<PAGE>
As filed with the Securities and Exchange Commission on March 31, 2000
Registration no. 333-13289
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
ISONICS CORPORATION
(Name of Small Business Issuer in Its Charter)
CALIFORNIA 2819 77-0338561
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
--------------
5906 MCINTYRE STREET
GOLDEN, COLORADO 80403
(303) 279-7900
(Address and telephone number of Principal Executive Offices and Principal
Place of Business)
--------------
JAMES E. ALEXANDER
CHIEF EXECUTIVE OFFICER
ISONICS CORPORATION
5906 MCINTYRE STREET
GOLDEN, COLORADO 80403
(303) 279-7900
(Name, Address and Telephone Number of Agent for Service)
--------------
Copies to:
HERRICK K. LIDSTONE, JR.
NORTON-LIDSTONE, P.C.
SUITE 850, THE QUADRANT
5445 DTC PARKWAY
ENGLEWOOD, CO 80111
TEL: 303-221-5552
FAX: 303-221-5553
--------------
Approximate Date of Proposed Sale to the Public: AS SOON AS PRACTICABLE
AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement number of
earlier effective registration statement for the same offering: [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following
<PAGE>
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. [X]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each class Amount of Proposed maximum Proposed maximum Amount of
of securities to be securities to be offering price per aggregate offering registration fee
registered registered share (1) price
- ----------------------- ----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Units (2), each 810,000 $5.90 $4,779,000 $1,646 (5)
consisting of
(a) 1 share of Common (a) 810,000
Stock
(b) 1 Redeemable (b) 810,000
Class A Common
Stock Purchase
Warrant
Common Stock issuable 810,000 $5.80 $4,698,000 $1,618 (5)
upon exercise of
Redeemable Warrants
Underwriters' 80,000 $0.001 $80 $1 (5)
Warrants (3)
Common Stock issuable 80,000 $9.57 $765,600 $232 (5)
upon exercise of
Underwriters'
Warrants (4)
Redeemable Warrants 80,000 $0.165 $13,200 $5 (5)
issuable upon
exercise of
Underwriters' Warrants
Common Stock issuable 80,000 $5.80 $464,000 $141 (5)
upon exercise of
Redeemable Warrants (4)
Total 2,750,000 $10,719,880 $3,642 (5)
</TABLE>
(1) Estimated solely for purpose of determining the registration fee pursuant
to Rule 457 under the Securities Act.
(2) Includes 10,000 shares of Common Stock and 10,000 Redeemable Warrants
issuable upon exercise of the Underwriter's Over-Allotment Option that
was exercised at the time of the original offering.
(3) No registration fee required pursuant to Rule 457 under the Securities Act.
(4) Pursuant to Rule 416 of the Securities Act, there are also being
registered hereby such additional indeterminate number of Shares of
Common Stock as may become issuable pursuant to the anti-dilution
provisions of the Redeemable Warrants and the Underwriter's Warrants.
(5) Previously paid.
2
<PAGE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
This post-effective amendment is being filed pursuant to undertaking
512(a)(3) required in Item 28 to remove from registration 110,000 Units
consisting of a portion of the Underwriters' over allotment option in the
original offering to the extent not exercised by the Underwriter. Each Unit
consists of one share of Common Stock and one Redeemable Class A Common Stock
Purchase Warrant.
In addition, this post-effective amendment is being filed to remove
from registration 110,000 shares of Common Stock and 110,000 Redeemable Class
A Common Stock Purchase Warrants underlying the Units being de-registered.
3
<PAGE>
The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective.
This prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
Subject to Completion, dated March 31, 2000
PROSPECTUS
MARCH ___, 2000
ISONICS CORPORATION
810,000 Shares of Common Stock underlying
Redeemable Class A Common Stock Purchase Warrants
Isonics Corporation ("Isonics" or "We") hereby offers 810,000 shares
of its Common Stock to holders upon exercise of its outstanding Redeemable
Class A Common Stock Purchase Warrants (which we will refer to as the "Class
A Warrants"). Each Class A Warrant entitles the registered holder to purchase
one share of Common Stock at a price of $5.80 per share, subject to
adjustment, through September 21, 2001.
Isonics has announced that it may make an exchange offer to the
holders of Class A Warrants. Any person who exercises a Class A Warrant prior
to the exchange offer will be given a Class C Warrant for no additional
consideration if the exchange offer is completed, thus giving the Class A
Warrant holder who exercises prior to the exchange offer the same value as
the Class A Warrant holders who accept the exchange offer before exercise.
Based on our current intentions (which are subject to change), the Class C
Warrants, if issued, will have a term of three years, will be exercisable for
one share of Common Stock at a price of from $10.00 to $12.00 per share, and
will be redeemable if our Common Stock trades at or above $15.00 per share
for any 20 of 30 consecutive trading days. The exchange offer, if made, will
only be made pursuant to a registration statement effective under the
Securities Act of 1933, as amended and applicable state law. There can,
however, be no assurance that we will complete the contemplated exchange
offer.
The Common Stock of Isonics has been traded in the over-the-counter
market and quoted through the OTC Bulletin Board under the symbol "ISON." We
expect it to continue to trade in that market. On March 30, 2000, the
reported closing price of Isonics Common Stock was $11.25 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE
SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS. SEE "RISK FACTORS" BEGINNING
ON PAGE 8. We have not authorized anyone to give information or to make any
representation other than as contained in this prospectus in connection with
the offering described herein.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
In deciding whether to purchase the shares offered, you should rely
only on the information contained in this document. We have not authorized
anyone to provide you with any information that is different from this
information.
Only residents of _______, _______, and ______ states may exercise
their Class A Warrants. We have not qualified the Class A Warrants under the
laws of any other state. When you exercise the Class A Warrants, you will
have to provide us information as to your state of residence. We may seek
qualification from time-to-time in other states; you may call Isonics
Corporation at 303-279-7900 to determine whether your state of residence has
been included.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary/Summary of Offering
Risk Factors
Use of Proceeds
Procedure for Exercise of Class A Warrants and Tax Aspects
Management's Discussion and Analysis of Financial Condition and Plan of Operation
Business
Management
Security Ownership of Certain Beneficial Owners and Management
Section 16(a) Beneficial Ownership Reporting Compliance
Executive Compensation
Certain Relationships and Related Transactions
Isonics' Capital Stock
Market for Common Equity and Related Stockholder Matters
Shares Available for Future Sale
Securities and Exchange Position on Indemnification for Securities Act Liabilities
Experts
Legal Matters
How To Obtain Additional Information
Index To Financial Statements
</TABLE>
This document may be used only where it is legal to sell these securities.
The information in the document may be accurate on the date on the cover only.
5
<PAGE>
PROSPECTUS SUMMARY/SUMMARY OF OFFERING
<TABLE>
<S> <C>
Isonics Corporation Isonics is an advanced materials and
technology company which develops and commercializes
products based on enriched stable isotopes.
The Offering 810,000 shares of Common Stock offered upon exercise of the Class A Warrants.
Use of Proceeds We will receive from $0.00 (if no Class A
Warrants are exercised) to $4,698,000 (if all of the
Class A Warrants are exercised). We expect to use any
proceeds received for research and development and
working capital.
Trading Symbol and
Market The Common Stock of Isonics is traded in the
over-the-counter market and is quoted on the OTC
Bulletin Board under the symbol "ISON." The market
for the stock has historically been characterized
generally by low volume and broad price and volume
volatility. We cannot give any assurance that a
stable trading market will develop for our stock.
Contemplated Exchange
Offer Isonics has announced that it may make an exchange
offer to the holders of Class A Warrants. Any person
who exercises a Class A Warrant prior to the exchange
offer will be given a Class C Warrant for no
additional consideration if the exchange offer is
completed. Consequently, if we complete the exchange
offer, we will ensure that any person exercising a
Class A Warrant prior to the exchange offer will
receive the same value as offered in the exchange
offer.
Based on our current intentions (which are subject to
change), the Class C Warrants, if issued, will have a
term of three years, will be exercisable for one
share of Common Stock at a price of from $10.00 to
$12.00 per share, and will be redeemable if our
Common Stock trades at or above $15.00 per share for
any 20 of 30 consecutive trading days. There can,
however, be no assurance that we will complete the
contemplated exchange offer as described, or at all.
Any such exchange offer, if made, will only be made
pursuant to a registration statement that is
effective or qualified under federal and applicable
state laws.
Address and Phone
Number The address of the principal executive offices of
Isonics and its telephone and facsimile numbers at
that address are:
Isonics Corporation
5906 McIntyre Street
Golden, Colorado 80403
Telephone No.: (303) 279-7900
Facsimile No.: (303) 279-7300
Risk Factors THE PURCHASE OF ISONICS COMMON STOCK INVOLVES
A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES
ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR
INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
We have not authorized anyone to give you information
or to make any representation other than those
contained in this prospectus.
A Note About Forward-
Looking Statements In our effort to make the information in this
prospectus more meaningful, this prospectus
contains both historical and forward-looking
statements. All statements other than statements of
historical fact are forward-looking statements within
the meanings of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act
of 1934. Forward-looking statements in this
prospectus are not based on historical facts, but
rather reflect the current expectations of our
management concerning future results and events.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
The forward-looking statements generally can be
identified by the use of terms such as "believe,"
"expect," "anticipate," "intend," "plan," "foresee,"
"likely," "will" or other similar words or phrases.
Similarly, statements that describe our objectives,
plans or goals are or may be forward-looking
statements.
Forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause
the actual results, performance or achievements of
Isonics to be different from any future results,
performance and achievements expressed or implied by
these statements. You should review carefully all
information, including the financial statements and
the notes to the financial statements included in
this prospectus. In addition to the factors discussed
under "Risk Factors," the following important factors
could affect future results, causing the results to
differ materially from those expressed in the
forward-looking statements in this prospectus:
- Demand for, and acceptance of, our materials;
- Changes in development and distribution and supply relationships;
- The impact of competitive products and technologies;
- The risk of operations in Russia and the Republic of Georgia;
- Dependence on future product development;
- The possibility of future customer concentration;
- Our dependence on key personnel;
- The volatility of our stock price; and
- The impact of new technologies.
These factors are not necessarily all of the
important factors that could cause actual results to
differ materially from those expressed in the
forward-looking statements in this prospectus. Other
unknown or unpredictable factors also could have
material adverse effects on the future results of
Isonics. The forward-looking statements in this
prospectus are made only as of the date of this
prospectus and Isonics does not have any obligation
to publicly update any forward-looking statements to
reflect subsequent events or circumstances. Isonics
cannot assure you that projected results will be
achieved.
</TABLE>
7
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before
deciding whether to invest in Isonics Corporation. If any of the
contingencies discussed in the following paragraphs or other materially
adverse events actually materialize, the business, financial condition and
results of operations could be materially and adversely affected. In such a
case, the trading price of our Common Stock could decline, and you could lose
all or part of your investment.
HISTORY OF LOSSES; ENGAGING IN NEW LINES OF BUSINESS
Through October 31, 1999 (the end of our fiscal quarter immediately
preceding the Eagle-Picher transaction), we have recognized accumulated
losses of more than $4,500,000 notwithstanding receiving substantial revenues
from the sale of depleted zinc and other products. We have not operated
profitably to date, except as a result of a significant gain realized from
our December 1999 sale of our depleted zinc assets to Eagle-Picher
Technologies, LLC.
The depleted zinc business had accounted for a significant portion
of our revenues during the past fiscal years. 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 have historically, and
expect to continue to, 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 are 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 prior quarters have
indicated these factors will affect our operating results for future periods.
We are engaging in research and development to diversify our
business and to expand other lines of our business. 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 1999 and 1998, research and
development expenses were $1,155,000 and $811,000, respectively. Research and
development expenditures for the nine months ended January 31, 2000, amounted
to approximately $919,000. We cannot offer any assurance that our current or
future lines of business and our research and development efforts will be
profitable. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" and "BUSINESS."
RELATIONSHIP WITH CERTAIN SUPPLIERS AND AVAILABILITY OF RAW MATERIALS
Related to, but separate from, the sale of the depleted zinc
business, we contemporaneously signed a ten-year Supply Agreement by which we
will have the exclusive right to purchase quantities of isotopically pure
silicon-28, silicon-29, and silicon-30, and a non-exclusive right to purchase
quantities of isotopically pure carbon-12 and carbon-13 produced by
Eagle-Picher from its current and planned facilities in Oklahoma for a
ten-year period. The Supply Agreement locks-in what we believe is a favorable
purchase price for the aforementioned isotopes. As partial consideration for
the exclusivity provision, we agreed to pay Eagle-Picher a fee equal to 3.0%
of the net revenues from all sales made by us of products incorporating
enriched silicon isotopes supplied by Eagle-Picher. The ability of
Eagle-Picher to produce isotopes meeting the specifications of the Supply
Agreement is contingent upon Eagle-Picher successfully beginning production
of silicon-28 as scheduled to commence in April 2000. A delay in
Eagle-Picher's ability to begin production could force us to seek other
suppliers. There is no guarantee Eagle-Picher will successfully begin
production of Silicon-28, or that we will obtain or negotiate agreements with
other suppliers on commercially viable terms. SEE "MANAGEMENT'S DISCUSSION
AND ANALYSIS" and "BUSINESS."
LIMITED SOURCES FOR RAW MATERIALS
Stable isotopes constitute the principal raw material required for
the manufacture of our products. The principal sources for enriched stable
isotopes are suppliers in Russia. Domestically, Oak Ridge National Laboratory
in Oak Ridge, Tennessee, which relies on government funding for continuing
production, and certain foreign facilities in the world including private and
pseudo-governmental organizations in Great Britain, Germany, The Netherlands
and South Africa, have the potential to produce stable isotopes, and in
certain cases, actually produce isotopes. Although currently enriched stable
isotopes are also available from additional foreign sources, there can be no
assurance that there will continue to be an adequate supply of enriched
stable isotopes.
8
<PAGE>
Although we expect that our current supply contracts will be sufficient to
produce most isotopes, the production processes require various proprietary
separation techniques, which although developed by our suppliers, may not
have all been tested to date and as to the success of which there can be no
assurance. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" and "BUSINESS."
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. 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. 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 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. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" and
"BUSINESS."
DEPENDENCE ON FUTURE PRODUCT DEVELOPMENT
On December 1, 1999, we sold our depleted zinc business, which
provided 35% of our revenues in fiscal 1999. As a result our future
operations will be more heavily dependent upon our ability to develop new
products using stable and radioisotopes and to market and sell those products
profitably. While we have a high degree of confidence we can be successful,
we can expect to incur significant operating losses until we are able to do
so. Our ability to develop, market and sell these products will depend on our
suppliers' (including Eagle-Picher) ability to meet our demand for stable and
radioisotopes, as well as, other suppliers who modify the chemical and
physical forms of these isotopes. There can be no assurance that we will be
able to develop products that can be profitably marketed and sold. SEE
"BUSINESS."
CUSTOMER CONCENTRATION
Historically, substantially all of our net revenues in any
particular period have been attributable to a limited number of customers,
primarily General Electric Corporation, prior to fiscal 1999. Consistent with
our historical experience, our quarterly results during fiscal year 2000 were
affected materially by the level of orders received from a limited number of
significant depleted zinc users during such quarters and product shipments by
us to our depleted zinc customers during such period. We continue to be
subject to a certain degree of variability based on the timing of sales of
our stable and radioisotopes orders. We cannot be assured that our principal
customers will continue to purchase our 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. SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS" AND "BUSINESS."
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.
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. SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS."
9
<PAGE>
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. SEE "BUSINESS."
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. 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.
SEE "MANAGEMENT."
POSSIBLE NEED FOR ADDITIONAL FINANCING
We anticipate no need for additional financing in the next twelve
months, but we do anticipate a possible future need for a substantial amount
of financing after the fiscal year ending April 30, 2001. Factors that may
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;
the necessity of having to protect and enforce our intellectual
property rights; and
technological and market developments.
The exercise of the Class A Warrants will provide us with some
additional financing, but we cannot offer any assurance that any warrants
will be exercised. The unavailability of additional financing, when needed,
could have a material adverse effect on our business. SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS AND "BUSINESS."
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. SEE "BUSINESS."
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
10
<PAGE>
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.
In April 1999, we announced that we had entered into an exclusive
licensing agreement with Yale University that entitles us to exclusive
intellectual property rights to patents covering semiconductor devices
derived for isotopically engineered materials. The license requires payment
by us of a royalty based on a percentage of our or our sublicenses' net sales
of products derived from technology covered by the Yale patents (#5,144,409,
dated September 1, 1992, and #5,442,191, dated August 15, 1995).
Third parties may have filed applications for or 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 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. SEE "BUSINESS."
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.
11
<PAGE>
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. SEE
"BUSINESS."
CONTROL BY DIRECTORS AND OFFICERS
Even if all of the Class A Warrants are exercised (which we cannot
assure), our directors and officers will beneficially own 65.4% of the
outstanding shares of Common Stock and, accordingly, will have the ability to
elect a majority of the directors of Isonics and otherwise control the
company. SEE "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
PRODUCT LIABILITY EXPOSURE AND INSURANCE
The use of our radioisotopes in radiopharmaceuticals and in clinical
trials may expose us to potential product liability risks that are inherent
in the testing, manufacture, marketing and sale of human diagnostic and
therapeutic products. In addition, if we fail to deliver radioisotopes or
other isotopes in accordance with our contractual requirements (whether or
not the failure is our fault), we may incur potential liability. We currently
have product liability insurance; however, there can be no assurance that a
product liability or other claim would not materially and adversely affect
our business or financial condition. SEE "BUSINESS."
PRICE VOLATILITY
The trading price of our securities has been subject to wide
fluctuations in response to quarter-to-quarter variations in operating
results, our 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. The securities markets have from time to time
experienced significant price and volume fluctuations that may be unrelated
to the operating performance of particular companies. Announcements of delays
in our testing and development schedules, technological innovations or new
products by Isonics or our competitors, developments or disputes concerning
patents or proprietary rights, regulatory developments in the United States
and foreign countries, public concern as to the safety of products containing
radioactive compounds and economic and other external factors, as well as
period-to-period fluctuations in our financial results, may have a
significant impact on the market price of our securities. In addition, the
realization of any of the risks described in these "Risk Factors" could have
a significant and adverse impact on such market prices. SEE "MARKET FOR
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS."
PENNY STOCK REGULATIONS
The Securities Enforcement and Penny Stock Reform Act of 1990
requires additional disclosure relating to the market for penny stocks in
connection with trades in any stock defined as a penny stock. The SEC
Regulations generally define a penny stock to be an equity security that has
a market price of less than $5.00 per share, subject to certain exceptions.
Unless an exception is available, the regulations require the delivery, prior
to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the risks associated therewith. We
have, at times in the recent past, been included within the SEC Rule 3a-51
definition of a penny stock. When our common stock is considered to be a
"penny stock", trading is covered by Rule 15g-9 promulgated under the
Securities Exchange Act of 1934 for non-Nasdaq and non-national securities
exchange listed securities. Under such rule, broker-dealers who recommend
such securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction
prior to sale. The regulations on penny stocks limit the ability of
broker-dealers to sell our Common Stock and thus the ability of purchasers of
our Common Stock to sell their securities in the secondary market.
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<PAGE>
SEE "MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS."
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 the date of this Prospectus,
approximately 5,281,771 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.
Substantially 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, including the Common Stock
covered by this Prospectus. This will permit the sale of registered shares of
Common Stock in the open market or in privately 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. SEE "SHARES AVAILABLE FOR FUTURE SALE."
EFFECT OF OUTSTANDING CONVERTIBLE PREFERRED STOCK, OPTIONS, AND WARRANTS
As of January 31, 2000, we had outstanding preferred stock
convertible into and options and warrants to purchase an aggregate of
11,396,668 shares of Common Stock. (This amount included warrants to purchase
4,000,000 shares held by Eagle Picher. Eagle-Picher gave us notice of its
exercise of this warrant in March 2000. Although we are discussing the terms
of this exercise, it will likely result in Eagle-Picher acquiring in excess
of 3,100,000 shares pursuant to a "net exercise" provision in the warrant.
Both the warrants and the common stock shares are contingent upon the
delivery of 200 kilograms of silicon-28 in 2000.) As long as these shares of
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 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. SEE "DESCRIPTION OF CAPITAL STOCK."
ANTI-TAKEOVER PROVISIONS
Our Articles of Incorporation authorize the issuance of "blank
check" preferred stock with such designations, rights and preferences as may
be determined by our Board of Directors. Accordingly, the Board of Directors
may, without stockholder approval, issue shares of preferred stock with
dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of our
Common Stock. Preferred stock could also be issued to discourage, delay or
prevent a change in our control, although we do not currently intend to issue
any additional series of our preferred stock. SEE "DESCRIPTION OF CAPITAL
STOCK."
INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Our Bylaws provide for indemnification of officers and directors to
the full extent permitted by California law. We may be required to pay
certain judgments, fines and expenses incurred by an officer or director,
including reasonable attorneys' fees, as a result of actions or proceedings
in which such officers and directors are involved by reason of being or
having been an officer or director. SEE "SECURITIES AND EXCHANGE POSITION ON
INDEMNIFICATION FOR CERTAIN LIABILITIES."
NO DIVIDENDS ANTICIPATED TO BE PAID
We have never paid any cash dividends on our Common Stock and we do
not anticipate paying cash dividends on our Common Stock in the future. The
future payment of dividends is directly dependent upon our future earnings,
capital
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<PAGE>
requirements, financial requirements and other factors to be determined by
our Board of Directors. It is anticipated that future earnings if any, which
may be generated from our operations will be used to finance our growth, and
that cash dividends will not be paid to our stockholders. SEE "MARKET FOR
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS."
RISK OF FORWARD-LOOKING INFORMATION
We have included a significant amount of forward-looking information
in this prospectus. Because it is not possible to predict the future, there
is a significant risk that the forward-looking information will prove to be
incorrect, and perhaps materially incorrect. SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS."
USE OF PROCEEDS
We will receive from $0.00 to a maximum of $4,698,000 if all of the
810,000 outstanding Class A Warrants are exercised. However, we cannot offer
any assurance that any Class A Warrants will be exercised. To the extent that
we receive any proceeds from the exercise of the Class A Warrants, we will
use the proceeds for research and development and working capital.
PROCEDURE TO EXERCISE CLASS A WARRANTS AND TAX ASPECTS
PROCEDURE TO EXERCISE CLASS A WARRANTS. The Class A Warrants were
distributed to the public in September 1997, and have been trading in the
over-the-counter market (and have been quoted on the OTC Bulletin Board)
since that time. Each registered holder of a Class A Warrant should have
possession of a certificate that represents that Class A Warrant. Persons who
hold their Class A Warrants in a brokerage account or otherwise in a "street
name" account may ask their brokers to deliver a Class A Warrant certificate
to them.
REGISTERED HOLDERS. If you are a registered holder and if you have
possession of your Class A Warrant certificate, in order to exercise a Class
A Warrant, you must:
- Complete the subscription form which is included as a part of
the Class A Warrant Certificate;
- Sign the subscription form and have your signature medallion
guaranteed by a broker-dealer member of the STAMP program;
- Deliver the original warrant certificate with the completed,
signed, and medallion guaranteed subscription form to Continental
Stock Transfer & Trust Co., Inc., 2 Broadway, New York, NY 10004,
Attn: Compliance Department; and
- Include your payment for an amount equal to $5.80 times the
number of warrants being exercised. You must pay for the exercise
by certified or bank cashiers' check payable in United States
funds, payable to the order of Isonics Corporation. If you prefer
to wire transfer funds, you should contact Continental Stock
Transfer & Trust Company by telephone and request wiring
instructions. Continental Stock Transfer can be reached by
telephone at 212-509-4000.
We recommend that you do not send your Class A Warrant certificate or
funds through the regular U.S. Mail. We recommend that you use
registered or certified U.S. mail, or a courier service that will
provide you a receipt indicating that Continental Stock Transfer
received your Class A Warrant certificate and payment. Neither Isonics
nor Continental Stock Transfer is responsible for your Class A Warrant
certificate or your payment until Continental Stock Transfer actually
receives delivery. DO NOT SEND CLASS A WARRANT CERTIFICATES OR PAYMENT
DIRECTLY TO ISONICS CORPORATION.
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<PAGE>
WARRANTS HELD IN A BROKERAGE ACCOUNT OR OTHERWISE IN STREET-NAME. If
you hold your Class A Warrants in a brokerage account or otherwise in a
"street name" account, you must follow the procedures required by your
broker, dealer, or other street-name holder.
LOST WARRANT CERTIFICATES. If you have lost your Class A Warrant
Certificate, you must contact Continental Stock Transfer & Trust Co., Inc.
and follow the procedures established by Continental Stock Transfer for your
lost Class A Warrant Certificate.
TAX ASPECTS. You will be required to recognize as ordinary income
for tax purposes the difference between your exercise price and the fair
market value of the Common Stock at the time of exercise. For example, if you
exercise your Class A Warrant at a time when the market price of the Common
Stock is $12.00 per share, you will recognize $6.20 ($12.00 minus $5.80) in
ordinary income. We will deliver to you a Form 1099 to reflect your exercise
to the extent required by the federal Internal Revenue Code of 1986, as
amended.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION OR PLAN OF OPERATION
THE STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT PURELY
HISTORICAL ARE FORWARD LOOKING STATEMENTS. "FORWARD LOOKING STATEMENTS"
INCLUDE 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; STATEMENTS
REGARDING FUTURE CAPITAL EXPENDITURES AND FINANCING REQUIREMENTS; AND SIMILAR
FORWARD LOOKING STATEMENTS. 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 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.
