<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-QSB
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
</TABLE>
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2000
<TABLE>
<C> <S>
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT.
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 001-12531
------------------------
ISONICS CORPORATION
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 77-0338561
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
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 11,793,326 at December 13, 2000.
Transitional Small Business Disclosure Format (check
one): Yes / / No /X/
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
ISONICS CORPORATION
TABLE OF CONTENTS
FORM 10-QSB
<TABLE>
<S> <C> <C> <C>
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of October 31, 2000
and April 30, 2000........................................ 3
Condensed Consolidated Statements of Operations for the
Three and Six Month Periods Ended October 31, 2000 and
1999...................................................... 4
Condensed Consolidated Statements of Cash Flows for the Six
Month Periods Ended October 31, 2000 and 1999............. 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 2: Changes in Securities....................................... 24
Item 6: Exhibits and Reports on Form 8-K............................ 24
Signatures..................................................................................... 25
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED FINANCIAL STATEMENTS
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, 2000 APRIL 30, 2000
---------------- --------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,082 $ 3,385
Accounts receivable (Net of allowance of $308 and $119,
respectively)........................................... 637 1,055
Notes receivable.......................................... 458 208
Income taxes receivable................................... 426 --
Inventories............................................... 280 266
Prepaid expenses and other current assets................. 90 209
Deferred income taxes, current............................ 53 148
------- -------
Total current assets.................................... 3,026 5,271
------- -------
LONG-TERM ASSETS
Property and equipment, net............................... 506 660
Goodwill, net............................................. 2,977 3,062
Notes receivable from shareholders........................ 17
Deferred income taxes..................................... 492 492
Other assets.............................................. 32 31
------- -------
Total long-term assets.................................. 4,007 4,262
------- -------
TOTAL ASSETS................................................ $ 7,033 $ 9,533
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and line of credit.......................... $ 17 $ 20
Accounts payable.......................................... 534 533
Accrued liabilities....................................... 744 591
Income taxes payable...................................... 6 373
------- -------
Total current liabilities............................... 1,301 1,517
------- -------
SHAREHOLDERS' EQUITY:
Class A Preferred Stock--no par value. 10,000,000 shares
authorized; 1,180,333 shares issued and outstanding on
October 31, 2000 and 1,830,000 shares issued and
outstanding on April 30, 2000........................... 1,770 2,745
Common stock--no par value. 20,000,000 shares authorized;
11,455,826 shares issued and outstanding on October 31,
2000 and 10,492,931 shares issued and outstanding on
April 30, 2000.......................................... 7,999 6,764
Deferred compensation..................................... (112) (150)
Accumulated deficit....................................... (3,925) (1,343)
------- -------
Total shareholders' equity.............................. 5,732 8,016
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 7,033 $ 9,533
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues............................................... $ 1,955 $4,460 $ 3,991 $7,544
Cost of revenues........................................... 1,550 3,469 3,071 5,868
------- ------ ------- ------
Gross margin........................................... 405 991 920 1,676
Operating expenses:
Selling, general and administrative...................... 1,780 945 2,980 1,830
Research and development................................. 412 205 716 332
Restructuring and office closure......................... -- -- -- 66
------- ------ ------- ------
Total operating expenses............................... 2,192 1,150 3,696 2,228
------- ------ ------- ------
Operating loss............................................. (1,787) (159) (2,776) (552)
------- ------ ------- ------
Other income (expense):
Foreign exchange......................................... (57) (4) 11 --
Interest and other income................................ 109 121 208 162
Interest expense......................................... (10) (101) (26) (225)
------- ------ ------- ------
Total other income (expense), net...................... (42) 16 193 (63)
------- ------ ------- ------
Loss before income taxes................................... (1,745) (143) (2,583) (615)
Income tax expense (benefit)............................... (1) -- -- 1
------- ------ ------- ------
NET LOSS................................................... $(1,744) $ (143) $(2,583) $ (616)
======= ====== ======= ======
NET LOSS PER SHARE--BASIC AND DILUTED
Net loss per share......................................... $ (0.21) $(0.02) $ (0.33) $(0.09)
Shares used in computing per share information............. 8,112 6,608 7,878 6,608
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net cash (used in) operating activities..................... $(2,495) $(1,385)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (21) --
------- -------
Cash used in investing activities....................... $ (21) $ --
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit.............................. -- (298)
Proceeds from issuance of notes payable................... -- 75
Repayments of notes payable............................... (3) (781)
Proceeds from issuance of common stock.................... 216 --
Proceeds from issuance of Class A Preferred Stock......... -- 2,250
------- -------
Cash provided by financing activities................... $ 213 $ 1,246
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS:.................. (2,303) (139)
Cash and cash equivalents at beginning of period.......... 3,385 452
------- -------
Cash and cash equivalents at end of period................ $ 1,082 $ 313
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 1 $ 186
======= =======
Income taxes............................................ $ -- $ 1
======= =======
Supplemental disclosure of noncash investing and financing
activities:
Accounts payable converted into notes payable............. $ -- $ 243
Liabilities converted into Class A Preferred Stock........ -- 495
Issuance of warrants in conjunction with notes payable.... -- 157
Class A Preferred Stock converted into Common Stock....... 975 --
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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,
2000, and for the three months and six months ended October 31, 2000, and 1999,
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 for the year ended April 30, 2000.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of
common shares and potentially dilutive securities outstanding during the period.
Potentially dilutive securities consist of the incremental common shares
issuable upon conversion of preferred stock (using the "if converted" method)
and shares issuable upon the exercise of stock options and warrants (using the
"treasury stock" method). Potentially dilutive securities are excluded from the
computation of net income (loss) per share if their effect is anti-dilutive.
Accordingly, as of October 31, 2000, a total of approximately 4,921,646
outstanding stock options and warrants, and 1,180,333 outstanding Class A
Convertible Preferred Stock shares have been excluded from the diluted net
income (loss) per share calculation, as the inclusion would be anti-dilutive.
