UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended October 31, 1997
[ ] Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from _______ to ______
Commission file number: 001-12531
ISONICS CORPORATION
(Exact name of small business issuer as specified in its charter)
California 77-0338561
---------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4010 Moorpark Avenue, Suite 119
San Jose, California 95117
--------------------------
(Address of principal executive offices)
(408) 260-0155
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 ___ No _X_
The number of shares outstanding of the registrant's Common Stock, no par value,
was 5,360,268 at December 3, 1997.
Transitional Small Business Disclosure Format (check one):
Yes ___ No _X_
<PAGE>
<TABLE>
Isonics Corporation
TABLE OF CONTENTS
FORM 10-QSB
<CAPTION>
Part I: Financial Information
Item 1: Financial Statements
<S> <C>
Condensed Balance Sheets as of October 31, 1997 and April
30, 1997......................................................................3
Condensed Statements of Operations for the Three and Six
Month Periods Ended October 31, 1997 and 1996.................................4
Condensed Statements of Cash Flows for the Six Month Period
Ended October 31, 1997 and 1996...............................................5
Notes to Condensed Financial Statements............................................6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................8
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K..................................................14
Signatures .............................................................................................15
</TABLE>
2
<PAGE>
<TABLE>
Part I: Financial Information
Item 1: Condensed Financial Statements
ISONICS CORPORATION
CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
<CAPTION>
October 31, April 30,
1997 1997
------- -------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,241 $ 28
Accounts receivable 484 4
Inventories 1,541 1,539
Prepaid expenses 47 14
------- -------
Total current assets 3,313 1,585
Property and equipment, net 132 70
Goodwill, net 276 315
Notes receivable from shareholders 167 41
Other assets 11 11
Debt issuance costs, net -- 106
Deferred offering costs -- 556
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Total $ 3,899 $ 2,684
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 74 $ 403
Accounts payable 921 1,105
Accrued liabilities 475 518
------- -------
Total current liabilities 1,470 2,026
Long-term debt 60 1,268
Commitments -- --
Stockholders' Equity (Deficit):
Class A Preferred Stock - no par value - 10,000,000
shares authorized; none outstanding -- --
Common stock - no par value - 20,000,000 shares
authorized; issued and outstanding: April 30, 1997,
3,570,046; October 31,1997, 5,360,268 4,581 1,129
Notes receivable from stockholders (354) (343)
Accumulated deficit (1,858) (1,396)
------- -------
Total stockholders' equity (deficit) 2,369 (610)
------- -------
Total $ 3,899 $ 2,684
======= =======
</TABLE>
3
<PAGE>
<TABLE>
ISONICS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
----------------------- -----------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues $ 1,771 $ 840 $ 3,306 $ 2,404
Cost of revenues 1,174 714 2,340 1,837
------- ------- ------- -------
Gross margin 597 126 966 567
Operating expenses:
Selling, general and administrative 368 321 636 587
Research and development 203 98 352 188
------- ------- ------- -------
Total operating expenses 571 419 988 775
------- ------- ------- -------
Operating income (loss) 26 (293) (22) (208)
Other income (expense)
Interest income 20 2 27 3
Interest expense (78) (84) (214) (97)
------- ------- ------- -------
Total other expense, net (58) (82) (187) (94)
------- ------- ------- -------
Loss before extraordinary item and income taxes (32) (375) (209) (302)
Income tax expense 1 23 1 53
------- ------- ------- -------
Loss before extraordinary item (33) (398) (210) (355)
------- ------- ------- -------
Extraordinary item - loss on extinguishment of debt (252) -- (252) --
------- ------- ------- -------
NET LOSS $ (285) $ (398) $ (462) $ (355)
======= ======= ======= =======
Net loss per share before extraordinary item $ (0.01) $ (0.07) $ (0.04) $ (0.06)
======= ======= ======= =======
Extraordinary item $ (0.05) $ -- $ (0.04) $ --
======= ======= ======= =======
Net loss per share $ (0.06) $ (0.07) $ (0.08) $ (0.06)
======= ======= ======= =======
Shares used in computing per share information 4,894 5,852 5,627 6,080
======= ======= ======= =======
Pro forma loss per share $ (0.06) $ (0.05) $ (0.05) $ (0.04)
======= ======= ======= =======
Shares used in computing pro forma share information 5,135 6,333 5,869 6,440
======= ======= ======= =======
</TABLE>
4
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<TABLE>
ISONICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<CAPTION>
Six Months Ended
October 31,
------------------------
1997 1996
------- -------
<S> <C> <C>
Net cash used in operating activities $ (379) $(1,429)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (71) (10)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and warrants -- 1,320
Repayments of debt (1,782) (64)
Proceeds from issuance of common stock, net 3,452 202
Payment of debt issuance costs (7) (106)
