-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mfi1rikoBKkM7PddnS/qLpr5SYGHF5aNowjiioBmScVovFEjMy/GnmaWpLl/Wgdt Toh6VHLIklSWBB7ohSaNZQ== 0000912057-00-011786.txt : 20000316 0000912057-00-011786.hdr.sgml : 20000316 ACCESSION NUMBER: 0000912057-00-011786 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISONICS CORP CENTRAL INDEX KEY: 0001023966 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 770338561 STATE OF INCORPORATION: CA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-12531 FILM NUMBER: 570870 BUSINESS ADDRESS: STREET 1: 5906 MCINTYRE STREET CITY: GOLDEN STATE: CO ZIP: 80403 BUSINESS PHONE: 3032797900 MAIL ADDRESS: STREET 1: 5906 MCINTYRE STREET CITY: GOLDEN STATE: CO ZIP: 80403 10QSB 1 FORM 10-QSB b UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-QSB (Mark One) /X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended January 31, 2000 / / Transition report under Section 13 or 15(d) of the Exchange Act. For the transition period from _______ to ______ Commission file number: 001-12531 ISONICS CORPORATION (Exact name of small business issuer as specified in its charter) CALIFORNIA 77-0338561 ---------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 5906 MCINTYRE STREET GOLDEN, COLORADO 80403 ---------------------- (Address of principal executive offices) (303) 279-7900 -------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the registrant's Common Stock, no par value, was 6,676,691 at March 10, 2000. Transitional Small Business Disclosure Format (check one): Yes No X ----- ----- Isonics Corporation TABLE OF CONTENTS FORM 10-QSB Part I: Financial Information Item 1: Financial Statements Condensed Consolidated Balance Sheets as of January 31, 2000 and April 30, 1999...................................3 Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended January 31, 2000 and 1999........................................5 Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended January 31, 2000 and 1999............................6 Notes to Condensed Consolidated Financial Statements.................................7 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................12 Part II: Other Information Item 6: Exhibits and Reports on Form 8-K.......................23 Signatures .......................................................24
2 PART I: FINANCIAL INFORMATION ITEM 1: CONDENSED FINANCIAL STATEMENTS ISONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
(UNAUDITED) JANUARY 31, APRIL 30, 2000 1999 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 4,576 $ 452 Accounts receivable (Net of allowance of $82) 1,915 932 Inventories 233 651 Prepaid expenses and other current assets 72 160 ------------ ------------ Total current assets $ 6,796 $ 2,195 ------------ ------------ LONG-TERM ASSETS Property and equipment, net 784 1,018 Goodwill, net 3,104 3,388 Notes receivable from shareholders 0 130 Other assets 32 75 ------------ ------------ Total long-term assets $ 3,920 $ 4,611 ------------ ------------ TOTAL ASSETS $ 10,716 $ 6,806 ============ ============
See notes to condensed consolidated financial statements. 3 ISONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED) JANUARY 31, APRIL 30, 2000 1999 ------------ ------------ CURRENT LIABILITIES: Notes payable and line of credit $ 24 $ 1,136 Notes payable to related parties 0 922 Accounts payable 1,364 1,368 Accrued liabilities 1,341 1,086 -------- -------- Total current liabilities $ 2,729 $ 4,512 -------- -------- SHAREHOLDERS' EQUITY: Class A Preferred Stock--no par value. 10,000,000 2,745 -- shares authorized; 1,830,000 shares outstanding 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 6,795 Notes receivable from shareholders (210) (469) Accumulated deficit (1,313) (4,032) -------- -------- Total shareholders' equity $ 7,987 $ 2,294 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,716 $ 6,806 ======== ========
See notes to condensed consolidated financial statements. 4 ISONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED JANUARY 31, JANUARY 31, -------------------- -------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Net revenues $ 3,571 $ 6,670 $ 11,115 $ 14,309 Cost of revenues 2,924 5,393 8,792 11,575 -------- -------- -------- -------- Gross margin 647 1,277 2,323 2,734 Operating expenses: Selling, general and administrative 1,284 826 3,117 2,444 Research and development 587 250 919 962 Restructuring and office closure (3) -- 60 708 -------- -------- -------- -------- Total operating expenses 1,868 1,076 4,096 4,114 -------- -------- -------- -------- Operating income (loss) (1,221) 201 (1,773) (1,380) -------- -------- -------- -------- Other income (expense): Foreign exchange (64) 131 (64) 35 Interest income 5 9 55 21 Other income 5,184 -- 5,296 -- Interest expense (100) (87) (325) (236) -------- -------- -------- -------- Total other income (expense), net 5,025 53 4,962 (180) -------- -------- -------- -------- Income (loss) before income taxes 3,804 254 3,189 (1,560) Income tax expense 470 177 471 197 -------- -------- -------- -------- NET INCOME (LOSS) $ 3,334 $ 77 $ 2,718 $ (1,757) ======== ======== ======== ======== NET INCOME (LOSS) PER SHARE--BASIC Net income (loss) per share $ 0.50 $ 0.01 $ 0.41 $ (0.29) Shares used in computing per share information 6,615 6,216 6,610 6,120 NET INCOME (LOSS) PER SHARE--DILUTED Net income (loss) per share $ 0.34 $ 0.01 $ 0.31 $ (0.29) Shares used in computing per share information 9,770 6,918 8,906 6,120
