<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-QSB
(Mark One)
/x/ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended July 31, 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 6,607,760 at September 10, 1999.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
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ISONICS CORPORATION
TABLE OF CONTENTS
FORM 10-QSB
<TABLE>
<CAPTION>
Part I: Financial Information
<S> <C>
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as
of July 31, 1999 and April 30, 1999...........................................3
Condensed Consolidated Statements of
Operations for the Three Month Periods
Ended July 31, 1999 and 1998..................................................5
Condensed Consolidated Statements of Cash
Flows for the Three Month Periods
Ended July 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...................................................................10
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K..................................................20
Signatures ..................................................................................21
</TABLE>
2
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PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED FINANCIAL STATEMENTS
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
(UNAUDITED)
JULY 31, 1999 APRIL 30, 1999
------------------------- -------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,627 $ 452
Accounts receivable (Net of allowance of $82) 1,135 932
Inventories 1,708 651
Prepaid expenses and other current assets 225 160
------------------------- -------------------------
Total current assets $ 4,695 $ 2,195
------------------------- -------------------------
LONG-TERM ASSETS
Property and equipment, net 952 1,018
Goodwill, net 3,326 3,388
Notes receivable from shareholders 133 130
Other assets 64 75
------------------------- -------------------------
Total long-term assets $ 4,475 $ 4,611
------------------------- -------------------------
TOTAL ASSETS $ 9,170 $ 6,806
========================= =========================
</TABLE>
See notes to condensed consolidated financial statements.
3
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ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED)
JULY 31, 1999 APRIL 30, 1999
------------------------- -------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable and line of credit $ 1,356 $ 1,136
Notes payable to related parties 246 922
Accounts payable 1,734 1,368
Accrued liabilities 1,139 1,086
------------------------------------------------------
Total current liabilities $ 4,475 $ 4,512
------------------------------------------------------
SHAREHOLDERS' EQUITY:
Class A Preferred Stock--no par value. 10,000,000
shares authorized; 1,816,667 shares outstanding 2,725 --
Common stock--no par value. 20,000,000 shares
authorized; 6,607,760 shares issued and outstanding 6,952 6,795
Notes receivable from shareholders (477) (469)
Accumulated deficit (4,505) (4,032)
------------------------------------------------------
Total shareholders' equity $ 4,695 $ 2,294
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,170 $ 6,806
======================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
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ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
------------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Net revenues $ 3,084 $ 3,933
Cost of revenues 2,399 2,989
---------------- ---------------
Gross margin 685 944
Operating expenses:
Selling, general and administrative 885 682
Research and development 127 323
Restructuring and office closure 66 --
---------------- ---------------
Total operating expenses 1,078 1,005
---------------- ---------------
Operating loss (393) (61)
---------------- ---------------
Other income (expense):
Foreign exchange 4 --
Interest income 41 24
Interest expense (124) (76)
---------------- ---------------
Total other income (expense), net (79) (52)
---------------- ---------------
Loss before income taxes (472) (113)
Income tax expense 1 20
---------------- ---------------
NET LOSS $ (473) $ (133)
================ ===============
NET LOSS PER SHARE--BASIC AND DILUTED
Net loss per share $ (0.07) $ (0.02)
Shares used in computing per share
information 6,608 5,978
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31,
------------------------------------------------------
1999 1998
------------------------- -------------------------
<S> <C> <C>
Net cash used in operating activities $ (884) $ (305)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Chemotrade, net of cash acquired -- (489)
Purchases of property and equipment (1) (32)
------------------------- -------------------------
Cash used in investing activities $ (1) $ (521)
------------------------- -------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit 370 187
Proceeds from issuance of long-term debt 75 --
Repayments of debt (615) (25)
Proceeds from issuance of common stock -- 17
Proceeds from issuance of Class A Preferred Stock 2,230 --
------------------------- -------------------------
Cash provided by financing activities $ 2,060 $ 179
------------------------- -------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS: 1,175 (647)
Cash and cash equivalents at beginning of period 452 1,044
------------------------- -------------------------
Cash and cash equivalents at end of period $ 1,627 $ 397
========================= =========================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 124 $ 60
========================= =========================
Income taxes $ 1 $ 1
========================= =========================
Supplemental disclosure of noncash investing and financing
activities:
Accounts payable converted into debt $ 243 $ --
Liabilities converted into Class A Preferred Stock 495 --
Equipment acquired under capital lease -- 10
========================= =========================
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
====================
</TABLE>
See notes to condensed consolidated financial statements.
