0000912057-01-537788.txt : 20011119
0000912057-01-537788.hdr.sgml : 20011119
ACCESSION NUMBER: 0000912057-01-537788
CONFORMED SUBMISSION TYPE: SB-2/A
PUBLIC DOCUMENT COUNT: 6
FILED AS OF DATE: 20011106
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: SB-2/A
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-56562
FILM NUMBER: 1775673
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
SB-2/A
1
a2062300zsb-2a.txt
SB-2/A
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 2001
REGISTRATION NO. 333-56562
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
AMENDMENT NO. 2 TO FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
ISONICS CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 2819 77-0338561
---------- ---- ----------
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Code Number) Identification Number)
5906 MCINTYRE STREET
GOLDEN, COLORADO 80403
(303) 279-7900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-----------
JAMES E. ALEXANDER
PRESIDENT, ISONICS CORPORATION
5906 MCINTYRE STREET
GOLDEN, COLORADO 80403
(303) 279-7900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------
COPIES TO:
HERRICK K. LIDSTONE, JR. THERESA M. MEHRINGER
NORTON LIDSTONE, P.C. PERKINS COIE LLP
SUITE 850, THE QUADRANT SUITE 700
5445 DTC PARKWAY 1899 WYNKOOP STREET
GREENWOOD VILLAGE, CO 80111 DENVER, CO 80202
TEL: 303-221-5552 TEL: 303-291-2300
FAX: 303-221-5553 FAX: 303-291-2400
-----------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
1
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
-----------
If securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. |_|
If this form is being 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 in 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 in the earlier effective registration statement
for the same offering. |_|
-----------
CALCULATION OF REGISTRATION FEE
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE(d)
----------------------------- ---------- ---------------- ---------------- -------------------
Common Stock 450,004 $ .98(a) $ 441,004 $ 110.25
Class B Common Stock
Purchase Warrants 1,350,000 $ 0.50(b) $ 675,000 $ 168.75
Shares of Common Stock
underlying Class B Common
Stock Purchase Warrants 1,350,000 $ 1.50(c) $2,025,000 $ 506.25
Class C Common Stock
Purchase Warrants 1,350,000 $ 0.10(e) $ 135,000 $ 33.75
Shares of Common Stock
underlying Class C Common
Stock Purchase Warrants 1,350,000 $ 2.50(c) $3,375,000 $ 843.75
TOTAL $ 1,662.75*
* $1,125 previously paid; $537.75 being submitted herewith.
(a) Offered by the selling security holders. The registration fee is based on
the closing market price for the
2
Registrant's common stock on October 5, 2001, pursuant to Rule 457(c).
(b) 1,350,000 warrants are offered by the selling security holders. The
registration fee is based on the closing market price for the Registrant's
Class B warrants on October 5, 2001, pursuant to Rule 457(c).
(c) 1,350,000 shares are offered by the selling security holders. Based on the
exercise price of the Class B and Class C common stock Purchase warrants,
respectively, pursuant to Rule 457(g)(1) under the Securities Act of 1933,
as amended.
(d) Calculated at the rate of $250 per $1,000,000 pursuant to fee rate advisory
#13 (SEC press release #2000-194).
(e) 1,350,000 Class C warrants are offered by the selling security holders
(upon exercise of the Class B warrants). The registration fee is based on
the Registrant's estimate of the sales price of the Class C warrants.
Although Class C warrants are currently outstanding, there is no market for
the Class C warrants and no basis to calculate the value of the Class C
warrants pursuant to Rule 457(c).
-----------
In accordance with SEC Rule 429, in addition to the shares of our common
stock, Class B warrants, and Class C warrants included in this Registration
Statement, the prospectus also includes 430,110 Class B redeemable common stock
purchase warrants, 632,610 Class C redeemable common stock purchase warrants,
430,110 shares of common stock underlying the Class B redeemable common stock
purchase warrants and 632,610 shares of common stock underlying the Class C
redeemable common stock purchase warrants from post-effective amendment number 2
on Form SB-2 to our Registration Statement on Form S-4 filed with the Securities
and Exchange Commission on January 18, 2001 (SEC File No. 333-37696) (as to
which the Registrant paid a filing fee of $5,358).
This prospectus also constitutes the prospectus for the exercise of our
Class B warrants and Class C warrants included in the post-effective amendments
to our registration statement on Form S-4.
Pursuant to Rule 416 of the Securities Act of 1933, there are also being
registered hereunder such additional shares as may be issued to the Selling
Stockholders because of future dividends, stock distributions, stock splits, or
similar capital adjustments.
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.
3
TABLE OF CONTENTS
PAGE
Summary ................................................................... 6
Risk Factors .............................................................. 9
Selling Shareholders and their Plan of Distribution ....................... 18
Procedure for Exercise of the Warrants and Tax Aspects .................... 23
Use of Proceeds ........................................................... 25
Management's Discussion and Analysis of Financial Condition or
Plan of Operation ...................................................... 26
Business .................................................................. 35
Management ................................................................ 62
Security Ownership of Certain Beneficial Holders and Management ........... 65
Section 16(b) Beneficial Ownership Reporting Compliance ................... 67
Executive Compensation .................................................... 68
Certain Relationships and Related Transactions ............................ 73
Isonics' Capital Stock .................................................... 75
Market for Common Equity and Related Stockholder Matters .................. 77
Shares Available for Future Sale .......................................... 79
Securities and Exchange Commission Position on Indemnification
for Securities Act Liabilities ......................................... 79
Experts ................................................................... 80
Legal Matters ............................................................. 80
How to Obtain Additional Information ...................................... 80
Financial Statements--April 30, 2001 ...................................... F-2
Financial Statements (unaudited)--July 31, 2001 ........................... F-24
Part II - Information Not Required in Prospectus .......................... II-1
4
SUBJECT TO COMPLETION DATED NOVEMBER 6, 2001
PROSPECTUS DATED NOVEMBER 6, 2001
ISONICS CORPORATION
SECURITIES OFFERED FOR RESALE BY SELLING HOLDERS
o 1,350,000 CLASS B WARRANTS
o 1,800,004 SHARES OF COMMON STOCK INCLUDING
o 1,350,000 SHARES UNDERLYING RESTRICTED CLASS B WARRANTS, AND
o 450,004 SHARES ISSUED OR TO BE ISSUED
SECURITIES OFFERED BY ISONICS CORPORATION
o 1,780,110 CLASS C REDEEMABLE WARRANTS UNDERLYING
o 1,350,000 RESTRICTED CLASS B WARRANTS, AND
o 430,110 OUTSTANDING CLASS B WARRANTS THAT ARE NOT RESTRICTED
o 2,412,720 SHARES OF COMMON STOCK UNDERLYING
o 430,110 OUTSTANDING CLASS B WARRANTS,
o 202,500 OUTSTANDING CLASS C WARRANTS,
o 430,110 CLASS C WARRANTS ISSUABLE UPON EXERCISE OF OUTSTANDING
CLASS B WARRANTS, AND
o 1,350,000 CLASS C WARRANTS ISSUABLE UPON EXERCISE OF RESTRICTED
CLASS B WARRANTS
The exercise price for the Class B warrants is $1.50 per share. If you
exercise the Class B warrants before their expiration date, we will issue to you
one share of common stock and one Class C warrant. The Class C warrants are
exercisable for one share of common stock at a price of $2.50 per share.
The Class B and Class C warrants expire on December 31, 2005, and are
redeemable if our common stock trades at or above $3.75 per share for any 20 of
30 consecutive trading days provided a registration statement permitting the
exercise of those warrants is then current and effective.
AN INVESTMENT IN OUR CLASS B WARRANTS, CLASS C WARRANTS, AND OUR COMMON
STOCK (SHOULD YOU CHOOSE TO EXERCISE ANY OF OUR WARRANTS OR PURCHASE THE COMMON
STOCK) INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 9.
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.
Our common stock is quoted on the Nasdaq SmallCap Stock Market under the
symbol "ISON". Our Class B warrants and Class C warrants are quoted on the
Nasdaq SmallCap Stock Market under the symbols "ISONL" and "ISONZ,"
respectively, but only 202,500 Class C warrants have been issued, and only
430,110 Class B warrants are eligible for public resale. No significant trading
market has developed for either the Class B warrants or the Class C warrants. On
October 5, 2001, our common stock closed at $.98 per share; our Class B warrants
closed at $.50 per warrant; and our Class C warrants did not trade. There have
not been any historical trades of the Class C warrants to date.
Only residents of Colorado, Delaware, Georgia, Illinois, Nevada and New
York may exercise their Class B warrants or Class C warrants, or purchase the
common stock offered by this Prospectus. We have not qualified the Class B
warrants, Class C warrants or the common stock under the laws of any other
state. When you exercise the Class B warrants or Class C warrants, you will have
to provide us with 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.
The delivery of this prospectus and/or the exercise of warrants to purchase
common stock does not mean that there have not been any changes in Isonics'
condition since the date of this prospectus. If you are in a jurisdiction where
it is unlawful to exercise the securities offered by this prospectus, or if you
are a person to whom it is unlawful to direct such activities, then the offer
presented by this prospectus does not extend to you. This prospectus speaks only
as of its date except where it indicates that another date applies. Documents
that are incorporated by reference in this prospectus speak only as of their
date, except where they specify that other dates apply. The information in this
prospectus is not complete and may be changed. The warrant holders may not
exercise these warrants and the Selling Shareholders may not sell the warrants
or common stock being registered herein until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to exercise these warrants or sell these securities and it is not
soliciting an offer to exercise these warrants or purchase these securities in
any state where the exercise or sale is not permitted.
5
SUMMARY
This summary presents selected information from this prospectus. You should
carefully read this entire document and the documents to which the prospectus
refers in order to understand this offering. SEE "HOW TO OBTAIN ADDITIONAL
INFORMATION."
ISONICS CORPORATION
Isonics is an advanced materials and technology company that develops and
commercializes products based on enriched stable and radioactive isotopes. The
common stock of Isonics is traded on the Nasdaq SmallCap Market under the symbol
"ISON." The market for our 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 or our
warrants.
The address of our principal executive offices and our 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
TRADING SYMBOLS
Common Stock ............ "ISON"
Class B Warrants ........ "ISONL"
Class C Warrants ........ "ISONZ"
The common stock is quoted on the Nasdaq SmallCap Market. 202,500 Class C
warrants have been issued. Through October 5, 2001, 632,610 registered Class B
warrants had been issued (of which 202,500 have been exercised), as well as
1,350,000 Class B warrants held by the selling shareholders. No significant
market has developed for either the Class B warrants or the Class C warrants.
SHARES OFFERED BY ISONICS UPON EXERCISE OF WARRANTS
Isonics Corporation is offering up to a maximum of 2,412,720 shares of
common stock to:
o holders of 430,110 outstanding Class B warrants which were registered
in our previous registration statement on Form S-4,
o holders of 202,500 outstanding Class C warrants which are outstanding,
which were registered in our previous registration statement on Form
S-4, and which were issued upon the exercise of Class B warrants,
o future holders of an additional 430,110 Class C warrants issuable upon
exercise of the registered Class B warrants, and
o future holders of an additional 1,350,000 Class C warrants issuable
upon exercise of Class B warrants held by the Selling Holders.
6
Isonics is also offering up to a maximum of 430,110 Class C warrants
issuable upon exercise of outstanding Class B warrants which were included in a
previous registration statement, and an additional 1,350,000 Class C warrants
issuable upon exercise of the Class B warrants held by the Selling Holders as
described below.
The Class B warrants are exercisable at $1.50 per share. The Class C
warrants are exercisable at $2.50 per share. Both the Class B warrants and the
Class C warrants expire on December 31, 2005.
THE OFFERING BY THE SELLING HOLDERS
This Prospectus also relates to the sale to the public of up to:
o 450,004 shares of our common stock issued to and held by the Selling
Holders;
o 1,350,000 Class B warrants issued to and held by the Selling Holders;
and
o 1,350,000 shares of our common stock underlying the Class B warrants
issued to and held by the Selling Holders.
SUMMARY OF MATERIAL TERMS OF CLASS B AND CLASS C WARRANTS
CLASS B WARRANTS CLASS C WARRANTS
(ISSUABLE ONLY UPON THE EXERCISE OF CLASS B
WARRANTS)
Expiration Date December 31, 2005 December 31, 2005
Exercise Price $1.50 $2.50
Product of Exercise Each person exercising a Class B warrant will Each person exercising a Class C warrant will
receive one share of common stock and one Class receive one share of common stock
C warrant
Redemption Provisions We may redeem the Class B warrants at a price We may redeem the Class C warrants at a price of
of $0.10 per warrant, on not less than 30 days' $0.10 per warrant on not less than 30 days' prior
prior written notice if our common stock trades written notice if our common stock trades at or
at or above $3.75 per share (subject to above $3.75 per share (subject to adjustment) for
adjustment) for any 20 of 30 consecutive any 20 of 30 consecutive trading days ending not
trading days ending not more than three days more than three days before the notice of
before the notice of redemption is deposited in redemption is deposited in the United States
the United States mails. mails.
Dilution Provisions The Class B Warrants contain provisions that The Class C Warrants contain provisions that
protect the holders protect the holders
7
CLASS B WARRANTS CLASS C WARRANTS
(ISSUABLE ONLY UPON THE EXERCISE OF CLASS B
WARRANTS)
thereof against dilution by adjustment thereof against dilution by adjustment
of the exercise price and number of of the exercise price and number of
shares issuable upon exercise, on the shares issuable upon exercise, on the occurrence
occurrence of certain events, such as stock of certain events, such as stock dividends, stock
dividends, stock splits, and splits, and recapitalizations. We are not
recapitalizations. We are not required to required to issue fractional shares. In lieu of
issue fractional shares. In lieu of the the issuance of such fractional shares, we will
issuance of such fractional shares, we will pay pay cash to such holders of the Warrants. In
cash to such holders of the Warrants. In computing the cash payable to such holders, a
computing the cash payable to such holders, a share of Common stock will be valued at its price
share of Common stock will be valued at its immediately prior to the close of business on the
price immediately prior to the close of expiration date. The holder of a Warrant will
business on the expiration date. The holder of not possess any rights as a shareholder of
a Warrant will not possess any rights as a Isonics unless such shareholder exercises such
shareholder of Isonics unless such shareholder Warrant.
exercises such Warrant.
Ability to Trade The Class B warrants are quoted on the Nasdaq The Class C warrants are quoted on the Nasdaq
SmallCap Stock Market. The market for the SmallCap Stock Market. The market for the Class C
Class B warrants is characterized by low warrants is characterized by low volume. There
volume. There can be no assurance that a can be no assurance that a market for the Class C
market for the Class B warrants will be warrants will be maintained.
maintained.
Registration The Class B warrants are registered under the The Class C warrants are also registered under
1934 Act. the 1934 Act.
Warrant holders are not Holders of Class B warrants are not considered Holders of Class C warrants are not considered
shareholders to be Shareholders of Isonics, and do not have to be Shareholders of Isonics, and do not have
the right to vote at shareholders' meetings or the or right to vote at shareholders' meetings or
to receive dividends when and if declared. to receive dividends when and if declared.
8
USE OF PROCEEDS
We will receive from $0.00 if no Class B warrants are exercised to a
maximum of $2,670,165 if all of the outstanding Class B warrants are exercised.
There are a total of 1,780,110 Class B warrants that could be exercised for a
price of $1.50 per warrant, consisting of:
430,110 outstanding Class B warrants held by public warrant holders;
675,000 outstanding restricted Class B warrants which were issued to
certain accredited investors in December 2000; and
675,000 outstanding restricted Class B warrants which were issued to the
accredited investors in July 2001 in consideration for certain adjustments
to their purchase terms.
202,500 Class C warrants have been issued upon exercise of Class B
warrants. We will receive from $0.00 to $506,250 if all of the outstanding
Class C warrants are exercised.
If certain or all of the Class B warrants are exercised, we will issue up
to an additional 1,780,110 additional Class C warrants and, if those warrants
are exercised, we will receive from $0.00 to $4,450,275 if all of the additional
Class C Warrants are exercised. The exercise price for the Class C warrants is
$2.50 per share.
We expect to use any proceeds from the exercise of Class B or Class C
warrants for research and development, the purchase of the raw materials
necessary for the production of silicon-28, and for working capital.
RISK FACTORS
THE PURCHASE OF ISONICS' COMMON STOCK AND WARRANTS INVOLVES A HIGH DEGREE
OF RISK. YOU SHOULD PURCHASE OUR SECURITIES OR EXERCISE YOUR CLASS B WARRANTS
AND/OR CLASS C WARRANTS ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR
INVESTMENT. SEE "RISK FACTORS." We have not authorized anyone to give you
information or to make any representation other than those contained in this
prospectus.
RISK FACTORS
Any person considering the purchase of Isonics' common stock or warrants
should understand that such purchase and ownership involves a high degree of
risk. You should purchase our securities or exercise your Class B warrants
and/or Class C warrants only if you can afford a complete loss of your
investment. Among the risks that you should consider in determining whether to
invest in our securities are the following:
9
UNLESS WE ARE ABLE TO DEVELOP AND SELL NEW PRODUCTS PROFITABLY, WE MAY BE UNABLE
TO REMAIN COMPETITIVE, FURTHERING THE LIKELIHOOD THAT OUR LOSSES AND NEGATIVE
CASH FLOW WILL CONTINUE.
We have not operated profitably since our 1996 fiscal year. We recognized
net income for the year ended April 30, 2000, only because of the gain
recognized on the sale of our depleted zinc assets to Eagle-Picher. In addition,
through November 30, 1999, our revenues had historically been derived from our
depleted zinc operations.
As a consequence of our sale of the depleted zinc operations, our
operations and our ability to generate revenues are more heavily dependent upon
our ability to develop new products using stable and radioactive isotopes, and
to market and sell those products profitably. We may be unable to develop
products that can be profitably marketed and sold, which may prevent us from
paying creditors as debts are due, and, in turn, may materially impact our
ability to continue our business operations. SEE "BUSINESS."
WE ARE CRITICALLY SHORT OF WORKING CAPITAL AND OUR AUDITORS ISSUED A GOING
CONCERN OPINION ON OUR FINANCIAL STATEMENTS
We are critically short of working capital for our operations for a number
of reasons. These reasons include:
o Eagle-Picher's failure to pay the cash amounts it owes to us under our
contractual arrangements;
o Eagle-Picher's failure to deliver 200 kilograms of silicon-28 to us,
resulting in our need to use our capital to purchase the silicon-28
from other suppliers and a delay in our ability to complete our
research and development program for silicon-28, resulting in a delay
in our ability to achieve revenues from silicon-28; and
o Continuing operating losses and negative cash flow.
It is possible that the following circumstances may develop and may further
adversely impact our available working capital:
o unanticipated expenses in developing our new products or in producing
or marketing our existing products;
o the necessity of having to protect and enforce our intellectual
property rights;
o technological and market developments;
o a corporate decision to expand our production capacity through capital
investment or acquisition; and
o the possibility that we may suffer an adverse decision in our
Eagle-Picher arbitration as described below in "LEGAL PROCEEDINGS".
We may not be able to obtain equity or debt financing on reasonable terms
when we need such financing. The unavailability of additional financing, when
needed, could have a material adverse effect on our business. SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS," AND "BUSINESS."
10
Our current working capital shortage and operating losses resulted in our
auditors including an explanatory paragraph in their opinion on our financial
statements as of and for the year ended April 30, 2001 indicating such factors
raised a substantial doubt regarding our ability to continue as a going concern.
WE HAVE RAISED CAPITAL IN THE LAST 12 MONTHS, WHICH HAS RESULTED IN DILUTION TO
OUR EXISTING SHAREHOLDERS. THIS WAS NECESSARY IN ORDER TO PROVIDE THE NECESSARY
WORKING CAPITAL AND WE MAY BE REQUIRED TO RAISE ADDITIONAL CAPITAL, WHICH MAY
RESULT IN SUBSTANTIAL ADDITIONAL DILUTION.
To alleviate cash shortages resulting from the foregoing, on December 13,
2000, we sold 337,500 units consisting of one share of our common stock and two
Class B warrants for $675,000 to a group of accredited investors. As a result of
subsequent adjustments, we issued an additional 112,504 shares of common stock
and an additional 675,000 Class B warrants.
The exercise of the Class B warrants, and/or the Class C warrants may
provide us with some additional financing, but it is likely that no warrants
will be exercised unless the market price is in excess of the exercise price
($1.50 per share for the Class B warrants, and $2.50 per share for the Class C
warrants). Any such exercise will result in additional dilution to our
shareholders.
Furthermore, our efforts to raise working capital have resulted in dilution
adjustments to our outstanding common stock warrants associated with the
preferred stock private placement completed on July 29, 1999. These dilution
adjustments did not result in any additional investment in Isonics, but resulted
in the issuance of approximately 401,301 additional common stock warrants for no
additional consideration and reduced the exercise price to $3.17 for all related
common stock warrants.
If we are successful in raising additional working capital, our
shareholders may incur additional dilution adjustments. SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS," AND "BUSINESS."
