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Executives

Gary Berger – CFO

Gordon Reichard – CEO

Analysts

Mark Tanowski [ph]

Dino Laho [ph]

ISCO International, Inc. (ISO) Q3 2008 Earnings Call Transcript November 13, 2008 11:00 AM ET

Operator

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter investor conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you. Mr. Berger, you may begin your conference.

Gary Berger

Thank you. Good morning, everyone. This is Gary Berger. Welcome to the third quarter ISCO International investor conference call. This morning I will have a few brief remarks. Gordon Reichard, our CEO, will join us then with his remarks and then we will open the lines up for questions. Our conference is scheduled to last one hour or so. With that, we’ll get started.

Before we start, I will read our Safe Harbor statement and explain the basis of presentation of our financial results. Certain statements in this presentation relate to future results that are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the accuracy of which are necessarily subject to risks, uncertainties and assumptions as to future events that may not prove to be accurate.

Factors that could cause actual results to differ materially from those expressed or implied include general economic conditions and the factors discussed in our most recent Form 10-K as amended, and other filings with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. I will reference non-GAAP information in this presentation. Non-GAAP information should be considered a supplement to, and not a substitute for, financial statements prepared in accordance with Generally Accepted Accounting Principles.

As many of you are aware or do not, we posted an earnings release last evening late, and so that information is out on our website and also on the SEC website as well. Consolidated revenues for Q3 2008 totaled $1,867,000 with a gross margin of $866,000 or 46.4%. Consolidated operating loss was $1,999,000 with a pretax loss of $2,330,000. Our revenues were approximately 25% lower than in Q2 of 2008. The operating loss was about $14,000 better than in the second quarter. This is the result of spending controls in both the hardware and software segments. Those comments are on a consolidated basis and include both Clarity and ISCO results.

I will briefly discuss results from the Clarity, our software segment of the business. As we have previously disclosed, we have initiated a formal process to sell the Clarity software business. With that said, I will highlight some of the key financial amounts for the third quarter and year-to-date results. Revenue for the quarter totaled $551,000 and for the year-to-date period $1,273,000. Primary revenue source of Clarity has continued to be third-party custom program development work. We also continue to provide hosted push-to-talk service for a small number of Tier 3 carriers.

During the third quarter, we completed our trial with the Department of Homeland Security, which represented approximately $120,000 of recognized revenue in the quarter. Operating loss for the quarter was $635,000 and for the year-to-date period $2,901,000. The third quarter loss was lower than the second quarter due to higher revenues along with a reduction in operating expenses of $161,000 or 16%. Third quarter R&D and admin expenses were lower than second quarter while sales and marketing expenses increased.

Turning now to the hardware business or the core ISCO business, hardware revenues totaled $1,316,000 for the quarter, a decline from both the prior year and Q2 2008. Sales of our RF square product continued to decline, continued the decline that we have seen in previous quarters this year. Sales of our Adaptive Interference management products were down slightly from Q2 levels, but were more than $500,000 higher than Q3 of 2007. AIM product sales represented approximately 55% of our Q3 revenue versus 35% in the second quarter.

Year-to-date hardware revenues totaled $5,837,000, which is $463,000 or 7% lower than the comparable year-to-date period in 2007. Sales of our AIM products were $1.6 million or 172% higher than in the prior year period. Deferred revenue associated with the software component of our AIM product family totaled $423,000 at the end of the third quarter, which is a decrease of approximately $32,000. Order backlog for hardware, both orders and installation, were $46,000 at the end of the third quarter.

Gross margins on hardware sales totaled $534,000 or 40.6% of revenue. While the absolute margin dollars were lower than prior year due to lower volumes, gross margin percentage increased from 36.6%. This improvement in margin rates is due to the increased portion of total revenues derived from the AIM product family. Year-to-date gross margins totaled $2,603,000, which is $63,000 less than prior year-to-date. While year-to-date revenues declined 7%, gross margins were only 2.3% lower due again to the favorable product mix.

Operating expenses for the quarter totaled $1,888,000 and were $393,000 or 70% lower than in Q3 2007. The largest decline was in research and development, which declined $201,000 or 28% from Q3 2007 levels. Lower salaries and related expenses due to lower headcount were the largest contributors to the lower expense levels in this department. Sequentially, being Q3 over Q2, expenses in the department declined $100,000 or 16.3%. Lower salaries in the quarter were partially offset by increases in the (inaudible) expenses and the consultants, as we replaced the engineers that departed late in the second quarter. Year-to-date R&D expenses are $196,000 or 10% lower than prior year-to-date amounts.