6
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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 July 31, 1999,
and for the three months ended July 31, 1999, and 1998, have been prepared on
the same basis as the annual 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 our audited financial
statements and notes thereto included in our 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
<TABLE>
<CAPTION>
Inventories consist of (in thousands):
JULY 31, 1999 APRIL 30, 1999
------------------------- -------------------------
<S> <C> <C>
Finished goods $ 1,181 $ 420
Work in progress -- --
Raw materials 527 231
------------------------- -------------------------
Total inventories $ 1,708 $ 651
========================= =========================
</TABLE>
7
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ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES PAYABLE - RELATED PARTIES
Two notes were issued to each of the sellers of Chemotrade GmbH and subsidiary
as consideration for a portion of the purchase price. The first note was repaid
in August 1998. A partial payment of approximately $550 thousand, was paid in
June 1999, on the second note. The remaining balance of approximately $343
thousand, including interest, was refinanced and is now payable July 31, 2000.
The new interest rate is 12% per annum. In addition, approximately 69,000
warrants (five-year, $3.00 strike price) were issued in June 1999, in
conjunction with the refinancing. The fair value of these warrants was
determined to be $157 thousand, using the Black-Scholes option pricing model,
and this value is being amortized as additional interest expense over the
revised term of the note.
RESTRUCTURING AND OFFICE CLOSURE COSTS
On October 31, 1998, the Company announced a restructuring of its operations and
relocation of its headquarters from San Jose, California to Golden, Colorado,
the location of the Company's subsidiary, Interpro. A net charge for fiscal 1999
of approximately $691 thousand, was recorded, of which approximately $468
thousand, was related to the write-off of certain fixed assets, approximately
$132 thousand, for the termination of certain lease agreements and approximately
$91 thousand, for severance and other costs. As of July 31, 1999, the only
significant restructuring cost remaining is the lease payments on the former San
Jose office. This liability, net of sublease income, is estimated to be
approximately $61 thousand, and will be paid over the next four years.
SIGNIFICANT CUSTOMERS
At July 31, 1999, one customer accounted for 33% of total accounts receivable.
Two customers accounted for approximately 29% and 12% respectively of net
revenues during the three months ended July 31, 1999. Two customers accounted
for approximately 30% and 14% respectively of net revenues during the three
months ended July 31, 1998.
8
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ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PREFERRED STOCK ISSUANCE
On July 29, 1999, the Company completed a private placement financing to
accredited investors and certain creditors valued in total at $2.7 million. The
Company issued 1,830,000 units, each consisting of one share of Series A
Convertible Preferred Stock and one warrant. The Company received $2,250,000
cash proceeds and converted $425,000 of long-term debt in connection with the
private placement. Each share of the Series A Convertible Preferred Stock is
convertible into one share of the Company's common stock at a conversion price
of $1.50. The liquidation preference for the Series A Convertible Preferred
Stock is $1.50. Each warrant allows the investor to purchase one share of the
Company's common stock for $3.75 through July 29, 2002.
In addition to converting $425,000 of existing debt into equity as part of the
private placement, the Company:
- - issued 500,000 warrants to purchase shares of the Company's common stock to
an investment banker for service rendered following this placement. The
warrants are exercisable at $3.75 per share through July 29, 2002.
- - issued 46,667 units in satisfaction of all current and future obligations
under the Isoserve royalty agreement.
- - extended the payment due date for the remaining balance on the Chemotrade
acquisition note to July 2000 and extended the payment due date for certain
unsecured promissory notes to January 2000.
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 OUR 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 OUR 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 US ON THE DATE HEREOF,
AND WE UNDERTAKE NO OBLIGATION TO UPDATE ANY SUCH FORWARD LOOKING STATEMENTS. IT
IS IMPORTANT TO NOTE THAT OUR 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, we
produce a wide range of enriched stable isotopes, which are then converted into
products, which meet the specialized needs of our customers.
Our core business originally was the production and supply of depleted zinc
("DZ"), a non-radio active stable isotope, to the energy industry. In fiscal
1996, we expanded our business scope to include development of isotopically
engineered materials for the medical research, medical diagnostic and
semiconductor industries. The acquisition of Chemotrade added radioactive
isotopes to our available products. Today we are no longer dependent on depleted
zinc for a majority of our revenues. We believe that a substantial portion of
our revenues in the future will depend on our success in developing and selling
products in the semiconductor and stable and radioactive isotope markets.
