impair
the ability to manufacture and deliver products on a timely basis and could have
a material adverse effect on our business, operating results and financial
condition.
Failure
of products to perform properly might result in significant warranty
expenses
In
general, our products carry a warranty of one or two years, limited to
replacement of the product or refund of the cost of the product. In
addition, we offer our customers extended warranties. Repeated or
widespread quality problems could result in significant warranty expenses and/or
the loss of customer confidence. The occurrence of such quality
problems could have a material adverse effect on our business, operating results
and financial condition.
TECHNOLOGY
AND MARKET RISKS
We
are dependent on wireless telecommunications
The
principal target market for our products is wireless
telecommunications. The devotion of substantial resources to the
wireless telecommunications market creates vulnerability to adverse changes in
this market. Adverse developments in the wireless telecommunications
market, which could come from a variety of sources, including future
competition, new technologies or regulatory decisions, could affect the
competitive position of wireless systems. Any adverse developments in
the wireless telecommunications market may have a material adverse effect on our
business, operating results and financial condition.
We
are dependent on the enhancement of existing networks and the build-out of
next-generation networks, and the capital spending patterns of wireless network
operators
Increased
sales of products are dependent on a number of factors, one of which is the
build-out of next generation (3G and 4G) enabled wireless communications
networks as well as enhancements of existing infrastructure. Building
wireless networks is capital intensive, as is the process of upgrading existing
equipment. Further, the capital spending patterns of wireless network
operators is beyond management’s control and depends on a variety of factors,
including access to financing, the status of federal, local and foreign
government regulation and deregulation, changing standards for wireless
technology, the overall demand for wireless services, competitive pressures and
general economic conditions. The build-out of next-generation
networks may take years to complete. The magnitude and timing of
capital spending by these operators for constructing, rebuilding or upgrading
their systems significantly impacts the demand for our products. Any
decrease or delay in capital spending patterns in the wireless communication
industry, whether because of a general business slowdown or a reevaluation of
the prospective demand for data and other services, would delay the build-out of
these networks and may significantly harm business prospects.
Our
success depends on the market’s acceptance of our products
Our RF
products have not been sold in very large quantities and a sufficient market may
not develop for these products. Similarly, Clarity has derived the
majority of its historical revenue from custom product development (contract
engineering) and not from product sales to customers. Customers
establish demanding specifications for performance, and although we believe we
have met or exceeded these specifications to date, there is no guarantee that
the wireless service providers will elect to use these solutions to solve their
wireless network problems. Although we have enjoyed substantial
revenue growth during recent years relative to prior years in company history,
there is no assurance that we will continue to receive orders from these
customers.
Intense
competition, and continued consolidation in the wireless telecommunications
industry could create stronger competitors and harm our business
The
wireless telecommunications applications market is very
competitive. Many of these companies have substantially greater
financial resources, larger research and development staffs and greater
manufacturing and marketing capabilities than we do. Our products
compete directly with products which embody existing and future competing
commercial technologies. Other emerging wireless technologies may
also provide similar functionality, potentially at lower prices and/or superior
performance, and may therefore compete with our products. Failure of
our products to improve performance sufficiently, reliably, or at an acceptable
price or to achieve commercial acceptance or otherwise compete with existing and
new technologies, would have a material adverse effect on our business,
operating results and financial condition.
Rapid
technological change and future competitive technologies could negatively affect
our operations
The field
of telecommunications is characterized by rapidly advancing
technology. Our success will depend in large part upon our ability to
keep pace with advancing our high performance RF technology and efficient,
readily available low cost materials technologies as well as our ability to keep
pace with advancing our solutions in light of applications and services offered
by competitors. Rapid changes have occurred, and are likely to
continue to occur, in the development of wireless
telecommunications. Development efforts may be rendered obsolete by
the adoption of alternative solutions to current wireless operator problems or
by technological advances made by others, which could have a material adverse
effect on our business, operating results and financial condition.
RISKS
RELATED TO OUR COMMON STOCK AND CHARTER PROVISIONS
Volatility
of common stock price
The
market price of our common stock, like that of many other high-technology
companies, has fluctuated significantly and is likely to continue to fluctuate
in the future. Since January 1, 2007 and through March 15, 2008, the
price of our common stock has ranged from a low of $0.13 per share to a high of
$0.35 per share. Announcements by us or others regarding the receipt
of customer orders, quarterly variations in operating results, acquisitions or
divestitures, additional equity or debt financings, results of customer field
trials, scientific discoveries, technological innovations, litigation, product
developments, patent or proprietary rights, government regulation and general
market conditions may have a significant impact on the market price of our
common stock. In addition, fluctuations in the price of our common
stock could affect our ability to maintain the listing of our common stock on
AMEX.
The
issuance of additional shares of common stock will result in dilution to our
existing stockholders
If we
issue the full number of shares of common stock pursuant to the merger with
Clarity and in connection with our June 2007 debt restructuring, we will be
issuing up to approximately 79.9 million additional shares of Common Stock, or
approximately 36% of the total number of shares currently outstanding as of
March 15, 2008. If stockholders approve the issuance of common stock
upon conversion of the $1.5 million in notes issued pursuant to the financing
obtained in connection with the merger with Clarity, and if we issue the full
number of shares issuable pursuant to this transaction, we will be issuing up to
approximately 8.4 million additional shares of common stock, or approximately
4% of the total
number of shares currently outstanding as of March 15, 2008. 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.
Further,
as of March 15, 2008, we had outstanding options to purchase 4.9 million shares
of common stock at a weighted average exercise price of $0.41 per share (fewer
than 0.1 million of which have not yet vested) issued to employees, directors
and consultants pursuant to the 2003 Equity Incentive Plan and its predecessor
1993 Stock Option Plan, as amended, the merger agreement with Spectral
Solutions, and individual agreements with management and
directors. In addition, on the same date we had 3.6 million unvested
shares of restricted stock outstanding. In order to attract and
retain key personnel, we may issue additional securities, including grants of
restricted shares, in connection with or outside our company employee benefit
plans, or may lower the price of existing stock options. The exercise
of options and notes for common stock and the issuance of additional shares of
common stock, shares of restricted stock and/or rights to purchase common stock
at prices below market value would be dilutive to existing stockholders and may
have an adverse effect on the market value of our common stock.
As a
result of the issuances described above, the sale of a substantial number of
shares of our common stock, or the perception that such sales could occur, could
adversely affect the market price for our common stock. It could also
impair our ability to raise money through the sale of additional shares of
common stock or securities convertible into shares of our common
stock.
Concentration
of our stock ownership
At the
time of this filing, officers, directors and principal stockholders (holding
greater than 5% of outstanding shares) together control more than 50% of the
outstanding voting power on a fully diluted basis. The two largest
stockholders, along with their affiliates, are also our lenders, holding all of
our outstanding debt instruments. Consequently, these stockholders,
if they act together, would be able to exert significant influence over all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. In addition, this
concentration of ownership may delay or prevent a change of control of us, even
if such a change may be in the best interests of our
stockholders. The interests of these stockholders may not always
coincide with our interests or the interests of other
stockholders. Accordingly, these stockholders could cause us to enter
into transactions or agreements that we would not otherwise
consider.
Certain
provisions in our charter documents have an anti-takeover effect
There
exist certain mechanisms that may delay, defer or prevent such a change of
control. For instance, our Certificate of Incorporation and By-Laws
provide that (i) our Board of Directors has authority to issue series of our
preferred stock with such voting rights and other powers as the Board of
Directors may determine and (ii) prior specified notice must be given by a
stockholder making nominations to the Board of Directors or raising business
matters at stockholders meetings. The effect of the anti-takeover
provisions in our charter documents may be to deter business combination
transactions not approved by our Board of Directors, including acquisitions that
may offer a premium over market price to some or all stockholders.
The
reporting requirements of a public company could result in significant cost to
us and divert attention from other activities
As a
public company, we are required to comply with various reporting
obligations. These obligations change from time to time, and
currently include compliance with certain provisions of Section 404 of the
Sarbanes-Oxley Act for our fiscal year ended December 31, 2007. The
process of achieving compliance might involve the commitment of significant
resources, including substantial levels of management
attention.
If we
fail to comply with the reporting obligations of the Exchange Act and Section
404 of the Sarbanes-Oxley Act, or if we fail to achieve and maintain adequate
internal controls over financial reporting, our business, results of operations
and financial condition, and investors’ confidence in us, could be materially
adversely affected. As a public company, we are required to comply with the
periodic reporting obligations of the Exchange Act, including preparing annual
reports, quarterly reports and current reports. Our failure to
prepare and disclose this information in a timely manner could subject us to
penalties under federal securities laws, expose us to lawsuits and restrict our
ability to access financing. In addition, we are required under
applicable law and regulations to integrate our systems of internal controls
over financial reporting. We plan to evaluate our existing internal
controls with respect to the standards adopted by the Public Company Accounting
Oversight Board. During the course of our evaluation, we may identify
areas requiring improvement and may be required to design enhanced processes and
controls to address issues identified through this review. This could
result in significant delays and cost to us and require us to divert substantial
resources, including management time, from other activities.
LEGAL
RISKS
Intellectual
property and patent protection and infringement may be costly
Our
success will depend in part on our ability to obtain patent protection for our
products and processes, to preserve trade secrets and to operate without
infringing upon the patent or other proprietary rights of others and without
breaching or otherwise losing rights in the technology licenses upon which any
of our products are based. We have applied for patents for inventions
developed internally and acquired patent rights in connection with the purchase
of the Adaptive Notch Filtering business unit of Lockheed Martin Canada, now
demonstrated in our AIM platform. One of the patents is jointly owned
with Lucent Technologies, Inc. (now Alcatel-Lucent Technologies). We
believe there are a large number of patents and patent applications covering RF
products and other products and technologies that we are
pursuing. Accordingly, the patent positions of companies using RF
technologies, including us, are uncertain and involve complex legal and factual
questions. The patent applications filed by us or others may not
result in issued patents or the scope and breadth of any claims allowed in any
patents issued to us or others may not exclude competitors or provide
competitive advantages. In addition, patents issued to us, our
subsidiaries or others may not be held valid if subsequently challenged or
others may claim rights in the patents and other proprietary technologies owned
or licensed by us. Others may have developed, or may in the future
develop, similar products or technologies without violating any of our
proprietary rights. Furthermore, the loss of any license to
technology that we might acquire in the future may have a material adverse
effect on our business, operating results and financial condition.
Some of
the patents and patent applications owned by us are subject to non-exclusive,
royalty-free licenses held by various U.S. governmental units. These
licenses permit these U.S. government units to select vendors other than us to
produce products for the U.S. Government, which would otherwise infringe our
patent rights that are subject to the royalty-free licenses. In
addition, the U.S. Government has the right to require us to grant licenses
(including exclusive licenses) under such patents and patent applications or
other inventions to third parties in certain instances.
Older
patent applications in the U.S. are currently maintained in secrecy until
patents are issued, though the likelihood of such an issuance impacting us tends
to decrease over time. In foreign countries and
for newer U.S. patent applications, this secrecy is maintained for a period of
time after filing. Accordingly, publication of discoveries in the
scientific literature or of patents themselves or laying open of patent
applications in foreign countries or for newer U.S. patent applications tends to
lag behind actual discoveries and filing of related patent
applications. Due to this factor and the large number of patents and
patent applications related to RF materials and technologies, and other products
and technologies that we are pursuing, comprehensive patent searches and
analyses associated with RF technologies and other products and technologies
that we are pursuing are often impractical or not cost-effective. As
a result, patent and literature searches cannot fully evaluate the patentability
of the claims in our patent applications or whether materials or processes used
by us for our planned products infringe or will infringe upon existing
technologies described in U.S. patents or may infringe upon claims in patent
applications made available in the future. Because of the volume of
patents issued and patent applications filed relating to RF technologies and
other products and technologies that we are pursuing, we believe there is a
significant risk that current and potential competitors and other third-parties
have filed or will file patent applications for, or have obtained or will
obtain, patents or other proprietary rights relating to materials, products or
processes used or proposed to be used by us. In any such case, to
avoid infringement, we would have to either license such technologies or design
around any such patents. We may be unable to obtain licenses to such
technologies or, if obtainable, such licenses may not be available on terms
acceptable to us or we may be unable to successfully design around these
third-party patents.
Our
participation in litigation or patent office proceedings in the U.S. or other
countries to enforce patents issued or licensed to us, to defend against
infringement claims made by others or to determine the ownership, scope or
validity of the proprietary rights of us and others, could result in substantial
cost to, and diversion of effort by, us. The parties to such
litigation may be larger, better capitalized than we are and better able to
support the cost of litigation. An adverse outcome in any such
proceedings could subject us to significant liabilities to third parties,
require us to seek licenses from third parties and/or require us to cease using
certain technologies, any of which could have a material adverse effect on our
business, operating results and financial condition.
Litigation
may be costly and divert management’s attention
We have
no active lawsuits or any pending or threatened to the best of our
knowledge. The act of defending against any potential claim may be
costly and divert management attention. If we are not successful in
defending against whatever claims and charges may be made against us in the
future, there may be a material adverse effect on our business, operating
results and financial condition.
Government
regulations may have a material adverse effect on our business
Although
we believe that our wireless telecommunications products themselves are not
subject to licensing by, or approval requirements of, the FCC, the operation of
base stations, wireless operators, and OEMs are subject to FCC licensing and the
radio equipment into which our products would be incorporated is subject to FCC
approval. Base stations and the equipment marketed for use therein
must meet specified technical standards. The ability to sell our
wireless telecommunications products is dependent on the ability of wireless
base station equipment manufacturers and wireless base station operators to
obtain and retain the necessary FCC approvals and licenses. In order
for them to be acceptable to base station equipment manufacturers and to base
station operators, the characteristics, quality and reliability of our base
station products must enable them to meet FCC technical standards. We
may be subject to similar regulations of foreign governments. Any
failure to meet such standards or delays by base station equipment manufacturers
and wireless base station operators in obtaining the necessary approvals or
licenses could have a material adverse effect on our business, operating results
and financial condition. In addition, certain RF filters are on the
U.S. Department of Commerce’s export regulation list. Therefore,
exportation of such RF filters to certain countries may be restricted or subject
to export licenses.
