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, 1999
[ ] 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.)
5906 McIntyre Street
Golden, Colorado 80403
----------------------
(Address of principal executive offices)
(303) 279-7900
--------------
(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 6,215,612 at March 12, 1999.
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
January 31, 1999 and April 30, 1998 ..................... 3
Condensed Consolidated Statements of Operations
for the Three and Nine Month Periods Ended
January 31, 1999 and 1998 ............................... 5
Condensed Consolidated Statements of Cash Flows
for the Nine Month Periods Ended January 31,
1999 and 1998 ........................................... 6
Notes to Condensed Consolidated Financial
Statements .............................................. 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 12
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K .......................... 21
Signatures .................................................................. 22
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>
ASSETS
(Unaudited)
January 31, 1999 April 30, 1998
---------------- --------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 228 $1,044
Accounts receivable (Net of allowance of $156 and $130,
respectively) 3,389 1,629
Inventories 1,134 456
Prepaid expenses and other assets 260 45
Deferred income taxes 128 112
--------------------------------
Total current assets $5,139 $3,286
--------------------------------
LONG-TERM ASSETS
Property and equipment, net 1,089 1,626
Goodwill, net 3,450 236
Notes receivable from shareholders 127 170
Other assets 81 22
Deferred income taxes 85 315
--------------------------------
Total long-term assets $4,832 $2,369
--------------------------------
TOTAL ASSETS $9,971 $5,655
================================
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
(Unaudited)
January 31, 1999 April 30, 1998
---------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 261 $ 80
Notes payable from shareholders 877 --
Accounts payable 3,908 657
Accrued liabilities 1,155 738
------------------------------------
Total current liabilities $ 6,201 $ 1,475
------------------------------------
LONG-TERM LIABILITIES:
Long-term debt 859 312
Deferred income taxes 197 427
------------------------------------
Total long-term liabilities $ 1,056 $ 739
------------------------------------
SHAREHOLDERS' EQUITY:
Class A Preferred Stock--no par value 10,000,000
shares authorized; none outstanding -- --
Common stock--no par value. 20,000,000 shares 6,364 5,289
authorized; issued and outstanding: April 30, 1998,
5,714,250; January 31, 1999, 6,327,779
Notes receivable from shareholders (382) (337)
Accumulated deficit (3,268) (1,511)
------------------------------------
Total shareholders' equity $ 4,832 $ 3,411
------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,971 $ 5,655
====================================
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 6,670 $ 1,968 $ 14,309 $ 5,274
Cost of revenues 5,393 1,296 11,575 3,636
-------- -------- -------- --------
Gross margin 1,277 672 2,734 1,638
Operating expenses:
Selling, general and administrative 826 369 2,444 1,005
Research and development 250 227 962 579
Restructuring and office closure -- -- 708 --
-------- -------- -------- --------
Total operating expenses 1,076 596 4,114 1,584
-------- -------- -------- --------
Operating income (loss) 201 76 (1,380) 54
-------- -------- -------- --------
Other income (expense):
Foreign exchange 131 -- 35 --
Interest income 9 27 21 53
Interest expense (87) (4) (236) (217)
-------- -------- -------- --------
Total other income (expense), net 53 23 (180) (164)
-------- -------- -------- --------
Income (loss) before extraordinary item
and income taxes 254 99 (1,560) (110)
Income tax expense 177 -- 197 1
-------- -------- -------- --------
Income (loss) before extraordinary item 77 99 (1,757) (111)
-------- -------- -------- --------
Extraordinary item - loss on
extinguishment of debt -- -- -- (252)
-------- -------- -------- --------
NET INCOME (LOSS) $ 77 $ 99 $ (1,757) $ (363)
======== ======== ======== ========
Net income (loss) per share--basic
Net income (loss) per share before
extraordinary item $ 0.01 $ 0.02 $ (0.29) $ (0.02)
Extraordinary item $ -- $ -- $ -- $ (0.04)
Net income (loss) per share $ 0.01 $ 0.02 $ (0.29) $ (0.06)
Shares used in computing per share
information 6,216 5,360 6,120 5,836
Net income (loss) per share--diluted
Net income (loss) per share before
extraordinary item $ 0.01 $ 0.01 $ (0.29) $ (0.02)
Extraordinary item $ -- $ -- $ -- $ (0.04)
Net income (loss) per share $ 0.01 $ 0.01 $ (0.29) $ (0.06)
Shares used in computing per share
information 6,918 6,625 6,120 5,836
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended January 31,
-----------------------------
1999 1998
------- -------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 146 $ (285)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (120) (72)
Purchase of Chemotrade, net of cash acquired (546) --
-----------------------------
Cash used in investing activities $ (666) $ (72)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit, net 931 --
Proceeds from issuance of long-term debt 500 --
Repayments of debt (1,714) (1,844)
Proceeds from issuance of common stock, net 17 3,452
Payment of debt issuance costs (30) (7)
-----------------------------
Cash provided by (used in) financing activities $ (296) $ 1,601
-----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS: (816) 1,244
Cash and cash equivalents at beginning of period 1,044 28
-----------------------------
Cash and cash equivalents at end of period $ 228 $ 1,272
=============================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 149 $ 171
=============================
Income taxes $ 242 $ 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>
6
<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 January 31,
1999, and for the three and nine months ended January 31, 1999, and 1998, 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. 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 (loss) 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 when the inclusion would be
antidilutive.