10
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Interpro (doing business as Colorado Minerals Research Institute) is a contract
research and development and materials processing company which performs key
steps in our depleted zinc manufacturing process and is developing new, lower
cost technologies to better meet our customer needs. Additionally, Interpro
generates the majority of its revenues from contract research and process
development engagements.
Chemotrade GmbH is headquartered in Dusseldorf, Germany, and its subsidiary is
located in Leipzig, Germany. Chemotrade is a value-added re-seller of stable and
radioactive isotopes. It supplies radioactive 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 radioactive
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
radioisotope used in positron emission tomography. Chemotrade's market is
primarily Europe but frequently sales are made to North America and Asia.
Prior to June 1998, substantially all of our net revenues in any particular
period were attributable to a limited number of customers and sales of depleted
zinc and other stable isotopes. We have historically operated with little
backlog. With the acquisition of Chemotrade we added radioisotopes to our
product mix, and consistent with our historical experience, our quarterly
results are expected to be materially affected by the size, timing and quantity
of depleted zinc, and since June 1998, radioisotopes orders, and product
shipments during a given quarter. As a result, a lost or delayed sale could have
a significant impact on our operating results for a particular period, and such
fluctuations could materially and adversely affect the our business, financial
condition and results of operations.
11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statement of
operations data expressed as a percentage of net sales. The table and the
discussion below should be read in conjunction with the condensed consolidated
financial statements and the notes thereto appearing elsewhere in this report.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
--------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Net revenues 100.0 % 100.0 %
Cost of revenues 77.8 76.0
----------------- -----------------
Gross margin 22.2 24.0
----------------- -----------------
Operating expenses:
Selling, general &
administrative 28.7 17.4
Research & development 4.1 8.2
Restructuring & office closure 2.1 --
----------------- -----------------
Total operating expenses 34.9 25.6
----------------- -----------------
Operating income (loss) (12.7) (1.6)
--------------------------------------
Other income (expense) net (2.6) (1.3)
----------------- -----------------
Income (loss) before income taxes (15.3) (2.9)
----------------- -----------------
Income tax expense -- 0.5
----------------- -----------------
NET INCOME (LOSS) (15.3) % (3.4) %
================= =================
</TABLE>
12
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NET REVENUES
Net revenues for the three months ended July 31, 1999, were $3.084 million, a
decrease of 22% over $3.933 million for the same period in the prior fiscal
year. The decrease is primarily because our net revenues from contract
research & development engagements decreased approximately $606 thousand for
the three months ended July 31, 1999, to approximately $374 thousand. Net
revenues from depleted zinc sales were approximately $1.016 million, net
revenues from radioisotope sales were approximately $950 thousand, and net
revenues from stable isotope sales were approximately $744 thousand, for the
three months ended July 31, 1999. Net revenues from depleted zinc and
radioisotope sales were slightly lower than the same quarter in the prior
fiscal year primarily because of fewer orders for these products. Net
revenues from stable isotope sales increased slightly primarily because of
increased demand for our carbon-13 and oxygen-18 products.
GROSS MARGIN
Gross margin for the three months ended July 31, 1999, decreased to
approximately 22% of net revenues from approximately 24% for the same period in
the prior fiscal year. The decrease is primarily because of a change in product
mix sold during the quarter as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased on a dollar basis to
approximately $885 thousand, or approximately 29% of net revenues for the three
months ended July 31, 1999, from $682 thousand, or 17.4% of net revenues in the
comparable period of the prior year. The dollar increase for the quarter ended
July 31, 1999, was primarily attributable to increased usage of professional
services including legal, business development and accounting services, while
the percentage increase was primarily caused by lower revenues. We anticipate
that selling, general and administrative expenses will generally remain stable
or decrease in absolute dollars because of our move to Colorado is complete, and
because of cost cutting measures implemented throughout the Company,
specifically the consolidation of overhead functions in Golden with our
subsidiary, Interpro. However, as a percentage of net revenues SG&A costs will
still vary because of the timing and size of large depleted zinc and radioactive
isotope sales.
13
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenses decreased by approximately $196 thousand, or
approximately 61%, to $127 thousand for the quarter ended July 31, 1999, from
$323 thousand for the comparable period in fiscal 1998, while declining on a
percentage basis to approximately 4% of net revenues from approximately 8%.
The dollar decrease during the quarter ended July 31, 1999, was primarily
because of decreased staffing and material costs associated with the development
of isotopically pure silicon wafers and development costs incurred at Interpro.