We are
subject to governmental labor, safety and discrimination laws and regulations
with substantial penalties for violations. In addition, employees and
others may bring suit against us for perceived violations of such laws and
regulations. Defending against such complaints could result in
significant legal costs for us. Although we endeavor to comply with
all applicable laws and regulations, we may be the subject of complaints in the
future, which could have a material adverse effect on our business, operating
results and financial condition.
Environmental
liability may involve substantial expenditures
Certain
hazardous materials may be used in research, development and to the extent of
any manufacturing operations. As a result, we are subject to
stringent federal, state and local regulations governing the storage, use and
disposal of such materials. It is possible that current or future
laws and regulations could require us to make substantial expenditures for
preventive or remedial action, reduction of chemical exposure, or waste
treatment or disposal. We believe we are in material compliance with
all environmental regulations and to date have not had to incur significant
expenditures for preventive or remedial action with respect to the use of
hazardous materials.
However,
our operations, business or assets could be materially and adversely affected by
the interpretation and enforcement of current or future environmental laws and
regulations. In addition, although we believe that our safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, there is the risk of
accidental contamination or injury from these materials. In the event
of an accident, we could be held liable for any damages that
result. Furthermore, the use and disposal of hazardous materials
involves the risk that we could incur substantial expenditures for such
preventive or remedial actions. The liability in the event of an
accident or the costs of such actions could exceed available resources or
otherwise have a material adverse effect on the business, results of operations
and financial condition. We carry property and worker’s compensation
insurances in full force and effect through nationally known carriers which
include pollution cleanup or removal and medical claims for industrial
incidents.
Not
applicable.
We
maintain our corporate headquarters in a 15,000 square foot building located in
Elk Grove Village, Illinois under a lease which expires in October 2014. This
facility houses our manufacturing, research, development, engineering,
administration and marketing activities. We also maintain a 4,000 square foot
facility located in Elk Grove Village, Illinois under a lease which expires in
October 2014, which is used for R&D purposes. Additionally, Clarity houses
its headquarters in a 14,000 square foot building in Aurora, Illinois under a
lease which expires in July 2009. We believe that these facilities
are adequate and suitable for our current needs and that additional space would
be available on commercial terms as necessary to meet any future needs.
We were
not involved in any such proceedings during 2007 nor are we aware of any pending
or threatened litigation.
On
December 27, 2007, the Company held a special meeting of
stockholders. At the meeting, the following proposals were approved
by the margins indicated:
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
Voted For
|
Against
|
Abstain
|
|
|
|
|
1.To approve the merger of ISCO
International, Inc. with Clarity Communication Systems Inc. and the
issuance of shares of our common stock to Jim Fuentes and the issuance of
shares of our common stock from our 2003 Equity Incentive Plan, as amended
to Clarity Rightsholders to satisfy certain employee rights and interests,
as described in the Proxy Statement.
|
104,721,502
|
3,744,614
|
144,846
|
|
|
|
|
|
|
|
|
|
|
|
|
2.To increase the number of
authorized shares of common stock permitted by our certificate of
incorporation, as described in the Proxy Statement.
|
103,973,340
|
4,427,880
|
209,742
|
|
|
|
|
|
|
|
|
|
|
|
|
3.To approve the increase in the
amount of shares of common stock available under the Plan, as described in
the Proxy Statement.
|
103,662,071
|
4,635,495
|
313,396
|
|
|
|
|
|
|
|
|
|
|
|
|
4.To approve the issuance of shares
of common stock upon the conversion of notes issued in accordance with our
debt restructuring in June 2007, as described in the Proxy
Statement.
|
104,364,793
|
3,920,582
|
325,587
|
|
|
|
Our
common stock has been listed since June 2002 on the American Stock Exchange
under the symbol “ISO.” Prior to that, and until April 1999, our stock had been
listed on the OTC Bulletin Board under the symbol “ISCO.” From 1993 until April
1999, our common stock was listed on the NASDAQ National Market. The following
table shows, for the periods indicated, the reported high and low sale prices
for the common stock. Such prices reflect prices between dealers, without retail
mark up, mark down, or commissions and may or may not reflect actual
transactions.
|
|
|
|
High
|
|
|
Low
|
|
|
FISCAL
YEAR ENDED DECEMBER 31, 2006
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.43
|
|
$
|
0.30
|
|
|
Second
Quarter
|
|
$
|
0.43
|
|
$
|
0.25
|
|
|
Third
Quarter
|
|
$
|
0.36
|
|
$
|
0.27
|
|
|
Fourth
Quarter
|
|
$
|
0.45
|
|
$
|
0.30
|
|
|
FISCAL
YEAR ENDED DECEMBER 31, 2007
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.35
|
|
$
|
0.25
|
|
|
Second
Quarter
|
|
$
|
0.32
|
|
$
|
0.15
|
|
|
Third
Quarter
|
|
$
|
0.30
|
|
$
|
0.15
|
|
|
Fourth
Quarter
|
|
$
|
0.28
|
|
$
|
0.13
|
|
On
December 31, 2007, there were approximately 300 holders of record of our
common stock. On such date the closing bid price for our common stock as
reported on the American Stock Exchange was $0.19.
We have
never paid cash dividends on the common stock and we do not expect to pay any
dividends on our common stock in the foreseeable future. In addition, borrowings
under our loan arrangements are collateralized by all of our assets and we are
prohibited from paying any dividends, other than dividends consisting solely of
common stock or rights to purchase common stock, unless our lenders waive such
prohibition.
Except as
reported on our Current Reports on Form 8-K filed with the Securities and
Exchange Commission on June 26, 2007 and November 20, 2007, there were no sales
of unregistered securities during 2007. Further, there were no repurchases of
equity securities by us during the fourth quarter of 2007.
Equity
Compensation Plan Information
The
following table gives information about the Company’s Common Stock that may be
issued upon the exercise of options, warrants and rights under the Company’s
1993 Plan and under the 2003 Equity Incentive Plan as of December 31,
2007.
|
Plan
Category
|
|
Number
of Securities
to
be issued upon exercise
of
outstanding Options,
warrants
and rights
|
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
|
Number
of Securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding securities
reflected
in second
column)
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
7,327,892
|
|
$
|
0.36
|
|
23,896,541
|
(1)
|
|
Equity
compensation plans not approved by security holders
|
|
1,100,000
|
|
|
0.43
|
|
—
|
(2)
|
|
Total
|
|
8,427,892
|
|
$
|
0.37
|
|
23,896,541
|
(1)
|
|
(1)
|
The
1993 Plan terminated in August 2003 and was replaced by the
Plan. At the Annual Meeting of Stockholders held in December
2005, the Company’s stockholders voted to approve the allocation of 12
million shares of common stock to the Plan, included above, and also
clarified the use of up to 5 million shares in the Plan that were
allocated to the 1993 Plan but were ultimately unused. During
the Annual Meeting of Stockholders held in June 2006, the Company’s
stockholders voted to approve an additional increase to the Plan of 6
million shares of common stock that corresponded to a grant of restricted
shares to John Thode that was not contemplated at the time of the December
2005 increase. During a special meeting of stockholders held in
December 2007, the Company’s stockholders increased the number of shares
of common stock in the Plan by 15 million shares. Of that
number, approximately 13 million shares are reserved for issuance to the
Clarity employees who remained with the combined entity following the
merger in accordance with the terms of the merger
agreement. This reservation is not deducted from the
outstanding number of shares as of December 31, 2007 in the table
above.
|
|
(2)
|
These
securities represent shares of Common Stock issuable upon exercise of
stock options granted to John Thode pursuant to a letter agreement dated
January 2005. Such options were issued outside the
Plan.
|
None.
A
NOTE CONCERNING FORWARD-LOOKING STATEMENTS
The
discussion below contains certain forward-looking statements that reflect our
current expectations regarding the Company’s future results of operations,
performance and achievements. Please see the discussion of such forward-looking
statements under “Forward Looking Statements” above.
Overview
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. Until we gain more experience managing the
Clarity business, and with the larger fluctuations and the cost of the combined
entity, we are unable to determine how long our financial resources would
sustain us under normal operating conditions.
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 2007 and early 2008,
including the merger with Clarity, the loss of CEO John Thode and addition of
new CEO Gordon Reichard, Jr., the refinancing of our maturing debt until 2009,
and the extension of our AIM family into a digital solution. During
2008 we also added 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 of course 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.
Results
of Operations
Years
Ended December 31, 2007 and 2006
Our net
sales decreased $5,360,000 or 36%, from $14,997,000 in 2006 to $9,637,000 in
2007, which we attribute to the lower volume of sales due to more sporadic data
network infrastructure spending during 2007. Gross margin was 39% and 40% for
the years ended December 31, 2007 and 2006, respectively, with the decrease due
to lower volume offsetting cost efficiencies. Cumulative deferred software
revenue, the amount of revenue that will be recognized in the future periods
related to currently installed equipment and related software, increased to $0.3
million in 2007, up from $0.2 million in 2006. We anticipate our unit
volume and related revenue to increase during 2008 as compared to 2007, due to
existing and/or anticipated customer orders. Our order backlog entering 2008
increased to $1.6 million from less than $0.5 million from going into
2007.
Cost of
sales decreased $3,155,000, or 35%, from $9,067,000 in 2006 to $5,912,000 in
2007. The decrease in cost of sales was due to the reduction in sales
volume.
Our
internally funded research and development expenses increased $790,000, or 39%,
from $2,012,000 in 2006 to $2,802,000 during 2007.
This
increase was due in part to increased spending associated with the addition of a
significant number of products to our RF² and ANF (now AIM) product families,
particularly due to the investment in a fully digital AIM product platform. With
the acquisition of Clarity, a primarily engineering-driven company, we expect to
see a significant increase in R&D spending in 2008 as compared to
2007.
Selling
and marketing expenses decreased $756,000, or 24%, from $3,208,000 during 2006
to $2,452,000 during 2007. 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 analysis of
spectrum performance in many different cities as a fundamental element to our
business plan and market penetration strategy. Lower sales revenue also
contributed to this decrease with respect to lower related sales
commissions. Clarity only recently began to look outside the OEM
channel, and thus did not have a significant sales function, but the addition of
its sales personnel plus anticipated increases in revenue are expected to
increase costs in this area.
General
and administrative expenses decreased $313,000, or 7%, from $4,287,000 in 2006
to $3,974,000 during 2007. This decrease was attributable to a decrease in
salary and non-cash compensation charges due to the CEO departure during the
fourth quarter of 2007. Favorable trends in the insurance industry, for example,
reduced insurance expense, contributing to this favorable
change. Total expenses will increase with the Clarity acquisition and
related integration costs, but should be relatively less significant than the
R&D function, above.
Interest
income decreased $27,000, or 22%, from $119,000 in 2006 to $92,000 during 2007.
This decrease was primarily the result of additional financing in 2006 but not
in 2007 and the related use of cash for operating activities, as well as the
additional expenses associated with the Clarity acquisition that otherwise could
have been invested in interest bearing investments.
Interest
expense increased $104,000, or 11%, from $907,000 in 2006 to $1,011,000 during
2007. The Company borrowed funds during June 2006, resulting in only a partial
year of related interest expense for 2006 and a full year of related interest
expense for 2007.
Liquidity
and Capital Resources
The
accompanying financial statements have been prepared assuming that we will
continue as a going concern. As discussed in Note 3 to the financial statements,
we incurred a net loss of $6 million during the year ended December 31,
2007, and, as of that date, our accumulated deficit was approximately $171
million. In addition, we have consistently used, rather than provided, cash in
our operations. These factors, among others, raise substantial doubt about our
ability to continue as a going concern. We have been engaged in developing new
solutions, and toward that end development spending has preceded sales revenues.
Management’s plans in regard to these matters include the focusing of
development efforts on products with a greater probability of commercial sales,
increased efficiencies and reduced product costs within our outsourced
production model, all of which are also described in Note 3. The financial
statements do not include any adjustments, including any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might result from the outcome of this
uncertainty. Significant uses of cash during 2007 included the cost to produce
inventory, personnel costs, facility related costs, increased product
development (engineering) costs and sales and marketing efforts and merger
transaction costs. Significant sources of cash during 2007 included sales and
the resulting realization of customer receivables, as well as a reduction in
inventories held during the year.
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, which in turn is dependent upon our ability
to meet our financing requirements on a continuing basis, to maintain present
financing, and to succeed in our future operations.
At
December 31, 2007, our cash and cash equivalents, excluding restricted
certificates of deposit, were approximately $1.8 million, a decrease of
approximately $1.1 million from the December 31, 2006 balance of
approximately $2.9 million. This decrease was due to the $6.4 million loss
during the year, as well as $0.6 million of capitalized costs
associated with the Clarity acquisition and $1.6 million in closing
costs. Offsetting these cash outflows were $2.5 million in expenses
for equity compensation and accrued interest expenses that were not paid in cash
but reflected in the net loss for 2007, the $3.3 million reduction in inventory
during 2007 and the incremental $1.5 million in debt financing obtained for the
Clarity merger.
The
continuing development of our product lines, integration of the Clarity merger,
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 extent
to which we prioritize certain international opportunities and the risks
associated with foreign operations, 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.