OPERATIONS IN RUSSIA, THE REPUBLIC OF UZBEKISTAN, AND THE REPUBLIC OF GEORGIA
MAY BE DISRUPTED BECAUSE OF A VOLATILE POLITICAL AND ECONOMIC CLIMATE BEYOND OUR
CONTROL, WHICH COULD ADVERSELY AFFECT OUR SUPPLY OF RAW MATERIALS.
Operations in Russia, the Republic of Uzbekistan, and the Republic of
Georgia entail risks. The former republics of the Soviet Union including
Uzbekistan and Georgia are experiencing political, social and economic change as
they obtain independence from the former central government in Moscow. Some of
the republics, including Russia, Uzbekistan and Georgia, are attempting to
transition from a central-controlled economy toward a market-based economy.
These changes have involved, in some cases, armed conflict and the risk of
continued instability has increased since the terrorist attacks on the United
States of September 11, 2001. Uzbekistan borders Afghanistan and will likely be
affected by any conflict in Afghanistan. The political or economic instability
in these republics may continue or worsen. The supply of stable and radioactive
isotopes could be directly affected by political, economic and military
conditions in Russia, Uzbekistan and Georgia.
11
We are dependent on suppliers from Russia, Uzbekistan, and Georgia for
approximately 90% of our stable isotopes and 90% of our radioisotopes.
Accordingly, our operations could be materially adversely affected if
hostilities in Russia, Uzbekistan, or Georgia should occur, if trade between
Russia, Uzbekistan and/or Georgia and the United States were interrupted, if
political conditions in Russia, Uzbekistan or Georgia disrupt transportation or
processing of our goods, if laws or government policies concerning foreign
business operations in Russia, Uzbekistan or Georgia change substantially, or if
tariffs are introduced. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" AND
"BUSINESS."
BECAUSE WE DEPEND UPON FEW CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES,
OUR BUSINESS MAY BE MATERIALLY AND ADVERSELY AFFECTED IF WE LOSE ANY ONE OF
THESE CUSTOMERS
Three customers accounted for approximately 43% of our net revenues for the
three months ended July 31, 2001. Two of these customers accounted for
approximately 44% of the German segment's revenue for the three months ended
July 31, 2001. 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. Present or future customers could terminate their
purchasing patterns with us or significantly change, reduce or delay the amount
of isotope products ordered from us. A termination of a customer relationship,
or change, reduction and/or delay in orders could materially harm us. SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS" AND "BUSINESS."
IF DEMAND FOR OUR PRODUCT GROWS SUDDENLY, WE MAY LACK THE RESOURCES TO MEET
DEMAND OR WE MAY BE REQUIRED TO INCREASE OUR CAPITAL SPENDING SIGNIFICANTLY
We have experienced, and may again experience, periods of rapid growth that
place a significant strain on our financial and managerial resources. We have
increased the number and type of products we offer to our customers in our
effort to replace the cash flow reduction that occurred as a result of the sale
of our depleted zinc operations, and we are continuing to look for new products
to offer; through our research and development efforts we are also attempting to
develop additional products and lines of business. 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, and will require us 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."
BECAUSE WE ARE DEPENDENT UPON OUR KEY PERSONNEL FOR OUR FUTURE SUCCESS, IF WE
FAIL TO RETAIN OR ATTRACT KEY PERSONNEL, OUR BUSINESS WILL BE ADVERSELY AFFECTED
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; Daniel
Grady, Vice President Life Sciences, Herbert Hegener, Managing Director of
Chemotrade, and Stephen Burden, Vice President Semiconductor Materials. We have
obtained $1,000,000 of key man life insurance on the lives of Mr. Alexander and
Mr. Rubizhevsky. Currently neither Mr. Alexander nor Mr. Rubizhevsky are covered
by employment agreements and the compensation committee has not yet determined
if they will issue new contracts. Mr. Hegener is covered by an employment
agreement extending through December
12
2001. Mr. Grady and Mr. Burden are covered by employment agreements with an
indefinite term that provides at-will employment, terminable at any time by
either party.
We believe that our future success will also depend upon our ability to
attract and retain other 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."
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD REDUCE OUR
COMPETITIVE ADVANTAGE
We rely primarily on a combination of trade secrets, confidentiality
procedures, and contractual provisions to protect our technology. Despite our
efforts to protect our technology, 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 to
information, materials and intellectual property that we regard as proprietary,
and that are protected under the laws of the United States. We may not be able
to protect our proprietary interests, or our competitors may independently
develop similar technology or intellectual property. If either one of these
situations occurs, we may lose existing customers and our business may suffer.
SEE "BUSINESS."
The validity of any of the patents licensed to us, or that may in the
future be owned by us, may not be upheld if challenged by others in litigation.
Further, our products or technologies, even if covered by our patents, may
infringe upon 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 proceeding 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.
We may choose not to seek patent protection and may rely on trade secrets
and other confidential information to protect our technology. We require all
employees, directors, and consultants to sign confidentiality agreements,
intellectual property assignment and non-disclosure agreements. We may enter
into agreements with some employees pursuant to which the employee is entitled
to a small royalty relative to products developed by Isonics based upon the
employee's inventions. We cannot be certain that these persons will honor the
terms of those agreements. If an employee, director or consultant breaches the
confidentiality provisions, we may lose customers to our competitors.
WE FACE TECHNOLOGICAL CHANGE AND INTENSE COMPETITION BOTH DOMESTICALLY AND
INTERNATIONALLY WHICH MAY ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS
PROFITABLY
Although we do not believe that any entity produces a complete range of
stable enriched isotopes for commercial sale, many of our competitors have
significantly greater funding than do we and may be able to develop products
which are competitive with our products. SEE "BUSINESS."
13
Further, it is possible that future technological developments may occur.
The market for our isotope products is characterized by rapidly evolving
technology and continuing process development. Our future success will depend
upon our ability to develop and market isotope products that meet changing
customer and technological needs on a cost effective and timely basis.
Specifically, the failure by Eagle-Picher to provide us with silicon-28 has
hindered, and may continue to hinder, our research and development activities,
which then negatively affects our ability to remain competitive. If we fail to
remain competitive by anticipating the needs of our customers and our customers
contract with other suppliers, our operation could be materially and adversely
affected.
WE COULD BE SUBJECT TO ENVIRONMENTAL REGULATION BY FEDERAL, STATE AND LOCAL
AGENCIES, INCLUDING LAWS THAT IMPOSE LIABILITY WITHOUT FAULT, WHICH COULD
ADVERSELY AFFECT OUR WORKING CAPITAL, SHAREHOLDERS' EQUITY AND PROFITABILITY
We could become 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 isotope product delivery and
manufacturing process, although we do not believe that there is any such
regulation directly applicable to our current operations. Regulations that
become applicable to our operations in the future could restrict our ability to
expand our facilities or could require us to acquire costly equipment or to
incur other significant expenses to comply with governmental regulations.
Historically, our costs of compliance with environmental regulations have not
been material. In the quarter ended October 31, 2000, we recognized a $270,000
expense to remediate the Golden, Colorado facility. The lease and this liability
were assumed by the buyers of International Process Research Corporation
("IPRC") effective February 1, 2001. SEE "BUSINESS."
WE ARE CONTROLLED BY ONLY A FEW OFFICERS AND DIRECTORS AND, CONSEQUENTLY,
PURCHASERS OF OUR SHARES WILL HAVE VERY LITTLE ABILITY TO ELECT OR CONTROL OUR
MANAGEMENT
Even if all outstanding warrants and stock options are exercised and
convertible securities are exchanged for common stock, our directors and
officers will beneficially own 28.31% of the outstanding shares of common stock
as of October 5, 2001, and, accordingly, may have the ability to elect a
majority of the directors of Isonics and otherwise control the company. As a
result, such persons, acting together, will have the ability to substantially
influence all matters submitted to stockholders for approval, including the
election and removal of directors and any merger, consolidation or sale of
substantially all of our assets, and to control our management and affairs. Such
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control, impeding a merger, consolidation or takeover or
other business combination involving us or discouraging a potential acquirer
from making a tender offer or otherwise attempting to obtain control of our
business, even if such a transaction would be beneficial to other stockholders.
SEE "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
14
WE RISK EXPOSING OURSELVES TO AN ABOVE-POLICY LIMIT PRODUCT LIABILITY CLAIM,
WHICH COULD ADVERSELY AFFECT OUR WORKING CAPITAL, SHAREHOLDERS' EQUITY AND
PROFITABILITY
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. We currently have product liability insurance; however, there is a
risk that our insurance would not cover completely or would fail to cover a
claim, in which case we may not have the financial resources to satisfy such
claims, and the payment of claims would require us to use funds that are
otherwise needed to conduct our business and make our products. SEE "BUSINESS."
OUR COMMON STOCK IS VULNERABLE TO PRICING AND PURCHASING ACTIONS THAT ARE BEYOND
OUR CONTROL AND, THEREFORE, PERSONS ACQUIRING OUR SHARES OR WARRANTS MAY BE
UNABLE TO RESELL THEIR SHARES OR WARRANTS AT A PROFIT AS A RESULT OF THIS
VOLATILITY
The trading price of our securities has been subject to wide fluctuations
in response to quarter-to-quarter variations in our operating results, our
announcements of technological innovations or new products by us or our
competitors, and other events and factors. The securities markets themselves
have from time to time and recently 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 us or our competitors and
developments or disputes concerning patents or proprietary rights could have a
significant and adverse impact on such market prices. Regulatory developments in
the United States and foreign countries, public concern as to the safety of
products containing radioactive compounds, economic and other external factors,
all affect 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."
SEC PENNY STOCK REGULATIONS MAY LIMIT THE ABILITY TO TRADE OUR SECURITIES ON THE
NASDAQ SMALL CAP MARKET
Although our common stock is currently quoted on the Nasdaq SmallCap
Market, our common stock has in the past been subject to additional disclosure
requirements for penny stocks mandated by the Securities Enforcement Remedies
and Penny Stock Reform Act of 1990. 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. We have, at times in the 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 this rule, broker-dealers who recommend such securities to persons
other than established customers and accredited investors must make a special
written disclosure to, and 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. To the extent we are able to maintain
our listing on the Nasdaq SmallCap Market, we will not be subject to these penny
stock rules. Reasons for being unable to maintain our listing on the Nasdaq
Small Cap Market include:
15
o the inability to maintain a bid price for our common stock of $1.00
for the requisite period of time and
o the inability to maintain either the minimum Stockholders' equity,
market capitalization or net income along with the required number of
market makers and shareholders necessary for listing.
We currently satisfy all requirements for continued listing on the Nasdaq
SmallCap Market with the exception of maintaining a minimum bid price of $1.00
(as of October 5, 2001 our common stock traded at $.98 per share). The time
required for meeting these thresholds is contingent on any action (or inaction)
by Nasdaq with respect to our listing. We have not received any notification
from Nasdaq regarding our failure to meet any of these thresholds. SEE "MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS."
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE
Our stock price may decline by future sales of our shares or the perception
that such sales may occur. As of October 5, 2001, approximately 4,807,533 shares
of common stock held by existing stockholders constitute "restricted shares" as
defined in Rule 144 under the Securities Act. The restricted 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.
Approximately 98% of the restricted shares of our common stock are either
eligible for sale pursuant to Rule 144 or have been registered under the
Securities Act for resale by the holders. 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 cause the
stock's market price to decline. SEE "SHARES AVAILABLE FOR FUTURE SALE."
OUTSTANDING SERIES A AND B PREFERRED STOCK, OPTIONS AND WARRANTS MAY MAKE IT
DIFFICULT FOR US TO OBTAIN ADDITIONAL CAPITAL ON REASONABLE TERMS
As of October 5, 2001, we had outstanding preferred stock convertible into,
and options and warrants to purchase, an aggregate of 7,367,833 shares of common
stock. As long as these shares of convertible preferred stock ("Series A and B
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 because any new investors will perceive that these lower
priced securities offer a risk of substantial potential dilution. Depending on
the market price for our common stock as reported by Nasdaq and other sources,
new investors frequently prefer to negotiate prices that are at or below the
conversion price or exercise price of existing securities. SEE "ISONICS' CAPITAL
STOCK."
16
PROVISIONS IN OUR CHARTER DOCUMENTS COULD PREVENT OR DELAY A CHANGE IN CONTROL,
WHICH COULD DELAY OR PREVENT A TAKEOVER
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 shareholder 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 "ISONICS' CAPITAL STOCK."
PROVISIONS IN OUR BYLAWS PROVIDE FOR INDEMNIFICATION OF OFFICERS AND DIRECTORS
TO THE FULL EXTENT PERMITTED BY CALIFORNIA LAW, WHICH COULD REQUIRE US TO DIRECT
FUNDS AWAY FROM OUR BUSINESS AND PRODUCTS
Our Bylaws provide for indemnification of officers and directors to the
full extent permitted by California law, our state of incorporation. We may be
required to pay 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. Funds paid in satisfaction of judgments,
fines and expenses may be funds we need for the operation of our business and
the development of our products, thereby affecting our ability to attain
profitability. This could cause our stock price to drop. See "SECURITIES AND
EXCHANGE COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES."
OUR SHAREHOLDERS SHOULD NOT RELY UPON DIVIDENDS TO GENERATE INCOME BECAUSE IT IS
UNLIKELY WE WILL EVER PAY DIVIDENDS
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
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. Because our common stock does
not generate a steady stream of income for our stockholders, the only profit or
gain our shareholders can hope to realize by virtue of their investment is that
our stock will appreciate in value, which it may not do. See "MARKET FOR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS."
THE TOTAL OF OUR AUTHORIZED, UNISSUED AND UNRESERVED COMMON STOCK IS INADEQUATE
TO IMPLEMENT OUR LONG-TERM BUSINESS STRATEGIES
As of October 5, 2001, the number of shares of common stock outstanding was
9,572,504. Including shares reserved for issuance under option plans and
outstanding options, warrants (including the Class C warrants underlying the
Class B warrants) and convertible securities, we have 19,911,289 shares of
common stock issued or reserved for issuance. This leaves only 88,711 shares of
our common stock remaining authorized, unissued, and unreserved. Our board of
directors does not believe that this total of authorized, unissued, and
unreserved shares is adequate to implement our long-term business strategies.
Therefore, the board of directors has proposed a substantial increase in our
authorized capital
17
for consideration by our shareholders at our next shareholders' meeting
scheduled for November 13, 2001.
However, we may not be able to obtain approval of an increase in our
authorized capitalization at the upcoming shareholders' meeting and (if we are
unable to increase our authorized capitalization at the next shareholders'
meeting) we may be unable to raise necessary working capital due to the
inability to issue equity.
FORWARD-LOOKING STATEMENTS MADE IN THIS PROSPECTUS MAY PROVE TO BE INACCURATE
In our effort to make the information in this prospectus more meaningful,
this report 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 report are not based on historical facts, but rather reflect the current
expectations of our management concerning future results and events.
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. Furthermore, 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 which 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. The factors discussed
under these "Risk Factors" and elsewhere in this Prospectus could affect future
results, causing the results to differ materially from those expressed in the
forward-looking statements in this prospectus.
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.
SELLING HOLDERS AND THEIR PLAN OF DISTRIBUTION
THE SELLING HOLDERS. This Prospectus includes:
o 450,004 shares of common stock which are already outstanding;
o 1,350,000 Class B warrants which are already outstanding; and
o 1,350,000 shares of common stock underlying the outstanding restricted
Class B warrants.
18
This Prospectus also includes 1,350,000 Class C warrants that are issuable
upon exercise of the Class B warrants held by the Selling Holders, as well as
1,350,000 shares of common stock underlying the Class C warrants. These
securities are being offered by Isonics Corporation, however, and are not
included in the securities being offered by the Selling Holders.
We issued 337,500 shares of common stock and 675,000 Class B warrants in a
private placement to accredited investors in December 2000. The terms of that
placement required certain pricing adjustments based on certain factors, among
the more significant being a reduction in the exercise price of the Class B
warrants issued to those accredited investors to $0.75 were this registration
statement not effective by June 14, 2001. We were unable to achieve that
effectiveness, but we were able to negotiate an accommodation with the
accredited investors; that accommodation resulted in an amendment of their
subscription agreement. These accredited investors also approved an amendment to
the Class B/C warrant agreement which clarified certain terms. As consideration
to the accredited investors for giving up these rights and accepting the
amendment, we issued an additional 112,504 shares of common stock and an
additional 675,000 Class B warrants.
We have set forth in the following table information relative to the
Selling Holders as of October 5, 2001. We calculated beneficial ownership based
on SEC requirements, and the information we included regarding beneficial
ownership is not necessarily indicative of beneficial ownership for any other
purpose. Unless otherwise indicate below, each person identified in the table
has sole voting and investment power with respect to all shares he, she, or it
beneficially owns, subject to applicable community property laws. We have based
the percentage calculated for each Selling Holder upon the sum of the "common
stock" and "common stock Issuable Upon Exercise of warrants" columns.
None of the Selling Holders had any material relationship with Isonics
during the past three years. Furthermore, none of the Selling Holders owns any
Series A convertible preferred stock or options or warrants to purchase our
common stock except the Class B warrants purchased in the December 2000 private
placement. Greenwood Partners, L.P. has acted as a market maker in Isonics
common stock from time to time and, therefore, as described in the table below
at October 5, 2001, owns additional Class B and Class C warrants. Exclusive
of the securities registered in this offering, the market positions of
Greenwood Partners, L.P. (which include both short and long positions) are
net long.
We do not know when or in what amounts the Selling Holders may offer the
shares described in this prospectus for sale. The Selling Holders may decide not
to sell all or any of the shares that this prospectus covers. Because the
Selling Holders may offer all or some of the shares pursuant to this offering,
and because there are currently no agreements, arrangements or understandings
with respect to the sale of any of the shares that the Selling Holders will hold
after completion of the offering, we cannot estimate the number of the shares
that the Selling Holders will hold after completion of the offering. However,
for purposes of this table, we have assumed that, after completion of the
offering, the Selling Holders will hold none of the securities that this
prospectus covers.
19
NAME OF SELLING (a) COMMON STOCK AND OTHER (a) COMMON STOCK AND (a) COMMON STOCK TO BE
HOLDER(S) (b) CLASS B WARRANTS SHARES, (b) CLASS B WARRANTS BENEFICIALLY OWNED AFTER
BENEFICIALLY OWNED OPTIONS (OR SHARES UNDERLYING OFFERING AND (b)
PRIOR TO THIS AND CLASS B WARRANTS, IN PERCENTAGE, ASSUMING ALL
OFFERING WARRANTS THE ALTERNATIVE) BEING SHARES OFFERED ARE SOLD
OFFERED BY THE SELLING
HOLDERS (1)
(a) (b) (a) (b) (a) (b)
------- ------- ------- ------- ------- ------- -------
Penelope A. Collins 16,667 50,000 0 16,667 50,000 0 0%
Generation Capital 66,667 200,000 0 66,667 200,000 0 0%
Associates (5)
Greenwood Partners, L.P. (2) 180,000 540,000 255,790 180,000 540,000 255,790 2.69%
Edward S. Gutman (3) 33,334 100,000 0 33,334 100,000 0 0%
Gutman Family 33,334 100,000 0 33,334 100,000 0 0%
Foundation (3)
The HRG Trust, Edward S . 33,334 100,000 0 33,334 100,000 0 0%
Gutman, Trustee (3)
Harvey Silverman 33,334 100,000 0 33,334 100,000 0 0%
Wolcott Capital Corp. (4) 33,334 100,000 0 33,334 100,000 0 0%
Alan R. Silberman 20,000 60,000 0 20,000 60,000 0 0%
(1) The Selling Holders are offering all of the common stock and Class B
warrants (or the shares underlying the Class B warrants, in the
alternative) they acquired in the December 2000 private placement, plus the
additional shares and Class B warrants they received in the July 2001
readjustment. The total beneficial ownership does not include Class C
warrants that will be issued upon the exercise of the Class B warrants.
20
(2) Greenwood Partners, L.P. is a privately-held company whose controlling
person is GMG & Associates, Inc., its general partner, which is owned by
Gregg M. Greenberg. Greenwood Partners, L.P. is a broker-dealer registered
under the Securities Exchange Act of 1934, as amended, and from
time-to-time makes a market in our common stock in the Nasdaq SmallCap
Market. As of October 5, 2001, Greenwood Partners, L.P. had a short
position of 96,096 shares of Isonics common stock and a long position of
53,290 Class B warrants and 202,500 Class C warrants.
(3) Mr. Gutman controls both the Gutman Family Foundation and the HRG Trust.
Mr. Gutman is a minority limited partner of Greenwood Partners, L.P., but
does not in any manner participate in the business of Greenwood Partners,
L.P.
(4) Wolcott Capital Corp. is a privately-held company whose controlling person
is Nicholas Ponzio, President.
(5) Generation Capital Associates is a privately-held company whose controlling
person is David Rappaport, President.
PLAN OF DISTRIBUTION. The Selling Holders may, from time to time, offer and
sell the shares and Class B warrants included in this Prospectus. Alternatively,
the Selling Holders may exercise the Class B warrants and offer and sell the
underlying shares and Class C warrants. The term "Selling Holders" includes
pledgees, donees, transferees or other successors in interest selling shares
that they acquired after the date of this prospectus from the Selling Holders as
a pledge, gift or other non-sale related transfer. To the extent required, we
may amend and supplement this prospectus from time to time to describe a
specific plan of distribution.