Originally, our core business was the production and supply of
depleted zinc, a non-radioactive stable isotope, to the nuclear 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 our sale of our
depleted zinc business in December 1999, as discussed below, our future
revenues will depend on our success in developing and selling products in the
semiconductor and stable and radioactive isotope markets.
International Process Research Corporation ("Interpro", doing
business as Colorado Minerals Research Institute) is a contract research and
development and materials processing company and is developing new, lower
cost technologies to better meet our customers' needs. Interpro generates the
majority of its revenues from contract research and process development
engagements.
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 radioisotopes 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 radioisotopes, in Germany and other European countries.
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.
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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.
On December 1, 1999, we sold our depleted zinc business to
Eagle-Picher Technologies, LLC ("Eagle-Picher") for approximately $8,200,000
of which $6,700,000 was paid on December 1, 1999. Additionally, we signed a
long-term isotope supply agreement with Eagle-Picher, and Eagle-Picher agreed
to supply us with 200 kilograms of silicon-28 in 2000 for no cost except for
the warrant to purchase 4,000,000 shares issued at the time to Eagle-Picher.
As a result, we anticipate lower revenues in future quarters and a
lost or delayed sale of radioisotopes could have a significant impact on our
operating results for a particular period, and such fluctuations could
materially and adversely affect our business, financial condition and results
of operations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of net revenues. The
table and the discussion below should be read in conjunction with the audited
financial statements and the notes thereto appearing elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
APRIL 30, JANUARY 31,
--------------- -----------------
1998 1999 1999 2000
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 68.7 78.7 80.9 79.1
----- ----- ----- -----
Gross margin 31.3 21.3 19.1 20.9
Operating expenses:
Selling, general and administrative 19.8 21.4 17.1 28.0
Research and development 12.0 6.8 6.7 8.3
Restructuring & office closure -- 4.1 4.9 0.5
----- ----- ----- -----
Total operating expenses 31.8 32.3 28.7 36.8
----- ----- ----- -----
Operating income (loss) (0.5) (11.0) ( 9.6) (15.9)
Other income (expense), net (2.1) (2.8) ( 1.3) 44.6
----- ----- ----- -----
Income (loss) before extraordinary item and income taxes (2.6) (13.8) (10.9) 28.7
Income tax (expense) benefit 4.6 (1.0) 1.4 4.2
----- ----- ----- -----
Income (loss) before extraordinary item 2.0 (14.8) (12.3) 24.5
Extraordinary item - loss on extinguishments of debt (3.7) (0.0) ( 0.0) ( 0.0)
----- ----- ----- -----
Net income (loss) (1.7)% (14.8)% (12.3)% (24.5)%
===== ===== ===== =====
</TABLE>
NET REVENUES
Net revenues increased from $6,780,000 in fiscal 1998 to $16,998,000
in fiscal 1999, an increase of $10,218,000 or 151%. The increase is primarily
due to additional net revenues from the Interpro and Chemotrade acquisitions.
Interpro 1999 revenues were $2,614,000. Chemotrade's fiscal 1999 revenue was
$10,181,000. As a result of the sale of the depleted zinc business to
Eagle-Picher on December 1, 1999, revenues will be decreased on an annual
basis by approximately $6,000,000. The impact on the fiscal year ended April
30, 2000, should be somewhat less as the sale occurred seven months into the
fiscal year.
Net depleted zinc revenues for fiscal 1999 increased by
approximately $323,000 from fiscal 1998 revenues of $5,636,000, on comparable
unit sales. Average unit sales prices of depleted zinc decreased slightly
from fiscal 1998 to fiscal 1999 due to less refined product being sold during
fiscal 1999. Net revenues for stable isotope labeled compounds (also known as
"SILCs") in fiscal 1999 were approximately $2,599,000, an increase of
approximately $1,492,000, or 135% from fiscal 1998. The revenue
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growth reflects the increasing demand for SILCs, specifically enriched carbon
and oxygen products; however, our revenue from SILCs is limited by the
available supply of enriched carbon and oxygen products. We have and intend
to continue to develop relationships with potential producers of SILCs, such
as the Institute of Stable Isotopes in Tblisi, Georgia, to meet the growing
demand for our SILC products.
Net revenues for the nine months ended January 31, 2000, were
$11,115,000, a decrease of approximately 22% or $3,194,000 from $14,309,000
for the same period in the prior fiscal year. The decrease is primarily
because our net revenues from contract research and development engagements
and other sources of sales decreased approximately $1,301,000 for the nine
months ended January 31, 2000, to approximately $1,017,000 from approximately
$2,318,000 in the comparable period of the prior year. Net revenues from
isotope product sales also decreased approximately $1,893,000 for the nine
months ended January 31, 2000, to approximately $10,098,000 from
approximately $11,991,000 in the comparable period of the prior year. Net
revenues from radioisotope sales decreased approximately $513,000 for the
nine months ended January 31, 2000, compared to the nine months ended January
31, 1999, to approximately $5,001,000. Net revenues from stable isotope sales
decreased approximately $1,380,000 for the nine months ended January 31,
2000, compared to the nine months ended January 31, 1999, to approximately
$5,097,000. Net revenues from stable isotopes and radioisotope sales varied
because of the timing and size of large depleted zinc and radioisotope sales
orders and shipments. Because of the Eagle-Picher transaction there were no
significant depleted zinc sales in the last two months of the nine-month
period ended January 31, 2000, and there will be no revenues for the
remainder of the fiscal year ending April 30, 2000.
International sales represented approximately 60% of revenues in
fiscal 1999 and less than 10% of net revenues for fiscal 1998. This
substantial increase is primarily attributable to our acquisition of
Chemotrade.
We do not anticipate significant revenues from sales of silicon-28
based products in the fiscal year ended April 30, 2000. 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.
GROSS MARGIN
As a result of the sale of the depleted zinc business to
Eagle-Picher on December 1, 1999, gross margin will be decreased on an annual
basis by approximately $1,000,000. The impact on the fiscal year ended April
30, 2000 should be somewhat less as the sale occurred seven months into the
fiscal year. As a percentage of revenues gross margin should not change
significantly.
Gross margin decreased to approximately 21.3% in fiscal 1999 from
31.3% in fiscal 1998. The decrease is because of reduced unit sales prices of
depleted zinc, the increased proportion of net revenues generated from
contract manufacturing performed by Interpro, and stable and radioisotope
revenues generated by Chemotrade which typically have lower margins.
Additionally, the entrance to the oxygen-18 market has been achieved by
pursuing market share over margin. Gross margin for the nine months ended
January 31, 2000, increased to approximately 20.9% of net revenues from
approximately 19.1% for the same period in the prior fiscal year. The
increase is primarily because of a change in product mix sold during the nine
month period as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased on a dollar
basis by approximately $2,300,000 to $3,600,000, or 21.4% of net revenues for
fiscal 1999 from approximately $1,300,000 or 19.8% of net revenues for fiscal
1998. The dollar increase in selling, general and administrative expenses is
primarily attributable to the acquisitions of Interpro and Chemotrade.
As a result of the sale of the depleted zinc business to
Eagle-Picher on December 1, 1999, selling, general and administrative
expenses will be decreased on an annual basis by approximately $100,000. The
impact on the fiscal year ended April 30, 2000 should be somewhat less as the
sale occurred seven months into the fiscal year. We anticipate that, in
general, selling, general and administrative expenses will remain relatively
stable because of cost controls implemented throughout Isonics
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<PAGE>
during the past twelve months. As a percentage of revenues selling, general
and administrative expenses should increase, as revenues will be
significantly lower.
Selling, general and administrative expenses increased $673,000 or
27.5% to approximately $3,117,000, or approximately 28.0% of net revenues for
the nine months ended January 31, 2000, from $2,444,000, or 17.1% of net
revenues in the comparable period of the prior year. The dollar increase for
the nine months ended January 31, 2000, was primarily attributable to
increased usage of professional services including legal, business
development and accounting services, and compensation expense related to
one-time bonuses associated with the Eagle-Picher transaction paid to certain
members of senior management. The same factors and lower revenues primarily
caused the percentage increase.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased by approximately
$344,000 or 42.4% for fiscal 1999, while declining on a percentage basis to
6.8% of net revenues in fiscal 1999, from 12.0% of net revenues in fiscal
1998. The dollar increase during fiscal 1999 is primarily because of
increased marketing and material costs associated with the development of
isotopically pure silicon wafers and development costs incurred at Interpro.
The decrease in research and development expenses as a percentage of net
revenues from fiscal 1998 to fiscal 1999 was because of revenue growth
associated with our acquisitions. We believe that the development and
introduction of new product applications is critical to our future success
and expect that research and development expenses will remain stable (as
measured in dollars) in the near term because of the timing of material usage
and outside services, but may vary as a percentage of revenues.
Research and development expenses will not be significantly affected
by the sale of the depleted zinc business to Eagle-Picher on December 1,
1999, because we had not spent significant funds on depleted zinc research
and development in the last fiscal year, and did not have plans for any
significant future research and development expenditures. However, as a
percentage of revenues research and development expenses should increase, as
revenues will be significantly lower.
As described above, we signed a long-term isotope supply agreement
with Eagle-Picher, and 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. The anticipated value of the 200 kilograms
is approximately $5,000,000. As we consume the silicon-28 we will recognize
an expense of approximately $25.00 per gram. Since we purchased the 200
kilograms of silicon-28 by issuing a warrant to Eagle-Picher to purchase
4,000,000 shares of stock, we will record the warrant expense proportionately
at the rate of $25 per gram of silocon-28 received. This is the price we most
recently paid for silicon-28 from another supplier.
Research and development expenses decreased by approximately
$43,000, or approximately 4.5%, to $919,000 for the nine months ended January
31, 2000, from $962,000 for the comparable period in fiscal 1999, while
increasing on a percentage basis to approximately 8.3% of net revenues from
approximately 6.7%. The percentage increase during the nine months ended
January 31, 2000, was primarily because of lower revenues as described above.
The absolute dollar expenditures are comparable year over year, however, more
emphasis is now being placed on semiconductor materials development.
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.
RESTRUCTURING AND OFFICE CLOSURE
On October 31, 1998, we announced a restructuring of our operation
and relocation of our headquarters to Golden, Colorado, the location of our
subsidiary, Interpro. We recorded a $708,000 charge in connection with the
restructuring.
As of January 31, 2000, the only significant restructuring cost
remaining is the lease payments on the former San Jose, California office,
which has been sublet for the remaining term of our lease. The net liability
is estimated to be approximately $51,000 and will be incurred over the next
four years. The $60,000 expense in the nine months ending January 31, 2000,
was primarily related to moving costs incurred by two senior executives.
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OTHER INCOME (EXPENSE), NET
Other income (expense), net includes interest income and expense,
amortization of debt issuance costs and the fair value of warrants issued in
connection with debt, and foreign currency gains and losses. Other expense,
net increased by approximately $339,000 to $484,000 for fiscal 1999. The
increase was the result of foreign currency gains from liabilities
denominated in German Deutsche Marks due to the sellers of Chemotrade which
was offset by a significant increase in interest expense including charges
for the fair value of warrants and common shares issued in connection with
debt and debt conversions. Other income (expense), net increased by
approximately $5,142,000, to $4,962,000, for the nine months ended January
31, 2000, from other income (expense), net of approximately $(180,000), for
the comparable period of the previous fiscal year. The Eagle-Picher
transaction resulted in $5,172,000 in other income. Additionally, an increase
in other income of approximately $112,000 was due to a favorable settlement
of an outstanding contingency. Foreign currency exchange losses increased by
approximately $99,000 for the nine months ended January 31, 2000.
Interest expense is expected to be significantly lower in future
periods as several notes payable were paid with a portion of the cash
proceeds received from the sale of the depleted zinc business to Eagle-Picher
on December 1, 1999.
INCOME TAXES
The income tax benefit was $314,000 for fiscal 1998 and the
effective rate of 177% relates to the realization of deferred tax assets
associated with the purchase of Interpro and the reduction of the previously
recorded valuation allowance. The consolidated entity had an income tax
expense of $171,000 for fiscal 1999. Because the Chemotrade subsidiary had
net income, income taxes were paid in Germany. The two United States-based
entities both had net losses and did not owe income taxes. A valuation
allowance has been provided against all deferred tax assets, which relate
primarily to net operating loss and research and development credit
carryforwards. We are exploring various tax minimization strategies in an
effort to conserve future cash flows.
We realized a gain on the sale of our depleted zinc business of
approximately $5,172,000. The tax effect of this sale, net of tax loss
carryforwards available is estimated to be approximately $435,000.
Additionally, there was income tax expense for the quarters ended January 31,
2000, and January 31, 1999, of $35,000 and $177,000 respectively, and income
tax expense for the nine months ended January 31, 2000 and 1999, of $36,000
and $197,000 respectively related to income generated by our Germany-based
subsidiary, Chemotrade.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the sale of the depleted zinc business to
Eagle-Picher on December 1, 1999, our liquidity has been significantly
improved.
Since inception, our principal sources of funding have been cash
from operations, borrowed funds and sales of Common Stock. We generated cash
in operating activities of approximately $357,000 during fiscal 1999, as
compared to a use of cash of $539,000 in fiscal 1998. During the nine months
ended January 31, 2000, we used approximately $2,904,000 in operating
activities, as compared to $146,000 generated in operating activities during
the first nine months of fiscal year 1999.
Positive influences on fiscal 1999 cash flow and on the cash flow
for the nine months ended January 31, 2000, included
- a decrease in accounts receivable of $1,748,000;
- depreciation and amortization expense of $520,000; and
- the loss on disposal of property (restructuring related) $504,000.
In addition to the net loss of $2,521,000 we recognized for fiscal
year 1999, other negative influences on our cash flow from operations were a
decrease in accounts payable $112,000 and an increase in inventory of $89,000.
At April 30, 1999, we had approximately $452,000 of cash
equivalents, a decrease of $592,000 compared to $1,044,000 at April 30, 1998.
At April 30, 1999, we had negative working capital of approximately
$2,317,000, a decrease of $4,128,000
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compared to working capital of $1,811,000 at April 30, 1998. The decrease is
primarily the result of our cash payments for the acquisition of Chemotrade
and the losses incurred for fiscal 1999. During fiscal 1999, we paid the
sellers of Chemotrade approximately $1,686,000 in cash, and had one note for
approximately $826,000 outstanding due to the sellers on June 1, 1999, of
which approximately $500,000 was repaid and approximately $326,000 was
extended until July 2000.
At January 31, 2000, we had approximately $4,576,000 of cash and
cash equivalents, an increase of approximately $4,124,000, compared to
$452,000 as of April 30, 1999. At January 31, 2000, we had positive working
capital of approximately $4,067,000, an increase of approximately $6,384,000
from negative working capital of approximately $2,317,000 April 30, 1999. The
increase is primarily the result of proceeds from the issuance of preferred
stock in July 1999 and the Eagle-Picher transaction.
Our principal sources of funding have been cash from borrowed funds
and sales of preferred stock. We used cash in operating activities of
approximately $2,904,000 and generated cash of $146,000, during the nine
months ended January 31, 2000, and 1999, respectively. Cash used in operating
activities during the nine months ended January 31, 2000 was principally the
result of a net loss of approximately $2,454,000 before the gain of
approximately $5,172,000 resulting from the Eagle-Picher Transaction, and
increase in net operating assets. Cash generated by operating activities
during the nine months ended January 31, 1999, was principally the result of
a net loss of $1,757,000, reduced by non-cash charges and decreases in net
operating assets.
On July 24, 1998, we obtained a $3,000,000 asset based credit
facility for our U.S. operations, secured by our U.S. assets, with an
unaffiliated lender. This facility was repaid, in full, in December 1999 with
funds made available by our sale of assets to Eagle-Picher. The proceeds of
that facility were used to repay approximately $537,000 of debt outstanding
and $742,000 of accounts payable. Chemotrade has one unsecured revolving line
of credit for 400,000 DM (approximately $220,000 (US) at April 30, 1999 and
approximately $200,000 (US) at January 31, 2000). We are evaluating
alternative secured credit facilities for Chemotrade.
Financing activities used cash of $244,000 in fiscal 1999, and
provided cash of $1,621,000 during fiscal 1998. Financing activities
generated cash of $318,000 during the nine months ended January 31, 2000 and
used cash of $296,000 during the comparable period of the prior fiscal year.
In fiscal 1999, the primary use of cash was the excess of repayments of debt,
$1,000,000 over proceeds of debt, $701,000. In fiscal 1998, the primary
source of cash was the issuance of Common Stock, $3,452,000 versus the use of
cash for payments of debt, $1,852,000. During the nine months ending January
31, 2000, our principal source of cash from financing activities was the
issuance of convertible preferred stock in July 1999 for cash of $2,250,000
and proceeds from the issuance of long-term debt of $75,000. Net repayments
on our revolving line of credit amounted to $513,000 during the nine-month
period, and we repaid additional debt during that period of approximately
$1,494,000, each resulting in a reduction in the net amount of cash received
from financing activities. Cash used during the nine months ended January 31,
1999, resulted primarily from repayments of debt of $1,714,000, offset by net
borrowings on the revolving line of credit of $931,000 and proceeds of
$500,000 from the issuance of long-term debt.
On July 29, 1999, we completed a private placement financing to
accredited investors and certain creditors valued in total at approximately
$2,700,000. We issued 1,830,000 units, each consisting of one share of Series
A Convertible Preferred Stock and one warrant. We received $2,250,000 in 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 our 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
Isonics Common Stock for $3.75 through July 26, 2002.
In addition to converting $425,000 of existing debt into equity as
part of the private placement we:
- Issued 500,000 warrants to purchase shares of our Common Stock to
an investment banker as a commission on 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
obligation 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, which notes have been paid in full.
Our investing activities used cash of approximately $705,000 and
$66,000 during fiscal 1999 and 1998, respectively, and generated cash of
approximately $6,710,000 for the nine months ended January 31, 2000.
Investing activities in fiscal 1998 were primarily for purchases of property
and equipment. Uses of cash in fiscal 1999, include approximately $159,000
for property and
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equipment, and $546,000 net cash used in the Chemotrade acquisition. The
significant positive cash flow from investing activities in the first nine
months of fiscal 2000 was principally the result of the completion of the
Eagle-Picher transaction. Our investing activities used cash of $666,000 for
the nine months ended January 31, 1999, primarily for purchases of property
and equipment and $546,000 was also used during the nine months ended January
31, 1999 for the purchase of our subsidiary Chemotrade.
At April 30, 1999, and subsequently until December 1, 1999, we were
in default of our borrowing agreements with Coast Business Credit ("Coast"),
and on December 1, 1999, we had approximately $215,000 of outstanding
borrowings. We have used some of the proceeds of the depleted zinc business
sale described above to pay off the Coast borrowings and our relationship
with Coast has been terminated. We currently have no borrowing agreements in
place with any lenders or similar organizations.
We believe that our current cash position, attributable to the
proceeds received from the sale of our depleted zinc business and the reduced
levels of debt associated therewith, will be sufficient to fund operations
for more than the next twelve months. However, our long-term capital
requirements will only be met if we are able to generate profits from
operations and positive cash flows, or develop new sources of financing of
which there can be no assurance.
BUSINESS
Isonics Corporation is an advanced materials and technology company
which develops and commercializes products based on enriched stable isotopes.
Stable isotopes can be thought of as extremely pure materials. This high
degree of purification accomplished on the sub-atomic level provides enhanced
performance properties compared to normal purity materials. Stable isotopes
have commercial uses in several areas, including: energy; medical research,
diagnostics and drug development; product tagging and stewardship;
semiconductors; and optical materials. We have successfully developed and
commercialized several isotope products and intend to promote the emergence
and growth of new stable isotope applications.
Our principal product through November 1999 was isotopically
depleted zinc. Depleted zinc is used to prevent corrosion in nuclear power
plants. Corrosion is a cause of high radiation fields in such plants and can
result in radiation exposure to workers. Depleted zinc also reduces
environmental cracking in certain kinds of nuclear reactors, which if not
controlled, can require extremely costly repairs, or possibly result in
premature shutdown and de-commissioning of the facility. However, in December
1999, we sold our depleted zinc business to Eagle-Picher Technologies, LLC.
New applications for stable isotopes are continually being developed
by us and by third parties. We believe that new applications have the
potential to create new markets. One of these new applications for stable
isotope labeled compounds is the diagnostic breath test ("DBT") market. DBTs
provide early diagnosis of conditions that could otherwise lead to expensive
procedures such as endoscopies and biopsies. DBTs under development by third
parties that utilize stable isotopes in their application include tests to
diagnose peptic ulcers, gastric emptying, fat malabsorption and liver
function. Two DBTs, relating to peptic ulcers, have been approved by the U.S.
Food and Drug Administration (the "FDA"). We believe that other companies
have applied to the FDA or comparable agencies in foreign countries for
approval of these and other tests. FDA approval must be obtained before DBTs
can be sold in the United States.
The rare, stable isotope of carbon is carbon-13. Carbon-13 is the
key ingredient for most DBTs. We believe that we are the third largest
supplier of carbon-13 in the world, and are the only non-Japanese owned
supplier. To further strengthen this position, in February 1998, we formed a
joint venture with the Institute of Stable Isotopes in Tblisi, Georgia. The
purpose of the joint venture was to increase carbon-13 production at the
Institute initially, and then to transfer that production technology to
manufacturing facilities to be established in Europe and North America. Our
carbon-13 production capacity does not presently meet our anticipated
requirements. Consequently, in December 1999, we entered into an agreement
with Eagle-Picher Technologies, LLC, to purchase carbon-13 from their
Oklahoma-based facility. To date this facility has not produced any
carbon-13, or other carbon isotopes of sufficient enrichment to be of
commercial interest to us. We believe production of enriched carbon isotopes
from this facility will commence in 2000. We are also investigating other
sources of supply of carbon-13.
We are collaborating with academia and industry to evaluate the
benefits of isotopically pure silicon-28. One of the properties of
isotopically pure silicon-28 is its high thermal conductivity, which we are
currently researching for use in semiconductor applications. We believe that
if evaluations demonstrate the commercial feasibility of one or more
products,
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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.
According to the Semiconductor Industry Association, sales in 1998 of silicon
wafers and other semiconductor substrates were over $7 billion.
Improved thermal conductivity of a thin film of isotopically pure
silicon-28 was demonstrated by a researcher at Brown University in 1997.
Based on our preliminary research, the 60% improvement in conductivity at
room temperature was in line with our expectations. Since 1994, we have been
working to produce isotopically pure silicon-28 epitaxial wafers suitable for
the manufacture of semiconductor devices. Epitaxial wafers are made by taking
an existing silicon wafer and then growing a thin surface layer of silicon
using chemical vapor deposition.
In fiscal 1999, we acquired an exclusive license relating to two
Yale University patents, which cover semiconductor devices made of
isotopically pure silicon, germanium, gallium arsenide and most isotopically
pure compound semiconductors. The patents claim that isotopic purity provides
improved device speed and improved thermal conductivity, two properties that
are of great importance to the semiconductor industry. We believe we have
achieved this goal as evidenced by our shipments of epitaxial wafers in
fiscal 1999.
We were formed in March 1992, as a partnership, and were
subsequently incorporated in California in March 1993, as A&R Materials, Inc.
In September 1996, we changed our name to Isonics Corporation. Our principal
executive offices are located at 5906 McIntyre Street, Golden, Colorado
80403. Our telephone number is (303) 279-7900, and our facsimile number is
(303) 279-7300. You can find our web site at http://www.isonics.com.
RECENT BUSINESS ACQUISITIONS
INTERNATIONAL PROCESS RESEARCH CORPORATION
Effective April 30, 1998, we purchased all of the outstanding
capital stock of International Process Research Corporation ("Interpro") from
a previously unaffiliated corporation (Metallurgy International, Inc.)
Interpro, which does business as Colorado Minerals Research Institute, is a
contract research and development, and materials processing company. Interpro
performed (through December 1, 1999) key steps in our depleted zinc
manufacturing process. Interpro is also jointly developing new, lower-cost
technologies to enable us to better meet customer needs. The acquisition was
made to assure future availability of this critical manufacturing technology,
and to provide an infrastructure platform for performing value-added
processing of other isotopes. Our consolidated balance sheets at April 30,
1999 and 1998 include the assets and liabilities of Interpro. Our
consolidated statement of operations includes Interpro only for fiscal 1999
since the acquisition occurred on the last day of fiscal 1998. In connection
with the acquisition, we issued 353,982 shares of our Common Stock (valued at
$708,000) in exchange for all of the outstanding shares of Interpro. We
accounted for the acquisition as a purchase.
CHEMOTRADE GmbH
Effective June 1, 1998, we acquired all of the outstanding shares of
Chemotrade GmbH, 75 percent of the outstanding shares of Chemotrade Leipzig
GmbH and 6 percent of the outstanding shares of IUT (collectively
"Chemotrade"). All three companies are located in Germany. Chemotrade GmbH is
located in Dusseldorf, Chemotrade Leipzig GmbH is located in Leipzig, and IUT
is located in Berlin. All three companies were owned by two common
shareholders. All three companies continue to be engaged in the distribution,
development and manufacture, of stable and radioactive isotopes. We paid the
unaffiliated former owners of Chemotrade $758,000 in cash, 357,730 restricted
shares of our Common Stock valued at $894,000, and two interest bearing
notes, one for $924,000 which was paid in September 1998, and a second note
for $826,000 which was partially paid in June 1999, with the balance due in
July 2000.
The sellers guaranteed Chemotrade's defined pre-tax earnings during
the sixteen months ended April 30, 1999, and the twelve months ended April
30, 2000, and 2001. Chemotrade has met the initial pre-tax earnings goal for
the sixteen months ended April 30, 1999. If the defined pre-tax earnings for
2000 and 2001 are met, the sellers will receive additional consideration of
$271,000. If the defined pre-tax earnings are not met, the consideration will
be reduced.
