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 July 31, 1998
[ ] 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.)
20 Great Oaks Blvd., Suite 220
San Jose, California 95119
(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 _X_ No ___
The number of shares outstanding of the registrant's Common Stock, no par value,
was 6,166,539 at September 14, 1998.
Transitional Small Business Disclosure Format (check one):
Yes __ No _X_
<PAGE>
Isonics Corporation
TABLE OF CONTENTS
FORM 10-QSB
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of July 31, 1998
and April 30, 1998.......................................3
Condensed Consolidated Statements of Operations for the
Three Month Periods Ended July 31, 1998 and 1997.........4
Condensed Consolidated Statements of Cash Flows for the
Three Month Periods Ended July 31, 1998 and 1997.........5
Notes to Condensed Consolidated Financial Statements..........6
Item 2: Management's Discussion and Analysis or Plan of Operations....9
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K.............................15
Signatures....................................................................16
2
<PAGE>
<TABLE>
Part I: Financial Information
Item 1: Condensed Financial Statements
<CAPTION>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
July 31, April 30,
1998 1998
-------- --------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 397 $ 1,044
Accounts receivable (net of allowances of $ 259 and $130, respectively) 3,354 1,629
Inventories 1,018 456
Prepaid expenses and other assets 323 45
Deferred income taxes 146 112
-------- --------
Total current assets 5,238 3,286
Property and equipment, net 1,602 1,626
Goodwill, net 3,517 236
Notes receivable from shareholders 142 170
Other assets 62 22
Deferred income taxes 293 315
-------- --------
Total $ 10,854 $ 5,655
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 173 $ 80
Notes payable 1,750 --
Accounts payable 2,754 657
Accrued liabilities 1,064 738
-------- --------
Total current liabilities 5,741 1,475
Long-term debt 495 312
Deferred income taxes 405 427
Stockholders' Equity:
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, 1998,
5,714,250: July 31,1998, 6,166,539 6,200 5,289
Notes receivable from stockholders (343) (337)
Accumulated deficit (1,644) (1,511)
-------- --------
Total stockholders' equity 4,213 3,441
-------- --------
Total $ 10,854 $ 5,655
======== ========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
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ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended
July 31,
--------------------
1998 1997
------- -------
Net revenues $ 3,933 $ 1,535
Cost of revenues 2,989 1,179
------- -------
Gross margin 944 356
Operating expenses:
Selling, general and administrative 682 267
Research and development 323 149
------- -------
Total operating expenses 1,005 416
------- -------
Operating loss (61) (60)
Interest income 24 6
Interest expense (76) (135)
------- -------
Total interest income (expense), net (52) (129)
------- -------
Loss before income taxes (113) (189)
Income tax expense 20 1
------- -------
NET LOSS $ (133) $ (190)
======= =======
Net income (loss) per share
Basic $ (.02) $ (.04)
======= =======
Diluted $ (.02) $ (.04)
======= =======
Shares used in computing per share amounts:
Basic 5,978 4,550
======= =======
Diluted 5,978 4,550
======= =======
See notes to condensed consolidated financial statements.
4
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<TABLE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<CAPTION>
Three Months Ended
July 31,
------------------------
1998 1997
------- -------
<S> <C> <C>
Net cash provided by (used in) operating activities $ (305) $ 373
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (32) (57)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit, net 187 --
Repayments of debt (25) (257)
Purchase of Chemotrade, net of cash acquired (489) --
------- -------
Cash used in financing activities (310) (257)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (647) 59
Cash and cash equivalents at beginning of period 1,044 28
------- -------
Cash and cash equivalents at end of period $ 397 $ 87
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 60 $ 63
======= =======
Income taxes $ 1 $ 1
======= =======
Supplemental disclosure of noncash investing and financing activities:
Equipment acquired under capital lease $ 10 $ --
======= =======
Purchase of Chemotrade
Cash paid, net of cash acquired $ 489
Stock issued to sellers 894
Debt issued to sellers 1,750
Liabilities assumed 1,598
-------
Assets acquired (including goodwill of $3,328) $ 4,731
=======
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying condensed financial statements of Isonics Corporation and
Subsidiaries (the "Company" or "Isonics") as of July 31, 1998 and for the three
months ended July 31, 1998 and 1997 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 Annual Report on Form
10-KSB.
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average number of common
and equivalent shares outstanding during the period. Basic net income (loss) per
share is computed by dividing net income (loss) by the number of weighted
average common shares outstanding. Diluted net income per share reflects
potential dilution from outstanding stock options and warrants, using the
treasury stock method. Outstanding stock options and warrants are excluded from
the diluted earnings per share calculation in loss periods.
