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, 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 Boulevard, Suite 220
San Jose, California 95119
--------------------------
(Address of principal executive offices)
(408) 350-0660
--------------
(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 December 4, 1998.
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
<S> <C> <C> <C>
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of October 31, 1998 and
April 30, 1998................................................................3
Condensed Consolidated Statements of Operations for the Three and
Six Month Periods Ended October 31, 1998 and 1997.............................4
Condensed Consolidated Statements of Cash Flows for the Six Month
Periods Ended October 31, 1998 and 1997.......................................5
Notes to Condensed Consolidated Financial Statements...............................6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................10
Part II: Other Information
Item 4: Submission of Matters to a Vote of Security
Holders...........................................................................17
Item 6: Exhibits and Reports on Form 8-K..................................................17
Signatures..............................................................................................18
</TABLE>
2
<PAGE>
Part I: Financial Information
Item 1: Condensed Financial Statements
<TABLE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<CAPTION>
October 31, April 30,
1998 1998
------------------ -----------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 308 $ 1,044
Accounts receivable (Net of allowance of $164 and $130, respectively) 2,051 1,629
Inventories 1,632 456
Prepaid expenses and other assets 127 45
Deferred income taxes 155 112
------------------ -----------------
Total current assets 4,273 3,286
Property and equipment, net 1,111 1,626
Goodwill, net 3,513 236
Notes receivable from shareholders 131 170
Other assets 90 22
Deferred income taxes 97 315
------------------ -----------------
Total $ 9,215 $ 5,655
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 279 $ 80
Notes payable - shareholders 907 --
Accounts payable 3,247 657
Accrued liabilities 1,072 738
------------------ -----------------
Total current liabilities 5,505 1,475
Long-term debt 994 312
Deferred income taxes 209 427
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; October 31,1998, 6,166,539 6,200 5,289
Notes receivable from stockholders (348) (337)
Accumulated deficit (3,345) (1,511)
------------------ -----------------
Total stockholders' equity 2,507 3,441
------------------ -----------------
Total $ 9,215 $ 5,655
================== =================
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
------------------------------ -----------------------------
1998 1997 1998 1997
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues $ 3,706 $ 1,771 $ 7,639 $ 3,306
Cost of revenues 3,193 1,174 6,182 2,340
------------ ------------- ----------- ------------
Gross margin 513 597 1,457 966
Operating expenses:
Selling, general and administrative 936 368 1,618 636
Research and development 389 203 712 352
Restructuring and office closure 708 -- 708 --
------------ ------------- ----------- ------------
Total operating expenses 2,033 571 3,038 988
------------ ------------- ----------- ------------
Operating income (loss) (1,520) 26 (1,581) (22)
Other income (expense):
Foreign exchange (96) -- (96) --
Interest income 6 20 30 27
Interest expense ( 91) (78) (167) (214)
------------ ------------- ----------- ------------
Total other income (expense), net (181) (58) (233) (187)
------------ ------------- ----------- ------------
Loss before extraordinary item and income taxes (1,701) (32) (1,814) (209)
Income tax expense -- 1 20 1
------------ ------------- ----------- ------------
Loss before extraordinary item (1,701) (33) (1,834) (210)
Extraordinary item - loss on extinguishment of debt -- (252) -- (252)
------------ ------------- ----------- ------------
NET LOSS $(1,701) $ (285) $ (1,834) $ (462)
============ ============= =========== ============
Net loss per share - basic and diluted
Net loss per share before extraordinary item $ (0.28) $ (0.01) $ (0.30) $ (0.05)
============ ============= =========== ============
Extraordinary item $ -- $ (0.05) -- $ (0.05)
============ ============= =========== ============
Net loss per share $ (0.28) $ (0.06) $ (0.30) $ (0.10)
============ ============= =========== ============
Shares used in computing per share information 6,167 4,892 6,072 4,721
============ ============= =========== ============
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<CAPTION>
Six Months Ended
October 31,
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 62 $ (379)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (108) (71)
Purchase of Chemotrade, net of cash acquired (546) --
--------------- ---------------
Cash used in investing activities (654) (71)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit, net 1,009
Proceeds from issuance of long-term debt 500 --
Repayments of debt (1,640) (1,782)
Proceeds from issuance of common stock, net 17 3,452
Payment of debt issuance costs (30) (7)
--------------- ---------------
Cash provided by (used in) financing activities (44) 1,663
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (736) 1,213
Cash and cash equivalents at beginning of period 1,044 28