See notes to condensed consolidated financial statements. 5 ISONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED JANUARY 31, ------------------ 2000 1999 ------- ------- 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 =======
See notes to condensed consolidated financial statements. 6 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 three and 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. The information included in this report should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-KSB for the year ended April 30, 1999. NET INCOME (LOSS) PER SHARE Net income (loss) per share is based on the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares include common stock options, warrants and convertible preferred stock. Basic net income (loss) per share is computed by dividing net income (loss) by the number of weighted average common shares outstanding. Diluted net income (loss) per share reflects potential dilution from outstanding stock options and warrants using the treasury stock method, and convertible preferred stock using the if-converted method. A total of approximately 1,513,000 outstanding stock options and warrants have been excluded from the diluted earnings per share calculation, as the inclusion would be anti-dilutive. An additional 4,000,000 warrants were excluded from the calculation, as the issuance of the warrants is contingent upon the delivery of silicon-28 per the terms of the Eagle-Picher Transaction. RECONCILIATION OF EARNINGS PER SHARE CALCULATIONS
THREE MONTHS ENDED NINE MONTHS ENDED JANUARY 31, JANUARY 31, ------------------ ----------------- NUMERATOR 2000 1999 2000 1999 ------- ------- ------- ------- Net income (loss) $ 3,334 77 2,718 (1,757) Preferred stock dividends -- -- -- -- ------- ------- ------- ------- Net income (loss) used in computing basic income (loss) per common share $ 3,334 $ 77 $ 2,718 $(1,757) Preferred stock dividends -- -- -- -- ------- ------- ------- ------- Net income (loss) used in computing diluted income (loss) per common share $ 3,334 77 2,718 (1,757) ======= ======= ======= ======= DENOMINATOR Weighted average common shares outstanding during the period 6,615 6,216 6,610 6,120 Dilutive effect of conversion of preferred stock 1,830 -- 1,220 -- ------- ------- ------- ------- Dilutive effect of options and warrants using the treasury stock method 1,325 702 1,076 -- 7 ------- ------- ------- ------- Shares used in computing diluted income (loss) per common share 9,770 6,918 8,906 6,120 ======= ======= ======= =======
8 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INVENTORIES Inventories consist of (in thousands):
JANUARY 31, APRIL 30, 2000 1999 ----------- ---------- Finished goods $138 $420 Work in progress 95 -- Raw materials -- 231 ---- ---- Total inventories $233 $651 ==== ====
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." RESTRUCTURING AND OFFICE CLOSURE COSTS On October 31, 1998, the Company announced a restructuring of its operations and relocation of its headquarters from San Jose, California to Golden, Colorado, the location of the Company's subsidiary, Interpro. As of January 31, 2000, the only significant restructuring cost remaining is the lease payments on the former San Jose office. This liability, net of sublease income, is estimated to be approximately $51 thousand, and will be paid over the next four years. SIGNIFICANT CUSTOMERS At January 31, 2000, one customer accounted for 33% of total accounts receivable. The same customer accounted for approximately 37% of net revenues during the three months ended January 31, 2000, and for approximately 18% of net revenues during the nine months ended January 31, 2000. The same customer accounted for approximately 13% of net revenues during the three months ended January 31, 1999, and 17% of net revenues during the nine months ended January 31, 1999. 9 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) PREFERRED STOCK ISSUANCE On July 29, 1999, the Company completed a private placement financing to accredited investors and certain creditors valued in total at $2.745 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 $495,000 of long-term debt and other obligations to equity. 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 $495,000 of existing debt and other obligations into equity as part of the private placement, the Company: - - issued 500,000 warrants to purchase shares of the Company's common stock to an investment banker for service rendered in this placement. The warrants are exercisable at $3.75 per share through July 29, 2002. - - 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. These notes were repaid in full, including accrued interest, in December 1999. SEGMENT INFORMATION (IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED JANUARY 31, JANUARY 31, ------------------- ------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Segment revenues: Isotope products $ 3,271 $ 5,985 $10,098 $11,991 Contract research and development services and other 300 685 1,017 2,318 ------- ------- ------- ------- Total $ 3,571 $ 6,670 $11,115 $14,309