------- -------
Cash provided by financing activities 1,663 1,352
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,213 (87)
Cash and cash equivalents at beginning of period 28 116
------- -------
Cash and cash equivalents at end of period $ 1,241 $ 29
======= =======
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 209 $ 30
======= =======
Income taxes $ 1 $ 9
======= =======
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
5
<PAGE>
ISONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying condensed financial statements of Isonics Corporation (the
"Company") as of October 31, 1997 and for the three and six months ended October
31, 1997 and 1996 have been prepared on the same basis as the audited financial
statements. In the opinion of management, such unaudited information includes
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of this interim information. Operating results and cash flows
for interim periods are not necessarily indicative of results for the entire
year. The information included in this report should be read in conjunction with
the Company's audited financial statements and notes thereto included in the
Company's Prospectus dated September 22, 1997.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents and trade accounts receivable.
Cash equivalents are maintained with high quality institutions and are regularly
monitored by management. The Company extends credit to its customers, most of
whom are large, established companies. Credit risk is mitigated by performing
ongoing credit evaluations of its customers' financial condition and generally
does not require collateral.
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average number of common
and common equivalent shares outstanding during the period. Common equivalent
shares include common stock options and warrants (using the treasury stock
method). Common equivalent shares are excluded from the computation in loss
periods as their effect is antidilutive, except that, pursuant to Securities and
Exchange Commission rules, all shares issuable from the exercise of warrants
issued and stock options granted by the Company at a price less than the initial
public offering price during the twelve months preceding the offering date of
September 23, 1997 have been included in the calculation (using the treasury
stock method) as if they had been outstanding for all periods.
Pro forma net loss per share has been presented to depict what the net loss per
share would have been had the common shares issuable for debt repayment been
outstanding during that period.
Inventories
Inventories consist of (in thousands):
October 31, April 30,
1997 1997
------ ------
Finished goods $1,378 $1,387
Work in process -- --
Raw materials 163 152
------ ------
Inventories $1,541 $1,539
====== ======
6
<PAGE>
ISONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
Significant Customers and Suppliers
At October 31, 1997 two customers accounted for 68% and 23% of total accounts
receivable. One customer accounted for 47% and 54% of net revenues during the
six months ended October 31, 1997 and 1996, respectively. A second customer
accounted for 12% and 11% of net revenues during the six months ended October
31, 1997 and 1996, respectively. Two different customers accounted for 23% and
20% of net revenues during the six months ended October 31, 1997 and 1996,
respectively.
The Company currently uses a single source processor in its manufacturing
process; a disruption of this relationship could have an adverse impact on the
operating results of the Company. The Company has not experienced a disruption;
however, the Company recognizes the risks and is actively pursuing alternative
sources.
Extinguishment of Debt
The terms of the Company's $1,397,000 non-convertible promissory notes issued in
September 1996 stated that in the event of an initial public offering, all
principal and interest is due within five days of the closing of the initial
public offering of the Company's stock. In accordance with the terms, the
Company repaid the notes and interest during September 1997. At the time of the
repayment, unamortized debt issuance costs and discounts totaling approximately
$252,000 were charged to earnings as an extraordinary item.
Recent Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". The
Company is required to adopt this standard in the first quarter of fiscal year
1999 and will restate at that time earnings per share ("EPS") data for prior
periods to conform with the standard. Earlier application is not permitted. This
new standard replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average amount of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. As with current EPS reporting
requirements, the standard requires common equivalent shares to be excluded in
loss periods as they are antidilutive.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income," which requires that an entity report, by major
components and as a single total, the change in its net assets from
non-shareholder sources during the period; and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information," which establishes annual and
interim reporting standards for an entity's business segments and related
disclosures about its products, services, geographic areas, and major customers.