BUSINESS THAT WE SOLD
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On December 1, 1999, we sold our depleted zinc business to
Eagle-Picher Technologies, LLC ("Eagle-Picher") for $8,200,000, including
$1,500,000 to be paid over a period of three years. Eagle-Picher's obligation
to pay the final $1,500,000 is subject to certain contingencies. We received
cash of approximately $6,700,000 from Eagle-Picher at the closing, of which
approximately $1,200,000 was used to pay certain accrued liabilities.
The Agreement executed between us and Eagle-Picher provides for:
(1) Our sale of the depleted zinc business to Eagle-Picher for a
purchase price including approximately $6,700,000 in cash plus
three additional payments of $500,000 over the next three years,
and
(2) Eagle-Picher's sale to us of 200 kilograms of silicon-28 in
consideration for a forty-two (42) month Warrant grant to
Eagle-Picher for the purchase of 4,000,000 shares of our Common
Stock at purchase price of $3.75 per share. The Warrant is subject
to a registration rights agreement. The number of shares issuable
upon exercise of the Warrant can be reduced if Eagle-Picher is
unable to supply the full 200 kilograms of silicon-28 during
calendar year 2000.
Related to, but separate from, the sale of the depleted zinc
business, we contemporaneously signed a ten-year Supply Agreement by which we
will have the exclusive right to purchase quantities of isotopically pure
silicon-28, silicon-29, and silicon-30, and a non-exclusive right to purchase
quantities of isotopically pure carbon-12 and carbon-13 produced by
Eagle-Picher from its Oklahoma-based facilities for a ten-year period. The
Supply Agreement locks-in what we believe is a favorable purchase price for
the aforementioned isotopes. As partial consideration for the exclusivity
provision, we agreed to pay Eagle-Picher a fee equal to 3.0% of the net
revenues from all sales made by us of products incorporating enriched silicon
isotopes supplied by Eagle-Picher. The ability of Eagle-Picher to produce
isotopes meeting the specifications of the Supply Agreement is contingent
upon Eagle-Picher successfully beginning production of silicon-28 as
scheduled by April 2000.
BACKGROUND
An isotope is one of two or more species of the same chemical
element, which differ from one another only in the number of neutrons in the
nucleus of the atom. The different number of neutrons can create
significantly different nuclear physics characteristics. To take advantage of
some of these different characteristics, it is usually necessary to increase
("enrich") or decrease ("deplete") the concentration of a particular isotope.
There are over 280 naturally occurring stable isotopes of 83 elements. Some
elements have only one naturally occurring stable isotope, while others have
many. Stable isotopes are not radioactive.
Stable isotopes of an element differ in mass and diameter, as well
as several nuclear properties, such as cross-section, spin and magnetic
moment. Differences in these properties can result in substantially different
effects, and some of these differences have the potential for commercial
application. For example, in ultra chemically pure crystals grown for
electronics or optical applications, isotopic impurities are the greatest
contributor to crystal disorder because of mass and diameter variations.
Eliminating this disorder by using a single enriched isotope (i.e.
isotopically pure substance) results in increased thermal conductivity and
optical transparency, and thus in improved product performance. Similarly,
enriching or depleting isotopes based upon their cross-sections allows
materials to be engineered for applications in the nuclear power industry,
for controlled doping of some semiconductors in the computer industry, and
for use as targets to produce radioisotopes for the medical and other
industries.
Stable isotopes of an element do not differ significantly in their
chemical behavior. By varying the natural abundance of isotopes present in
the material it can be "Tagged". Varying the natural abundance gives a
material its own unique mass or nuclear magnetic signature. Most importantly,
tagging in this manner does not change a given material's chemical
properties. Though chemically equivalent, the "tagged" or labeled material is
discernible from its unlabeled twin through the use of several types of
instruments called spectrometers.
COMPANY STRATEGY
We believe that our strength is the ability to bring the necessary
ingredients together to identify, evaluate, develop, engineer, and
successfully commercialize applications for stable isotopes and value-added
products manufactured from stable isotopes. This is evidenced by management's
experience (at Isonics and in prior employment) in developing depleted zinc
from
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what was initially a cost prohibitive concept to a commercial product. The
worldwide market for depleted zinc is now one of the largest for a stable
isotope product.
We believe we have created a product development model that can
serve as a basis for our current and future expansion. To capitalize on the
commercial opportunities that have been identified for stable isotopes, we
have adopted a business strategy designed to maximize the value of our
technologies, business development and management resources, while attempting
to minimize capital costs. This strategy involves:
- focusing on development of high value-added products, which have a
competitive advantage in large or growing markets;
- leveraging research and development expenditures through
collaborations, government programs and corporate partnerships;
- minimizing early capital needs by obtaining stable isotopes through
alliances and supply agreements with existing stable isotope
sources, followed by investment in company-owned isotope production
facilities when markets are more established and the optimum
production technology has been determined;
- obtaining value-added processing technology through sub-contract
manufacturing agreements, joint ventures and acquisitions of
strategically important technologies and companies; and
- developing a time-balanced product pipeline to provide a continual
supply of new business opportunities.
PRODUCTS. Depleted zinc sales have historically been our most
significant source of revenues. However, in fiscal 1999, our revenues were
generated from a more broad range of sources, including depleted zinc sales
(approximately 35%), radioisotopes sales (approximately 34%), and other
stable isotopes sales including our newly introduced silicon-28 isotope
(approximately 15%). The balance of our revenues comes from the operations of
our subsidiary, International Process Research Corporation (approximately
16%), who performs metallurgical and mineral processing contract research and
process analysis test work. Because we sold our depleted zinc business in
December 1999, depleted zinc will continue to be a significant contributor to
our revenues from operations in fiscal 2000, however depleted zinc sales will
cease to be a significant contributor to our revenues in subsequent fiscal
years.
RADIOISOTOPES. With the acquisition of Chemotrade GmbH in Germany,
we have expanded our product offerings to include radioisotopes produced at
several facilities in Russia and Uzbekistan. Radioisotopes are radioactive.
These products are sold to us under territory-specific, exclusive
distribution agreements with the licensed representatives of the production
facilities. Extensive export controls effectively restrict the flow of these
products to well-defined channels, limiting the price competition more
commonly observed with some stable isotope products from countries that once
were part of the former Soviet Union. Sales of these products represented 34%
of net revenues in fiscal 1999.
Radioisotopes are used in fields as diverse as basic physics,
biomedical research, medical imaging and therapy, radioactive waste
management technology development, and inspection/verification technologies.
Several of these market segments are already experiencing strong growth, and
with additional radioisotope-based products in various stages of development
and regulatory approval, promise significant potential for further growth.
Examples of existing and emerging applications follow.
BIOMEDICAL RESEARCH. Traditionally, numerous aspects of the many
phases of drug development have been carried out using radioisotope-labeled
versions of promising compounds. Metabolism, distribution, mode of action and
elimination of candidate drug compounds can be studied with the radioisotopes
of hydrogen, carbon, and phosphorus, among others. We have been supplying
several precursor compounds labeled with carbon-14 to a major manufacturer
who incorporates them into more complex radioisotope labeled compounds for
use in basic research and pharmaceutical development. The precursors are
produced under contract with a company in which we hold a small minority
share. While rational drug design and stable isotope labeled compounds
represent competition for this more traditional approach to research and drug
development, we believe a combination of increasing drug development activity
and the large body of data and experience will ensure a strong market for
these products.
MEDICAL IMAGING AND THERAPY. Radioisotopes have been used for years
in the diagnosis and treatment of many medical conditions in humans. The
trend in these two areas has been towards increasingly more specific
chemicals which, after labeling with the radioisotope and introduced into the
patient, quickly concentrate at the site of interest. In theory, the
appropriate choice of
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chemical and radioisotope labels would allow disease detection and
determination of extent, followed by therapy selection, administration and
monitoring. Several classes of chemical compounds ranging from monoclonal
antibodies to peptides, most recently, are being developed, tested and
approved for use in the detection, and eventually, the treatment of many
disease states. While certain isotopes will remain the dominant radioisotopes
for imaging and therapy monitoring, they typically have no role in therapy.
We believe that with the increased supply of new radioisotopes and the
ongoing development of highly specific biochemical therapies, this market
segment represents a major growth opportunity.
BRACHYTHERAPY. Cancer therapy continues to evolve to more
effectively target the many different types of cancer. The radioisotope
labeled compounds mentioned above promise great advances in focused
treatment, but are still well in the future. Today, external beam
radiotherapy and chemotherapy are the predominant technologies used in cancer
treatment, but another technology, brachytherapy, is emerging in the
treatment of specific disease states like prostate cancer. In this technique,
small sealed sources are inserted directly into the tumor using a variety of
minimally invasive surgical methods. The radioisotope is chosen to ensure
that only the tissue immediately adjacent to the implanted seed is
irradiated; this avoids irradiating nearby healthy tissue as occurs with
external beam radiotherapy. Several companies (Theragenics, North American
Scientific, International Isotopes, etc.) already offer or have announced
plans to offer brachytherapy products for the treatment of certain forms of
prostate cancer. Studies continue in the application of this technique for
other tumor types, including some breast cancers. We currently supply several
companies with radioisotopes for this application. We believe this market
segment represents one of the largest growth opportunities for radioisotopes.
Another form of brachytherapy involves the temporary introduction of
a sealed and shielded source of radioisotope into the body to deliver a
localized, high dose irradiation of tissue. One of the applications being
evaluated is for irradiation of vessel walls immediately following balloon
angioplasty to reduce the occurrence of restenosis. We believe this
application and others like it will take several years to develop, but they
represent interesting and promising new opportunities for radioisotopes.
INDUSTRIAL APPLICATIONS. Numerous industrial applications require
radioactive materials. One of the largest uses is in radioactive source
standards. These are employed as calibration tools for numerous radiation
detectors, with one of the largest group of users being the Nuclear Medicine
departments in the thousands of hospitals throughout the world. We supply
many isotopes used in the manufacture of these sources and distribute the
finished products of one of these manufacturers in parts of Europe. The
continued growth in the numbers and complexity of nuclear medicine imaging
equipment, especially PET (positron emission tomography), should ensure
growth in the demand for these radioisotopes.
STABLE ISOTOPE LABELED COMPOUNDS. Stable isotope labeled compounds
(known as "SILCs") are created by incorporating carbon, nitrogen, hydrogen,
and oxygen isotopes into several thousand relevant chemical compounds. Sales
of SILCs represented approximately 15% and 16% of our net revenues in fiscal
1999 and 1998 and, because of the sale of our depleted zinc business, we
expect this percentage to increase in and after fiscal 2000. SILCs allow
researchers to probe the metabolism of living systems, determine the
structures of important biological compounds, design new drugs and measure
extremely low levels of environmental toxins. We believe that greater
availability of stable isotopes and advances in instrumentation (improvements
in sensitivity and reduced cost) will promote increased demand for SILCs. We
have expanded our ability to acquire some of these isotopes as a result of
the Supply Agreement we entered into with Eagle-Picher. If Eagle-Picher is
able to produce enriched carbon isotopes from its facilities in Oklahoma, we
will have expanded our supply of these isotopes and we will no longer be
solely dependent on facilities in the former Soviet Union as suppliers of
these isotopes. Examples of existing and emerging applications include:
METABOLIC STUDIES. Increasingly, drug studies are performed with
labeled drugs to facilitate research on metabolism, distribution, mode of
action, and elimination. The FDA may eventually mandate the labeling of all
new drugs for investigational use during some or all phases of pre-clinical
and clinical evaluations of these drugs, but there can be no assurance that
the FDA will make this mandate in the near future, if at all.
RATIONAL DRUG DESIGN. Nuclear magnetic resonance ("NMR")
spectroscopy is being developed as a tool to determine the structure of
larger and larger molecules in solution, many of which cannot be analyzed by
the more traditional x-ray crystallography techniques. We believe that this
new NMR sensitivity, combined with the sophisticated isotopically labeled
cell growth media needed to produce the labeled human proteins, will require
an increasing supply of the stable isotopes of carbon, nitrogen, and
deuterium.
PRODUCT TAGGING AND STEWARDSHIP APPLICATIONS. The source of
materials and explosives may be identified, without changing their chemistry,
by tagging with the stable isotopes of carbon, nitrogen, oxygen, and
hydrogen. Several other approaches are currently being implemented, and other
technologies have also been proposed. These other approaches involve the
addition of
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extraneous materials such as dyes, exotic chemical compounds or radioactive
compounds. We believe that adding such extraneous materials can sometimes
detract from the performance of the product. Tagging with small amounts of
isotopically engineered versions of the material itself results in a unique
identifier that behaves chemically in exactly the same way as the host
material.
Our efforts to date in the production and sales of SILCs have
focused on structurally simple "building block" compounds which are used by
our customers to synthesize more complex and higher value SILCs. We market
carbon-13 and nitrogen-15 building block SILCs, which we obtain through our
supply alliance with several stable isotope producers. In the near term, we
will continue this strategy of supplying "building block" forms of stable
isotopes while at the same time increasing our production capacity both at
our alliance producers and our facilities.
In addition to providing additional revenue potential and possibly
higher margins, we believe that developing or acquiring complex SILC
synthesis capability would be synergistic with our efforts to develop the
breath test diagnostics product area, and would also aid in early
identification of future stable isotope business opportunities.
DIAGNOSTIC BREATH TESTS. Healthcare consumes a large amount of
resources in the United States and worldwide. We believe that substantial
changes are taking place to control or reduce the high cost of healthcare. A
significant trend is a general shift from therapy to cost-effective
prevention. Early diagnosis of conditions which otherwise could require
expensive therapies could help diminish the risks and expense of such
subsequent procedures. We have elected to pursue what we believe is a
promising segment of this market: diagnostic breath tests ("DBTs").
Breath tests are all based on the same principle and use a common
instrument to measure the result:
- a small amount of a carbon-13 SILC (referred to as a substrate) is
swallowed by the patient;
- breath samples are collected at regular intervals; and
- breath samples are analyzed for their carbon-13 content.
Most DBTs are intended to replace unpleasant, costly and sometimes
risky procedures such as endoscopies and biopsies of the digestive system. We
believe that DBTs may become a widely used and accepted diagnostic tool.
Certain DBTs are currently being sold in the U.S. and in Europe. Their ease
of administration may allow medical internists and general practitioners to
use them, potentially resulting in lower cost, earlier diagnosis, and broader
application.
The market for DBTs is defined by the incidence of diseases
addressed, and existing, alternative diagnostic procedures. The urea breath
test is the most established DBT. As they become more widely available,
carbon-13 urea breath tests ("UBTs") may address a potential population of
approximately 8,000,000 peptic ulcer patients in the U.S., who presently
utilize drugs and procedures with an estimated cost of at least $2 billion
each year. We believe that the UBT, coupled with antibiotic treatment, can
reduce the cost of peptic ulcer management. Two companies in the U.S. have
received FDA approval for a carbon-13 UBT. We believe that several companies
in Europe have received regulatory approval.
The following table identifies additional breath tests, which are at
various stages of clinical research and pre-clinical and clinical trials by
various third parties.
<TABLE>
<CAPTION>
BREATH TEST CONDITION DIAGNOSED
----------- -------------------
<S> <C>
(13)C-Urea Helicobacter pylori
(13)C-Triolein Fat malabsorption
(13)C-Spirulina Gastric emptying
(13)C-Galactose Liver function
(13)C-Xylose Small Bowel Bacterial Overgrowth (the major cause of chronic diarrhea)
(13)C-Aminopyrine Liver function
(13)C-Caffeine Liver function
(13)C-Erythromycin Cyclosporin dosage following transplantation
(13)C-Valine Genotype of MSUD (Maple Syrup Urine Disease)
(13)C-Sucrose Sucrose malabsorption (sucrase-isomaltase complex deficiency)
(13)C-Starch Pancreas amylase function
(13)C-Cholesteryl Octanoate Pancreas esterase function
</TABLE>
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We have entered this market supplying carbon-13 to manufacturers. We
are considering the possibility of manufacturing pharmaceutical-grade
substrates sometime in the future. We purchase carbon-13 from the Institute
of Stable Isotopes located in Tblisi, Georgia. This institute was the center
of development of technology for light isotope separation in the former
Soviet Union.
We are investigating the feasibility of building such plants and are
considering various strategic options, such as partnering or acquisition of
complementary technologies or businesses, to leverage our carbon-13
production capability. One such effort is the Supply Agreement we negotiated
with Eagle-Picher for the supply of various isotopes including carbon-13 as
described above.
The DBT business is subject to extensive government regulation. The
products and instruments used, which may be regulated as drugs and devices,
are subject to the scrutiny of FDA review and approval as well as ongoing FDA
inspection of most aspects of the production, marketing, distribution and use
of these tests. We believe that the production and marketing of DBTs are also
subject to similar regulatory controls in the foreign countries where we
would likely seek to market products. Consequently, such products cannot be
commercially introduced for several years, and there can be no assurance that
the products would ever be approved for use.
MEDICAL IMAGING AND THERAPY MATERIALS. Stable isotopes of thallium,
zinc, cadmium, xenon, oxygen, strontium, and many others are routinely used
in a variety of medical imaging and therapy applications. In their enriched
form or converted to a specific radioactive isotope in a cyclotron or nuclear
reactor, these materials are incorporated in chemical compounds which
concentrate in specific parts of the human body upon injection, inhalation,
or ingestion. Measuring the distribution of the materials in the patient can
assist physicians in diagnosing disease states and developing appropriate
treatment therapies, some of which incorporate radioactive materials produced
from stable isotopes.
We have decided to pursue one particular target isotope, oxygen-18,
used to produce fluorine-18, which is incorporated into the pseudo-sugar,
FDG, and used in Nuclear Medicine to diagnose multiple metabolic
abnormalities. Recent approvals by the FDA, favorable reimbursement levels by
Medicare/Medicaid and third party insurers, combined with similar dynamics in
Europe and Asia are expected to result in significant growth in FDG studies,
which should translate into increased oxygen-18 demand. Buyers of oxygen-18
range from the single site users who purchase in gram quantities, to the
radiopharmacy companies who will buy in kilogram quantities.
To meet this demand, we announced in May 1999 a multi-year joint
cooperation agreement with Global Scientific Technologies in Russia, which is
the third largest producer of oxygen-18 in the world. With market demand
exceeding supply and increasing market prices, this agreement encompasses
current production, increased production through recycling, new production
facilities in the United States and elsewhere, and new value-added forms of
the isotope. The agreement has resulted in a shift in our sales and marketing
strategy from smaller buyers to larger commercial providers of irradiation
equipment, flourine-18, and FDG, who will likely dominate the market and whom
we anticipate will favor long-term supply partnerships.
We will initially focus our sales efforts on the smaller buyer until
assured supplies permit us to aggressively pursue long-term supply agreements
with the large radiopharmacy companies, like PetNet, Syncor, and
Nycomed-Amersham, who we believe will dominate this market through their
networks of regional radiopharmacies. To supply this anticipated demand, we
are exploring a combination of options that include exclusive distribution
rights for existing production, investment in expansion of existing
production facilities, and investment in our own production facilities.
Most phases of the development and ongoing production of these
materials are controlled by the FDA and similar foreign regulatory agencies.
This fact, combined with the complexities of production and distribution, has
resulted in a market with only a few manufacturers. Tight quality control
requirements, and the importance to the health-care industry of a ready
supply of these drugs, leads these manufacturers to pay close attention to
their stable isotope suppliers. Quality, supply reliability, ultimate source,
breadth of offerings, price and track record are principal factors that a
manufacturer considers in evaluating a potential stable isotope supplier.
Much of the material used to manufacture such products originates in
countries of the former Soviet Union. While the U.S. Department of Energy
("DOE") has facilities that can manufacture stable isotopes, its costs are
usually substantially higher because of the full cost recovery mandated by
legislation governing the DOE's operations.
We believe that we are capable of supplying many of the stable
isotopes currently sold in this market. Since the original impetus for new
applications of stable isotopes in health care frequently comes from the drug
manufacturers, we have recently begun marketing our products, services and
capabilities to the existing and emerging manufacturers.
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<PAGE>
ISOTOPICALLY PURE SEMICONDUCTORS. Isotopic purification of carbon
used to manufacture synthetic diamonds has resulted in substantially improved
physical properties. Published tests conducted by General Electric
Corporation and others have shown that the removal of a small amount of
carbon-13 to produce isotopically pure carbon-12 synthetic diamonds can
result in a 50% improvement in thermal conductivity of the diamond at room
temperature. Additionally the new diamond was found to be highly transparent,
and the transmission of certain frequencies of laser light was increased by
approximately ten times without the diamond sustaining damage. General
Electric Corporation has stated that isotopically pure carbon-12 diamonds may
enable faster, more reliable computers due to their superior heat removal
capability and may result in more efficient cutting tools and more accurate
laser measurement devices, and that the new diamonds may enable designers to
use lasers in semiconductor fabrication techniques.
Studies conducted at Lawrence Berkeley Laboratory and the Max Planck
Institute on isotopically pure germanium have shown thermal conductivity
improvements similar to those found in isotopically pure carbon-12 diamonds.
The thermal conductivity of a thin film of isotopically pure silicon-28 was
demonstrated by a researcher at Brown University in 1997. The thermal
conductivity was found to be 60% higher than natural silicon at room
temperature and 40% higher at 100 degrees Centigrade. We believe that this
level of thermal conductivity improvement should significantly benefit the
semiconductor industry, and therefore we have decided to concentrate our
development efforts on silicon-28 for the near term future.
According to the Semiconductor Industry Association, the 1998 market
for silicon wafers and other semiconductor substrates was approximately $7
billion. Improvement in the thermal conductivity of silicon is important
since as the feature size of semiconductor devices continuously decreases,
the power density increases. As power density increases, more heat is
generated per unit volume causing the device-operating temperature to rise.
The semiconductor industry is moving toward lower operating voltages and is
using mechanical means to remove bulk heat, but we believe that greater heat
dissipation on the micro scale will become even more important to the
industry in the future. Better thermal conductivity directly affects heat
removal capability, and indirectly improves device speed. As the industry
moves toward deep sub-micron devices, the ability to remove heat will be a
prime consideration for the semiconductor industry.
We believe that if commercial opportunities emerge, isotopically
pure silicon-28, deployed as wafers or substrates and as silane or
trichlorosilane gas for building epitaxial layers should find a niche in the
manufacture of high-performance silicon semiconductors. Even at a premium
price, we believe that silicon-28 can compete in high-performance, less
cost-driven markets. We have produced isotopically pure silicon-28 silane
gas, and we have produced silicon-28 epitaxial layers on natural silicon
substrates.
We believe that these materials meet industry standards for
semiconductor fabrication and have met the quality standards for
microprocessor fabrication. We have provided specimens to academic
institutions and industrial semiconductor manufacturers. These institutions
have agreed to measure certain physical and electrical properties of
silicon-28, manufacture devices, and compare the performance to devices made
with natural silicon. Epitaxial wafers with layers of silicon-28 made to
custom specifications are currently for sale in pilot-scale quantities. It is
our goal to provide silicon-28 epitaxial wafers to a wide variety of
semiconductor manufacturers, but the best near term opportunity appears to be
microprocessors and certain power semiconductors. To this end, we delivered
wafers to Advanced Micro Devices in the fourth quarter of fiscal 1999.
During fiscal 1999, we acquired an exclusive license to two U.S.
patents owned by Yale University, concerning isotopically pure semiconductor
devices. These patents expire in 2009 and 2012 and cover silicon, germanium,
gallium arsenide and most isotopically pure compound semiconductors. We
believe that if evaluations demonstrate the commercial feasibility of one or
more products, demand could emerge in certain segments of the semiconductor
market. There can be 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.
During fiscal 1999, we signed a joint research and development
agreement with Silex Systems Ltd. The agreement calls for Silex to partially
fund some of our development activities and for Silex to assess the
feasibility of building a silicon isotope separation plant using Silex's
patented laser isotope separation process. These agreements represent the
launch of our efforts to ensure a large supply of silicon isotopes at a
reasonable cost to support the large-scale manufacture of isotopically pure
silicon wafers. In December 1999, we entered into a Supply Agreement with
Eagle-Picher Technologies, LLC for the supply of isotopically pure silicon-28
from its Oklahoma-based facility. This Supply Agreement superceded a prior
agreement, signed in fiscal 1999, with Eagle-Picher to cooperate on
developing silicon-28 production capabilities at the Oklahoma facility. As of
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February 10, 2000, no silicon-28 has been delivered by Eagle-Picher, however,
shipments are scheduled for April 2000 per the terms of the agreement.
RESEARCH AND DEVELOPMENT
Consistent with our product development strategy, we are 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 1999 and 1998, research and
development expenses were $1,155,000 and $811,000, respectively. Research and
development expenditures during the nine months ending January 31, 2000 were
approximately $919,000.
We have focused our efforts on developing lower-cost carbon-13
separation methods and the production of high chemical-purity silicon-28
silane gas and epitaxial wafers made from that silane gas. To date this work
has been performed for us on a sub-contract basis by unaffiliated
contractors. We attempt to retain, to the maximum extent possible, ownership
of any intellectual property resulting from such work.
We have been seeking to enter into formal joint development
agreements with a number of semiconductor industry participants in the areas
of silicon wafer manufacture and various potential applications for
isotopically engineered silicon. During fiscal 1999, we signed an agreement
with Voltaix, Inc. to be the distributor of our products for the ion
implantation industry. The first product being sold in accordance with the
Voltaix agreement is silicon tetrafluoride enriched in the silicon-29
isotope. The isotopically enriched materials allow higher beam currents and
higher productivity than the natural silicon tetrafluoride currently used in
the industry.