10 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED JANUARY 31, JANUARY 31, -------------------- -------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Segment operating (loss) income: Isotope products $(1,058) $ (340) $(1,387) $(1,217) Contract research and development services and other (163) 541 (386) (163) ------- ------- ------- ------- Total $(1,221) $ 201 $(1,773) $(1,380)
January 31, 2000 ----------- Identifiable Assets: Isotope products $ 9,750 Contract research and development services and other 966 ------- Total $10,716
A summary of operations by geographic area is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED JANUARY 31, JANUARY 31, ------------------------ ----------------------- 2000 1999 2000 1999 ---------- ---------- --------- --------- Net revenues: United States $ 1,098 $ 3,908 $ 3,904 $ 6,964 Germany 2,473 2,762 7,211 7,345 ---------- ---------- --------- --------- Total $ 3,571 $ 6,670 $ 11,115 $ 14,309 THREE MONTHS ENDED NINE MONTHS ENDED JANUARY 31, JANUARY 31, ------------------------ ----------------------- 2000 1999 2000 1999 ---------- ---------- --------- --------- Operating (loss) income: United States $ (1,258) $ 593 $ (1,982) $ (1,107) Germany 37 (392) 209 (273) ---------- ---------- --------- --------- Total $ (1,221) $ 201 $ (1,773) $ (1,380)
11 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2000 ----------- Identifiable Assets: United States $ 8,798 Germany 1,918 ----------- Total $ 10,716
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, has 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. 12 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE STATEMENTS CONTAINED IN THIS REPORT ON FORM 10-QSB THAT ARE NOT PURELY HISTORICAL ARE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING STATEMENTS REGARDING OUR EXPECTATIONS, HOPES, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS INCLUDE: STATEMENTS REGARDING FUTURE PRODUCTS OR PRODUCT DEVELOPMENT; STATEMENTS REGARDING FUTURE SELLING, GENERAL AND ADMINISTRATIVE COSTS AND RESEARCH AND DEVELOPMENT SPENDING AND OUR PRODUCT DEVELOPMENT STRATEGY; AND STATEMENTS REGARDING FUTURE CAPITAL EXPENDITURES AND FINANCING REQUIREMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE UNDERTAKE NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. IT IS IMPORTANT TO NOTE THAT OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS. OVERVIEW Founded in 1992, Isonics Corporation ("Isonics" or the "Company") is a specialty chemical and advanced materials company, which develops and commercializes products based on stable isotopes. Stable isotopes are ultra pure materials engineered at the molecular level to provide enhanced performance properties in semiconductors, lasers and high performance lighting and energy production. Stable isotopes are also widely used in basic research, pharmaceutical development and drug design, as well as in medical diagnostics and imaging. By replacing materials traditionally used in these industries with isotopically engineered versions of the same materials, product performance, safety, and economics can be enhanced significantly. Using state-of-the-art technology, we produce a wide range of enriched stable isotopes, which are then converted into products, which meet the specialized needs of our customers. Originally, our core business was the production and supply of depleted zinc ("DZ"), a non-radioactive stable isotope, to the energy industry. In fiscal 1996, we expanded our business scope to include development of isotopically engineered materials for the medical research, medical diagnostic and semiconductor industries. The acquisition of Chemotrade GmbH ("Chemotrade") in 1998 added radioactive isotopes (or radioisotopes) to our available products. As a result of the sale of our depleted zinc business in December 1999, (see discussion below) our revenues in the future 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 radioactive isotopes for pharmaceutical and industrial research as well as for industrial and medical imaging, calibration sources and for brachytherapy applications. Chemotrade also distributes calibration sources, manufactured by duPont with Chemotrade supplied radioactive isotopes, in Germany and other European countries. 13 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. 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 $8.2 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 with 200 kilograms of silicon-28 in 2000. We also gave Eagle-Picher a warrant to obtain 4,000,000 shares of our common stock. As a result of the sale of the depleted zinc business, 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 sales. The table and the discussion below should be read in conjunction with the condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.