Each Selling Holder will act independently in making decisions with respect
to the timing, manner, and size of each sale. Each Selling Holder may make these
sales at prices and under terms then prevailing or at prices related to the then
current market price. The Selling Holders may also make sales in negotiated
transactions, including pursuant to one or more of the following methods:
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o an over-the-counter distribution in accordance with the rules of the
Nasdaq SmallCap Market; and
o in privately negotiated transactions.
In connection with distributions of the shares or otherwise, the Selling
Holders may:
o enter into hedging transactions with broker-dealers or other financial
institutions, which may in turn engage in short sales of the shares in
the course of hedging the positions they assume;
o sell the shares short and redeliver the shares to close out such short
positions;
21
o enter into option or other transactions with broker-dealers or other
financial institutions which require the delivery to them of shares
that this prospectus offers, which they may in turn resell; and
o pledge shares to a broker-dealer or other financial institution,
which, upon a default, they may in turn resell.
In addition, the Selling Holders may sell any shares that qualify for sale
pursuant to Rule 144, rather than pursuant to this prospectus.
In effecting sales, broker-dealers or agents that the Selling Holders
engage may arrange for other broker-dealers to participate. Broker-dealers or
agents may receive commissions, discounts or concessions from the Selling
Holders, in amounts that the parties may negotiate immediately prior to the
sale.
In offering shares that this prospectus covers, the Selling Holders, and
any broker-dealers and any other participating broker-dealers who execute sales
for the Selling Holders, may qualify as "underwriters" within the meaning of the
Securities Act in connection with these sales. Any profits that the Selling
Holders realize, and the compensation that they pay to any broker-dealer, may
qualify as underwriting discounts and commissions. One selling Holder, Greenwood
Partners, L.P. is a broker-dealer that acquired the securities included in this
registration statement for investment purposes, and not for the purpose of
causing or facilitating a distribution. However, in the view of the staff of the
SEC, a broker-dealer offering securities acquired from an issuer should be
considered to be an underwriter, and therefore Greenwood Partners, L.P. may be
liable as an underwriter for securities sold by it pursuant to this registration
statement. Greenwood Partners, L.P. does not represent that it is an
underwriter with respect to those securities since it purchased them with
investment intent.
In order to comply with the securities laws of some states, the Selling
Holders must sell the shares in those states only through registered or licensed
brokers or dealers. In addition, in some states the Selling Holders must sell
the shares only if we have registered or qualified those shares for sale in the
applicable state or an exemption from the registration or qualification
requirement is available and the Selling Holder complies with the exemption.
We have advised the Selling Holders that the anti-manipulation rules of
Regulation M under the Exchange Act may apply to sales of shares in the market
and to the activities of the Selling Holders and their affiliates. In addition,
we will make copies of this prospectus available to the Selling Holders for the
purpose of satisfying the prospectus delivery requirements of the Securities
Act. The Selling Holders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against liabilities, including
liabilities arising under the Securities Act.
At the time a Selling Holder makes a particular offer of shares we will, if
required, distribute a prospectus supplement that will set forth:
o the number of shares that the Selling Holder is offering;
o the terms of the offering, including the name of any underwriter,
dealer or agent;
22
o the purchase price paid by any underwriter;
o any discount, commission and other underwriter compensation;
o any discount, commission or concession allowed or reallowed or paid to
any dealer; and
o the proposed selling price to the public.
We have agreed to indemnify the Selling Holders against claims and losses
due to material misstatements or omissions made by the Company (and not by the
Selling Holders) in this prospectus. Each of the Selling Holders has agreed to
indemnify us against claims and losses due to material misstatements or
omissions made by them.
PROCEDURE FOR EXERCISE OF THE WARRANTS AND TAX ASPECTS
PROCEDURE TO EXERCISE WARRANTS. We issued the Class B warrants to persons
who exchanged Class A warrants that were originally distributed to the public in
September 1997. The Class B warrants have been quoted on either the OTC Bulletin
Board or the Nasdaq SmallCap Stock Market since April 2001. As of October 5,
2001
430,110 publicly-traded Class B warrants are outstanding;
202,500 publicly-traded Class C warrants are outstanding; and
1,350,000 restricted Class B warrants are outstanding.
Additional Class C warrants will be issued to any person who exercises a Class B
warrant before December 31, 2005.
Each registered holder of a Class B warrant or Class C warrant should have
possession of a certificate that represents that warrant. Persons who hold their
warrants in a brokerage account or otherwise in a "street name" account may ask
their brokers to deliver a warrant certificate to them.
REGISTERED HOLDERS. In order to exercise a warrant, you must:
o be a registered holder and have possession of your warrant
certificate;
o complete the subscription form that is included as part of the warrant
Certificate;
o sign the subscription form and have your signature medallion
guaranteed by a broker-dealer member of the STAMP program;
o 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
o include your payment for the exercise price ($1.50 times the number of
Class B warrants being exercised; and $2.50 times the number of Class
C warrants being exercised). You must pay for the exercise by
certified or bank cashiers' check payable in United States funds 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.
23
We recommend that you do not send your 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 warrant certificate and payment.
Neither we, nor Continental Stock Transfer, are responsible for your warrant
certificate or your payment until Continental Stock Transfer actually receives
delivery. DO NOT SEND WARRANT CERTIFICATES OR PAYMENT DIRECTLY TO ISONICS
CORPORATION.
WARRANTS HELD IN A BROKERAGE ACCOUNT OR OTHERWISE IN STREET-NAME. If you
hold your Class B warrants or Class C 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 warrant certificate, you
must contact Continental Stock Transfer & Trust Co., Inc., and follow the
procedures established by Continental Stock Transfer for your lost warrant
certificate. If you have lost your certificate, please ensure that you leave a
sufficient amount of time before expiration of your warrants to follow the lost
instrument procedures.
TAX ASPECTS. No gain or loss will be recognized by a holder of either the
Class B warrant or the Class C warrant held for investment on the holder's
purchase of common stock for cash upon exercise of the warrant. The adjusted tax
basis of the common stock so acquired will be equal to the tax basis of the
warrant plus the exercise price. The holding period of the common stock acquired
upon the exercise of the Class B warrant or the Class C warrant will begin on
the date the warrant is exercised and the common stock is purchased.
24
USE OF PROCEEDS
We will receive from $0.00 to a maximum of $2,670,165 from the exercise of
outstanding Class B warrants, and from $0.00 to a maximum of $4,956,525 from the
exercise of Class C warrants. The maximum proceeds from the exercise of Class C
warrants includes those that are currently outstanding and those issuable upon
the exercise of Class B warrants.
We expect that any proceeds from the exercise of warrants would be spent as
follows:
Assuming one-half Assuming all Assuming all Assuming all
Class B warrants Class B warrants Class B warrants and Class B warrants
and no Class C and no Class C one-half Class C and all Class C
warrants are warrants are warrants are warrants are
exercised exercised exercised exercised
----------------- ---------------- -------------------- ----------------
Research and Development $ 335,083 $ 670,165 $1,000,000 $1,000,000
Purchase of the raw materials necessary
for the production of silicon-28
Bulk-Wafers 0 1,000,000 3,000,000 5,000,000
Working Capital 1,000,000 1,000,000 1,148,428 1,626,690
Total Amount Received
From Exercise of Warrants $1,335,083 $2,670,165 $5,148,428 $7,626,690
========== ========== ========== ==========
The amounts actually expended for each use are at the discretion of our
Board of Directors and may vary significantly depending upon a number of
factors, including future revenue growth and the amount of cash generated by our
operations. Further, if our Board of Directors believes that the proposed uses
of the proceeds are not in our best interests, our Board of Directors will
decide how the proceeds will be used.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION OR PLAN OF OPERATION
THE STATEMENTS CONTAINED IN THIS REPORT 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 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. IT IS IMPORTANT
TO NOTE THAT OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN SUCH
FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
The following table sets forth operations data expressed as a percentage of
net revenues. The table and the discussion below should be read in conjunction
with the condensed consolidated financial statements and notes thereto and the
audited financial statements and the notes thereto appearing elsewhere in this
report.
Three Months Ended
July 31,
-----------------------
2001 2000
------- -------
Net revenues 100.0% 100.0%
Cost of revenues 74.3 74.8
------- -------
Gross margin 25.7 25.2
Operating expenses:
Selling, general and administrative 56.9 59.1
Research and development 6.5 14.9
------- -------
Total operating expenses 63.4 74.0
------- -------
Operating loss (37.7) (48.8)
Other income (expense), net (4.3) 7.5
------- -------
Loss before income tax expense (42.0) (41.3)
Income tax expense -- --
------- -------
Net Loss (42.0%) (41.3%)
======= =======
26
Year Ended
April 30,
-----------------------
2001 2000
------- -------
Net revenues 100.0% 100.0%
Cost of revenues 77.3 79.8
------- -------
Gross margin 22.7 20.2
Operating expenses:
Selling, general and administrative 59.6 29.5
Research and development 14.6 9.6
------- -------
Total operating expenses 74.2 39.1
------- -------
Operating (loss) (51.5) (18.9)
Other income (expense), net (6.3) 41.0
------- -------
Income (loss) before income tax expense (57.8) 22.1
Income tax expense -- 1.0
------- -------
Net income (loss) (57.8%) 21.1%
======= =======
SALE OF DEPLETED ZINC BUSINESS IN DECEMBER 1999
A primary factor that significantly affected our financial condition and
results of operations in fiscal year 2000, and as fiscal 2000 compares to fiscal
2001 is the sale of our depleted zinc business to Eagle-Picher (which
transaction has resulted in an arbitration proceeding as described in "LEGAL
PROCEEDINGS"). Because of the one time gain associated with the Eagle Picher
transaction, we believe that the financial results expressed in our fiscal 2000
financial statements are not comparable to our anticipated future operations.
NET REVENUES
Net revenues for the three months ended July 31, 2001 were approximately
$1,634,000, a decrease of approximately 19.7%, or approximately $402,000, from
approximately $2,036,000 for the three months ended July 31, 2000. The decrease
is principally due to the reduction in net revenues from international isotope
product sales partially offset by an increase in domestic isotope product sales.
Net revenues from international isotope product sales for the three months
ended July 31, 2001 were approximately $730,000, a decrease of approximately
52%, or approximately $778,000, from approximately $1,508,000 for the three
months ended July 31, 2000. The decrease was primarily the result of the
acquisition of a major customer by one of our competitors during the second
quarter of fiscal 2001.
27
Net revenues from domestic isotope product sales for the three months ended
July 31, 2001 were approximately $904,000, an increase of approximately 71%, or
approximately $376,000, from approximately $528,000 for the three months ended
July 31, 2000. The increase was primarily the result of additional product sales
to our existing customers and an increase in our customer base for the three
months ended July 31, 2001.
Net revenues decreased from $12,733,000 in fiscal 2000 to $7,789,000 in
fiscal 2001, a decrease of $4,944,000 or 38.8%. The decrease is primarily
because our net revenues from isotope product sales decreased approximately
$3,788,000. This reduction is primarily because of the lack of depleted zinc
revenues after the sale of the depleted zinc business to Eagle-Picher in
December 1999, and the acquisition of a major customer by one of our
competitors. We expect that the loss of this customer will have a short-term
effect until we are able to replace the revenues generated by that customer
through sales to other customers.
Net revenues from contract research and development services sales
decreased approximately $1,156,000 to $0, because of our cessation of these
activities in May 2000.
Depleted zinc revenues for fiscal 2000, through December 1999, the date we
sold our depleted zinc business, were approximately $2,645,000. Because we sold
our depleted zinc business during fiscal 2000, our depleted zinc revenues for
fiscal 2001 were $0.
Our revenues for fiscal 2001 were also reduced as a result of our decision
to cease shipping product to one of our customers who had failed to pay
approximately $218,000 in invoices due. We did not accept any orders from this
customer during the last six months of fiscal 2001. Revenues recognized from
this customer during the first six months of fiscal 2001 were approximately
$300,000. Additionally, we had ordered, based on purchase orders placed by this
customer, approximately $131,000 in product specific to this customer that was
charged to cost of sales during fiscal 2001.
We do not anticipate significant revenues from sales of silicon-28 based
products in fiscal 2002. 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 the high-performance micro-processor segment 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.
The sale of our subsidiary, IPRC, effective February 1, 2001, will not
adversely affect revenues as we had ceased all revenue producing activities at
IPRC effective May 1, 2000.
28
International sales decreased approximately $3,045,000, to approximately
$5,187,000, in fiscal 2001, from approximately $8,232,000, in fiscal 2000.
International sales represented approximately 67% of net revenues in fiscal
2001, and 65% of net revenues in fiscal 2000. The dollar decrease is due
primarily to the acquisition of a major customer by one of our competitors and
the lack of depleted zinc revenues after the sale of the depleted zinc business
to Eagle-Picher in December 1999. The percentage increase is primarily
attributable to significantly lower domestic revenues from IPRC substantially
offset by a decrease in international revenues during fiscal 2001. Lower
depleted zinc sales had a comparable effect on both international and domestic
sales on a percentage basis.
GROSS MARGIN
Gross margin for the three months ended July 31, 2001 was approximately
$421,000, a decrease of approximately 18%, or approximately $93,000, from
approximately $514,000 for the three months ended July 31, 2000. On a percentage
of net revenues basis, gross margin increased .5 percentage points to
approximately 25.7%, for the three months ended July 31, 2001, from
approximately 25.2%, for the three months ended July 31, 2000. The dollar
decrease is directly attributable to the decrease in net revenues.
Gross margin decreased approximately $807,000, to approximately $1,770,000,
in fiscal 2001, from approximately $2,577,000, in fiscal 2000. On a percentage
of net revenues basis gross margin increased 2.5 percentage points to
approximately 22.7% in fiscal 2001, from approximately 20.2%, in fiscal 2000.
The dollar decrease is due to the sale of the depleted zinc business in December
1999, the cessation of contract research and development service activities in
May 2000, and the recent acquisition of a major customer by one of our
competitors. The percentage increase is due to increases in the margins on the
sale of stable and radioisotopes and the cessation of contract research and
development services which typically had lower margins. The percentage increase
was partially offset by a decrease in sales of depleted zinc which was typically
a higher margin product.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased approximately
$274,000, to approximately $929,000, for the three months ended July 31, 2001,
from approximately $1,203,000, for the three months ended July 31, 2000. On a
percentage of net revenues basis, selling, general and administrative expenses
decreased approximately 2.2 percentage points to approximately 56.9%, for the
three months ended July 31, 2001, from approximately 59.1%, for the three months
ended July 31, 2000. The dollar decrease is primarily attributable to reduced
salaries and headcount, and other related expenses due to the sale of IPRC,
effective February 1, 2001. The percentage decrease is also attributable to the
sale of our subsidiary IPRC, partially offset by a decrease in net revenues.
Selling, general and administrative expenses increased approximately
$891,000, to approximately $4,645,000, in fiscal 2001, from approximately
$3,754,000, in fiscal 2000. On a percentage of net revenues basis selling,
general and administrative expenses increased approximately 30.1 percentage
points to approximately 59.6% in fiscal 2001, from approximately 29.5%, in
fiscal 2000. The dollar increase is primarily attributable to increased usage of
professional services including legal, business development and accounting
services, increased bad debt expense resulting from the net write off of $96,000
attributable to a single customer, and remediation expenses related to the
Golden,
29
Colorado facility that was leased by the Company. During fiscal 2001 we
recognized a $270,000 expense to remediate the Golden, Colorado facility that
was leased by the Company. The lease and related remediation liability were
assumed by the buyers of IPRC effective February 1, 2001. The dollar increase in
fiscal 2001 was partially offset by the sale of our subsidiary, IPRC, effective
February 1, 2001. The percentage increase was caused by significantly lower
revenues and higher levels of spending
RESEARCH AND DEVELOPMENT EXPENSES
Consistent with our product development strategy, we are seeking to
identify and evaluate new stable and radioactive isotope products and potential
markets for economic and technical feasibility. We will, in addition, continue
funding research and development to improve technologies for isotope separation
and material processing technologies. Because of the uniqueness of our business,
the unique chemicals and processes we deal with and the handling precautions
required, these expenses are significant. We cannot offer any assurance that our
current or future lines of business or products resulting from our research and
development efforts will be profitable or generate significant revenues.
Research and development expenses decreased approximately $199,000, to
approximately $105,000, for the three months ended July 31, 2001, from
approximately $304,000, for the three months ended July 31, 2000. On a
percentage of net revenues basis research and development expenses decreased
approximately 8.4 percentage points to approximately 6.5% for the three months
ended July 31, 2001, from approximately 14.9%, for the three months ended July
31, 2000. The dollar decrease is primarily related to decreased research and
development expenses associated with the zinc recovery and recycling project.
These expenses were incurred by our subsidiary IPRC, which was sold effective
February 1, 2001. The percentage decrease is also attributable to the sale of
our subsidiary IPRC, partially offset by a decrease in net revenues.
Research and development expenses decreased approximately $90,000, to
approximately $1,134,000, in fiscal 2001, from approximately $1,224,000, in
fiscal 2000. On a percentage of net revenues basis research and development
expenses increased approximately 5.0 percentage points to approximately 14.6% in
fiscal 2001, from approximately 9.6%, in fiscal 2000. The dollar decrease is
primarily related to decreased research and development expenses associated with
silicon-28 product development. This decrease is due primarily to the failure of
Eagle-Picher to meet its obligation to deliver 200 kilograms of silicon-28 as
described in "LEGAL PROCEEDINGS". The dollar decrease in fiscal 2001 was
partially offset by an increase in research and development costs associated
with the development of our zinc recovery and recycling project prior to the
sale of our subsidiary, IPRC on February 1, 2001. The percentage increase is
primarily attributable to lower revenues as described above.
We believe that the development and introduction of new product
applications is critical to our future success. We expect that research and
development expenses may increase assuming sufficient cash remains available and
we are able to procure necessary materials and outside services, but will likely
continue to vary as a percentage of revenues because of the timing and amount of
future revenues. We operate no facilities of our own for research and
development. All research and development work is performed by outside entities,
none of which we control. None of the companies that currently perform research
and development work for us do so on an exclusive basis.
30
OTHER INCOME (EXPENSE), NET
Other income (expense), net includes interest income and expense and
foreign currency gains and losses. Other income (expense), net decreased
approximately $222,000 , to approximately ($70,000), for the three months ended
July 31, 2001, from approximately $152,000, for the three months ended July 31,
2000. The decrease is primarily attributable to a decrease in interest income of
approximately $90,000 due to lower amounts of cash and cash equivalents and
lower interest rates. In addition, for the three months ended July 31, 2001 we
realized an approximate $59,000 loss related to the translation of the German
financial statements of Chemotrade to US dollars as compared to an approximate
$69,000 gain for the three months ended July 31, 2000.
Other income (expense), net includes interest income and expense, gains or
losses on the sale of lines of businesses or subsidiaries, impairment
write-downs related to contract research and development assets held by IPRC and
foreign currency gains and losses. Other income (expense), net decreased
approximately $5,708,000, to approximately ($489,000), in fiscal 2001, from
approximately $5,219,000, in fiscal 2000. Interest expense decreased by
approximately $319,000 due to lower debt levels following the sale of our
depleted zinc business. During Fiscal 2001, we also realized a gain of
approximately $59,000 on the sale of IPRC. These increases in other income were
offset by a decrease of approximately $5,296,000 related to the initial gain
recognized on the sale of the depleted zinc business to Eagle-Picher in fiscal
year 2000 and the reversal of $208,000 of additional gain from the depleted zinc
sale recognized in fiscal 2000. In addition, in fiscal 2001 we recorded
impairment losses of approximately $354,000 related to contract research and
development assets held by IPRC. During fiscal 2001 we also realized a foreign
currency loss of approximately $66,000 upon translation of the German Mark
financial statements of Chemotrade to US dollars. During fiscal 2000, we
recognized a gain of $110,000 resulting from the favorable settlement of a
dispute with a vendor.
Part of the consideration for the depleted zinc sale was a $1.5 million
note payable in three installments of $500,000 on November 30, 2000, 2001 and
2002. Eagle-Picher failed to make the first additional payment due November 30,
2000. We had been recognizing the contingent gain of $1,500,000 on a
straight-line basis over the thirty-six month period (approximately $41,667 per
month), as an unaffiliated supplier performed under a contract that was assigned
to Eagle-Picher. Through November 1, 2000, we had recognized $458,000 of the
additional gain. As of November 1, 2000, we ceased recognizing any additional
gain and reversed the previously recognized $458,000.
INCOME TAXES
We currently operate at a loss and expect to operate at a loss until the
products currently under development begin to generate sufficient revenue. While
we recognized a taxable gain upon the sale of our depleted zinc product line,
the tax expense incurred was offset by the realization of previously
unrecognized deferred tax assets related to the net operating losses used to
offset the taxes paid. As a result, for fiscal 2000, our reported tax expense
was limited to the taxes payable in Germany on the income of our Chemotrade
subsidiary.
