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 January 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.)
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 X No ___
The number of shares outstanding of the registrant's Common Stock, no par value,
was 5,360,268 at March 4, 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 Balance Sheets as of January 31, 1998 and April
30, 1997....................................................3
Condensed Statements of Operations for the Three and Nine
Month Periods Ended January 31, 1998 and 1997...............4
Condensed Statements of Cash Flows for the Nine Month
Periods Ended January 31, 1998 and 1997.....................5
Notes to Condensed Financial Statements..........................6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................9
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K................................15
Signatures ...................................................................16
2
<PAGE>
Part I: Financial Information
Item 1: Condensed Financial Statements
ISONICS CORPORATION
CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
January 31, April 30,
1998 1997
------- -------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,272 $ 28
Accounts receivable 149 4
Inventories 1,247 1,539
Prepaid expenses 43 14
------- -------
Total current assets 2,711 1,585
Property and equipment, net 128 70
Goodwill, net 256 315
Notes receivable from shareholders 164 41
Other assets 7 11
Debt issuance costs, net -- 106
Deferred offering costs -- 556
------- -------
Total $ 3,266 $ 2,684
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 32 $ 403
Accounts payable 314 1,105
Accrued liabilities 390 518
------- -------
Total current liabilities 736 2,026
Long-term debt 40 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; January 31,1998, 5,360,268 4,581 1,129
Notes receivable from stockholders (332) (343)
Accumulated deficit (1,759) (1,396)
------- -------
Total stockholders' equity (deficit) 2,490 (610)
------- -------
Total $ 3,266 $ 2,684
======= =======
See notes to condensed financial statements.
3
<PAGE>
<TABLE>
ISONICS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
---------------------- ----------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues $ 1,968 $ 951 $ 5,274 $ 3,355
Cost of revenues 1,296 742 3,636 2,579
------- ------- ------- -------
Gross margin 672 209 1,638 776
Operating expenses:
Selling, general and administrative 369 303 1,005 890
Research and development 227 133 579 321
------- ------- ------- -------
Total operating expenses 596 436 1,584 1,211
------- ------- ------- -------
Operating income (loss) 76 (227) 54 (435)
Interest income 27 6 53 9
Interest expense (4) (138) (217) (235)
------- ------- ------- -------
Total interest income (expense), net 23 (132) (164) (226)
------- ------- ------- -------
Income (loss) before extraordinary item and income taxes 99 (359) (110) (661)
Income tax expense -- -- 1 53
------- ------- ------- -------
Income (loss) before extraordinary item 99 (359) (111) (714)
Extraordinary item - loss on extinguishment of debt -- -- (252) --
------- ------- ------- -------
NET INCOME (LOSS) $ 99 $ (359) $ (363) $ (714)
======= ======= ======= =======
Net income (loss) per share - basic
Net income (loss) per share before extraordinary item $ 0.02 $ (0.06) $ (0.02) $ (0.12)
======= ======= ======= =======
Extraordinary item $ -- $ -- $ (0.04) $ --
======= ======= ======= =======
Net income (loss) per share $ 0.02 $ (0.06) $ (0.06) $ (0.12)
======= ======= ======= =======
Shares used in computing per share information 5,360 6,138 5,836 6,109
======= ======= ======= =======
Net income (loss) per share - diluted
Net income (loss) per share before extraordinary item $ 0.01 $ (0.06) $ (0.02) $ (0.12)
======= ======= ======= =======
Extraordinary item $ -- $ -- $ (0.04) $ --
======= ======= ======= =======
Net income (loss) per share $ 0.01 $ (0.06) $ (0.06) $ (0.12)
======= ======= ======= =======
Shares used in computing per share information 6,625 6,138 5,836 6,109
======= ======= ======= =======
Pro forma net income (loss) per share - diluted
Net income (loss) per share $ 0.01 $ (0.04) $ (0.03) $ (0.08)
======= ======= ======= =======
Shares used in computing pro forma per share information 6,625 6,378 5,997 6,440
======= ======= ======= =======
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
4
<PAGE>
ISONICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
January 31,
------------------
1998 1997
------- -------
Net cash used in operating activities $ (285) $(1,811)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (72) (10)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and warrants -- 1,741
Repayments of debt (1,844) (66)
Proceeds from issuance of common stock, net 3,452 202
Payment of debt issuance costs (7) (106)
------- -------
Cash provided by financing activities 1,601 1,771
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,244 (50)
Cash and cash equivalents at beginning of period 28 116
------- -------
Cash and cash equivalents at end of period $ 1,272 $ 66
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 171 $ 123
======= =======
Income taxes $ 1 $ 9
======= =======
See notes to condensed financial statements.
5
<PAGE>
ISONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying condensed financial statements of Isonics Corporation (the
"Company") as of January 31, 1998 and for the three and nine months ended
January 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 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.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128.