Accordingly, as of October 31, 1999, a total of approximately 5,794,047
outstanding stock options and warrants, and 1,830,000 outstanding Class A
Convertible Preferred Stock shares have been excluded from the diluted net
income (loss) per share calculation, as their inclusion would be anti-dilutive.
Contingently issued shares are included in the computation when the related
conditions are satisfied. Accordingly, as of October 31, 2000, 3,130,435 shares
of Common Stock were excluded from the net income (loss) per share calculation,
as the issuance of this Common Stock is contingent upon the delivery of
silicon-28 per the terms of the Eagle-Picher transaction, as described in the
paragraph titled "SALE OF DEPLETED ZINC BUSINESS," under Management's Discussion
and Analysis. Eagle-Picher disputes our calculation and believes we should issue
to it an additional 155,279 shares of Common Stock. We believe Eagle-Picher's
calculation is in error and we are continuing discussions with representatives
of Eagle-Picher to resolve this matter. These disputed shares have also been
excluded from the earnings per share calculation, as they have not been issued.
6
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the six month period ended October 31, 2000, we issued the following
shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF COMMON
DESCRIPTION STOCK SHARES
----------- ----------------
<S> <C>
Balance as of April 30, 2000............................... 10,492,931
Exercise of options for cash............................... 185,912
Conversion of Class A Preferred Stock...................... 313,333
Issuance for services...................................... 4,000
ESPP issuances............................................. 7,484
----------
Balance as of July 31, 2000................................ 11,003,660
Exercise of options for cash............................... 16,500
Conversion of Class A Preferred Stock...................... 336,334
Surrender of Warrants for Common Stock..................... 99,332
----------
Balance as of October 31, 2000............................. 11,455,826
</TABLE>
INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, 2000 APRIL 30, 2000
---------------- --------------
<S> <C> <C>
Finished goods................................... $156 $139
Work in progress................................. 124 127
---- ----
Total inventories.............................. $280 $266
</TABLE>
SIGNIFICANT CUSTOMERS
At October 31, 2000, four customers accounted for 56.3% of total accounts
receivable. These four customers, plus a fifth customer accounted for
approximately 42.6% of net revenues during the three months ended October 31,
2000. These same five customers accounted for approximately 45.4% of net
revenues during the six months ended October 31, 2000. A different customer
accounted for approximately 17% of net revenues during the three months ended
October 31, 1999, and the same customer accounted for approximately 10% of net
revenues during the six months ended October 31, 1999.
7
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Segment revenues:
Isotope products.......................... $1,955 $4,076 $3,991 $6,827
Contract research and development services
and other............................... -- 384 -- 717
------ ------ ------ ------
Total................................... $1,955 $4,460 $3,991 $7,544
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Segment operating (loss) income:
Isotope products.......................... $(1,787) $ (28) $(2,776) $(329)
Contract research and development services
and other............................... -- (131) -- (223)
------- ----- ------- -----
Total................................... $(1,787) $(159) $(2,776) $(552)
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 2000
----------------
<S> <C>
Total Assets:
Isotope products.......................................... $6,190
Contract research and development services and other...... 843
------
Total................................................... $7,033
</TABLE>
8
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of operations by geographic area is as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
United States............................................. $ 771 $1,895 $1,299 $2,805
Germany................................................... 1,184 2,565 2,692 4,739
------ ------ ------ ------
Total................................................... $1,955 $4,460 $3,991 $7,544
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating (loss) income:
United States............................................. $(1,766) $(275) $(2,637) $(724)
Germany................................................... (21) 116 (139) 172
------- ----- ------- -----
Total................................................... $(1,787) $(159) $(2,776) $(552)
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 2000
----------------
<S> <C>
Total Assets:
United States............................................. $5,780
Germany................................................... 1,253
------
Total................................................... $7,033
</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 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 enriched stable isotopes. Enriched 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. Enriched 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.
Originally, our core business was the production and supply of depleted
zinc, a non-radioactive 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 GmbH ("Chemotrade") in 1998 added
radioactive isotopes (or radioisotopes) to our available products. As a result
of the sale of our depleted zinc business in December 1999, (as described in the
paragraph entitled "SALE OF DEPLETED ZINC BUSINESS,") our revenues in the future
will depend on our success in developing and selling products in the
semiconductor and stable and radioactive isotope markets.
On May 1, 2000, we reorganized International Process Research Corporation
("Interpro," doing business as Colorado Minerals Research Institute), as
described in the paragraph, "REORGANIZATION OF INTERPRO SUBSIDIARY." Previously
Interpro was a contract research and development and materials processing
company and was developing new, lower cost technologies to better meet our then
existing customers' needs. As a result of the reorganization, Interpro will
focus on one specific application--the recovery and recycling of zinc metal from
various sources. As discussed below, we are considering selling all or a portion
of Interpro to a management group, however, this transaction is subject to
definitive agreements that have not yet been negotiated, as well as other
considerations.
Chemotrade 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.
Additionally, 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 sales are also made to North America and Asia.
10
<PAGE>
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 have been materially affected by the size, timing and quantity of orders
and product shipments during a given quarter.
SALE OF DEPLETED ZINC BUSINESS
On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC ("Eagle-Picher") for approximately $8.2 million, of which
$6.7 million was paid on December 1, 1999. Subject to certain conditions three
additional annual payments of $500,000 each are due on November 30, 2000, 2001
and 2002, representing the balance of $1.5 million. These installments are
contingent upon the performance of an unaffiliated supplier of depleted zinc
whose contract with us was assigned to Eagle-Picher.
Eagle-Picher failed to make the first additional payment due November 30,
2000. We believe that the condition precedent has been met and that Eagle-Picher
has no defense to its non-payment. We have demanded payment from Eagle-Picher,
but Eagle-Picher has made an unacceptable counteroffer. Correspondence from
Eagle-Picher indicated that it may be using the mandatory payment as leverage to
renegotiate certain other portions of our agreements.