Adoption of these statements will not impact the Company's financial position,
results of operations or cash flows. Both statements are effective for fiscal
years beginning after December 15, 1997, with earlier application permitted.
7
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The statements contained in this Report on Form 10-QSB that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward looking statements
include: statements regarding future products or product development; statements
regarding future selling, general and administrative costs and research and
development spending and the Company's product development strategy; statements
regarding future capital expenditures and financing requirements. All forward
looking statements included in this document are based on information available
to the Company on the date hereof, and the Company undertakes no obligation to
update any such forward looking statements. It is important to note that the
Company's actual results could differ materially from those in such forward
looking statements.
Overview
Founded in 1992, Isonics Corporation ("Isonics" or the "Company") is a specialty
chemical and advanced materials company which develops and commercializes
products based on stable isotopes. Stable isotopes are ultra-ultra pure
materials engineered at the molecular level to provide enhanced performance
properties in semiconductors, lasers and high performance lighting, and energy
production. Stable isotopes are also widely used in basic research,
pharmaceutical development and drug design, as well as in medical diagnostics
and imaging. By replacing materials traditionally used in these industries with
isotopically engineered versions of the same materials, product performance,
safety, and economics can be enhanced significantly. Using state-of-the-art
technology, Isonics produces a wide range of enriched stable isotopes which are
then converted into products which meet the specialized needs of Isonics'
customers.
Isonics' core business is production and supply of depleted zinc (DZ), a
non-radioactive stable isotope, to the energy industry. In fiscal 1996, Isonics
expanded its business scope to include development of isotopically engineered
materials for the medical research, medical diagnostic, and semiconductor
industries. In June 1997 Isonics produced the world's first isotopically pure
silicon epitaxial wafer suitable for semiconductor fabrication. In July 1997
Isonics exercised an option for an exclusive license for two U.S. patents owned
by Yale University concerning isotopically pure silicon and a wide range of
other semiconductor materials. The Company is currently evaluating potential
applications for isotopically pure silicon in collaboration with certain
industrial and university partners and is developing strategies for
commercialization. Isonics is supplying stable isotope labeled compounds
("SILCs"), mainly enriched carbon for pharmaceutical research and medical
diagnostic test development. The Company is developing advanced, lower cost,
production technology for enriched carbon which the Company believes will allow
it to become the cost leader in the potentially large enriched carbon market
supporting a new class of minimally invasive diagnostic tests which are being
developed by others. The Company believes that a substantial portion of its
revenues in the future will depend on its success in developing and selling
products in the semiconductor and SILC markets.
In September 1997, Isonics completed its initial public offering. The proceeds
of this offering will allow the Company to continue its silicon and carbon
development efforts, to selectively add key technical personnel and to perform
engineering studies prior to adopting a plan to increase and geographically
diversify manufacturing capacity necessary to support planned sales growth.
Historically, substantially all of the Company's net revenues in any particular
period have been attributable to a limited number of customers and sales of DZ.
The Company operates with little backlog and a significant portion of the
Company's total revenues to date have been, and the Company believes will
continue to be in the near term, derived from a limited number of DZ orders in
any particular quarter. Consistent with the Company's historical experience, the
Company's quarterly results are expected to be materially affected by the size,
timing and quantity of DZ orders, and products shipments made to DZ users during
such quarter. As a result, a lost or delayed sale could have a significant
impact on the Company's operating results for a particular period, and such
fluctuations could materially and adversely affect the Company's business,
financial condition and results of operations. The Company expects that if it
continues to increase sales of depleted zinc products to end users, develops
additional sources of SILCs and commercializes electronic material products,
concentration of net revenues from a limited number of customers will be
reduced.
8
<PAGE>
Results of Operations
<TABLE>
The following table sets forth, for the periods indicated, certain statement of
operations data expressed as a percentage of net sales. The table and the
discussion below should be read in conjunction with the condensed financial
statements and the notes thereto appearing elsewhere in this report.