31
The losses incurred in fiscal 2001 and the three months ended July 31, 2001
are not expected to generate an income tax benefit because of the uncertainty of
the realization of the deferred tax asset. As such we have provided a valuation
allowance against the deferred tax assets for the amount in excess of the taxes
paid in prior years that are subject to refund. We anticipate receiving a tax
refund of approximately $419,000 resulting from a carry-back claim associated
with the current year taxable loss. We received approximately $362,000 of this
refund in October 2001. The remaining amount was not refunded due to alternative
minimum tax restrictions.
Income tax expense was $0 for fiscal 2001, and approximately $129,000 for
fiscal 2000. Both of the United States entities and the Chemotrade subsidiary in
Germany had net losses in fiscal 2001 and as a result did not have income tax
expense.
NET INCOME (LOSS)
We recognized a net loss of approximately $687,000 for the three months
ended July 31, 2001, as compared to a net loss of approximately $842,000 for the
three months ended July 31, 2000. Losses, as incurred during the three months
ended July 31, 2001, of this magnitude will likely continue until revenues
increase from our current operations or until we generate revenues from products
introduced as a result of our research and development projects.
We recognized a net loss of approximately $4,498,000 for fiscal 2001, as
compared to net income of approximately $2,689,000 for fiscal 2000. The net
income recorded for fiscal 2000, was the result of the $5,296,000 gain
recognized on the sale of our depleted zinc business to Eagle-Picher on December
1, 1999. Without this one-time gain, we would have recognized a net loss in
fiscal 2000.
Net income in future years will be dependent on our ability to increase net
revenues faster than we increase our selling, general and administrative
expenses, research and development expense and other expenses. Because of our
continuing research and development efforts on new products, we do not expect to
generate any significant increase in net revenues in fiscal 2002. Consequently,
we anticipate that the operations in fiscal 2002 will result in a significant
loss unless we are able to increase our revenues from our existing products or
generate additional sales from the new products we may develop.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital and liquidity have eroded significantly during the
three months ended July 31, 2001 and the year ended April 30, 2001. Working
capital decreased approximately $313,000, to approximately $1,296,000 at July
31, 2001, from approximately $1,609,000, at April 30, 2001. Working capital
decreased approximately $2,145,000, to approximately $1,609,000, at the end of
fiscal 2001, from approximately $3,754,000, at the end of fiscal 2000.
32
Our principal sources of funding for the three months ended July 31, 2001
and 2000 have been from the exercise of stock warrants, the exercise of stock
options and proceeds from the sale of shares under our employee stock purchase
program. We used cash in operating activities of approximately $755,000 and
$1,508,000, during the three months ended July 31, 2001 and 2000, respectively.
Cash used in operating activities during the three months ended July 31, 2001
was principally the result of a net loss of approximately $687,000. Cash used in
operating activities for the three months ended July 31, 2000 was principally
the result of a net loss of approximately $842,000 and tax payments of $675,000.
Our investing activities used cash of approximately $2,000 and
approximately $11,000 for the three months ended July 31, 2001 and 2000,
respectively. Cash used in investing activities for the three months ended July
31, 2001 and July 31, 2000, resulted primarily from purchases of property and
equipment.
Financing activities generated cash of approximately $327,000 and
approximately $193,000 for the three months ended July 31, 2001 and 2000,
respectively. Cash provided by financing activities for the three months ended
July 31, 2001 resulted primarily from the exercise of stock warrants for
approximately $322,000 and proceeds of approximately $5,000 from the sale of
shares under our employee stock purchase program. Cash provided by financing
activities for the three months ended July 31, 2000 resulted primarily from the
exercise of stock options and proceeds from the sale of shares under our
employee stock purchase program.
At July 31, 2001, we had approximately $660,000 of cash and cash
equivalents, a decrease of approximately $430,000, compared to $1,090,000, at
April 30, 2001. The decrease is primarily the result of net losses incurred
during the three months ended July 31, 2001.
Our principal sources of funding for the years ended April 30, 2001 and
2000 have been cash from the sales of lines of business, sales of common and
preferred stock and borrowed funds. We used cash in operations of approximately
$3,147,000 and $4,327,000 during fiscal 2001 and 2000, respectively. Our
investing activities used cash of approximately $43,000 and provided cash of
approximately $6,715,000 during fiscal 2001 and 2000, respectively. The cash
provided in fiscal 2000 was primarily due to proceeds from the sale of the
depleted zinc business to Eagle-Picher on December 1, 1999.
Financing activities generated cash of approximately $895,000 and $545,000
for fiscal 2001 and 2000, respectively. Cash provided by financing activities
during fiscal 2001 resulted primarily from the December 13, 2000 issuance of
units, comprised of one share of common stock bundled with two Class B warrants
for cash of approximately $675,000 and the exercise of stock options for
approximately $208,000. Cash provided by financing activities during fiscal 2000
resulted primarily from the issuance of convertible preferred stock for cash of
approximately $2,250,000, the issuance of common stock for cash of approximately
$94,000 and proceeds from the issuance of long-term debt of approximately
$75,000. Net repayments on a line of credit and other borrowings of
approximately $1,931,000 were the primary uses of cash in financing activities
during fiscal 2000.
33
The private placement agreement associated with the private placement
completed on December 13, 2000 required that we register the common stock and
the common stock underlying the Class B common stock warrants by June 14, 2001
or certain penalty provisions would apply. As we were unable to complete the
effective registration of such shares by June 14, 2001, on July 26, 2001, we
rectified the situation by issuing an additional 112,504 shares of common stock
and an additional 675,000 Class B warrants to the accredited investors of the
private placement.
On April 30, 2001, we completed an exchange offer whereby the holders of
Class A warrants could exchange each Class A warrant for a Class B warrant. In
order to participate in the exchange offer, each holder of the Class A warrants
was required to submit their election by April 30, 2001. As of April 30, 2001,
124,400 of the 810,000 Class A warrants had been processed and exchanged for
Class B warrants, and an additional 508,210 Class A warrants which had been
tendered by holders prior to the expiration date were subsequently processed for
exchange. Consequently, as of the expiration of the exchange offer, 632,610
Class A warrants had been exchanged for Class B warrants.
At April 30, 2001 we had approximately $1,090,000 of cash and cash
equivalents, a decrease of approximately $2,295,000, compared to $3,385,000 as
of April 30, 2000. The decrease is largely attributable to funding our net loss
with our existing working capital.
Two events adversely impacted our cash and working capital position at
April 30, 2001. The first adverse event was that we were forced to settle in the
amount of $122,000 related accounts receivable of $218,000 and $131,000 of
specialized product we had purchased based on purchase orders placed by this
customer that we wrote off. The second adverse event was Eagle-Picher's failure
to make the annual installment payment of $500,000 due November 30, 2000,
related to the sale of our depleted zinc business.
On July 29, 1999, we completed a $2,745,000 private placement financing to
a limited number of accredited investors (including some creditors who converted
debt). We issued 1,830,000 units, each consisting of one share of Series A
convertible preferred stock and one warrant. We received cash proceeds of
$2,250,000 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 allowed the investor to purchase one share of Isonics common
stock for $3.75 through July 29, 2002. We granted registration rights to the
holders of the shares of common stock underlying the Class A convertible
preferred stock and the warrants.
Under the terms of the preferred stock private placement on July 29, 1999,
the related shareholders have anti-dilution rights if we issue or sell common
stock after July 29, 1999 for a per share consideration less than the current
exercise price of the related warrants. As a result of potential dilution
triggered by the December 13, 2000 private placement, we issued an additional
146,301 common stock warrants to the preferred shareholders and reduced the
exercise price to $3.52 on all related warrants in order to satisfy the
anti-dilution provisions.
34
As a result of the exchange offer completed on April 30, 2001 and the
issuing of the additional 112,504 shares of common stock and an additional
675,000 Class B warrants to the accredited investors of the December 13, 2000
private placement, on July 26, 2001 we issued approximately 255,000 additional
common stock warrants and reduced the exercise price on all related warrants to
$3.17 in order to satisfy the anti-dilution provisions related to the July 29,
1999 private placement.
The purchase agreement relating to the acquisition of Chemotrade required
that the former shareholders of Chemotrade receive additional consideration in
the event that defined levels of pretax earnings are achieved for fiscal 2001.
As a result of the performance of Chemotrade during fiscal 2001, we are required
to pay the former shareholders of Chemotrade contingent consideration of
approximately $114,000 during fiscal 2002. There are no other events of
contingent consideration under the terms of the purchase agreement.
As of the present time we have no material agreements with banks or other
financial institutions to borrow funds. Chemotrade has one unsecured revolving
line of credit for DM 400,000 (approximately $182,000) that we have not utilized
to date.
We expect that our working capital will continue to decrease over time as
we continue to use our capital for operations, research and development, and
investing activities. We do not expect working capital to increase until we are
able to increase our revenues to exceed our cash out-flow (assuming we are able
even to increase our revenues) or complete a financing arrangement. We cannot
offer any assurance that we will be able to do so in the near term. We have
sufficient cash available to fund our working capital requirements for
approximately 3 months.
We continue to pursue several items that will help us meet our future cash
needs. We expect to receive an income tax refund of approximately $419,000 (of
which $362,000 was received in October 2001) resulting from a carry-back claim
associated with the current year taxable loss. In addition, we continue to
aggressively pursue our claim of $75,500,000 against Eagle-Picher. We are
currently in the arbitration process and hope to come to resolution in 2002 (see
"LEGAL PROCEEDINGS"). Management is also currently working with several
different sources, including both strategic and financial investors, in order to
raise sufficient capital to finance both our continuing operations and our
proposed implementation of our silicon-on-insulator (SOI) business plan based on
the license we have acquired to Silicon Evolution, Inc.'s ("SEI") technology
(see "BUSINESS"). Although there is no assurance that funding will be available
or that the outcome in the Eagle-Picher case will be positive, we believe that
our current business plan, if successfully funded, will significantly improve
our operating results and cash flow in the future.
BUSINESS
We are an advanced materials and technology company. We are developing and
we anticipate commercializing products created from materials whose natural
isotopic ratios have been modified. An isotope is one of two or more species (or
nuclides) of the same chemical element that differ from one another only in the
number of neutrons in the atom's nucleus. The different number of neutrons can
create significantly different nuclear properties. The most well-known of these
properties is radioactivity. Radioactive isotopes (or radioisotopes) can be
found in nature. Most of our radioisotopes, however, are man-made. Stable
isotopes, as distinguished from radioisotopes, are not radioactive. Several
35
manufacturers, located primarily in republics that once were part of the Soviet
Union, produce these isotopes. We buy these isotopes from the manufacturers and
resell them in the form of common chemical compounds. For example, oxygen-18 is
sold as water, and carbon-13 is sold as carbon dioxide. Today our isotope
business addresses the material needs of two primary markets:
o life sciences and
o semiconductor materials.
While we currently are focusing on these two markets, we continually
evaluate other applications for both stable and radioisotopes. We also sell
isotopes for use in basic scientific research and certain specific industrial
applications. We believe our core competency is our ability to identify,
develop, source, and commercialize products and services based on isotopically
engineered materials.
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.
Our web site is www.isonics.com. We currently have two subsidiaries through
which we conduct some of our operations. The following chart identifies those
subsidiaries and our ownership interest in each:
Name and Place of Ownership
Headquarters Formation Percentage Business
------------ --------- ---------- --------
Chemotrade GmbH Germany 100% Chemotrade and its subsidiary are value-added re-sellers of
Dusseldorf, Germany stable and radioactive isotopes. They supply radioactive
isotopes for pharmaceutical and industrial research as well
as for industrial and medical imaging, calibration sources
and for brachytherapy applications.
Chemotrade Leipzig Germany 75% (through Additionally, they supply various stable isotope labeled
GmbH Chemotrade) compounds for pharmaceutical research and drug design, as
Leipzig, Germany well as oxygen-18 for use in producing a radioisotope used
in positron emission tomography. Their market is primarily
Europe, but sales are also made to North America and Asia.
The foregoing does not include Isonics' minority ownership in two companies
which are not considered to be subsidiaries:
o Interpro Zinc, LLC, a Colorado entity which engages in the research
and development for the recovery and recycling of zinc metal from
various sources. Isonics has a 25% interest in this entity.
36
o Institut of Umwelttechnologien GmbH ("IUT"), an entity based in
Berlin, Germany which performs research and development, and
manufacturing of radioisotopes. Isonics has a 6% interest in this
entity through Chemotrade.
OUR ISOTOPE BUSINESS. In order to develop our products, it is usually
necessary to increase ("enrich") or decrease ("deplete") the concentration of a
particular isotope or isotopes. There are over 280 naturally occurring stable
isotopes of 83 different elements. The number of isotopes of any given element
varies widely. Stable isotopes of a given element typically do not differ
significantly in their chemical behavior. Stable isotopes of an element differ
in mass and diameter, as well as several nuclear properties, such as
cross-section, spin, and magnetic movement. Differences in these properties can
result in substantially different effects, and some of these different effects
have the potential for commercial application.
Isotopes are typically referred to by their atomic mass number, which
number is derived from the number of protons and neutrons in the atom's nucleus.
For example, oxygen-18 has eight protons and ten neutrons in its nucleus, and
silicon-28 has fourteen protons and fourteen neutrons in its nucleus. In ultra
chemically pure crystals, grown for electronics or optical applications,
isotopic impurities can be the greatest contributor to crystal disorder because
of mass and diameter differences. Eliminating these variations by using a single
enriched isotope (i.e. an isotopically pure substance) increases thermal
conductivity and optical transparency, and thus improves product performance.
Similarly, enriching or depleting isotopes based upon their nuclear
cross-sections allows materials to be engineered for applications in the nuclear
power industry, for controlled doping of semiconductors in the computer
industry, and for use as targets to produce radioisotopes for the life sciences
and other industries.
STABLE ISOTOPES. Stable isotopes may be thought of as extremely pure
materials. Not only are these isotopes chemically pure, but they frequently
consist of only one isotope depending on the level of enrichment. This extra
degree of purification, accomplished on the sub-atomic level, provides enhanced
performance properties as distinguished from normal (i.e., chemical only) purity
materials. Depleted isotopes are the elimination (or reduction in level) of an
isotope, or isotopes, and can prevent the creation of undesirable byproducts in
subsequent processing steps. In some instances the undesirable byproducts are
produced during the intended use of the non-depleted isotope material. Stable
isotopes have commercial uses in several areas, including, but not limited to:
o energy generation;
o medical research, diagnostics, and drug development;
o product tagging and stewardship;
o semiconductors; and
o optical materials.
We have successfully developed and commercialized several isotope products
(notably, even-numbered cadmium isotopes for use with helium-cadmium lasers and
depleted zinc oxide for nuclear power plants). We intend to promote the
emergence and growth of new stable isotope applications.
37
RADIOISOTOPES. The radioisotopes we acquire and sell are typically used in
medical diagnostic, treatment and therapy applications. In most cases we first
acquire an enriched or depleted stable isotope "target," which is then exposed
to an appropriate form of radiation to create a specific radioisotope. A key
property of a radioisotope is its half-life. The half-life is a measure of how
fast a radioisotope decays into either a stable isotope or another radioisotope.
Since most radioisotopes used in life science applications have short
half-lives, they are rarely found in nature. Therefore, radioisotopes have to be
made from a target material, usually in a nuclear reactor or a cyclotron, and
must generally be used immediately. A nuclear reactor or a cyclotron generates
the appropriate form of radiation required to convert the target material into
the desired radioisotope.
COMPANY STRATEGY
We believe our strength lies in our ability to bring the necessary
resources together to identify, evaluate, develop, engineer and successfully
commercialize applications for stable and radioactive isotopes, and value-added
products manufactured from these isotopes. This strength is reflected in
management's experience in taking depleted zinc from a cost prohibitive concept
to a successful commercial reality.
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 minimizing capital costs. This
strategy involves:
o focusing on development of high value-added products, which products
should give us a competitive advantage in large or growing markets;
o leveraging research and development expenditures through
collaborations, government programs, and corporate and academic
partnerships;
o minimizing early capital needs by obtaining stable and radioactive
isotopes through alliances and supply agreements with existing stable
and radioactive isotope sources, followed by investment in
Isonics-owned isotope production facilities when markets are better
established and the optimum production technology has been determined;
o obtaining value-added processing technology through sub-contract
manufacturing agreements, joint ventures, and acquisitions of
strategically important technologies and companies; and
o developing a time-balanced product pipeline to provide a continual
supply of new business opportunities.
38
RECENT LICENSE
On September 14, 2001 we entered into an agreement with SEI which, if
completed, will result in Isonics entering the business of manufacturing
silicon-on-insulator wafers and other silicon wafers. SEI is based in Vancouver,
Washington, and has had significant financial difficulties, including an
inability to pay rent and salaries when due. SEI was founded in February 1999 as
SOI-TRONIC, Inc. to develop and manufacture SOI silicon wafers to integrated
circuit component (IC's or "Chips") and micro mechanical system (MEMS)
manufacturers. SEI's products center around its core intellectual property (IP)
technology of precision wafer polishing, cleaning, and bonding silicon wafers to
produce thick film SOI in the 100 mm, 150 mm, 200 mm, and 300mm form factors.
In an effort to alleviate SEI's financial difficulties, we considered
purchasing its assets and hiring its employees. During July and August 2001, we
loaned approximately $90,000 to SEI to use in its business operations; our loan
to SEI is collateralized by substantially all of SEI's assets. Because of SEI's
working capital needs we concluded that a purchase of its assets was not a
favorable alternative for us. As a result, we negotiated other arrangements with
SEI, including:
o On September 14, 2001, we licensed SEI's technology for a total cost
of 500,000 shares of a newly-created Series B Preferred Stock which
will be automatically converted into the same number of shares of our
restricted common stock when our shareholders authorize an increase in
our capitalization (which we expect to present to our shareholders at
our next annual meeting on November 13, 2001). The license is
exclusive, perpetual, and does not bear any royalty obligation. The
license includes an exclusive sublicense to us of technology that SEI
had licensed from Wacker Siltronic Corporation and Wacker Siltronic AG
(both referred to as "Wacker") - corporations that are not affiliated
with SEI. SEI's obligations to Wacker are in default, and it is
possible that Wacker may try to invalidate Isonics' right to use its
technology.
o On September 14, 2001, we also entered into an agreement with SEI
which contemplates future employment agreements with SEI principals
and a lease agreement with SEI by which we can lease its equipment for
$30,000 per month.
o In the September 14, 2001, agreement, we also agreed to work with
SEI's landlords, equipment lessors, and vendors, to determine whether
we can negotiate other arrangements with them which will permit us to
continue SEI's business under Isonics' name.
The employment agreements and the lease agreements are dependent on our
ability to raise at least $2,000,000 in equity financing in the near term. Our
obligations under those agreements do not commence until we raise the necessary
financing, unless we decide to commence the agreements before that time. We
understand that SEI is contemplating filing a petition for relief under Chapter
7 of the United States bankruptcy code. We are a creditor of SEI as well as a
license holder. We believe that our position in both capacities is sufficiently
protected, but there can be no assurance that a trustee in bankruptcy for SEI
may not attempt to impact our status as a secured creditor or as a licensor.
SEI's bankruptcy proceeding is in its early stages.
39
In addition, we may cancel the license and receive a return of the 500,000
shares issued to SEI if by November 30, 2001, we are not able to negotiate new
leases with landlords who own or lease the facilities we need to commence wafer
manufacturing.
Based on our market research, it appears to us that the use of SOI wafers
is growing rapidly in three major markets:
integrated circuits,
MEMS manufacturing, and
micro-optical chips for fiber-optic network devices.
Chip designers are relentlessly driven by the marketplace to seek
innovative ways to improve device performance in three key areas:
speed,
power consumption, and
size.
Based on our review, it appears that the SOI technology enables circuit
designers to reduce parasitic capacitance between adjacent circuits, thereby
improving device speed approximately 30%; and as the oxide provides a superior
source of insulation, leakage current is reduced, providing an energy savings of
better than 30%, as well as enabling circuits to be spaced on a finer pitch. SOI
technology also provides a degree of radiation hardening to integrated circuits,
thus improving circuit reliability and resistance to soft errors induced by
background radiation sources. In MEMS and micro-optical device fabrication the
use of SOI technology wafers significantly simplifies the manufacturing process.
In general, however, our ability to pursue the SOI business plan will
depend on a number of factors, including the following:
o Our ability to obtain at least $2,000,000 of financing. Although we
need much more than this amount to meet our SOI goals, the first
$2,000,000 (when coupled with the employment agreements and the leases
if we are able to negotiate acceptable arrangements with SEI's
existing landlords) will provide us the ability to commence operations
on a commercial scale.
o Unless we are able to negotiate new lease arrangements with the
landlords of SEI's existing space and equipment, we will not be able
to immediately commence operations. We are aware that two of the more
important SEI landlords have given SEI notice that they have
terminated the lease arrangements by October 7, 2001, because of SEI's
non-payment of rent.
o Although we have agreed to enter into employment agreements with the
principals necessary for continuing operations at SEI, our ability to
enter into those agreements will depend on our ability to raise
necessary financing. In the interim, each of these individuals may
seek and obtain positions with other companies, in which event their
services may not be available to us.