THREE MONTHS ENDED NINE MONTHS ENDED JANUARY 31, JANUARY 31 ------------------ ------------------ 2000 1999 2000 1999 ------ ------ ------ ------ Net revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues 81.9 80.9 79.1 80.9 ----- ----- ----- ----- Gross margin 18.1 19.1 20.9 19.1 ----- ----- ----- ----- Operating expenses: Selling, general & Administrative 36.0 12.4 28.0 17.1 Research & development 16.4 3.7 8.3 6.7 Restructuring & office closure (0.1) -- 0.5 4.9 ----- ----- ----- ----- Total operating expenses 52.3 16.1 36.8 28.7 ----- ----- ----- ----- Operating income (loss) (34.2) 3.0 (15.9) (9.6) ===== ===== ===== ===== Other income (expense) net 140.7 0.8 44.6 (1.3) ----- ----- ----- ----- Income (loss) before income taxes 106.5 3.8 28.7 (10.9) ----- ----- ----- ----- Income tax expense 13.2 2.7 4.2 1.4 ----- ----- ----- ----- NET INCOME (LOSS) 93.3% 1.1% 24.5% (12.3)% ===== ===== ===== =====
14 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) NET REVENUES 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 $6.0 million dollars. 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 revenues for the three months ended January 31, 2000, were $3.571 million, a decrease of approximately 46.5% or $3.099 million over $6.670 million for the same period in the prior fiscal year. The decrease is primarily because our net revenues from isotope product sales decreased approximately $2.714 million for the three months ended January 31, 2000, to approximately $3.271 million from approximately $5.985 million in the comparable period of the prior year. Net revenues from radioisotope sales decreased approximately $856 thousand for the three months ended January 31, 2000, compared to the three months ended January 31, 1999, to approximately $2.445 million. Net revenues from stable isotope sales decreased approximately $1.858 million for the three months ended January 31, 2000, compared to the three months ended January 31, 1999, to approximately $826 thousand. Net revenues from contract research and development services sales as well as other sources of sales decreased approximately $385 thousand for the three months ended January 31, 2000, to approximately $300 thousand from approximately $685 thousand in the comparable period of the prior year. Net revenues from stable isotope and radioisotope sales varied considerably from the same quarter in the prior fiscal year primarily because of timing 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 quarter ended January 31, 2000. Net revenues for the nine months ended January 31, 2000, were $11.115 million, a decrease of approximately 22% or $3.194 million from $14.309 million 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 million for the nine months ended January 31, 2000, to approximately $1.017 million from approximately $2.318 million in the comparable period of the prior year. Net revenues from isotope product sales also decreased approximately $1.893 million for the nine months ended January 31, 2000, to approximately $10.098 million from approximately $11.991 million in the comparable period of the prior year. Net revenues from radioisotope sales decreased approximately $513 thousand for the nine months ended January 31, 2000, compared to the nine months ended January 31, 1999, to approximately $5.001 million. Net revenues from stable isotope sales decreased approximately $1.380 million for the nine months ended January 31, 2000, compared to the nine months ended January 31, 1999, to approximately $5.097 million. 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. 15 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 $1.0 million dollars. 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 for the three months ended January 31, 2000, decreased to approximately 18.1% of net revenues from approximately 19.1% for the same period in the prior fiscal year. The decrease is primarily because of a change in product mix sold during the quarter as discussed above. 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 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 thousand dollars. 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 contols implemented throughout the Company 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 $458 thousand or 55.4% to approximately $1.284 million, or approximately 36.0% of net revenues for the three months ended January 31, 2000, from $826 thousand, or 12.4% of net revenues in the comparable period of the prior year. The dollar increase for the quarter 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 percentage increase was primarily caused by much lower revenues during the quarter ended January 31, 2000. 