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
--------------------- ---------------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 66.3 85.0 70.8 76.4
----- ----- ----- -----
Gross Margin 33.7 15.0 29.2 23.6
----- ----- ----- -----
Operating expenses:
Selling, general and administrative 20.7 38.2 19.2 24.4
Research and development 11.5 11.7 10.7 7.9
----- ----- ----- -----
Total operating expenses 32.2 49.9 29.9 32.3
----- ----- ----- -----
Operating income (loss) 1.5 (34.9) (0.7) (8.7)
Other income (expense)
Interest income 1.1 0.2 0.8 0.1
Interest expense (4.4) (10.0) (6.5) (4.0)
----- ----- ----- -----
Total other expense, net (3.3) (9.8) (5.7) (3.9)
----- ----- ----- -----
Loss before extraordinary item and income taxes (1.8) (44.7) (6.3) (12.6)
Income tax expense 0.1 2.7 0.0 2.2
----- ----- ----- -----
Loss before extraordinary item (1.9) (47.4) (6.4) (14.8)
Extraordinary item - loss on extinguishment of debt (14.2) 0.0 (7.6) (0.0)
----- ----- ----- -----
NET LOSS (16.1)% (47.4)% (14.0)% (14.8)%
===== ===== ===== =====
</TABLE>
Net Revenues
Net revenues for the three and six months ended October 31, 1997 were $1.77
million and $3.31 million, respectively, an increase of 110.8% and 37.5% over
$840,000 and $2.40 million for the comparable periods in prior fiscal period.
The growth on a quarterly and year-to -date basis is due primarily to increased
demand for DZ and SILC products. Net revenues from DZ increased by approximately
$951,000 and $992,000 for the three and six months ended October 31, 1997, on
increased unit sales of approximately 152% and 45%, respectively. Average unit
sales prices for DZ increased in comparison to the previous fiscal years
comparable quarter. Net revenues from SILCs were approximately $323,000 for the
three months ended October 31, 1997, an increase of approximately $91,000 or 39%
from the same period of the previous year. For the six months ended October 31,
1997, SILC revenues were approximately $627,000, an increase of approximately
$338,000 or 117% for the comparable period of the previous year. The revenue
growth reflects the increasing demand for SILCs, specifically, enriched carbon
products.
International sales represented less than 10% of net revenues for the three and
six months ended October 31, 1997 and 1996.
9
<PAGE>
Gross Margin
Gross margin percentage for the three and six months ended October 31, 1997
increased to 33.7% and 29.2% of net revenues from 15.0% and 23.6% for the same
periods in the prior fiscal year. The improvement is due to increased average
unit sales prices for DZ and the increased proportion of net revenues generated
from DZ, which at present has a higher gross margin than SILCs. Increases in
gross margins were offset in part by charges associated with reducing the
Company's cadmium inventory to market value during the three months ended
October 31, 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased on a dollar basis to
approximately $368,000 for the quarter ended October 31, 1997, from $321,000,
while declining on a percentage basis to 20.7% of net revenues for the second
quarter of fiscal 1998 from 38.2% of net revenues for the comparable period in
fiscal 1997. For the six months ended October 31, 1997, these expenses increased
on a dollar basis to $636,000 from $587,000 for the comparable period in fiscal
1997 while declining on a percentage basis to 19.2% of net revenues for the six
months ended October 31, 1997 from 24.4% for the comparable period in fiscal
1997. The dollar increase during the quarter and six months ended October 31,
1997 was primarily attributable to professional and media relations costs
associated with being a public company, while the decrease as a percentage of
net revenues was due to growth in energy and SILC product revenues. The Company
anticipates that selling, general and administrative expenses will generally
continue to increase in absolute dollars, but may vary as a percentage of net
revenues.
Research and Development Expenses
Research and development expenses increased by approximately $105,000, or
107.1%, to $203,000 for the quarter ended October 31, 1997 from $98,000 for the
comparable period in fiscal 1997, while declining on a percentage basis to 11.5%
of net revenues from 11.7%. For the six months ended October 31, 1997, research
and development expenses increased by $164,000 or 87.2%, to $352,000 from
$188,000 for the comparable period in the previous fiscal year, while increasing
on a percentage basis to 10.7% of net revenues from 7.9%. Both the dollar and
percentage increases during the quarter and six months ended October 31, 1997
were primarily due to increased staffing and consulting costs associated with
the development of isotopically pure silicon wafers; costs to develop advanced,
lower cost, production technology for enriched carbon; and commencement of a
feasibility study to increase isotope production. The decrease in research and
development expenses as a percentage of net revenues for the quarter ended
October 31, 1997 compared to the same period of the previous fiscal year was due
to revenue growth. The Company believes that the development and introduction of
new product applications is critical to its future success and expects that
research and development expenses will increase on a dollar basis, but may vary
as a percentage of net revenues.