We believe that the development and introduction of new product applications is
critical to our future success and we expect that research and development
expenses will increase (as measured in dollars), in the near term because of the
timing of material usage and outside services, but will likely continue to vary
as a percentage of revenues because of the timing and size of large depleted
zinc and radioactive isotope sales.
RESTRUCTURING AND OFFICE CLOSURE
On October 31, 1998, we announced a restructuring of our operations and
relocation of our headquarters to Golden, Colorado, the location of our
subsidiary, Interpro. We recorded a $708 thousand, charge of which approximately
$468 thousand, is related to the write-off of certain fixed assets, $132
thousand to terminate certain lease agreements and approximately $108 thousand,
for severance and other costs. As of July 31, 1999, the only significant
restructuring cost remaining is the lease payments on the former San Jose
office, which has been sublet for the remaining term of our lease. The net
liability is estimated to be approximately $61 thousand and will be incurred
over the next four years. The $66 thousand incurred in the quarter ending July
31, 1999 was primarily moving costs incurred by two senior executives.
OTHER INCOME (EXPENSE), NET
Other income (expense), net reflects interest expense, amortization of debt
issuance costs and the fair value of warrants issued in connection with the
debt, and foreign currency gains and losses. Other (expense), net increased by
approximately $27 thousand, to $79 thousand, for the quarter ended July 31,
1999, from other (expense), net of approximately $52 thousand, for the
comparable period of the previous fiscal year. The increase in interest expense
of approximately $48 thousand, was offset by an increase in interest income of
approximately $17 thousand, and a foreign currency exchange gain of
approximately $4 thousand.
INCOME TAXES
There was income tax expense for the quarter ended July 31, 1999, because of
income generated by our Germany-based subsidiary, Chemotrade, during the
quarter. The income tax expense for the three months ended July 31, 1999, was
approximately $1 thousand, a decrease of approximately $19 thousand from the
income tax expense incurred in the comparable period of the prior fiscal year of
approximately $20 thousand.
14
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funding have been cash from borrowed funds and sales of
preferred stock. We used cash in operating activities of approximately $884
thousand and $305 thousand, during the three months ended July 31, 1999, and
1998, respectively. Cash used in operating activities during the three months
ended July 31, 1999 was principally the result of a net loss of approximately
$473 thousand and increases in accounts receivable, and inventory, offset by
adjustments for non-cash items, primarily depreciation and amortization, and
increases in accounts payable and accrued liabilities. Cash used by operating
activities during the three months ended July 31, 1998, was principally the
result of a net loss of $133 thousand, net of adjustments for non-cash items,
primarily depreciation, amortization, and increases in accounts receivable,
inventory, and other current assets.
Our investing activities used cash of $1 thousand, and $32 thousand for the
three months ended July 31, 1999, and 1998, respectively, resulting from
purchases of property and equipment. Cash amounting to $489 thousand, was also
used during the three months ended July 31, 1998 for the purchase of our
subsidiary Chemotrade.
Financing activities generated cash of $2.060 million during the three months
ended July 31, 1999, and $179 thousand during the comparable period of the
previous fiscal year. Cash provided by financing activities during the three
months ended July 31, 1999, resulted primarily from the issuance of $2.725
million in convertible preferred stock for cash, proceeds from net borrowings
on the revolving line of credit, of $370 thousand, and issuance of debt of $75
thousand, that were offset by repayments of debt of $615 thousand. Cash
provided during the three months ended July 31, 1998, resulted primarily from
repayments of debt of $25 thousand, offset by net borrowings on the revolving
line of credit of $187 thousand and proceeds of $17 thousand from the sale of
common stock.
At July 31, 1999, we had approximately $1.627 million of cash and cash
equivalents, an increase of approximately $1.175 million, compared to $452
thousand as of April 30, 1999. At July 31, 1999, we had positive working capital
of approximately $220 thousand, an increase of approximately $2.537 million from
April 30, 1999. The increase is primarily the result of proceeds from the
issuance of preferred stock in July 1999.
15
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
On July 29, 1999, we issued approximately $2.725 million in convertible
preferred stock. Cash proceeds from this transaction totaled approximately
$2.230 million and conversion of several notes payable to preferred stock
totaled approximately $0.495 million. This convertible preferred stock
placement is described in detail in the Form 8-K we filed on August 11, 1999.