Until we gain more experience managing the Clarity business, and with the larger
fluctuation and the cost of the combined entity, we are unable to determine how
long our financial resources would sustain us under normal operating conditions.
During
March 2008, we entered into an agreement with our Lenders wherein we could
assign, or factor, certain customer receivables to them at our request and
subject to their approval. We believe this arrangement will provide
flexibility in managing our cash flows by addressing short-term cash
needs. Future utilization of this arrangement, however, is subject to
our request and lender approval. On March 20, 2008, we received $0.5
million under this arrangement, which is expected to be repaid during April 2008
upon collection of the underlying customer receivables and at a cost of an
implied annual interest rate of 10%.
2007
Convertible Debt that replaced the 2002 Credit Line
On June
26, 2007, our 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 Lenders, including affiliates, are our two
largest shareholders and the lenders of the 2006 Convertible Debt discussed
below.
We 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 certain amendments to our line of credit arrangement (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 our common stock, par
value $0.001 per share, at an initial conversion price of $0.20 per share. In
addition, 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 conversion 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 our 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 to finance the Clarity acquisition, Alexander purchased an
additional $1.5 million of these Amended and Restated Notes. Before
Alexander may exercise its right to convert the additional $1.5 million of
Amended and Restated Notes into Conversion Shares, we are required to obtain
approval of our stockholders and obtain the approval of AMEX to list the
additional Conversion Shares on AMEX. We are 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 we entered into with
Alexander in connection with this additional financing, 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 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 this additional note is approved as described above and
held to 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 we entered into a Securities Purchase Agreement (the “Agreement”) and
convertible notes (the “2006 Notes”) with 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 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 our common stock at a rate of $0.33 per share, subject to
certain anti-dilution adjustments. The Lenders have the right to convert the
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.
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.
We filed
registration statements covering the resale of the shares of common stock
issuable upon conversion of the 2006 and Amended and Restated (2007) Notes with
the Securities and Exchange Commission. The Notes, above, are secured on a first
priority basis by all our assets, and payment of the Notes is guaranteed by our
Clarity subsidiary.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or
conditions.
Critical
accounting policies are defined as those that are reflective of significant
judgments and uncertainties, and potentially result in materially different
results under different assumptions and conditions. We believe that our critical
accounting policies are limited to those described below. For a detailed
discussion on the application of these and other accounting policies, see Note 2
in the notes to the consolidated financial statements.
Revenue
Recognition
In
accordance with SAB No. 104, we recognize revenue when the following criteria
are met: persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, price is fixed and determinable, and collectability
is reasonably assured. Revenues from product sales are generally recognized at
the time of shipment and are recorded net of estimated returns and allowances.
Revenues from services are generally recognized upon substantial completion of
the service and acceptance by the customer. We have under certain conditions,
granted customers the right to return product during a specified period of time
after shipment. In these situations, we establish a liability for estimated
returns and allowances at the time of shipment and make the appropriate
adjustment in revenue recognized for accounting purposes. During 2007, no
revenue was recognized on products that included a right to return or otherwise
required customer acceptance after December 31, 2007. We have established a
program which, in certain situations, allows customers or prospective customers
to field test our products for a specified period of time. Revenues from field
test arrangements are recognized upon customer acceptance of the
products.
During
2006, we began to sell the dANF product which contains software that is
essential to the functionality of the product and as such is required to be
accounted for in accordance with SOP 97-2, “Software Revenue Recognition,” as
amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions.” The revenue recognized for each separate
element of a multiple-element software contract is based upon vendor-specific
objective evidence of fair value, which is based upon the price the customer is
required to pay when the element is sold separately. The dANF product is
recognized as revenue upon shipment while the maintenance is deferred and
recognized on a straight line basis during the applicable maintenance period,
typically 1-3 years.
We
warrant our products against defects in materials and workmanship typically for
a 1-2 year period from the date of shipment, though these terms may be
negotiated on a case by case basis. A provision for estimated future costs
related to warranty expenses is recorded when revenues are recognized. At both
December 31, 2007 and 2006 we accrued $34,000 for warranty costs. This
warranty reserve is based on the cost to replace a percentage of products in the
field at a given point, adjusted by actual experience. Returns and allowances
were not significant in any period reported, and form a data point in
establishing the reserve. Should this warranty reserve estimate be deemed
insufficient, by new information, experience, or otherwise, an increase to
warranty expense would be required.
Goodwill
and Intangible Assets
During
2007, we completed our annual process of evaluating goodwill for impairment
under SFAS No. 142 “Goodwill and Other Intangible Assets”. As the fair value of
the enterprise, using quoted market prices for our common stock, exceeded the
carrying amount, goodwill was determined to be not impaired. We assess the
potential for impairment of goodwill annually, or more frequently if events or
changes in circumstances indicate that the asset might be impaired. If we
determine that the carrying value of goodwill is less than its fair value, a
write-down may be required. In accordance with SFAS No. 144 “Accounting for the
Impairment or Disposal of Long-Lived Assets”, we review our identifiable
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Recoverability of the
intangible assets is measured by a comparison of the carrying amount to the fair
value. If intangible assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds the fair value.
Allowance
for Doubtful Receivables
An
allowance for doubtful receivables may be maintained for potential credit
losses. Management specifically analyzes accounts receivable, on a client by
client basis, when evaluating the adequacy of our allowance for doubtful
receivables including customer credit worthiness and current economic trends and
records any necessary bad debt expense based on the best estimate of the facts
known to date. Alternatives to this approach include applying a fixed and/or
empirical rate of bad debts to receivables. Bad debts have historically been
very low (none in 2007 or 2006). We believe our current method to be less
arbitrary and more reliable than the alternatives as described. Should the facts
regarding the collectability of receivables change, the resulting change in the
allowance would be charged or credited to income in the period such
determination is made. Such a change could materially impact our financial
position and results of operations.
Stock-Based
Compensation
Effective
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123R, "Share-Based Payment," ("FAS 123R") which
establishes accounting for equity instruments exchanged for employee services.
Under the provisions of FAS 123R, share-based compensation cost is measured at
the grant date, based on the calculated fair value of the award, and is
recognized as an expense over the employee's requisite service period (generally
the vesting period of the equity grant). Performance-based grants (grants that
vest upon a future event and not due to the passage of time) are not expensed
until we believe it probable that vesting will occur. We elected to adopt the
modified prospective transition method as provided by FAS 123R and, accordingly,
financial statement amounts for the prior periods have not been retroactively
adjusted to reflect the fair value method of expensing share-based compensation.
Under the modified prospective method, share-based expense recognized after
adoption includes: (a) share-based expense for all awards granted prior to, but
not yet vested as of January 1, 2006, based on the grant date fair value and (b)
share-based expense for all awards granted subsequent to January 1, 2006. We
changed our equity compensation practices at the same time to emphasize grants
of restricted stock as opposed to stock options. As most options were fully
vested as of January 1, 2006, only a small portion of its total equity
compensation expense came from stock options, with the vast majority coming from
grants of restricted stock. Grants of restricted stock are valued at the market
price on the date of grant and amortized during the service period on a
straight-line basis or the vesting of such grant, whichever is
higher.
Recent
Accounting Pronouncements
During
September 2006, FASB issued SFAS No. 157, Fair Value Measurements (FAS 157),
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We will adopt
FAS 157 effective as of January 1, 2008, as required, which will be reflected in
our first quarter 10-Q filing for the period ended March 31, 2008. We do not
expect this standard to have a material impact on our operating income and
statement of financial
During
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (FAS 159). FAS 159 permits entities to choose
to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. FAS 159 is effective for fiscal years
beginning after November 15, 2007. We are currently assessing the impact of FAS
159 on our consolidated financial position and results of
operations.
During
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (FAS
141R), to create greater consistency in the accounting and financial reporting
of business combinations. FAS 141R establishes principles and requirements for
how the acquirer in a business combination (i) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any controlling interest, (ii) recognizes and measures the goodwill acquired
in the business combination or a gain from a bargain purchase, and (iii)
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. FAS 141R applies to fiscal years beginning after December 15, 2008.
We believe the adoption of this pronouncement will not have a material impact on
our consolidated financial statements.
During
December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51 (FAS 160). FAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The guidance will
become effective as of the beginning of the Company’s fiscal year on January 1,
2009. We believe the adoption of this pronouncement will not have a material
impact on our consolidated financial statements.
During
December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110
Share-Based Payment (SAB 110). SAB 110 establishes the continued use of the
simplified method for estimating the expected term of equity based compensation.
The simplified method was intended to be eliminated for any equity based
compensation arrangements granted after December 31, 2007. SAB 110 is being
published to help companies that may not have adequate exercise history to
estimate expected terms for future grants. We believe the adoption of this
pronouncement will not have a material impact on our consolidated financial
statements.
During
June 2006, the FASB ratified a consensus opinion reached by the Emerging Issues
Task Force (EITF) on EITF Issue 06-3, "How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation)." The guidance in EITF Issue 06-3
requires disclosure in interim and annual financial statements of the amount of
taxes on a gross basis, if significant, that are assessed by a governmental
authority that are imposed on and concurrent with a specific revenue producing
transaction between a seller and customer such as sales, use, value added, and
some excise taxes. Additionally, the income statement presentation (gross or
net) of such taxes is an accounting policy decision that must be disclosed. The
consensus in EITF Issue 06-3 is effective for interim and annual reporting
periods beginning after December 15, 2006. We adopted EITF Issue 06-3 effective
January 1, 2007. We present sales tax on a net basis in its consolidated
financial statements. The adoption did not have a material effect on our
consolidated financial statements.
During
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 9 for a more detailed discussion of FIN 48.
Off
Balance Sheet Financing
None.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
ISCO
International, Inc.
We have
audited the accompanying consolidated balance sheets of ISCO International, Inc.
(a Delaware corporation) and Subsidiaries (the “Company”), as of
December 31, 2007 and 2006, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the two years ended
December 31, 2007. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ISCO
International, Inc. and Subsidiaries as of December 31, 2007 and 2006, and
the consolidated results of their operations and their cash flows for each of
the two years ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 3, the Company incurred a
net loss of approximately $6.4 million during the year ended December 31,
2007, and, as of that date, the Company’s accumulated deficit was approximately
$171 million. In addition, the Company has consistently used, rather than
provided, cash in its operations. These factors, among others, as discussed in
Note 3 to the financial statements, raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in regard to these
matters are also described in Note 3. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
Grant
Thornton LLP
Chicago,
Illinois
March 28,
2008
ISCO
INTERNATIONAL
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
1,789,953
|
|
$
|
2,886,476
|
|
|
Inventory,
net
|
|
|
3,043,230
|
|
|
6,368,599
|
|
|
Accounts
Receivable, net
|
|
|
2,311,110
|
|
|
2,554,716
|
|
|
Prepaid
Expenses and Other
|
|
|
149,659
|
|
|
168,741
|
|
|
Total
Current Assets
|
|
|
7,293,952
|
|
|
11,978,532
|
|
|
Property
and Equipment
|
|
|
1,437,030
|
|
|
1,334,203
|
|
|
Less:
Accumulated Depreciation and Amortization
|
|
|
(940,328)
|
|
|
(811,167)
|
|
|
Net
Property and Equipment
|
|
|
496,702
|
|
|
523,036
|
|
|
Restricted
Certificates of Deposit
|
|
|
129,307
|
|
|
162,440
|
|
|
Other
Assets
|
|
|
587,824
|
|
|
-
|
|
|
Goodwill
|
|
|
13,370,000
|
|
|
13,370,000
|
|
|
Intangible
assets, net
|
|
|
850,811
|
|
|
841,187
|
|
|
Total
Assets
|
|
$
|
22,728,596
|
|
$
|
26,875,195
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
904,910
|
|
$
|
1,172,844
|
|
|
Accrued
Inventory-related material purchase
|
|
|
240,126
|
|
|
328,663
|
|
|
Accrued
Employee-related liability
|
|
|
331,522
|
|
|
284,653
|
|
|
Accrued
Professional Services
|
|
|
106,921
|
|
|
93,000
|
|
|
Other
Accrued Liabilities and Current Deferred Revenue
|
|
|
452,581
|
|
|
225,724
|
|
|
Current
Portion of LT Debt, including related interest, with related
parties
|
|
|
-
|
|
|
11,295,957
|
|
|
Total
Current Liabilities
|
|
|
2,036,060
|
|
|
13,400,841
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
facility reimbursement
|
|
|
87,500
|
|
|
102,500
|
|
|
Deferred
revenue - non current
|
|
|
104,940
|
|
|
75,900
|
|
|
Notes
and related accrued interest with related parties, net of current
portion
|
|
|
15,939,229
|
|
|
5,131,762
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock; 300,000 shares authorized; No shares issued and
outstanding
|
|
|
|
|
|
|
|
|
at December 31, 2007 and December 31, 2006
|
|
|
-
|
|
|
-
|
|
|
Common
stock ($.001 par value); 250,000,000 shares authorized;
202,259,359
|
|
|
|
|
|
|
|
|
and 189,622,133 shares issued and outstanding at December 31, 2007
and
|
|
|
|
|
|
|
|
|
December 31, 2006, respectively
|
|
|
202,260
|
|
|
189,622
|
|
|
Additional
paid-in capital
|
|
|
175,281,340
|
|
|
172,379,842
|
|
|
Treasury
Stock; 485,000 shares at December 31, 2007 (none at December 31,
2006)
|
|
|
(95,050)
|
|
|
-
|
|
|
Accumulated
deficit
|
|
|
(170,827,683)
|
|
|
(164,405,272)
|
|
|
Total
Shareholders' Equity
|
|
|
4,560,867
|
|
|
8,164,192
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
22,728,596
|
|
$
|
26,875,195
|
|
See the
accompanying Notes which are an integral part of the financial
statements.