40
o Our ability to maintain our sublicense to the Wacker technology should
Wacker attempt to terminate its license to SEI.
o We understand that SEI is contemplating filing a chapter 7 bankruptcy
petition and, therefore, our ability to pursue our SOI business plan
may also be subject to efforts that a trustee in bankruptcy may exert
to affect our interest as a secured creditor in SEI's assets, or as a
licensee of SEI's technology.
Consequently, although we have obtained and paid-for a license to the
technology necessary for us to commence the business of manufacturing SOI and
other silicon wafers, there are many additional items that must be resolved
before we will be able to commence the manufacturing process. Although we
believe that the wafer manufacturing business, if we are able to commence it,
will complement our silicon-28 research project, we cannot offer any assurance
that we will be able to complete the steps necessary for us to be able to
commence the manufacturing process.
RECENT BUSINESS DISPOSITIONS
SALE OF DEPLETED ZINC BUSINESS - DISPUTE WITH EAGLE-PICHER.
On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC for $8.2 million, of which $6.7 million was paid on December
1, 1999. Eagle-Picher was obligated to make three additional payments of
$500,000 each on November 30, 2000, 2001, and 2002, representing the balance of
$1.5 million. These installments were contingent upon the performance of an
unaffiliated supplier of depleted zinc whose contract with us was assigned to
Eagle-Picher. Eagle-Picher failed to pay the first installment, failed to meet
certain other contractual requirements, and has made certain allegations against
us. As a result, we are engaged in binding arbitration with Eagle-Picher as
described in "Legal Proceedings".
REORGANIZATION AND SUBSEQUENT SALE OF INTERNATIONAL PROCESS RESEARCH CORPORATION
On April 30, 1998, we purchased all of the outstanding capital stock of
International Process Research Corporation ("IPRC") from a previously
unaffiliated corporation (Metallurgy International, Inc.). IPRC was a materials
processing and contract research and development company. Through December 1,
1999, IPRC performed key steps in our depleted zinc manufacturing process. We
acquired IPRC to assure future availability of this critical manufacturing
technology, and to provide an infrastructure platform for performing value-added
processing of other isotopes. IPRC had also jointly developed new, lower-cost
technologies to enable its customers to better meet the various metallurgical
and mineral processing needs. 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 IPRC. We accounted for the acquisition as a purchase.
On May 1, 2000, we substantially reorganized IPRC to focus on the recovery
and recycling of zinc metal from various sources, including galvanized steel
scrap, electric arc furnace dust, and brass scrap. We chose this course of
action for two reasons. First, we believed the market potential for this, and
related processes, was significant. Second, the profound and lengthy slump in
the mineral processing and mining industries significantly eroded IPRC's
historical customer base. We continued to meet the demands of a few remaining
customers through various sub-contractor relationships. We
41
also kept the physical infrastructure in place at our Golden, Colorado location
in case the market conditions warranted a reentry into IPRC's historical
markets. We used a significant portion of this infrastructure in our zinc
recovery and recycling project.
In January 2001, we acquired the patent rights related to the recovery and
recycling of zinc processes from three unaffiliated parties. We issued a total
of 75,000 shares of our common stock valued at $131,000 for these rights. On
February 1, 2001, we sold IPRC and transferred the patent rights for the zinc
recovery process to Interpro Zinc, LLC, a newly-formed entity owned by Dr.
Robert H. Cuttriss, formerly president of IPRC, James E. Alexander, president,
chief executive officer, and chairman of the board of directors of Isonics
Corporation, and Boris Rubizhevsky, senior vice president and director of
Isonics Corporation. Each of the three aforementioned individuals owns 25% of
Interpro Zinc, LLC. Isonics Corporation owns the remaining 25%. Each individual
contributed $100,000 to Interpro Zinc LLC to continue the development of the
zinc recovery technology. Interpro Zinc, LLC has informed us that they will be
actively seeking further investment to continue their development and
commercialization efforts.
As a part of the February 1, 2001, transaction, Interpro Zinc, LLC assumed
approximately $700,000 in liabilities associated with the operations of IPRC and
agreed to indemnify us against any contingent liabilities related to the IPRC
site in Golden.
We have signed a cooperation agreement with Interpro Zinc, LLC to continue
leasing office, laboratory, and storage space at our current location. This
agreement expires December 31, 2001. We anticipate relocating to another
facility, possibly in the Denver area, later this calendar year. At this time we
cannot determine what effect, if any, this will have on our operations.
The disinterested directors of Isonics approved the transaction after
receiving advice from management not participating in the transaction, as well
as independent consultants, and believe that the transaction was fair and
reasonable to, and in the best interests of, Isonics and our shareholders.
From May 1, 2000, through January 31, 2001, IPRC did not engage in any
revenue producing activities. We have no intention of returning to the contract
research and development activities that IPRC engaged in prior to May 1, 2000.
PRODUCTS
Our revenues have historically derived from sales from a broad range of
sources. The mix of our revenues has changed significantly during the past three
years:
In fiscal 1999, our revenues were generated from depleted zinc sales, other
stable isotopes sales, radioisotopes sales and from contract research and
development activities.
In fiscal 2000, our revenues were again generated from depleted zinc sales,
oxygen-18 and other stable isotopes sales, radioisotopes sales, and from
contract research and development activities. We sold our depleted zinc business
in December 1999 and did not recognize any revenues from depleted zinc sales
after that time.
During fiscal 2001, our revenues were solely generated from sales of stable
and radioactive
42
isotopes because of the prior sale of the depleted zinc operations and the
cessation by IPRC of its contract research and development activities.
We are attempting to develop new product lines which we expect to add to
our revenue stream, but we do not expect any significant revenues from these new
products during fiscal 2002. The following is a more specific discussion of our
current products.
WE SUPPLY ISOTOPES FOR LIFE SCIENCES APPLICATIONS
For the past several years, we have supplied stable isotopes in elemental
and simple compound forms for use in life science applications. In 1998, we
expanded our product offerings to include radioisotopes. We will continue
selling our current stable and radioactive isotope products, develop new
products along similar lines, and expand our product offerings by vertically
integrating the products offered. From time to time we evaluate building
additional isotope separation facilities in the United States or Western Europe.
We currently do not have the capital to do so, but it is an integral aspect of
our stated strategic plans. In addition, we intend to expand our value-added
manufacturing capabilities.
Our existing and emerging life sciences products include isotopes used for
a large number of purposes and can be categorized as follows:
o stable isotope labeled compounds;
o isotopes used in diagnostic breath tests;
o isotopes used in biomedical research;
o isotopes used in medical imaging and therapy;
o isotopes used in positron emission tomography;
o isotopes used in brachytherapy; and
o isotopes used to calibrate medical diagnostic equipment.
Although there is currently little FDA oversight affecting our supply of
the raw material isotopes to our customers for their use in life science
applications, FDA regulation may increase in the next few years. It is not
immediately apparent what implications any additional regulation may have for
us. The following paragraphs provide a brief summary of our existing and
emerging life sciences products:
STABLE ISOTOPE LABELED COMPOUNDS ("SILCS"). SILCs are created by incorporating
known quantities of stable isotopes including carbon, nitrogen, hydrogen
(deuterium), oxygen, and other elements, into thousands of different chemical
compounds. SILCs allow researchers to investigate living systems, determine the
chemical structure of important biological compounds, design new drugs, and
measure extremely low levels of environmental toxins. We believe that greater
availability and lower cost of stable isotopes, and advances in instrumentation
to detect stable isotopes will continue to increase the demand for SILCs.
Our products are typically simple compound SILCs that are used by our
customers to synthesize more complex and higher-value SILCs. We market primarily
deuterium, carbon-13 and nitrogen-15 to our customers for this purpose. Examples
of existing and emerging applications for these products include:
METABOLIC STUDIES. Increasingly, studies of new drugs are performed with
isotope-labeled drugs to facilitate research on metabolism, distribution,
mode of action, and elimination. The FDA one day
43
may require the isotope labeling of all new drugs for investigational use
during some or all phases of pre-clinical and clinical evaluations of these
drugs, although it does not so mandate today.
RATIONAL DRUG DESIGN. Drugs historically were designed using a screening
process in which prior experience was employed to determine what chemicals
might work to treat a condition, and then tests on subjects were performed.
Today specialized instrumentation is routinely available to determine the
chemical structure of large molecules, including the human proteins and
enzymes that a drug is designed to affect. This approach is known as
rational drug design. We believe that this new instrumentation, combined
with sophisticated SILCs, will prove beneficial in determining the chemical
structure of human proteins and enzymes. We believe rational drug design
will require an increasing supply of stable isotopes.
DIAGNOSTIC BREATH TESTS (DBTS). DBTs are a new class of non-invasive diagnostic
testing that are gaining worldwide acceptance. DBTs use stable isotope labeled
compounds to detect a wide range of human abnormalities, particularly digestive
disorders such as ulcers. The FDA has approved one test and similar approvals
exist in Europe. Demand for DBTs has increased as health care insurance
providers have determined to include reimbursement in many health insurance
plans. That demand, in turn, is expected to accelerate as regulatory approval is
awarded in other countries. Many other tests based on the same principles as
DBTs are in various stages of development worldwide. We supply stable isotope
raw material to companies developing DBT chemicals. While these sales are not
currently a large source of revenues, we continue our sales and marketing
efforts in order to monitor the development and direction of this potentially
very large market.
We do not manufacture the DBTs. DBT manufacture is subject to extensive
government regulation. The products and instruments in which our isotopes are
used may be subject to the scrutiny of FDA review and approval, as well as
ongoing FDA inspection of most aspects of the production, marketing,
distribution, and usage. We believe that the production and marketing of DBTs
are also subject to similar regulatory controls in foreign countries where we
might seek to market our isotopes for use in DBTs. Consequently, new products
cannot be introduced commercially until after approval which may or may not be
granted after several years.
BIOMEDICAL RESEARCH. Traditionally, numerous aspects of the many phases of drug
development have been carried out using radioisotope-labeled versions of
promising compounds. We supply precursor compounds labeled with radioisotopes,
such as carbon-14 and phosphorous-33, to manufacturers who incorporate them into
more complex radioisotope labeled compounds. These complete radioisotopes are in
turn used in basic research and pharmaceutical development. The carbon-14
precursors are produced under contract by IUT, a company in which we hold a
minority interest.
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 a large
body of data and experience will ensure a strong market for these products.
Importantly, we also supply some of the basic stable isotope products used to
make the compounds of these competing technologies.
44
MEDICAL IMAGING AND THERAPY. Radioisotopes have been used for years in the
diagnosis and treatment of many medical conditions. The trend in these two areas
has been towards increasingly more specific chemicals that, after labeling with
the radioisotope and injection into the patient, quickly concentrate at the
disease site(s). In theory, the appropriate choice of chemical and radioisotope
labels facilitate disease detection and stage determination which improves
therapy selection, administration and monitoring. The medical community is
developing and testing several classes of chemical compounds ranging from
monoclonal antibodies to peptides for use in the detection, and, eventually, the
treatment of many diseases. The FDA has approved some of these for use.
We currently supply stable isotopes of thallium, zinc, cadmium, xenon,
strontium, and many others that are routinely used in a variety of medical
imaging and therapy applications. These are used in their enriched stable form,
such as Xenon-129, or converted to a specific radioactive isotope in a cyclotron
or nuclear reactor. We believe that the increased supply of new isotopes
combined with the ongoing development of highly specific biochemical therapies
represents a major growth opportunity in this market segment.
POSITRON EMISSION TOMOGRAPHY ("PET"). Although this very powerful nuclear
medicine imaging technology has been available for over 25 years, its complexity
and cost until recently had relegated PET to a research role. Technology and
infrastructure improvements have reduced the cost and complexity of performing
PET studies. PET's unique ability to diagnose multiple metabolic abnormalities,
particularly cancer, has resulted in recent approvals by the FDA and favorable
reimbursement levels by Medicare, Medicaid, and third party insurers. Similar
approvals are now common in Europe and parts of Asia though reimbursement levels
vary. We believe PET studies are growing at rates of approximately 20 to 50%
annually worldwide.
Oxygen-18 is a rare stable isotope of oxygen. Oxygen-18 is used to produce
fluorine-18, a radioisotope which is the source of the positrons tracked by the
PET imaging equipment. Demand for oxygen-18 is currently greater than the
supply. Although we do not produce oxygen-18 ourselves, we purchase oxygen-18
from two sources and resell oxygen-18 to end users worldwide. In fiscal 1999, we
introduced a novel program to recycle "used" oxygen-18; we believe that this
program provides an economic advantage to our customers and provides a
competitive advantage for us over our competitors.
BRACHYTHERAPY. Cancer therapy continues to evolve to target specific types of
cancer more effectively. Today, external beam radiotherapy and chemotherapy are
the predominant technologies used in cancer treatment. However, another
technology, brachytherapy, is emerging in the treatment of specific cancers such
as prostate cancer.
In brachytherapy, small sealed radioactive seeds are inserted directly into
the tumor using a variety of minimally invasive surgical methods. The
radioisotope, which is placed inside the seed, is selected and manufactured to
ensure that only the cancerous tissue immediately adjacent to the implanted seed
is irradiated. This minimizes the irradiation of nearby healthy tissue, a common
adverse side effect that occurs with external beam radiotherapy. There are three
primary criteria that govern the selection of the radioisotope to be implanted
in the patient:
45
o half-life,
o type of radiation emitted, and
o strength of the radiation emitted.
The half-life and form of radiation emitted is dictated by the radioisotope
selected. Strength of the radiation is determined during the manufacturing
process.
Several companies (Nycomed-Amersham, Theragenics, North American
Scientific, and others) already offer, or have plans to offer, brachytherapy
products for the treatment of prostate cancer. Studies continue in the
applicability of this technique for other tumor types, including some breast and
eye cancers. We currently supply several companies with radioisotopes (or stable
isotope targets to be made into radioisotopes) for this application. We believe
this market represents one of the largest growth opportunities for
radioisotopes. It also represents a significant opportunity to provide
value-added products/services in the form of manufactured subcomponents such as
the seeds.
CALIBRATION STANDARDS. There are many medical devices that measure levels of
radiation in patients. These devices need to be calibrated using standards of
known radiation strength and type in order to ensure their accuracy. These
standards derive from radioisotopes such as cobalt-57 and gadolinium-153. We
supply many of the stable isotope target materials, as well as radioisotopes, to
many of the manufactures of the equipment needing calibration.
Medical equipment calibration standards is one of the largest markets for
radioactive source standards. These medical devices are found in the nuclear
medicine departments at thousands of hospitals around the world. The continued
growth in the numbers and complexity of nuclear medicine imaging equipment,
especially PET, ensure growth in the demand for these radioisotopes.
PRODUCT TAGGING AND STEWARDSHIP APPLICATIONS
Thousands of chemicals used everyday in our society are fungible. That is,
chemicals meeting a certain chemical formula cannot be differentiated, even when
produced by different manufacturers or on different days. Industry can identify
and distinguish identical chemicals and the products made from them by adding
stable isotopes of carbon, nitrogen, oxygen, hydrogen and other elements to the
chemicals or products. Because the stable isotopes used as the tag are
chemically identical to the chemicals used in the product, the tag should be
free of undesirable side effects. We can add stable isotopes to identify
different production lots of the same products without changing the chemical
properties of the products themselves. To date, we have not had significant
demand for stable isotopes for these applications. We believe that the demand
for suitable isotopes will increase. We believe that there are many products
suited for isotope tagging:
o Products such as perfumes may be ideally suited for product tagging.
Imitation perfumes, made by other manufacturers but sold as the
original to unsuspecting consumers, are not uncommon. If the original
perfume has been tagged using stable isotopes, then imitations can be
easily identified.
o Similarly, product tagging may be utilized where information regarding
the manufacture and distribution of a chemical is important. Ammonium
nitrate, for example, is a common fertilizer. When combined with fuel
oil, however, it becomes a powerful explosive. Knowing by whom, when
and where the ammonium nitrate was made, and to which distributor it
was sold, can be very
46
useful information if authorities need to investigate the unlawful use
of such a product. Tagging the ammonium nitrate with stable isotopes
would provide that information, even after the explosion, as the
isotopic ratios are unaffected by an explosive reaction.
These and other product tagging and stewardship applications may develop
over time.
There are several alternative tagging methodologies in use today. These
methods typically involve the addition of extraneous materials such as dyes,
exotic chemical compounds, or radioactive compounds. We believe that adding
these extraneous materials can sometimes detract from the performance of the
product, and/or cause deleterious side effects.
ISOTOPICALLY PURE SEMICONDUCTOR MATERIALS
The majority of semiconductor devices built today use natural silicon as
the starting material. Silicon has many desirable characteristics as compared to
other semiconductor materials, and the semiconductor industry has invested
billions of dollars to improve and optimize their manufacturing technologies for
silicon-based devices. Devices fabricated on single crystal silicon have
performance characteristics that are governed by the electrical and physical
characteristics of silicon including:
o carrier mobilities,
o effective mass of the carriers,
o energy band-gap,
o electrical conductivity, and
o thermal conductivity.
Carrier mobilities, for example, govern signal transit times and thus place
a limit on device speed. Thermal conductivity governs power dissipation, which,
in turn, places an upper limit on the packing densities achievable for devices
on a chip, or on the amount of power that can safely be generated in the circuit
without significantly degrading circuit performance.
The semiconductor industry trend of adding more transistors to a single
chip to increase performance, and shrinking the size of transistors to both
increase performance and decrease costs, has resulted in increased power
requirements and significantly higher operating temperatures. Nowhere is this
trend more evident than in microprocessors. Historically, the 80286, 80386, and
80486 generations of microprocessors typically did not need external heat sinks
to remove heat and function properly. High operating temperatures and thermal
management were not issues outside of mainframe or workstation computers.
Beginning with the Pentium(R), Sparc(R), and Alpha(R) microprocessors, heat
sinks and fans became necessary to control the higher operating temperatures.
According to the Semiconductor Industry Association, when the microprocessor's
power requirements exceed approximately 110 watts, heat sinks and fans will no
longer be adequate and active cooling (refrigeration) will be required. Most of
the major computer companies have already demonstrated cryogenically cooled
computers that operate up to one-third faster than their conventionally cooled
counterparts. These cryogenic cooling devices can cost upwards of $400 per
microprocessor.
47
A significant body of research, generated over the last twenty years,
supports the thesis that isotopically pure semiconductor materials have superior
thermal conductivity properties compared to natural, multi-isotopic materials.
We believe this solution (i.e., using isotopically pure semiconductor materials
to manage operating temperatures) is compatible with virtually every other heat
management solution currently implemented or envisioned to date. Critically, it
does not require changing a single device design or manufacturing process
because isotopically pure semiconductor materials are essentially chemically and
physically identical to naturally-occurring semiconductor materials. For
example, silicon has three naturally occurring stable isotopes:
o silicon-28 (92% natural abundance),
o silicon-29 (5% natural abundance), and
o silicon-30 (3% natural abundance).
By purifying silicon to 99.9% silicon-28, the thermal conductivity is
improved 60% at room temperature and over 600% at -423 degrees Fahrenheit.
In 1997, we began a program to introduce 99.9% isotopically pure silicon-28
as a superior substitute to natural silicon for the manufacture of semiconductor
devices. SEE "RESEARCH AND DEVELOPMENT." Our first efforts toward developing
isotopically pure semiconductors involved securing the intellectual property
rights to commercialize silicon-28 and similar materials. These efforts
culminated in our acquiring exclusive rights to two Yale University patents. SEE
"PATENTS AND PROPERTY RIGHTS."
We then began acquiring sufficient quantities of pure silicon-28 to make
epitaxial wafers. These wafers have been sold or given to numerous manufacturers
and academic institutions to perform additional tests to validate previous
findings and to confirm the substitutability of pure silicon-28 for natural
silicon in their manufacturing processes. These tests support our belief that
pure silicon-28 is not only a viable substitute material for natural abundance
silicon, but that the anticipated thermal conductivity property improvements are
significant.
The next step in our development program is to make bulk wafers of pure
silicon-28. The manufacture of bulk wafers requires substantially more material
than we could economically acquire from our existing suppliers, however. Our
efforts to secure an unlimited, U.S.-based, economical supply of silicon-28
culminated with the December 1999 signing of an agreement with Eagle-Picher to
provide silicon-28 to us on an exclusive basis. Under our agreement with
Eagle-Picher, we expected to receive the initial 200-kilogram delivery by
December 31, 2000. Eagle-Picher failed to make timely delivery of this amount.
We had identified several benefits to our contractual arrangement with
Eagle-Picher:
o Eagle-Picher had promised to deliver 200 kilograms of
isotopically-pure silicon-28 by December 31, 2000;
o Eagle-Picher accepted full payment for the 200 kilograms in our
equity, thus allowing us to conserve our cash for our other business
activities; and
o Eagle-Picher intended to produce the silicon-28 at a reasonable
contract price, at facilities located in the United States.