--------------- ---------------
Cash and cash equivalents at end of period $ 308 $ 1,241
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 109 $ 209
=============== ===============
Income taxes $ 151 $ 1
=============== ===============
Supplemental disclosure of noncash investing and financing activities:
Equipment acquired under capital lease $ 14 $ --
=============== ===============
Purchase of Chemotrade
Cash paid, net of cash acquired $ 546
Stock issued to sellers 894
Debt issued to sellers 1,750
Liabilities assumed 1,598
---------------
Assets acquired (including goodwill of $ 3,385) $ 4,788
===============
<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 consolidated financial statements of Isonics
Corporation and Subsidiaries (the "Company" or "Isonics") as of October 31, 1998
and for the three and six months ended October 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 common equivalent shares outstanding during the period. Common equivalent
shares include common stock options and warrants (using the treasury stock
method). 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):
October 31, April 30,
1998 1998
---------------- -----------------
Finished goods $ 1,511 $ 250
Work in process 111 --
Raw materials 10 206
---------------- -----------------
Inventories $ 1,632 $ 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 - shareholders
Two notes were issued to each of the sellers of Chemotrade GmbH and subsidiary
as consideration for a portion of the purchase price. One note with an aggregate
value of 1,663,000 DM ($924,000), bearing interest at 2% per month, and secured
by certain accounts receivable was issued in June 1998 and repaid in August
1998. A second note for 1,500,000 DM valued at $826,000 upon issuance and
reflected at its dollar equivalent of $907,000 at October 31, 1998, bearing
interest at 10%, secured by the common stock purchased by Isonics, due June
1999, was also issued in connection with the purchase.
6
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long term debt
Long term debt consists of the following (in thousands):
October 31, April 30,
1998 1998
---------- -----------
Bank term loan - guaranteed by the SBA $ -- $ 40
Bank term loan 469 147
Bank term loan 250 --
Revolving line of credit 525 159
Capital leases 29 46
----------- ----------
1,273 392
Less current maturities 279 80
---------- ----------
$ 994 $ 312
========== ===========
The bank term loan is collateralized by all of Isonics' U.S. assets and bears
interest at prime (8.0% at October 31, 1998) plus 2.25%. Principal and interest
payments are due monthly based upon 48 monthly payments. The balance of the note
is due July 2000.
The bank term loan is collateralized by all of Isonics' U.S. assets and bears
interest at prime (8.0% at October 31, 1998) plus 5.0%. Interest only payments
were due through October 31, 1998, commencing November 1, 1998 principal and
interest payments are due monthly based upon 25 monthly payments. The balance of
the note is due July 2000.
The revolving line of credit is collateralized by all of Isonics' U.S. assets
and bears interest at prime (8.0% at October 1998) plus 2.25%. Borrowings are
limited to 35% of eligible inventory up to $500,000 and 80% of eligible accounts
receivable up to $1,250,000. Interest payments are due monthly and the
outstanding balance is due July 2000.
The bank term loan, guaranteed by the SBA, bank term loan, and revolving line of
credit outstanding at April 30, 1998 was repaid from the proceeds of the debt
issued in August 1998.
Maturities of long-term debt as of October 31, 1998 are as follows (in
thousands):
1999 $ 279
2000 125
2001 869
--------
$ 1,273
========
7
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restructuring and office closure costs
On October 31, 1998, the Company announced a corporate restructuring and the
relocation of its headquarters to Golden, Colorado, the site of its wholly-owned
subsidiary, International Process Research Corporation (Interpro). On October
31, 1998, the Company recorded a $708,000 charge of which $468,000 is related to
the write-off of certain fixed assets, $132,000 to terminate certain lease
agreements and $108,000 for severance and other costs. At October 31, 1998
accrued restructuring costs totaling $212,000 are included in accrued
liabilities. The Company anticipates additional charges in subsequent periods of
approximately $170,000 to $260,000 related to the relocation of personnel.
Significant Customers and Suppliers
At October 31, 1998 one customer accounted for 27% of total accounts receivable
(See Related Party Transactions). One customer accounted for 25% of net revenues
during the six months ended October 31, 1998. Three different customers
accounted for 47%, 23%, and 12% of net revenues during the six months ended
October 31, 1997.
Related party transactions
The Company has a 6% ownership interest in IUT Institute GmbH ("IUT"), located
in Berlin, Germany. IUT purchases certain raw materials from Chemotrade,
processes the materials and sells the finished material to Chemotrade. At
October 31, 1998 accounts receivable totaling $556,000 was due from IUT and
accounts payable totaling $609,000 was due to IUT. The Company has also advanced
IUT $54,000 for services to be performed in the future. During the six months
ended October 31, 1998, Chemotrade sold $284,000 of material to IUT and
purchased $406,000 of material from IUT, respectively.