ISCO
INTERNATIONAL
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
9,637,298
|
|
$
|
14,997,320
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
5,911,813
|
|
|
9,066,929
|
|
|
Resarch
and development
|
|
|
2,801,777
|
|
|
2,011,652
|
|
|
Selling
and marketing
|
|
|
2,452,218
|
|
|
3,207,882
|
|
|
General
and administrative
|
|
|
3,974,396
|
|
|
4,287,080
|
|
|
Total
cost and expenses
|
|
|
15,140,204
|
|
|
18,573,543
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(5,502,906)
|
|
|
(3,576,223)
|
|
| |
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
92,005
|
|
|
118,590
|
|
|
Interest
expense
|
|
|
(1,011,510)
|
|
|
(907,351)
|
|
| Total
other expense, net |
|
|
(919,505) |
|
|
(788,761)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(6,422,411) |
|
$ |
(4,364,984)
|
|
|
|
|
|
|
|
|
|
|
| Basic
and diluted loss per common share |
|
$ |
(0.03) |
|
$ |
(0.02) |
|
|
|
|
|
|
|
|
|
|
| Weighted
average number of common shares outstanding |
|
|
194,886,941 |
|
|
185,506,261 |
|
See the
accompanying Notes which are an integral part of the financial
statements.
ISCO
INTERNATIONAL
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Years
Ended December 31, 2006 and 2007
|
|
|
Common
|
|
Common
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Stock
|
|
Paid-In
|
|
Treasury
|
|
Accumulated |
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Stock
|
|
Deficit
|
|
Total
|
|
|
Balance
as of December 31, 2005
|
|
183,252,036
|
$ |
183,252
|
$ |
170,387,752 |
$ |
|
$ |
(160,040,288)
|
$ |
10,530,716
|
|
|
Exercise
of stock options
|
|
2,582,826
|
|
2,583
|
|
427,330 |
|
|
|
|
|
429,913
|
|
|
Equity
Financing
|
|
3,787,271
|
|
3,787
|
|
(3,787) |
|
|
|
|
|
|
|
| Section
16b Recovery |
|
|
|
|
|
3,124 |
|
|
|
|
|
3,124 |
|
| Stock-Based
Compensation |
|
|
|
|
|
1,565,423 |
|
|
|
|
|
1,565,423 |
|
| Net
Loss |
|
|
|
|
|
|
|
|
|
(4,364,984) |
|
(4,364,984) |
|
| Balance
as of December 31,2006 |
|
189,622,133 |
|
189,622 |
|
172,379,842 |
|
|
|
(164,405,272) |
|
8,164,192 |
|
| Vesting
of Restricted Stock |
|
4,303,893 |
|
4,304 |
|
(4,304) |
|
|
|
|
|
1,500,000 |
|
| Accrued
Interest converted to Equity |
|
8,333,333 |
|
8,334 |
|
1,491,666 |
|
|
|
|
|
|
|
| Stock-Based
Compensation |
|
|
|
|
|
1,414,136 |
|
|
|
|
|
1,414,136 |
|
| Acquisition
of Treasury Stock |
|
|
|
|
|
|
|
(95,050) |
|
|
|
(95,050) |
|
| Net
Loss |
|
|
|
|
|
|
|
|
|
(6,422,411) |
|
(6,422,411) |
|
| Balance
as of December 31,2007 |
|
202,259,359 |
$ |
202,260 |
$ |
175,281,340 |
$ |
(95,050) |
$ |
(170,827,683) |
$ |
4,560,867 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
See the
accompanying Notes which are an integral part of the financial
statements.
ISCO
INTERNATIONAL
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(6,422,411)
|
|
$
|
(4,364,984)
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
129,160
|
|
|
92,963
|
|
|
|
Amortization
|
|
|
53,854
|
|
|
54,431
|
|
|
|
Equity
based compensation charges
|
|
|
1,414,136
|
|
|
1,565,423
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
243,606
|
|
|
(877,382)
|
|
|
|
Inventories
|
|
|
3,325,369
|
|
|
(3,653,429)
|
|
|
|
Prepaid
expenses and other
|
|
|
(568,743)
|
|
|
84,426
|
|
|
|
Accounts
payable
|
|
|
(267,934)
|
|
|
756,749
|
|
|
|
Accrued
liabilities and deferred revenue
|
|
|
1,239,661
|
|
|
476,837
|
|
|
|
Deferred
occupancy costs
|
|
|
(15,000)
|
|
|
106,250
|
|
|
|
Net
cash used in operating activities
|
|
|
(868,302)
|
|
|
(5,758,716)
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Decrease
in restricted certificates of deposit
|
|
|
33,133
|
|
|
79,740
|
|
|
|
Payment
of patent costs
|
|
|
(63,478)
|
|
|
(51,556)
|
|
|
|
Acquisition
of property and equipment, net
|
|
|
(102,826)
|
|
|
(302,458)
|
|
|
|
Net
cash used in investing activities
|
|
|
(133,171)
|
|
|
(274,274)
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds
from Section 16b recovery
|
|
|
|
|
|
3,124
|
|
|
|
Exercise
of stock options
|
|
|
|
|
|
429,912
|
|
|
|
Acquisition
of Treasury Stock
|
|
|
(95,050)
|
|
|
|
|
|
|
Proceeds
from issuance of notes
|
|
|
-
|
|
|
5,000,000
|
|
|
|
Net
cash (used in) / provided by financing activities
|
|
|
(95,050)
|
|
|
5,433,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)/Increase
in cash and cash equivalents
|
|
|
(1,096,523)
|
|
|
(599,954)
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
2,886,476
|
|
|
3,486,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,789,953
|
|
$
|
2,886,476
|
|
|
|
Supplemental
cash flow information
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest and income taxes
|
|
$
|
-
|
|
$
|
-
|
|
|
Supplemental
Disclosure of Non-Cash Financing Activity:
During
June 2007, $1.5 million of accrued interest was converted to Equity in a
non-cash transaction.
See the
accompanying Notes which are an integral part of the financial statements
Notes
to the Financial Statements
1.
Description of Business
ISCO
International (including its inactive subsidiaries, Spectral Solutions, Inc.,
and Illinois Superconductor Canada Corporation, the “Company”) addresses RF
(Radio Frequency) and radio link optimization issues, including interference
issues, within wireless communications. These two inactive subsidiaries were
terminated as a subsequent event during early 2008 as the Company’s new
subsidiary, Clarity Communication Systems Inc. (“Clarity”), was added following
the merger that closed on January 3, 2008 (see note 14). The Company
uses unique products, including AIM (Adaptive Interference Management, including
the ANF – Adaptive Notch Filter - 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.
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All intercompany balances and transactions have been
eliminated.
Cash
and Cash Equivalents
Cash and
cash equivalents consist of demand deposits, time deposits, money market funds,
and commercial paper which have original maturities of three months or less from
the date of purchase. Management believes that the financial institutions in
which it maintains such deposits are financially sound and, accordingly, minimal
credit risk exists with respect to these deposits.
Accounts
receivable
The
majority of the Company’s accounts receivable is due from companies in the
telecommunications industry. Credit is extended based on evaluation of a
customers’ financial condition and, generally, collateral is not required.
Accounts receivable are typically due within 30 days and are stated at amounts
due from customers, net of an allowance for doubtful accounts. Accounts
outstanding longer than the contractual payment terms are considered past due.
The Company determines its allowance for doubtful accounts by considering a
number of factors, including the length of time trade accounts receivable are
past due, the Company’s previous loss history, the customer’s current ability to
pay its obligation to the Company, and the condition of the general economy and
the industry as a whole. The Company writes-off accounts receivable when they
become uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts. The allowance could be
materially different if economic conditions change or actual results deviate
from historical trends. As of December 31, 2007 and 2006,
respectively, the Company determined that an allowance for doubtful accounts was
unnecessary based on an evaluation of the factors above.
Inventories
Inventories
are stated at the lower of cost (determined on a first in, first out basis) or
market.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation and
amortization, and are depreciated over the estimated useful lives of the assets
using both straight line and accelerated methods. The accelerated method used is
the double declining balance method. Software is typically amortized over 3
years utilizing the straight-line method. Leasehold improvements are amortized
using the straight-line method over the shorter of the useful life of the asset
or the term of the lease. The useful lives assigned to property and
equipment for the purpose of computing book depreciation follow:
|
Manufacturing
equipment
|
|
3 to 4 years
|
|
Office
equipment
|
|
3
to 5 years
|
|
Furniture
and fixtures
|
|
5
years
|
|
Leasehold
improvements
|
|
Life of lease
|
Income
Taxes
Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company uses a valuation allowance when it determines
the amount of deferred tax asset to include in its financial statement for the
current period is not realizable. This valuation allowance is based on
historical patterns of taxable income, recognized deferred tax liabilities, and
other factors that could impact the current view of future tax asset
utilization.
Revenue
Recognition
Revenues
from product sales are generally recognized at the time of shipment and are
recorded net of estimated returns and allowances. Revenues from services are
generally recognized upon substantial completion of the service and acceptance
by the customer. We have under certain conditions, granted customers the right
to return product during a specified period of time after shipment. In these
situations, we establish a liability for estimated returns and allowances at the
time of shipment and make the appropriate adjustment in revenue recognized for
accounting purposes. During 2007, no revenue was recognized on products that
included a right to return or otherwise required customer acceptance after
December 31, 2007. We have established a program which, in certain
situations, allows customers or prospective customers to field test our products
for a specified period of time. Revenues from field test arrangements are
recognized upon customer acceptance of the products.
During
2006, we began to sell the dANF product which contains software that is
essential to the functionality of the product and as such is required to be
accounted for in accordance with SOP 97-2, “Software Revenue Recognition,” as
amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions.” The revenue recognized for each separate
element of a multiple-element software contract is based upon vendor-specific
objective evidence of fair value, which is based upon the price the customer is
required to pay when the element is sold separately. The dANF product is
recognized as revenue upon shipment while the maintenance is deferred and
recognized on a straight line basis during the applicable maintenance period,
typically 1-3 years.
Product
Warranty
The
Company warrants its products against defects in materials and workmanship
typically for a 1-2 year period from the date of shipment, though these terms
may be negotiated on a case-by-case basis. A provision for estimated future
costs related to warranty expenses is recorded when revenues are recognized. At
both December 31, 2007 and 2006 the Company accrued $34,000 for warranty
costs. This warranty reserve is based on the cost to replace a percentage of
products in the field at a given point, adjusted by actual experience. Returns
and allowances were not significant in any period reported, and form a data
point in establishing the reserve. Should this warranty reserve estimate be
deemed insufficient, by new information, experience, or otherwise, an increase
to warranty expense would be required.
Concentration
of Credit Risk
Sales to
three of the Company’s customers accounted for 99% and 98% of the Company’s
total revenues for 2007 and 2006, respectively. The balance of Accounts
Receivable from our top three customers was $2.3 million and $2.5 million as of
December 31, 2007 and 2006, respectively. During both 2007 and 2006, the
top three customers were Verizon Wireless, Alltel Corporation, and Bluegrass
Cellular Corporation, respectively.
Advertising
Costs
Advertising
costs are charged to expense in the period incurred.
Research
and Development Costs
Research
and development costs related to both present and future products are charged to
expense in the period incurred.
Net
Loss Per Common Share
Basic and
diluted net loss per common share are computed based upon the weighted average
number of common shares outstanding. Approximately 4.9 million common
shares issuable as of December 31, 2007 upon the exercise of options and
warrants, and 3.6 million unvested shares of restricted stock, are not included
in the per share calculations since the effect of their inclusion would be
antidilutive. The shares issued and issuable in connection with the
acquisition of Clarity are not considered as the transaction did not close until
2008.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Description
of Certain Concentrations and Risks
The
Company operates in a highly competitive and rapidly changing industry. Product
revenues are currently concentrated with a limited number of customers, and the
supply of certain materials is concentrated among a few providers. The
development and commercialization of new technologies by any competitor could
adversely affect the Company’s results of operations.
Goodwill
and Intangible Assets
Patents
and trademarks 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.
There was
no impairment of intangible assets for the years ended December 31, 2007 and
2006, respectively. Total capitalized patent and trademark costs were
approximately $851,000 and $841,000 at December 31, 2007 and 2006,
respectively. Capitalized patent costs related to pending patents were
approximately $318,000 and $289,000 at December 31, 2007 and 2006,
respectively. Patents and trademarks were reported net of accumulated
amortization of approximately $375,000 and $321,000 at December 31, 2007
and 2006, respectively.
As of the
reporting date, the Company had 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 is 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 reported shareholders’ equity indicates that the
goodwill of the Company’s sole reporting unit was not impaired as of
December 31, 2007 and 2006.
The
Company’s balances of Goodwill and Intangible Assets were as
follows:
|
|
|
Year Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(in thousands of dollars)
|
|
|
Patent,
gross
|
|
$
|
1,226
|
|
$
|
1,162
|
|
|
Accumulated
amortization
|
|
|
(375)
|
|
|
(321)
|
|
|
|
|
|
|
|
|
|
|
|
Other
amortizable intangibles, net
|
|
$
|
851
|
|
$
|
841
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
13,370
|
|
$
|
13,370
|
|
The
following table summarizes the estimated annual pretax amortization expense for
the intangible assets with definitive lives:
|
2008
|
|
|
|
|
|
53
|
|
|
2009
|
|
|
|
|
|
53
|
|
|
2010
|
|
|
|
|
|
53
|
|
|
2011
|
|
|
|
|
|
52
|
|
|
2012
|
|
|
|
|
|
51
|
|
|
Thereafter
|
|
|
|
|
|
589
|
|
|
Total
|
|
|
|
|
$
|
851
|
|
Fair
Value of Financial Instruments
The
carrying values of financial instruments, including cash and cash equivalents,
accounts receivable, and accounts payable approximates fair value due in part to
the short-term nature of these financial instruments. Long term debt
has interest rates that approximate current market values, therefore the
carrying value approximates fair value.