48
Unfortunately, Eagle-Picher did not meet its commitments and failed to
deliver the silicon-28 when promised. As a result, we are in arbitration with
Eagle-Picher to resolve the disputes which resulted from Eagle-Picher's
failures. SEE "SALE OF DEPLETED ZINC BUSINESS - DISPUTE WITH EAGLE PICHER,"
"LEGAL PROCEEDINGS," and "MANAGEMENT'S DISCUSSION AND ANALYSIS." We do not know
whether Eagle-Picher will ever develop its technology to the point where it can
supply the necessary quantities of silicon-28. Because we are in arbitration
with Eagle-Picher, even if they can produce silicon-28 we do not know whether
they will permit us to purchase the silicon-28 from them on favorable terms.
We have identified other sources available for supplying silicon-28, but
those sources are not domestic. We have not placed large orders with these
suppliers because of the cost involved. At an expected cost of approximately
$25.00 per gram, 200 kilograms would cost approximately $5.0 million. In
addition, certain other possible sources for bulk quantities of silicon-28 are
in the process of developing their technology and are not in commercial
production. In June 2001 we placed an order for sample quantities of silicon-28
in the form of trichlorosilane with a Russian supplier. An initial sample was
received in August 2001 for the evaluation of chemical purity, and a larger
sample (anticipated to be delivered in the fourth quarter of calendar 2001),
will be evaluated to determine whether trichlorosilane from this supplier will
provide acceptable silicon-28 epitaxial wafers. If we can use trichlorosilane
from this supplier for our purposes and if we can obtain it at a reasonable
price and on reasonable terms, and subject to financing, we expect to place an
order for sufficient trichlorosilane to produce 200 kilograms of silicon-28.
We anticipate very little revenue from silicon-28 based products in fiscal
2002, as we are still developing this business. Nonetheless, if we are able to
complete our development efforts successfully and market silicon-28 based
products, we project significant revenues in subsequent fiscal years.
We are also examining other semiconductor materials including gallium and
zinc. As with silicon, gallium and zinc have multiple, naturally occurring
stable isotopes. Our development program for gallium, which we began in October
2000, is similar to the one outlined above for silicon-28. At this time we have
begun funding development of separation technology and procuring small amounts
of isotopically pure gallium-69 and gallium-71 as trimethylgallium for use in
chemical vapor deposition reactors. In October 2001, we also delivered a small
amount of zinc-64 oxide to Cermet, Inc., for the manufacture of single crystal
zinc oxide wafers and intend to procure isotopically pure zinc-64 as diethylzinc
for use in chemical vapor deposition reactors.
DISTRIBUTION METHOD
We operate sales offices in Columbia, Maryland; Dusseldorf, Germany; and
Leipzig, Germany. We also identify customers through industry sales journals,
website identification and trade shows. In addition, many customers come to us
by referral from existing customers. There are a limited number of suppliers in
the isotope industry and, therefore, most customers are aware of the products
and services we offer. Customers directly place the orders and we either ship
directly to the customer through our sales offices or the product is shipped
directly from the supplier. We use commercial courier services such as Federal
Express and DHL to ship all products.
49
SIGNIFICANT CUSTOMERS
At July 31, 2001, three customers accounted for approximately 47% of total
net accounts receivable. These three customers accounted for approximately 43%
of net revenues for the three months ended July 31, 2001. At April 30, 2001,
five customers accounted for approximately 50.2% of total net accounts
receivable. At July 31, 2001, two customers accounted for approximately 50% of
the German segment's net accounts receivable. These two customers accounted for
approximately 44% of the German segment's net revenues for the three months
ended July 31, 2001. One customer accounted for approximately 23.3% of the
German segment's accounts receivable at April 30, 2001.
RESEARCH AND DEVELOPMENT
Consistent with our product development strategy, we are seeking to
identify and evaluate new stable and radioactive isotope products and potential
markets for economic and technical feasibility. We will, in addition, continue
funding research and development to improve technologies for isotope separation
and materials processing technologies. During fiscal 2001 and 2000, research and
development expenses were $1.134 million and $1.224 million, respectively.
In fiscal 2001, we focused our research and development efforts on the
production of high chemical-purity silicon-28 silane gas, silicon-28
trichlorosilane and silicon-28 epitaxial wafers. Through IPRC (which we owned
100% through January 31, 2001), we also performed research and development for
the recovery and recycling of zinc from various sources such as scrap metals,
including galvanized steel and brass, and electric arc furnace dust.
In fiscal 2000, we focused our efforts on the production of high
chemical-purity silicon-28 silane gas and silicon-28 epitaxial wafers as
described above; and the zinc recovery and recycling, also as described above.
We transferred the zinc recovery program in conjunction with the sale of
our former subsidiary to Interpro Zinc, LLC and we are no longer directly
engaged in research and development efforts for zinc recovery and recycling. (We
continue to be engaged in these efforts indirectly through our 25% ownership of
Interpro Zinc, LLC.)
SILICON-28.
To expand our capacity and to ensure product quality, we were proceeding to
build our own silane gas facility in Golden, Colorado. We have postponed
building this plant due to Eagle-Picher's inability to supply silicon-28. We
will continue to use outside sources to perform processing as required for our
needs until circumstances and financing warrant proceeding with our contemplated
facility.
In August 2001, we entered into a marketing agreement with a major wafer
manufacturer. We will supply silicon-28 as trichlorosilane to the wafer producer
for the manufacture of silicon-28 epitaxial wafers. These wafers will be
supplied to interested customers worldwide for evaluation in a number of
semiconductor devices. This agreement is critical in assuring that silicon-28
epitaxial wafers will be available to meet the increasingly stringent quality
demands of the semiconductor industry. Any revenues generated under this
agreement will be split 50-50 with the wafer manufacturer.
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In May 2001, we entered into a one-year silicon-28 joint development
program with Advanced Micro Devices (AMD), a major microprocessor manufacturer.
We will supply AMD with silicon-28 wafers. AMD will use our products to make and
rigorously test state-of-the-art microprocessors to accurately quantify the
benefits of high thermal conductivity silicon-28 in this application. We expect
to use the results of the testing program to find the proper balance between
performance and cost. In addition to AMD, another major microprocessor
manufacturer is currently evaluating silicon-28 epitaxial wafers that were
delivered in September 2000.
In fiscal 2001, we delivered a second batch of epitaxial wafers to Cypress
Semiconductor, and we also sold a small quantity of silicon-28 epitaxial wafers
to two Japanese semiconductor manufacturers for their evaluation.
In fiscal 2001, we entered into two new research programs at universities;
o The University of Texas (Austin) will evaluate the use of silicon-28
epitaxial wafers as substrates for SiGe:C based transistors, and
o The University of California (Santa Cruz) will use silicon-28
epitaxial wafers to build novel thermoelectric coolers
In fiscal 2000, we funded two new university research programs and
participated in two others.
o The first funded program is at Southern Methodist University, Dallas,
Texas. The Southern Methodist University Program will measure the
thermal conductivity of silicon-28 thin films with various electrical
dopants, and model the effect of epitaxial layer thickness on the
temperature of silicon and gallium arsenide transistors. This program
is still underway.
o The second funded program was at North Carolina State University,
Raleigh, North Carolina. The North Carolina State University Program
modeled and built power semiconductor devices and determined the
effect of silicon-28 epitaxial layers on the device's temperature
distribution. This program has been completed, and the unpublished
results indicate that significantly smaller leakage currents were
found in diodes built on silicon-28 wafers, as compared to natural
silicon wafers, indicating that lower temperatures were achieved.
o Innovations for High Performance Microelectronics (IHP), a German
research organization, is evaluating silicon-28 epitaxial wafers in
their SiGe:C technology being developed for wireless
telecommunications applications. This program is still underway.
o DIMES, a research organization associated with Delft University in the
Netherlands is evaluating silicon-28 SOI wafers to determine if
improved cooling can be accomplished. This program is still underway.
Additionally, in fiscal 2000, we entered into a Cooperative Research &
Development Agreement with Lawrence Berkeley Laboratory in Berkeley, California,
to study the properties of various silicon isotopes. This agreement is part of a
U.S. Department of Energy program to re-deploy Russian nuclear weapons
technology to commercial applications. Delays within the Department of Energy
have pushed the start of this program to our fiscal year 2002.
51
We also supplied silicon-28 silane gas to ATMI, Inc. in Danbury,
Connecticut, and will participate in their Office of Naval Research funded
program to investigate isotopically pure silicon carbide. Initial data from this
program have shown an improvement in the thermal conductivity of isotopically
pure silicon carbide epitaxial layers. This is the first data that we are aware
of that has shown improvement in an isotopically modified compound
semiconductor. This program is still underway.
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. This agreement reflects our effort to ensure a large supply of silicon
isotopes at a reasonable cost to support the large-scale manufacture of
isotopically pure silicon wafers. According to Silex, in 2001 they started a
stable isotope separation program that includes silicon.
The adoption of silicon-28 by semiconductor manufacturers will depend on
the outcome of the evaluations underway. Even though silicon-28 is a one-for-one
substitution for normal silicon, semiconductor companies are very conservative
about changing anything in their manufacturing process, for fear that their
yields will suffer. Typically the testing sequence at these companies is:
1) A detailed analysis of the silicon-28 wafers to make sure that they
are equivalent to standard wafers and that their is no risk of
contamination to the semiconductor fabrication facility or other wafers in
process,
2) Manufacture and testing of test transistors to ensure that the
electrical parameters are unchanged,
3) Gate oxide integrity testing as a function of oxide thickness to
determine any changes from standard wafers,
4) Manufacture and testing of a device using a well documented (generally
older) technology to determine any yield or performance improvements,
5) Manufacture and testing of a device using state-of-the-art technology
to determine any yield or performance improvements. Depending on the
specific company, this could be technology already in production or
technology scheduled for future production such as 0.18 or 0.13 micron
design rules,
6) Repeat step 5 with a sufficient quantity of wafers from a qualified
wafer supplier to generate a statistically valid conclusion, and finally
7) Production planning for the introduction of a new product based on
silicon-28.
This a very time consuming process. While several companies are well into
in the evaluation process, we do not expect the introduction of products based
on silicon-28 wafers in our fiscal year 2002, and therefore do not expect
significant revenues from silicon-28 product sales in fiscal 2002.
52
OTHER SILICON ISOTOPES.
We have an oral agreement with Voltaix, Inc. of North Branch, New Jersey to
act as a distributor of our products for the ion implantation industry. The
first product sold in accordance with the Voltaix agreement is silicon
tetrafluoride enriched in the silicon-29 isotope. This isotopically enriched
material allows higher beam currents and higher productivity than the natural
silicon tetrafluoride currently used in the gallium arsenide industry today.
ZINC RECOVERY AND RECYCLING.
Until February 1, 2001, we owned 100% of IPRC. It had been engaged in
contract research and development activities. During the course of its contract
research and development activities, IPRC was introduced to a patented
technology using chlorine gas to recover and recycle zinc from galvanized steel
scrap. Because we sold IPRC effective February 1, 2001, we do not expect to
incur additional research or development expenses relating to zinc recovery and
recycling, and we are no longer involved in this or any related activities. We
received a 25% interest in the purchaser and, therefore, still retain an
interest should the purchaser's research and development of zinc recovery prove
to be successful.
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. SEE "RISK
FACTORS."
We currently have no patents in our own name, although we have filed
several 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
(which is currently being performed by outside entities) 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 rights to patents covering semiconductor devices derived from
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). Each of these patents
expire seventeen years after issuance.
53
COMPETITION
Many of our potential competitors, are larger and have significantly
greater financial, technical, marketing and other resources than us. Some of our
competitors may form partnerships or alliances with large pharmaceutical or
electronics companies, with the resulting entity possessing greater market
strength than we have. We face competition relative to many of our products,
including:
STABLE ISOTOPE LABELED COMPOUNDS AND DIAGNOSTIC BREATH TEST PRODUCTS.
Several companies compete with us for a piece of the stable isotope labeled
compounds market. We will have additional competitors if we offer diagnostic
breath test products and additional stable isotope label compounds in the
future. Two of these companies, Cambridge Isotope Laboratories Inc. and Isotec,
Inc., have their own isotope separation facilities, while all of our competitors
produce some combination of stable isotope labeled compounds and diagnostic
breath test substrates. We are aware of at least one company in the United
States who has received FDA approval for a carbon-13 Urea Breath Test, a
specific type of diagnostic breath test. Several companies in Europe have also
received regulatory approval for diagnostic breath tests. Our principal current
competitors and potential competitors also include:
o Euriso-top,
o Aldrich Chemicals,
o Icon Services,
o Omicron,
o C/D/N Isotopes and
o Martek Biosciences.
SEMICONDUCTOR MATERIALS.
Although we have not yet identified significant competitors in the
semiconductor markets, numerous companies in the United States and throughout
the world are currently manufacturing semiconductor materials and are working to
improve the thermal conductivity and other beneficial characteristics of
semiconductor materials. Many of these companies are larger than Isonics and
have significantly greater financial resources at their disposal. Given the size
and importance of these potential markets, we anticipate that substantial
competition will emerge as the markets develop.
SUMMARY.
Many of the areas in which we either compete or intend to compete are
rapidly evolving. Competition may develop a patentable product or process that
may prevent us from competing in our intended markets. While we expect to
compete primarily on the basis of product performance, proprietary position and
price, 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.
54
MANUFACTURING AND SUPPLY
We obtain stable isotopes from a variety of isotope sources, primarily
located in Russia or other former Soviet republics. We may invest in our own
isotope production facilities in the future upon our determining the optimum
production technology for a given isotope or family of isotopes. Other
facilities elsewhere in the world, including the Oak Ridge National Laboratory
in Oak Ridge, Tennessee, and private and pseudo-governmental facilities in Great
Britain, Germany, the Netherlands and the Republic of South Africa, have the
potential to produce stable isotopes.
To date, we have only been able to obtain limited quantities of silicon-28
for use in manufacturing epitaxial wafers. We are testing supplies of silicon-28
to determine their suitability for the manufacture of a bulk wafer needed to
continue our silicon-28 research and development program discussed above. We
believe that we will be able to obtain adequate supplies of silicon-28, but we
are unable to commit to the suppliers because of our lack of working capital. We
do not anticipate that Eagle-Picher will be a source of supply of silicon-28 to
us during the continuation of the arbitration process even if they resolve their
technical problems and are able to produce the product.
We have historically depended on a limited number of suppliers and
processors for most of our manufacturing processes. Except for our agreement
with Eagle-Picher (which Eagle-Picher has defaulted on), we do not have any
written agreements with our suppliers and processors. Although we attempt to
reduce our dependence on our suppliers, disruption or termination of any of the
sources could occur, and such disruptions or terminations could have at least a
temporary, materially adverse, affect on our business, financial condition, and
results of operations. Moreover, a prolonged inability to obtain alternative
sources for processing could have a materially adverse affect on our relations
with our customers.
GOVERNMENT REGULATION
Regulation by government authorities in the United States and other
countries is a significant consideration in the research, development,
production, distribution and marketing of our products. In order to clinically
test, manufacture, distribute, market and sell products, we must follow safety
and other standards established by applicable regulatory authorities. We may be
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, and the use, storage and disposal of
hazardous or potentially hazardous substances used in connection with our
research, development and manufacturing activities. The regulations potentially
material to our business are summarized below.
FDA REGULATION
We are not currently subject to any FDA regulation because we do not
currently manufacture any Diagnostic Breath Tests, drug products or other
medical devices. Our customers may in many cases be subject to FDA regulation.
However, if we test, manufacture, market, distribute, export or sell diagnostic
products or medical devices in the future, we will also likely be subject to
extensive regulation nationally and internationally. We have not yet determined
from what specific countries, other than the United States, we might seek
regulatory approvals to market such products, though we anticipate seeking
approval in Europe and Japan. We intend to develop products that are subject to
rigorous pre-clinical and clinical testing both domestically and
internationally.
55
Because of these regulatory hurdles, products developed by us may not meet
the requisite standards to receive marketing approval. Nor is there any
guarantee that such approval will be granted on a timely basis, if at all, or
that such products if approved will be commercially successful. Delays and costs
in obtaining these regulatory approvals could adversely affect our ability to
commercialize our products and our ability to generate revenues. Even if
regulatory approvals for a product are obtained, such approvals may involve
restrictions and limitations on the labeling and clinical use of the product.
Following market approval, the product will continue to be subject to compliance
with applicable federal and state laws and regulations.
DIAGNOSTIC MEDICAL DEVICE PRODUCTS
Our carbon-13 based proposed diagnostic products may be regulated as
medical devices. Diagnostic products may be subject to one of two marketing
approval procedures. One procedure, known as a "510(k) review," is available
when the manufacturer can demonstrate that the proposed product is
"substantially equivalent" to another product that either was in commercial
distribution in the United States before May 28, 1976, or that has been
subsequently classified as a Class I or Class II medical device. When a 510(k)
review is used, a sponsor is required to submit a Pre-Market Notification to the
FDA at least 90 days before it plans to initiate commercial distribution of the
product.
Where there is no existing legally marketed product "substantially
equivalent" to a contemplated product, the sponsor is required to seek marketing
approval of the product by a different process. This process, a Pre-Market
Approval application, implicates a lengthy, more burdensome procedure that would
likely require clinical studies. Together with the FDA review of the Pre-Market
Approval, this application process may take three-to-five years before
commercial marketing can occur. Of course, we do not know whether the FDA will
determine that any future product we develop will have an intended use and
characteristics that qualifies the product for commercial distribution for
clinical use under 510(k) Pre-Market Notification. Thus, Pre-Market Approvals
may be required for some or all of our future contemplated and proposed
products.
We have not developed any product that requires any clearance procedure
with the FDA, and no such product is under active development. We believe that
any Diagnostic Breath Test instruments we develop in the future will be eligible
for marketing under a 510(k) Pre-Market Notification, but that the substrate
would require approval of a New Drug Application. We believe that clinical
studies would be required to obtain FDA approval of the 510(k)/New Drug
Application for the DBT instrument/substrate and would be conducted under an
investigational device exemption approved by the FDA. An investigational device
exemption normally restricts the transfer of an investigational device to a
limited number of institutions for a limited number of investigators. The FDA
may not allow us to conduct such clinical studies. Furthermore, such studies may
not provide the data necessary to obtain the approval of the 510(k)/New Drug
Application for any DBT or other product that we may develop. Moreover, the FDA
may not provide the necessary approval of the 510(k)/New Drug Application in a
timely manner, if at all.
In addition, use of DBTs and other diagnostic products that we develop may
be subject to regulation under the Comprehensive Laboratory Improvement Act of
1986. Under this Act, clinical laboratories must be certified to perform
diagnostic tests. Such certification specifies the highest "complexity level" of
tests that the laboratory can perform. The specific complexity level of a given
diagnostic product is determined by the U.S. Centers for Disease Control. Our
ability to successfully
56
market diagnostic products within the U.S. may depend on our obtaining a
complexity level determination that allows the broadest use. We may not obtain
such complexity level determination in a timely manner, if at all. Failure to
obtain the requisite complexity level may have a material adverse effect on us
and our operations.
DRUG PRODUCTS
We have not yet developed any drug products, as defined by the FDA, and our
research and development efforts for such products are only in the very
preliminary stages. The development and marketing of drugs is highly regulated
by the FDA. Development of a drug product for use in humans is a multi-step
process. First, laboratory and animal testing establish reasonable safety and
potential efficiency of the experimental product for testing in humans. After
the general investigative plan and protocols for specific human studies are
developed, an investigational new drug application is submitted to the FDA for
approval. Once approved, clinical investigations may commence.
Following the successful completion of clinical trials, the accumulated
clinical evidence is submitted to the FDA as part of a new drug application.
Approval of the New Drug Application is necessary before a company may market
the product. The approval process can be lengthy, frequently taking one, two or
more years after submission. Timely approval depends in part upon the speed of
the FDA's application review and the time required for the company to provide
satisfactory answers or additional data when specified by the FDA. A New Drug
Application may not be approved in a timely manner, if at all. Failure to obtain
such approvals would prevent us from commercializing our products and would have
a material adverse effect on our business. Furthermore, the process of seeking
and obtaining FDA approval for a new product generally requires substantial
funding. We cannot now say that we will have the funds to pursue such approval.
CURRENT GOOD MANUFACTURING PRACTICES AND OTHER CONTROLS
The FDA also has extensive regulations concerning manufacturing of
regulated products in accordance with current good manufacturing practices. If
we commence the manufacture of any products subject to FDA regulation (and we
are not currently manufacturing any such products), we will have to comply with
current good manufacturing practices and we will have to ensure, compliance by
our third-party manufacturers. Continued compliance with such practices is
required to market both drugs and medical devices once they are approved.
Failure to comply with the current good manufacturing practices regulations or
other applicable legal requirements can lead to the seizure of non-complying
products, injunctive relief actions brought by the federal government and
potential criminal investigation and prosecution of violators and its officers
and employees who are responsible for the activities that lead to the
violations.
57
OTHER GOVERNMENT REGULATION
The import, export, handling, transportation, sale, storage and other
activities undertaken in connection with our non-medical products are subject
to, or potentially subject to, significant federal, state, local and foreign
government controls pertaining to hazardous chemicals, 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. We are not currently engaged in any
activities that may require us to incur significant expenses related to
environmental compliance.