"Earnings Per Share." The Company has adopted SFAS 128 for the quarter ended
January 31, 1998 and restated earnings per share data for periods to conform
with SFAS 128. SFAS 128 replaces current earnings per share ("EPS") reporting
requirements and requires a dual presentation of basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing net income attributable to
common stockholders by the weighted average 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. However, the SEC rules regarding share issuances and option
and other rights granted to acquire shares prior to an initial public offering,
as stated above, are still applicable and such amounts are included in both
basic and diluted EPS.
Pro forma net loss per share has been presented to depict what the net income
(loss) per share would have been had the common shares issuable for debt
repayment been outstanding during that period.
6
<PAGE>
<TABLE>
The following table illustrates the reconciliation of the numerators and
denominators of the basic and diluted earnings per share computation:
<CAPTION>
Three Months Nine Months
Ended Ended
January 31, January 31,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
BASIC EPS
Net income (loss) before
extraordinary item $ 99 $ (359) $ (111) $ (714)
Extraordinary item -- -- (252) --
------- ------- ------- -------
Net income (loss) $ 99 $ (359) $ (363) $ (714)
======= ======= ======= =======
Weighted average common
stock outstanding 5,360 4,471 4,934 3,972
Stock options, warrants and convertible
preferred stock issued twelve
months preceding the initial
public offering -- 1,667 902 2,137
------- ------- ------- -------
Number of shares 5,360 6,138 5,836 6,109
======= ======= ======= =======
DILUTED EPS
Net income (loss) before
extraordinary item $ 99 $ (359) $ (111) $ (714)
Extraordinary item -- -- (252) --
------- ------- ------- -------
Net income (loss) $ 99 $ (359) $ (363) $ (714)
======= ======= ======= =======
Weighted average common
stock outstanding 5,360 4,471 4,934 3,972
Stock options, warrants and convertible
preferred stock issued twelve
months preceding the initial
public offering -- 1,667 902 2,137
Dilutive effect of stock options 515 -- -- --
Dilutive effect of warrants 750 -- -- --
------- ------- ------- -------
Number of shares 6,625 6,138 5,836 6,109
======= ======= ======= =======
</TABLE>
Inventories
Inventories consist of (in thousands):
January 31, April 30,
1998 1997
------ ------
Finished goods $1,041 $1,387
Work in process -- --
Raw materials 206 152
------ ------
Inventories $1,247 $1,539
====== ======
7
<PAGE>
ISONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
Significant Customers and Suppliers
At January 31, 1998 one customer accounted for 95% of total accounts receivable.
One customer accounted for 53% and 67% of net revenues during the nine months
ended January 31, 1998 and 1997, respectively. Three different customers
accounted for 15%, 12% and 12% of net revenues during the nine months ended
January 31, 1998.
The Company currently uses a single source processor in its 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.
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 of the
Company's stock, all principal and interest would be due within five days of the
closing of such initial public offering. Accordingly, the Company repaid the
notes and interest during the second quarter ended October 31, 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 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.
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 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. 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 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.
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.
9
<PAGE>
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
<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 Nine Months Ended
January 31, January 31,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 65.9 78.0 68.9 76.9
----------- ------------- ----------- -------------
Gross Margin 34.1 22.0 31.1 23.1
----------- ------------- ----------- -------------
Operating expenses:
Selling, general and administrative 18.8 31.9 19.0 26.5
Research and development 11.4 14.0 11.0 9.6
----------- ------------- ----------- -------------
Total operating expenses 30.2 45.9 30.0 36.1
----------- ------------- ----------- -------------
Operating income (loss) 3.9 (23.9) 1.1 (13.0)
Interest income (expense)
Interest income 1.4 0.7 1.0 0.3
Interest expense (0.2) (14.5) (4.2) (7.0)
----------- ------------- ----------- -------------
Total interest income (expense), net 1.2 (13.8) (3.2) (6.7)
----------- ------------- ----------- -------------
Income (loss) before extraordinary item and income taxes 5.1 (37.7) (2.1) (19.7)
Income tax expense -- -- -- (1.6)
----------- ------------- ----------- -------------
Income (loss) before extraordinary item 5.1 (37.7) (2.1) (21.3)
Extraordinary item - loss on extinguishment of debt -- -- (4.8) --
=========== ============= =========== =============
NET INCOME (LOSS) 5.1% (37.7)% (6.9)% (21.3)%
=========== ============= =========== =============
</TABLE>
Net Revenues
Net revenues for the three and nine months ended January 31, 1998 were $1.97
million and $5.27 million, respectively, an increase of 106.9% and 57.2%,
respectively for the comparable periods in the prior fiscal period. The growth
on a quarterly and year-to-date basis is due primarily to increased sales of DZ
and SILC products. Net revenues from DZ increased by approximately $807,000 and
$1.80 million, respectively for the three and nine months ended January 31,
1998, on increased unit sales of approximately 43% and 44%, respectively.
Average unit sales prices for DZ increased in comparison to the previous fiscal
years comparable quarter. Net revenues from SILCs were approximately $225,000
for the three months ended January 31, 1998, an increase of approximately
$210,000 from the same period of the previous year. For the nine months ended
January 31, 1998, SILC revenues were approximately $852,000, an increase of
approximately $548,000 or 181% for the comparable period of the previous year.