Sales and marketing expenses declined $87,000 or 16% from Q3 2007 levels. Lower headcounts along with lower commissions due to lower bookings were the main causes of these expense declines. Sequentially, sales and marketing expenses increased $12,000 or 2.5% from the second quarter. Increases in consulting [ph] expenses were partially offset by lower sales and travel expenses due to vacancies and lower commissions due to lower booking levels. Year-to-date sales and marketing expense is $292,000 or 16% lower than the prior year-to-date. Again, higher consulting expenses were offset by lower salaries and headcount related expenses along with lower commissions.

General and administrative expenses declined $103,000 or approximately 10% from Q3 2007 levels. Equity compensation expense for all employees as well as facility and leasehold improvement depreciation for all facilities are included in G&A expenses. Lower equity compensation expense was partially offset by higher franchise taxes and depreciation expense in the third quarter. Sequentially general and administrative expenses decreased $65,000 or 6.7%. Increases in franchise taxes primarily related to the Clarity acquisition were offset by decreases in professional fees, employee equity compensation expense, and depreciation. Year-to-date G&A expenses are $250,000 or 8% below prior year-to-date expense levels.

Other expenses, which are interest income less interest expense, netted to $340,000 and were $125,000 or 59% higher than in the prior year. Interest expense for both the hardware and software segments is included in this amount. Average outstanding debt was approximately $20 million during the third quarter of 2008. This is an increase of $4.7 million or approximately 30% over average 2007 Q3 levels. Year-to-date other expenses are $223,000 or 32% higher than prior year, again due to higher outstanding debt levels.

I want to spend just a moment to talk about our balance sheet management. Cash on hand at the end of the third quarter was $789,000, which was an increase from the second quarter ending balance of $337,000. In order to conserve cash, we continue to aggressively manage working capital. Accounts receivable are down $647,000 or 39% from Q2 levels, a part of the decline is attributed to lower revenues.

We also realized an improvement in days sales outstanding of almost 15 days from Q2 levels. That DSO improvement freed up approximately $300,000 of cash for other uses. Days sales outstanding levels are down 62% from – compared to the 2007 year-end numbers. Inventory decreased approximately $220,000 or 7.5% from June 30 and are down $357,000 from December 2000 [ph] ending balances. We are expecting an increase in both accounts receivable and inventory balances at the end of this year.

In conclusion, while revenues were down from prior year and prior quarter, we realized improvements in margin rates due to the favorable product mix. Our focus on spending controls continued to provide benefit when compared to 2007 and prior quarters in 2008. Cash conservation remains an ongoing focus in our operations.

I’ll now turn the call over to Gordon Reichard, our CEO, for additional insight into our customer and marketing activities. Gordon?

Gordon Reichard

Thank you, Gary, and good morning, everyone. Thank you for attending this morning’s ISCO International Q3 2008 earnings call. I’m taking the call remotely from my hotel room here in San Francisco since I’ve been with our customers all week out here in the West Coast.

Consistent with our previous calls, I will divide my comments today into three distinct categories. First, I will address Q3 results and the immediate challenges facing the company. Second, I will review the status of our longer-term plan to turn ISCO around and put it on a stable, solid growth path. And third, I will focus on execution. I will highlight current activities and successes, because while slow, we are making progress regardless of the terrible economy impacting all of us. In all cases, there are customer-specific successes and activities that I cannot disclose without jeopardizing our business and our future with those customers. I hope you understand.

Please note this morning’s call will focus almost entirely on ISCO’s core hardware business. My vision and related forward-looking statements are exclusive to the ongoing core hardware business since that will soon become our primary business. As I indicated in last quarter’s earnings call and in other public disclosures that we have been – or that we have issued, I quote, “We are committed to continuing our analysis of all strategic options available to us for various lines of business.” This included, of course, the Clarity software business.

I also stated previously that as a condition of funding we received in August, we were to continue to evaluate the company’s various lines of business. Accordingly we have continued to refine our strategy to spend our limited available funds where they were most productive while reducing or eliminating spending on non-core areas. And as a result of that evaluation, we have initiated the formal process to sell Clarity. It was an extensive process that included discussions with a number of potential buyers. We have received and evaluated a number of offers and have now executed a non-binding letter of intent. We believe that a definitive agreement will be executed by the end of November and the sale will be closed at that time or shortly thereafter. This will be the last I speak of Clarity in my discussion this morning, though I will answer your questions during the Q&A session as best I can.