Inventories
Inventories consist of (in thousands):
January 31, 1999 April 30, 1998
---------------- --------------
Finished goods $1,125 $ 250
Work in progress -- --
Raw materials 9 206
---------------------------
Total inventories $1,134 $ 456
===========================
Goodwill
Goodwill resulted from the Isoserve, Inc., and Chemotrade GmbH and subsidiary
acquisitions, and is being amortized on a straight line basis over six and
twenty years, respectively.
7
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $877,000 at January 31, 1999, bearing
interest at 10%, secured by the common stock purchased by Isonics, due June
1999, was also issued in connection with the purchase.
Long term debt
Long term debt consists of the following (in thousands):
January 31, 1999 April 30, 1998
---------------- --------------
Bank term loan - guaranteed by the SBA $ 0 $ 40
Bank term loan 220 147
Bank term loan 437 0
Revolving line of credit 460 159
Capital leases 3 46
--------------------------
Sub-total $1,120 $ 392
Less current maturities 261 80
--------------------------
Total $ 859 $ 312
==========================
The bank term loan is collateralized by all of Isonics' U.S. assets and bears
interest at the lender's prime (8.00% at January 31, 1999) plus 2.25%. Principal
and interest payments are due monthly based upon forty-eight (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 the lender's prime (8.00% at January 31, 1999) 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 twenty-five (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 the lender's prime (8.00% at January 31, 1999) 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.
8
<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 January 31, 1999,
accrued restructuring costs totaling $133,000 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
At January 31, 1999, and January 31, 1998, no one customer accounted for more
than 10% of total accounts receivable. However, one customer accounted for
approximately 17% of net revenues during the nine months ended January 31, 1999,
and approximately 13% of net revenues during the three months ended January 31,
1999.
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
January 31, 1999, accounts payable totaling approximately $35,000 was due to
IUT. The Company has also advanced IUT $54,000 for services to be performed in
the future. During the nine months ended January 31, 1999, Chemotrade sold
$308,000 of material to IUT and purchased $124,000 of material from IUT.
9
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 Deutsche Marks, and all amounts
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 January 31, 1999, 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 operations for the nine-month period ended January 31, 1999, 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, and two notes. The first note of $924,000 (1,663,000 DM) bearing
interest at 2% per month, was paid in August 1998, and a second note of $826,000
(1,500,000 DM) bearing interest at 10%, is due June 1, 1999.
The sellers have guaranteed Chemotrade's defined pretax earnings will be at
least 1,000,000 DM (the dollar equivalent of $584,000 at January 31, 1999), for
the sixteen months ended April 30, 1999, and twelve months ended April 30, 2000
and 2001. If the pretax 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 $877,000 at January 31, 1999 (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 consideration of 500,000 DM (the
dollar equivalent of $292,000 at January 31, 1999). If the pretax 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 pretax 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 $877,000 at January
31, 1999, and $826,000 at June 30, 1998, as well as other foreign currency gains
and losses have been included in foreign exchange expense in the condensed
consolidated statements of operations. The Functional Currency of Chemotrade is
the U.S. Dollar.
10
<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 (doing business as 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 nine months ended
January 31, 1999, include 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):
Nine Months Ended
January 31,
---------------------------------
1999 1998
------------- -------------
Net revenues $ 12,683 $ 14,949
Gross Margin 3,065 2,834
------------- -------------
Net income (loss) (257) (1,762)
------------- -------------
Net income (loss) per share--basic $ (0.04) $ (0.29)
============= =============
Shares used in computing per share
information 6,072 6,161
Net income (loss) per share--diluted $ (0.04) $ (0.29)
============= =============
Shares used in computing per share
information 6,072 6,161
11
<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 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-radio active 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.
12
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Effective April 30, 1998, Isonics acquired all of the outstanding capital stock
of Interpro (doing business as 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.