Inventories
Inventories consist of (in thousands):
July 31, April 30,
1998 1998
------ ------
Finished goods $ 740 $ 250
Work in process -- --
Raw materials 278 206
------ ------
Inventories $1,018 $ 456
====== ======
Goodwill
Goodwill resulted from the Isoserve, Inc., and Chemotrade GmbH and subsidiary
acquisitions (See Business Developments) and is being amortized on a straight
line basis over six and twenty years, respectively.
Notes payable
Two notes payable were issued to the sellers of Chemotrade GmbH and subsidiary
as consideration for a portion of the purchase price. One note is for $924,000,
bears interest at 2% per month, and is secured by certain accounts receivable.
The note was repaid in August 1998. A second note for $826,000 bearing interest
at 10%, secured by the common stock purchased by Isonics, is due June 1999.
Significant Customers and Suppliers
At July 31, 1998 three customers accounted for 30%, 14%, and 14% of total
accounts receivable. Two customers accounted for 30% and 14% of net revenues
during the three months ended July 31, 1998. Three different customers accounted
for 51%, 19%, and 17% of net revenues during the three months ended July 31,
1997.
6
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company currently uses a single source processor in its DZ manufacturing
process; a disruption of this relationship would have an adverse impact on the
operating results of the Company. To date, the Company has not experienced a
disruption; however, the Company is actively pursuing alternative sources. There
can be no assurance that such alternative sources will be available on
commercially reasonable terms or at all.
Business Developments
Acquisition of Chemotrade GmbH and Subsidiary
On July 21, 1998, the Company acquired all of the outstanding shares of
Chemotrade GmbH and subsidiary (collectively "Chemotrade"), which was owned by
two common shareholders. Chemotrade is engaged in the distribution, development
and manufacture of stable and radio isotopes. The purchase has been accounted
for effective June 1, 1998, the date control of Chemotrade was transferred. The
purchase price consideration consisted of $2.576 million paid at closing and
$1.107 million to be paid through June 2001. Transaction costs as of July 31,
1998 were $68,000 and imputed interest from the effective date of the
acquisition, June 1, 1998, to the date that consideration was paid or interest
began accruing on consideration, June 30, 1998, totaled $28,000. Imputed
interest is reflected as interest expense in the consolidated statements of
operations for the three month period ended July 31, 1998 as a reduction in the
purchase price. The consideration paid upon closing consisted of cash of
$758,000, 357,730 restricted shares of common stock with a fair market value of
$894,000, two notes, one for $924,000 bearing interest at 2% per month, which
was paid in August, and a second note of $826,000 bearing interest at 10%, due
June 1, 1999. The sellers have guaranteed Chemotrade's defined pre tax earnings
will be at least $550,000 during each of the sixteen months ended April 30, 1999
and twelve months ended April 30, 2000 and 2001. If the pre tax earnings of
Chemotrade are less than $550,000 for the sixteen month period ended April 30,
1999 or year ended April 30, 2000, the note payable of $826,000 due June 1,
1999, will be reduced by $0.75 for each $1.00 shortfall of earnings. If
Chemotrade has pretax earnings of at least $550,000 for the fiscal year ended
April 30, 2001, the sellers will receive additional consideration of $281,000.
If the pre tax earnings are less than $550,000 during the twelve months ended
April 30, 2001, the consideration will be reduced $0.50 for each shortfall in
earnings. The contingent consideration for the year ended April 30, 2001 will be
recorded as additional goodwill upon Chemotrade meeting the pre tax earnings
requirement. The excess of the $3.442 million purchase price over the fair value
of the tangible assets acquired, $1.712 million, less liabilities assumed of
$1.598 million, $3.328 million has been allocated to goodwill and will be
amortized over twenty years.
7
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Acquisition of International Process Research Corporation ("Interpro")
Effective April 30, 1998, the Company acquired all of the outstanding common
stock of Interpro dba Colorado Minerals Research Institute. The purchase price
was paid in 353,982 shares of the Company's common stock with a fair market
value of $708,000. Transaction costs were $70,000, no goodwill was recognized
upon completing the transaction.