The revenue growth reflects the increasing sales of SILCs, specifically,
enriched carbon products.
International sales represented less than 10% of net revenues for the three and
nine months ended January 31, 1998 and 1997.
10
<PAGE>
Gross Margin
Gross margin for the three and nine months ended January 31, 1998 increased to
34.1% and 31.1% of net revenues respectively, from 22.0% and 23.1% for the same
periods in the prior fiscal year. The improvement is due to increased average
unit sales prices for DZ, increased proportion of net revenues generated from DZ
and to a lesser extent increased gross margins from SILCs. Increases in gross
margins were offset in part by charges associated with writing off the Company's
cadmium inventory and certain SILCs during the nine months ended January 31,
1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased on a dollar basis to
approximately $369,000 for the quarter ended January 31, 1998, from $303,000,
while declining on a percentage basis to 18.8% of net revenues for the third
quarter of fiscal 1998 from 31.9% of net revenues for the comparable period in
fiscal 1997. For the nine months ended January 31, 1998, these expenses
increased on a dollar basis to $1.0 million from $890,000 for the comparable
period in fiscal 1997, while declining on a percentage basis to 19.0% of net
revenues for the nine months ended January 31, 1998 from 26.5% for the
comparable period in fiscal 1997. The dollar increase for the quarter and nine
months ended January 31, 1998 was primarily attributable to professional fees
and media relations costs associated with being a public company, while the
decrease as a percentage of net revenues was due to growth in DZ and SILC
product revenues. 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 approximately $94,000, or 70.7% ,
to $227,000 for the quarter ended January 31, 1998 from $133,000 for the
comparable period in fiscal 1997, while declining on a percentage basis to 11.4%
of net revenues from 14.0%. For the nine months ended January 31, 1998, research
and development expenses increased by $258,000 or 80.4%, to $579,000 from
$321,000 for the comparable period in the previous fiscal year, while increasing
on a percentage basis to 11.0% of net revenues from 9.6%. Both the dollar and
percentage increases during the quarter and nine months ended January 31, 1998
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
January 31, 1998 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.
Interest income (expense), net
Interest expense, reflects interest and prior to the Company's initial public
offering, amortization of issuance costs and discounts on outstanding debt.
Interest expense, net, decreased by $155,000 to net interest income of $23,000
for the quarter ended January 31, 1998 from net interest expense of $132,000 for
the comparable period of the previous fiscal year. For the nine months ended
January 31, 1998, interest expense, net, decreased to $164,000 from $226,000 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 for the quarter and nine months ended
January 31, 1998.
Income taxes
There is no provision for income taxes for the quarters ended January 31, 1998
and 1997, respectively. The Company has sufficient net operating loss
carryforwards to eliminate net income generated during the three months
11
<PAGE>
ended January 31, 1999. For the nine months ended January 31, 1998, 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 nine months ended January 31, 1997 was 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, in the
quarter ended October 31, 1997, 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 $285,000 and $1.8 million during the
nine months ended January 31, 1998 and 1997, respectively. Cash used by
operating activities during the nine months ended January 31, 1998 was
principally the result of a net loss of $363,000, net of adjustments for
non-cash items, primarily depreciation, amortization and extraordinary loss on
extinguishment of debt. Cash used by operating activities during the nine months
ended January 31, 1997, was principally the result of a net loss of $714,000,
adjusted for non-cash items, increases in accounts receivable and inventories,
offset in part by increases in accounts payable.
The Company's investing activities used cash of $72,000 and $10,000 for the nine
months ended January 31, 1998 and 1997, respectively. Investing activities were
for purchases of property and equipment.
Financing activities provided cash of $1.6 million and $1.8 million during the
nine months ended January 31, 1998 and 1997, respectively. Cash provided by
financing activities during the nine months ended January 31, 1998 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 nine months ended January 31, 1997 consisted of the issuance of notes and
common stock which was offset in part by debt issuance costs and principal
payments on debt.
At January 31, 1998, the Company had $1.3 million of cash and equivalents, an
increase of $1.2 million compared to $28,000 as of April 30, 1997. At January
31, 1998, the Company had $2.0 million working capital, an increase of $2.4
million compared to negative $441,000 as of April 30, 1997. 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 several credit facilities. The Company believes that cash
and equivalents on hand at January 31, 1998 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 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 or
12
<PAGE>
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 and the Republic of Georgia
Operations in Russia and the republic of Georgia ("Georgia") entail certain
risks. In recent years 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 market-based economics. 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 the 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 1998 and 1999 are expected to be affected materially by the level of
orders received from significant DZ and SILC users during such quarter and
product shipments by the Company to DZ and SILC 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 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.
13
<PAGE>
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.
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 Common Stock and 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 has been advised by officials of the Representative in the
initial public offering, 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. The Company did not file any Reports on Form
8-K during the quarter ended January 31, 1998.
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 16th day of March, 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
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-QSB FOR THE PERIOD ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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