The revolving line of credit with Coast Business Credit ("Coast"), the
Company's primary lender, is secured by substantially all of the assets of
the Company. Interest is at prime (7.75% at July 31, 1999) plus 4%. In
April 1999, Coast sent notification that we were in default of the terms of
the loan agreements. As a result, Coast placed substantial restrictions on
the availability of funds and established revised repayment terms. Because
of this default, the entire outstanding balance has been classified as
current. Borrowings are presently limited to the lesser of:
- - $500,000 or 35% of eligible inventory; and
- - $1,250,000 or 80% of eligible accounts receivable.
We have implemented new cash management policies and procedures, which will
increase our ability to more effectively manage our cash resources. These
efforts include more rigorous internal reporting, and timing inventory
acquisitions more closely with sales to reduce inventory carrying costs and
better match related cash inflows and outflows. We believe that our cash
management strategies along with borrowings from our line of credit, and the
proceeds from our recently completed private placement, will be sufficient
for us to meet our cash needs for the next twelve months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In evaluating our business, prospective investors should carefully consider the
following factors in addition to the other information presented in this report
and in our other reports filed with the SEC that attempt to advise interested
parties of the risks and factors that may affect our business.
RELATIONSHIP WITH CERTAIN SUPPLIERS AND AVAILABILITY OF RAW MATERIALS
We depend on 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. We also rely upon a single supplier
of raw material for DZ. We 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 our single
supplier of raw material could have a material and adverse affect upon our
financial condition and results of operations.
16
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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, our operations 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
our 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 our net revenues in any particular period
have been attributable to a limited number of customers. Consistent with our
historical experience, our quarterly results during fiscal 1999 and 2000 are
expected to be affected materially by the level of orders received from
significant depleted zinc, stable, and radioisotope users during such quarters
and product shipments by us to depleted zinc and radioisotope customers during
such periods. There can be no assurance that our current 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 our financial condition
and results of operations.
FACTORS AFFECTING OPERATING RESULTS; VARIABILITY OF ORDERS
We operate with little backlog and a significant portion of our net revenues
have been, and we believe 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 our operating results. Our
expense levels are relatively fixed, and as has been the case in prior quarters,
these factors will affect our operating results for future periods.
17
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
MANAGEMENT OF GROWTH
We have experienced periods of rapid growth that have placed a significant
strain on our financial and managerial resources. Our ability to manage growth
effectively, particularly given our increasing scope of operations, will require
us to continue to implement and improve our management, operational, and
financial information systems, as well as to develop the management skills of
our personnel and to train, motivate and manage our employees. Our failure to
effectively manage growth could have a material adverse effect on our business,
financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
Our future success will depend in significant part upon the continued service of
our key technical, sales and senior management personnel, including James E.
Alexander, our President and Chief Executive Officer, Boris Rubizhevsky, our
Senior Vice President, Isotope Production and Supply, Robert Cuttriss, President
of Interpro, and Herbert Hegener, Managing Director of Chemotrade. We maintain
$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. We believe that our future success will depend in large part upon
our ability to attract and retain qualified personnel for our operations. The
failure to attract or retain such persons could materially adversely affect our
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. We rely on our 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. We have
evaluated such systems and have implemented and tested appropriate changes to
our systems to ensure Y2K compatibility. We believe the cost of addressing any
unidentified issues with the Year 2000 Problem will not have a material adverse
affect on our results of operations or financial position. Additionally, based
on information received from our key third party vendors, we have evaluated the
potential impact of a Year 2000 problem on the part of our important third party
vendors and have found none. However, even though the Year 2000 issue does not
materially affect our internal systems, we could be affected through disruption
in the operation of the enterprises with which we interact.
18
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
VOLATILITY OF STOCK PRICE
The trading price of our 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 us or our 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 our common stock and
common stock warrants.
19
<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
July 31, 1999, however on approximately August 11, 1999, we filed a Form 8-K
describing our sale of approximately $2.725 million of convertible preferred
stock. This sale occurred on July 29, 1999.
20
<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 10h day of September, 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
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE PERIOD ENDED JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-START> MAY-1-1999
<PERIOD-END> JUL-31-1999
<CASH> 1,627
<SECURITIES> 0
<RECEIVABLES> 1,135
<ALLOWANCES> 0
<INVENTORY> 1,708
<CURRENT-ASSETS> 4,695
<PP&E> 952
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2,725
<COMMON> 6,952
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<OTHER-EXPENSES> 79
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<INCOME-PRETAX> (472)
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