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 regulations in the shipping and packaging of the stable isotope
chemicals. We must also comply with Department of Transportation regulations
when packaging material kept in inventory for domestic shipment. As required
under federal and state law, we have prepared Material Safety Data Sheets, which
are enclosed with each product shipment. We must periodically update these Data
Sheets based on new literature reports.
The shipments received at our Columbia, Maryland facility are subject to
Federal and State regulations pertaining to hazardous chemicals and hazardous
waste disposal. These shipments are stored in an area of the facility designated
for such materials. We believe we are in compliance, in all material respects,
with applicable federal and state environmental regulatory requirements.
The shipments from Russian manufacturing sources now enter the U.S. duty
free (without tariff). If the shipments become subject to tariff, we may not be
able to sell the imported products. Further, the products may cease to be
commercially viable because of these increased tariff costs.
The Nuclear Regulatory Commission has authority to regulate importation and
exports 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.
The Nuclear Regulatory Commission regulates exports of deuterium containing
chemicals under general license. We will not be able to ship these chemicals to
countries that require a special license for such shipments. None of these
countries represents significant current or expected future markets for our
products.
Our facilities and employees must also comply with environmental and other
regulations concerning our operations. Failure to ensure compliance with such
federal, state, or local laws and regulations could have a material adverse
effect on us.
In addition, the manufacture, distribution and export of some of our
current or potential products and technology may be subject to governmental
controls pertaining to materials and technology that have potential military,
nuclear power or nuclear weapons purposes. These controls include export license
requirements or other restrictions. We may be unable to obtain or maintain such
licenses. Further, the failure to obtain or maintain such licenses, or comply
with other restrictions that might be placed on such manufacturing and exports,
may have a material adverse effect on us and our operations.
58
PRODUCT LIABILITY AND INSURANCE
Our business exposes us to substantial product, environmental, occupational
and other liability risks. These risks are inherent in product research and
development, manufacturing, marketing, distribution, and in the use of our
products and operations. We have product liability insurance (which currently
expires April 30, 2002) in order to protect ourselves from such potential
exposures, however there can be no guarantee that upon expiration of our current
coverage that adequate insurance coverage will be available, and at an
acceptable cost. Furthermore, a product liability or other claim could
materially and adversely affect our business or financial condition. The terms
of our customer agreements provide that liability 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 file suit against us based
on product liability, breach of warranty or other claims. The foregoing contract
clauses might effectively limit our liability in any such actions.
EMPLOYEES
As of October 5, 2001, we had 15 full and part-time employees. Five of our
employees have Ph.D.s in scientific or engineering disciplines. Approximately
five employees are involved in research and product development, two in
sourcing, and eight in business development and administration. An employee's
responsibilities may also encompass areas other than his or her primary area of
responsibility. We consider our relations with our employees to be good. None of
our employees is covered by a collective bargaining agreement.
PROPERTIES
We relocated our headquarters to Golden, Colorado in December 1998, into
facilities leased by IPRC. This lease expires in June 2002. Following the sale
of IPRC in February 2001, we entered into a cooperation agreement with Interpro
Zinc, LLC that allows us to continue to use the facility for a total cost to us
of approximately $2,500 per month through December 31, 2001.
We lease 1,750 square feet of office space in Columbia, Maryland that
expires December 1, 2003. Chemotrade leases office space in Dusseldorf and
Leipzig, Germany that expires July 31, 2003. IUT leases production and
administration facilities in Berlin, Germany.
LEGAL PROCEEDINGS
We are involved in an arbitration matter pending before the American
Arbitration Association in Dallas, Texas (the "AAA") involving our dispute with
Eagle-Picher. We filed this arbitration demand on March 26, 2001, and
Eagle-Picher filed a competing claim. These competing claims have been
consolidated into a single proceeding (No. 71Y1980017501) before the AAA in
which Eagle-Picher is the claimant, and we are the respondent and
counter-claimant. The arbitration hearing has been scheduled for April 2002. We
have been informed by our legal counsel that it will likely take a minimum of
six-to-nine months or longer to complete the arbitration phase.
59
The matter derives from the Asset Purchase Agreement between Eagle-Picher
and the Company dated November 30, 1999 and completed on December 1, 1999, which
contemplated the completion of a number of different transactions:
We sold our depleted zinc business to Eagle-Picher for total consideration
of $8.2 million, of which we have received $6.7 million and Eagle-Picher
has defaulted on at least the first installment of the remaining amount due
and we anticipate that Eagle-Picher will default on the remaining payments
as well.
Eagle-Picher promised to deliver to us by no later than December 31, 2000,
200 kilograms of silicon-28 to be used in our research and development
activities. Eagle-Picher has defaulted on this obligation.
We signed a long-term isotope supply agreement with Eagle-Picher and placed
an order to purchase 300 kilograms of silicon-28 pursuant to that
agreement. Eagle-Picher has defaulted on this obligation.
We gave Eagle-Picher a warrant to obtain 4,000,000 shares of our common
stock, however, these warrants and the underlying shares, were contingent
upon the delivery of 200 kilograms of silicon-28 by Eagle-Picher by
December 31, 2000. Eagle-Picher exercised its warrant, under a net exercise
provision in the warrant agreement, and we issued 3,130,435 shares of our
common stock to Eagle-Picher in March 2000. Because Eagle-Picher exercised
its warrant pursuant to the terms of the net exercise provision,
Eagle-Picher did not pay us cash. Eagle-Picher disputed our calculation and
believed we should have issued it an additional 155,279 shares of common
stock. We believe Eagle-Picher improperly exercised the warrant because of
its failure to execute the required subscription agreement and because of
its failure to deliver silicon-28 as agreed. We had retained the
certificate pending Eagle-Picher's performance under its agreements, and
surrendered the certificate and cancelled the shares on February 20, 2001.
Eagle-Picher has claimed that the Company failed to disclose that a
principal purchaser of depleted zinc had advised the Company that it did not
intend to purchase further depleted zinc from the Company after the expiration
of the then-existing purchase order. While we do not believe Eagle-Picher's
claims are accurate, subsequently, Eagle-Picher negotiated a termination of this
then-existing purchase order with this purchaser. The Company has denied any
liability to Eagle-Picher, and has affirmatively stated that, in any event, it
had fully disclosed the status of the arrangement with the purchaser to
Eagle-Picher, and that no action taken or omitted by the Company has resulted in
any damages to Eagle-Picher. Eagle-Picher has claimed damages of up to
$10,000,000.
Our claim for damages against Eagle-Picher includes a number of separate
components, resulting under the Asset Purchase Agreement and the Isotope Supply
Agreement. These components are generally as follows:
o Eagle-Picher has failed to pay us $500,000 that was due November 30,
2000, under the Asset Purchase Agreement for the sale of our depleted
zinc business. We have also claimed anticipatory breach of two
additional $500,000 payment obligations due November 30, 2001 and
2002, respectively.
60
o Eagle-Picher has failed to deliver to us 200 kilograms of silicon-28
on or before December 31, 2000, as required by the Asset Purchase
Agreement. We gave Eagle-Picher the 30 days notice of this failure,
and, after Eagle-Picher failed to cure its default during that period,
we cancelled the warrant to purchase 4,000,000 shares issued to
Eagle-Picher and also cancelled the underlying shares.
o Eagle-Picher has wrongfully refused to honor a purchase order for 300
kilograms of silicon-28 which we submitted under Eagle-Picher's
agreement to supply silicon-28 to us "commencing upon Eagle-Picher's
completion of the delivery requirements" for the 200 kilograms of
silicon-28. In addition, we are claiming anticipatory breach of the
ten-year supply agreement for future years.
Eagle-Picher's principal defense to the breach of its various obligations
appears to be its claims that it is technically difficult to produce silicon-28
at Eagle-Picher's production facility in Oklahoma. Eagle-Picher refers to its
inability to produce silicon-28 at its plant as a FORCE MAJEURE which
Eagle-Picher believes entitles Eagle-Picher to delay its obligations to deliver
silicon-28. We believe that Eagle-Picher's technical difficulties do not meet
the legal definition of FORCE MAJEURE per our agreements.
We are claiming damages against Eagle-Picher of $75,500,000. We have
cancelled the warrant and the shares of common stock underlying the warrant.
Eagle-Picher has denied our claims.
This arbitration proceeding is currently in the initial stages of
discovery. Consequently, it is premature for us to predict any likely outcome.
We intend to vigorously defend against Eagle-Picher's claim and to prosecute our
own claims against Eagle-Picher until successfully resolved or a settlement is
reached.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
61
MANAGEMENT
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 as of
October 5, 2001. 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.
NAME AGE POSITION
---- --- --------
James E. Alexander 52 President, Chief Executive Officer, Treasurer, and
Chairman of the Board
Boris Rubizhevsky 50 Senior Vice President, Vice Chairman and Director
Daniel J. Grady 47 Vice President, Life Sciences
Stephen J. Burden 52 Vice President, Semiconductor Materials
John V. Sakys 33 Vice President, Chief Financial Officer and Secretary
Herbert Hegener 55 Managing Director of Chemotrade
Lindsay A. Gardner (1)(2) 50 Director
Richard Parker (1)(2) 58 Director
Larry J. Wells (1)(2) 58 Director
(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.
JAMES E. ALEXANDER is our co-founder. He has served as our President, Chief
Executive Officer and as a director since our inception. Mr. Alexander 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 in the aircraft engine and nuclear power divisions, most recently as
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.
62
BORIS RUBIZHEVSKY is a co-founder of Isonics and has been Senior Vice
President and a director since our inception. Mr. Rubizhevsky became Vice
Chairman in March 1997 and has worked exclusively for Isonics during this time.
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. DANIEL J. GRADY joined us as Vice President, Life Sciences 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. From May 1988 through March
1991, Dr. Grady served as Software Engineer Manager, Nuclear Medicine for
General Electric in England. From October 1984 through May 1988, he served as
Clinical Applications Manager for General Electric 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. STEPHEN J. BURDEN joined us in January 1997 as Director of Research &
Development. He was promoted to Vice President, Semiconductor Materials
effective January 1, 1999. From 1993 to 1997, 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
received his Ph.D. and Masters of Science degrees in Materials Science and
Engineering from Drexel University, and his Bachelors degree in Science
Engineering from Northwestern University. Dr. Burden also has an MBA from the
University of Michigan.
JOHN SAKYS joined us in May 2001 as Controller. He was promoted to Vice
President, Chief Financial Officer effective September 3, 2001. From September
2000 to April 2001 Mr. Sakys was controller of AuraServ Communications. From
July 1998 to September 2000 Mr. Sakys was Director of Financial Reporting for
Media One, Inc. From December 1994 to July 1998 Mr. Sakys was an audit manager
at Ernst and Young LLP. From September 1990 to December 1994 Mr. Sakys was
employed at Arthur Andersen LLP in various capacities. Mr. Sakys received his
Bachelors degree in Business Economics with an emphasis in accounting from the
University of California at Santa Barbara and is a Certified Public Accountant.
HERBERT HEGENER is a co-founder of Chemotrade and has served as its
President since its formation in 1991. From 1988 to 1991, Mr. Hegener was with
Medgenix Deutschland GmbH-Dusseldorf, Germany. He was Medgenix Deutschland's
Managing Director when he left Medgenix Deutschland to found Chemotrade. 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.
63
LINDSAY A. GARDNER was elected a director in September 1993. Ms. Gardner is
currently Director, Corporate Development and Strategic Planning for Menasha
Corporation. From 1991 to 2001, Ms. Gardner was President of LG Associates, a
U.S.-based management consulting firm providing strategic planning and materials
management expertise to foreign company affiliates of U.S. companies in
developing countries. During her tenure at LG Associates, Ms. Gardner resided in
Moscow, Russia from September 1991 to January 1994, and Beijing, China from
January 1994 to April 2000. She currently resides in Appleton, Wisconsin. 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 supply chain management. 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.
RICHARD 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.
LARRY J. 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. He left Citicorp to become Senior Vice President of Inco Venture
Capital. Mr. Wells is also 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, 2001, and subsequently, there were
and are no family relationships among the officers, directors or any person
chosen by the Company 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. There are no material
legal proceedings pending against Isonics, although Isonics is involved in an
arbitration proceeding that is material. SEE "LEGAL PROCEEDINGS."
64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
HOLDERS AND MANAGEMENT
The following table sets forth information regarding the ownership of the
our common stock as of October 5, 2001 by: (i) each director or nominee for
director; (ii) each of the executive officers named in the Summary Compensation
Table; (iii) all executive officers and directors of the Company as a group; and
(iv) all those known by us to be beneficial owners of more than five percent of
our common stock.
BENEFICIAL OWNERSHIP
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
---------------- -------------------- ----------------
James E. Alexander (1) 1,950,167 20.3%
Boris Rubizhevsky (2) 1,695,865 17.6%
Stephen J. Burden (3) 290,370 3.0%
Daniel J. Grady (4) 244,438 2.5%
Herbert Hegener (5) 48,600 0.5%
Lindsay Gardner (6) 299,761 3.1%
Richard Parker (7) 50,000 0.5%
Larry Wells (8) 117,241 1.2%
John Sakys (9) 100,000 1.0%
All executive officers and directors
as a group (9 persons). The address for all of 4,796,442 46.3%
the above directors and executives officers is:
5906 McIntyre Street, Golden, CO 80403
Richard Grossman (10) 2,080,809 17.9%
Anfel Trading (11) 724,947 7.3%
Silicon Evolution, Inc. (12) 500,000 5.0%
(1) Includes: (i) 25,000 shares of common stock underlying options that are
currently exercisable; (ii) 45,455 shares of common stock held in the name
of The James & Carol Alexander Family Foundation; (iii) 500,000 shares held
by wife Carol; (iv) 4,000 shares held by son Jonathan Alexander.
(2) Includes: (i) 1,568,872 shares of common stock held jointly with wife Nancy
Eiden Rubizhevsky; (ii) 22,500 shares of common stock underlying options
that are currently exercisable; (iii) 39,160 shares of common stock
underlying 39,160 warrants to purchase common stock of Isonics; (iv) 33,333
shares of common stock held by wife Nancy Eiden Rubizhevsky; (v) 16,000
shares of common stock held by son Zachary Rubizhevsky; and (vi) 16,000
shares of common stock held by son Ryan Rubizhevsky
(3) Includes 192,887 shares of common stock underlying options of which 155,738
are vested as of October 5, 2001 and which are currently exercisable
(4) Includes 222,965 shares of common stock underlying stock options that are
currently exercisable.
(5) Includes 35,000 shares of common stock underlying warrants that are
currently exercisable.
(6) Includes 50,000 shares of common stock underlying stock options that are
currently exercisable.
(7) Includes 50,000 shares of common stock underlying stock options that are
currently exercisable.
(8) Includes 40,000 shares of common stock underlying stock options that are
currently exercisable. Also includes 77,241 shares owned by Daystar
Partners, L.P. of which an affiliate owned by Mr. Wells, and in which Mr.
Wells owns a 9.9% equity interest.
65
(9) Includes 100,000 shares of common stock underlying stock options of which
25,000 are vested as of October 5, 2001 and which are currently
exercisable.
(10) Includes beneficial ownership of the following shares: (i) 43,496 shares of
common stock underlying 20,000 shares of Series A Stock and 23,496 warrants
owned of record and beneficially by Richard Grossman; (ii) 43,496 shares of
common stock underlying 20,000 shares of Series A Stock and 23,496 warrants
owned of record and beneficially by Orin Hirschman (of which shares Mr.
Grossman disclaims beneficial ownership); (iii) 1,203,411 shares of common
stock underlying 553,334 shares of Series A Stock and 650,077 warrants
owned of record and beneficially by Adam Smith Investment Partners, L.P.;
(iv) 246,482 shares of common stock underlying 113,334 shares of Series A
Stock and 133,148 warrants owned of record and beneficially by Adam Smith
Investments, Ltd.; and (v) 587,420 shares of common stock underlying
587,420 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.
(11) Includes 391,613 shares of common stock underlying 391,613 warrants. The
principal executive offices of Anfel Trading Ltd. are c/o M. Andre Zolty,
24 Route De Malagnou, 1208 Geneva, Switzerland. Andre Zolty is the
principal and controlling shareholder of Anfel Trading Ltd. and may be
deemed to beneficially own these shares.
(12) Includes 500,000 shares of common stock underlying 500,000 shares of Series
B preferred stock. The principal executive offices of Silicon Evolution,
Inc., are located at 12013 NE 99th Street, Suite 1600, Vancouver,
Washington 98682.
The Series A Stock consists of 1,830,000 shares issued with a liquidation
preference of $1.50 per share and a right to convert the shares based on a value
of approximately $1.20 per share (but which we are still attempting to determine
based on our most recent stock issuance to SEI). As of October 5, 2001, 866,334
shares of Series A Stock have elected to convert into common stock. The
conversion right of the preferred stock is on a one-for-one basis. 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, Isonics may redeem all or any part of the Series A 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 and unless Isonics chooses
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 Isonics' shareholders.
66
We have also issued 500,000 shares of our Series B Convertible Preferred
Stock. We issued the Series B Stock to Silicon Evolution, Inc. in consideration
of a license agreement. We may terminate the license agreement if certain future
events do not occur and, in that case, we will cancel the Series B Stock issued
to Silicon Evolution. The Series B Stock will automatically convert into common
stock on a share-for-share basis if the shareholders approve our
recapitalization proposed for their consideration at the Annual Shareholders
Meeting, scheduled to be held on November 13, 2001.
We know of no plans or arrangement that will result in a change of control
at Isonics.
SECTION 16(b) 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 upon a review of the copies of such reports
furnished to us and based upon written representations that no other reports
were required, all Section 16(a) filing requirements applicable to Isonics'
officers, directors and greater than ten percent beneficial owners were complied
with exception (or in addition) to the following during the fiscal year ended
April 30, 2001 and subsequently:
1. 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 1999 and September 1999, which
Dr. Cuttriss amended in May 2000. Dr. Cuttriss and Metallurgy International
are no longer affiliates of Isonics effective February 1, 2001.
2. Mr. Herbert Hegener filed Forms 4 in August 2000 reporting sales that took
place in May, June and July of 2000.
3. Eagle-Picher Technologies, LLC became subject to the Section 16(a)
reporting requirements when it became a greater than 10% beneficial owner
in December 1999. Eagle-Picher filed a Form 3 in March 2000. Eagle-Picher
attempted to exercise warrants in March 2000 but, to our knowledge has not
yet filed a Form 4 reporting the attempted exercise. Eagle-Picher has also
not yet filed an amendment to its Schedule 13D reporting this attempted
exercise. In February 2001 we cancelled the shares (subsequent to canceling
the warrant) and we have notified Eagle-Picher of the cancellation. To the
knowledge of Isonics, Eagle-Picher has not filed any report with the
Securities and Exchange Commission regarding the cancellation of the
shares.
67
4. Mr. Alexander filed a Form 4 after July 10, 2000, reporting a transfer of
536,000 shares in June 2000. Mr. Alexander transferred 500,000 of these
shares to his wife who continues to own these shares.
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, 1999, 2000, and 2001. No
other executive officer earned salary and bonus compensation exceeding $100,000
during any of those years. This includes all compensation paid to each by
Isonics and any subsidiary.
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------------- -----------------------
AWARDS PAYOUT
---------- ------
SECURITIES
($) UNDERLYING
NAME AND FISCAL ($) ($) ($) RESTRICTED OPTIONS & LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OTHER(a) AWARDS SARS (#) PAYOUT COMPENSATION
------------------ ------ ------- ------- -------- --------- ---------- ------ ------------
James E. Alexander 1999 200,000 50,000 35,016(f) 0 25,000(o) 0 0
President & CEO 2000 212,000 172,549(d) 39,280(g) 0 0 0 0
2001 240,000 0 6,704(h) 0 0 0 0
Boris Rubizhevsky 1999 184,100 45,000 25,404(f) 0 22,500(p) 0 0
Senior Vice President 2000 191,000 147,670(e) 28,185(i) 0 0 0 0
2001 216,000 0 14,280(j) 0 0 0 0
Stephen J. Burden, 1999 0 0 0 0 121,458(r) 0 0
Vice President (b) 2000 125,000 0 23,452 0 0 0 0
2001 125,000 0 9,750(m) 0 0 0 0
Daniel J. Grady 1999 127,188 16,000 0 0 15,625(q) 0 0
Vice President 2000 125,000 10,271 23,833(k) 0 0 0 0
2001 143,208 0 13,320(l) 0 0 0 0
Brantley J. Halstead, 1999 22,182 0 0 0 116,000(s) 0 0
Vice President (c) 2000 102,000 16,000 3,870 0 25,000(t) 0 0
2001 122,000 24,000 12,330(n) 0 0 0 0
(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) Dr. Burden became an officer of Isonics effective January 1999.
(c) Mr. Halstead became an officer of Isonics in February 1999, upon his
joining Isonics as Chief Financial Officer. Mr. Halstead was promoted to
Vice President, Finance in January 2000. Mr. Halstead resigned effective
May 1, 2001.
(d) Mr. Alexander's amount includes $133,451 for forgiveness of a loan owed to
Isonics, and $39,098 to pay applicable payroll taxes on a stock bonus
granted in January 1999. Please see "CORPORATE LOANS TO OFFICERS."