We had intended to recognize a contingent gain, of $1.5 million, on a
straight-line basis over the thirty-six month period (approximately $41,667 per
month), as the aforementioned unaffiliated supplier performed under the
contract. Three months, or approximately $125,000, have been recognized in the
quarter ended October 31, 2000. Six months, or approximately $250,000, have been
recognized in the six months ended October 31, 2000. We will cease recognizing
any additional contingent gain until the dispute with Eagle-Picher has been
resolved. We have not yet established a reserve for the $500,000 due on
November 30, 2000, as we believe we will be able to resolve this dispute and
collect the $500,000. If, however, the matter is not resolved by January 31,
2000, we will incur a charge of $500,000 to offset the contingent gain
recognized since December 1999.
Additionally, as of December 1, 1999, we signed a long-term isotope supply
agreement with Eagle-Picher, and Eagle-Picher was to have supplied us by
December 31, 2000, with 200 kilograms of silicon-28 to be used in research and
development activities. We gave Eagle-Picher a warrant to obtain 4,000,000
shares of our common stock, however, these warrants and the underlying shares,
are contingent upon the delivery of silicon-28 by Eagle-Picher by December 31,
2000. As silicon-28 was to be delivered we intended to record the value of the
silicon and the warrants proportionately (20,000 warrants per kilogram), at a
value of $25.00 per gram. This is the price we most recently paid for silicon-28
from another supplier.
In addition to its refusal to pay the aforementioned $500,000 due
November 30, 2000, Eagle-Picher has indicated its apparent inability to deliver
200 kilograms of silicon-28, meeting the specifications as set forth in our
agreement, by December 31, 2000. We know that Eagle-Picher's silicon-28
production facility in Oklahoma has encountered certain technical difficulties,
which Eagle-Picher refers to as a FORCE MAJEURE. We believe that Eagle-Picher's
technical difficulties do not meet the definition of FORCE MAJEURE per our
agreements, which would entitle Eagle-Picher to a delay in the delivery
requirement.
Eagle-Picher exercised their warrant, under a net exercise provision in the
warrant agreement, and received 3,130,435 shares of our Common Stock, in
March 2000. Eagle-Picher disputes our calculation and believes we should issue
to it an additional 155,279 shares of Common Stock. We believe Eagle-Picher's
calculation is in error. As Eagle-Picher is claiming FORCE MAJEURE, it believes
it is entitled to retain its ownership to the 3,130,435 shares, as well as the
disputed 155,279 shares of our Common Stock. We continue to dispute
Eagle-Picher's calculations, and we also believe Eagle-Picher may have
11
<PAGE>
improperly exercised the Warrant because of its failure to execute the required
subscription agreement. We are evaluating the ramifications of this apparent
improper warrant exercise.
Isonics has notified Eagle-Picher of its intention to pursue the dispute
resolution mechanisms as set forth in the agreement with Eagle-Picher to address
these and other related matters.
As a result of Eagle-Picher's alleged breaches and defaults, we do not
anticipate having the 200 kilograms of silicon-28 meeting the specifications set
forth in the agreement, as promised by Eagle-Picher by December 31, 2000. We
have other sources of supply for silicon-28 meeting the necessary
specifications, although orders have not been placed. Without silicon-28 meeting
our specifications our research and development activities will be hindered.
Additionally, Eagle-Picher's failure to make the payment due on November 30,
2000, has caused our working capital to be significantly reduced, and we are
seeking other means of financing our operations. On December 13, 2000, we
entered into a financing agreement described in more detail in the paragraph
titled, "LIQUIDITY AND CAPITAL RESOURCES."
As a result of the sale of the depleted zinc business, we have realized
significantly lower revenues in the period since the completion of the sale, and
we anticipate lower revenues in future quarters. Consequently, a lost or delayed
sale of stable or radioisotopes could have a significant impact on our operating
results for a particular period, and any fluctuations could materially and
adversely affect our business, financial condition and results of operations.
REORGANIZATION OF INTERPRO SUBSIDIARY
On May 1, 2000, we substantially reorganized one of our subsidiaries,
Interpro, to focus on one specific application, the recovery and recycling of
zinc metal from various sources, including galvanized steel scrap, electric arc
furnace dust, and brass scrap. We chose this course of action for two reasons.
First, we believe the market potential for this, and related processes, is
significant. Second, the profound and lengthy slump in the mineral processing
and mining industries has significantly eroded Interpro's historical customer
base. We will continue to meet the demands of a few remaining customers through
various sub-contractor relationships. We will also keep the physical
infrastructure in place at our Golden, Colorado location if market conditions
warrant a reentry into Interpro's historical markets. Currently, we are using a
significant portion of this infrastructure in our zinc recovery and recycling
project.
We are presently considering alternatives for Interpro, and the zinc
recovery business, because of its significant negative cash flow and the failure
to attract any outside investors. Management estimates the negative cash flow
directly attributable to the zinc recovery project to be approximately $100,000
per month. It is also Management's opinion that outside investors are reluctant
to invest in the zinc recovery business as long as it is part of Isonics.
These alternatives include selling a portion or all of the zinc recovery
business to a management group that will assume the related assets, liabilities,
and all subsequent expenses and costs of developing the zinc recovery business.
The Board of Directors has received such an offer subject to the finalization of
acceptable terms, the preparation of a "fairness opinion," and the possible
submission of the matter to, and approval by, our Shareholders.
In the quarter ended October 31, 2000, we recognized a $270,000 expense to
remediate the Golden, Colorado facility we currently lease. This expense will be
incurred prior to the expiration of our lease in June 2001. In the event that
the zinc recovery business is sold, this would become the obligation of the
management group proposing to buy the zinc recovery business.