Now let’s go to first section of comments. Let’s take a look at Q3 and the immediate challenges facing the company. As you are aware from Q3 results that Gary has already shared with you, our topline revenue performance for hardware business was weak, which was not surprising for a number of reasons, which we’ll review this morning. But more important, key cost and the income numbers are beginning to reflect a positive result of activities we initiated as part of our turnaround strategy.

For the ISCO hardware business, the operating loss in Q3 of $1.35 million was an improvement of around $221,000 over Q3 2007. The gross margin percentage also improved year-over-year by 4 percentage points. This is not trivial for this industry. Impacting revenue were three principle factors. First, as was the case with any manufacturer providing infrastructure equipment to the wireless service providers, capital spending has been under pressure. Service provider spending directly and immediately impact our revenue. In Q3, as the global economic conditions deteriorated, the impact in capital spending was negative and that had a negative impact on our results.

Second, we had to rebuild our sales team from nearly the ground up. During the quarter, we took our sales and business development team down to its core and started to rebuild with a profile necessary to implement our long-term, value-driven, solutions approach sales strategy.

And third, we were finalizing and then implementing our plans to focus our activities and eliminate costly distractions from our business, while at the same time, we’ve had multiple initiatives and decisions showing positive results. First one, the personnel reductions that occurred during Q2 produced savings in Q3. This includes the expiration of severance payments and reduced headcount. Second, the use of the Magis Group versus hiring full-time employees to create and implement our marketing plan reduced overall operating expenses. Using the Magis Group resources provided a less costly alternative than the full-time equivalent dedicated resources. Once our topline revenue starts to show the results, we can then hire the full time employees.

Third, more important and probably more exciting, we continue to focus our efforts on our higher margin, value-added Adaptive Interference Mitigation products and we are starting to see the positive returns from that focus. We are continuing to work closely with our lenders regarding future funding. We continue to manage our costs. We have sufficient real prospects in our pipeline and are aggressively working to close Q4 orders. But particularly given the state of the economy and the unknown status of our customers’ budgets, along with recent industry consolidation, we cannot be certain that we will achieve all of our short-term revenue goals.

While as usual we will not provide guidance regarding our internal targets, they are based on sound execution of our business strategy. I know some of you would like to see these targets, but despite flawless execution, there are external factors that will impact our results that are outside of our control. We will adjust as needed in rapid fashion, but nonetheless our results will be impacted. We believe that our plan is sound and our prospects for both our current Adaptive Interference Mitigation solutions and our new products are very promising. And though we still have a very steeple decline, we have what we believe is a reasonably good chance to have a solid Q4 and we will continue to fight for revenues and funding we require to get us to cash flow positive operation in 2009.

Let’s go to the next section. Now let’s look at our long-term focus now getting ISCO and how we’re going to get ISCO turn around and on the path to stable, consistent growth. Our strategy remains simple. We will focus on value-add solutions that provide benefits to our customers versus being focused purely as a provider of technology. Our solutions will improve the value of our customers networks by increasing sell-side capacity, providing better utilization of their spectrum, improving the quality of their service by reducing dropped calls and data transfer rates, increasing sell-side coverage, and probably most important, doing all of this at a cost lower than is available through alternative methods today.

Our sales strategy and approach with supporting materials and programs all focus on providing these value propositions to our customers, different than in the past. I’ve spent the last 60 days focused on our customers and marketing initiatives to personally validate our strategy. I can tell you first hand, this approach works and customer reception has been positive. At this point, we intend to continue implementing this strategy of (inaudible) our customers more above the corporate national and the local market levels.

We intend to continue to build on our sales infrastructure that we have started to put in place over the past 60 days. This approach is not easy because the message has to be communicated in person to our customers. It takes time. It takes the right sales people. It takes the right support team, but it does work. Once the customer understands our value proposition, they realize the potential return on investment they can begin to see from our products, they move immediately to purchase our products.

Our plan, as I reviewed with you in the past, includes adding more customers for revenue diversification, adding new distribution channels, increasing awareness among consultants and other influencers [ph] in the wireless industry, establishing new OEM agreements, and expanding our presence with our current customers. We are making progress on all fronts.

Since much to date, I’d like to go through with accomplishments that we are realizing. One, we have added a significant new international customer. That is Telesur we announced in last quarter who continues to show interest and seize the results in our products and continues to purchase our products on an ongoing basis. Second, we have a significant new North American wireless customer who continues to increase purchases of our Adaptive Interference Mitigation products.