Other Expense, Net
Other expense reflects interest and, prior to the Company's initial public
offering, amortization of issuance costs and discounts on outstanding debt.
Other expense, net decreased by $24,000 to $58,000 for the quarter ended October
31, 1997 from $82,000 for the comparable period of the previous fiscal year. For
the six months ended October 31, 1997, other expense, net increased to $187,000
from $94,000 for the comparable period in fiscal 1997. During the quarter ended
October 31, 1997, the Company repaid approximately $1.78 million of outstanding
debt which resulted in reduced interest expense. Interest expense, net,
increased for the six months ended October 31, 1997, as the debt was outstanding
for four months during fiscal 1998 versus two months during the prior years
comparable period.
10
<PAGE>
Income taxes
The provision for income taxes was $1,000 for the quarter ended October 31,
1997, a decrease of $22,000 from the comparable period of the prior year. For
the six months ended October 31, 1997, income taxes decreased $52,000 to $1,000
for the comparable period of the previous year. Fiscal 1998 taxes are the result
of minimum state taxes. The provision for income taxes for the quarter and six
months ended October 31, 1996 were the result of providing a valuation allowance
on deferred tax assets.
Extraordinary Item
In accordance with the terms of certain outstanding notes the Company was
required to repay debt totaling $1,397,000 upon the closing of the Company's
initial public offering in September 1997. Upon repayment of the notes,
unamortized debt issuance costs and discounts totaling $252,000 were charged to
earnings as an extraordinary item.
Liquidity and Capital Resources
Since inception, the Company's principal sources of funding have been its cash
from operations, borrowed funds and sales of common stock. The Company used cash
in operating activities of approximately $379,000 and $1,146,000 during the six
months ended October 31, 1997 and 1996, respectively. Cash used by operating
activities during the six months ended October 31, 1997 was principally the
result of a net loss of $462,000, net of adjustments for non-cash items,
primarily depreciation, amortization and extraordinary loss on extinguishment of
debt, and increases of accounts receivable and other current assets. Cash used
by operating activities during the six months ended October 31, 1996, was
principally the result of a net loss of $355,000, adjusted for non-cash items,
increases in accounts receivable and inventories and decreases in accrued
liabilities, offset in part by increases in accounts payable.
The Company's investing activities used cash of $71,000 and $10,000 for the six
months ended October 31, 1997 and 1996, respectively. Investing activities were
for purchases of property and equipment.
Financing activities provided cash of $1,663,000 and $1,069,000 during the six
months ended October 31, 1997 and 1996, respectively. Cash provided by financing
activities during the six months ended October 31, 1997 resulted primarily from
the completion of the Company's initial public offering which was offset in part
by the repayment of outstanding debt. Financing activities during the six months
ended October 31, 1996 consisted of the issuance of notes and common stock which
was offset in part by debt issuance costs, deferred offering costs, and
principal payments on debt.
At October 31, 1997, the Company had $1,241,000 of cash equivalents, an increase
of $1,213,000 compared to $28,000 as of October 31, 1996. At October 31, 1997,
the Company had $1,843,000 working capital, an increase of $2,276,000 compared
to negative $432,000 as of October 31, 1996. The increases were primarily the
result of the Company's initial public offering in September 1997. At present,
the Company has no credit facility with a bank or other financial institution
and no in-place source of capital, however, the Company is in the process of
evaluating credit facilities and anticipates securing financing by the end of
the Company's third quarter, January 31, 1998. The Company believes that cash
equivalents on hand at October 31,1997 will be sufficient to allow the Company
to continue its expected level of operations for at least 12 months.