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 price has been
accounted for effective June 1, 1998, the date control was transferred. The
purchase price was denominated in German Deutche Marks, and all amount reported
below are translated at the historical conversion rate unless otherwise stated.
The purchase price consideration on June 1, 1998 consisted of $2.576 million
paid at closing and $1.07 million to be paid through June 2001. Transaction
costs as of October 31, 1998 were $125,000. 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 operation for the six month period ended October 31, 1998 and 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 (1,663,000 DM) bearing interest at 2% per
month, which was paid in August, and a second note of $826,000 (1,500,000 DM)
bearing interest at 10%, due June 1, 1999. The sellers have guaranteed
Chemotrade's defined pre tax earnings will be at least 1,000,000 DM (the dollar
equivalent of $606,000 at October 31, 1998) for 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 1,000,000 DM for the sixteen month period
ended April 30,1999 or year ended April 30, 2000, the note payable valued at
$826,000 upon issuance and reflected at its dollar equivalent of $907,000 at
October 31, 1998 (1,500,000 DM) due June 1, 1999, will be reduced by 0.75 DM for
each 1.00 DM shortfall of earnings. If Chemotrade has pretax earnings of at
least 1,000,000 DM for the fiscal year ended April 30, 2001, the sellers will
receive additional
8
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
consideration of 500,000 DM (the dollar equivalent of $303,000 at October 31,
1998). If the pre tax earnings are less than 1,000,000 DM during the twelve
months ended April 30, 2001, the consideration will be reduced 0.50 DM for each
1.00 DM 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 $3.499 million purchase
price over the fair value of the tangible assets acquired, $1.712 million, less
liabilities assumed of $1.598 million, $3.385 million has been allocated to
goodwill and will be amortized over twenty years. The difference between the
note valued at $907,000 at October 31, 1998 and $826,000 at June 30, 1998 as
well as other foreign currency gains and losses has been included in foreign
exchange expense in the condensed consolidated statements of operations.
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.
<TABLE>
The reported results of operations of the Company for the six months ended
October 31, 1998 includes the operating results of Chemotrade commencing June 1,
1998 and the operating results of Interpro commencing May 1, 1998. Pro forma
results of operations are as follows (in thousands, except per share data):
<CAPTION>
Six Months Ended
October 31,
---------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Net revenues $ 8,432 $ 8,237
Gross margin 1,570 1,891
Net loss (1,793) (556)
Net loss per share - basic and diluted $ (0.29) $ (0.10)
============= =============
Number of shares used in computing per share information: 6,132 5,433
============= =============
</TABLE>
9
<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.
Effective April 30, 1998, Isonics acquired all of the outstanding capital stock
of Interpro dba Colorado Minerals Research Institute. 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.
10
<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 labeled 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 was the case during
the three months ended October 31, 1998. 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 consolidated
financial statements and the notes thereto appearing elsewhere in this report.
<CAPTION>
Three Months Ended Six Months Ended,
October 31, October 31,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 86.2 66.3 80.9 70.8
----------- ------------- ------------ ------------
Gross Margin 13.8 33.7 19.1 29.2
----------- ------------- ------------ ------------
Operating expenses:
Selling, general and administrative 25.3 20.7 21.2 19.2
Research and development 10.5 11.5 9.3 10.7
Restructuring and office closure 19.1 -- 9.3 --
----------- ------------- ------------ ------------
Total operating expenses 54.9 32.2 39.8 29.9
----------- ------------- ------------ ------------
Operating income (loss) (41.1) 1.5 (20.7) (0.7)
Other income (expense) net (4.8) (3.3) (3.0) (5.7)
----------- ------------- ------------ ------------
Loss before extraordinary item and income taxes (45.9) (1.8) (23.7) (6.4)
Income tax expense -- 0.1 0.3 --
----------- ------------- ------------ ------------
Loss before extraordinary item (45.9) (1.9) (24.0) (6.4)
Extraordinary item - loss on extinguishment of debt -- (14.2) -- (7.6)
----------- ------------- ------------ ------------
NET LOSS (45.9)% (16.1)% (24.0)% (14.0)%
=========== ============= ============ ============
</TABLE>
11
<PAGE>
Net Revenues
Net revenues for the three and six months ended October 31, 1998 were $3.71
million and $7.64 million, respectively, an increase of 109.3% and 131.1% over
$1.77 million and $3.31 million for the comparable periods in the prior fiscal
period. The growth on a quarterly and year-to-date basis is due to the
additional net revenues from the Interpro and Chemotrade acquisitions. Net
revenues from DZ decreased by approximately $387,000 for the three months ended
October 31, 1998, on decreased unit sales of approximately 3 %. Net revenues
from DZ decreased approximately $505,000 for the six months ended October 31,
1998 on decreased unit sales of approximately 10 %. Average unit sales prices of
DZ decreased for the three and six months ended October 31, 1998 in comparison
to the previous year's fiscal quarter and year to date period due to a less
refined product being sold during the periods.