PATENTS AND PROPRIETARY 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 to as great an extent as do 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 which we believe may
be patentable. Ongoing work in the area of isotope separation by chemical
means may also lead to patentable inventions.
In April 1999, we announced that we had entered into an exclusive
licensing agreement with Yale University that entitles us to exclusive
intellectual property right to patents covering semiconductor devices derived
for isotopically engineered materials. The license requires payment by us of
a royalty based on a percentage of our, or our sublicensees', net sales of
products derived from technology covered by the Yale patents (#5,144,409,
dated September 1, 1992, and #5,442,191, dated August 15, 1995).
SIGNIFICANT CUSTOMERS
Four separate customers accounted for 10% or more of net revenues in
fiscal 1998: 47%, 18%, 12% and 11%. Two separate customers accounted for 10%
or more of net revenues in fiscal 1999: 23% and 13%. At January 31, 2000, one
customer accounted for approximately 18% of net revenues during the nine
months ended January 31, 2000. The same customer accounted for approximately
17% of net revenues during the nine months ended January 31, 1999.
COMPETITION
The markets for our products and proposed products are highly
competitive, and we expect that competition will continue and increase as
markets grow and new opportunities are realized. Some of our current
competitors, and many of our potential competitors, are larger and have
significantly greater financial, technical, marketing and other resources.
Some of our competitors
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<PAGE>
may form partnerships or alliances with large pharmaceutical or electronics
companies, with the resulting entity possessing more market strength than we
have. Our competition varies greatly depending on which product or industry
is considered.
DEPLETED ZINC. During fiscal 1999, we were among the leading
producers of depleted zinc. We also believed that other entities or persons
were expected to begin producing depleted zinc in substantial quantities in
the near future. Several such possible producers have adequate technical and
financial resources to become viable competitors in the near future. In
particular, Siemens has indicated that it has a relationship with
Ultracentrifuge Netherlands ("UCN") and GE has indicated that it may
establish a second Russian supply source. UCN also competes with us in the
markets for medical target isotopes. This competitive environment, along with
many other factors, contributed to our decision to sell our depleted zinc
business to Eagle-Picher Technologies, LLC in December 1999.
SILCS AND DBT MATERIALS. We have several larger and numerous smaller
competitors in the markets for the SILC products, and we will have additional
competitors if we offer breath test diagnostic products and additional SILCs
in the future. Two of these companies, Cambridge Isotope Laboratories Inc.,
and Isotec, Inc., have their own isotope separation capability, while all of
our competitors produce some combination of SILCs and DBT substrates. Two
recently merged companies in the U.S. have received FDA approval for a
carbon-13 UBT. Several companies in Europe have also received regulatory
approval. Our principal current competitors and potential competitors also
include MassTrace, euriso-top, Aldrich Chemicals, Icon Services, Omicron,
C/D/N Isotopes and Martek Biosciences. We have in the past, and may in the
future, sell products to or purchase products from these companies.
SEMICONDUCTOR MATERIALS. Due to the early stage of the semiconductor
materials opportunities, we have not identified material competitors in these
markets. However, given the potential size and importance of these new
potential markets, we anticipate that substantial competition will emerge if
these markets develop.
Many of the areas in which we are or intend to compete are rapidly
evolving. There can be no assurance that an existing or potential competitor
has already developed, or may develop, a patentable product or process, which
will substantially prevent us from competing in our intended markets.
We compete primarily on the basis of product performance,
proprietary position and price. Some of our products may also compete based
on product efficacy, safety, patient convenience and reliability. In many
cases the first company to introduce a product to the market will obtain at
least a temporary competitive advantage over subsequent market entrants.
MANUFACTURING AND SUPPLY
Consistent with our strategy to minimize capital expenditures, we
obtain isotopes through multi-year supply agreements. To a lesser extent,
from time to time, we also obtain stable isotopes from a variety of other
Russian isotope sources and may invest in our own isotope production
facilities in the future upon determining the optimum production technology.
Currently, we obtain substantially all of our isotopes from Russia, the
Republic of Georgia, and other locations within the former Soviet Union. In
December 1999, we entered into a Supply Agreement with Eagle-Picher
Technologies, LLC, for the right to purchase enriched silicon and carbon
isotopes from its facilities in Oklahoma. In addition, Eagle-Picher has an
obligation to provide us 200 kilograms of isotopically pure silicon-28 during
calendar year 2000. The first deliveries from the Eagle-Picher silicon
facility are scheduled to begin in April 2000.
We entered into a Supply Agreement dated July 1996 with
Techsnabexport and an isotope enrichment plant located in Russia, which is
owned by the Ministry of Atomic Energy of the Russian Federation, which is
part of the cabinet of the government of the Russian Federation. Under the
Supply Agreement, the plant produced depleted zinc and other stable isotopes
for us. We assigned this supply agreement to Eagle-Picher in December 1999.
We are still receiving other stable isotopes from plants located in
Russia. The enforceability of the agreement might be subject to the greater
degree of uncertainty than if the agreement was with a U.S. company, and
disputes were resolved in the U.S. The supply of stable isotopes could be
directly affected by political, economic and military conditions in Russia.
Accordingly, our operations could be materially adversely affected if
hostilities involving Russia should occur, if trade between Russia and the
United States were interrupted or curtailed, or if we should fail to obtain
and maintain all necessary governmental approvals. We have assigned this
supply agreement to Eagle-Picher and we no longer have any rights under it.
Operations in Russia entail certain other risks, including, among
others, supply disruptions as well as introduction of
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<PAGE>
tariffs and fluctuations in freight rates. See "RISK FACTORS," above. There
can be no assurance that our relationship with our processor in Russia will
be successfully maintained. Disruption or termination of our supply sources
could delay shipments by us and could have a material adverse effect on our
business, financial condition and results of operations. We do not presently
maintain political risk insurance but we will evaluate the desirability and
availability of such insurance in the future.
The plant with which we have the agreement described above is one of
four similar plants which were designed to address the former Soviet Union's
and certain other countries' needs for low enriched uranium for commercial
nuclear power plant fuel and for highly enriched uranium for military
purposes. Following the nuclear accident at Chernobyl, certain of the Russian
nuclear power plants have been shut down, reducing demand on these enrichment
plants. In addition, in recent years the demand on these plants to produce
products for military purposes has declined. In part in response to these
trends, the plant has converted a portion of its capacity to processing
stable isotopes, and we believe that additional capacity could be converted
if the plant decided to do so. We believe that the plant has the potential
capacity to meet all of our foreseeable needs for the processing of stable
isotopes. We believe that one or more of the other similar enrichment plants
may convert part of its capacity to the production of stable isotopes should
market demand grow substantially. Certain other facilities elsewhere in the
world, including the Oak Ridge National Laboratory in Oak Ridge, Tennessee
(which relies on government funding for continuing production), and certain
private and pseudo-governmental organizations in Great Britain, Germany, The
Netherlands and South Africa, have the potential to produce stable isotopes
and, in certain cases, actually produce isotopes.
Recognizing the need to have more control over the production of
Isonics' isotopes, we announced plans for a joint venture with the Institute
of Stable Isotopes in the Republic of Georgia, the pre-eminent center for the
separation of light isotopes in the countries that comprised the former
Soviet Union. This agreement calls for investment by both parties to increase
carbon-13 production at the Institute and provides for exclusive sales of all
carbon-13 production to Isonics. This agreement also grants rights to us to
employ the Institute's separation technology at new production facilities
anywhere in the world. The two parties have also agreed to cooperate on
development projects, which would include new isotope production
technologies, as well as, new applications of isotope products.
To increase capacity and to geographically diversify our production
of certain isotopes, on December 1, 1999, we entered into a Supply Agreement
with Eagle-Picher Technologies, LLC, for it to supply us with enriched
isotopes of silicon and carbon. We have already purchased 200 kilograms from
Eagle-Picher to be delivered during 2000. Eagle-Picher expects to produce
these isotopes from its facilities in Oklahoma, a portion of which are
currently under construction. There can be no guarantee, however, that the
facility will be able to produce high-purity isotopes on commercially
reasonable terms. We believe that this relationship with Eagle-Picher may
improve our profitability and will improve the security of our supply if the
facility performs as expected.
We have historically depended upon a single processor, located in
Russia, for one process involved in the manufacturing of our products, and
upon a single supplier or a limited number of suppliers and processors for
certain other manufacturing processes. Although we do have written agreements
with certain of our suppliers and processors, we do not have any written
agreements with other suppliers and processors. We seek to reduce our
dependence on our sole and limited suppliers, but disruption or termination
of any of the sources could occur, and such disruptions could have at least a
temporary material adverse affect on our business, financial condition and
results of operations. Moreover, a prolonged inability to obtain alternative
sources for processing could materially adversely affect our relations with
our customers. Although the relationship with Eagle-Picher should provide
greater security for our supply of silicon and carbon isotopes, if the
facility performs as expected, there can be no assurance that it will in fact
do so.
GOVERNMENT REGULATION
Regulation by government authorities in the United States and other
countries is a significant consideration in the development, production,
distribution and marketing of our products and in our continuing research,
development, and other activities. In order to clinically test, manufacture,
distribute, market, and sell products, especially those intended for
therapeutic or diagnostic use, mandatory procedures and safety and other
standards established by applicable regulatory authorities must be followed.
In many cases, specific approval to clinically test and commercially
distribute such products must be obtained from numerous governmental
authorities. Furthermore, we are subject to various laws, regulations and
requirements relating to such matters as the import and export of our
products, ensuring safe working conditions, laboratory and manufacturing
practices, the use and disposal of hazardous or potentially hazardous
substances used in connection with our research, development and
manufacturing activities. Some of the regulations are summarized below.
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FDA REGULATION. We are not currently subject to any FDA regulation
because we do not currently manufacture any DBTs, drug products, or other
medical devices. Our customers may, in many cases, be subject to FDA
regulation. If we, in the future, test, manufacture, market, distribute,
export, or sell diagnostic products (such as any DBTs) or medical devices, we
will also likely be subject to extensive and rigorous regulation by the
United States and other countries in which we may choose to test, manufacture
or market our proposed diagnostic products. We have not determined those
countries, other than the United States, where we might seek regulatory
approvals to market any such products it may develop. The products we intend
to develop are subject to rigorous preclinical and clinical testing and other
FDA approval requirements, and similar requirements in most other countries.
EXPORT AND ENVIRONMENTAL CONTROLS. Certain of our products and
technology, particularly those having potential nuclear energy or military
applications, such as depleted zinc and related technology, are subject to
stringent controls over their manufacture, use, distribution, dissemination
and export. In many cases, such activities may require approvals or licenses
from various U.S. and foreign governmental agencies, and compliance with
substantial regulatory controls. Such approvals can be difficult to obtain
and maintain and may not be obtainable from certain countries. Furthermore,
such approvals or licenses may be restricted or terminated because of changes
in laws, regulations, policies governing those approvals and licenses, or
changes in the political or other matters in the countries granting such
approvals or licenses to which our products and technology would be exported.
Likewise, certain of our current and potential operations may
necessitate submitting registrations or notifications to federal and state
regulatory authorities responsible for environmental and related matters,
including the U.S. Environmental Protection Agency ("EPA"). Additionally, we
are required to comply with stringent controls pertaining to the handling and
distribution of our products and operations, including under certain
conditions obtaining governmental approvals and licenses, either of which may
be subject to significant restrictions. Violation of any of these regulatory
controls may subject us to significant administrative civil and criminal
penalties, including loss of our approvals and licenses, or the imposition of
additional restrictions on our operations. There can be no assurances that we
will be able to obtain and maintain the approvals or licenses necessary to
successfully market our products and technology, or that it will be able to
comply with applicable laws and regulations. Any such failure to obtain such
licenses or approvals, where required, and comply with such laws and
regulations may materially and adversely affect our business, financial
condition and results of operations.
REGULATION OF NON-MEDICAL CHEMICAL PRODUCTS. The import, export,
handling, transportation, sale, storage and other activities undertaken in
connection with our non-medical products are subject, or potentially subject,
to substantial federal, state, local and foreign government controls
pertaining to hazardous chemicals and chemical wastes, import export controls
and other matters. These regulations are complex, pervasive and constantly
evolving. Our ability to effect and maintain compliance with these controls
is important to our commercial success.
With respect to transportation of our products, we rely
predominantly on Russian and U.S. freight carriers to handle and deliver all
our shipments, and utilize domestic overnight courier services for shipments
to our customers. These carriers must comply with Department of
Transportation ("DOT") regulations in the shipping and packaging of the
stable isotope chemicals. We must also comply with DOT regulations when
packaging material kept in inventory for domestic shipment. As required under
federal and state law, we have prepared Material Safety Data Sheets ("MSDS"),
which are enclosed with each product shipment. We must periodically update
our MSDS sheets based on new literature reports. We cannot assure that our
MSDS sheets will continue to be in compliance with applicable requirements.
The shipments received at our Columbia, Maryland facility are
subject to Federal and Maryland regulations pertaining to hazardous chemicals
and hazardous waste disposal. These shipments are stored in an area of the
facility designated for such materials. Currently, we are considered a small
quantity generator of hazardous waste and will rely on certified haulers to
dispose of our minimal amounts of hazardous waste. We believe we are in
compliance, in all material respects, with applicable federal and state
environmental regulatory requirements.
Should the levels of hazardous waste increase as our inventory and
handling operations increase in volume, we would then have to comply with
Environmental Protection Agency ("EPA") requirements and obtain an EPA ID
number, which is costly and requires an increased investment of personnel and
money. We have no experience in this area of compliance and we would have to
rely on outside consultants or hire additional employees with pertinent
experience and training. Potentially, if substantially
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larger inventories of hazardous chemicals must be maintained at the Maryland
facility, we might have to move to new facilities in order to meet EPA
requirements for the storage of hazardous chemicals.
The shipments from Russian manufacturing sources now enter the U.S.
duty free (without tariff); however, there can be no assurance that such
duty-free importation will continue. If the shipments are subject to tariff,
we cannot assure that we will be able to sell the imported products or that
the products will be commercially viable because of these increased tariff
costs.
The Nuclear Regulatory Commission ("NRC") has authority to regulate
the importation and exportation of deuterium containing chemicals whose ratio
of deuterium atoms to hydrogen atoms exceed 1:5,000. At present, the
deuterium containing compounds that we import do not require any special
licenses or importation authorization. There can be no assurances that the
NRC will continue these policies. The NRC regulates exports of deuterium
containing chemicals under general license. We will not be able to ship these
chemicals to certain countries that require a special license for such
shipments; none of these countries represent significant current or expected
future markets for our anticipated and present products. In addition, certain
technology or products that we have or may in the future develop, may be
subject to other government controls pertaining to armaments, including the
need to obtain special licenses for exports. The imposition of such controls
may impair our ability to broadly market such products.
PRODUCT LIABILITY AND INSURANCE
Our business exposes us to potentially substantial product,
environmental, occupational and other liability risks which are inherent in
product research and development, manufacturing, marketing distribution and
use of our products and operations, including, but not limited to, products
used in nuclear power plants and medical device products. We have product
liability insurance in order to protect ourselves from such potential
exposures. There can be no assurance that adequate insurance coverage will be
available at an acceptable cost, if at all, or a product liability or other
claim would not materially and adversely affect our business or financial
condition.
The terms of our agreements with our customers provide that
liability to nuclear power plant utilities is limited to our standard
warranty to replace non-conforming product, and liability for consequential
damages caused by the improper use of our products is limited by contractual
terms. Nevertheless, one or more third parties could bring an action against
us based on product liability, breach of warranty or other claims, and, there
can be no assurance that the foregoing contract clauses would effectively
limit our liability in any such actions.
EMPLOYEES
As of January 31, 2000, we had 31 full and part-time employees, of
whom eight have Ph.D.s and one other has an advanced degree in engineering.
Approximately seven employees are involved in research and product
development, ten in manufacturing and sourcing, and fourteen in business
development and administration, but such employees' responsibilities may also
encompass areas other than their primary area of responsibility. We consider
our relations with our employees to be good. None of our employees are
covered by a collective bargaining agreement.
PROPERTIES
We relocated our headquarters to Golden, Colorado in December 1998,
and now share facilities with our wholly-owned subsidiary, Interpro. Interpro
leases approximately 41,000 square feet of office, research and production
facilities. The lease expires in July 2000. The facility is used for contract
research and development and materials processing as well as administration.
By combining our headquarters into the facility of our subsidiary, we have
significantly reduced our costs for both space and administrative support. We
also lease 650 square feet for an administrative office in Columbia, Maryland
that expires November 30, 2001. Chemotrade leases office space in Dusseldorf
and Leipzig, Germany.
LEGAL PROCEEDINGS
We are not subject to any pending or, to its knowledge, threatened,
legal proceedings.
33
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of all the
Directors and Executive Officers of Isonics, and the positions held by each
such person. The directors each serve until their successors are duly elected
and qualified; officers are appointed by, and serve at the pleasure of, the
Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James E. Alexander 51 President, Chief Executive Officer and Chairman of the Board
Boris Rubizhevsky 49 Senior Vice President, Vice Chairman and Director
Daniel J. Grady 45 Vice President, Medical, Research and Diagnostics
Stephen J. Burden 51 Vice President, Semiconductor Materials
Brantley J. Halstead 42 Chief Financial Officer, Vice President, Finance
Robert Cuttriss 50 President of Interpro
Herbert Hegener 53 Managing Director of Chemotrade
Lindsay A. Gardner (1)(2) 46 Director
Richard Parker (1)(2) 56 Director
Larry J. Wells (1)(2) 53 Director
</TABLE>
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Each of the directors holds office until the next annual meeting of
shareholders and until his or her successor is elected and qualified or until
his or her earlier death, resignation, or removal. Each officer serves at the
discretion of the Board.
Mr. Alexander is our co-founder and has served as our President,
Chief Executive Officer and a director since our inception. He has worked
full-time for Isonics since January 1994. From June 1972 to December 1993, he
worked in a variety of technology positions at General Electric Corporation
("GE") in the aircraft engine and nuclear power businesses, where his last
position was Manager of Technology Programs. Mr. Alexander received his
Bachelors degree in Metallurgical Engineering from the University of
Cincinnati and performed graduate work in materials science there. He earned
a Masters degree in Business Administration from Santa Clara University.
Mr. Rubizhevsky is also a co-founder of Isonics and has been a
Senior Vice President and a director since inception and became Vice Chairman
in March 1997. From November 1986 through December 1994, he owned and
operated SAR Marketing, a consulting firm providing business advice and
services to large multinational corporations. From June 1977 to May 1986, Mr.
Rubizhevsky worked at General Electric Corporation as Business Development
Manager in various international locations. He received his Bachelors degree
in Engineering from Stevens Institute of Technology.
Dr. Grady joined us as Vice President, Medical, Research and Diagnostics
in 1995. From March 1994 through September 1995, Dr. Grady was Vice President
of Research and Development at Sopha Medical Systems, a medical diagnostic
imaging equipment manufacturer. From April 1991 until March 1994, he served
as Marketing Manager, Nuclear Energy for General Electric Corporation ("GE").
From May 1988 through March 1991, Dr. Grady served as Software Engineer
Manager, Nuclear
34
<PAGE>
Medicine for GE in England. From October 1984 through May 1988, he served as
Clinical Applications Manager for GE Nuclear Medicine. Between June 1981 and
October 1984, he served as Engineering Analysis Section Head for TRW. Dr.
Grady received his Bachelors and Masters degrees, and Ph.D. in Nuclear
Engineering from the University of Michigan.
Dr. Burden joined us in 1997. Prior to joining Isonics Dr. Burden was
Director of Product Development at sp3, Inc., a manufacturer of
diamond-coated tools. From 1984 to 1993, he was Manager of Advanced Materials
R&D at GTE Valenite, a subsidiary of GTE Corporation, a manufacturer of
cutting tools. From 1974 to 1984, Dr. Burden was employed by General Electric
Corporation in various capacities. Dr. Burden has a Ph.D. and a Masters of
Science degree, both in Materials Science, and both from Drexel University.
Dr. Burden has a Bachelors degree in Science Engineering, and an MBA from the
University of Michigan.
Mr. Halstead joined us as Chief Financial Officer in 1999 and was
promoted to Vice President, Finance effective January 30, 2000. Most
recently, Mr. Halstead was Chief Financial Officer of Bio-Medical Automation,
Inc. (formerly OZO Diversified Automation, Inc.), from 1997 through 1999. Mr.
Halstead also has nine years of management consulting experience, including
five years with Deloitte & Touche LLP. Prior to earning his Masters of
Business Administration in Finance from the University of Denver, Mr.
Halstead worked as a metallurgical engineer. Mr. Halstead received his
Bachelors degree in Metallurgical Engineering from the Colorado School of
Mines, and his Masters of Accountancy from the University of Denver.
Dr. Cuttriss has served as the President of Interpro since 1993.
With 29 years experience in process operations in the mining and
metallurgical industries, Dr. Cuttriss' experience includes holding the title
of principal consultant and director of Metallurgy International, Inc., from
1983 through 1993. He has undertaken management and technical assignments
covering the design, commissioning and operation of mineral treatment plants,
technical audits and evaluations, pilot plant testing and process development
for projects throughout the world. Dr. Cuttriss received his Bachelors and
Ph.D. degrees in Metallurgy from the University of Melbourne and his Masters
in Metallurgy from the University of Queensland.
Mr. Hegener is a co-founder of Chemotrade and has served as the
President since its formation in 1991. From 1988 to 1991, Mr. Hegener was
with Medgenix Deutschland GmbH-Dusseldorf, and his last position with this
firm was Managing Director. From 1973 to 1988, Mr. Hegener worked at the
Hempel Group, Dusseldorf, Germany, in various management positions. Mr.
Hegener is a specialist in stable and radioactive isotopes. He has degrees in
Chemistry and Economics.
Ms. Gardner was elected a director in September 1993. She has served
from 1991 through the present as President of LG Associates, a US-based
management consulting firm providing materials management expertise to
foreign company affiliates of US companies in developing countries. During
her tenure at LG Associates Ms. Gardner resided in Moscow, Russia from
September 1991 to January 1994, when she moved to Beijing, China, where she
currently resides. From 1977 to 1991, Ms. Gardner worked for General Electric
Corporation in a variety of management and functional positions including
international marketing, quality assurance and materials. Ms. Gardner
received a Bachelors degree in International Economics from The George
Washington University Elliott School of International Affairs, and earned a
Masters of Business Administration from the University of Louisville.
Mr. Parker has served as a director since August 1998. Mr. Parker is
presently Vice-President of Distribution Sales for Cypress Semiconductor and
has held that position since December 1997. Previously, Mr. Parker was
Director of Sales for Cypress from April 1984 to December 1997. Prior to
joining Cypress, he held various sales and marketing management positions at
Fairchild Semiconductor from 1973 to 1984. He received a Bachelors degree in
Education from the University of North Dakota.
Mr. Wells was elected a director of Isonics in January 2000. Since 1989,
Mr. Wells has been a general partner of SVP Management Company, the
management company for Sundance Venture Partners, L.P., a venture capital
fund. From 1983 to 1989, Mr. Wells served as Vice President of Citicorp
Venture Capital then became Senior Vice president of Inco Venture Capital.
Mr. Wells is a director of Cellegy Pharmaceuticals, Identix, Inc., as well as
several privately held companies. Mr. Wells received his bachelors degree in
Economics and earned a masters degree in Business Administration from
Stanford University. Mr. Wells was previously a director of Isonics from
September 1996 through December 1998.
There are no significant employees who are not also directors or
executive officers as described above. As of April 30, 1999, and
subsequently, there were and are no family relationships among the officers,
directors or any person chosen by Isonics to become a director or officer. No
arrangement exists between any of the above officers and directors pursuant
to which any one of those persons was elected to such office or position.
35
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of Isonics Common Stock as of February 29, 2000, by: (i) each of
the executive officers named in the Summary Compensation Table; (ii) all
executive officers and directors of Isonics as a group; and (iii) all those
known by Isonics to be beneficial owners of more than five percent of its
Common Stock.
This table is based upon information supplied by officers, directors
and principal shareholders and Schedules 13D and 13G filed with the
Securities and Exchange Commission ("SEC"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, we believe that each of the shareholders named in this table has
sole voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 6,663,017 shares of
Common Stock outstanding on February 29, 2000, adjusted as required by rules
promulgated by the SEC.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-------------------------------------------
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
---------------- ---------------- ----------------
<S> <C> <C>
James E. Alexander (1) 2,104,779 31.5%
Boris Rubizhevsky (2) 1,923,293 28.5%
Stephen J. Burden (3) 300,504 4.3%
Daniel J. Grady (4) 237,510 3.4%
Brantley J. Halstead (5) 141,000 2.1%
Robert H. Cuttriss (6) 337,482 5.1%
Herbert Hegener (7) 213,865 3.2%
Lindsay Gardner (8) 293,784 4.3%
Richard Parker (9) 30,000 0.4%
Larry Wells (10) 20,000 0.3%
All executive officers and directors as a group (10 5,602,217 69.9%
persons). The address for all of the above
directors and executives officers is:
5906 McIntyre Street, Golden, CO 80403
Jacques Delente (11) 376,339 5.6%
Richard Grossman (12) 1,873,336 27.9%
Anfel Trading (13) 666,668 9.1%
Fairway Investors (14) 400,000 5.7%
Eagle-Picher Technologies, LLC (15) 4,000,000 37.5%
</TABLE>
(1) Includes (i) 25,000 shares of Common Stock underlying options which are
currently exercisable, and (ii) 45,455 shares of Common Stock held in the
name of The James & Carol Alexander Family Foundation.