The reported results of operations of the Company for the three months ended
July 31, 1998 includes two months of the operating results of Chemotrade and
three months of the operating results of Interpro. Pro forma results of
operations as if the acquisition had occurred at the beginning of the three
month period ended July 31, 1998 and 1997 are as follows (in thousands, except
per share data):
Three Months Ended
July 31,
--------------------
1998 1997
------- -------
Net revenues $ 4,854 $ 3,867
Gross margin 1,051 777
Net loss (64) (269)
Net loss per share:
basic $ (0.01) $ (0.05)
diluted $ (0.01) $ (0.05)
Number of shares used in computing per share information
basic 6,099 5,262
======= ========
diluted 6,099 5,262
======= ========
8
<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; and
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 and radio isotopes. 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. 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 isotopes which are then converted into
products which meet the specialized needs of Isonics' customers.
Isonics' core business is the 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. In February 1998, the Company announced the
availability of isotopically pure silicon-28 epitaxial wafers in prototype
quantities. 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
currently supplies stable isotope labeled compounds ("SILCs"), mainly enriched
carbon, for pharmaceutical research and medical diagnostic test development. In
February 1998, the Company announced its intention to enter a joint venture
agreement with the Institute of Stable Isotopes in Tblisi, Georgia, for enriched
carbon-13 production. The partners anticipate first increasing capacity of the
existing facilities located in Tblisi, followed by establishing additional
production facilities in Europe and the United States. The Company is also
independently developing advanced, lower cost, production technology for
enriched carbon for use in 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
remaining proceeds of the offering are being used to fund the Company's 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.
Effective April 30, 1998, Isonics purchased International Process Research
Corporation ("Interpro") dba Colorado Minerals Research Institute by acquiring
all of the outstanding capital stock of Interpro. Interpro is a contract
research and development and materials processing company which has been
performing key steps in Isonics' DZ manufacturing process and jointly developing
new, lower cost technologies to better meet customer needs. The acquisition was
made to assure future availability of this critical manufacturing technology and
to provide an infrastructure platform for performing value added processing of
other isotopes.
9
<PAGE>
Effective June 1, 1998, Isonics acquired Chemotrade GmbH and subsidiary,
headquartered in Dusseldorf, Germany, to expand Isonics' product offerings and
to enter the European market for stable and radio isotopes. Chemotrade is a
value-added re-seller of stable and radio isotopes. It supplies radio isotopes
for pharmaceutical and industrial research as well as for industrial and medical
imaging, calibration sources and for brachytherapy applications. Chemotrade also
distributes calibration sources, manufactured by duPont with Chemotrade supplied
radio isotopes, in Germany and other European countries.
Chemotrade supplies various stable isotope labelled compounds for pharmaceutical
research and drug design, as well as oxygen-18 for use in producing a radio
isotope used in positron emmission tomography. Chemotrade's market is primarily
Europe but frequently sales are made to North America and Asia; customers
include duPont, Amersham, and New England Nuclear Life Sciences.
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
and SILCs. 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 and SILC
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 and SILC orders, and product
shipments made to DZ and SILC 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.
Results of Operations
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 consolidated
financial statements and the notes thereto appearing elsewhere in this report.
Three Months Ended
July 31,
-----------------
1998 1997
----- -----
Net revenues 100.0% 100.0%
Cost of revenues 76.0 76.8
----- -----
Gross Margin 24.0 23.2
----- -----
Operating expenses:
Selling, general and administrative 17.4 17.4
Research and development 8.2 9.7
----- -----
Total operating expenses 25.6 27.1
----- -----
Operating loss (1.6) (3.9)
Interest income (expense) net (1.3) (8.4)
----- -----
Loss before income taxes (2.9) (12.3)
Income tax expense 0.5 0.1
----- -----
NET LOSS (3.4)% (12.4)%
===== =====
Net Revenues
Net revenues for the three months ended July 31, 1998 were $3.93 million
compared to $1.53 million for the three months ended July 31, 1997, an increase
of $2.40 million or 157%. The increase was primarily due to increases in
revenues from DZ sales and the net revenues from the Interpro and Chemotrade
acquisitions. Net revenues from DZ increased by approximately $903,000 for the
three months ended July 31, 1998, on increased unit sales of
10
<PAGE>
approximately 35%. Average unit sales prices for DZ increased in comparison to
the previous fiscal years' comparable quarter.
Gross Margin
Gross margin for the three months ended July 31, 1998 increased to 24.0% from
23.2% of net revenues in the comparable period of the prior year. The
improvement is due to increased average unit sales prices for DZ, offset in part
by lower margins on contract manufacturing performed by Interpro and stable and
radio isotope revenues generated by Chemotrade.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased on a dollar basis to
approximately $682,000, or 17.4% of net revenues for the three months ended July
31, 1998, from $267,000, or 17.4% of net revenues in the comparable period of
the prior year. The dollar increase for the quarter ended July 31, 1998 was
primarily attributable to the acquisition of Interpro and Chemotrade as well as
professional fees and media relations costs associated with being a public
company, while the amount as a percentage of net revenues did not change. The
Company anticipates that selling, general and administrative expenses will
generally continue to increase in absolute dollars to support anticipated
revenue growth, but may vary as a percentage of net revenues.