Long
Lived Assets
In
accordance with the provisions of SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” the Company reviews long-lived
assets, including property and equipment, for impairment whenever events or
changes in business circumstances indicate the carrying amount of the assets may
not be fully recoverable. Under SFAS No. 144, an impairment loss is
recognized when estimated undiscounted future cash flows expected to result from
use of the asset and its eventual disposition are less than the carrying amount.
Impairment, if any, is determined using discounted cash flows. The Company had
no such impairment losses in 2007 or 2006.
Stock-Based
Employee Compensation
In
December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment”
(SFAS No.123R). This statement requires that the compensation cost relating to
share-based payment transactions be recognized in the financial statements.
Compensation cost is to be measured based on the estimated fair value of the
equity-based compensation awards issued as of the grant date. The related
compensation expense will be based on the estimated number of awards expected to
vest and will be recognized over the requisite service period (often the vesting
period) for each grant. The statement requires the use of assumptions and
judgments about future events and some of the inputs to the valuation models
will require considerable judgment by management.
SFAS
No.123(R) replaces FASB Statement No.123 (SFAS No.123), “Accounting for
Share-Based Compensation,” and supersedes APB Opinion No.25, “Accounting for
Stock Issued to Employees.” The provisions of SFAS No.123(R) are required to be
applied by public companies that do not file as small business issuers, as of
the first interim or annual reporting period that begins after June 15, 2005,
and all other public companies as of the first interim or annual reporting
period that begins after December 15, 2005. On April 14, 2005, the SEC adopted a
new rule amending the effective date for Statement 123(R). Based on the amended
rule, registrants were required to implement Statement 123(R) as of the first
annual period beginning after June 15, 2005, which was January 1, 2006 for
us.
On
January 1, 2006, we adopted SFAS No.123(R), under the modified prospective
application transition method without restatement of prior interim periods. This
resulted in our recognizing compensation cost based on the requirements of SFAS
No.123(R) for all equity-based compensation awards issued after the effective
date of this statement. For all equity-based compensation awards that were
unvested as of that date, compensation cost is recognized for the unamortized
portion of compensation cost not previously included in the SFAS No.123 pro
forma footnote disclosure.
The
following table summarizes the stock option activity during the fiscal years
ended December 31, 2007 and 2006:
| |
|
|
Shares |
|
|
Outstanding,
December 31, 2005
|
|
|
8,146,000
|
|
|
Granted
|
|
|
-
|
|
|
Forfeited
or canceled
|
|
|
(651,000)
|
|
|
Exercised
|
|
|
(2,583,000)
|
|
|
Outstanding,
December 31, 2006
|
|
|
4,912,000
|
|
|
Granted
|
|
|
-
|
|
|
Forfeited
or canceled
|
|
|
(40,300)
|
|
|
Exercised
|
|
|
|
|
|
Outstanding,
December 31, 2007
|
|
|
4,871,700
|
|
No
options were granted during 2007 or 2006. At December 31, 2007, a
total of 4.9 million stock options were outstanding under the Company’s equity
compensation plans.
Restricted Share
Rights
Restricted
share grants offer employees the opportunity to earn shares of the Company’s
stock over time. For grants during 2007 and beyond, we expect that the typical
vesting period for employees to be 2-4 years while the vesting period for
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 an
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 fiscal year ended December 31, 2007 except for
40,000 shares that vested during the second quarter of
2007. Performance-based shares that are not earned (and therefore
vested) are forfeit by the grantee(s).
The
following table summarizes the restricted stock award activity during
2007.
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
Grant Date
|
|
|
|
|
Shares
|
|
|
Fair
Value (per share)
|
|
Outstanding,
December 31, 2005
|
|
|
-
|
|
$
|
-
|
|
|
Granted
|
|
|
15,598,000
|
|
|
0.35
|
|
|
Forfeited
or canceled
|
|
|
(3,097,000)
|
|
|
0.34
|
|
|
Vested
|
|
|
(3,787,000)
|
|
|
0.35
|
|
|
Outstanding,
December 31, 2006
|
|
|
8,714,000
|
|
|
0.35
|
|
|
Granted
|
|
|
3,592,000
|
|
|
0.25
|
|
|
Forfeited
or canceled
|
|
|
(4,445,000)
|
|
|
0.33
|
|
|
Vested
|
|
|
(4,304,000)
|
|
|
0.32
|
|
|
Outstanding,
December 31, 2007
|
|
|
3,557,000
|
|
$
|
0.29
|
|
The total
fair value of restricted shares vested during the fiscal year ended December 31,
2007 was $1.4 million. Total non-cash equity compensation expense recognized
during the fiscal year ended December 31, 2007 was $1.4 million. Non-cash equity
expense for the fiscal year ended December 31, 2007 included less than $0.1
million for the straight-line amortization of restricted share grants that did
not vest during the fiscal year ended December 31, 2007, including the offset
for accrued expense from 2006 for shares that vested during 2007.
Recent
Accounting Pronouncements
During
September 2006, FASB issued SFAS No. 157, Fair Value Measurements (FAS 157),
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
will adopt FAS 157 effective as of January 1, 2008, as required, which will be
reflected in its first quarter 10-Q filing for the period ended March 31, 2008.
The Company does not expect this standard to have a material impact on its
operating income and statement of financial
During
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (FAS 159). FAS 159 permits entities to choose
to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. FAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact
of FAS 159 on its consolidated financial position and results of
operations.
During
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (FAS
141R), to create greater consistency in the accounting and financial reporting
of business combinations. FAS 141R establishes principles and requirements for
how the acquirer in a business combination (i) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any controlling interest, (ii) recognizes and measures the goodwill acquired
in the business combination or a gain from a bargain purchase, and (iii)
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. FAS 141R applies to fiscal years beginning after December 15, 2008.
Management believes the adoption of this pronouncement will not have a material
impact on the Company’s consolidated financial statements.
During
December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51 (FAS 160). FAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The guidance will
become effective as of the beginning of the Company’s fiscal year on January 1,
2009. Management believes the adoption of this pronouncement will not have a
material impact on the Company’s consolidated financial statements.
During
December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110
Share-Based Payment (SAB 110). SAB 110 establishes the continued use of the
simplified method for estimating the expected term of equity based compensation.
The simplified method was intended to be eliminated for any equity based
compensation arrangements granted after December 31, 2007. SAB 110 is being
published to help companies that may not have adequate exercise history to
estimate expected terms for future grants. Management believes the adoption of
this pronouncement will not have a material impact on the Company’s consolidated
financial statements.
During
June 2006, the FASB ratified a consensus opinion reached by the Emerging Issues
Task Force (EITF) on EITF Issue 06-3, "How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation)." The guidance in EITF Issue 06-3
requires disclosure in interim and annual financial statements of the amount of
taxes on a gross basis, if significant, that are assessed by a governmental
authority that are imposed on and concurrent with a specific revenue producing
transaction between a seller and customer such as sales, use, value added, and
some excise taxes. Additionally, the income statement presentation (gross or
net) of such taxes is an accounting policy decision that must be disclosed. The
consensus in EITF Issue 06-3 is effective for interim and annual reporting
periods beginning after December 15, 2006. The Company adopted EITF Issue 06-3
effective January 1, 2007. The Company presents sales tax on a net basis in its
consolidated financial statements. The adoption did not have a material effect
on the consolidated financial statements.
During
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 9 for a more detailed discussion of FIN 48.
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. In
addition, the Company has used, rather than provided, cash in its
operations
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 and 2006, the Company incurred net losses of
$6.4 million and $4.4 million, respectively. During those years the Company
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, we 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 to the organization. Until the Company gains more experience managing
the Clarity business, and with the larger fluctuations and the cost of the
combined entity, the company is unable to determine how long its
financial resources would sustain the combined entity under normal
operating conditions.
The
continuing development of our product lines, integration of the Clarity
acquisition, any other potential merger and acquisition activity, as well as any
required defense of our intellectual property, will require a commitment 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
extent to which we prioritize certain international opportunities and related
risks, 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.
4.
Inventories
Inventories
consist of the following:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Raw
materials
|
|
$ |
1,696,000 |
|
|
$ |
2,675,000 |
|
|
Work
in process
|
|
|
655,000 |
|
|
|
2,332,000 |
|
|
Finished
product
|
|
|
692,000 |
|
|
|
1,362,000 |
|
|
Total
|
|
$ |
3,043,000 |
|
|
$ |
6,369,000 |
|
Cost of
product sales for the years ended December 31, 2007 and 2006 includes
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. At December 31, 2007 and 2006, those reserves were approximately
$325,000 and $325,000, respectively.
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Beginning
Balance
|
|
$ |
325,000 |
|
|
$ |
160,000 |
|
|
Inventory
Obsolescence Expense
|
|
|
- |
|
|
|
165,000 |
|
|
Inventory
Wirtten Off
|
|
|
- |
|
|
|
- |
|
| Recoveries
|
|
|
- |
|
|
|
- |
|
| Ending
Balance |
|
$ |
325,000 |
|
|
$ |
325,000 |
|
5.
Allowance for Doubtful Accounts
|
|
|
December 31, |
|
December 31, |
|
|
|
|
2007
|
|
2006
|
|
|
Beginning
Balance
|
$
|
0
|
|
$
|
0
|
|
|
Bad
Debt Expense
|
|
|
|
|
|
|
|
Accounts
Written Off
|
|
|
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
Ending
Balance
|
$
|
0
|
|
$
|
0
|
|
6.
Capital Stock
The
Company has an authorized class of undesignated preferred stock consisting of
300,000 shares. Preferred stock may be issued in series from time to time with
such designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereof, to the extent that such are not fixed in
the Company’s certificate of incorporation, as the Company’s Board of Directors
(“Board of Directors” or “Board”) determines.
On
February 9, 1996, the Board of Directors adopted a shareholder rights plan
(the “Rights Plan”). In conjunction with the adoption of the Rights Plan, the
Company created one series of preferred stock, consisting of 10,000 shares of
Series A Junior Participating Preferred Stock (“Series A Preferred”). Each share
of Series A Preferred entitled the holder to receive dividends equal to 1,000
times the dividends per share declared with respect to the Company’s common
stock and, in the event of liquidation, such holders would have received a
preference of 1,000 times the aggregate amount to be distributed per share to
the holders of the Company’s common stock. Pursuant to the Rights Plan, a Series
A Right was associated with, and would have traded with, each share of common
stock outstanding. This Rights Plan expired during February 2006.
At
December 31, 2007, authorized but unissued shares of common stock have been
reserved for future issuance as follows:
|
Options
outstanding (Note 7)
|
|
|
4,871,700
|
|
At
December 31, 2007, 3.6 million shares of restricted stock had been issued but
had not vested.
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 delivering a portion of
restricted stock vestings to the Company in accordance with the terms of the
Plan, and concerning the taxation of deferred compensation to the Company’s
plans. Pursuant to these changes, upon the share vesting on June 30, 2007, the
Company withheld 145,000 shares from Dr. Abdelmonem and 195,000 shares from Mr.
Thode as treasury stock. An additional 145,000 shares were withheld
from Dr. Abdelmonem’s December 2007 vesting as treasury
stock. Additional description of this policy and related transactions
is provided in Footnote 7.
7.
Stock Options and Warrants
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. During December 2007, our shareholders
approved a 15 million share increase to the plan related to the acquisition of
Clarity, as the acquisition shares to employees and certain other persons under
a phantom stock plan would come out of this 2003 Equity Plan. The
maximum number of shares issuable under these 1993 and 2003 plans is 47,011,468.
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 (“RSGs”) with vesting provisions that are not based solely on
employees’ rendering of additional service to the Company.
For
outside directors, Company policy, subject to 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 RSGs 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 RSGs in lieu of stock options within both employee and
non-employee compensation programs. The impact of the new accounting standard,
industry trends, and the ability to use fewer shares to achieve intended results
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
2007 the Board granted approximately 3.4 million RSGs to the Company’s
employees, most of which are scheduled to vest over a four year
period. The Company’s non-employee director compensation program
resulted in grants of approximately 0.2 million RSGs to non-employee members of
the Board of Directors during 2007.
On June
26, 2007, as part of the debt restructuring that is detailed in Note 8, $1.5
million of accrued interest was converted into ISCO common stock at $0.18 per
share. See note 8 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 then 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, the
Company withheld 145,000 shares from Dr. Abdelmonem and 195,000 shares from Mr.
Thode as treasury stock. An additional 145,000 shares were withheld
from Dr. Abdelmonem’s December 2007 vesting.
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 acquisition of Clarity, 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 asked for, and received,
shareholder approval to increase the size of the plan during the December 2007
special meeting of shareholders, at which our shareholders also approved the
other elements of the transaction.
The table
below summarizes all option activity during the three year period ended
December 31, 2007:
|
|
|
|
Options
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercise
Price Per Share
|
|
|
Outstanding
at December 31, 2005
|
|
|
8,146,000
|
|
$
|
0.11
— 18.25
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
(2,583,000)
|
|
|
0.11
- 0.39
|
|
|
Forfeited
|
|
|
(651,000)
|
|
|
0.25
- 18.25
|
|
|
Outstanding
at December 31, 2006
|
|
|
4,912,000
|
|
|
0.11
- 1.81
|
|
|
Granted
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
(40,300)
|
|
|
0.25
|
|
Outstanding
at December 31, 2007
|
|
|
4,871,700
|
|
$
|
0.11
- 1.81
|
The
weighted-average exercise price of options outstanding at December 31, 2007
and 2006 was $0.41 and $0.41,respectively. The weighted-average exercise price
of options granted, exercised, and forfeited during 2007 was N/A, N/A and $0.25,
respectively. No stock option grants were issued during 2007 or
2006.