Factors That May Affect Future Results
In evaluating the Company's business, prospective investors should carefully
consider the following factors in addition to the other information presented in
this report and in the Company's other reports filed with the Securities
11
<PAGE>
and Exchange Commission that attempt to advise interested parties of the risks
and factors that may affect the Company's business.
Relationship With Certain Suppliers and Availability of Raw Materials
The Company depends upon an isotope enrichment plant, located in Russia, which
is owned by the Ministry of Atomic Energy of the Russian Federation ("the
Ministry"), which is part of the cabinet of the government of the Russian
Federation, for one process involved in the manufacturing of DZ. The Company
also relies upon a single or limited number of suppliers and processors for
certain other manufacturing processes. The Company signed an agreement with the
commercial department of the Ministry to purchase certain isotope separation
services through 2001. Disruption or termination of services provided by the
Ministry or the Company's single or limited suppliers and processors could have
a material and adverse affect upon the Company's financial condition and results
of operations.
Operations in Russia
Operations in Russia entail certain risks. In recent years the former republics
of the Soviet Union have experienced political, social and economic change as
constituent republics sought independence from the former central government in
Moscow, and certain of the republics, including Russia, have attempted to
transition from a central controlled economy toward market-based economics.
These changes have involved, in certain cases, armed conflict in certain
republics. There can be no assurance that political or economic instability in
these republics will not continue or worsen. The supply of stable isotopes could
be directly affected by political, economic and military conditions in Russia.
Accordingly the operations of the Company could be materially adversely affected
if hostilities in Russia should occur, if trade between Russia and the United
States were interrupted, if political conditions in Russia disrupt
transportation or processing concerning the Company's goods, if laws or
government policies concerning foreign business operations in Russia change
substantially, or if tariffs are introduced.
Customer Concentration
Historically, substantially all of the Company's net revenues in any particular
period have been attributable to a limited number of customers. Consistent with
the Company's historical experience, the Company's quarterly results during
fiscal 1998 and 1999 are expected to be affected materially by the level of
orders received from significant DZ users during such quarter and product
shipments by the Company to DZ customers during such period. The Company
believes that if it continues to increase sales of depleted zinc products to end
users, if SILC revenues continue to grow, and if it develops and sells products
in the electronic materials industries, concentration of net revenues from a
limited number of customers will be reduced. There can be no assurance that the
Company's principal customers will continue to purchase products. A decrease in
or loss of orders from one of more major customers could have a material and
adverse effect on the Company's financial condition and results of operations.
Factors Affecting Operating Results; Variability of Orders
The Company operates with little backlog and a significant portion of the
Company's net revenues have been, and the Company believes will continue to be,
derived from a limited number of orders that are processed and shipped in the
same quarter in which the orders are received. The timing of such orders and
their fulfillment has caused, and is likely to continue to cause, material
fluctuations in the Company's operating results. The Company's expense levels
are relatively fixed and as has been the case in prior quarters, these factors
will affect the Company's operating results for future periods.
12
<PAGE>
Management of Growth
The Company has in the past experienced periods of rapid growth that have placed
a significant strain on the Company's financial resources. The Company's ability
to manage growth effectively, particularly given the increasing scope of
operations, will require it to continue to implement and improve its management,
operational, and financial information systems, as well as to develop the
management skills of its personnel and to train, motivate and manage its
employees. The Company's failure to effectively manage growth could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Key Personnel
The Company's future success will depend in significant part upon the continued
service of its key technical, sales and senior management personnel, including
James E. Alexander, the Company's President and Chief Executive Officer, and
Boris Rubizhevsky, the Company's Senior Vice President, Isotope Production and
Supply. The Company maintains $1 million of key man life insurance on the lives
of Messrs. Alexander and Rubizhevsky and both are covered by employment
agreements with the Company extending through September 2001. The Company
believes that its future success will depend in large part upon its ability to
attract and retain qualified personnel for its operations. The failure to
attract or retain such persons could materially adversely affect the Company's
business, financial condition and results of operations.