Research and Development Expenses
Research and development expenses increased by $174,000, or 117%, to $323,000
for the quarter ended July 31, 1998 from $149,000 for the comparable period of
the prior year, while declining on a percentage basis to 8.2% of net revenues
from 9.7%. The dollar increase during the quarter ended July 31, 1998 were
primarily due to increased staffing and material costs associated with the
development of isotopically pure silicon wafers and development costs incurred
at Interpro. The decrease in research and development expenses as a percentage
of net revenues for the quarter ended July 31, 1998 compared to the same period
of the previous 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.
Interest income (expense), net
Interest expense, reflects interest costs and, prior to the Company's initial
public offering in September 1997, amortization of issuance costs and discounts
on outstanding debt. Interest expense, net, decreased by $77,000 to $52,000 for
the quarter ended July 31, 1998 from net interest expense of $129,000 for the
comparable period of the previous fiscal year. The decrease was due to the
Company repaying approximately $1.78 million of outstanding debt from the
proceeds of its initial public offering offset in part by interest charged on
notes payable issued to the sellers of Chemotrade, imputed interest of $28,000
recorded from the effective date of the acquisition to the actual date
consideration was paid to the sellers, and interest on debt outstanding at
Interpro.
Income taxes
The provision for income taxes was $20,000 and $1,000 for the quarters ended
July 31, 1998 and 1997, respectively. The provision for income taxes of $20,000
for the three months ended July 31, 1998, was the result of foreign taxes on
Chemotrade's net income. The provision of $1,000 for the three months ended July
31, 1997 was the result of state taxes.
11
<PAGE>
Liquidity and Capital Resources
Since inception, the Company's principal sources of funding have been cash from
operations, borrowed funds and sales of common stock. The Company used cash
in operating activities of approximately $305,000 and generated cash from
operating activities of $373,000 during the three months ended July 31, 1998 and
1997, respectively. Cash used in operating activities during the three months
ended July 31, 1998 was principally the result of a net loss of $133,000, offset
by adjustments for non-cash items, primarily depreciation and amortization,
imputed interest, and increases in accounts receivable and inventory. Cash
generated from operating activities during the three months ended July 31, 1997,
was principally the result of decreases in inventory and increases in accounts
payable and accrued liabilities, offset by the net loss of $190,000, adjusted
for non-cash expense items and increases in accounts receivable.
The Company's investing activities used cash of $32,000 and $57,000 for the
three months ended July 31, 1998 and 1997, respectively. Investing activities
were for purchases of property and equipment.
Financing activities used cash of $310,000 and $257,000 during the three months
ended July 31, 1998 and 1997, respectively. Cash used by financing activities
during the three months ended July 31, 1998 resulted primarily from the payment
of the cash portion of the Chemotrade consideration which was offset in part by
proceeds from line of credit borrowings. Cash used in financing activities
during the three months ended July 31, 1997, consisted of repayment of debt.
At July 31, 1998, the Company had $397,000 of cash and equivalents, a decrease
of $647,000 compared to $1,044,000 as of April 30, 1998. At July 31, 1998, the
Company had negative working capital of $503,000, a decrease of $2,314,000
compared to working capital of $1,811,000 as of April 30, 1998. The decrease is
primarily the result of the Company's acquisition of Chemotrade. During the
three months ended July 31, 1998, the Company paid the sellers of Chemotrade
$758,000 of cash and issued two notes payable for an aggregate $1,750,000.
On July 24, 1998, the Company obtained a $3.0 million credit facility for its
U.S. operations, secured by its U.S. assets, with a lender. The loan consists of
a $500,000 equipment term loan, payable over forty eight months, a $250,000 term
loan with interest only payments due monthly and principal due October 31, 1998,
$500,000 revolving line of credit, with borrowings limited to 35% of eligible
inventory, a $1,250,000 revolving line of credit, with borrowings limited to 80%
of eligible accounts receivable and a $500,000 equipment acquisition term loan.
The availability of the equipment acquisition loan is conditioned upon the
Company achieving and maintaining minimum debt service coverage ratios. The
proceeds of the new facility were used to repay approximately $537,000 of debt
outstanding at July 31, 1998 and $742,000 of accounts payable. Chemotrade has
two unsecured revolving lines of credit that combined total $395,000. The
Company is in the process of evaluating several secured credit facilities for
Chemotrade.