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
12
<PAGE>
conjunction with the condensed consolidated financial statements and the notes
thereto appearing elsewhere in this report.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................ 79.3 77.8 77.0 77.8
----- ----- ----- -----
Gross margin.............................. 20.7 22.2 23.0 22.2
----- ----- ----- -----
Operating expenses:
Selling, general & Administrative......... 91.0 21.2 74.7 24.3
Research & development.................... 21.1 4.6 17.9 4.4
Restructuring & office closure............ -- -- -- 0.8
----- ----- ----- -----
Total operating expenses................ 112.1 25.8 92.6 29.5
----- ----- ----- -----
Operating income (loss)..................... (91.4) (3.6) (69.6) (7.3)
----- ----- ----- -----
Other income (expense) net.................. 2.1 0.4 4.9 (0.9)
----- ----- ----- -----
Income (loss) before income taxes........... (89.3) (3.2) (64.7) (8.2)
----- ----- ----- -----
Income tax expense (benefit)................ (0.1) -- -- --
----- ----- ----- -----
NET INCOME (LOSS)........................... (89.2)% (3.2)% (64.7)% (8.2)%
===== ===== ===== =====
</TABLE>
NET REVENUES
Net revenues for the three months ended October 31, 2000, were
$1.955 million, a decrease of approximately 56%, or $2.505 million, from
$4.460 million for the same period in the prior fiscal year. The decrease is
primarily because our net revenues from isotope product sales decreased
approximately $2.121 million for the three months ended October 31, 2000, to
approximately $1.955 million. This reduction is due to the lack of depleted zinc
revenues after the sale of the depleted zinc business to Eagle-Picher, and the
recent acquisition of a major customer by one of our competitors. Net revenues
from contract research and development services sales decreased approximately
$384,000 for the three months ended October 31, 2000, to $0, because of our
cessation of these activities at our subsidiary Interpro.
Net revenues for the six months ended October 31, 2000, were
$3.991 million, a decrease of approximately 47%, from $7.544 million for the
same period in the prior fiscal year. This reduction is due to the lack of
depleted zinc revenues after the sale of the depleted zinc business to
Eagle-Picher, and the recent acquisition of a major customer by one of our
competitors. Net revenues from contract research and development services sales
decreased approximately $717,000 for the six months ended October 31, 2000, to
$0, because of our cessation of these activities at our subsidiary Interpro.
Following the end of our fiscal quarter, we were adversely impacted by one
customer's failure to pay approximately $218,000 in invoices due. Additionally,
we had ordered, based on purchase orders placed by this customer, approximately
$131,000 in product from our suppliers. We have taken the actions we believe
appropriate to recover these obligations. We have been informed by the
management of this customer that they are currently selling a portion of their
business and intend to pay the amounts owed us with the proceeds from this sale.
We believe if this customer does not honor its purchase orders we will be able
to sell the inventory to other customers.
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<PAGE>
We do not anticipate significant revenues from sales of silicon-28 based
products in the fiscal year ended April 30, 2001. We are collaborating with
academia and industry to evaluate the benefits of isotopically pure silicon-28.
We believe that if evaluations demonstrate the commercial feasibility of one or
more products, demand could emerge in certain segments of the semiconductor
market. We can offer no assurance, however, that these evaluations will
demonstrate the commercial feasibility of any products, that we will be able to
commercialize any such products, or that a market will emerge for any such
products.
Eagle-Picher has indicated its apparent inability to deliver 200 kilograms
of silicon-28, meeting the specifications as set forth in our agreement, by
December 31, 2000. If true, our silicon-28 development program may be
significantly hindered and we will have to consider alternative suppliers of
silicon-28. This may, at a minimum, delay any revenues from certain silicon-28
based products, such as bulk wafers. We believe we may still be able to generate
significant revenues from silicon-28 based products in the future.
We are engaging in research and development to diversify our business and to
expand other lines of our business. We have also expanded our sales and
marketing efforts. We are now seeking to identify and evaluate a variety of new
stable isotope products and potential markets for economic and technical
feasibility. We will continue to fund research and development to improve
technologies for isotope separation and materials processing technologies.
During fiscal 2000, 1999, and 1998, research and development expenses were
$1.224 million, $1.155 million, and $811,000, respectively. We cannot offer any
assurance that our current or future lines of business and our research and
development efforts will be profitable or generate significant revenues.
GROSS MARGIN
As a result of the sale of the depleted zinc business to Eagle-Picher on
December 1, 1999, we anticipate gross margin will be decreased on an annual
basis by approximately $1.0 million dollars.
Gross margin for the three months ended October 31, 2000, decreased to
approximately 20.7% of net revenues from approximately 22.2% for the same period
in the prior fiscal year. The decrease is primarily because of the lack of
depleted zinc sales and sales to a lost customer that carried higher margins.
Gross margin for the six months ended October 31, 2000, increased to
approximately 23.0% of net revenues from approximately 22.2% for the same period
in the prior fiscal year.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
We anticipate that our selling, general, and administrative expenses will
increase during the current fiscal year as we increase our sales and marketing
efforts in other product lines. As a percentage of revenues selling, general and
administrative expenses should increase, as revenues (current fiscal year
quarter to prior fiscal year quarter) will be significantly lower.
Selling, general, and administrative expenses increased on a dollar basis to
approximately $1.780 million, or approximately 91.0% of net revenues for the
three months ended October 31, 1999, from $945,000, or 21.2% of net revenues in
the comparable period of the prior year. The dollar increase for the quarter
ended October 31, 2000, was primarily attributable to increased usage of
professional services including legal, business development and accounting
services, bad debt expense (as described above in the paragraph titled "NET
REVENUES"), and remediation expenses related to our Golden facility, while the
percentage increase was primarily caused by lower revenues as described above,
as well as, higher levels of spending.
In the quarter ended October 31, 2000, we recognized a $270,000 expense to
remediate the Golden, Colorado facility we currently lease. This expense will be
incurred prior to the expiration of
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<PAGE>
our lease in June 2001. In the event that the zinc recovery business is sold
this would become the obligation of the management group proposing to buy the
zinc recovery business.
Selling, general and administrative expenses increased on a dollar basis to
approximately $2.980 million, or approximately 74.7% of net revenues for the six
months ended October 31, 2000, from approximately $1.830 million, or
approximately 24.3% of net revenues for the six months ended October 31, 1999.