Third, we have expanded our presence with our existing customers who are Cellular, Verizon, and Alltel. Fourth, we have signed a significant North American distributor, which will be announced in concert with a customer promotional program before the end of this year, but that agreement is signed. We have started to rebuild our sales and marketing engine with the first new hires coming onboard during October.

Sixth, we have had a number of international prospects entering into valuations and trials starting as soon as this week. We have delivered on our first OEM engagement with a major provider of medical devices helping them improve the performance of certain wireless products and are now discussing the next phase of this project to use our signal processing technology and associated know-how.

Eighth, we have spoken at a number of industry engagements and chaired conference calls with consultants firms, educating the marketplace about ISCO and the benefits of our Adaptive Interference Mitigation solution. And lastly, we have established a strategic partner in India and are now actively working three opportunities in that very, very challenging marketplace.

We have honed our messaging and positioning. We are diversifying our customer revenue. We are expanding our presence and are beginning the building of our new sales engine. Not bad, but we still have – we are still early in the process and have a long way to go. We have to deal with a very challenging global economy and we have to become a solution that is required by our customers versus a nice to have tactical product purchased on an as-needed basis.

As I have stated before, we believe that establishing the foundation – this foundation will result in the longer term sustainable performance for our shareholders, but it takes time. We are now in the third month of our 12-month plan to turn around ISCO and grow ISCO. The initial objectives of the plan were cost reductions, staff-related changes, creation of new challenge, focusing on the AIM products, new marketing programs and beginning the transition to a sales/marketing oriented organization. We are on our way to achieving each of these and have begun to see positive results from these initiatives.

That brings me to the last or final portion of this morning’s call. Current activities, progress, and successes. While I touched on some key activities above, I want to expand on a few significant key positive activities currently underway. With the agreement now signed, we are scheduling the training of our new North American distributor sales force. We have a large sales force that has the ability to sell our AIM products not only in the US but internationally over time. The distributor will significantly expand our customer reach. We will not likely see incremental order activity or revenue from the distributor this year, but we plan for them to play an important role in our 2009 results.

Now the news you’ve all been waiting for for over 12 months. The first DIF units are complete and have been shipped to Europe for evaluation and field trial. Key people from our R&D staff are currently in Europe assisting with the evaluation as we speak. If the evaluation is successful, the units will be moved into the field and immediately go into a field trial. The product along with a new name will be launched in two phases after the first of the year. We will launch the product first in Europe, followed by the US introduction shortly thereafter. The product is truly the first of its kind in the industry. And if the trials are successful, as we believe they will be, ISCO will be able to deliver a solution and value proposition not available from any other source.

In our lab, the DIF is performing as designed and reacting to interference within 150 microseconds. This opens a host of new applications of market to ISCO. We are implementing a new sales strategy that is intended to move us towards achieving a required product designation with our customers. Early results from this approach are positive, but we are less than 60 days into this approach.

We are disappointed with our success in Europe to date, but are optimistic about our progress we are now beginning to see resulting from changes that we have recently put in place. Pending new trials resulting from our try-and-buy program coupled with different, newly engaged SFE agents, we are starting to see positive signs. At balance, overall for the company, we are executing successfully against our tactical objectives. The completed DIF is now in customer trial and evaluation.

New programs have been launched; the try-and-buy, the CoW/CoLT program. New sales people have been hired in October. They are in place. New channels have been established, this national distributor. New customers have been secured, both here and abroad. And the list goes on. A successful DIF trial and subsequent product launches, coupled with revenue contribution from our new distributor and continuing traction from our new sales strategy, all point to a change in momentum. So at this point, we are not satisfied with this year’s revenue performance, but we believe we have the right pieces in place to produce positive results.

So at this point, I want to thank you all for your attention, and we are now ready to answer your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Mr. Mark Tanowski [ph], your line is open.

Mark Tanowski

Good morning, Gordon.

Gordon Reichard

Good morning, Mark.

Mark Tanowski

And Gary.

Gary Berger

Good morning.