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 SEC 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 supplier of raw material for DZ. 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
12
<PAGE>
Ministry or the Company's single supplier of raw material could have a material
and adverse affect upon the Company's financial condition and results of
operations.
Operations in Russia and the Republic of Georgia
Operations in Russia and the republic of Georgia ("Georgia") entail certain
risks. Recently, the former republics of the Soviet Union including Georgia have
experienced political, social and economic change as they sought independence
from the former central government in Moscow, and certain of the republics,
including Russia and Georgia, have attempted to transition from a central
controlled economy toward a market-based economy. These changes have involved,
in certain cases, armed conflict. 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 and Georgia. Accordingly, the operations of the
Company could be materially adversely affected if hostilities in Russia should
occur, if trade between Russia or Georgia and the United States were
interrupted, if political conditions in Russia or Georgia disrupt transportation
or processing concerning the Company's goods, if laws or government policies
concerning foreign business operations in Russia or Georgia 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 1999 and 2000 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. 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 or more major customers would
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.
Management of Growth
The Company has 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 its 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, Boris
Rubizhevsky, the Company's Senior Vice President, Isotope Production and Supply,
Robert Cuttriss, President of Interpro, and Herbert Hegener, Managing Director
of Chemotrade. The Company maintains $1
13
<PAGE>
million of key man life insurance on the lives of Messrs. Alexander, Rubizhevsky
and Cuttriss and all are covered by employment agreements with the Company
extending through September 2001, 2001, and 2003, respectively. Messr. Hegener
is covered by an employment agreement with the Company extending through the
year 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.
Dates following December 31, 1999 and beyond (the "Year 2000 Problem")
Many existing computer systems and applications, and other devices, use only two
digits to identify a year in the date field, without considering the impact of
the upcoming change in the century. Such systems and applications could fail or
create erroneous results unless corrected. The Company relies on its internal
financial systems and external systems of business enterprises such as
customers, suppliers, creditors, and financial organizations both domestically
and globally, directly and indirectly for accurate exchange of data. The Company
has evaluated such systems and believes the cost of addressing the Year 2000
Problem will not have a material adverse affect on the result of operations or
financial position of the Company. However, even though the internal systems of
the Company are not materially affected by the Year 2000 issue, the Company
could be affected through disruption in the operation of the enterprises with
which the Company interacts.
Volatility of Stock Price
The trading price of the Company's securities has been 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, and 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 Company's common stock and common stock warrants.
Shares Eligible for Future Sale
The officers and directors of the Company and all other stockholders have
agreed, pursuant to lock-up agreements, that without the prior written consent
of Monroe Parker Securities, Inc. (the "Representative") and the Company, that
they will not sell or otherwise dispose of common stock beneficially owned by
them. The Company was advised by officials of the Representative, that on
December 22, 1997, the Representative ceased market-making activities;
therefore, the Company may, in the future at its sole discretion, release a
portion of securities subject to these lock-up agreements.
14
<PAGE>
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description Page(s)
------ ----------- -------
27.01 Financial Data Schedule 17
(b) Reports on Form 8-K.
An amended Current Report on Form 8-K/A was filed by the
Registrant on July 29, 1998 to submit the audited financial
statements of International Process Research Corporation and pro
forma financial information for the year ended April 30, 1998.
A Current Report on Form 8-K was filed by the Registrant on May
27, 1998 to put on file the Stock Purchase Agreement among Isonics
Corporation, Metallurgy International, Inc. and International
Process Research Corporation; the Escrow Agreement among Isonics
Corporation, Metallurgy International, Inc., Robert H, Cuttriss
(as Agent), and Colorado Business Bank as Escrow Agent, and press
releases announcing the execution and consummation of the
acquisition.
15
<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 18th day of September, 1998.
Isonics Corporation
(Registrant)
By
James E. Alexander
President, Chief Executive Officer and Director
By
Paul J. Catuna
Vice President, Finance
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-QSB FOR THE PERIOD ENDED JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 397
<SECURITIES> 0
<RECEIVABLES> 3,613
<ALLOWANCES> 259
<INVENTORY> 1,018
<CURRENT-ASSETS> 5,238
<PP&E> 1,808
<DEPRECIATION> 206
<TOTAL-ASSETS> 10,854
<CURRENT-LIABILITIES> 5,741
<BONDS> 495
0
0
<COMMON> 6,200
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<TOTAL-LIABILITY-AND-EQUITY> 10,854
<SALES> 3,933
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