16 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Selling, general and administrative expenses increased $673 thousand or 27.5% to approximately $3.117 million, or approximately 28.0% of net revenues for the nine months ended January 31, 2000, from $2.444 million, 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 percentage increase was primarily caused by the same factors and lower revenues. RESEARCH AND DEVELOPMENT 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. Research and development expenses increased approximately $337 thousand, or approximately 134.8%, to $587 thousand for the quarter ended January 31, 2000, from $250 thousand for the comparable period in fiscal 1999, while increasing on a percentage basis to approximately 16.4% of net revenues from approximately 3.7%. The dollar increase during the quarter ended January 31, 2000, was primarily because of research and development costs associated with the development of isotopically pure silicon wafers. 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. We also gave Eagle-Picher a warrant to obtain 4,000,000 shares of our common stock. The warrants are contingent upon the delivery of silicon-28 by Eagle-Picher. The anticipated value of the 200 kilograms is approximately $5,000,000. As we use the silicon-28 in our research and development activities, we will recognize an expense of approximately $25.00 per gram, as this is the price we most recently paid for silicon-28 from another supplier. As silicon-28 is delivered we will record the warrants proportionately (20,000 warrants per kilogram). Research and development expenses decreased by approximately $43 thousand, or approximately 4.5%, to $919 thousand for the nine months ended January 31, 2000, from $962 thousand 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. 17 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESTRUCTURING AND OFFICE CLOSURE On October 31, 1998, we announced a restructuring of our operations and relocation of our headquarters to Golden, Colorado, the location of our subsidiary, Interpro. We recorded a $708 thousand charge 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 thousand and will be incurred over the next four years. The $60 thousand expense in the nine months ending January 31, 2000, was primarily related to moving costs incurred by two senior executives. OTHER INCOME (EXPENSE), NET 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. 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 income, net increased by approximately $4.972 million, to $5.025 million, for the quarter ended January 31, 2000, from other income, net of approximately $53 thousand, for the comparable period of the previous fiscal year. The Eagle-Picher transaction resulted in a gain of $5.172 million in other income. Other income (expense), net increased by approximately $5.142 million, to $4.962 million, for the nine months ended January 31, 2000, from other (expense), net of approximately $180 thousand, for the comparable period of the previous fiscal year. The Eagle-Picher transaction resulted in $5.172 million in other income. Additionally, an increase in other income of approximately $112 thousand was due to a favorable settlement of an outstanding contingency. Foreign currency exchange losses increased by approximately $99 thousand for the nine months ended January 31, 2000. INCOME TAXES We realized a gain on the sale of our depleted zinc business of approximately $5.2 million. The tax effect of this sale, net of tax loss carryforwards available is estimated to be approximately $435 thousand. Additionally, there was income tax expense for the quarters ended January 31, 2000, and January 31, 1999, of $35 thousand and $177 thousand respectively, and income tax expense for the nine months ended January 31, 2000 and 1999, of $36 thousand and $197 thousand, respectively, related to income generated by our Germany-based subsidiary, Chemotrade. 18 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES As a result of the sale of the depleted zinc business to Eagle-Picher on December 1, 1999, liquidity has been significantly improved. 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 million and generated cash of $146 thousand, 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 million before the gain of approximately $5.172 million 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 million, reduced by non-cash charges and decreases in net operating assets. Our investing activities generated cash of $6.710 million for the nine months ended January 31, 2000, primarily because of the sale of our depleted zinc business to Eagle-Picher. Our investing activities used cash of $666 thousand for the nine months ended January 31, 1999, primarily for purchases of property and equipment and $546 thousand was also used during the nine months ended January 31, 1999 for the purchase of our subsidiary Chemotrade. Financing activities generated cash of $318 thousand during the nine months ended January 31, 2000, and used cash of $296 thousand during the comparable period of the previous fiscal year. Cash provided by financing activities during the nine months ended January 31, 2000, resulted primarily from the issuance of convertible preferred stock for cash of $2.250 million, and proceeds from the issuance of long-term debt of $75 thousand. Net repayments on the revolving line of credit of $513 thousand, and repayments of