Following
is additional information with respect to options outstanding at
December 31, 2007:
|
|
|
|
$0.11
to
|
|
$0.24
to
|
|
$0.45
to
|
|
|
|
|
$0.22
|
|
$0.43
|
|
$1.81
|
|
OUTSTANDING
AT DECEMBER 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Number
of options
|
|
|
1,145,000
|
|
|
2,730,000
|
|
|
1,012,000
|
|
|
Weighted-average
exercise price
|
|
$
|
0.14
|
|
$
|
0.35
|
|
$
|
0.89
|
|
|
Weighted-average
remaining contractual life in years
|
|
|
6
|
|
|
6
|
|
|
3
|
|
|
EXERCISABLE
AT DECEMBER 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Number
of options
|
|
|
1,128,000
|
|
|
2,730,000
|
|
|
1,012,000
|
|
|
Weighted-average
exercise price
|
|
$
|
0.14
|
|
$
|
0.35
|
|
$
|
0.89
|
|
The total
number of unvested options outstanding at December 31, 2007 was less than
0.1 million, which will vest based on employees’ continued service to the
Company.
8.
Long-Term Debt
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 Lenders, including affiliates, are our two
largest shareholders and the lenders of the 2006 Convertible Debt discussed
below.
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 certain amendments to our line of credit arrangement (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 our common stock, par
value $0.001 per share, at an initial conversion price of $0.20 per share. In
addition, 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 conversion 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 our 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 to finance the Clarity acquisition, Alexander purchased an
additional $1.5 million of these Amended and Restated Notes. Before
Alexander may exercise its right to convert the additional $1.5 million of
Amended and Restated Notes into 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 we entered
into with Alexander in connection with this additional financing, 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 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 this additional note is approved as described above and held to
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 the Lenders, pursuant
to which the Lenders have agreed, to each loan it $2,500,000, or an aggregate of
$5,000,000, in convertible debt.
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 our common stock at a rate of $0.33 per share, subject to
certain anti-dilution adjustments. The Lenders have the right to convert the
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.
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.
We filed
registration statements covering the resale of the shares of common stock
issuable upon conversion of the 2006 and Amended and Restated (2007) Notes with
the Securities and Exchange Commission.
The
Notes, above, are secured on a first priority basis by all our assets, and
payment of the Notes is guaranteed by our Clarity subsidiary.
9.
Income Taxes
The
Company has net operating loss carryforwards for tax purposes of approximately
$142,145,000 at December 31, 2007. The net operating loss carryforwards
expire in the following years:
|
Year
|
|
|
Amount
|
|
|
2008
|
|
|
1,658,000
|
|
|
2009
|
|
|
3,973,000
|
|
|
2010
|
|
|
8,199,000
|
|
|
2011
|
|
|
11,953,000
|
|
|
2012
|
|
|
11,922,000
|
|
|
2018
|
|
|
11,146,000
|
|
|
2019
|
|
|
10,726,000
|
|
|
2020
|
|
|
15,501,000
|
|
|
2021
|
|
|
24,904,000
|
|
|
2022
|
|
|
13,982,000
|
|
|
2023
|
|
|
5,284,000
|
|
|
2024
|
|
|
9,758,000
|
|
|
2025
|
|
|
3,371,000
|
|
|
2026
|
|
|
3,651,000
|
|
|
2027
|
|
|
6,117,000
|
|
|
Total
|
|
|
$
142,145,000
|
|
A
reconciliation of income tax expense at the statutory rate to the Company’s
actual income tax expense is shown below:
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Tax
benefit computed at the Federal statutory rate
|
34.00%
|
|
|
34.00%
|
|
|
|
|
Increase
(decrease) in taxes due to:
|
|
|
|
|
|
|
|
|
|
|
Change
in valuation allowance
|
|
|
-38.80%
|
|
|
-38.80%
|
|
|
|
|
State
taxes, net of Federal benefit
|
|
|
4.80%
|
|
|
4.80%
|
|
|
|
|
Effective
income tax rate
|
|
|
0%
|
|
|
0%
|
|
|
|
Significant
components of the Company’s deferred tax assets and liabilities are as
follows:
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred
tax assets
|
|
|
|
|
|
|
|
|
Net
operating loss carryforward
|
|
$
|
54,015,000
|
|
$
|
52,061,000
|
|
|
Accrued
liabilities
|
|
|
165,000
|
|
|
1,223,000
|
|
|
Inventories
|
|
|
185,000
|
|
|
124,000
|
|
|
Property
and Equipment
|
|
|
893,000
|
|
|
893,000
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
55,258,000
|
|
|
54,301,000
|
|
|
Deferred
liabilities:
|
|
|
|
|
|
|
|
|
Patent
costs
|
|
|
(323,000)
|
|
|
(320,000)
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
|
54,935,000
|
|
|
53,981,000
|
|
|
Projected
limitation of NOL carryforward utilization as described
below
|
|
|
(12,540,000)
|
|
|
*
|
|
|
Valuation
allowance
|
|
|
(42,395,000)
|
|
|
(53,981,000)
|
|
|
Net
Deferred tax assets
|
|
$
|
—
|
|
$
|
—
|
|
The
Company records a valuation allowance to reduce the deferred income tax assets
to the amount that is more likely than not to be realized. Excluding
the projected limitation of net operating loss carryforward utilization
discussed below, the valuation allowance increased during 2007 and 2006 by
approximately $1.0 million and $2.0 million, respectively, due primarily to the
increase in the net operating loss carryforward. Based on the Internal Revenue
Code and changes in the ownership of the Company, utilization of the net
operating loss carryforwards will be subject to annual limitations.
* see
discussion below regarding projected limitation of net operating loss
carryforward utilization.
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. Such losses may be limited by
change of control provisions of the tax code. We believe that
approximately $114 million of operating loss carryforwards are affected by
change in control limitations, resulting in an estimated usable operating loss
carryforward of $81 million as of December 31, 2007. The remaining
$33 million in carryforwards are expected to not be usable. We
believe that approximately $28 million in carryforwards are not impacted by any
such limitation.
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 December 31, 2007 for interest and
penalties.
10.
Leases
The
Company leases its manufacturing and office space, as well as some testing and
office equipment. Under the terms of its two leases in Elk Grove Village, IL,
which expire October 2014, the Company is responsible for proportionate real
estate taxes and operating expenses.
Future
minimum payments under the operating leases consist of the following at
December 31, 2007:
|
Year
|
|
|
Amount
|
|
|
2008
|
|
$
|
205,000
|
|
|
2009
|
|
|
208,000
|
|
|
2010
|
|
|
211,000
|
|
|
2011
|
|
|
216,000
|
|
|
2012
|
|
|
221,000
|
|
Rent
expense totaled $364,000 and $251,000 for the years ended December 31, 2007
and 2006, respectively.
11.
401(k) Plan
The
Company has a 401(k) plan covering all employees who meet prescribed service
requirements. The plan provides for deferred salary contributions by the plan
participants and a Company contribution. Through 2005, Company contributions, if
any, have been at the discretion of the Board of Directors and not to exceed the
amount deductible under applicable income tax laws. No Company contribution was
made for the year ended December 31, 2005. Beginning in 2006, the Company
began providing a partial match of employee contributions, up to a maximum of 3%
of employee salary. For the years ended December 31, 2007 and 2006,
the Company contributions were $54,000 and $74,000,
respectively.
12.
Litigation
There was
no existing, pending, or threatened litigation at the time of this
filing.
13.
Segment Reporting
The
Company adopted SFAS No. 131 “Disclosures about Segments of an Enterprise
and Related Information”. SFAS No. 131 requires a business enterprise,
based upon a management approach, to disclose financial and descriptive
information about its operating segments. Operating segments are components of
an enterprise about which separate financial information is available and
regularly evaluated by the chief operating decision maker(s) of an enterprise.
Under this definition, the Company operated as a single segment for all periods
presented.
14.
Subsequent Events
During
March 2008, the Company entered into an agreement with its Lenders wherein it
could assign, or factor, certain customer receivables to them at its request and
subject to their approval. The Company believes this arrangement will
provide flexibility in managing its cash flows by addressing short-term cash
needs. Future utilization of this arrangement, however, is subject to
the Company’s request and lender approval. On March 20, 2008, the
Company received $0.5 million under this arrangement, which is expected to be
repaid during April 2008 upon collection of the underlying customer receivables
and at a cost of an implied annual interest rate of 10%.
As noted
above, the Company acquired Clarity on January 3, 2008 for approximately $7
million in stock and closing costs, plus additional shares based on future
Company market capitalization. This acquisition effectively doubled
the size of the company in terms of headcount, and brought immediate products
and expertise in the field of mobile device software
applications. Shortly after adding Clarity as a wholly owned
subsidiary, the Company terminated its two inactive subsidiaries from prior
mergers, Illinois Superconductor Canada Corporation and Spectral Solutions,
Inc. Neither entity had any assets or activity during the past two
years, as those operations were fully absorbed into the Company. In
connection to the Clarity merger, we borrowed an additional $1.5 million which
was used to satisfy closing costs. Additionally, the Company reported
that the role of Chief Executive Officer, vacant since Mr. John Thode left the
Company during November 2007, was filled during March 2008 by Mr. Gordon
Reichard, Jr. Finally, the Company announced the departure of
director Mr. Michael Fenger, and the addition of director Mr. Torbjorn
Folkebrant.
The
following pro forma financial information is presented due to the subsequent
acquisition of Clarity.
|
UNAUDITED
PRO FORMA BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,2007
|
|
|
|
|
Historical
|
|
|
|
Pro
|
|
Forma
|
|
|
|
ISCO
|
|
Clarity
|
|
Adjustments
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash
and Equivalents
|
$ |
1,789,953
|
$ |
61,993
|
$ |
(93,432)
|
A,B
|
$
|
1,758,514
|
|
Inventory
|
|
3,043,230
|
|
|
|
|
|
|
3,043,230
|
|
Accounts
Receivable, net
|
|
2,311,110
|
|
424,653
|
|
|
|
|
2,735,763
|
|
Prepaid
Expenses and Other
|
|
149,659
|
|
60,292
|
|
|
|
|
209,951
|
|
Total
Current Assets
|
|
7,293,952
|
|
546,938
|
|
(93,432)
|
|
|
7,747,458
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Property and Equipment
|
|
496,702
|
|
224,315
|
|
|
|
|
721,017
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Certificates of Deposit
|
|
129,307
|
|
|
|
|
|
|
129,307
|
|
Other
Assets (cap acquisition)
|
|
587,824
|
|
|
|
(587,824)
|
C
|
|
|
|
Goodwill
|
|
13,370,000
|
|
|
|
4,445,267
|
C
|
|
17,815,267
|
|
Intangible
assets, net
|
|
850,811
|
|
65,000
|
|
2,140,000
|
B,C
|
|
3,055,811
|
|
Total
Assets
|
|
22,728,596
|
|
836,253
|
|
5,904,011
|
|
|
29,468,860
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
2,036,060
|
|
1,468,088
|
|
(1,227,824)
|
|
|
2,276,324
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
facility reimbursement
|
|
87,500
|
|
|
|
|
|
|
87,500
|
|
Deferred
revenue - non current
|
|
104,940
|
|
|
|
|
|
|
104,940
|
|
Notes
and related accrued interest with related parties
|
|
15,939,229
|
|
|
|
1,500,000
|
A
|
|
17,439,229
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
202,260
|
|
1,000
|
|
24,000
|
C
|
|
227,260
|
|
Treasury
Stock
|
|
(95,050)
|
|
|
|
|
|
|
(95,050)
|
|
Additional
paid-in capital (net of unearned compensation)
|
|
175,281,340
|
|
2,020,569
|
|
2,954,431
|
C
|
|
180,256,340
|
|
Accumulated
deficit
|
|
(170,827,683)
|
|
(2,653,404)
|
|
2,653,404
|
C
|
|
(170,827,683)
|
|
Total
Shareholders' Equity
|
|
4,560,867
|
|
(631,835)
|
|
5,631,835
|
|
|
9,560,867
|
|
Total
Liabilities and Shareholders' Equity
|
$ |
22,728,596
|
$ |
836,253
|
$ |
5,904,011
|
|
$
|
29,468,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A -
ISCO borrow $1.5M
|
|
|
|
|
|
|
|
|
|
|
B -
ISCO pay seller transaction costs
|
|
|
|
|
|
|
|
|
|
|
C -
Total purchase price allocation and old equity elimination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNAUDITED
PRO FORMA STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
Month Period Ended December 31, 2007
|
|
|
|
|
Historical
|
|
|
|
|
Pro
Forma
|
|
|
|
|
ISCO
|
|
Clarity
|
|
Adj
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
$
|
9,637,298
|
$ |
3,572,042
|
|
|
|
$
|
13,209,340
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
5,911,813
|
|
1,536,666
|
|
|
|
|
7,448,479
|
|
Research
and Development
|
|
2,801,777
|
|
2,941,265
|
|
|
|
|
5,743,042
|
|
Selling
and Marketing
|
|
2,452,218
|
|
306,216
|
|
|
|
|
2,758,434
|
|
General
and Administrative
|
|
3,974,396
|
|
1,155,724
|
|
|
|
|
5,130,120
|
|
Total
Costs and Expenses
|
|
15,140,204
|
|
5,939,871
|
|
|
|
|
21,080,075
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(Loss) Income
|
|
(5,502,906)
|
|
(2,367,829)
|
|
|
|
|
(7,870,735)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense), net
|
|
(919,505)
|
|
(8,886)
|
|
|
|
|
(928,391)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss (Income)
|
$ |
(6,422,411)
|
$ |
(2,376,715)
|
|
|
|
$
|
(8,799,126)
|
|
ISCO
Purchase Price Accounting for Clarity Acquisition (January 3,
2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clarity
Assets
|
$ |
836,253
|
|
|
|
|
Adj
|
|
|
|
|
|
|
Net
Assets
|
|
836,253
|
|
|
|
|
|
|
|
|
|
|
|
Clarity
Liabilities
|
|
1,468,088
|
|
|
|
|
Adj
|
|
(1,240,000)
|
Included
in cash to seller
|
|
|
Net
Liabilities
|
|
228,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value assets acquired
|
608,165
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets:
|
|
|
|
|
|
|
PTT/LBS
Tech
|
|
250,000
|
5
years
|
|
|
|
CLASS/RADiCL
platforms
|
1,400,000
|
10
years
|
|
|
|
Alcatel-Lucent
Relationship
|
300,000
|
3
years
|
|
|
|
Other
Customer Relationships
|
130,000
|
5
years
|
|
|
|
Non-competition
agmts
|
60,000
|
2
years
|
|
|
|
Goodwill
|
|
4,445,267
|
|
|
|
|
Total Acqusition Intangibles |
|
6,585,267
|
|
|
|
|
|
|
|
|
| Total
Consideration |
$
|
7,193,432 |
|
|
|
None.