Gross Margin
Gross margin for the three and six months ended October 31, 1998 decreased to
13.8% and 19.1% of net revenues from 33.7% and 29.2% for the same periods in the
prior fiscal year. The decrease is due to reduced unit sales prices of DZ and
the increased proportion of net revenues generated from contract manufacturing
performed by Interpro and stable and radio isotope revenues generated by
Chemotrade which typically have lower gross margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased on a dollar basis to
approximately $936,000, or 25.3% of net revenues for the three months ended
October 31, 1998, from $368,000, or 20.7% of net revenues in the comparable
period of the prior year. The dollar increase for the quarter ended October 31,
1998 was primarily attributable to the acquisition of Interpro and Chemotrade,
while the percentage increase was due mainly to reduced net revenues from DZ
sales. For the six months ended October 31, 1998, these expenses increased on a
dollar basis to approximately $1,618,000, or 21.2% of net revenues from
$636,000, or 19.2% of net revenues on the comparable period of the prior year.
The dollar increase was primarily attributable to the acquisition of Interpro
and Chemotrade, while the percentage increase was due to reduced net revenues
from DZ sales. The Company anticipates that selling, general and administrative
expenses will generally remain stable or decrease in absolute dollars due to the
restructuring and San Jose office closure and may vary as a percentage of net
revenues (See Restructuring and office closure).
Research and Development
Research and development expenses increased by approximately $186,000, or 91.7%,
to $389,000 for the quarter ended October 31, 1998 from $203,000 for the
comparable period in fiscal 1998, while declining on a percentage basis to 10.5%
of net revenues from 11.5%. For the six months ended October 31, 1998, research
and development expenses increased by approximately $360,000, or 102.3%, to
$712,000 from $352,000 for the comparable period in the previous fiscal year,
while decreasing on a percentage basis to 9.3% of net revenues from 10.7%. The
dollar increase during the quarter and six months ended October 31, 1998 was
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 and six months ended October 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 remain stable in the near term due to the timing of
material usage and outside services, but may vary as a percentage of revenues.
12
<PAGE>
Restructuring and office closure
On October 31, 1998, the Company announced a restructuring of its operations and
relocation of its headquarters to Golden, Colorado, the site of its wholly-owned
subsidiary, International Process Research Corporation (Interpro). The Company
recorded a $708,000 charge of which $468,000 is related to the write-off of
certain fixed assets, $132,000 to terminate certain lease agreements and
$108,000 for severance and other costs. The Company anticipates additional
charges in subsequent periods of approximately $170,000 to $260,000 related to
the relocation of personnel.
Other income (expense), net
Other expense, net reflects interest expense, amortization on issuance costs,
and foreign currency gains and losses. Other expense, net increased by $123,000
to $181,000 for the quarter ended October 31, 1998 from net other expenses of
$58,000 for the comparable period of the previous fiscal year. The increase was
the result of foreign currency losses from notes payable denominated in German
Deutche Marks due to the sellers of Chemotrade and an increase in interest
expense on the notes payable to the sellers to Chemotrade and bank line of
credit and term loans. Other expense, net increased by $46,000 to $233,000 for
the six months ended October 31, 1998 from $187,000 during the comparable period
of the previous fiscal year. The increase was due mainly to the foreign exchange
losses.
Income taxes
There was no provision for income taxes for the quarter ended October 31, 1998
due to losses sustained in the quarter. The provision for the six months ended
October 31, 1998 of $20,000 was the result of Foreign taxes. The provision of
$1,000 for the three and six months ended October 31, 1997 was the result of
state taxes.
Liquidity and Capital Resources
The Company's principal sources of funding have been cash from operations,
borrowed funds and sales of common stock. The Company generated cash from
operations of approximately $62,000 and used cash in operating activities of
$379,000 during the six months ended October 31, 1998 and 1997, respectively.