The dollar increase for the six months ended October 31, 2000, is primarily
attributable to increased usage of professional services including legal,
business development and accounting services, bad debt expense, and remediation
expenses related to our Golden facility, while the percentage increase was
primarily caused by lower revenues as described above, as well as, higher levels
of spending.
We expect that our selling, general and administrative expenses will
continue to fluctuate as we are attempting to develop and market new products
and increase the sales of our existing products. While we are attempting to keep
control over these expenses, we anticipate that we will not be able to reduce
selling, general, and administrative expenses in the near future. Our goal is to
increase revenues so that selling, general, and administrative expenses as a
percentage of revenues will decrease over time.
RESEARCH AND DEVELOPMENT
Research and development expenses increased by approximately $207,000, or
approximately 101%, to $412,000 for the quarter ended October 31, 2000, from
$205,000 for the comparable period in fiscal 1999, while increasing on a
percentage basis to approximately 21.1% of net revenues from approximately 4.6%.
The dollar increase during the quarter ended October 31, 2000, was primarily
because of research and development costs associated with the development of our
zinc recovery and recycling project. The percentage increase is primarily
attributable to lower revenues as described above, as well as, higher levels of
spending.
Research and development expenses increased by approximately $384,000, or
approximately 116%, to $716,000 for the six months ended October 31, 1999, from
$332,000 for the comparable period in fiscal 1999, while increasing on a
percentage basis to approximately 17.9% of net revenues from approximately 4.4%.
The dollar increase during the six months ended October 31, 2000, was primarily
because of research and development costs associated with the development of our
zinc recovery and recycling project. The percentage increase is primarily
attributable to lower revenues as described above, as well as, higher levels of
spending.
As described above in the paragraph titled "SALE OF DEPLETED ZINC BUSINESS,"
we signed a long-term isotope supply agreement with Eagle-Picher, under which
Eagle-Picher will supply us with 200 kilograms of silicon-28 in 2000. The
silicon-28 will be used to further development of our semiconductor materials
business. We also gave Eagle-Picher a warrant to obtain 4,000,000 shares of our
common stock. The warrants are contingent upon the delivery of silicon-28 by
Eagle-Picher. The anticipated value of the 200 kilograms is approximately
$5,000,000. As we use the silicon-28 in our research and development activities,
we will recognize an expense of approximately $25.00 per gram, as this is the
price we most recently paid for silicon-28 from another supplier.
As also described above we believe Eagle-Picher will not meet this
obligation to deliver the 200 kilograms of silicon-28. If the delay is
significant, or if Eagle-Picher's technology cannot produce silicon-28 meeting
our requirements we will need to make other arrangements for our silicon-28
supply.
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 amount of future revenues.
15
<PAGE>
On May 1, 2000, we substantially reorganized Interpro to focus on one
specific application, the recovery and recycling of zinc metal from various
sources including, galvanized steel scrap, electric arc furnace dust, and brass
scrap. We chose this course of action for two reasons. First, we believe the
market potential for this, and related processes, is significant. Second, the
profound and lengthy slump in the mineral processing and mining industries has
significantly eroded Interpro's historical customer base. We will continue to
meet the demands of a few remaining customers through various sub-contractor
relationships. We will also keep the physical infrastructure in place at our
Golden location if market conditions warrant a reentry into Interpro's
historical markets. Currently, we are using a significant portion of this
infrastructure in our zinc recovery and recycling project.
As discussed above in the paragraph titled, "REORGANIZATION OF INTERPRO
SUBSIDIARY," we are presently considering alternatives for Interpro, and the
zinc recovery business, because of its significant negative cash flow and the
failure to attract any outside investors. Management estimates the negative cash
flow directly attributable to the zinc recovery project to be approximately
$100,000 per month. It is also Management's opinion that outside investors are
reluctant to invest in the zinc recovery business as long as it is part of
Isonics.
These alternatives include selling a portion or all of the zinc recovery
business to a management group that will assume the related assets, liabilities,
and all subsequent expenses and costs of developing the zinc recovery business.
The Board of Directors has received such an offer subject to the finalization of
acceptable terms, the preparation of a "fairness opinion", and the possible
submission of the matter to, and approval by, our Shareholders. In the event
that the zinc recovery business is sold, we will reduce our research and
development expenses by $75,000 to $100,000 per month.
OTHER INCOME (EXPENSE), NET
Other income (expense), net includes 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 income (expense), net
increased by approximately $58,000, to $42,000, for the quarter ended
October 31, 2000, from other income, net of approximately $16,000, for the
comparable period of the previous fiscal year. The decrease in interest expense
of approximately $91,000 was offset by an increase in foreign currency
adjustment of $53,000 and a decrease in other income of approximately $12,000.
Other income, net increased by approximately $256,000, to $193,000, for the
six months ended October 31, 2000, from other (expense), net of approximately
$63,000, for the comparable period of the previous fiscal year. The decrease in
interest expense of approximately $199,000 was augmented by an increase in other
income of approximately $45,000, and a foreign currency exchange gain of
approximately $12,000.
As described above, Eagle-Picher failed to make the first additional payment
due November 30, 2000. We had intended to recognize a contingent gain, of
$1.5 million, on a straight-line basis over the thirty-six month period
(approximately $41,667 per month), as the aforementioned unaffiliated supplier
performed under the contract. Three months, or approximately $125,000, have been
recognized in the quarter ended October 31, 2000. Six months, or approximately
$250,000, have been recognized in the six months ended October 31, 2000.
We will cease recognizing any additional contingent gain until the dispute
with Eagle-Picher has been resolved. We have not yet established a reserve for
the $500,000 due on November 30, 2000, as we believe we will be able to resolve
this dispute and collect the $500,000. If, however, the matter is not resolved
by January 31, 2000, we will incur a charge of $500,000 to offset the contingent
gain recognized since December 1999.