(a)
Disclosure Controls and Procedures
The
Company’s disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company is recorded, processed,
summarized and reported within the time period specified by the SEC’s rules and
forms. The Company’s disclosure controls and procedures include controls and
procedures designed to ensure that information required to be disclosed is
accumulated and communicated to the Company’s management, including its Chief
Executive Officer and its Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
The
Company’s management, including its Chief Executive Officer and its Chief
Financial Officer, evaluates the effectiveness of our disclosure controls and
procedures. Based on an evaluation of the disclosure controls and procedures as
of December 31, 2007, the Company’s Chief Executive Officer and Chief Financial
Officer have concluded that the disclosure controls and procedures were
effective and that the consolidated financial statements fairly present our
consolidated financial position and the results of our operations for the
periods presented.
(b)
Management’s Annual Report on Internal Control over Financial
Reporting
The
Company’s management is responsible for the integrity and fair presentation of
our consolidated financial statements and all other financial information
presented in this report. We prepared our consolidated financial statements
using GAAP, and they reflect all material correcting adjustments. We made
estimates and assumptions that affect amounts recorded in the financial
statements and disclosures.
The
Company’s management is responsible for establishing and maintaining an
effective system of internal control over financial reporting. We established
this system to provide reasonable assurance that assets are safeguarded from
loss or unauthorized use, that transactions are recorded in accordance with GAAP
under management’s direction, and that financial records are reliable for use
when preparing financial statements. We support the internal control structure
with careful selection, training and development of qualified personnel. The
Company’s employees are subject to its Code of Conduct (Ethics Policy) designed
to assure that all employees perform their duties with honesty and integrity.
Also, this Policy covers all such directors and officers of the Company and its
subsidiaries, including the Company’s Chief Executive Officer and Chief
Financial Officer. We do not allow loans to executive officers. The
aforementioned system includes a documented organizational structure and
policies and procedures that we communicate throughout the Company. We are
committed to taking prompt action to correct control deficiencies and improve
the system.
All
internal control structures and procedures for financial reporting, no matter
how well designed, have inherent limitations. Even internal controls and
procedures determined to be effective may not prevent or detect all
misstatements. Changes in conditions or the complexity of compliance with
policies and procedures creates a risk that the effectiveness of our internal
control structure and procedures for financial reporting may vary over
time.
The
Company’s management, including its Chief Executive Officer and its Chief
Financial Officer, evaluates the effectiveness of our internal control over
financial reporting. In making this assessment, the company’s management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on an evaluation of the internal control over
financial reporting as of December 31, 2007, the Company’s management, including
the Company’s Chief Executive Officer and Chief Financial Officer, has concluded
that the internal control over financial reporting was effective and that the
consolidated financial statements fairly present our consolidated financial
position and the results of our operations for the periods presented. This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
(c)
Changes in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act
Rules 13a-15 or 15d-15 that occurred during the Company’s last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial
reporting.
The
information required by this item is incorporated herein by reference to the
similarly named sections in our definitive proxy statement for the 2008 annual
meeting of shareholders.
Code
of Conduct and Ethics
We
adopted a Code of Business Conduct and Ethics (“Code of Ethics”) applicable to
our principal executive officer and principal financial and accounting officer
and any persons performing similar functions. In addition, the Code of Ethics
applies to our employees, officers, directors, agents and representatives. The
Code of Ethics requires, among other things, that our employees avoid conflicts
of interest, comply with all laws and other legal requirements, conduct business
in an honest and ethical manner, and otherwise act with integrity and in our
best interest.
The Code
of Ethics includes procedures for reporting violations of the Code of Ethics. In
addition, the Sarbanes-Oxley Act of 2002 requires companies to have procedures
to receive, retain and treat complaints received regarding accounting, internal
accounting controls or auditing matters and to allow for the confidential and
anonymous submission by employees of concerns regarding questionable accounting
or auditing matters. The Code of Ethics is intended to comply with the rules of
the SEC and AMEX and includes these required procedures. The Code of Ethics is
available on our website at www.iscointl.com (under “Investors”). We have also
filed the Code of Ethics as Exhibit 14 to the Annual Report on Form 10-K for the
year ended December 31, 2006.
The
information required by this item is incorporated herein by reference to the
similarly named sections in our definitive proxy statement for the 2008 annual
meeting of shareholders.
The
information required by this item is incorporated herein by reference to the
similarly named sections in our definitive proxy statement for the 2008 annual
meeting of shareholders.
The
information required by this item is incorporated herein by reference to the
similarly named sections in our definitive proxy statement for the 2008 annual
meeting of shareholders.
The
information required by this item is incorporated herein by reference to the
similarly named sections in our definitive proxy statement for the 2008 annual
meeting of shareholders.
|
|
(a)
|
The
following documents are filed as part of this Form
10-K:
|
|
1.
The following financial statements of the Company, with the report of
independent auditors, are filed as part of this Form 10-K:
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
|
|
|
|
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2007 and
2006
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity (Net Capital Deficiency) for the Years
Ended December 31, 2007 and 2006
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007 and
2006
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
|
|
|
|
2.
The following financial statement schedules of the Company are filed as
part of this Form 10-K:
|
|
|
|
|
|
|
All
financial schedules are omitted because such schedules are not required or
the information required has been presented in the aforementioned
financial statements.
|
|
|
|
|
|
|
3.
Exhibits are listed in the Exhibit Index to this Form
10-K.
|
|
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Amendment to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 28th day of March,
2008.
|
ISCO
INTERNATIONAL
|
|
|
|
|
By:
|
|
/s/
GORDON REICHARD, JR.
|
|
|
|
Gordon
Reichard, Jr.
|
|
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Amendment has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated on the 28th day of March, 2008.
/s/
GEORGE CALHOUN
|
Signature
|
|
Title
|
|
|
|
|
/s/
GORDON REICHARD, JR.
|
|
Chief
Executive Officer and Director
(Principal
Executive Officer)
|
|
Gordon
Reichard, Jr.
|
|
|
|
|
|
|
/s/
FRANK CESARIO
|
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
|
Frank
Cesario
|
|
|
|
|
|
|
/s/
JAMES FUENTES
|
|
Director
and General Manager
|
|
James
Fuentes
|
|
|
|
|
|
|
/s/
AMR ABDELMONEM
|
|
Director,
Chief Operating Officer and Chief Technology Officer
|
|
Amr
Abdelmonem
|
|
|
|
|
|
|
/s/
RALPH PINI
|
|
Chairman
of the Board of Directors
|
|
Ralph
Pini
|
|
|
|
|
|
|
/s/
GEORGE CALHOUN
|
|
|
|
George
Calhoun
|
|
|
| |
|
|
|
/s/
JOHN THODE
|
|
Director
|
| John
Thode |
|
|
| |
|
|
|
/s/
JOHN OWINGS
|
|
Director
|
|
John
Owings
|
|
|
| |
|
|
|
/s/
TORBJORN FOLKEBRANT
|
|
Director
|
|
Torbjorn
Fokebrant
|
|
|
ISCO
INTERNATIONAL
EXHIBIT
INDEX
|
Exhibit
Number
|
|
Description
of Exhibits
|
|
2.1
|
|
Agreement
and Plan of Merger by and between the Company, ISCO Illinois, Inc. (“ISCO
Illinois”), Clarity Communication Systems Inc. (“Clarity”) and James
Fuentes, dated November 13, 2007, incorporated by reference to Exhibit 2.1
to the Company’s Current Report on Form 8-K filed on November 20,
2007.
|
|
|
|
|
|
3.1
|
|
Certificate
of Incorporation of the Company, incorporated by reference to Exhibit 3.1
to the Company’s Registration Statement on Form S-3/A, filed with the
Securities and Exchange Commission (“SEC”) on August 13, 1998,
Registration No. 333-56601 (the “August 1998 S-3”).
|
|
|
|
|
3.2
|
|
By-Laws
of the Company, incorporated by reference to Exhibit 3.2 to Amendment No.
3 to the Company’s Registration Statement on Form S-1, filed with the SEC
on October 26, 1993, Registration No. 33-67756 (the “IPO Registration
Statement”).
|
|
|
|
|
3.3
|
|
Certificate
of Amendment of Certificate of Incorporation of the Company, incorporated
by reference to Exhibit 3.3 to the IPO Registration
Statement.
|
|
|
|
|
3.4
|
|
Certificate
of Amendment of Certificate of Incorporation of the Company, incorporated
by reference to Exhibit 4.3 to the Company’s Registration Statement on
Form S-3/A, filed with the SEC on July 1, 1999, Registration No.
333-77337.
|
|
|
|
|
3.5
|
|
Certificate
of Amendment of Certificate of Incorporation of the Company filed July 18,
2000, incorporated by reference to the Company’s registration statement on
Form S-8 filed August 7, 2000 (the August 2000 S-8”).
|
|
|
|
|
3.6
|
|
Certificate
of Amendment to Certificate of Incorporation filed with the Secretary of
State of the State of Delaware on June 25, 2001, incorporated by reference
to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June
27, 2001.
|
|
|
|
|
3.7
|
|
Certificate
of Amendment to Certificate of Incorporation filed with the Secretary of
State of the State of Delaware on December 16, 2004, incorporated by
reference to Exhibit 3.7 to the Company’s Annual Report on Form 10-K filed
on March 31, 2005 (the “2004 10-K”).
|
|
|
|
|
4.1
|
|
Specimen
stock certificate representing common stock, incorporated by reference to
Exhibit 4.1 to the IPO Registration Statement.
|
|
|
|
|
4.2
|
|
Rights
Agreement dated as of February 9, 1996 between the Company and LaSalle
National Trust, N.A., incorporated by reference to the Exhibit to the
Company’s Registration Statement on Form 8-A, filed with the SEC on
February 12, 1996.
|
|
|
|
|
4.3
|
|
The
SSI Replacement Nonqualified Stock Option Plan, incorporated by reference
to Exhibit 4.1 to the Company’s Registration Statement on Form S-8, filed
with the SEC on November 3, 2000, Registration No.
333-49268.*
|
|
|
|
|
4.4
|
|
Amendment
No. 1 to the Rights Agreement between ISCO International, Inc. (formerly
Illinois Superconductor Corporation) and LaSalle National Trust
Association (formerly known as LaSalle National Trust Company) dated as of
February 9, 1996, incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed with the SEC on February 22,
2002.
|
|
|
|
|
10.1 *
|
|
Form
of Amended and Restated Director Indemnification Agreement, incorporated
by reference to Exhibit 10 to the Company’s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1998.
|
|
|
|
|
10.2
|
|
Public
Law Agreement dated February 2, 1990 between Illinois Department of
Commerce and Community Affairs and the Company, incorporated by reference
to Exhibit 10.5 to the IPO Registration Statement.
|
|
|
|
|
10.3
|
|
Public
Law Agreement dated December 30, 1991 between Illinois Department of
Commerce and Community Affairs and the Company, amended as of June 30,
1992, incorporated by reference to Exhibit 10.6 to the IPO Registration
Statement.
|
|
|
|
|
10.4
|
|
Subcontract
and Cooperative Development Agreement dated as of June 1, 1993 between
American Telephone and Telegraph Company and the Company, incorporated by
reference to Exhibit 10.9 to the IPO Registration
Statement.
|
|
|
|
|
10.5
|
|
Intellectual
Property Agreement dated as of June 1, 1993 between American Telephone and
Telegraph Company and the Company, incorporated by reference to Exhibit
10.10 to the IPO Registration Statement.
|
|
|
|
|
10.6
|
|
License
Agreement dated January 31, 1990 between the Company and Northwestern
University, incorporated by reference to Exhibit 10.13 to the IPO
Registration Statement.
|
|
|
|
|
10.7
|
|
License
Agreement dated February 2, 1990 between the Company and ARCH Development
Corporation, incorporated by reference to Exhibit 10.14 to the IPO
Registration Statement.
|
|
|
|
|
10.8
|
|
License
Agreement dated August 9, 1991 between the Company and ARCH Development
Corporation, incorporated by reference to Exhibit 10.15 to the IPO
Registration Statement.
|
|
|
|
|
10.9
|
|
License
Agreement dated October 11, 1991 between the Company and ARCH Development
Corporation, incorporated by reference to Exhibit 10.16 to the IPO
Registration Statement.
|
|
|
|
|
10.10
|
|
Public
Law Agreement dated August 18, 1993 between Illinois Department of
Commerce and Community Affairs and the Company, incorporated by reference
to Exhibit 10.17 to the IPO Registration
Statement.
|
FORM10_K_HTM_D10K_HTM_TOC
|
|
|
|
10.11 *
|
|
Form
of Officer Indemnification Agreement incorporated by reference to Exhibit
10.17 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 1998.
|
|
|
|
|
10.12
|
|
Escrow
Agreement dated August 8, 2000 among the Company, Russell Scott, III, as
stockholder representative, and American National Bank and Trust Company,
as escrow agent, incorporated by reference to Exhibit 10.25 to the
Company’s registration statement on Form S-2 filed September 7, 2000,
Registration No. 333-45406 (the “September S-2”).
|
|
|
|
|
10.13
|
|
ISCO
International, Inc. Amended and Restated 1993 Stock Option Plan,
incorporated by reference to Appendix C and D of the Company’s Definitive
Proxy materials filed on May 22, 2001.
|
|
|
|
|
10.14
|
|
Secured
9 1/2 % Grid Note dated October 23, 2002 between ISCO International, Inc.
and Alexander Finance L.P. in the principal amount of $1,752,400,
incorporated by reference to Exhibit 10.3 to the Company’s Current Report
on Form 8-K filed on October 24, 2002.
|
|
|
|
|
10.15
|
|
Secured
9 1/2 % Grid Note dated October 23, 2002 between ISCO International,
Inc. and Manchester Securities Corporation in the principal amount of
$2,247,600, incorporated by reference to Exhibit 10.4 to the Company’s
Current Report on Form 8-K filed on October 24, 2002.
|
|
|
|
|
10.16
|
|
Registration
Rights Agreement dated October 23, 2002 between ISCO International, Inc.