Mark Tanowski

Couple questions for you, please. You talked about the new directive for your sales force here to go out and demonstrate the value propositions for our hardware products that there is an ROI that we need to stick in their face and that will convince them. I guess if you look back and listen to a couple of conference calls before you got here, Gordon, we were hearing the same thing that the hardware product that ISCO has fills in the perfect storm, it saves the customer money, obvious things. And so in trying times of a tough economy, I would think that these things would sell themselves than if the customer can actually save money by not having to spend for future deployment or can get more out of what they have by using our products. So, while I agree with you that, yes, this is a good thing, I’m not seeing a whole lot of change between the argument that you are going to use to try to sell the product and the same argument that we’ve been using for the last three or four years. And so therefore I ask, how is it that trying to sell using the same basis is going to be any different than the results we’ve seen before?

Gordon Reichard

Well, Mark, I’ll try and be as concise as possible. It’s hard for me to speak about the past. Amr and I – and you are all aware of Amr. Amr has been with the company a long time. He keeps me fully informed and briefed on things that have occurred in the past and things that haven’t occurred in the past. I can’t speak first hand other than what I here my Amr what has really occurred and what really has not occurred. What I can tell you is, it seems to be from my personal engagements with customers, for whatever reason, we are getting good reception from the messaging, from the approach that seems to be new when we talk to these customers. So we’re also hopeful for the next generation product because again the price point on that product, we haven’t set the final pricing. The new product is different, like the DIF product, but that new price point could also open up some opportunities. But I guess at the end of the day, selling or engaging in these type of sales where you sell is very difficult. It takes a certain type of sales person and the – it takes all the materials and all the support behind that sales person to be there for that type of sale to come off. So I guess my short answer to my long explanation is, I can’t speak to what has occurred in the past. I can only speak to what we are putting in place now, which seems to be new, and that I’m personally validating that the message seems to be making sense. It seems to be fresh when I’m talking to these customers.

Mark Tanowski

I guess I don’t know all the details of what happened in the past. I just know what we shared on the conference calls, but to me, at the high level, it sounded like the value proposition you are trying to state is the same thing that we were stating before. So I hope you have more success this time around. I’ll move on to our second question. Cash on hand, I think Gary quoted $789,000 at the end of quarter three. How long do you see that keeping the company afloat with the Clarity disposition I guess? At what point do we have to go back and look for more funding? Or is that a down-the-road issue that you don’t have to worry about in the fourth quarter?

Gary Berger

Mark, we’ve got – based on our cash flow forecast, we’ve got cash to get us through the end of the year. So we’re not looking for that to be an issue this year. We continue to evaluate cash alternatives. We are in constant contact with the lenders, both Gordon and I. On cash, we again still do a weekly cash flow forecast. But we have $1 million left on the line that we borrowed or that we were granted in August with the lenders. And with that and the cash that we have on hand, we don’t have a cash issue for the fourth quarter.

Mark Tanowski

To those that may be writing that you are bankrupt and everything else, they may be a bit premature.

Gordon Reichard

Well, they are way past premature, but –

Mark Tanowski

That’s close enough. Thank you. Okay. And then speaking of Clarity, what was the initial cost to make that purchase?

Gary Berger

The initial cost on that, Mark, was they were about $1.5 million with a cash closing cost, and the rest of it was related to shares that we’re issuing [ph]. Total shares that could be issued on that acquisition would have been 40 million shares, but a large portion of those were performance-based based on total market cap for four years out. So depending on financial performance go-forward (inaudible) not, but the total out of pocket cash was $1.5 million.

Mark Tanowski

Okay. And for your [ph] comment, Clarity is up on the blocks, something has been at least offered on it and that will be finalized hopefully before the end of the year. Could you share the amount of that sales price or give a ballpark of it?

Gary Berger

We can’t –

Gordon Reichard

No, we can’t, that – as you can imagine, under the agreement with the potential buyer, that information cannot be disclosed at this time.

Mark Tanowski

Okay. The personnel expenses related to the Clarity side of the business, however many software engineers are still around supporting that, will that become less of a liability than in fourth quarter when they are transferred to the new buyer? In other words, do we look to have more savings on personnel costs coming up or have we already cut everyone who are going to from the software end in the fourth quarter?

Gordon Reichard

On the software side, Mark, we’re looking to sell the entire business. And so, once that sale is consummated, all the current Clarity employees would go with the new buyer depending on what their needs and desires are, but we’re selling the business. And so, once that sale is closed, those expenses would disappear completely from ISCO.

Mark Tanowski

And again, as you stated, you are hoping that will be in fourth quarter?

Gordon Reichard

That’s the direction we’re headed.