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 emission 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, SILC, or radio isotopes orders,
and product shipments made to DZ, SILC, and radio isotope users during such
quarter as was the case in certain previous quarters. 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.
13
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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 Nine Months Ended
January 31, January 31,
----------------------- ----------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues 100.0 % 100.0% 100.0% 100.0%
Cost of revenues 80.9 65.9 80.9 68.9
----- ----- ----- -----
Gross margin 19.1 34.1 19.1 31.1
----- ----- ----- -----
Operating expenses:
Selling, general &
administrative 12.4 18.8 17.1 19.1
Research & development 3.7 11.5 6.7 11.0
Restructuring & office closure -- -- 4.9 --
----- ----- ----- -----
Total operating expenses 16.1 30.3 28.7 30.1
----- ----- ----- -----
Operating income (loss) 3.0 3.8 (9.6) 1.0
----- ----- ----- -----
Other income (expense) net 0.8 1.2 (1.3) (3.1)
----- ----- ----- -----
Income (loss) before extraordinary
item and income taxes 3.8 5.0 (10.9) (2.1)
----- ----- ----- -----
Income tax expense 2.7 -- 1.4 --
----- ----- ----- -----
Income (loss) before extraordinary
Item 1.1 5.0 (12.3) (2.1)
----- ----- ----- -----
Extraordinary item--loss on
extinguishment of debt -- -- -- (4.8)
----- ----- ----- -----
NET INCOME (LOSS) 1.1 % 5.0% (12.3)% (6.9)%
===== ===== ===== =====
</TABLE>
14
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Net Revenues
Net revenues for the three and nine months ended January 31, 1999, were $6.670
million and $14.309 million, respectively, an increase of 239% and 171% over
$1.968 million and $5.274 million for the comparable periods in the prior fiscal
period. The growth on a quarterly and year-to-date basis is because of the
additional net revenues from the Interpro and Chemotrade acquisitions. Net
revenues from DZ decreased by approximately $67,000 for the three months ended
January 31, 1999, on increased unit sales of approximately 24%. Net revenues
from DZ decreased approximately $885,000 for the nine months ended January 31,
1999, on increased unit sales of approximately 4%. Average unit sales prices of
DZ decreased for the three and nine months ended January 31, 1999, 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 nine months ended January 31, 1999, decreased to
approximately 19.1% and 19.1% of net revenues from approximately 34.1% and 31.1%
for the same periods in the prior fiscal year. The decrease is because of
reduced unit sales prices of DZ, 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
margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased on a dollar basis to
approximately $826,000, or 12.4% of net revenues for the three months ended
January 31, 1999, from $369,000, or 18.8% of net revenues in the comparable
period of the prior year. The dollar increase for the quarter ended January 31,
1999, was primarily attributable to the acquisition of Interpro and Chemotrade,
while the percentage decrease was due primarily to increased net revenues
attributable acquisition of Interpro and Chemotrade. For the nine months ended
January 31, 1999, these expenses increased on a dollar basis to approximately
$2,444,000, or 17.1% of net revenues from $1,005,000, or 19.1% of net revenues
of the comparable period of the prior year. The dollar increase was again
primarily attributable to the acquisition of Interpro and Chemotrade, as was the
percentage decrease. The Company anticipates that selling, general and
administrative expenses will generally remain stable or decrease in absolute
dollars because of the restructuring and San Jose office closure, and may vary
as a percentage of net revenues (See Restructuring and office closure).
15
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Research and Development
Research and development expenses increased by approximately $23,000, or 10.1%,
to $250,000 for the quarter ended January 31, 1999, from $227,000 for the
comparable period in fiscal 1998, while declining on a percentage basis to 3.7%
of net revenues from approximately 11.5%. For the nine months ended January 31,
1999, research and development expenses increased by approximately $383,000, or
66.1%, to $962,000 from $579,000 for the comparable period in the previous
fiscal year, while decreasing on a percentage basis to 6.7% of net revenues from
11.0%.
The dollar increase during the quarter and nine months ended January 31, 1999,
was primarily because of 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 nine months ended January 31,
1999, compared to the same period of the previous fiscal year was because of
revenue growth associated with the Company's acquisitions. 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 (as measured in dollars), in the near term because of the timing
of material usage and outside services, but may vary as a percentage of
revenues.
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 location of its
subsidiary, 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. Restructuring and office
closure costs incurred through January 31, 1999, are approximately $575,000.