Manchester Securities Corporation, and Alexander Finance L.P.,
incorporated by reference to Exhibit 10.7 to the Company’s Current Report
on Form 8-K filed on October 24, 2002.
|
|
|
|
|
10.17
|
|
ISCO
International, Inc. 2003 Equity Incentive Plan, as amended incorporated by
reference to Exhibit D of the Company’s Definitive Proxy materials filed
on December 11, 2007.
|
|
|
|
|
10.18
|
|
Secured
14% Grid Note dated October 24, 2003 between ISCO International, Inc. and
Alexander Finance, L.P. in the principal amount of $876,200, incorporated
by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K
filed on October 27, 2003.
|
|
|
|
|
10.19
|
|
Secured
14% Grid Note dated October 24, 2003 between ISCO International, Inc. and
Manchester Securities Corporation in the principal amount of $1,123,800,
incorporated by reference to Exhibit 10.11 to the Company’s Current Report
on Form 8-K filed on October 27, 2003.
|
|
|
|
|
10.20
|
|
Secured
14% Grid Note dated July 23, 2004 between ISCO International, Inc. and
Alexander Finance, L.P. in the principal amount of $386,900, incorporated
by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed on July 28, 2004.
|
|
|
|
|
10.21
|
|
Secured
14% Grid Note dated July 23, 2004 between ISCO International, Inc. and
Manchester Securities Corporation in the principal amount of $113,100,
incorporated by reference to Exhibit 10.4 to the Company’s Current Report
on Form 8-K filed on July 28, 2004.
|
|
|
|
|
10.22
|
|
Stock
Purchase Agreement dated December 15, 2003 between ISCO International,
Inc. and Morgan & Finnegan, L.L.P., incorporated by reference to
Exhibit 10.1 to the Company’s Current Report of Form 8-K filed on December
16, 2003.
|
|
|
|
|
10.23
|
|
Office/Service
Center Lease Agreement dated July 20, 2004 between ISCO International,
Inc. and D&K Elk Grove Industrial II, LLC, incorporated by reference
to Exhibit 10.24 to the 2004 10-K.
|
|
|
|
|
10.24
|
|
Third
Amended and Restated Loan Agreement dated November 10, 2004 between ISCO
International, Inc., Manchester Securities Corporation, and Alexander
Finance L.P., incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on November 12, 2004.
|
|
|
|
|
10.25
|
|
Secured
14% Grid Note dated November 10, 2004 between ISCO International, Inc. and
Alexander Finance, L.P. in the principal amount of $1,100,000,
incorporated by reference to Exhibit 10.3 to the Company’s Current Report
on Form 8-K filed on November 12, 2004.
|
|
|
|
|
10.26
|
|
Secured
14% Grid Note dated November 10, 2004 between ISCO International, Inc. and
Manchester Securities Corporation in the principal amount of $900,000,
incorporated by reference to Exhibit 10.4 to the Company’s Current Report
on Form 8-K filed on November 12, 2004.
|
|
|
|
|
10.27
|
|
Amendment
to Loan Documents dated February 10, 2005 between ISCO International,
Inc., Manchester Securities Corporation, Alexander Finance, L.P., Spectral
Solutions, Inc. and Illinois Superconductor Corporation, incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on February 15, 2005.
|
FORM10_K_HTM_D10K_HTM_TOC
|
|
|
|
10.28
|
|
Securities
Purchase Agreement dated July 25, 2005 by and among ISCO International,
Inc. Alexander Finance, L.P., Grace Brothers LTD, Elliott Associates,
L.P., and Elliott International, L.P., incorporated by reference to
Exhibit 10.1 to the Company’s Current Report of Form 8-K filed on July 26,
2005
|
|
|
|
|
10.29
|
|
Amendment
to and Waiver Under Loan Documents dated July 25, 2005 by and among ISCO
International, Inc., Manchester Securities Corporation and Alexander
Finance, L.P., incorporated by reference to Exhibit 10.2 to the Company’s
Current Report of Form 8-K filed on July 26, 2005
|
|
|
|
|
10.30
|
|
Letter
Agreement dated August 5, 2005 by and among ISCO International, Inc.,
Elliott Associates, L.P., and Elliott International, L.P., incorporated by
reference to Exhibit 10.1 to the Company’s Current Report of Form 8-K
filed on August 9, 2005.
|
|
|
|
|
10.31*
|
|
Thode
Employment Agreement dated January 10, 2006 between ISCO International,
Inc. and John S. Thode, incorporated by reference to Exhibit 10.1 to the
Company’s Current Report of Form 8-K filed on January 17,
2006.
|
|
|
|
|
10.32*
|
|
Abdelmonem
Employment Agreement dated January 12, 2006 between ISCO International,
Inc. and Dr. Amr Abdelmonem, incorporated by reference to Exhibit 10.2 to
the Company’s Current Report of Form 8-K filed on January 17,
2006.
|
|
|
|
|
10.33*
|
|
Restricted
Stock Agreement dated January 12, 2006 by and between ISCO International,
Inc. and Dr. Amr Abdelmonem, incorporated by reference to Exhibit 10.3 to
the Company’s Current Report of Form 8-K filed on January 17,
2006.
|
|
|
|
|
10.34*
|
|
Employment
Agreement dated February 6, 2006 between ISCO International, Inc. and
Frank J. Cesario, incorporated by reference to Exhibit 10.1 to the
Company’s Current Report of Form 8-K filed on February 9,
2006.
|
|
|
|
|
10.35*
|
|
Summary
of Non-Employee Director Compensation Policy, incorporated by reference to
Exhibit 10.1 to the Company’s Current Report of Form 8-K filed on February
24, 2006.
|
|
|
|
|
|
10.36
|
|
Securities
Purchase Agreement by and among ISCO International, Inc., Manchester
Securities Corporation and Alexander Finance, L.P. dated June 22, 2006,
incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on June 28, 2006.
|
|
|
|
|
|
10.37
|
|
5%
Senior Secured Convertible Note by and between ISCO International, Inc.
and Manchester Securities Corporation, incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 28,
2006.
|
|
|
|
|
|
10.38
|
|
5%
Senior Secured Convertible Note by and between ISCO International, Inc.
and Alexander Finance, L.P., incorporated by reference to Exhibit 10.3 to
the Company’s Current Report on Form 8-K filed on June 28,
2006.
|
|
|
|
|
|
10.39
|
|
Registration
Rights Agreement by and among ISCO International, Inc., Manchester
Securities Corporation and Alexander Finance, L.P. dated June 22, 2006,
incorporated by reference to Exhibit 10.4 to the Company’s Current Report
on Form 8-K filed on June 28, 2006.
|
|
|
|
|
|
10.40
|
|
Fourth
Amended and Restated Security Agreement by and among ISCO International,
Inc., Spectral Solutions, Inc., Illinois Superconductor Canada
Corporation, Manchester Securities Corporation and Alexander Finance, L.P.
dated June 22, 2006, incorporated by reference to Exhibit 10.5 to the
Company’s Current Report on Form 8-K filed on June 28,
2006.
|
|
|
|
|
|
10.41
|
|
Fourth
Amended and Restated Guaranty of Spectral Solutions, Inc., incorporated by
reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K
filed on June 28, 2006.
|
|
|
|
|
|
10.42
|
|
Fourth
Amended and Restated Guaranty of Illinois Superconductor Canada
Corporation, incorporated by reference to Exhibit 10.7 to the Company’s
Current Report on Form 8-K filed on June 28, 2006.
|
|
|
|
|
|
10.43
|
|
Amendment
to and Waiver Under the Third Amended and Restated Loan Agreement by and
among ISCO International, Inc., Spectral Solutions, Inc., Illinois
Superconductor Canada Corporation, Manchester Securities Corporation and
Alexander Finance, L.P. dated June 22, 2006, incorporated by reference to
Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on June 28,
2006.
|
|
|
|
|
|
10.44
|
|
Amendment
to Loan Documents dated June 26, 2007 between the Company, Manchester
Securities Corporation, Alexander Finance, L.P., ISCO International, Inc.,
Spectral Solutions, Inc. and Illinois Superconductor Corporation,
incorporated by reference to Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q filed on November 14, 2007.
|
|
|
|
|
|
10.45
|
|
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, incorporated by reference to Exhibit
10.2 to the Company’s Quarterly Report on Form 10-Q filed on November 14,
2007.
|
|
|
|
|
|
10.46
|
|
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, incorporated by reference to Exhibit
10.3 to the Company’s Quarterly Report on Form 10-Q filed on November 14,
2007.
|
|
|
|
|
|
10.47
|
|
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, incorporated by reference to Exhibit
10.4 to the Company’s Quarterly Report on Form 10-Q filed on November 14,
2007.
|
|
|
|
|
|
10.48
|
|
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, incorporated by reference to Exhibit
10.5 to the Company’s Quarterly Report on Form 10-Q filed on November 14,
2007.
|
|
|
|
|
|
10.49
|
|
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, incorporated by reference to Exhibit 10.6 to
the Company’s Quarterly Report on Form 10-Q filed on November 14,
2007.
|
|
|
|
|
|
10.50
|
|
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, incorporated by reference to Exhibit 10.7 to
the Company’s Quarterly Report on Form 10-Q filed on November 14,
2007.
|
|
|
|
|
|
10.51
|
|
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, incorporated by reference to Exhibit 10.8 to
the Company’s Quarterly Report on Form 10-Q filed on November 14,
2007.
|
|
|
|
|
|
10.52
|
|
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, incorporated by reference to Exhibit 10.9 to
the Company’s Quarterly Report on Form 10-Q filed on November 14,
2007.
|
|
|
|
|
|
10.53
|
|
Registration
Rights Agreement dated June 26, 2007, by and among ISCO International,
Inc., Manchester Securities Corp. and Alexander Finance, L.P. ,
incorporated by reference to Exhibit 10.10 to the Company’s Quarterly
Report on Form 10-Q filed on November 14, 2007.
|
|
|
|
|
|
10.54*
|
|
Employment
Agreement with Jim Fuentes, incorporated by reference to Exhibit B to the
Agreement and Plan of Merger by and among ISCO International, Inc., ISCO
Illinois, Inc., Clarity Communication Systems Inc. and James Fuentes (for
himself and as Representative of the Clarity Rightsholders) filed as
Exhibit 2.1 to ISCO International, Inc.’s Current Report on Form 8-K filed
on November 20, 2007.
|
|
|
|
|
|
10.55
|
|
Registration
Rights Agreement with Jim Fuentes and Certain Clarity Rightsholders,
incorporated by reference to Exhibit C to the Agreement and Plan of Merger
by and among ISCO International, Inc., ISCO Illinois, Inc., Clarity
Communication Systems Inc. and James Fuentes (for himself and as
Representative of the Clarity Rightsholders) filed as Exhibit 2.1 to ISCO
International, Inc.’s Current Report on Form 8-K filed on November 20,
2007.
|
|
|
|
|
|
10.56
|
|
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.
|
|
|
|
|
|
10.57
|
|
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.
|
|
|
|
|
|
10.58
|
|
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.
|
|
|
|
|
|
10.59
|
|
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.
|
|
|
|
|
|
10.60
|
|
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.
|
|
|
|
|
|
10.61
|
|
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.
|
|
|
|
|
|
10.62*
|
|
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.
|
|
|
|
|
|
10.63*
|
|
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.
|
|
|
|
|
|
10.63
|
|
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.
|
|
|
|
|
|
10.64
|
|
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.
|
|
|
|
|
|
10.65
|
|
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.
|
|
|
|
|
14
|
|
Code
of Ethics incorporated by reference to Exhibit 14 to the Company’s Annual
Report on Form 10-K filed on March 30, 2004.
|
|
|
|
|
21**
|
|
List
of subsidiaries: Clarity Communication Systems, Inc., an Illinois
corporation.
|
|
|
|
|
|
23.1**
|
|
Consent
of Grant Thornton LLP
|
|
|
|
|
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**
|
|
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-K.
|
|
**
|
Filed
herewith.
|