(2) Includes (i) 91,730 shares of Common Stock held by Mr. Rubizhevsky's wife,
(ii) 22,500 shares of Common Stock underlying options which are currently
exercisable, and (iii) 66,666 shares of Common Stock underlying 33,333
shares of Series A Convertible Preferred Stock and 33,333 warrants to
purchase Common Stock of Isonics.
(3) Includes (i) 192,887 shares of Common Stock underlying options (of which
104,312 have vested as of February 29, 2000 and which are currently
exercisable), (ii) warrants exercisable for 40,951 shares of Common Stock
and (iii) 66,666 shares of Common Stock underlying 33,333 shares of
Convertible Preferred Stock and 33,333 warrants.
(4) Includes 222,965 shares of Common Stock subject to stock options that are
currently exercisable.
(5) Includes 141,000 shares of Common Stock underlying options (of which 81,000
have vested as of February 29, 2000 and which are currently exercisable.)
(6) Includes (i) 317,482 shares of Common Stock held in the name of Metallurgy
International, Inc. In which Dr. Cuttriss and his wife, P. D. Cuttriss, are
controlling shareholders, and (ii) 20,000 shares of Common Stock underlying
options that are currently exercisable.
36
<PAGE>
(7) Includes 35,000 shares of Common Stock underlying warrants which are
currently exercisable.
(8) Includes (i) warrants exercisable for 91,001 shares of Common Stock, and
(ii) 30,000 shares of Common Stock underlying stock options that are
currently exercisable. Does not include options to purchase 10,000
shares of Common Stock that will be granted to Ms. Gardner if she is
re-elected to the Board of Directors at the Annual Meeting of
Shareholders scheduled for April 26, 2000.
(9) Includes 30,000 shares of Common Stock underlying stock options which are
currently exercisable. Does not include options to purchase 10,000 shares
of Common Stock that will be granted to Mr. Parker if he is re-elected to
the Board of Directors at the Annual Meeting of Shareholders scheduled for
April 26, 2000.
(10) Includes 20,000 shares of Common Stock underlying stock options which are
currently exercisable. Does not include options to purchase 10,000 shares
of Common Stock that will be granted to Mr. Wells if he is re-elected to
the Board of Directors at the Annual Meeting of Shareholders scheduled for
April 26, 2000.
(11) Includes (i) 37,272 shares of Common Stock held by the Jacques Delente
Revocable Trust, (ii) warrants exercisable for 85,581 shares of Common
Stock., (iii) 20,938 shares of Common Stock underlying options which are
currently exercisable. Dr. Delente's address is c/o Isonics Corporation,
5906 McIntyre Street, Golden, CO 80403.
(12) Includes beneficial ownership of the following shares: (i) 40,000 shares of
Common Stock underlying 20,000 shares of Convertible Preferred Stock and
20,000 warrants owned of record and beneficially by Richard Grossman,
(ii) 40,000 shares of Common Stock underlying 20,000 shares of Convertible
Preferred Stock and 20,000 warrants owned of record and beneficially by
Orin Hirschman (of which shares Mr. Grossman disclaims beneficial
ownership), (iii) 1,106,668 shares of Common Stock underlying 553,334
shares of Convertible Preferred Stock and 553,334 warrants owned of
record and beneficially by Adam Smith Investment Partners, L.P.,
(iv) 226,668 shares of Common Stock underlying 113,334 shares of
Convertible Preferred Stock and 113,334 warrants owned of record and
beneficially by Adam Smith Investments, Ltd., and (v) 500,000 shares of
Common Stock underlying 500,000 warrants owned of record and beneficially
by Adam Smith & Company, Inc., all as set forth on the Schedule 13D filed
by such persons on August 12, 1999. The business addresses of Richard
Grossman and Orin Hirschman, and the principal executive offices of Adam
Smith Investment Partners, L.P. and Adam Smith & Company, Inc., are located
at 101 East 52nd Street, New York, New York 10022. The principal executive
offices of Adam Smith Investments, Ltd. are c/o Insinger Fund
Administration (BVI) Limited, Tropic Isle Building, P.O. Box 438, Road
Town, Tortola, British Virgin Islands.
(13) Includes 666,668 shares of Common Stock underlying 333,334 shares of
Convertible Preferred Stock and 333,334 warrants. The principal
executive offices of Anfel Trading Ltd. are c/o Me. Andre Zolty, 24
Route De Malagnou, 1208 Geneva, Switzerland.
(14) Includes 400,000 shares of Common Stock underlying 200,000 shares of
Convertible Preferred Stock and 200,000 warrants, as set forth on the
Schedule 13G filed on August 13, 1999. The principal executive offices
of Fairway Investors are located at 8707 Skokie Boulevard, Skokie,
Illinois 60077.
(15) This share ownership results from Eagle-Picher's ownership of a warrant
to purchase 4,000,000 shares of our Common Stock at $3.75 per share. On
March 15, 2000, Eagle-Picher gave us notice of its exercise of the
warrants pursuant to a `net exercise' provision. We have not agreed on
the terms of the net exercise, although it is likely to result in the
issuance to Eagle-Picher of in excess of 3,100,000 shares. We paid the
warrants to Eagle-Picher in consideration of its obligation to deliver
200 kilograms of silicon-28 to us. If Eagle-Picher does not deliver the
full 200 kilograms to us in calendar year 2000, the shares held pursuant
to the exercise of the warrants will be proportionately reduced. The
principal executive offices of Eagle-Picher Technologies, LLC are
located at 250 East Fifth Street, Suite 500, Cincinnati, Ohio 45202.
The Series A Convertible Preferred Stock ("Series A Stock") consists
of 1,830,000 shares issued with a liquidation preference and conversion right
of $1.50 per share. The Series A Stock is entitled to dividends or
distributions equal to the amount of the dividend or distribution per share
of Common Stock payable at such time multiplied by the number of shares of
Common Stock then obtainable upon conversion of such Series A Stock. The
Redemption Trigger Date for the Series A Stock shall be the business day
immediately following the thirtieth consecutive trading day that the average
closing price during such trading days (or, if no closing price is reported,
the average of the bid and ask prices) of the shares of Common Stock was
above $8.00 per share (which minimum price shall be proportionally adjusted
for stock splits, stock dividends, reverse stock splits and any other
subdivision or combination of the Common Stock). After the Redemption Date,
we may redeem all or any part of the Series A
37
<PAGE>
Stock at its election at any time and from time to time. The Series A Stock
is convertible into Common Stock at the option of the holder until we, if at
all, choose to redeem such shares on the basis of one share of Common Stock
per share of Series A Stock and, until converted, each share of Series A
Stock is entitled to one vote at any meeting of the shareholders of Isonics.
We know of no arrangement, the operation of which may, at a
subsequent date, result in change in control of Isonics.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
SECTION 16(a) DISCLOSURE
Section 16(a) of the Securities Exchange Act of 1934 (the "1934
Act") requires Isonics' directors, executive officers and persons who own
more than ten percent of a registered class of Isonics' equity securities, to
file with the SEC initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of Isonics. Officers,
directors and greater than ten percent shareholders are required by SEC
regulation to furnish Isonics with copies of all Section 16(a) forms they
file.
To our knowledge, based solely on a review of the copies of such
reports furnished to our and written representations that no other reports
were required, during the fiscal year ended April 30, 1999, all Section 16(a)
filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners were complied with exception (or in addition)
to the following:
1. Mr. Rubizhevsky filed a Form 4 in February 2000 reporting a purchase that
took place in July 1999.
2. Mr. Parker filed a Form 3 in February 2000. He became subject to the
Section 16(a) reporting requirements when he became a director of Isonics
in August 1998.
3. Dr. Cuttriss and his affiliate, Metallurgy International, Inc., jointly
filed a Form 3 in February 2000. Dr. Cuttriss became subject to the Section
16(a) reporting requirements when he became an executive officer of Isonics
in May 1998. A joint filing of two Form 4s was also made in February 2000
reporting transactions that occurred in July and September of 1999. These
transactions indicated that Dr. Cuttriss may have obtained a short-swing
profit of $4,218.00. Dr. Cuttriss resolved this alleged liability to
Isonics in February 2000 by paying Isonics $500.00 and entering into a
promissory note for the balance payable with interest over eight quarters
beginning June 1, 2000, at the rate of $499.92 per quarter.
4. Mr. Halstead filed a Form 3 in February 2000. He became subject to the
Section 16(a) reporting requirements when he became an executive
officer of Isonics in March 1999.
5. Dr. Burden filed a Form 3 in February 2000. He became subject to the
Section 16(a) reporting requirements when he became an executive
officer of Isonics in January 1999. Dr. Burden also filed a Form 4 in
February 2000 reporting a purchase that took place in July 1999.
6. Mr. Herbert Hegener filed a Form 3 in February of 2000. He became
subject to the Section 16(a) reporting requirements when he became an
executive officer of Isonics' subsidiary, Chemotrade, Inc., in June
1998. Mr. Hegener filed a Form 4 in February 2000, reporting a warrant
acquired in June 1999.
7. Eagle Picher Technologies, LLC became subject to the Section 16(a)
reporting requirements when it became a greater than 10% beneficial
owner in December of 1999. Eagle Picher has filed a Form 3 in March
2000.
8. Mr. Paul Catuna, a former executive officer of Isonics, was subject to
the reporting requirements of Section 16(a) of the 1934 Act during the
course of his employment. Mr. Catuna has filed a Form 4 in February
2000, reporting a stock bonus received in January 1999.
In addition to the foregoing, several directors and executive
officers filed Form 4s in February 2000, which voluntarily reported the
acquisition of certain Common Stock options that are exempt from the
reporting requirements pursuant to Rule 16b-3.
38
<PAGE>
(a) Mr. Alexander voluntarily filed three Form 4s in February 2000
reporting transactions that took place in January, April, and December
of 1999. The Board of Directors approved the January and April
transactions in minutes effective October 31,1999.
(b) Mr. Rubizhevsky voluntarily filed two Form 4s in February 2000
reporting transactions that took place in January and April 1999. The
January and April transactions were approved by the Board of Directors
in minutes effective October 31,1999.
(c) Ms. Gardner voluntarily filed one Form 4 in February 2000 reporting
transactions that took place in May and October of 1998.
(d) Mr. Parker voluntarily filed a Form 4 in February 2000 reporting
transactions that occurred in October 1998.
(e) Mr. Halstead voluntarily filed two Form 4s in February 2000 reporting
transactions that took place in April 1999 and in January 2000. The
Board of Directors approved these transaction in minutes effective
October 31,1999, and in January 30, 2000.
(f) Dr. Burden voluntarily filed one Form 4 in February 2000 reporting a
transaction that took place in April 1999. The Board of Directors
approved this transaction in minutes effective October 31,1999.
(g) Dr. Grady voluntarily filed two Form 4s in February 2000 reporting
transactions that took place in January and April 1999 and were
approved by the Board of Directors in minutes effective October 31,1999.
SHORT-SWING LIABILITY
Dr. Cuttriss and his affiliate, Metallurgy International, Inc., as a
result of selling and acquiring shares in July and September of 1999
respectively, may have obtained a short-swing profit of $4,218.00. Dr.
Cuttriss resolved this alleged liability to Isonics in February 2000 by
paying Isonics $500.00, and entering into a promissory note for the balance
payable with interest over eight quarters beginning June 1, 2000, at the rate
of $499.92 per quarter.
In February and March 2000, Dr. Cuttriss and his affiliate, Metallurgy
International, Inc. sold additional shares of Isonics Common Stock at prices
higher than he received earlier. As a result, he increased his Section 16(b)
liability and obtained a short-swing profit of $30,937,50. Dr. Cuttriss has
resolved this alleged liability by agreeing to pay Isonics $30,937.50 in cash
no later than March 31, 2000.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation
awarded, paid to, or earned by the chief executive officer and the other
principal officers of Isonics for the three years ended April 30, 1997, 1998,
and 1999. No other person who is currently an executive officer of Isonics
earned salary and bonus compensation exceeding $100,000 during any of those
years. This includes all compensation paid to each by Isonics and any
subsidiary.
<TABLE>
<CAPTION>
Annual compensation Long-term Compensation
Awards
------------------------------------ --------------------------------------
Awards Payout
------------------------- ------------
Securities
($) Underlying All Other
Name and Fiscal ($) ($) ($) Restricted Options & LTIP Compensation
Principal Position Year Salary Bonus Other (a) Awards SARs (#) Payout
- ------------------- --------- ------------ ----------- ----------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James E. 1997 174,000 0 0 0 0 0 0
Alexander` 1998 204,870 0 60,553(b) 0 0 0 0
President & 1999 200,000 50,000 35,016(b) 0 25,000 (e) 0 0
39
<PAGE>
CEO
Boris Rubizhevsky 1997 147,000 0 0 0 0 0 0
Senior Vice 1998 176,975 0 25,946(b) 0 0 0 0
President 1999 184,100 45,000 25,404(b) 0 22,500 (f) 0 0
Daniel J. Grady 1997 107,000 0 0 0 0 0 0
Vice President 1998 125,603 0 0 0 0 0 0
1999 127,188 16,000 0 0 15,625 (g) 0 0
Stephen J. Burden 1997 N/A N/A N/A N/A 71,459 (h) N/A N/A
Vice President (c) 1998 N/A N/A N/A N/A N/A N/A N/A
1999 0 0 0 0 121,458 (i) 0 0
Robert H. Cuttriss 1997 N/A N/A N/A N/A N/A N/A N/A
President of 1998 N/A N/A N/A N/A N/A N/A N/A
Interpro (d) 1999 92,872 80,000 0 0 20,000 (j) 0 0
</TABLE>
(a) Excludes other compensation, the aggregate amount of which does not exceed
the lesser of $50,000 or 10% of such named Executive Officers' annual
compensation.
(b) Mr. Alexander's amounts represent $35,016 for interest and taxes
payable as a result of a loan in fiscal year 1999, and $60,553 for
interest and taxes payable as a result of a loan in fiscal year 1998.
Mr. Rubizhevsky's amounts represent $25,404 for interest and taxes
payable as a result of a loan in fiscal year 1999, and $25,946 for
interest and taxes payable as a result of a loan in fiscal year 1998.
(c) Dr. Burden became an officer of Isonics effective January 1999.
(d) Interpro was acquired effective April 30, 1998. Prior to May 1, 1998,
Dr. Cuttriss was not an Isonics employee. The bonus paid to Dr.
Cuttriss in fiscal year 1999 was for back pay accrued prior to the
acquisition of Interpro by Isonics.
(e) Options to purchase 25,000 shares of Common Stock were granted in April
1999 as consideration for delaying salary in March and April 1999, and
are currently exercisable at $1-7/16 per share and expire April 26, 2004.
(f) Options to purchase 22,500 shares of Common Stock were granted in April
1999 as consideration for delaying salary in March and April 1999, and
are currently exercisable at $1-7/16 per share and expire April 26, 2004.
(g) Options to purchase 15,625 shares of Common Stock were granted in April
1999 as consideration for delaying salary in March and April 1999, and
are currently exercisable at $1-7/16 per share and expire April 26, 2004.
(h) Options to purchase 71,429 shares of Common Stock were granted upon
beginning employment with Isonics (of which 42,854 have vested as of
February 10, 2000, and continue to vest at a rate of 5% per quarter) in
January 1997. Dr. Burden was not an executive officer at the time of
this award. Dr. Burden became an executive officer in January 1999.
(i) Options to purchase 100,000 shares of Common Stock were granted in
January 1999 as consideration for Dr. Burden's promotion to vice
president in January 1999, with an exercise price of $1.10 per share
(of which 40,000 have vested as of February 10, 2000, and continue to
vest at a rate of 5% per quarter). Options to purchase 21,458 shares of
Common Stock were granted in April 1999 as consideration for delaying
salary in March and April 1999, and are currently exercisable at
$1-7/16 per share and expire April 26, 2004.
(j) Options granted in May 1998 in connection with the acquisition of
Interpro by Isonics are currently exercisable at $2.00 per share and
expire May 1, 2003.
In October 1996, we adopted an employee benefit plan under Internal
Revenue Code Section 401(k). The 401(k) plan is a profit sharing plan under
which both employees and Isonics are entitled (at their own discretion) to
contribute a portion of compensation and earnings, respectively, to
investment funds to supplement employee retirement benefits. On November 1,
1999, the Isonics Corporation 401(k) plan was merged with the Interpro 401(k)
plan.
40
<PAGE>
We do not have written plans to pay bonuses or deferred compensation
to our employees except those expressly stated in the following sections.
We have adopted medical, dental, and life insurance plans for our
employees and their dependents at our cost. In some cases, we also provide
discretionary disability and other insurance plans for the benefit of our
employees.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
AGREEMENTS
In September 1997, we entered into employment agreements with James
E. Alexander and Boris Rubizhevsky. The agreements have a term of four years
and provide for annual salaries of $200,000 and $180,000, respectively. By
resolution of the Board made on January 30, 2000, both Mr. Alexander and Mr.
Rubizhevsky received salary increases commencing February 1, 2000, equal to
20% of their current salary. The salary increases were granted in recognition
of their performance for Isonics and the fact that neither Mr. Alexander nor
Mr. Rubizhevsky had received salary increase in approximately two and
one-half years. Either Isonics or the officer may terminate the agreement at
any time upon notice to the other party. Under the agreements, the officer is
entitled to receive incentive compensation up to 50% of the officer's annual
salary, as approved by Isonics pursuant to such executive compensation plan
as Isonics may approve. The agreements provide that upon a termination of
employment other than for cause (as defined in the agreements), the officer
is entitled to severance compensation of 18 months of his salary, paid at the
same time as salary payments, 25% of the officer's annual prevailing salary,
paid upon termination, and in addition all outstanding stock options held by
the officer will be accelerated and will become exercisable in full and our
right of repurchase will terminate with respect to such shares. The
agreements provide for similar accelerated vesting of outstanding stock
options upon a change in control of Isonics.
We have also entered into employment agreements with Dr. Daniel J. Grady
and Dr. Stephen J. Burden. The agreements have an indefinite term and
provides for at-will employment, terminable at any time by either party. The
agreements provide for a rate of annual compensation, which we will review
annually. Under the each agreement, Dr. Grady and Dr. Burden are entitled to
participate in our standard plans and policies. The agreements also include
confidentiality and invention assignment provisions. Additionally, Mr.
Herbert Hegener and Dr. Robert Cuttriss are covered by an employment
agreements extending through the September 2001 and September 2003,
respectively.
Mr. Brantley J. Halstead was hired as Chief Financial Officer in March
1999. Mr. Halstead has entered into an employment agreement with us. The
agreement has an indefinite term and provides for at-will employment,
terminable at any time by either party. The agreement provides for a rate of
annual compensation of $96,000, which we will review annually. Under the
agreement, Mr. Halstead is entitled to participate in our standard plans and
policies. The agreement also includes confidentiality and invention
assignment provisions.
STOCK OPTIONS AND OPTION PLANS
We grant options to executive officers, employees and consultants
under the following plans (collectively the "Plans"):
(a) 1996 Stock Option Plan which has been terminated, but as to which,
there are options outstanding.
(b) 1996 Executives' Equity Incentive Plan (the "Executives' Plan")
authorized the grant of options to purchase 225,000 stock options,
which after being adjusted for stock splits that occurred following the
adoption of the plan resulted in 570,000 shares. The options granted
may be either incentive stock options if they meet the requirements of
Section 422 of the Internal Revenue Code, or non-qualified stock
options. The directors approved this plan in September 1996 and by the
shareholders in October 1996.
(c) 1996 Equity Incentive Plan (the "Employees' Plan") authorized the grant
of options to purchase 50,000 stock options, which after being adjusted
for stock splits that occurred following the adoption of the plan
resulted in 150,000 shares. The options granted may be either incentive
stock options if they meet the requirements of Section 422 of the
Internal Revenue Code, or non-qualified stock options. The directors
approved this plan in September 1996 and by the shareholders in October
1996.
41
<PAGE>
(d) 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan")
authorized employee purchase of up to 200,000 shares of Isonics Common
Stock, none of which has been purchased to date, although we have
received funds there from. The directors approved this plan in August
1998, and by the shareholders in October 1998.
As of February 29, 2000, options to purchase a total of 380,583
shares, 79,638 shares, and 488,356 shares respectively, were outstanding
under the Executives' Plan, Employees' Plan, and 1996 Stock Option Plan, and
options to purchase 189,417, 70,362, and 0 shares, respectively, remained
available for grant. As of February 29, 2000, options to purchase a total of
80,000 shares were outstanding under the Directors' Plan.
We have not adopted any other stock option or stock appreciation
rights plan.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following options were granted to executive officers named in
the compensation table during the fiscal year ended April 30, 1999. We did
not grant any stock appreciation rights to any person during fiscal year 1999
or subsequently. There was no exercise of options or SARs during the fiscal
year ended April 30, 1999.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS/
UNDERLYING SARS GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME AND PRINCIPAL POSITION GRANTED (#) FISCAL YEAR ($/SH) DATE
<S> <C> <C> <C> <C>
James E. Alexander
President & CEO 25,000 7.1% $1-7/16 April 2004
Boris Rubizhevsky
Senior Vice President 22,500 6.3% $1-7/16 April 2004
Daniel J. Grady
Vice President 15,625 4.4% $1-7/16 April 2004
Stephen J. Burden 21,458 $1-7/16 April 2004
Vice President 100,000 33.9% $1.10 January 2004
Robert H. Cuttriss
President of Interpro 20,000 5.6% $2.00 April 2003
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
No officer exercised stock options during the fiscal year ended
April 30, 1999, or subsequently. The following table sets forth information
regarding the year-end value of options being held by the Chief Executive
Officer and the other such named officers and persons on April 30, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
ACQUIRED ON VALUE OPTIONS/SARS AT APRIL 30, 1999 AT APRIL 30, 1999
NAME AND PRINCIPAL POSITION EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C> <C> <C>
James E. Alexander
President & CEO (a) 0 0 25,000/0 $53,125.00/$0.00
42
<PAGE>
Boris Rubizhevsky
Senior Vice President (a) (b)
0 0 22,500/0 $47,812.50/$0.00
Daniel J. Grady
Vice President (a) 0 0 222,965/0 $651,851.78/$0.00
Stephen J. Burden
Vice President 0 0 78,599/114,288 $166,991/$257,822
Robert H. Cuttriss
President of Interpro 0 0 20,000/0 $31,350/$0
</TABLE>
(a) Does not include 45,455 shares of Common Stock awarded to Mr.
Alexander, 36,364 shares of Common Stock awarded to Mr. Rubizhevsky,
and 14,545 shares of Common Stock awarded to Dr. Grady in January 1999.
These were stock grants and not grants of stock options.
(b) Does not include 33,333 warrants obtained in a private transaction
completed in July 1999.
LONG TERM INCENTIVE COMPENSATION PLANS, AND DEFINED BENEFIT AND ACTUARIAL PLANS
Isonics has no long term incentive compensation plans, defined benefit
plans, or actuarial plans.
COMPENSATION OF DIRECTORS
The directors of Isonics were not compensated for their services
during fiscal year 1999, or subsequently during calendar year 1999. However,
each director was reimbursed for travel and related expenses associated with
Board of Directors' meetings. In January 2000, it was agreed to compensate
non-employee directors $2,000 for attending Board of Directors' meetings in
person and $500 for attending Board of Directors' meetings telephonically
beginning January 1, 2000.
The 1998 Directors' Plan (the "Directors' Plan") authorized each
person serving as a member of the Board who is not an employee of Isonics to
receive options to purchase 20,000 shares of Isonics Common Stock when such
person accepts his position as a Director and to receive an additional option
to purchase 10,000 shares when such person is re-elected as a Director
provided such person is not an employee of Isonics. The exercise price for
the options is the Fair Market Value (as defined in the Executives' Plan) on
the date such person becomes a director and the options are exercisable for
five years from such date. The options granted under the Directors' plan vest
immediately upon the date of the grant. In the event a Director resigns or is
not re-elected to the Board, failure to exercise the options in three months
results in the options' termination prior to the expiration of their term.
Although the Directors adopted the plan in 1998, the Board formalized the
plan by resolution in January 2000.
Under the Directors' Plan the following individuals have been
granted options:
(a) On May 21, 1998, Lindsay Gardner received 20,000 options exercisable at
$2.3750 per share through May 21, 2003.
(b) On August 1, 1998, Richard Parker received 20,000 options exercisable at
$1.65 per share through August 1, 2003.
(c) On October 5, 1998, as a result of their re-election to the Board of
Directors Ms. Gardner and Mr. Parker each received options to acquire
an additional 10,000 shares exercisable at $1.1875 per share through
October 5, 2003.
(d) On January 30, 2000, Larry J. Wells received 20,000 options exercisable at
$7.3125 per share through January 29, 2005.
As of February 29, 2000, options to purchase a total of 80,000 shares were
outstanding under the Directors Plan. We do not have any other arrangements
pursuant to which it compensates the Directors for acting in their capacities
as such.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
43
<PAGE>
The following sets out information regarding transactions between
officers, directors and significant shareholders of Isonics during the most
recent two fiscal years and during the subsequent fiscal year.
CORPORATE LOANS TO OFFICERS
During the fiscal years ended April 30, 1998 and 1999, we had loans
outstanding to two officers. The funds had been advanced to the officers to
allow them to exercise options prior to our Initial Public Offering. The
options were exercised in September 1996, in part, to allow us to establish a
pool of shares available for future awards pursuant to the Plans in amounts
that comply with the guidelines established by certain state blue sky
authorities. Interest was charged on these loans at a rate of 6.6% per annum.