debt of $1.494 million were the primary uses of cash during the nine-month period ended January 31, 2000. Cash used during the nine months ended January 31, 1999, resulted primarily from repayments of debt of $1.714 million, offset by net borrowings on the revolving line of credit of $931 thousand and proceeds of $500 thousand from the issuance of long-term debt. At January 31, 2000, we had approximately $4.576 million of cash and cash equivalents, an increase of approximately $4.124 million, compared to $452 thousand as of April 30, 1999. At January 31, 2000, we had positive working capital of approximately $4.067 million, an increase of approximately $6.384 million from negative working capital of approximately $2.317 million 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. During the nine months ended January 31, 2000, we issued approximately $2.745 million in convertible preferred stock. Cash proceeds totaled approximately $2.250 million and conversion of notes payable and other obligations to preferred stock totaled approximately $0.495 million. This convertible preferred stock placement is described in detail in the Form 8-K we filed on August 11, 1999. 19 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 thousand 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 the cash proceeds from the recent sale of our depleted zinc business will be sufficient for us to meet our cash needs for 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. FACTORS THAT MAY AFFECT FUTURE RESULTS In evaluating our business, prospective investors should carefully consider the following factors in addition to the other information presented in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business. Following the sale of our depleted zinc business, our primary risk is our reliance on products that have to date not produced significant revenues. We operate with little backlog and a significant portion of our net revenues have been, and we believe will continue to be, derived from a limited number of orders that are processed and shipped in the same quarter in which the orders are received. These orders being primarily for radioisotopes. The timing of such orders and their fulfillment has caused, and is likely to continue to cause, material fluctuations in our operating results. Our expense levels are relatively fixed, and as has been the case in prior quarters, these factors will affect our operating results for future periods. RELATIONSHIP WITH CERTAIN SUPPLIERS AND AVAILABILITY OF RAW MATERIALS We depend on an isotope enrichment plant, located in Russia, which is owned by the Ministry of Atomic Energy of the Russian Federation (the "Ministry"), which is part of the cabinet of the government of the Russian Federation, for most of our stable and radioisotopes. We signed an agreement with the commercial department of the Ministry to purchase certain isotope separation services through 2001. Disruption or termination of services provided by the Ministry could have a material and adverse affect upon our financial condition and results of operations. 20 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OPERATIONS IN RUSSIA AND THE REPUBLIC OF GEORGIA Operations in Russia and the republic of Georgia ("Georgia") entail certain risks. Recently, the former republics of the Soviet Union including Georgia have experienced political, social and economic change as they sought independence from the former central government in Moscow, and certain of the republics, including Russia and Georgia, have attempted to transition from a central controlled economy toward a market-based economy. These changes have involved, in certain cases, armed conflict. There can be no assurance that political or economic instability in these republics will not continue or worsen. The supply of stable isotopes could be directly affected by political, economic and military conditions in Russia and Georgia. Accordingly, our operations could be materially adversely affected if hostilities in Russia should occur, if trade between Russia or Georgia and the United States were interrupted, if political conditions in Russia or Georgia disrupt transportation or processing concerning our goods, if laws or government policies concerning foreign business operations in Russia or Georgia change substantially, or if tariffs are introduced. CUSTOMER CONCENTRATION Historically, substantially all of our net revenues in any particular period have been attributable to a limited number of customers. Consistent with our historical experience, our quarterly results are expected to be affected materially by the level of orders received and product shipments by us during such periods. This factor pertains primarily to radioisotope sales. There can be no assurance that our current customers will continue to purchase products. A decrease in or loss of orders from one or more major radioisotope customers would have a material and adverse effect on our financial condition and results of operations. 