No Prior Public Market; Determination of Public Offering Price; Possible
Volatility of Stock Price
Prior to the Company's initial public offering on September 23, 1997, there was
no public market for the Company's securities. Consequently, the initial public
offering price was determined by negotiations among the Company and its
underwriter. There can be no assurance that an active public market for the
Company's Common Stock and Warrants will develop or be sustained after the
offering or that the market price of the Common Stock and Warrants will not
decline below the initial public offering price. The trading price of the
Company's securities could be subject to wide fluctuations in response to
quarter to quarter variations in operating results, announcements of
technological innovations or new products by the Company or its competitors, or
other events or factors. In addition, the stock market has experienced wide
price and volume fluctuations, which have at times been unrelated to the
operating performance of the companies whose securities are traded. These broad
market fluctuations may adversely effect the market price of the Common Stock
and Warrants.
13
<PAGE>
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
(a) Exhibits.
<CAPTION>
Exhibit
Number Description Page(s)
------ ----------- -------
<S> <C> <C>
11.01 Statement Regarding Calculation of Net Income (Loss) Per Share 16
27.0 Financial Data Schedule 17
</TABLE>
(b) Reports on Form 8-K. The Company did not file any Reports on Form 8-K
during the quarter ended October 31, 1997.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Jose, County of Santa
Clara, State of California, on the 12th day of December, 1997.
Isonics Corporation
(Registrant)
By /s/James E. Alexander
-------------------------
James E. Alexander
President, Chief Executive Officer and Director
By /s/ Paul J. Catuna
------------------------
Paul J. Catuna
Vice President, Finance
Chief Financial Officer
15
<TABLE>
EXHIBIT 11.01
ISONICS CORPORATION
STATEMENTS REGARDING CALCULATION
OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share amounts)
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
----------------------- -----------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income (Loss) $ (285) $ (398) $ (462) $ (355)
======= ======= ======= =======
Weighted Average Common Stock Outstanding 4,894 3,875 4,722 3,723
Dilutive effect of stock options and warrants
(including grants approximately twelve months
preceding the initial public offering) using the
treasury stock method -- 1,978 906 2,238
Dilutive effect of preferred stock -- -- -- 118
------- ------- ------- -------
Shares used in computing per share information 4,894 5,852 5,627 6,079
======= ======= ======= =======
Net Income (Loss) Per Share $ (0.06) $ (0.07) $ (0.08) $ (0.06)
======= ======= ======= =======
</TABLE>
<TABLE>
PRO FORMA
---------
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
----------------------- -----------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income (Loss) $ (285) $ (398) $ (462) $ (355)
Interest on nonconvertible promissory notes 70 76 193 76
------- ------- ------- -------
Net Income (Loss) $ (215) $ (322) $ (269) $ (279)
======= ======= ======= =======
Weighted average common stock outstanding 4,894 3,875 4,722 3,723
Dilutive effect of stock options and warrants
(including grants approximately twelve months
preceding the initial public offering) using the
treasury stock method -- 1,978 906 2,238
Dilutive effect of preferred stock -- 239 -- 239
Pro forma shares issued for repayment of debt 241 241 241 241
------- ------- ------- -------
Shares used in computing per share information 5,135 6,333 5,869 6,080
======= ======= ======= =======
Pro forma Net Income (Loss) Per Share $ (0.06) $ (0.05) $ (0.05) $ (0.04)
======= ======= ======= =======
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-QSB FOR THE PERIOD ENDED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-1-1997
<PERIOD-END> OCT-31-1997
<CASH> 1,241
<SECURITIES> 0
<RECEIVABLES> 484
<ALLOWANCES> 0
<INVENTORY> 1,541
<CURRENT-ASSETS> 3,313
<PP&E> 168
<DEPRECIATION> 36
<TOTAL-ASSETS> 3,899
<CURRENT-LIABILITIES> 1,470
<BONDS> 60
0
0
<COMMON> 4,581
<OTHER-SE> (354)
<TOTAL-LIABILITY-AND-EQUITY> 3,899
<SALES> 3,306
<TOTAL-REVENUES> 3,306
<CGS> 2,340
<TOTAL-COSTS> 2,340
<OTHER-EXPENSES> 988
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 187
<INCOME-PRETAX> (209)
<INCOME-TAX> 1
<INCOME-CONTINUING> (210)
<DISCONTINUED> 0
<EXTRAORDINARY> (252)
<CHANGES> 0
<NET-INCOME> (462)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