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<PAGE>
INCOME TAXES
We currently operate at a loss and expect to operate at a loss until the
products currently under development begin to generate sufficient revenue. While
we recognized a taxable gain upon the sale of our depleted zinc product line,
the tax expense incurred was offset by the expected recovery of such taxes due
to the availability of net operating losses to offset the taxes paid. As a
result, for the fiscal year ended April 30, 2000, our reported tax expense was
limited to the taxes payable in Germany on the income of our Chemotrade
subsidiary.
The losses to be incurred in the current year are not expected to generate
an income tax benefit because of the uncertainty of the realization of the
deferred tax asset. As such we have provided a valuation allowance against the
deferred tax assets for the amount in excess of the taxes paid in prior years
that are subject to refund.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital and liquidity were significantly improved as a result of
the sale of the depleted zinc business to Eagle-Picher on December 1, 1999.
However, our liquidity has been decreasing since then as is shown by the
following table:
<TABLE>
<CAPTION>
DATE WORKING CAPITAL
---- ---------------
<S> <C>
January 31, 2000............................................ $4.067 million
April 30, 2000.............................................. $3.754 million
July 31, 2000............................................... $3.319 million
October 31, 2000............................................ $1.725 million
</TABLE>
We expect that our working capital will continue to decrease over time as we
continue to use our capital for operations, research and development, and
investing activities. We do not expect working capital to increase until, if
ever, we are able to increase our revenues to exceed our cash out-flow. We
cannot offer any assurance that we will be able to do so in the near term. We
believe we have sufficient working capital for the current fiscal year, ending
April 30, 2001, and into the next fiscal year.
Our principal sources of funding have been cash from sales of lines of
business, borrowed funds, and sales of preferred stock. We used cash in
operating activities of approximately $2.495 million and $1.385 million during
the three months ended October 31, 2000, and 1999, respectively. Cash used in
operating activities during the six months ended October 31, 2000 was
principally the result of a net loss of approximately $2.583 million. Cash used
by operating activities during the three months ended October 31, 1999, was
principally the result of a net loss of $1.744 million 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.
Our investing activities used cash of $21,000, and $0 for the three months
ended October 31, 2000, and 1999, respectively, resulting from purchases of
property and equipment.
Financing activities generated cash of $213,000 and $1.246 million for the
three months ended October 31, 2000, and 1999, respectively. Cash provided by
financing activities during the three months ended October 31, 2000, resulted
primarily from the exercise of employee stock options. Net repayments of debt of
$3,000 were the primary use of cash in financing activities for the six months
ended October 31, 2000. Cash provided by financing activities during the six
months ended October 31, 1999, resulted primarily from the issuance of
convertible preferred stock for cash of $2.250 million and proceeds from the
issuance of long-term debt of $75,000. Net repayments on the revolving line of
credit of $298,000 and repayments of debt of $781,000 were the primary uses of
cash during the six-month period ended October 31, 1999.
17
<PAGE>
At October 31, 2000, we had approximately $1.082 million of cash and cash
equivalents, a decrease of approximately $2.303 million, compared to
$3.385 million as of April 30, 2000. At October 31, 2000 we has positive working
capital of $1.725 million, a decrease of $2.029 million from April 30, 2000. The
decrease is largely attributable to net loss of $2.583 for the same period.
During the six months ended October 31, 1999, we issued approximately
$2.745 million in convertible preferred stock. Cash proceeds totaled
approximately $2.250 million and conversion of notes payable and other
obligations to preferred stock totaled approximately $495,000. This convertible
preferred stock placement is described in detail in the Form 8-K we filed on
August 11, 1999.
Two events, subsequent to the end of the quarter, significantly and
adversely impacted our cash position. A customer has not paid approximately
$218,000 in invoices due at the end of the quarter. This account receivable has
been fully reserved as of October 31, 2000. We have taken actions we believe
appropriate to recover this obligation. In addition we have ordered $131,000 of
product based on purchase orders placed by this customer. We have been informed
by the management of this customer that they are currently selling a portion of
their business and intend to pay the amounts owed us with the proceeds from this
sale. We believe if this customer does not honor its purchase orders we will be
able to sell the inventory to other customers.
The second adverse event subsequent to the end of the quarter was
Eagle-Picher's failure to make the $500,000 annual installment due November 30,
2000. We have not reserved this amount at this time, as we believe we will
collect this amount including accrued interest in the near future.
One event, subsequent to the end of the quarter, significantly and
positively impacted our cash position. In a private placement with approximately
ten accredited investors we sold 337,500 units consisting of one share of our
Common Stock and two Class B Warrants for $675,000 ($2.00 per unit). This
transaction was completed on December 13, 2000.
If the zinc recovery business is sold, as discussed in the paragraph titled,
"REORGANIZATION OF INTERPRO SUBSIDIARY," we will reduce our cash outflow by
approximately $100,000 per month. We will also eliminate certain current
liabilities totaling between $500,000 and $750,000, which will improve our
working capital position.
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.
Following the sale of our depleted zinc business, our primary risk is our
reliance on products that have to date not produced significant revenues. 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. These orders being primarily for radioisotopes. 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.
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
most of our stable and radioisotopes. We signed an agreement with the commercial
department of the Ministry to purchase certain isotope separation
18
<PAGE>
services through 2001. Disruption or termination of services provided by the
Ministry could have a material and adverse affect upon our financial condition
and results of operations.
COLLECTION OF ACCOUNTS AND NOTES RECEIVABLE
We have been adversely impacted by a customer's failure to pay $218,000 due
to us. Additionally, Eagle-Picher has also failed to make the annual installment
payment of $500,000 due November 30, 2000. We have temporarily resolved this
problem by completing a private placement of our equity and reallocating other
resources, but we could be adversely impacted if we are unable to collect these
obligations due us.