In minutes effective October 31, 1999 and January 30, 2000, the Board of
Directors agreed to forgive a portion of the current interest and principal
due and to accept Isonics Common Stock, owned by the officers, in payment of
the remaining balance owed. The amount owed by Mr. Alexander, that was
forgiven by the Board of Directors, in October 1999, was $74,038.54. The
amount owed by Mr. Rubizhevsky, that was forgiven by the Board of Directors,
in October 1999, was $60,534.23. Both amounts were paid in December 1999. In
both cases the amount forgiven was treated as bonus compensation to Mr.
Alexander and Mr. Rubizhevsky. Both officers surrendered 30,437 shares of
Isonics Common Stock each to pay off $175,012.33 in accumulated interest and
principal ($10,012.33 in interest and $165,000.00 in principal each). As of
February 29, 2000 we had no loans receivable outstanding with its officers or
employees. Please refer to the following schedule.
<TABLE>
<CAPTION>
JAMES E. ALEXANDER BORIS RUBIZHEVSKY
PRESIDENT & CEO SENIOR VICE PRESIDENT
<S> <C> <C>
Balance as of May 1, 1997 $198,570.46 $167,570.46
FY 1998 Borrowings (a) 86,662.35 59,812.86
FY 1998 Repayments (a) 53,207.42 4,040.88
----------- -----------
Balance as of April 30, 1998 $232,025.39 223,342.44
FY 1999 Borrowings (a) 8,360.78 3,750.51
FY 1999 Repayments (a) 4,025.79 3,767.73
----------- -----------
Balance as of April 30, 1998 $236,360.38 $223,325.22
FY 2000 Borrowings (a) 7,690.49 7,221.34
FY 2000 Repayments (a) 244,050.87 230,546.56
----------- -----------
Balance as of Feb. 10, 2000 $0.00 $0.00
</TABLE>
(a) Includes interest accrued and paid. Amounts are aggregated.
CORPORATE LOANS FROM OFFICERS AND EMPLOYEES
On occasion during the fiscal years ended April 30, 1998 and 1999,
officers and employees of Isonics loaned Isonics funds. The following
schedule summarizes these borrowing and repayments.
<TABLE>
<CAPTION>
BALANCE AS OF FY 1998 FY 1998 BALANCE AS OF
NAME AND PRINCIPAL POSITION MAY 1, 1997 BORROWINGS (a) REPAYMENTS (a) APRIL 30, 1998
<S> <C> <C> <C> <C>
James E. Alexander $0.00 $25,000.00 $25,000.00 $0.00
President & CEO
Boris Rubizhevsky $0.00 $0.00 $0.00 $0.00
Senior Vice President
Daniel J. Grady $0.00 $15,600.00 $15,600.00 $0.00
Vice President
Stephen J. Burden $0.00 $86,821.92 $86,821.92 $0.00
Vice President (b)
Lindsay Gardner $0.00 $122,880.28 $122,880.28 $0.00
Director (c)
44
<PAGE>
Jacques J. Delente $150,000.00 $13,020.55 $163,020.55 $0.00
</TABLE>
(a) Includes interest accrued and paid through April 30, 1998. Amounts are
aggregated.
(b) Dr. Burden was also granted warrants exercisable for 40,951 shares of
Common Stock issued in connection with a private placement (the
"Placement I") of 12% nonconvertible promissory notes and warrants
to purchase Isonics Common Stock in September 1997.
(c) Ms. Gardner was also granted warrants exercisable for 91,001 shares of
Common Stock issued in connection with Placement I of 12%
nonconvertible promissory notes and warrants to purchase Isonics Common
Stock in September 1997.
(d) Dr. Delente was also granted warrants exercisable for 122,853 shares of
Common Stock issued in connection with Placement I of 12%
nonconvertible promissory notes and warrants to purchase Isonics Common
Stock in September 1997.
<TABLE>
<CAPTION>
BALANCE AS OF FY 1999 FY 1999 BALANCE AS OF
NAME AND PRINCIPAL POSITION MAY 1, 1998 BORROWINGS (a) REPAYMENTS (a) APRIL 30, 1999
<S> <C> <C> <C> <C>
James E. Alexander $0.00 $0.00 $0.00 $0.00
President & CEO
Boris Rubizhevsky $0.00 $44,290.20 $0.00 $44,290.20
Senior Vice President
Daniel J. Grady $0.00 $47,100.00 $47,100.00 $0.00
Vice President
Stephen J. Burden $0.00 $0.00 $0.00 $0.00
Vice President
Lindsay Gardner $0.00 $0.00 $0.00 $0.00
Director
Jacques J. Delente $0.00 $93,000.00 $48,000.00 $45,000.00
</TABLE>
(a) Includes interest accrued and paid through April 30, 1999. Amounts are
aggregated.
<TABLE>
<CAPTION>
BALANCE AS OF FY 2000 FY 2000 BALANCE AS OF
NAME AND PRINCIPAL POSITION MAY 1, 1999 BORROWINGS (a) REPAYMENTS (a) FEB. 29, 2000
<S> <C> <C> <C> <C>
James E. Alexander $0.00 $0.00 $0.00 $0.00
President & EO
Boris Rubizhevsky $44,290.20 $8,858.04 $53,214.24 $0.00
Senior Vice President (b)
Daniel J. Grady $0.00 $0.00 $0.00 $0.00
Vice President
Stephen J. Burden $0.00 $57,500.00 $57,500.00 $0.00
Vice President (c)
Lindsay Gardner $0.00 $0.00 $0.00 $0.00
Director
Jacques J. Delente $45,000.00 $13,500.00 $58,500.00 $0.00
</TABLE>
45
<PAGE>
(a) Includes interest accrued and paid through February 29, 2000. Amounts are
aggregated.
(b) Mr. Rubizhevsky's note to Isonics was converted into 66,666 shares of
Common Stock underlying 33,333 shares of Series A Convertible Preferred
Stock and 33,333 warrants issued in connection with a second private
placement (the "Placement II") of Series A Convertible Preferred Stock and
warrants to purchase Isonics Common Stock on July 30, 1999.
(c) Dr. Burden's note to Isonics was converted into 66,666 shares of Common
Stock underlying 33,333 shares of Series A Convertible Preferred Stock and
33,333 warrants issued in connection with Placement II on July 30, 1999.
Mr. Hegener had a loan payable to him from Isonics in the amount of
$438,314 resulting from the 1998 purchase of Chemotrade by Isonics. Isonics
issued to Mr. Hegener 35,000 warrants to purchase Common Stock at $3.00 per
share through June 30, 2004 to compensate him for a late loan payment.
ISONICS' CAPITAL STOCK
Our authorized capital stock consists of 20,000,000 shares of Common
Stock and 10,000,000 shares of Preferred Stock. As of March 13, 2000, there
were outstanding 6,676,691 shares of Common Stock and 1,830,000 shares of
Series A Convertible Preferred Stock. As of that date, there were also
outstanding options issued pursuant to our employee benefit plans to purchase
a total of 1,028,577 shares, and other options and warrants to purchase a
total of 8,703,666 shares of Common Stock. This amount includes a warrant to
purchase 4,000,000 shares held by Eagle-Picher. Eagle-Picher gave us notice
of its exercise of this warrant in March 2000. Although we are discussing the
terms of this exercise, it will likely result in Eagle-Picher acquiring in
excess of 3,100,000 shares pursuant to a "net exercise" provision in the
warrant.
COMMON STOCK
Subject to preferences that may be applicable to any Preferred Stock
outstanding at the time, the holders of outstanding shares of Common Stock
are entitled to receive dividends out of assets legally available therefor at
such times and in such amounts as the Board of Directors may from time to
time determine.
Each shareholder is entitled to one vote for each share of Common
Stock held on all matters submitted to a vote of shareholders.
Cumulative voting for the election of directors is specifically
authorized by the Bylaws. Under cumulative voting for the election of
directors, upon a proper and timely request by a shareholder, each
shareholder is entitled to cast a number of votes equal to the number of
shares held multiplied by the number of directors to be elected. The votes
may be cast for one or more candidates. Thus, under cumulative voting, a
majority of the outstanding shares will not necessarily be able to elect all
of the directors, and minority shareholders may be entitled to greater voting
power with respect to election of directors than if cumulative voting did not
apply.
The Bylaws provide that so long as we are a "listed company" as
defined by applicable California law, there will not be cumulative voting in
connection with the election of directors. At the present time, we are not a
"listed company" as defined in California law, and therefore cumulative
voting will continue to apply in connection with the election of directors.
The Common Stock is not entitled to preemptive rights and is not
subject to conversion or redemption. Upon liquidation, dissolution or winding
up of Isonics, the remaining assets legally available for distribution to
shareholders, after payment of claims or creditors and payment of any
liquidation preferences, if any, on outstanding Preferred Stock, are
distributable ratably among the holders of the Common Stock and any
participating Preferred Stock outstanding at that time. Each outstanding
share of Common Stock is fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations
prescribed by California law, to provide for the issuance of shares of
Preferred Stock in one or more series, to establish from time to time the
number of shares to be included in each such series, to fix the rights,
preferences and privileges of the shares of each unissued series and any
qualifications, limitations or restrictions thereon, and to increase or
decrease the number of shares of any such series (but not below the number of
shares of such series then outstanding), without any further vote or action
by the shareholders. The Board of Directors may authorize the
46
<PAGE>
issuance of Preferred Stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of Common
Stock. Thus, the issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of Isonics.
We have issued 1,830,000 shares of its Series A Convertible
Preferred Stock. The Preferred Stock may be converted to common shares of
Isonics stock at a fixed conversion price of $1.50 per share, which would
result in the exchange of one share of Common Stock for each share of Series
A Convertible Preferred Stock. This conversion ratio is subject to dilution
adjustments. The Series A Convertible Preferred Stock is entitled to receive
dividends on a share-for-share basis with the shares of Common Stock except
in the case of a "Silicon Isotope Transaction" as defined in the Certificate
of Determination that was filed with the California Secretary of State to
create the Series A Convertible Preferred Stock. If a "Silicon Isotope
Transaction" occurs, the holders of Series A Convertible Preferred Stock have
certain additional rights. The Series A Convertible Preferred Stock is
entitled to a liquidation preference of $1.50 per share.
CLASS A WARRANTS
Class A Warrants to purchase Common Stock were issued in September
1997 and are registered pursuant to Section 12(g) of the Securities Exchange
Act of 1934, as amended. The following is a brief summary of certain
provisions of the Warrants.
We issued Class A Warrants to purchase an aggregate of 810,000
shares of Common Stock. We have also reserved 810,000 shares for issuance
upon exercise of the Class A Warrants. Each Class A Warrant entitles the
registered holder thereof to purchase one share of Common Stock at a price of
$5.80, subject to adjustment, through September 21, 2001. After expiration,
the Warrants will be void and of no value.
We may redeem the Warrants at a price of $.10 per Warrant on not
less than 30 days' prior written notice if the average of the last reported
bid and asked prices of the Common Stock (if the Common Stock is then traded
in the over-the-counter market) or the last reported sale price of the Common
Stock (if the Common Stock is then traded on a national securities exchange
or the Nasdaq National Market or SmallCap Market) has been at least $14.50
per share (subject to adjustment) for at least 20 consecutive trading days
ending within three days prior to the date on which notice of redemption is
given.
The Warrants contain provisions that protect the holders thereof
against dilution by adjustment of the exercise price and number of shares
issuable upon exercise, on the occurrence of certain events, such as stock
dividends, stock splits and recapitalizations. We are not required to issue
fractional shares. In lieu of the issuance of such fractional shares, we will
pay cash to such holders of the Warrants. In computing the cash payable to
such holders, a share of Common Stock will be valued at its price immediately
prior to the close of business on the expiration date. The holder of a
Warrant will not possess any rights as a shareholder of Isonics unless such
shareholder exercises such Warrant.
47
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On September 22, 1997, our Units (consisting one share of Common
Stock and one Class A Warrant) started trading on the Over The Counter (OTC)
Electronic Bulletin Board under the symbol ISONU. In October 1997, we
unbundled the Units and the Common Stock and Class A Warrants commenced
trading on the OTC Electronic Bulletin Board under the symbols ISON and
ISONW, respectively.
The following table sets forth the high and low bid prices for each
of the Unit, the Common Stock and the Class A Warrant (quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not represent actual transactions) from September 22, 1997 through January
31, 2000 as reported by OTC Electronic Bulletin Board. The FY 2000 fourth
quarter (Quarter Ended April 30, 2000) values are through February 29, 2000,
only.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------
July 31, 1999 Oct. 31, 1999 Jan. 31, 2000 Apr. 30, 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Units (ISONU)
High -- -- 12 10-1/8
Low -- -- 12 10
Common Stock (ISON)
High 3-5/8 2-1/8 10-1/2 9-1/16
Low 1-7/8 0-7/8 1 7
Class A Warrants (ISONW)
High 13/16 1/2 3-15/16 4-1/4
Low 1/2 3/16 1/4 3
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------
July 31, 1998 Oct. 31, 1998 Jan. 31, 1999 Apr. 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Units (ISONU)
High - 1 1/4 2 15/16 2 1/8
Low - 1 1/16 15/16 2 1/8
Common Stock (ISON)
High 2 23/32 1 29/32 2 3 9/16
Low 1 21/32 1 1/32 25/32 1 7/16
Class A Warrants (ISONW)
High 3/4 7/16 3/8 3/4
Low 9/32 3/16 3/32 9/32
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------
July 31, 1997 Oct. 31, 1997 Jan. 31, 1998 Apr. 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Units (ISONU)
High - 10 - -
Low - 6 3/8 - -
Common Stock (ISON)
High - 8 3/8 5 5/8 3
Low - 5 1/2 1/4 1 13/16
Class A Warrants (ISONW)
High - 2 3/4 2 1/4 11/16
Low - 1 3/8 .01 1/8
</TABLE>
48
<PAGE>
As of March 15, 2000, there were approximately 250 holders of record
of our Common Stock. This does not include an indeterminate number of persons
who hold our Common Stock in brokerage accounts and otherwise in `street
name.'
We have never declared or paid a cash dividend on our Common Stock.
We presently intend to retain our earnings to fund development and growth of
our business and, therefore, do not anticipate paying any cash dividends in
the foreseeable future. Additionally, the certificate of designation for the
Series A Convertible Preferred Stock contains restrictions on our ability to
pay dividends to holders of our Common Stock.
SHARES AVAILABLE FOR FUTURE SALE
The market price of our Common Stock could drop if substantial
amounts of shares are sold in the public market or if the market perceives
that such sales could occur. A drop in the market price could adversely
affect holders of the stock and could also harm our ability to raise
additional capital by selling equity securities. The securities that may be
sold from time to time under this prospectus represent a market overhang.
As of March 13, 2000, we had outstanding options, warrants and
convertible securities for the purchase of up to approximately 11,396,668
shares of Common Stock at an average price of $3.01 per share, representing
approximately 63% of our outstanding shares of Common Stock on a
fully-diluted basis. The perception that these instruments may be exercised
for or converted into Common Stock that could be sold into the public market
could adversely affect the market price of our Common Stock. In addition, we
have entered into registration rights agreements with certain of our
stockholders entitling them to include their shares of Common Stock in
registration statements for securities filed by Isonics under the Securities
Act of 1933, as amended. Awareness of the existence of these registration
rights could lead to a perception that sales of the shares subject to the
registration rights could occur, which could materially and adversely affect
our stock price or could impair our ability to obtain capital through sales
of equity securities. In addition, shares we have issued in private
transactions over the past two years will become eligible for sale in the
public market under SEC Rule 144.
These shares are restricted securities as defined in Rule 144. Under
that rule, a stockholder who owns restricted shares that have been
outstanding for at least one year is entitled to sell, within any three-month
period, a number of restricted shares that does not exceed 1% of the then
outstanding shares of Common Stock, or approximately 667,669 shares as of
March 13, 2000. If more, a person selling under Rule 144 can sell an amount
equal to the average weekly trading volume in the Common Stock during the
four calendar weeks preceding the sale.
SECURITIES AND EXCHANGE POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
The Articles of Incorporation of Isonics require it to indemnify its
officers, directors, employees and agents against certain liabilities
incurred by them in those capacities if they acted in good faith and
reasonably believed their conduct was in the best interests of Isonics or not
opposed to it. Isonics is also required to indemnify a person who is or was a
director, officer, employee or agent of Isonics and who was successful, on
the merits or otherwise, in defense of any proceeding to which he was a
party, against reasonable expenses, which include attorneys' fees, incurred
by him or her in connection with the proceeding.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of Isonics under the provisions discussed in the previous
paragraph, or otherwise, Isonics has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in that Act and is, therefore, unenforceable.
49
<PAGE>
EXPERTS
The consolidated balance sheets as of April 30, 1998 and 1999, and
the consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended, have been audited by Grant Thornton LLP,
independent certified public accountants, as set forth in their report
thereon appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered
hereby has been passed upon for Isonics by Fenwick & West LLP, Palo Alto,
California. Fenwick & West LLP holds a warrant to purchase 20,000 shares of
Common Stock.
HOW TO OBTAIN ADDITIONAL INFORMATION
We file annual, quarterly, proxy statements, and other information
with the Securities and Exchange Commission (the "SEC"). You may read and
copy any document we have filed with the SEC in its public reference room at
450 Fifth Street N.W. Washington, D.C. 20549. You may obtain information on
the operation of the public reference room by calling the SEC at
1-800-432-0330. Our filings are also available to on the Internet through the
SEC's EDGAR database. You may access the SEC's web site at http://www.sec.gov.
We also furnish Annual Reports to our shareholders that contain
audited financial information.
This prospectus is part of a post-effective amendment to a
registration statement (on Form SB-2) we have filed with the SEC relating to
our Common Stock described in this prospectus. As permitted by the SEC rules,
this prospectus does not contain all of the information contained in the
registration, accompanying exhibits and schedules we file with the SEC. You
may refer to the registration, the exhibits and schedules for more
information about our Company and our Common Stock. The registration
statement, exhibits, and schedules are also available at the SEC's public
reference rooms or through its EDGAR database on the Internet.
50
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of Isonics include a provision that
eliminates to the fullest extent permitted by law the personal liability of
its directors to Isonics and its shareholders for monetary damages for breach
of the directors' fiduciary duties. This limitation has no effect on a
director's liability
(i) for acts or omissions that involve intentional misconduct or a knowing
and culpable violation of law,
(ii) for acts or omissions that a director believes to be contrary to the
best interests of Isonics or its shareholders or that involved the
absence of good faith on the part of the director,
(iii) for any transaction from which the director derived an improper
personal benefit,
(iv) for acts or omissions that show a reckless disregard for the
director's duty to Isonics or its shareholders in circumstances in
which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of
serious injury to Isonics or its shareholders,
(v) for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to
Isonics or its shareholders,
(vi) under Section 310 of the California Corporations Code (the "California
Code") concerning contracts or transactions between Isonics and a
director or
(vii) under Section 316 of the California Code concerning directors
liability for improper dividends, loans and guarantees.
The provision does not extend to acts or omissions of a director in his
capacity as an officer. Further, the provision will not affect the
availability of injunctions and other equitable remedies available to
Isonics' shareholders for any violation of a director's fiduciary duty to
Isonics or its shareholders.
The Articles of Incorporation further authorize Isonics to indemnify
its agents (as defined in Section 317(a) of the Code which includes directors
and officers) through Bylaw provisions, agreements with agents, votes of
shareholders or disinterested directors or otherwise, to the fullest extent
permissible under California law. Pursuant to this provision, the Bylaws of
Isonics provide for indemnification of directors and officers. The Bylaws
also permit Isonics to enter into indemnity agreements with individual
directors, officers, employees and other agents. Isonics intends to enter
into such agreements with its directors and executive officers effective upon
the closing of this offering. These Agreements, together with the Bylaws and
Articles of Incorporation, may require Isonics, among other things, to
indemnify directors or officers against certain liabilities that may arise by
reason of their status or service as directors (other than liabilities
resulting from willful misconduct of a culpable nature), to advance expenses
to them as they are incurred, provided that they undertake to repay the
amount advanced if it is ultimately determined by a court that they are not
entitled to indemnification, and to obtain and maintain directors' and
officers' insurance if available on reasonable terms.
In addition to the rights to indemnification provided under
California law, in the Articles of Incorporation and in the Bylaws, the 1996
Stock Option Plan provides indemnification to members of the Board of
Directors, officers, or employees of Isonics to whom authority to act for the
Board in connection with the Existing Plan is delegated shall be indemnified
against all reasonable expenses, including attorneys' fees, actually and
necessarily incurred in defense of any proceeding to which he or she is made
a party because of any action allegedly taken or alleged failure to act in
connection with the Plan, and against amounts paid in settlement (if approved
by independent legal counsel), or in satisfaction of any judgment in such
proceeding, unless the director, officer, or employee, as the case may be, is
adjudged to have behaved in bad faith, in a grossly negligent manner, or with
intentional misconduct as to duties.
Isonics currently has directors and officers' liability insurance.
At present, there is no pending litigation or proceeding involving a
director, officer or employee of Isonics pursuant to which indemnification is
sought, nor is Isonics aware of any threatened litigation that may result in
claims for indemnification.
Section 317 of the Code and the Bylaws of Isonics make provision for
the indemnification of officers, directors and other corporate agents in
terms sufficiently broad to indemnify such persons, under certain
circumstances, for liabilities (including
51
<PAGE>
reimbursement of expenses incurred) arising under the Securities Act. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, Isonics has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Reference is made to the following documents filed as exhibits to
this Registration Statement regarding relevant indemnification provisions
described above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
-------- --------------
<S> <C>
Underwriting Agreement 1.01
Registrant's Certificate of Incorporation 3.01
Registrant's Bylaws 3.02
Form of Indemnity Agreement 10.09
</TABLE>
ITEM 25 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid in
connection with the sale of the shares of Common Stock being registered
hereby. All amounts are estimates except for the Securities and Exchange
Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee $ 3,642
NASD filing fee 1,845
Accounting fees and expenses 85,000
Legal fees and expenses 250,000
Printing fees and expenses 140,000
Blue sky fees and expenses 50,000
Transfer agent and registrar fees and expenses 5,000
Miscellaneous 114,513
Estimated legal fees, blue sky fees, and accounting fees
and expenses for the post effective amendment 50,000
----------
Total $ 700,000
</TABLE>
ITEM 26 RECENT SALES OF UNREGISTERED SECURITIES.
EMPLOYEE OFFERINGS
(a) SECURITIES SOLD. During the past three years, Isonics has issued shares
of Common Stock, and options to purchase shares of Common Stock
pursuant to its existing employee benefit plans. These employee benefit
plans are as follows:
(i) 1996 Stock Option Plan which has been terminated, but as to which,
there are options outstanding.
(ii) 1996 Executives' Equity Incentive Plan (the "Executives' Plan")
authorized the grant of options to purchase 225,000 stock options,
which after being adjusted for stock splits that occurred
following the adoption of the plan resulted in 570,000 shares. The
options granted may be either incentive stock options if they meet
the requirements of Section 422 of the Internal Revenue Code, or
non-qualified stock options. This plan was approved by the
directors in November 1996, and by the shareholders in October 1996.
(iii) 1996 Equity Incentive Plan (the "Employees' Plan") authorized the
grant of options to purchase 50,000 stock options, which after
being adjusted for stock splits that occurred following the
adoption of the plan resulted in 150,000 shares. The options
granted may be either incentive stock options if they meet the
requirements of Section 422 of the Internal Revenue Code, or
non-qualified stock options. This plan was approved by the
directors in November 1996, and by the shareholders in October 1996.
52
<PAGE>
(iv) 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan")
authorized employee purchase of up to 200,000 shares of Isonics
Common Stock , none of which has been purchased to date, although
funds therefor have been received by Isonics. This plan was
approved by the directors in August 1998, and by the shareholders
in October 1998.
(v) 1998 Directors' Plan (the "Directors' Plan) authorized each person
serving as a member of the Board of Directors who is not an employee
of Isonics to receive options to purchase 20,000 shares of Isonics
Common Stock when such person accepts his position as a Director and
to receive an additional option to purchase 10,000 shares when such
person is re-elected as a Director provided such person is not an
employee of Isonics. The exercise price for the options is the Fair
Market Value (as defined in the Executives' Plan) on the date such
person becomes a director and the options are exercisable for five
years from such date. The options granted under the Directors' plan
vest immediately upon the date of the grant. In the event a Director
resigns or is not re-elected to the Board, failure to exercise the
options in three months results in the options' termination prior
to the expiration of their term. Although the Directors adopted the plan
in 1998, the Board formalized the plan by resolution in January 2000.
As of February 29, 2000, options to purchase a total of 380,583 shares,
79,638 shares, and 488,356 shares, respectively, were outstanding under
the Executives' Plan, Employees' Plan and 1996 Stock Option Plan; and
options to purchase 189,417, 70,362 and 0 shares, respectively,
remained available for grant. As of February 29, 2000, options to
purchase a total of 80,000 shares were outstanding under the Directors'
Plan.
In addition, Isonics has issued options and stock bonuses to its
employees outside of the Plans.
Isonics has an effective registration statement on Form S-8 relating
to the foregoing plans.
(b) NAMES OF PRINCIPAL UNDERWRITERS. None
(c) CONSIDERATION RECEIVED. The securities issued pursuant to employee
benefit plans were, for the most part, issued in consideration of
services rendered and did not (therefore) involve the offer or sale of
securities.
Where Isonics has received cash for the purchase of securities on
exercise of stock options prior to the effectiveness of the form S-8
registration statement, it has been used for working capital purposes.
(d) EXEMPTION CLAIMED. Many of the securities referred to in this section
were not offered or sold in a manner that constituted a "sale" of
securities as that term is defined in Section 2(a)(3) of the Securities
Act. Where a "sale" occurred, The transactions were exempt from
registration under the Securities Act of 1933, as amended by reason of
Sections 4(2) and 4(6) of the Securities Act of 1933 or Rule 701.