Mark Tanowski

Okay. Yes, the economy is not that great, as we all know. I’ve seen companies doing layoffs and salary cuts, salary freezes, all those kinds of things. What are you doing within the company to try to save cash regarding – not maybe draconian measures to save cash, but are you implementing salary freezes, stock option moratoriums, things like that?

Gordon Reichard

Over the last – I’ve been here eight months, and all that we have done over the last eight months is ask – reduce the size of the headcount, while simultaneously asking the remaining employees to do more. There has been no salary increases across the board. And there have been on selective basis a stock grants – qualified stock grants to incent the extra work effort that we are asking from our employees. With that, we’re seeing the results come from our DIF product, which is now over in Europe. So, that team band together and as well the rest of the organization to deliver on other parts of the business. So we believe we have the right controls in place. Gary shared with you the numbers that indicate to that effect our expenses are under control. And we believe at this point we do have cash management in place enough, given the bad economy.

Mark Tanowski

Okay. And finally, regarding the numbers release yesterday, and I spent a whole lot of time watching after 4 PM looking for that sales release and I guess (inaudible) why you would release it after 10 PM at night. And I’m sure a lot of people were frustrated there too. I think, as a long time shareholder, if you can’t sell and make a profit for us, you’re giving it your best shot, but gosh, don’t kick us in those areas too. That to me would have been a very controllable thing is to release the numbers during the day. Or when you put out the announcement, pick a time. If you’re going to do it at 10 PM, then say we’re going to release the numbers at 10 PM. Then we won’t be watching it all day waiting for it. But please always consider your shareholders in that regard.

Gary Berger

Well, Mark, I’ll take that one. That was on me. My intention was not to release at 10 o’clock last night. I spent most of the day yesterday working with the accountants and the attorneys on primarily the accounts on goodwill issues. And so it took us that long. And while I apologize for getting it out that late, I also committed to get it out yesterday. And again, 10 o’clock at night is an extremely poor time, but it certainly was not for lack of effort. And for that I apologize, and we are working to improve on that in the future.

Mark Tanowski

It does help to hear there was a reason behind it. So, thank you for that. And then finally on the goodwill issue, can you maybe just do a high level run-through of what that means? I’m a little confused on that? And with the sale of Clarity, with whatever proceeds come in, I guess what’s your read on how that will affect the bottom line and stock price and the valuation of the company?

Gary Berger

Well, again, we’re still working on the issues around Clarity and the sale of that. The goodwill, as everyone knows, is an intangible asset. In the earnings release, we outlined the amount of goodwill that’s associated with the hardware business and the software business until we finalize the purchase and transfer of Clarity. We won’t know what the final amounts are on that. And on the hardware business, we continue to evaluate that. In fact, I have another meeting this morning with the accountants and with the appraisal folks to come with what the valuation on the goodwill is, to the extent that there is an impairment, and we don’t know if there is an impairment or not. We’ll record the appropriate adjustment in the fourth quarter financial statements. There is no cash impact to that. It’s a non-cash expense. So we won’t be writing a check to anyone as a result of making that adjustment. But basically it’s bringing the asset value down to the appropriate valuation based on the future earnings potential of the assets. Market cap of the business is also a consideration there. So there are a lot of different issues that are impacting that. But again it would be a non-cash charge, to the extent that there is one. And I’m not certain at this point that there is.

Mark Tanowski

How stable do you see the continued listing on the American Exchange? Are we at a limit or a time limit or a value limit where we may have to be de-listed from there?

Gary Berger

We have had some preliminary discussions with the American Stock Exchange on this very topic. And we’ll be forwarding more information out as that becomes available.

Mark Tanowski

Okay. I’ll step back and let someone else ask questions, but please make sure you check for any further ones before you end the conference call if we have time.

Gary Berger

Absolutely.

Mark Tanowski

Thank you.

Gordon Reichard

Thanks, Mark.

Operator

Your next question comes from the line of Dino Laho [ph]. Your line is open.

Dino Laho

Couple of questions. My first question is, when the sale of Clarity does go through, those funds from that transaction, will you be able to use those for operating expenses or are you required by your lenders to pay back some of the loan first?

Gordon Reichard

The current agreement with the lenders – and again, all of that has to get finalized. But the current agreement with the lenders is the proceeds from that transaction will remain with ISCO and used in our coffers for running the business.

Dino Laho

And my second question is, can you give us an approximate savings from operating expenses for the Clarity operations once it’s gone? How much saving is that to the bottom line from an operating expense approximate?