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 changing 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. 21 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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, Dr. Robert Cuttriss, President of Interpro, and Herbert Hegener, Managing Director of Chemotrade. We maintain $1 million of key man life insurance on the lives of Messrs. Alexander and Rubizhevsky, and Dr. Cuttriss and all are covered by employment agreements with the Company extending through September 2001, 2001, and 2003, respectively. Mr. Hegener is covered by an employment agreement with the Company extending through the year 2001. We believe that our future success will depend in large part upon our ability to attract and retain qualified personnel for our operations. The failure to attract or retain such persons could materially adversely affect our business, financial condition and results of operations. VOLATILITY OF STOCK PRICE The trading price of our securities has been subject to wide fluctuations in response to quarter-to-quarter variations in operating results, announcements of technological innovations or new products by us or our competitors, and other events or factors. In addition, the stock market has experienced wide price and volume fluctuations, which have at times been unrelated to the operating performance of the companies whose securities are traded. These broad market fluctuations may adversely effect the market price of our common stock and common stock warrants. 22 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SHARES ELIGIBLE FOR FUTURE SALE As of March 10, 2000, there are 6,676,691 shares outstanding of our Common Stock. An additional 11,396,668 shares of Common Stock are issuable through the exercise of options and warrants and the conversion of our Preferred Stock, including 4,000,000 warrants held by Eagle Picher that are contingent on the delivery of 200 kilograms of silicon-28 by Eagle-Picher to us. Based on the 17-3/8 per share closing price of our Common Stock on March 10, 2000, all of our common stock equivalents are in-the-money. If the Common Stock underlying these securities were issued, the existing holders of our Common Stock would be subject to substantial dilution of their holdings. Because our officers, directors and affiliates hold a significant number of these securities, these persons would continue to control more than 50% of our Common Stock on a fully diluted basis. There are approximately 1.924 million shares and equivalents subject to a lock- up agreement that expires in September 2000. Because of actions taken by the underwriter of our initial public offering, we have the sole discretion to release these securities from the lock-up agreement prior to September 2000. The warrants issued in conjunction with the private placement of convertible preferred stock as well as the convertible preferred stock (approximately 2.33 million and 1.83 million respectively) in July 1999, are also subject to a lock-up that expires in April 2000. Although many of the shares issuable through the exercise of warrants or the conversion of our Preferred Stock are not registered, the majority of the securities are subject to registration rights agreements whereby we can be required to register the underlying shares for resale. Once the shares are registered, all of our outstanding Common Stock will be eligible for resale in the open market. The offer of a large number of shares of common stock for sale could have a negative effect on the trading price of our Common Stock. We may call up to 4.810 million of the outstanding warrants in the event the closing price of our Common Stock exceeds various pre-determined values for a period of time. The call provision with the greatest restrictions requires the closing price of our Common Stock to exceed $14.50 for twenty consecutive trading days. If we were to exercise all our call provisions as of March 10, 2000, there would be approximately 11.487 million shares of our Common Stock outstanding on a fully diluted basis. 23 PART II: OTHER INFORMATION ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K We filed a report on Form 8-K and a subsequent Form 8-K/A describing the sale of our depleted zinc business to Eagle-Picher Technologies dated December 15, 1999. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Golden, County of Jefferson, State of Colorado, on the 14th day of March, 2000. Isonics Corporation (Registrant) By /s/James E. Alexander ------------------------- James E. Alexander President, Chief Executive Officer and Director By /s/ Brantley J. Halstead ------------------------- Brantley J. Halstead Chief Accounting Officer and Chief Financial Officer 25 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB FOR THE PERIOD ENDED JANUARY 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS APR-30-2000 MAY-01-1999 JAN-31-2000 4,576 0 1,915 0 233 6,796 784 0 10,716 2,729 0 0 2,745 6,765 (1,523) 10,716 11,115 11,115 8,792 4,096 0 0 325 3,189 471 2,718 0 0 0 2,718 0.41 0.31
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