Cash generated from operating activities during the six months ended October 31,
1998 was principally the result of a net loss of $1.70 million and increases in
inventory, offset by adjustments for non-cash items, primarily the write-off of
fixed assets in the restructuring, depreciation and amortization, and increases
in accounts payable. Cash used from operating activities during the six months
ended October 31, 1997, was principally the result of a net loss $462,000, net
of adjustments for non-cash items, primarily depreciation, amortization and
extraordinary loss on extinguishment of debt, and increases in accounts
receivable and other current assets.
The Company's investing activities used cash of $654,000 and $71,000 for the six
months ended October 31, 1998 and 1997, respectively. Cash used during the six
months ended October 31, 1998 resulted primarily from the purchase of Chemotrade
and property and equipment. Investing activities for the six months ended
October 31, 1997 were for purchases of property and equipment.
Financing activities used cash of $44,000 during the six months ended October
31, 1998 and provided cash of $1.63 million during the comparable period of the
previous fiscal year. Cash used during the six months ended October 31, 1998
resulted primarily from the payment of debt associated with the Chemotrade
acquisition which was offset in part by proceeds from line of credit and term
loan. 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.
At October 31, 1998, the Company had $308,000 of cash and cash equivalents, a
decrease of $736,000 compared to $1,044,000 as of April 30, 1998. At October 31,
1998, the Company had negative working capital of $1,232,000, a decrease of
$3,546,000 compared to working capital of $1,811,000 as of April 30, 1998. The
decrease is primarily the result of the Company's cash payments for the
acquisition of Chemotrade and the losses incurred for the six
13
<PAGE>
months ended October 31, 1998. During the six months ended October 31, 1998, the
Company paid the sellers of Chemotrade $1,601,000 of cash and has one note for
$907,000 outstanding due to the sellers on June 1, 1999.
On July 24, 1998, the Company obtained a $3.0 million asset based 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 through
October 31, 1998, and commencing August 1, 1998, payable over twenty five
months, a $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 and $742,000 of accounts payable.
Chemotrade has one unsecured revolving line of credit for 400,000 DM ($242,000
at October 31, 1998). The Company is in the process of evaluating 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 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
14
<PAGE>
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 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
15
<PAGE>
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 expiring September 2000, 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.
16
<PAGE>
Part II: Other Information
Item 4: Submission of Matters to a Vote of Security Holders
A. The annual meeting of shareholders was held on October 6, 1998
B. The following matters were voted upon at the annual meeting:
1. To elect the following directors to serve until the next annual
meeting:
For Withheld
--- --------
James E. Alexander, Chairman 4,866,165 0
Boris Rubizhevsky, Vice Chairman 4,866,165 0
Lindsay A. Gardner, Director 4,866,165 0
Larry J. Wells, Director 4,866,165 0
Richard Parker, Director 4,866,165 0
2. To approve the 1998 Employee Stock Purchase Plan
For - 4,866,165 Against - 0 Abstain - 0
3. To ratify the appointment of Grant Thornton LLP as independent
auditors for the fiscal year ending April 30, 1998.
For - 4,866,165 Against - 0 Abstain - 0
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description Page(s)
-------- ---------------------------------- -------
27.01 Financial Data Schedule 19
(b) (b) Reports on Form 8-K.
An amended Current Report on Form 8-K/A was filed by the Registrant
on October 5, 1998 to submit the audited financial statements of
Chemotrade GmbH and subsidiary 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 August
8, 1998 to file the Sale and Purchase Agreement among Isonics
Corporation and Mr. Helmut Swyen and Mr. Herbert Hegener, the
sellers, and press releases announcing the execution and
consummation of the Chemotrade acquisition.
17
<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 15h day of December, 1998.
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
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE PERIOD ENDED OCTOBER 31, 1998 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-30-1999
<PERIOD-START> MAY-1-1998
<PERIOD-END> OCT-31-1998
<CASH> 308
<SECURITIES> 0
<RECEIVABLES> 2,215
<ALLOWANCES> 164
<INVENTORY> 1,632
<CURRENT-ASSETS> 4,273
<PP&E> 1,337
<DEPRECIATION> 226
<TOTAL-ASSETS> 9,215
<CURRENT-LIABILITIES> 5,505
<BONDS> 994
0
0
<COMMON> 6,200
<OTHER-SE> (348)
<TOTAL-LIABILITY-AND-EQUITY> 9,215
<SALES> 7,639
<TOTAL-REVENUES> 7,639
<CGS> 6,182
<TOTAL-COSTS> 6,182
<OTHER-EXPENSES> 3,038
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 233
<INCOME-PRETAX> (1,814)
<INCOME-TAX> 20
<INCOME-CONTINUING> (1,834)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,834)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