Gary Berger

Well, in my comment, we’ve talked about what the loss is from Clarity. And when that business disappears, all of that loss goes away. So in the third quarter, we had an operating loss of $635,000 and that’s pretty much cash. So I think it would be fair to say that’s couple of hundred thousand dollars a month.

Dino Laho

Okay. That’s all the questions I have. Thank you.

Gary Berger

Thank you, sir.

Operator

(Operator instructions) There are no further questions at this – your next question comes from the line of Mark Tanowski [ph]. Your line is open.

Mark Tanowski

Good to have you guys schedule an hour and I use it here to do the best we can. What can you tell us about sales force? Europe, you said things were a little slow there. I think when we last talked three months ago, I asked what they were doing. And you said, well, basically all of Europe is on vacation but, boy, come September 1st, they were all trained and they should be hitting the road running. I’m paraphrasing you slightly, but I got the impression they would be out down [ph] in the pavements on, our stuff all ready to go. Is that still happening, or has there been a setback there? What can you tell us about that, please?

Gordon Reichard

Yes. I would say, not a setback, but as I indicated in my script, we are disappointed. I mean, I was expecting, we were all expecting to start to see more results. Now, I’m always overly optimistic about my view on initiatives once I put them in place. And probably I was overly optimistic. This is the first time in any major way ISCO tried to go into Europe. And it just takes time, and it takes some companies years to get an established footprint. That is not acceptable to us regardless. And we are – we did make changes and we have a good cooperative relationship with SFE. And we have made changes. So, agents that we were not seeing the results from or activity from, we switched out for other agents. We also learned how to more refine our targets or who to go after, and we are refocusing on certain areas with certain new agents. And over the last 60 days, especially the last 30, we’re starting to see a nice uplift in activity. Nothing definitive, of course, but we are seeing activity that we did not see as recent as 90 days ago. So, cautiously optimistic again, but there is a pipeline that didn’t exist there before. And again, I think we got the right people with the refined focus currently underway. And it’s one of those things we’ll continue to measure. And if we need to make a drastic change after the first year, then we’ll make one. But right now, there are three or four opportunities that have been identified that are not being worked, that we need to see through over the next 60 days.

Mark Tanowski

Okay. You had a try-and-buy promotional issue a little bit ago. What kind of interest did you see in that?

Gordon Reichard

Yes. In the try-and-buy and the CoW/CoLT initiatives, both are ongoing. It’s not – we’re doing them in ways, so that way we can – we do the mailer, we do the phone calls with unlimited staff to follow up. Because this is a high-touch – this is a high-touch sale. This isn’t a web sale. This isn’t a direct mail sale where people call us and buy the product. This is a high-touch sale and requires a professional sales force that has the ability to communicate and clearly articulate the value that our products and solutions could bring these customers. So, the try-and-buy as well as the CoW/CoLT seemed to get a good reception with our customers. Let me also – more important about the try-and-buy is why we did the try-and-buy. And going back to the earlier question you had, Mark, about – we’ve tried the stuff before – again, before my time. And Amr has kept me very abreast of acting in the case. But I also believe the way we’re approaching these things are a little bit different than in the past, at least from what I’m gathering from the remaining people that we’ve decided to keep. What I’m finding is when I engage with a customer first hand and we take the time to go through the ROI model and go through the various applications that have been identified and take a more solutions, more consultative approach, they bar-none are interested in the prospects of what the product can do. So I just find that interesting – you know, take that where you want to go. Then we find the next barrier is – they don’t really believe it. And they are so busy and the capital budgets are constrained. How do we jump the hurdle of getting them to take the perceived risk of trying this? That’s what the whole idea of try-and-buy is. We go in, our technical staff takes a look at their data to identify sites that might be (inaudible), we absorb the cost of installing it, providing the consultative evaluation of their network, and then running the devices for two weeks, collecting the data and then going back to them, showing them the results. Bar-none, again. Once a customer puts this in, they see the results. So the trick is, and that’s the whole concept of the try-and-buy, remove the risk from the customer, put it in, show them the results, and they keep it. It’s – with Verizon, US Cellular, AT&T, Telesur, the new customers that we’re bringing on board over in Europe, every one of them, when they put the product, then they see the immediate result. Some are very dramatic. But it’s just like any time you sell, get them over that first hump taking the risk is the key. And that’s the whole concept of the try-and-buy. It’s being well received by customers. And it’s just now the matter of having enough sales people to follow up on the opportunities and pursue the opportunities as they are identified, as well as sales engineering staff because we are looking to add sales engineers as well.

