ISCO INTERNATIONAL, INC.

(Name of Registrant as Specified in Its Charter)

 

 

Delaware		36-3688459
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

1001 Cambridge Drive, Elk Grove Village, Illinois		60007
(Address of Principal Executive Offices)		(Zip Code)

 

(847) 391-9400

(Registrant’s Telephone Number, Including Area Code)

 

 

 

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x    No   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨                                             Accelerated filer   ¨                                             Non-accelerated filer   x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.     ¨  Yes     x  No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at April 30, 2007
Common Stock, par value $0.001 per share		190,600,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Note 4 - Inventories

 

Inventories consisted of the following:

 

			March 31, 2007			December 31, 2006
Raw materials		$	2,587,000		$	2,675,000
Work in process			1,989,000			2,332,000
Finished product			1,723,000			1,362,000
Total		$	6,299,000		$	6,369,000

 

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Cost of product sales for the three months ended March 31, 2007, and the twelve months ended December 31, 2006 include approximately $0 and $165,000, respectively, of costs in excess of the net realizable value of inventory (including obsolete materials).

 

Inventory balances are reported net of a reserve for obsolescence. This reserve is computed by taking into consideration the components of inventory, the recent usage of those components, and anticipated usage of those components in the future. This reserve was approximately $325,000 as of both March 31, 2007 and December 31, 2006.

 

Note 5 - Stock Options and Warrants

 

Effective January 1, 2006, we adopted SFAS No. 123(R), “Share Based Payments,” as described in Note 7, in the Notes to the Consolidated Financial Statements.

 

At March 31, 2007, a total of 4,912,000 stock options were outstanding under the Company’s equity compensation plans. Stock-based compensation expense recognized during the first quarter of 2007 and 2006 included compensation expense for stock options granted prior to, but not yet fully vested as of, March 31, 2007 and 2006, respectively. Such amounts were none and $61,000, respectively.

 

Restricted Share Rights

 

Restricted share grants offer employees the opportunity to earn shares of the Company’s stock over time. These grants generally vest over two years to four years for employees and one year for non-employee directors. The Company recognizes the issuance of the shares related to these stock-based compensation awards and the related compensation expense on a straight-line basis over the vesting period. Included within these grants are also performance-based shares, that is, shares that vest based on accomplishing particular objectives as opposed to vesting over time. No performance-based shares were vested during the first quarter 2007 or 2006, respectively.

 

The following table summarizes the restricted stock award activity during the first quarter of 2007.

 

				Weighted
				Average Grant Date
		Shares		Fair Value (per share)
Outstanding, December 31, 2006		8,714,000		0.35
Granted		1,500,000		0.33
Forfeited or canceled		(339,000)		0.38
Vested		(976,000)		0.37
Outstanding, March 31, 2007		8,899,000		0.34

 

 

The Notes are secured on a first priority basis by all of our intangible and tangible property and assets. Payment of the Notes is guaranteed by our two inactive subsidiaries, Spectral Solutions, Inc. and Illinois Superconductor Canada Corporation. The Agreement contains customary representations, warranties and covenants. We filed a registration statement covering the resale of the shares of common stock issuable upon conversion of the Notes with the Securities and Exchange Commission Concurrently with the execution of the Agreement, the Lenders have waived their right under the 2002 Credit Line to receive the financing proceeds from the issuance of the Notes, allowing us to use the funds for product development or general working capital purposes. No fees were paid to any financial advisor, placement agent, broker or finder in connection with the transactions contemplated by the Agreement and the Notes.

 

Assuming the Notes are held for the full four year term, 18,505,719 shares of common stock would be required upon settlement, for both principal and interest. This amount is approximately 10% of the then approximately 186 million shares of common stock currently issued and outstanding. As of March 31, 2007, the Lenders, including their affiliates, owned approximately 43% of the Company’s outstanding shares. As a result of this transaction, the combined holdings of the Lenders would be approximately 48% of the Company’s outstanding common stock.

 

Note 7 - Income Taxes

          

The Company adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. Previously, the Company had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards 5, Accounting for Contingencies. As required by FIN 48, which clarifies Statement 109, Accounting for Income Taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied FIN 48 to all tax positions for which the statute of limitations remained open. As a result of the implementation of FIN 48, there was no effect on the Company’s financial statements as of January 1, 2007 and there have been no material changes in unrecognized tax benefits since January 1, 2007 through March 31, 2007.

The Company is subject to income taxes in the U.S. federal jurisdiction and various states jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. As the Company has sustained losses since inception, a large number of tax years (1992-2006) are open as the losses have not been utilized by the Company.