(e) NOT APPLICABLE.
(f) USE OF PROCEEDS. Where proceeds were received, the proceeds were
utilized for working capital purposes.
DECEMBER 1999 WARRANT ISSUANCE
(a) SECURITIES SOLD. The sale, as described above, occurred on December 1,
1999. The securities sold consists of one restricted warrant (A Warrant
to purchase 4,000,000 shares of restricted Common Stock issued at an
exercise price of $3.75 per share.
(b) UNDERWRITERS AND OTHER PURCHASERS. No underwriters, agents, or
placement agents participated in the private placement.
(c) PURCHASE PRICE. The warrant was issued to a single accredited investor
as consideration for the purchase of 200 kilograms of silicon-28
pursuant to an Asset Purchase Agreement executed between Isonics and
Eagle-Picher Technologies, LLC, an accredited investor.
(d) EXEMPTION CLAIMED. The transactions were exempt from registration under
the Securities Act of 1933, as amended by reason of Sections 4(2) and
4(6) of the Securities Act of 1933.
53
<PAGE>
(e) TERMS OF CONVERSION OR EXERCISE. Terms of conversion or exercise are
as follows:
The Warrant granted to Eagle-Picher may be exercised to purchase
4,000,000 shares of restricted Common Stock issued on a
warrant-for-share basis with Isonics Common Stock (subject to dilution
adjustment) for a purchase price of $3.75 per share through the
expiration date, May 30, 2003. On March 15, 2000, Eagle-Picher notified
us of its exercise of the warrant pursuant to a `net exercise'
provision, which will result in Eagle-Picher acquiring in excess of
3,100,000 shares of our common stock. We are still discussing the terms
of Eagle-Picher's net exercise.
Isonics also entered into a registration rights agreement relating to
the shares of Common Stock underlying the Warrant.
(f) USE OF PROCEEDS. Isonics intends to use the 200 kilograms of silicon-28
from the issuance of the Warrant for the continued development and
commercialization of silicon-28 wafers for the semiconductor industry.
JULY 1999 PRIVATE PLACEMENT
(a) SECURITIES SOLD. The sale of securities, as described above, occurred
on July 29, 1999. The securities sold include:
1,830,000 shares of restricted Series A Convertible Preferred Stock,
created by filing an amended certificate of determination of
preferences and rights (the "Certificate of Determination") with the
California Secretary of State; and
1,830,000 restricted warrants to purchase shares of restricted Common
Stock issued on a warrant-for-share basis with the Series A Convertible
Preferred Stock; and
500,000 restricted warrants issued as a fee pursuant to an investment
banking agreement
(b) UNDERWRITERS AND OTHER PURCHASERS.
(i) No underwriters, agents, or placement agents participated in
the private placement; and
(ii) 1,500,000 Units (each Unit consisting of one share of Series A
Convertible Preferred Stock and one warrant) were sold to
accredited investors for cash; and
(iii) 330,000 Units were issued to accredited investors in settlement
of debt obligations; and
(iv) 500,000 warrants were issued to a single accredited investor as
compensation pursuant to an investment banking agreement.
(c) OFFERING PRICE. The Units were sold for a purchase price of $1.50 per
Unit. The Units described in (b)(ii) above were sold for cash; the
Units described in (b)(iii) above were issued in satisfaction of debt
obligations.
(d) EXEMPTION CLAIMED. The transactions were exempt from registration under
the Securities Act of 1933, as amended by reason of Sections 4(2) and
4(6) of the Securities Act of 1933, and Rule 506 of Regulation D
thereunder.
(e) TERMS OF CONVERSION OR EXERCISE. Terms of conversion or exercise are as
follows:
(i) The Series A Convertible Preferred Stock is convertible into
shares of Common Stock on a share-for-share basis, subject to
dilution adjustments. The Series A Convertible Preferred Stock
is entitled to receive dividends on a share-for-share basis
with the shares of Common Stock except in the case of a
"Silicon Isotope Transaction" as defined in the Certificate of
Determination, in which case the holders of Series A
Convertible Preferred Stock have certain additional rights.
The Series A Convertible Preferred Stock is entitled to a
liquidation preference of $1.50 per share.
(ii) The warrants are each exercisable to purchase a single share
of Common Stock (subject to dilution adjustment) for a
purchase price of $3.75 per share through the expiration date,
July 29, 2002.
54
<PAGE>
(iii) Isonics also entered into a registration rights agreement
relating to the shares of Common Stock underlying the Series A
Convertible Preferred Stock and the warrants, by which
(subject to certain conditions) Isonics is required to
register the underlying Common Stock on the request of the
holders of 30% or more of the "registrable securities."
Isonics is not obligated to obtain effectiveness for more than
two such registration statements during the term of the
registration rights agreement, which expires upon the
unanimous consent of the holders and Isonics.
(f) USE OF PROCEEDS. Isonics intends to use the cash proceeds from the sale
of the Units for repayment of debt, working capital, and to finance the
continued growth of operations including the continued development and
commercialization of Silicon-28 wafers for the semiconductor industry.
JUNE 1998 CHEMOTRADE ACQUISITION
(a) SECURITIES SOLD. 357,730 shares of Common Stock.
(b) NAMES OF PRINCIPAL UNDERWRITERS. None.
(c) CONSIDERATION RECEIVED. The shares issued were partial consideration
for Isonics' acquisition of all of the outstanding shares of Chemotrade
GmbH, 75% of the outstanding shares of Chemotrade Leipzig GmbH and 6%
of the outstanding shares of IUT (collectively "Chemotrade"). All three
companies are located in Germany. Chemotrade GmbH is located in
Dusseldorf, Chemotrade Leipzig GmbH is located in Leipzig, and IUT is
located in Berlin. Two common shareholders owned all three companies.
All three companies continue to be engaged in the distribution,
development and manufacture, of stable and radioactive isotopes.
(d) EXEMPTION CLAIMED. The transactions were exempt from registration under
the Securities Act of 1933, as amended by reason of Regulation S for
offers and sales made to non-U.S. Persons.
(e) NOT APPLICABLE.
(f) USE OF PROCEEDS. Not applicable.
JUNE 1998 INTERPRO ACQUISITION
(a) SECURITIES SOLD. 353,982 shares of Common Stock.
(b) NAMES OF PRINCIPAL UNDERWRITERS. None.
(C) CONSIDERATION RECEIVED. The shares issued were partial consideration
for Isonics' acquisition of all of the outstanding shares of
International Process Research Corporation ("Interpro"), which does
business as Colorado Minerals Research Institute, and which is a
contract research and development, and materials processing company
located in Golden, Colorado. A single corporate shareholder, Metallurgy
International, Inc., a previously unaffiliated corporation principally
owned by an individual who is now an executive officer of Isonics,
owned interpro.
(d) EXEMPTION CLAIMED. The transactions were exempt from registration under
the Securities Act of 1933, as amended by reason of Sections 4(2) and
4(6).
(e) NOT APPLICABLE.
(f) USE OF PROCEEDS. Not applicable.
ITEM 27 EXHIBITS.
(a) Exhibits Pursuant to Item 601 of Regulation S-B:
55
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Title
----------- -----
<S> <C>
1.01* Form of Underwriting Agreement.
3.01* Registrant's Amended and Restated Articles of Incorporation. (1)
3.02* Registrant's Bylaws. (1)
3.03* Certificate of Determination of Preferences and Rights of the Series A Preferred Stock. (SEE
EXHIBIT 10.18)
4.01* Specimen Common Stock Certificate. (1)
4.02* Form of Representatives' Warrant Agreement. (1)
4.03* Form of Warrant Agreement between the Registrant and Continental Stock Transfer & Trust Company,
Monroe Parker Securities. (1)
4.04* Specimen Warrant Certificate. (1)
5.01* Opinion of Fenwick & West LLP
10.01* Registrant's 1996 Stock Option Plan. (1)(2)
10.02* Form of Employment Agreement between the Registrant and certain officers of the Registrant. (1)(2)
10.03* Registrant's 1996 Executives Equity Incentive Plan. (1)(2)
10.04* Registrant's 1996 Equity Incentive Plan. (1)(2)
10.05* Memorandum of Agreement between Electrochemical Plant, AO Techsnabexport, Co., Ltd. and Registrant.(1)
10.06* Option Agreement between the Registrant and Yale University. (1)
10.07* Office Lease Agreement between Paulsen Properties and the Registrant dated as of January 1, 1996,
as amended. (1)
10.08* Letter from Yale University to Registrant dated February 10, 1996. (1)
10.09* Form of Indemnity Agreement entered into by Registrant with each of
its directors and investors. (2)
10.10* Stock Purchase Agreement, dated as of April 30, 1998, among Isonics Corporation, a California
corporation, Metallurgy International, Inc., a Nevada corporation, and International Process
Research Corporation, a Colorado corporation. (3)
10.10.1* Escrow Agreement, dated as of May 15, 1998, among Isonics
Corporation, a California corporation, Metallurgy
International, Inc., a Nevada corporation, Robert H. Cuttriss
(as Agent), and Colorado Business Bank, as Escrow Agent. (3)
10.11* Registration Rights Agreement dated as of September 27, 1996 by and between Registrant and certain
investors. (1)
10.12* Employment Agreement between the Registrant and James E. Alexander. (1)(2)
10.13* Employment Agreement between the Registrant and Boris Rubizhevsky. (1)(2)
10.14* Security Agreement dated March 31, 1995 between Isonics and Isoserve, Inc. (1)
10.15* Consulting Agreement between the Registrant and Larry Wells Co., Inc. (1)(2)
10.16* February 1997 Agreement between the Registrant, Electrochemical Plant and AO Techsnabexport, Co.,
Ltd. (1)
10.17* Letter from Yale University to Registrant dated January 28, 1997. (1)
10.18* Certificate of Determination of Preferences and Rights of the Series A Preferred Stock. (4)
10.19* Form of Subscription Agreement. (4)
10.20* Form of Warrant. (4)
10.21* Investment Banking Agreement. (4)
10.22* Form of Registration Rights Agreement. (4)
10.23* Asset Purchase Agreement dated December 1, 1999 between the Registrant and Eagle Picher
Technologies, LLC (5)
10.24* Registration Rights Agreement dated December 1, 1999 between the Registrant and Eagle Picher
Technologies, LLC (5)
10.25* Warrant Agreement dated December 1, 1999 between the Registrant and Eagle Picher Technologies, LLC (5)
10.26* Supply Agreement between the Registrant and Eagle Picher Technologies, LLC (6)
23.10 Consent of independent accountants
24.01* Power of Attorney (see page 27).
27.01* Financial Statement Schedule.
</TABLE>
56
<PAGE>
(1) Incorporated herein by reference to exhibit filed with Isonics'
Registration Statement on Form SB-2 ("Registration Statement") (Commission
file No. 333-13289) in which this exhibit bears the same number except
exhibit 3.01 which was numbered 3.03 in that registration statement.
(2) Items that are management contracts or compensatory plans or arrangements
required to be filed as exhibits pursuant to Item 13(a) of Form 10-KSB.
(3) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531), dated
May 15 and filed May 27, 1998, and incorporated herein by reference.
(4) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531), dated
July 29 and filed August 12, 1999, and incorporated herein by reference.
(5) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531) dated
December 1, 1999 and filed December 10, 1999, and amendment thereto filed
February 10, 2000, and incorporated herein by reference.
(6) Confidential treatment requested.
* Previously filed.
ITEM 28 UNDERTAKINGS.
The Registrant hereby undertakes the following:
(a) (1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect
in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration
statement; and (iii) include any additional or changed material information
of the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
BONA FIDE offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) To supplement the prospectus after the end of the subscription period to
include the results of the subscription offer, the transactions by the
underwriters during the subscription period, the amount of unsubscribed
securities that the underwriters will purchase, and the terms of any later
reoffering.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 24 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(d) (1) For determining liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(2) For determining liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
as a new registration statement for the securities offered therein, and that
offering of the securities at that time shall be deemed to be the initial
BONA FIDE offering of those securities.
57
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
City of Golden, State of Colorado, on March 31, 2000.
ISONICS CORPORATION
By: /s/ James E. Alexander
---------------------------------
James E. Alexander, President
In accordance with the requirements of the Securities Act of 1933,
the following persons in their capacities and on the dates stated signed this
registration statement.
<TABLE>
<S> <C> <C>
President, Chief Executive
Officer, Chief Operating Officer,
James E. Alexander and Director March 31, 2000
Senior Vice President, Vice
Boris I. Rubizhevsky Chairman and Director March 31, 2000
Lindsay A. Gardner Director March 31, 2000
Richard Parker Director March 31, 2000
Larry J. Wells Director March 31, 2000
Chief Financial Officer, Chief
Accounting Officer, and Vice
Brantley J. Halstead President--Finance March 31, 2000
</TABLE>
58
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.............................................................F-2
Consolidated Financial Statements for the Years Ended April 30, 1998 and 1999
Consolidated Balance Sheets...............................................................................F-3
Consolidated Statements of Operations.....................................................................F-4
Consolidated Statement of Stockholders' Equity............................................................F-5
Consolidated Statements of Cash Flows.....................................................................F-6
Notes to Consolidated Financial Statements................................................................F-7
Condensed Consolidated Financial Statements for the Nine Months Ended January 31, 1999 and 2000
Condensed Consolidated Balance Sheets.....................................................................F-20
Condensed Consolidated Statements of Operations...........................................................F-22
Condensed Consolidated Statements of Cash Flows...........................................................F-23
Notes to Condensed Consolidated Financial Statements......................................................F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Isonics Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Isonics
Corporation and Subsidiaries as of April 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Isonics
Corporation and Subsidiaries as of April 30, 1999 and 1998, and the
consolidated results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
San Jose, California
July 23, 1999, except for Note 13 as to which the date is July 29, 1999
F-2
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1998 1999
-------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,044 $ 452
Accounts receivable (net of allowances of $130 and $82, respectively) 1,629 932
Inventories 456 651
Prepaid expenses 45 160
Deferred income taxes 112 -
-------- ---------
Total current assets 3,286 2,195
PROPERTY AND EQUIPMENT, net 1,626 1,018
GOODWILL, net 236 3,388
NOTES RECEIVABLE FROM SHAREHOLDERS 170 130
OTHER ASSETS 22 75
DEFERRED INCOME TAXES 315 -
-------- ---------
TOTAL $ 5,655 $ 6,806
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and line of credit $ 80 $ 1,136
Notes payable to related parties - 922
Accounts payable 657 1,368
Accrued liabilities 738 1,086
-------- ---------
Total current liabilities 1,475 4,512
LONG-TERM DEBT 312 -
DEFERRED INCOME TAXES 427 -
COMMITMENTS - -
STOCKHOLDERS' EQUITY:
Common stock - no par value; 20,000,000 shares authorized; issued and
outstanding: 1998 - 5,714,250; 1999 - 6,607,760 5,289 6,795
Notes receivable from shareholders (337) (469)
Accumulated deficit (1,511) (4,032)
-------- ----------
Total stockholders' equity 3,441 2,294
-------- ----------
TOTAL $ 5,655 $ 6,806
======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended
April 30,
----------------------
1998 1999
-------- ---------
<S> <C> <C>
Net revenues $ 6,783 $ 16,998
Cost of revenues 4,662 13,375
-------- ---------
Gross margin 2,121 3,623
Operating expenses:
Selling, general and administrative 1,342 3,643
Research and development 811 1,155
Restructuring and office closure - 691
-------- ---------
Total operating expenses 2,153 5,489
-------- ---------
Operating loss (32) (1,866)
Other income (expense)
Interest income 74 36
Interest expense (219) (575)
Foreign currency gain - 55
-------- ---------
Total other expense, net (145) (484)
-------- ----------
Loss before extraordinary item and taxes (177) (2,350)
Income tax expense (benefit) (314) 171
--------- ---------
Income (loss) before extraordinary item 137 (2,521)
Extraordinary item - loss on extinguishment of debt (252) -
--------- ---------
NET LOSS $ (115) $ (2,521)
====== =========
NET INCOME (LOSS) PER SHARE - BASIC
Net income (loss) per share before extraordinary item $ 0.03 $ (0.41)
Extraordinary item $ (0.05) $ -
Net loss per share $ (0.02) $ (0.41)
Shares used in computing per share information 5,039 6,210
NET INCOME (LOSS) PER SHARE - DILUTED
Net income (loss) per share before extraordinary item $ 0.02 $ (0.41)
Extraordinary item $ (0.04) $ -
Net loss per share $ (0.02) $ (0.41)
Shares used in computing per share information 6,469 6,210
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Notes
Common Stock Receivable
------------------ from (Accumulated
Shares Amount Shareholders Deficit) Total
--------- ------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCES, May 1, 1997 4,550,268 $ 1,129 $ (343) $ (1,396) $ (610)
Issuance of common stock (net of issuance costs
of $1,327) 810,000 3,452 - - 3,452
Interest on notes receivable from stockholders - - (22) - (22)
Repayment of interest from stockholders - - 28 - 28
Issuance of common stock in connection with
Interpro acquisition 353,982 708 - - 708
Net loss - - - (115) (115)
--------- ------- --------- ---------- --------
BALANCES, April 30, 1998 5,714,250 5,289 (337) (1,511) 3,441
Issuance of common stock in connection with
Chemotrade acquisition 357,730 894 - - 894
Issuance of common stock in lieu of salaries 118,182 130 - - 130
Conversion of debt into common stock 127,209 191 - - 191
Exercise of stock options and warrants 290,389 147 (130) - 17
Fair value of warrants issued with debt - 144 - - 144
Interest on notes receivable from stockholders - - (24) - (24)
Repayment of interest from stockholders - - 22 - 22
Net loss - - - (2,521) (2,521)
--------- ------- --------- ---------- --------
BALANCES, April 30, 1999 6,607,760 $ 6,795 $ (469) $ (4,032) $ 2,294
========= ======= ========== ========= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended
April 30,
----------------------
1998 1999
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (115) $ (2,521)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 200 520
Interest on notes receivable from shareholders (22) (24)
Fair value of warrants issued with debt - 144
Interest recognized upon conversion of debt to equity - 64
Deferred income taxes (315) -
Loss on disposal of property and equipment - 504
Issuance of common stock in lieu of salaries - 130
Extraordinary item - loss on extinguishment of debt 252 -
Changes in operating assets and liabilities:
Accounts and notes receivable (1,232) 1,748
Inventories 1,083 (89)
Prepaid expenses 5 98
Other assets 5 (30)
Accounts payable (283) (112)
Accrued liabilities and other (117) (75)
-------- ---------
Net cash provided by (used in) operating activities (539) 357
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (72) (159)
Cash acquired in purchase of Interpro 6 -
Purchase of Chemotrade, net of cash acquired - (546)
-------- ---------
Net cash used in investing activities (66) (705)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from line of credit - 16
Proceeds from issuance of debt - 701
Repayment of notes receivable from shareholders 28 22
Payments of debt (1,852) (1,000)
Proceeds from issuance of common stock 3,452 17
Payment of debt issuance costs (7) -
-------- ---------
Net cash provided by (used in) financing activities 1,621 (244)
-------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,016 (592)
Cash and cash equivalents at beginning of period 28 1,044
-------- ---------
Cash and cash equivalents at end of period $ 1,044 $ 452
======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Isonics Corporation, (the "Company") develops and markets products
worldwide based on enriched stable isotopes for applications in the energy,
medical research, diagnostic, pharmaceutical and semiconductor industries.
Through one of the Company's subsidiaries, it also provides contract research
and development services.
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, International Process Research
Corporation ("Interpro"), acquired April 30, 1998, and Chemotrade GmbH
("Chemotrade"), acquired June 1, 1998. The consolidated balance sheet at
April 30, 1998 includes the assets and liabilities of Isonics Corporation and
Interpro. The consolidated statement of operations for the fiscal year ended
April 30, 1998, includes the results of Isonics Corporation and does not
include the operations of Interpro as the acquisition occurred on the last
day of fiscal 1998. The consolidated balance sheet at April 30, 1999,
includes the assets and liabilities of Isonics Corporation, Interpro and
Chemotrade. The consolidated statement of operations for the fiscal year
ended April 30, 1999, includes the results of Isonics and Interpro for the
year then ended and the results of Chemotrade for the eleven months then
ended. All significant intercompany accounts have been eliminated in
consolidation. A pro forma income statement for the year ended April 30,
1999, has not been presented as the pro forma results of operations for the
year would not have been materially different from the results reported.
CASH EQUIVALENTS
Cash equivalents include investments purchased with a maturity of less
than ninety days. Cash balances held in foreign bank accounts were $405,000
at April 30, 1999.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents and trade
accounts receivable. Cash equivalents are maintained with high quality
institutions and are regularly monitored by management. The Company extends
credit to its customers, most of whom are large, established companies.
Credit risk is mitigated by performing ongoing credit evaluations of its
customers' financial condition and generally does not require collateral.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over five to seven years. Leasehold
improvements are amortized over the shorter of their estimated useful lives
or the lease term.
F-7
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill resulted from the acquisitions of Isoserve, Inc. and
Chemotrade, and is being amortized on a straight-line basis over six years
and twenty years, respectively. The Company evaluates the realizability of
goodwill to determine potential impairment by comparing the undiscounted
future cash flows of the related assets. The Company modifies or adjusts
goodwill if an impairment is indicated. Based upon its most recent
evaluation, the Company believes that no impairment of goodwill exists as of
April 30, 1999.
INCOME TAXES
The Company accounts for income taxes using an asset and liability
approach for financial accounting and reporting purposes. A valuation
allowance is provided when deferred tax assets are not expected to be
realized.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment. Product returns
and warranty costs have not been material in any period. Revenue from
research contracts is recognized ratably as services are performed and costs
are incurred.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements, as well as revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of cash and equivalents, trade receivables and trade
payables approximates carrying value due to the short maturity of such
instruments. The fair value of debt with third-party financial institutions
is not determinable due to the default status of the debt. The fair value of
debt with related parties and promissory notes is not determinable due to the
terms of the debt and no comparable market for such debt.
TRANSLATION OF FOREIGN CURRENCIES
The Company conducts substantially all of its transactions in U.S.
dollars, except for transactions by its foreign subsidiary. The financial
statements of the Company's foreign subsidiary are denominated in the
country's local currency and remeasured for purposes of consolidation, with
the U.S. dollar as the functional currency. Gains and losses from
remeasurement and transaction gains and losses are included in the statement
of operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The Company provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION.
F-8
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT REPORTING
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, effective May 1, 1998. SFAS No. 131
establishes new rules for presenting reportable business segments. The
adoption had no effect on the Company's net loss or stockholders' equity.
NET INCOME (LOSS) PER SHARE
Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of options and warrants. Approximately 3,439,000 options and
warrants were excluded from the loss per share calculation in 1999 as the
inclusion would be antidilutive.
The following table reconciles the denominator used in the per share
computation (in thousands):
<TABLE>
<CAPTION>
Year Ended April 30,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Basic shares outstanding 5,039 6,210
Stock options and warrants 1,430 -
--------- ---------
Diluted shares outstanding 6,469 6,210
========= =========
</TABLE>
NOTE 2 - FINANCIAL STATEMENT COMPONENTS
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
April 30,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Finished goods $ 250 $ 420
Raw Materials 206 231
--------- ---------
$ 456 $ 651
========= =========
</TABLE>
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
April 30,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Office furniture and equipment $ 118 $ 159
Production equipment 1,549 1,094
Leasehold Improvements 4 19
--------- ---------
1,671 1,272
Accumulated depreciation and amortization (45) (254)
--------- ---------
$ 1,626 $ 1,018
========= =========
</TABLE>
F-9
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - FINANCIAL STATEMENT COMPONENTS (CONTINUED)
Goodwill related to acquisitions consists of the following (in thousands):
<TABLE>
<CAPTION>
April 30,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Isoserve, net of accumulated amortization of $236 and $315 $ 236 $ 157
Chemotrade, net of accumulated amortization of $0 and $155 - 3,231
--------- ---------
$ 236 $ 3,388
========= =========
</TABLE>
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
April 30,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Compensation $ 419 $ 391
Accrued interest 12 68
Customer advances and deposits 76 97
Other 231 530
--------- ---------
$ 738 $ 1,086
========= =========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities (in
thousands):
<TABLE>
<CAPTION>
April 30,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Stock issued for note receivable $ - $ 130
========= =========
Conversion of trade payables into debt $ - $ 95
========= =========
Forgiveness of note receivable from shareholder $ 33 $ -
========= =========
Purchase of subsidiary
Cash paid $ - $ 546
Cash acquired 6 309
Stock issued to seller 708 894
Debt issued to seller - 1,750
Liabilities assumed 1,464 1,598
Goodwill - (3,385)
--------- ---------
Assets acquired $ 2,178 $ 1,712
========= =========
</TABLE>
Supplemental disclosures of cash flow information (in thousands):
<TABLE>
<CAPTION>
April 30,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Cash paid during the period for:
Interest $ 177 $ 475
Income taxes 1 227
</TABLE>
F-10
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
April 30,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Deferred tax assets
Accruals and expenses deductible in future periods $ 297 $ 1,269
Net operating loss carryforwards 211 435
--------- ---------
Total deferred tax assets 508 1,704
Valuation allowance (81) (1,178)
--------- ---------
427 526
Deferred tax liabilities
Amortization and depreciation (427) (526)
---------- ----------
$ - $ -
========= =========
</TABLE>
Income tax expense (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
April 30,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Current
Federal $ - $ -
State 1 -
Foreign - 171
--------- ---------
1 171
Deferred
Federal (230) -
State (85) -
--------- ---------
(315) -
--------- ---------
$ (314) $ 171
========= =========
</TABLE>
The primary differences between the statutory federal tax rate and the
effective rate in 1999 are the taxable earnings of the Company's foreign
subsidiary, the non-deductibility of certain expenses associated with
warrants and commons shares issued with debt and upon debt conversion and the
valuation allowance provided against deferred tax assets. In 1998, the
primary differences resulted from the non-deductibility of certain expenses
associated with the extinguishment of debt and the valuation allowance
provided against the deferred tax assets. The change in the valuation
allowance for deferred tax assets for the years ended April 30, 1998 and 1999
was $81,000 and $1,097,000, respectively. The Company provided a valuation
allowance for its deferred tax asset to the extent it believes realization of
such asset is uncertain.