Other income (expense), net
Other income (expense), net reflects interest expense, amortization of issuance
costs, and foreign currency gains and losses. Other income, net increased by
$30,000 to $53,000 for the quarter ended January 31, 1999, from other income,
net of $23,000 for the comparable period of the previous fiscal year. The
increase was the result of foreign currency gains from notes payable denominated
in German Deutsche Marks due to the sellers of Chemotrade which was offset by an
increase in interest expense. Other expense, net increased by $16,000 to
$180,000 for the nine months ended January 31, 1999, from $164,000 during the
comparable period of the previous fiscal year. The increase was due mainly to
increased interest expense.
Income taxes
There was a provision for income taxes for the quarter ended January 31, 1999,
because of income generated by the Company's German-based subsidiary,
Chemotrade, during the quarter. The provision for the nine months ended January
31, 1999, of $197,000 was also the result of foreign taxes attributable to
Chemotrade. The provision of $1,000 for the three months and $0 for the nine
months ended January 31, 1998, was the result of domestic (primarily) state
taxes.
16
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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 $146,000 and used cash in operating activities of
$285,000 during the nine months ended January 31, 1999, and 1998, respectively.
Cash generated from operating activities during the nine months ended January
31, 1999, was principally the result of a net loss of $1.757 million and
increases in accounts receivable, and 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 and accrued
liabilities. Cash used by operating activities during the nine months ended
January 31, 1998, was principally the result of a net loss $363,000, net of
adjustments for non-cash items, primarily depreciation, amortization and
extraordinary loss on extinguishment of debt, and increases in accounts
receivable, inventory, and other current assets.
The Company's investing activities used cash of $666,000 and $72,000 for the
nine months ended January 31, 1999, and 1998, respectively. Cash used during the
nine months ended January 31, 1999, resulted primarily from the purchase of
Chemotrade and purchase of property and equipment. Investing activities for the
nine months ended January 31, 1998, were for purchases of property and
equipment.
Financing activities used cash of $296,000 during the nine months ended January
31, 1999, and provided cash of $1.601 million during the comparable period of
the previous fiscal year. Cash used during the nine months ended January 31,
1999, resulted primarily from the payment of bank debt and notes associated with
the Chemotrade acquisition, which was offset in part by proceeds from the line
of credit and term loans. 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.
At January 31, 1999, the Company had $228,000 of cash and cash equivalents, a
decrease of $816,000 compared to $1,044,000 as of April 30, 1998. At January 31,
1999, the Company had negative working capital of $1,062,000, a decrease of
$2,873,000 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 nine months ended
January 31, 1999. During the nine months ended January 31, 1999, the Company
paid the sellers of Chemotrade $1,601,000 of cash, and has one note for $877,000
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 ($234,000
at January 31, 1999). The Company is in the process of evaluating secured credit
facilities for Chemotrade.
17
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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 quarters and product
shipments by the Company to DZ customers during such periods. 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.
18
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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 and managerial 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. Mr. 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.
19
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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 has implement appropriate changes to its systems
to ensure Y2K compatibility. The Company believes the cost of addressing any
unidentified issues with the Year 2000 Problem will not have a material adverse
affect on the result of operations or financial position of the Company.
Additionally, the company has evaluated the potential impact on it of a Year 200
problem on the part of its important third party vendors and has found none.
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.
Based on published reports, the Company does not anticipate that the Year 2000
problem will have a material impact on its business or operations.
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 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.
20
<PAGE>
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended January 31,
1999.
21
<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 Golden, County of
Jefferson, State of Colorado, on the 16h day of March, 1999.
Isonics Corporation
(Registrant)
By /s/James E. Alexander
----------------------------------------------------
James E. Alexander
President, Chief Executive Officer and Director
By /s/Brantley J. Halstead
----------------------------------------------------
Brantley J. Halstead
Chief Accounting Officer and Chief Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-QSB FOR THE PERIOD ENDED JANUARY 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 228
<SECURITIES> 0
<RECEIVABLES> 3,389
<ALLOWANCES> 156
<INVENTORY> 1,134
<CURRENT-ASSETS> 5,139
<PP&E> 1,352
<DEPRECIATION> (263)
<TOTAL-ASSETS> 9,971
<CURRENT-LIABILITIES> 6,201
<BONDS> 859
0
0
<COMMON> 6,364
<OTHER-SE> (382)
<TOTAL-LIABILITY-AND-EQUITY> 9,971
<SALES> 14,309
<TOTAL-REVENUES> 14,309
<CGS> 11,575
<TOTAL-COSTS> 11,575
<OTHER-EXPENSES> 4,114
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<INTEREST-EXPENSE> 236
<INCOME-PRETAX> (1,560)
<INCOME-TAX> 197
<INCOME-CONTINUING> (1,757)
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<NET-INCOME> (1,757)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
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