OPERATIONS IN RUSSIA, THE REPUBLIC OF UZBEKISTAN, AND THE REPUBLIC OF GEORGIA
Operations in Russia, the Republic of Uzbekistan ("Uzbekistan"), and the
Republic of Georgia ("Georgia") entail certain risks. Recently, the former
republics of the Soviet Union including Uzbekistan and Georgia have experienced
political, social and economic change as they obtained independence from the
former central government in Moscow. Certain of the republics, including Russia,
Uzbekistan, 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. The political or economic instability in these republics
may continue or even worsen. The supply of stable isotopes could be directly
affected by political, economic and military conditions in Russia, Uzbekistan,
and Georgia. Accordingly, our operations could be materially adversely affected
if hostilities in Russia, Uzbekistan, or Georgia should occur, if trade between
Russia, Uzbekistan, or Georgia and the United States were interrupted, if
political conditions in Russia, Uzbekistan, or Georgia disrupt transportation or
processing concerning our goods, if laws or government policies concerning
foreign business operations in Russia, Uzbekistan, 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 are expected to be affected
materially by the level of orders received and product shipments by us 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.
While our goal is to diversify our customer base, we expect to continue to
depend upon a relatively small number of customers for a significant percentage
of our revenues for the foreseeable future. Significant reductions in sales to
any of our large customers have had and may in the future have a material
adverse effect on us. We cannot guarantee that present or future customers will
not terminate their arrangements with us or significantly change, reduce or
delay the amount of manufacturing services ordered from us. A termination of a
manufacturing relationship or change, reduction or delay in orders could harm
us.
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 affect the market price of our common stock and
common stock warrants.
19
<PAGE>
FACTORS AFFECTING OPERATING RESULTS; VARIABILITY OF ORDERS
We operate with little backlog. 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.
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 $1,000,000 of key man life insurance on the lives of
Messrs. Alexander, Rubizhevsky and Cuttriss and all are covered by employment
agreements extending through September 2001, 2001, and 2003, respectively
(although the individuals may terminate these agreements prematurely, in their
discretion). Mr. Hegener is covered by an employment agreement 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.
POSSIBLE NEED FOR ADDITIONAL FINANCING
We had anticipated no need for additional financing in the current fiscal
year, but had anticipated a need for a substantial amount of financing after our
current fiscal year ending April 30, 2001. Factors that we believed would lead
to a need for additional financing include:
- delays in Eagle-Picher's production of silicon and carbon isotopes from
its plant in Oklahoma, and the resulting delays in their delivery of the
isotopes to us under the terms of the supply agreement;
- unanticipated expenses in developing our new products or in producing or
marketing our existing products;
- the necessity of having to protect and enforce our intellectual property
rights;
- technological and market developments; and
- a corporate decision to expand our production capacity through capital
investment or acquisition.
The first factor, relating to Eagle-Picher has become a reality. In
addition, Eagle-Picher failed to make the first $500,000 annual installment due
us on November 30, 2000. We have also had a customer fail to pay approximately
$218,000 due us. These events have resulted in a significant decrease in our
working capital position. On December 13, 2000, we sold 337,500 units consisting
of one share of our
20
<PAGE>
Common Stock and two Class B warrants for $650,000 to a group of accredited
investors. We believe these additional funds will be sufficient until the monies
owed to us by Eagle-Picher and the aforementioned customer who has failed to pay
invoices due, are collected ($500,000 and $218,000, respectively).
NO ASSURANCE AS TO VALIDITY OF INTELLECTUAL PROPERTY RIGHTS
We rely primarily on a combination of trade secrets, confidentiality
procedures, and contractual provisions to protect our technology. Despite our
efforts to protect our rights, unauthorized parties may attempt to copy aspects
of our products or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our technology and products is difficult. In
addition, the laws of many countries do not protect our rights in information,
materials and intellectual property that we regard as proprietary and that are
protected under the laws of the United States. There can be no assurance that
our means of protecting our rights in proprietary information, materials and
technology will be adequate or that our competitors will not independently
develop similar information, technology, or intellectual property.
We currently have no patents in our own name and have not filed any patent
applications. We have rights to several isotopically engineered innovations
regarding electronic and optical materials that we believe may be patentable.
Ongoing work in the area of isotope separation by chemical means may also lead
to patentable inventions. In such cases, we intend to file patent applications
for some of these modifications, improvements, and inventions and to protect
others as trade secrets. There can be no assurance, however, that patents on
such modifications, improvements, or inventions will be issued or, if issued,
that such patents or modifications and improvements protected as trade secrets
will provide meaningful protection.
Third parties may have filed applications for or have been issued patents
and may obtain additional patents and proprietary rights related to products or
processes competitive with or similar to those of Isonics. We may not be aware
of all patents potentially adverse to our interests that may have been issued to
others and there can be no assurance that such patents do not exist or have not
been filed or may not be filed or issued. If patents have been or are issued to
others containing preclusive or conflicting claims and such claims are
ultimately determined to be valid, we may be required to obtain licenses thereto
or to develop or obtain alternate technology. There can be no assurance that
such licenses, if required, would be available on commercially acceptable terms,
if at all, or that we would be able to develop or obtain alternate technology,
which would have a material adverse effect on our business.
There can be no assurance that the validity of any of the patents licensed
to, or that may in the future be owned by us would be upheld if challenged by
others in litigation or that our products or technologies, even if covered by
our patents, would not infringe patents owned by others. We could incur
substantial costs in defending suits brought against us, or any of our
licensors, for infringement, in suits by us against others for infringement, or
in suits contesting the validity of a patent. Any such proceedings may be
protracted. In any suit contesting the validity of a patent, the patent being
contested would be entitled to a presumption of validity and the contesting
party would be required to demonstrate invalidity of such patent by clear and
convincing evidence. If the outcome of any such litigation were adverse to our
interests, our business would be materially adversely affected.
In certain instances, we may choose not to seek patent protection and may
rely on trade secrets and other confidential know-how to protect our
innovations. There can be no assurance that protectable trade secrets or
know-how will be established, or if established, that they will remain protected
or that others will not independently and lawfully develop similar or superior
innovations. We require all employees to sign intellectual property assignment
and non-disclosure agreements. In certain instances, we will enter into
agreements with our employees pursuant to which the employee will be
21
<PAGE>
entitled to a small royalty with respect to products developed by Isonics based
upon the employee's inventions. In addition, all directors, consultants and
other parties to whom confidential information has been or will be disclosed
have or will execute agreements containing confidentiality provisions. There can
be no assurance, however, that any such intellectual property assignment
agreements and confidentiality agreements will be complied with or will be
enforceable.
COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE
Within the United States, we believe there currently is no producer of a
full range of stable enriched isotopes for commercial sale. The U.S. government
produces isotopes, but primarily for research purposes. There can be no
assurance that a third party will not contract with the U.S. government to
acquire isotopes for commercial sale. Outside the United States, many countries
and businesses produce stable and radioactive isotopes. Some of these businesses
have substantially greater capital and other resources than do we.
Further, it is possible that future technological developments may occur,
and these developments may render our radioisotopes and stable isotopes obsolete
or non-competitive.
Rapidly changing technology and continuing process development characterize
the market for our manufacturing services. We believe that our future success
will depend in large part upon our ability to develop and market manufacturing
services which meet changing customer needs, maintain technological leadership
and successfully anticipate or respond to technological changes in manufacturing
processes on a cost-effective and timely basis. We cannot guarantee that our
process development efforts will be successful.
In the future, we may face substantial competition, and we may not be able
to compete successfully against present or future competitors.
ENVIRONMENTAL COMPLIANCE
We are subject to a variety of federal, state, and local environmental
regulations relating to the use, storage, discharge, and disposal of hazardous
chemicals used during the manufacturing process. While we believe that we are in
compliance with all environmental regulations, if we fail to comply with present
and future regulations we could be subject to future liabilities or the
suspension of production. In addition, these regulations could restrict our
ability to expand our facilities or could require us to acquire costly equipment
or to incur other significant expenses to comply with governmental regulations.
Historically, our costs of compliance with environmental regulations have not
been material. In the quarter ended October 31, 2000, we recognized a $270,000
expense to remediate the Golden, Colorado facility we currently lease. This
expense will be incurred prior to the expiration of our lease in June 2001.
POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Our stock price may be hurt by future sales of our shares or the perception
that such sales may occur. As of December 10, 2000, approximately 8,252,486
shares of Common Stock held by existing stockholders constitute "restricted
shares" as defined in Rule 144 under the Securities Act. These shares may only
be sold if they are registered under the Securities Act or sold under Rule 144
or another exemption from registration under the Securities Act. Sales under
Rule 144 are subject to the satisfaction of certain holding periods, volume
limitations, manner of sale requirements, and the availability of current public
information about us.
A substantial portion of all of our restricted shares of Common Stock are
either eligible for sale pursuant to Rule 144 or have been registered under the
Securities Act for resale by the holders. This will permit the sale of
registered shares of Common Stock in the open market or in privately
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negotiated transactions without compliance with the requirements of Rule 144. We
are unable to estimate the amount, timing, or nature of future sales of
outstanding Common Stock. Sales of substantial amounts of our Common Stock in
the public market may hurt the stock's market price.
EFFECT OF OUTSTANDING SERIES A PREFERRED STOCK, OPTIONS, AND WARRANTS
As of December 13, 2000, we had outstanding Series A Convertible Preferred
Stock convertible into, and options and warrants to purchase, an aggregate of
6,751,979 shares of Common Stock. As long as these shares of Series A
Convertible Preferred Stock remain outstanding, and the options and warrants
remain unexercised, the terms under which we could obtain additional capital may
be adversely affected. Moreover, the holders of the Series A Convertible
Preferred Stock, options and warrants may be expected to exercise them at a time
when we would, in all likelihood, be able to obtain any needed capital by a new
offering of our securities on terms more favorable than those provided by these
securities.
LACK OF AUTHORIZED CAPITAL
As a result of the December 13, 2000, completion of a private placement to a
group of accredited investors, we issued a total of 337,500 shares of our Common
Stock and 650,000 Class B warrants. Additionally, if all of the 650,000 Class B
warrants are exercised we will issue an additional 650,000 Class C warrants.
This private placement increases our shares of Common Stock outstanding to
11,793,326.
As described above, we also have 1,180,333 shares of Series A Convertible
Preferred Stock outstanding, options outstanding totaling 1,107,852, and
warrants outstanding of 4,488,794. Additionally, we have reserved Common Stock
shares for 1,485,000 upon the possible conversion of Class C warrants (none of
which are currently outstanding), 796,779 shares are reserved for our Employee
Stock Option Plans, and 178,793 shares of Common Stock are reserved for our
Employee Stock Purchase Plan. The total of these outstanding shares of Common
Stock, convertible and exercisable into Common Stock equity instruments, and
reserved shares of Common Stock is 21,030,877. This exceeds our authorized
capital of 20,000,000 by 1,030,877 shares of Common Stock.
Since our authorized Common Stock is only 20,000,000 shares, we will not be
able to issue those additional shares and we may become liable for our inability
to issue shares as we have committed to do. We intend to propose an amendment to
our Articles of Incorporation to increase our authorized capital as a special
meeting of shareholders, which we expect to hold in March or April 2001.
However, there can be no assurance that we will be able to obtain approval of an
increase in our authorized capitalization from our shareholders at the meeting
when held. Until then, and thereafter, if the shareholders do not approve the
increase we are potentially liable for our inability to issue all shares as
committed.
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PART II: OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES
In a private placement, under Rule 144 of the 1934 Securities Act, with
approximately ten accredited investors we sold 337,500 units consisting of one
share of our Common Stock and two Class B Warrants (exercisable at $1.50 per
warrant) for $675,000 ($2.00 per unit). This transaction was completed on
December 13, 2000. The proceeds of this private placement will be for working
capital purposes. There was no underwriter involved with this offering. The
units were offered pursuant to the exemption from registration contained in
Section 4(2) and Section 4(6) of the Securities Act of 1933, and Rule 506
thereunder. We will undertake to register these shares and warrants under the
Securities Act of 1933.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended October 31, 2000.
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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 20th day of December, 2000.
<TABLE>
<S> <C> <C>
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
</TABLE>
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