Mark Tanowski

Regarding your sales staff, it seemed like when you started, you kind of stepped back. You changed your sales model. You said, gosh, the opportunities in the US really aren’t here this year. So we’re going to focus on partnering in Europe and in Asia and India and places like that. It almost looks like in a bout phase or a 360 where we make that a 180. We’re back to now trying to implement a sales force in the US. You’ve hired two regional managers. I’m guessing there are other regions that you haven’t flowed [ph] yet. And if that means that you’re going to have people out there pound in the street selling product, boy, if they can sell enough to pay their expenses and plus some, then that’s more than we had before. But that definitely seems to be a change in where we started, say, back in April or May.

Gordon Reichard

I’m not sure. I mean, the whole idea was – they are all good people when I walked into ISCO. I mean, they are all good people. Were they the right people for the sales model that we wanted to put in place? I don’t know. They obviously weren’t. That’s why we had to make some changes. But it’s (inaudible) on the people or anything along those lines. But the plan that we had originally put in place, if I didn’t communicate this accurately, then I apologize, but it always included having that direct sales force. But it also included adding distribution, which is what we’ve done, adding international, which we’re doing, to augment the single customer or the two customers that ISCO had, and where the company was focused when I walked in the door. Even with the distributor, we’re going to have to support that distributor. With Europe, we are going to have to support that European distribution with technical staff and potentially business development staff. But it needs to be the right people with the right message, carrying the right product with the right price point. So I would say, those – I don’t know if it’s a big change from what we were doing, it was just we’re further into the cycle. We’ve evaluated what we have, replaced what we needed to replace, rebuilding what we needed to rebuild.

Mark Tanowski

Okay. One other thing you talked about was product development. I think you said when you did your initial evaluation that we had the technical products we needed, what we needed to do now is get out and sell them. Do you see us especially with the software end of it, whatever development we’re doing there being completed and now done, are there new products you’re still working on? Or is your major effort now to just sell what we have?

Gordon Reichard

Well, when I say products, that did include the DIF. And it did include – we have this software called the IAT software, which is a monitoring diagnostic software tool that goes along with our current Adaptive Interference Mitigation product. So we do have the products. And it is just the matter of selling what we have today, which is the dANF adaptive interference mitigation product. It’s the AIT software. It’s the RF Square products, which is of lesser focused than was in the past. And it does include after the first year the DIF product, which by the way again, as I mentioned, we will rename. So, no change. Amr, by the way, is assisting me in putting together our three-year vision, which includes what new products that we intend to bring to market in ’09. So we’re already putting together that roadmap. So we have a pretty good feel of what’s going to happen over the next 36 months. But right now we’re selling what we have, which I think are exceptional products, and customers are buying them. And by the numbers that Gary shared with you, you’re seeing our revenue shift as we wanted it to do towards the Adaptive Interference Mitigation products. And you’re going to continue to see that shift towards the DIF in 2009.

Mark Tanowski

Well, I appreciate what you’re doing. I guess I can’t say I’m as excited yet about the year based on what you are saying, but I sure hope it comes true. I am looking at a $0.04 a share share price right about now and that’s certainly discouraging I’m sure to all of us. So, anything you can do to shore that up and get that moving in the right direction would sure be appreciated. So, to you and all the other people there, I know it’s been a tough year, but keep tugging away, I guess. We’ll support you as best as we can.

Gordon Reichard

Well, thank you. And we are not satisfied yet either, Mark. So, we’re all working in that same direction.

Mark Tanowski

Just really quickly, will there be a shareholder meeting this year?

Gary Berger

Yes, Mark. That’s part of what I was doing yesterday as well was working on the proxy statement and shareholder meeting would be on December 12, and it will be here in Elk Grove Village just around the corner from the office here. There will be – those proxies are going to go out next week. And all the information will be in there.

Mark Tanowski

Okay. I’ll leave the last five minutes to anyone else here. Thank you again, gentlemen.

Gary Berger

Thank you, Mark.

Gordon Reichard

Thank you, Mark.

Operator

There are no further questions at this time.

Gordon Reichard

Okay, let’s wrap it up.

Gary Berger

All right. That will do it. Everyone, thank you so much for your call this morning and your time. We appreciate it, and look forward to meeting again and we’ll review fourth quarter results.

Gordon Reichard

Thank you, everyone.

Gary Berger

Bye.

Gordon Reichard

Bye-bye.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: ISCO International, Inc. Q3 2008 Earnings Call Transcript
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