The Company is currently not aware of any current or threatened examination by any jurisdiction. The Company has elected to classify interest and penalties related to unrecognized tax benefits as a component of income tax expense, if applicable. No accrual is required as of January 1, 2007 and March 31, 2007 for interest and penalties.

 

 

 

 

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Forward Looking Statements

 

Because we want to provide investors with more meaningful and useful information, this Quarterly Report on Form 10-Q contains, and incorporates by reference, certain forward-looking statements that reflect our current expectations regarding its future results of operations, performance and achievements. We have tried, wherever possible, to identify these forward-looking statements by using words such as “anticipates,” “believes,” “estimates,” “expects,” “designs,” “plans,” “intends,” “looks,” “may,” and similar expressions. These statements reflect our current beliefs and are based on information currently available to us. Accordingly, these statements are subject to certain risks, uncertainties and contingencies, including the factors set forth under Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2006, which could cause our actual results, performance or achievements for 2007 and beyond to differ materially from those expressed in, or implied by, any of these statements. You should not place undue reliance on any forward-looking statements. Except as otherwise required by federal securities laws, we undertake no obligation to release publicly the results of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.

 

General

 

We have shifted from manufacturing in-house to an outsourced manufacturing model wherein we supply parts and raw materials to third parties, who then complete the products to our specifications. This system has allowed us to begin to outsource procurement and realize additional manufacturing efficiencies. Our products are designed for efficient production in this manner, emphasizing solid-state electronics over mechanical devices with moving parts. The decrease in cost associated with these developments, coupled with enhanced product functionality, have significantly reduced overhead costs since 2002 and allowed us to realize consistently improved margins. In addition, because we have built upon and expanded upon our earlier developed technology, based on substantial input from customers, to launch the RF² product family and consider additional solutions, we have generally controlled total research and development (“R&D”) costs.

 

Wireless telecommunications has undergone significant merger activity in recent years, a trend which we believe will continue. These activities often result in operators with disparate technologies and spectrum assets, and the need to integrate those assets. In addition, the deployment of data applications is adding to the industry requirement to integrate disparate technologies into base stations and other fixed points of access, resulting in the need to manage multiple wireless signals and keep them from interfering with each other. We are focused on providing solutions that address these types of requirements. During 2006 and 2007 (year to date), we bid on substantially larger business opportunities than we had in recent years. These proposals often are accompanied by long approval cycles and we may bear up-front product development costs. We believe the potential benefits to outweigh these costs, and expect to continue to bid on these types of business opportunities.

 

The wireless telecommunications industry is subject to risks beyond our control that can negatively impact customer capital spending budgets (as occurred during 2003) and/or spending patterns (as occurred during 2004 and to a lesser extent on a quarterly basis after 2004 and through the first quarter 2007). In addition, a large portion of our debt ($11.3 million) matures in August 2007 and must be refinanced. For these and other reasons, our financial statements have been prepared assuming we will continue as a going concern.

 

From a company-specific view, we have invested in measured infrastructure growth to allow for potentially substantial revenue expansion. This has caused spending to increase during the past three years, which has resulted in increased revenue during that time. We believe that we now have the infrastructure largely in place to allow for such potential revenue expansion, and therefore as a general guideline do not expect fixed costs to rise, except for some R&D associated with product initiatives, during 2007. We also announced the impending retirement of one director (Mr. Tom Powers) when his term expires during June 2007, as well as the loss of another director (Dr. Martin Singer) during March 2007. Our Governance Committee has an ongoing program designed to identify and retain qualified external directors on our Board.

 

Contractual Obligations and Commitments

 

The following table lists the contractual obligations and commitments that existed as of March 31, 2007:

 

Contractual Obligations	Payments Due by Period
					Less than 1									More than
Year		Total			Year			1-3 Years			3-5 Years			5 Years
Long Term Debt Obligations	$	17,787,000		$	11,749,000			-		$	6,038,000			-
Operating Lease Obligations	$	1,609,000		$	202,000		$	414,000		$	429,000		$	564,000
Total	$	19,396,000		$	11,951,000		$	414,000		$	6,467,000		$	564,000

 

Off Balance Sheet Arrangements

            We do not have any off balance sheet arrangements.

 

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Signatures

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 14 day of May 2007.

 

ISCO International, Inc.
By:		/s/ John Thode
		Mr. John Thode
		President and Chief Executive Officer
		(Principal Executive Officer)
By:		/s/ Frank Cesario
		Frank Cesario
		Chief Financial Officer
		(Principal Financial and Accounting Officer)