The Company has $1,086,000 of net operating loss carryforwards for
federal purposes and associated state net operating loss carryforwards, which
expire at various dates through 2019. Current federal and state tax law
includes certain provisions limiting the annual use of net operating loss
carryforwards in the event of certain defined changes in stock ownership. The
annual use of the Company's net operating loss carryforwards could be limited
according to these provisions.
F-11
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - DEBT AND LINE OF CREDIT
Debt and line of credit consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Bank term loan - guaranteed by the SBA, repaid in 1999 $ 40 $ -
Bank term loan, repaid in 1999 306 -
Revolving line of credit - 514
Notes payable to related parties - 922
10% Subordinated promissory note - 92
Unsecured promissory notes - 494
Other 46 36
--------- ---------
392 2,058
Less current maturities 80 2,058
--------- ---------
Long-term debt $ 312 $ -
========= =========
</TABLE>
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 April 30, 1999) plus 4%. The loan
consists of the following:
- $500,000 equipment term loan, payable over forty eight equal monthly
installments of principal and interest;
- $250,000 term loan, with interest only payments due monthly and
principal due October 31, 1998;
- $500,000 revolving line of credit, borrowings are limited to 35% of
eligible inventory;
- $1,250,000 revolving line of credit, borrowings are limited to 80% of
eligible accounts receivable; and
- $500,000 equipment acquisition term loan, borrowings are limited to 80%
of invoice cost of equipment, payable over thirty-six monthly
installments of principal and interest. The availability of the loan is
conditioned upon the Company achieving and maintaining minimum debt
service coverage ratios.
In April 1999, Coast sent notification that Isonics was 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 under the loan are presently limited to
eligible receivables and inventory amounts.
Notes payable to related parties consist of an $812,000 (DM1,500,000)
note payable to the sellers of Chemotrade and other unsecured notes to
officers and directors amounting to $110,000. The Chemotrade note is secured
by the shares of Chemotrade, bears interest at 10% and was due in June 1999.
The Company paid $550,000 towards the Chemotrade note principal in July 1999
and extended the due date of the balance to July 31, 1999. In consideration
for the extension, the Company will grant one $3 warrant for each $5 of
deferred payment. The unsecured notes to officers and directors bear interest
at 5% per month and are payable upon demand.
Unsecured promissory notes consist of two notes bearing interest at
prime plus 4% for $200,000 each to a vendor and a $94,500 note to a different
vendor. The $200,000 notes were due in April 1999. The Company issued 75,000
warrants to the vendor in connection with the $200,000 notes. The fair value
of these warrants, $144,000, was recorded as additional interest expense for
the period. The $94,500 note represents the conversion of certain trade
payables into a non-interest bearing note due in seven equal monthly
installments beginning in June 1999.
F-12
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS
The Company rents office, production facilities and equipment under
operating leases expiring through July 2003. Rent expense for operating
leases was approximately $39,000 and $202,000 for the years ended April 30,
1998 and 1999, respectively. Future minimum annual operating lease
commitments are as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 197,000
2001 161,000
2002 44,000
2003 18,000
2004 9,000
-----------
$ 429,000
===========
</TABLE>
The Company is required to make royalty payments to Isoserve, Inc. for
depleted zinc metal sold through fiscal 2000. The maximum royalty payments
under the agreement are $1,000,000. The Company paid royalties of $192,000
and $110,000 for the years ended April 30, 1998 and 1999, respectively, and
has paid $633,000 of royalties since inception through April 30, 1999. At
April 30, 1999, the company had accrued royalties payable under this
agreement amounting to $88,000.
NOTE 6 - STOCKHOLDERS' EQUITY
On August 11, 1997, the Board of Directors approved a 3 for 1 stock
split of its common shares. All per share amounts, number of shares, stock
options and warrant data have been restated to reflect the stock split.
COMMON STOCK
On September 22, 1997, the Company completed an initial public offering
of 810,000 units, each unit consisting of one share of common stock and one
redeemable common stock purchase warrant. Each warrant entitles the holder to
purchase one share of common stock at $5.80 per share, commencing September
22, 1998. The Company may redeem the warrants commencing March 21, 1999 at a
price of $.10 per warrant if the closing price of the common stock is at
lease $14.50 per share for at lease 20 consecutive trading days.
In connection with the offering, the Company granted the underwriter
warrants to purchase up to 160,000 shares of common stock at a weighted
average exercise price of $7.77. The warrants are exercisable for a four year
period commencing September 22, 1998.
The Company has reserved shares of common stock for issuance as follows:
<TABLE>
<CAPTION>
April 30,
1999
----------
<S> <C>
Exercise of stock options 1,208,356
Exercise of warrants 2,442,475
Employee stock purchase plan 200,000
-----------
3,850,831
===========
</TABLE>
F-13
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN
1996 STOCK OPTION PLAN
The Company's 1996 Stock Option Plan authorized the grant of 1,727,832
incentive and nonqualified stock options to key employees, directors or
consultants of the Company. Incentive stock options are granted at a price
not less than fair market value, and nonqualified stock options are granted
at a price not less than 85% of the fair market value, as determined by the
Board of Directors. Options generally become exercisable upon issuance under
the 1996 Stock Option Plan and are subject to redemption rights typically
over three years and generally expire ten years after the date of grant. In
September 1997, the Board of Directors terminated the Company's 1996 Stock
Option Plan.
EXECUTIVE AND INCENTIVE STOCK OPTION PLANS
In November 1996, the Board of Directors adopted the Executive and
Incentive Stock Options Plans authorizing the granting of up to 570,000 and
150,000 incentive and nonqualified stock options to key employees, directors
or consultants of the Company, respectively. Incentive stock options are
granted at a price not less than fair market value, and nonqualified stock
options are granted at a price not less than 85% of the fair market value.
Options are exercisable when vested, typically over five years and expire ten
years after the date of grant.
The exercise price of the options generally approximates the fair market
value per share of the Company's stock on the date of grant. Accordingly, no
compensation cost has been recognized for grants made from the plans. Had
compensation cost for the plans been determined based on the fair value of
the options at the grant dates consistent with SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, the Company's net loss and net loss per share for
the years ended April 30, 1998 and 1999 would have been changed to the pro
forma amounts indicated below.
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
Net loss
As reported $ (115,000) $ (2,521,000)
Pro forma (379,000) (3,174,000)
Loss per share (diluted)
As reported $ (0.02) $ (0.41)
Pro forma (0.06) (0.51)
</TABLE>
F-14
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted average
assumptions; no expected dividends, volatility of 150%; risk-free interest rate
of 6.0%; and expected lives of 5 years. A summary of the status of the Company's
stock option plans as of April 30, 1998 and 1999, and changes during the years
ending on these dates is presented below.
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
---------- ---------
<S> <C> <C>
Outstanding, May 1, 1997 684,809 $0.72
Granted 382,500 $3.82
Exercised - -
Canceled (12,500) $2.60
------------
Outstanding, April 30, 1998 1,054,809 $1.84
Granted 480,721 $1.71
Exercised (195,830) $0.66
Canceled (343,123) $3.35
-----------
Outstanding, April 30, 1999 996,577 $1.49
===========
</TABLE>
The weighted average fair value of options granted during the years
ended April 30, 1998 and 1999 was $3.25 and $1.56, respectively.
The following information applies to options outstanding at April 30, 1999:
<TABLE>
<CAPTION>
Range of exercise prices $0.58 $1.00-$1.44 $1.62-$2.38 $2.56-$3.50
<S> <C> <C> <C> <C>
Options outstanding 336,927 255,721 223,929 180,000
Weighted average exercise price $0.58 $1.25 $1.95 $2.98
Weighted average remaining contractual life (years) 7 10 9 9
Options exercisable 336,927 144,721 59,072 105,000
Weighted average exercise price $0.58 $1.36 $1.89 $3.28
</TABLE>
F-15
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
In fiscal 1997, two executive officers of the Company exercised stock
options to each acquire 259,175 shares of common stock at an exercise price
of $0.64 per share. In fiscal 1999, two other executive officers exercised
stock options to acquire 57,603 and 138,227 shares of common stock at
exercise prices of $0.87 and $0.58, respectively. In each case, the Company
loaned the executive officer the aggregate amount representing the exercise
price of the option, and the officer executed a promissory note reflecting
the loan. Each executive officer pledged the purchased shares as collateral
for the loan pursuant to a pledge agreement. Each loan bears interest at an
annual rate equal to the minimum applicable federal rate, and interest is
payable annually; principal and accrued but unpaid interest is due five years
from the date of the note. Until each note has been paid in full and upon any
sale of such option shares by the respective executive, a portion of the
sales proceeds will be used to pay amounts owed under the note. In addition,
during fiscal 1998, the Company loaned to each of the two executive officers
related to the fiscal 1997 option exercises, pursuant to a five-year note
with interest at the minimum applicable federal rate, the amount equal to the
federal and state tax liability incurred by him as a result of exercising
such option, and to pay compensation to such officer equal to the amount of
interest payable under these loans and the amount of taxes payable as a
result of such compensation. At April 30, 1998, principal and interest due on
the loans to acquire the common stock totaled $330,000 and $7,000,
respectively. At April 30, 1999, principal and interest due on the loans to
acquire the common stock totaled $460,000 and $9,000, respectively. At April
30, 1998, principal and interest on the loans to pay the federal and state
tax liability incurred as a result of exercising such option totaled $123,000
and $3,000, respectively. At April 30, 1999, principal and interest on the
loans to pay the federal and state tax liability incurred as a result of
exercising such option totaled $126,000 and $4,000, respectively. During
fiscal 1998, the executives received compensation of $38,000 to repay
interest payable to the Company on the common stock and tax notes.
EMPLOYEE STOCK PURCHASE PLAN
The Company had in effect an employee stock purchase plan under which
200,000 shares of the Company's common stock were reserved for issuance to
all permanent employees who have met minimum employment criteria. Employees
who do not own 5% or more of the outstanding shares are eligible to
participate through payroll deductions. At the end of each offering period,
shares are purchased by the participants at 85% of the lower of the fair
market value at the beginning or the end of the offering period. No stock has
been issued under the plan as of April 30, 1999.
NOTE 7 - EXTRAORDINARY ITEM
The terms of the Company's non-convertible promissory notes stated that
in the event of an initial public offering of the Company's stock, all
principal and interest would be due within five days of the closing of such
initial public offering. Accordingly, the Company repaid the notes and
interest in fiscal 1998. At the time of repayment, unamortized debt issuance
costs and discounts totaling $252,000 were charged to earnings as an
extraordinary item.
NOTE 8 - EMPLOYEE BENEFIT PLAN
The Company has established a profit sharing plan under section 401(k)
of the Internal Revenue Code. The plan is a defined contribution plan,
covering substantially all employees of the Company. Company contributions to
the plan aggregated approximately $3,000 and $30,000 for 1998 and 1999.
F-16
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - CONCENTRATIONS
Four separate customers accounted for 10% or more of net revenues in
fiscal 1998: 47%, 18%, 12% and 11%. Two separate customers accounted for 10%
or more of net revenues in fiscal 1999: 23% and 13%.
Sales by geographic region are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------------- -----------
<S> <C> <C>
United States $ 6,354 $ 8,072
Europe 331 8,348
Other 98 578
</TABLE>
NOTE 10 - BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company has two operating segments: Stable Isotope Production
and Contract Research and Development Services. The Company's reportable
segments are strategic business units that offer different products and
services. They are managed based on the fundamental differences in their
operations.
Information by segment is set forth below (in thousands):
<TABLE>
<CAPTION>
1998 1999
------------- -----------
<S> <C> <C>
Net revenues
Stable Isotope Production $ 6,783 $ 14,384
Contract Research and Development Services - 2,614
Operating income (loss)
Stable Isotope Production $ (32) $ (1,035)
Contract Research and Development Services - (831)
Identifiable assets
Stable Isotope Production $ 4,189 $ 5,713
Contract Research and Development Services 1,466 1,093
Depreciation and amortization
Stable Isotope Production $ 200 $ 263
Contract Research and Development Services - 257
Net capital expenditures
Stable Isotope Production $ 72 $ 88
Contract Research and Development Services - 71
</TABLE>
F-17
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - BUSINESS SEGMENTS AND FOREIGN OPERATIONS (CONTINUED)
A summary of the Company's operations by geographic area is presented below
(in thousands):
<TABLE>
<CAPTION>
1998 1999
------------- -----------
<S> <C> <C>
Net revenues
United States $ 6,783 $ 6,817
Germany - 10,181
Operating income (loss)
United States $ (32) $ (2,322)
Germany - 456
Identifiable assets
United States $ 5,655 $ 5,507
Germany - 1,299
</TABLE>
NOTE 11 - RESTRUCTURING
In October 1998, the Company recorded a charge to operations amounting
to $708,000 relating to a planned restructuring of the Company's operations.
This charge consisted primarily of lease termination costs, employee
severance pay and the write down of fixed assets. As of April 30, 1999, the
company had implemented nearly all of the changes in the operations and
expected to incur approximately $65,000 of additional costs to be expensed in
the year ending April 30, 2000. The Company reduced the accrual for
restructuring costs by $17,000 in the quarter ended April 30, 1999, to
reflect the actual costs incurred. A liability amounting to $61,000 remains
as a recorded liability at April 30, 1999 relating to the lease termination
costs.
NOTE 12 - ACQUISITIONS
On April 30, 1998, the Company acquired all of the outstanding common
stock of Interpro. The purchase price was paid in 353,982 shares of the
Company's common stock with a fair market value of $708,000. Transaction
costs were $70,000 and no goodwill was recognized upon completing the
transaction. The results of operations for Interpro are included from May 1,
1998, as the acquisition occurred on the last day of the fiscal year ended
April 30, 1998.
On July 21, 1998, the Company acquired all of the outstanding shares of
Chemotrade GmbH and subsidiary (collectively "Chemotrade"), which was owned
by two shareholders. Chemotrade is engaged in the distribution, development
and manufacturing of stable and radioisotopes. The purchase price has been
accounted for effective June 1, 1998, the date control was transferred. The
purchase price was denominated in German Deutsche Marks, and all amounts
reported below are translated at the historical conversion rate unless
otherwise noted. The purchase price consideration on June 1, 1998 consisted
of $2.576 million paid at closing and $1.07 million to be paid through June
2001. Transaction costs were $125,000. Imputed interest from the effective
date of the acquisition, June 1, 1998, totaled $28,000.
The consideration paid upon closing consisted of cash of $758,000,
357,730 restricted shares of common stock with a fair market value of
$894,000, and two notes. The first note of $924,000 (DM1,663,000) bore
interest at 2% per month and was paid in August 1998, and the second note of
$812,000 (DM1,500,000) bears interest at 10%, due on June 1, 1999.
F-18
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - ACQUISITIONS (CONTINUED)
The purchase agreement provides for the selling shareholders to receive
additional consideration in the event certain levels of pretax earnings are
achieved in the periods ending through April 30, 2001. The agreement also
contains a provision to reduce the consideration given if the pretax earnings
are not achieved for each of the years ended April 30, 2000 and 2001. The
maximum additional consideration that can be earned is $271,000 (DM500,000).
Any additional consideration will be recorded as additional goodwill.
Pro forma results of operations as if the acquisitions of Interpro and
Chemotrade had occurred at the beginning of fiscal 1998, combining the
audited results of operations of Isonics for the year ended April 30, 1998
with the results of operations of Interpro and Chemotrade for the years ended
April 29, 1998 and May 31, 1998, respectively, are as follows (in thousands):
<TABLE>
<S> <C>
Net revenues $16,990
Gross margin 3,998
Net loss (174)
Net loss per share (.03)
Number of shares used in computing per share information 5,751
</TABLE>
NOTE 13 - SUBSEQUENT EVENTS
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 as a commission on this placement. The
warrants are exercisable at $3.75 per share through July 29, 2002.
- issued 46,667 units in satisfaction of all currents 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.
Management believes that the proceeds and the revised debt structure
resulting from the private placement and additional strategies developed by
management will be sufficient to fund operations for the next twelve months.
F-19
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
(Unaudited)
January 31, 2000
-------------------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,576
Accounts receivable (Net of allowance of $82) 1,915
Inventories 233
Prepaid expenses and other current assets 72
-------------------------
Total current assets $ 6,796
-------------------------
LONG-TERM ASSETS:
Property and equipment, net 784
Goodwill, net 3,104
Notes receivable from shareholders 0
Other assets 32
-------------------------
Total long-term assets $ 3,920
-------------------------
TOTAL ASSETS $ 10,716
=========================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-20
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Unaudited)
January 31, 2000
-------------------------
<S> <C>
CURRENT LIABILITIES:
Notes payable and line of credit $ 24
Notes payable to related parties 0
Accounts payable 1,364
Accrued liabilities 1,341
-------------------------
Total current liabilities $ 2,729
-------------------------
SHAREHOLDERS' EQUITY:
Class A Preferred Stock--no par value. 10,000,000
shares authorized; 1,830,000 shares outstanding 2,745
Common stock--no par value. 20,000,000 shares
authorized; 6,663,017 shares issued and outstanding on
January 31, 2000 and 6,607,760 shares issued and
outstanding on April 30, 1999 6,765
Notes receivable from shareholders (210)
Accumulated deficit (1,313)
-------------------------
Total shareholders' equity $ 7,987
-------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,716
=========================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-21
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
------------------------------------
2000 1999
------------------------------------
<S> <C> <C>
Net revenues $ 11,115 $ 14,309
Cost of revenues 8,792 11,575
------------------------------------
Gross margin 2,323 2,734
Operating expenses:
Selling, general and administrative 3,117 2,444
Research and development 919 962
Restructuring and office closure 60 708
------------------------------------
Total operating expenses 4,096 4,114
------------------------------------
Operating (loss) (1,773) (1,380)
------------------------------------
Other income (expense):
Foreign exchange (64) 35
Interest income 55 21
Other income 5,296 --
Interest expense (325) (236)
------------------------------------
Total other income (expense), net 4,962 (180)
------------------------------------
Income (loss) before income taxes 3,189 (1,560)
Income tax expense 471 197
------------------------------------
NET INCOME (LOSS) $ 2,718 $ (1,757)
====================================
NET INCOME (LOSS) PER SHARE--BASIC
Net income (loss) per share $ 0.41 $ (0.29)
Shares used in computing per share
information 6,610 6,120
NET INCOME (LOSS) PER SHARE--DILUTED
Net income (loss) per share $ 0.31 $ (0.29)
Shares used in computing per share
information 8,906 6,120
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-22
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended January 31,
------------------------------------------------------
2000 1999
------------------------- -------------------------
<S> <C> <C>
Net cash (used in) provided by operating activities $ (2,904) $ 146
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Chemotrade, net of cash acquired -- (546)
Sale of depleted zinc business 6,730 --
Purchases of property and equipment (20) (120)
------------------------- -------------------------
Cash provided by (used in) investing activities $ 6,710 $ (666)
------------------------- -------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit (513) 931
Proceeds from issuance of notes payable 75 500
Repayments of notes payable (1,494) (1,714)
Proceeds from issuance of common stock -- 17
Proceeds from issuance of Class A Preferred Stock 2,250 --
Payments of debt issuance costs -- (30)
------------------------- -------------------------
Cash provided by (used in) financing activities $ 318 $ (296)
------------------------- -------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS: 4,124 (816)
Cash and cash equivalents at beginning of period 452 1,044
------------------------- -------------------------
Cash and cash equivalents at end of period $ 4,576 $ 228
========================= =========================
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 252 $ 149
========================= =========================
Income taxes $ 53 $ 242
========================= =========================
Supplemental disclosure of noncash investing and financing activities:
Accounts payable converted into notes payable $ 243 $ --
Liabilities converted into Class A Preferred Stock 495 --
Equipment acquired under capital lease -- 14
Issuance of warrants in conjunction with notes payable 245 --
Retirement of Common Stock by shareholders to pay
off subscriptions 275 --
========================= =========================
Purchase of Chemotrade:
Cash paid, net of cash acquired $ 546
Stock issued to sellers 894
Notes payable 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.
F-23
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Isonics
Corporation and Subsidiaries (the "Company" or "Isonics") as of January 31,
2000, and for the nine months ended January 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.
NET INCOME (LOSS) PER SHARE
A total of approximately 1,513,000 and 3,400,000 outstanding stock
options and warrants have been excluded from the diluted earnings per share
calculation for the nine month ended January 31, 2000 and 1999,respectively,
as the inclusion would be anti-dilutive. An additional 4,000,000 warrants
were excluded from the calculation for the nine month ended January 31, 2000
as the issuance is contingent upon the delivery of silicon-28 per the terms
of the Eagle-Picher Transaction.
RECONCILIATION OF EARNINGS PER SHARE CALCULATIONS
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
------------------------------------
Numerator 2000 1999
---------------- ----------------
<S> <C> <C>
Net income (loss) 2,718 (1,757)
Preferred stock dividends -- --
---------------- ----------------
Net income (loss) used in computing basic
income (loss) per common share $ 2,718 $ (1,757)
Preferred stock dividends -- --
---------------- ----------------
Net income (loss) used in computing diluted
income (loss) per common share 2,718 (1,757)
=============== ================
Denominator
Weighted average common shares outstanding
during the period 6,610 6,120
Dilutive effect of conversion of preferred
stock 1,220 --
Dilutive effect of options and warrants
using the treasury stock method 1,076 --
---------------- ----------------
Shares used in computing diluted income
(loss) per common share 8,906 6,120
================ ================
</TABLE>
F-24
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
January 31, 2000
-------------------------
<S> <C>
Finished goods $ 138
Work in progress 95
Raw materials --
-------------------------
Total inventories $ 233
=========================
</TABLE>
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 was
originally payable July 31, 2000. The new interest rate was 12% per annum. In
addition, approximately 70,000 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 has been amortized as additional
interest expense. This note, and all accrued interest, was paid in December
1999, with proceeds made available from the Eagle-Picher Transaction,
described in more detail below in the paragraph entitled "SALE OF DEPLETED
ZINC BUSINESS."
SIGNIFICANT CUSTOMERS
At January 31, 2000, one customer accounted for 33% of total accounts
receivable. The same customer accounted for approximately 18% of net revenues
during the nine months ended January 31, 2000. The same customer accounted
for approximately 17% of net revenues during the nine months ended January
31, 1999.
F-25
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEGMENT INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
------------------------------------
2000 1999
------------------------------------
<S> <C> <C>
Segment revenues:
Isotope products $ 10,098 $ 11,991
Contract research and development
services and other 1,017 2,318
------------------------------------
Total $ 11,115 $ 14,309
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
------------------------------------
2000 1999
------------------------------------
<S> <C> <C>
Segment operating (loss) income:
Isotope products $ (1,387) $ (1,217)
Contract research and development
services and other (386) (163)
------------------------------------
Total $ (1,773) $ (1,380)
</TABLE>
<TABLE>
<CAPTION>
January 31, 2000
------------------------------
<S> <C>
Identifiable Assets:
Isotope products $ 9,750
Contract research and development
services and other 966
------------------------------
Total $ 10,716
</TABLE>
A summary of operations by geographic area is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
------------------------------------
2000 1999
------------------------------------
<S> <C> <C>
Net revenues:
United States $ 3,904 $ 6,964
Germany 7,211 7,345
------------------------------------
Total $ 11,115 $ 14,309
</TABLE>
F-26
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
------------------------------------
2000 1999
------------------------------------
<S> <C> <C>
Operating (loss) income:
United States $ (1,982) $ (1,107)
Germany 209 (273)
------------------------------------
Total $ (1,773) $ (1,380)
</TABLE>
<TABLE>
<CAPTION>
January 31, 2000
------------------------------
<S> <C>
Identifiable Assets:
United States $ 8,798
Germany 1,918
------------------------------
Total $ 10,716
</TABLE>
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. Additionally, we signed a
long-term isotope supply agreement with Eagle-Picher, and Eagle-Picher will
supply us in 2000 with 200 kilograms of silicon-28 to be used in research and
development activities. 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. As silicon-28 is delivered we will
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.
The balance of $1.5 million is payable in three annual installments of
$500 thousand. These installments are contingent upon the performance of an
unaffiliated supplier of depleted zinc whose contract with us was assigned to
Eagle-Picher. We will recognize the contingent gain on a straight-line basis
over the thirty-six month period, approximately $41,500 per month, as the
supplier performs under the contract. Two months, or approximately $83,000,
have been recognized in the quarter ended January 31, 2000.
We do not anticipate significant revenues from sales of silicon-28 based
products in the fiscal year ended April 30, 2000. 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.
F-27
<PAGE>
Exhibit 23.10
Consent of Independent Accountants
We have issued our report dated July 23, 1999 (except for Note 13 as to which
the date is July 29, 1999), accompanying the consolidated financial statements
of Isonics Corporation contained in the Post-Effective Amendment No. 1 to the
Registration Statement. We consent to the use of the aforementioned report in
the Post-Effective Amendment No. 1 to the Registration Statement, and to the use
of our name as it appears under the caption "Experts."
GRANT THORNTON LLP
San Jose, California
March 24, 2000