68
(e) Mr. Rubizhevsky's amount includes $113,598 for forgiveness of a loan owed
to Isonics, and $29,072 to pay applicable taxes on stock bonus granted in
January 1999, and a $5,000 additional cash bonus. Please see "CORPORATE
LOANS TO OFFICERS."
(f) Mr. Alexander's amounts represent $35,016 for interest and taxes payable as
a result of a loan in fiscal year 1999. Mr. Rubizhevsky's amounts represent
$25,404 for interest and taxes payable as a result of a loan in fiscal year
1999.
(g) Mr. Alexander's amount includes $26,543 for accrued vacation that was paid
in December 1999, $9,487 car allowance, and $3,250 employer matching
contribution to Isonics' 401k plan.
(h) Mr. Alexander's amount includes $1,704 car allowance and $5,000 employer
matching contribution to Isonic's 401k plan.
(i) Mr. Rubizhevsky's amount includes $15,005 for accrued vacation that was
paid in December 1999, $9,000 car allowance, and $4,180 employer matching
contribution to Isonics' 401k plan.
(j) Mr. Rubizhevsky's amount includes $9,000 car allowance and $5,280 employer
matching contribution to Isonic's 401k plan.
(k) Dr. Grady's amount includes $12,020 for accrued vacation that was paid in
December 1999, $9,000 car allowance, and $2,813 employer matching
contribution to the Isonics' 401k plan.
(l) Dr. Grady's amount includes $9,000 car allowance and $4,320 employer
matching contribution to Isonics 401k plan.
(m) Dr. Burden's amount includes $6,000 car allowance and $3,750 employer
matching contribution to Isonics 401k plan.
(n) Mr. Halstead's amount includes $9,000 car allowance and $3,330 employer
matching contribution to Isonics 401k plan.
(o) 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 $1.4375 per share and expire April 26, 2004.
(p) 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 $1.4375 per share and expire April 26, 2004.
(q) 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 $1.4375 per share and expire April 26, 2004.
(r) 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 70,000
have vested as of October 5, 2001, and continue to vest at a rate of 5%, or
5,000, 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 $1.4375 per share and expire
April 26, 2004.
(s) Options to purchase 100,000 shares of common stock were granted in February
1999, as consideration for Mr. Halstead joining the Company as Chief
Financial Officer, with an exercise price of $2.5625 per share. As a result
of Mr. Halstead's resignation, his unexercised options expired July 31,
2001.
(t) Options to purchase 25,000 shares of common stock were granted in January
2000, as consideration for Mr. Halstead's promotion to Vice President in
January 2000. As a result of Mr. Halstead's resignation, his unexercised
options expired July 31, 2001.
69
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 had a term of four years and
provide for annual salaries of $200,000 and $180,000, respectively, although
either Isonics or the individuals may terminate these agreements prematurely in
their discretion. By resolution of the Board of the Directors 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, $240,000, and
$216,000, respectively. 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 increases in approximately two and one-half
years. Under the agreements, each officer is entitled to receive incentive
compensation up to 50% of the officer's annual salary, as we approve, pursuant
to such executive compensation plan as we 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 eighteen (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. These
contracts expired in September 2001, and the compensation committee has not yet
determined whether to offer new contracts to these officers.
We have also entered into employment agreements with Dr. Daniel J. Grady,
Dr. Stephen J. Burden and Mr. John Sakys. The agreements have an indefinite term
and provide 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 each agreement, Dr. Grady, Dr. Burden and Mr. Sakys are entitled
to participate in our standard plans and policies. The agreements also include
confidentiality and invention assignment provisions. Additionally, Mr. Herbert
Hegener is covered by an employment agreement extending through December 2001.
Dr. Cuttriss and Isonics agreed to a cancellation of his previous employment
agreement (which extended through September 2003) in connection with our sale of
IPRC to a management group that included him.
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. Although this plan has been terminated, there
are options outstanding.
(B) 1996 EXECUTIVES' EQUITY INCENTIVE PLAN. The Executives' Plan
authorized the grant of options to purchase 1,000,000 stock options.
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 the shareholders in October 1996. The directors
approved an amendment to this plan in August 2000; the shareholders
approved the amendment in October 2000. We are presenting a further
amendment to this plan to increase the number of shares reserved for
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issuance under this plan to 2,000,000. The amendment will be presented
for approval to our shareholders at the Annual Meeting of Shareholders
on November 13, 2001.
(C) 1996 EQUITY INCENTIVE PLAN. The Employees' Plan authorized the grant
of options to purchase 500,000 stock options. 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 the
shareholders in October 1996. The directors approved an amendment to
this plan in August 2000; the shareholders approved the amendment in
October 2000. We are presenting a further amendment to this plan to
increase the number of shares reserved for issuance under this plan to
1,000,000. The amendment will be presented for approval to our
shareholders at the Annual Meeting of Shareholders on November 13,
2001.
(d) 1998 EMPLOYEE STOCK PURCHASE PLAN. The Stock Purchase Plan authorized
employee purchase of up to 200,000 shares of Isonics common stock. The
directors approved this plan in August 1998. Shareholders approved it
in October 1998.
As of October 5, 2001, options to purchase a total of 263,125 shares,
101,458 shares, and 358,769 shares respectively, were outstanding under the
Executives' Plan, Employees' Plan, and 1996 Stock Option Plan, and options to
purchase 664,417, 354,362, and 0 shares, respectively, remained available for
grant.
Except for the Director's Plan, we have not adopted any other stock option
or stock appreciation rights plan. SEE "COMPENSATION OF DIRECTORS."
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
There were no options granted to executive officers named in the
compensation table during the fiscal year ended April 30, 2001. We did not grant
any stock appreciation rights to any person during fiscal year 2001 or
subsequently. We have not granted any stock options to executives named in the
compensation table in fiscal 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
Mr. Halstead exercised 16,000 stock options for cash in October 2000. These
stock options were granted in April 1999, and approved by the board of directors
in October 1999. No other officer exercised employee stock options during the
fiscal year ended April 30, 2001, or subsequently.
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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, 2001.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/STOCK APPRECIATION OPTIONS/STOCK APPRECIATION
NAME AND ACQUIRED ON VALUE RIGHTS AT APRIL 30, 2001 RIGHTS AT APRIL 30, 2001
PRINCIPAL POSITION EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE
------------------ ------------- -------- -------------------------- --------------------------
James E. Alexander 0 0 25,000/0 $0/$0
President & CEO
Boris Rubizhevsky 0 0 22,500/0 $0/$0
Senior Vice President (a)
Daniel J. Grady 0 0 222,965/0 $174,423/$0
Vice President
Stephen J. Burden 0 0 167,167/25,720 $27,200/$4,800
Vice President
Brantley J. Halstead 16,000 $16,000 90,000/35,000 $0/$0
Vice President (b)
(a) Does not include 33,333 warrants obtained in a private transaction
completed in July 1999 or the additional 2,123 warrants obtained under
anti-dilution provisions in January 2001.
(b) Mr. Halstead resigned effective May 1, 2001. As a result, the 90,000
outstanding stock options held by Mr. Halstead expired July 31, 2001.
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
In January 2000, we 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. Previously we
had not compensated our directors for their service as such.
The 1998 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 Isonics
employee. 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
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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 through October 5, 2001:
NAME SHARES UNDER OPTION EXERCISE PRICE EXPIRATION
---- ------------------- -------------- ----------
Lindsay Gardner 20,000 $2.375 May 21, 2003
10,000 $1.1875 October 5, 2003
10,000 $6.250 April 26, 2005
10,000 $2.1875 October 10, 2005
Richard Parker 20,000 $1.656 August 17, 2003
10,000 $1.1875 October 5, 2003
10,000 $6.250 April 26, 2005
10,000 $2.1875 October 10, 2005
Larry Wells 20,000 $7.3125 January 29, 2005
10,000 $6.250 April 26, 2005
10,000 $2.1875 October 10, 2005
We do not have any other arrangements pursuant to which we compensate the
Directors for acting in their capacities as such.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We provide the following information regarding transactions among officers,
directors and significant shareholders of Isonics during the most recent two
fiscal years and during the subsequent fiscal year.
SALE OF INTERNATIONAL PROCESS RESEARCH CORPORATION
Effective February 1, 2001, we sold IPRC to a limited liability company,
Interpro Zinc LLC, in a management buy-out. Robert H. Cuttriss, Ph.D. (formerly
an executive officer of Isonics) is the manager of Interpro Zinc LLC and a 25%
owner. James E. Alexander (president, chief executive officer, and a director of
Isonics) and Boris I. Rubizhevsky (senior vice president and a director of
Isonics) are also 25% owners of Interpro Zinc LLC and participated in the
purchase of IPRC. Mr. Alexander and Mr. Rubizhevsky advised our board that they
do not intend to participate actively in Interpro Zinc's activities.
73
CORPORATE LOANS TO OFFICERS
In the past, Isonics has from time-to-time made loans to Messrs. Alexander
and Rubizhevsky. In each case, the loans have been interest-bearing and have
been repaid. The following table sets forth some information regarding these
loans through April 30, 2001. Isonics has not made any loans to any officers
subsequently.
JAMES E. ALEXANDER BORIS RUBIZHEVSKY
PRESIDENT & CEO SENIOR VICE PRESIDENT
------------------ ---------------------
Balance as of April 30, 1999 $ 236,360.38 $ 223,325.22
FY 2000 Borrowings (a) 7,690.49 7,221.34
FY 2000 Repayments (a) 244,050.87(b) 230,546.56(c)
------------ ------------
Balance as of April 30, 2000 $ 0.00 $ 0.00
FY 2001 Borrowings (a) 100,000.00 100,000.00
FY 2001 Repayments (a) 100,000(d) 100,000(d)
Balance as of April 30, 2001 $ 0.00 $ 0.00
(a) Includes interest accrued and paid. Amounts are aggregated.
(b) In October 1999 Mr. Alexander applied $74,038.54 of a bonus awarded to him
to the repayment of this indebtedness. In February 2000, Mr. Alexander
surrendered 30,437 shares of Isonics common stock in satisfaction of the
remaining $165,000 principal and $10,012.33 interest.
(c) In October 1999 Mr. Rubizhevsky applied $60,534.23 of a bonus awarded to
him to the repayment of this indebtedness. In February 2000, Mr.
Rubizhevsky surrendered 30,437 shares of Isonics common stock in
satisfaction of the remaining $165,000 principal and $10,012.33 interest.
(d) The loans were made to the officers in March ($50,000 each) and April
($50,000 each), 2001, and were repaid, with interest at 6.6% per annum, on
April 30, 2001.
CORPORATE LOANS FROM OFFICERS AND EMPLOYEES
During the fiscal year ended April 30, 2000, Isonics' officers, directors
and employees loaned Isonics funds. No loans were made to Isonics during the
year ended April 30, 2001. The following schedule summarizes these borrowing and
repayments for the year ended April 30, 2001.
NAME AND BALANCE AS OF FY 2000 FY 2000 BALANCE AS OF
PRINCIPAL POSITION MAY 1, 1999 BORROWINGS (a) REPAYMENTS (a) APRIL 30 2000
------------------ ------------- -------------- -------------- -------------
Boris Rubizhevsky
Senior Vice President (b)................ $44,290.20 $ 8,858.04 $53,148.24 $0.00
Stephen J. Burden
Vice President (c)....................... $ 0.00 $57,500.00 $57,500.00 $0.00
(a) Includes interest accrued and paid through April 30, 2000. Amounts are
aggregated.
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(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 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 the second private placement on
July 30, 1999.
As of April 30, 2001 we owe approximately $114,000 to the former owners of
Chemotrade resulting from contingent consideration payable to the sellers based
on the 2001 earnings of Chemotrade. Included in the $114,000 is approximately
$57,000 payable to Mr. Hegener.
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 October 5, 2001, there were
outstanding:
o 9,572,504 shares of common stock,
o 963,666 shares of Series A convertible preferred stock which are
immediately convertible into the same number of shares of common
stock,
o 500,000 shares of Series B convertible preferred stock which will
automatically convert into the same number of shares of common stock
if the shareholders approve our recapitalization proposed for their
consideration at the Annual Shareholders Meeting scheduled to be held
on November 13, 2001. These shares are subject to a cancellation
provision by Isonics if we decide to not proceed with the SEI license
agreement,
o options issued pursuant to our employee benefit plans to purchase a
total of 863,352 shares,
o 1,190,842 shares reserved for issuance under our employee benefit
plans and Employee Stock Purchase Plan in excess of the options and
shares that have been issued,
o warrants to purchase a total of approximately 5,040,815 shares of
common stock, and Class C warrants issuable upon exercise of related
Class B warrants to purchase 1,780,110 shares of common stock.
All of the outstanding warrants, and a substantial amount of the
outstanding options are immediately exercisable. As a result of those securities
and other securities issuable or reserved for issuance, Isonics only has
approximately 88,711 unreserved shares available for issuance. SEE "RISK
FACTORS."
Our board of directors does not believe that this total of authorized,
unissued, and unreserved shares is adequate to implement our long-term business
strategies. Therefore, the board of directors intends to propose a substantial
increase in our authorized capital for consideration by our shareholders at our
next shareholders' meeting scheduled for November 13, 2001.
75
We may not be able to obtain approval of an increase in our authorized
capitalization from our shareholders at the meeting when held. If the
shareholders do not approve the increase we are potentially liable for our
inability to issue all shares as committed. We do not believe that the lack of
authorized capital will impact the ability of any person to exercise the Class B
warrants or the Class C warrants.
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 from assets legally available 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. Generally, a "listed company" is a company that
is traded on the NYSE, AMEX or NASDAQ-NMS. 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 Isonics' liquidation, dissolution or winding up,
the remaining assets legally available for distribution to shareholders, after
payment of claims or creditors and payment of 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 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.
76
We have issued 1,830,000 shares of our Series A convertible preferred stock
of which 963,666 shares have not yet been converted to common stock as of
October 5, 2001. This preferred stock may be converted at any time prior to
redemption to common shares of Isonics stock at a fixed conversion price which
is based on the lowest price at which we have issued shares. We are in the
process of calculating the current conversion price which has adjusted as a
result of the issuances of shares to SEI, but we expect it to be approximately
$1.20 per share. This conversion price is subject to standard dilution
adjustments such as stock splits or stock dividends. The conversion price is
also subject to adjustment if we sell shares of our common stock at an amount
that is less than the then current conversion price per share or if we sell any
securities convertible into or exercisable for common stock if the price per
share of conversion or exercise is less than the then current conversion price
per share. The Series A convertible preferred stock is entitled to receive
dividends on a share-for-share basis with the shares of common stock.
We have also issued 500,000 shares of our Series B convertible preferred
stock to Silicon Evolution, Inc., as consideration for a license agreement
purchased from Silicon Evolution. This preferred stock is not currently
convertible, but will be automatically converted into common stock on a
share-for-share basis if the shareholders approve our recapitalization proposed
for their consideration at a meeting scheduled to be held on November 13, 2001.
The Series B stock is entitled to vote on a share-for-share basis with the
common stock, and is entitled to dividends with the common stock. It is entitled
to a liquidation preference of $1.50 per share. We may terminate the license
agreement if certain future events do not occur and, in that case, we will
cancel the Series B Stock issued to Silicon Evolution.
UNDERWRITERS' WARRANTS
Upon the completion of our initial public offering in September 1997, we
issued warrants to purchase 80,000 units to our underwriter. The Underwriters'
warrants are exercisable at $9.57 per Unit and expire on September 1, 2002. If
any of the Underwriters' warrants are exercised, the holder will receive one
share of our common stock and one Class A warrant for each Underwriters' warrant
properly exercised. Upon exercise of the underwriter warrants, the warrant
holder will only receive one share of common stock, since the Class A warrants
have expired. This prospectus assumes that no Underwriters' warrants will be
exercised.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On September 22, 1997, our Units (consisting of one share of common stock
and one Class A warrant) started trading on the Over The Counter (OTC) 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 Bulletin Board.
Our Class A warrants expired by their terms on September 21, 2001. Currently the
trading symbols for our outstanding securities are as follows:
Common Stock ............ "ISON"
Class B Warrants ........ "ISONL"
Class C Warrants ........ "ISONZ"
77
The common stock is quoted on the Nasdaq SmallCap Market. As of October 5,
2001, we have outstanding 202,500 Class C warrants, 430,110 registered Class B
warrants, as well as 1,350,000 restricted Class B warrants. The Class B warrants
and the Class C warrants are quoted on the Nasdaq SmallCap Market.
The following table sets forth the high and low bid prices for the common
stock (quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions) from May 1, 1999
through July 31, 2001, as reported by OTC Bulletin Board, and beginning July 13,
2000, by the Nasdaq SmallCap Market.
OCT. 31, 2001
QUARTER ENDED (THROUGH
JULY 31, 2001 OCT. 5, 2001)
------------- -------------
Common Stock (ISON)
High $ 1.85 $ 1.49
Low $ 1.14 $ .77
QUARTER ENDED
JULY 31, 2000 OCT. 31, 2000 JAN. 31, 2001 APR. 30, 2001
------------- ------------- ------------- -------------
Common Stock (ISON)
High 7.0625 4.0000 2.6250 1.6250
Low 3.3750 1.4375 1.0625 0.8125
QUARTER ENDED
JULY 31, 1999 OCT. 31, 1999 JAN. 31, 2000 APR. 30, 2000
------------- ------------- ------------- -------------
Common Stock (ISON)
High 3.6250 2.1250 10.5000 17.9375
Low 1.8750 0.8750 1.2500 5.5625
As of October 5, 2001, there were approximately 72 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, we do not anticipate paying 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.
78
SHARES AVAILABLE FOR FUTURE SALE
The market price of our common stock could decline if substantial amounts
of shares are sold in the public market or if the market perceives that such
sales could occur. A decline in the market price could adversely affect holders
of the stock and could also harm our ability to raise capital through equity
securities sales. The securities that may be sold from time to time under this
prospectus represent a market overhang.
As of October 5, 2001, we had outstanding options and warrants for the
purchase of up to 5,904,167 shares of common stock at an average price of
approximately $2.61 per share, representing approximately 34.9% of our
outstanding shares of common stock on a fully-diluted basis. Additionally, we
have 963,666 shares of Series A convertible preferred stock outstanding
convertible to 963,666 shares of our common stock and Series B convertible
preferred stock outstanding which is convertible to 500,000 shares of common
stock when and if additional shares of common stock are authorized. The sum of
these convertible securities represents approximately 8.6% 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 then 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 the accredited investors who
purchased in December 2000 the private placement 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.
Virtually all of the common stock underlying the convertible securities
outstanding at that time were registered effective October 10, 2000. The
remaining unregistered securities are being registered in the registration
statement of which this prospectus is a part. 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.
Some of the shares underlying options and warrants 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, restricted shares that do not exceed the
greater of: (i) 1% of the then outstanding shares of common stock; and (ii) an
amount equal to the average weekly trading volume in the common stock during the
four calendar weeks preceding the sale.
SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Isonics' Articles of Incorporation require it to indemnify its officers,
directors, employees and agents against liabilities incurred by them in those
capacities if they acted in good faith and reasonably believed their conduct was
consistent with Isonics' best interests. 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.
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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.
EXPERTS
The consolidated balance sheets as of April 30, 2001 and 2000, 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 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
Certain legal matters, have been passed upon for Isonics by
Norton-Lidstone, P.C., Greenwood Village, Colorado. Arter & Hadden, LLP, Los
Angeles, California, has passed on the validity of the shares of common stock
offered hereby under California law.
HOW TO OBTAIN ADDITIONAL INFORMATION
We file annual and quarterly reports, proxy statements, and other
information with the Securities and Exchange Commission. 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. The
SEC maintains a World Wide Web site on the Internet at http://www.sec.gov that
contains reports, proxy and information statements, and other information
regarding companies, including those that Isonics files electronically with the
SEC.
We also furnish Annual Reports to our shareholders that contain audited
financial information.
This prospectus is part of a registration statement we have filed with the
SEC relating to this exchange offer and 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 statement, accompanying
exhibits and schedules we file with the SEC. You may refer to the registration
statement, 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.
You should rely only on the information contained or incorporated by
reference in this prospectus. Isonics has not authorized anyone to provide you
with information that is different from what is contained in this prospectus.
You should not assume that the information contained in this prospectus is
accurate as of any date other than the date set forth on the front cover of this
prospectus.
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ISONICS CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements
PAGE
----
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements for the Years Ended April 30, 2001 and 2000
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 Three Months
Ended July 31, 2001 and 2000
Condensed Consolidated Balance Sheets F-24
Condensed Consolidated Statements of Operations F-25
Condensed Consolidated Statements of Cash Flows F-26
Notes to Condensed Consolidated Financial Statements F-27
F-1
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, 2001 and 2000, 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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2000, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company incurred
a net loss of $4,498,000 during the year ended April 30, 2001, and has an
accumulated deficit of $7,256,000 as of April 30, 2001. In addition, net cash
used in operating activities was $3,147,000 for the year ended April 30, 2001.
These factors, among others, as discussed in Note 2 to the consolidated
financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 8, the net income (loss) attributable to common
shareholders for the year ended April 30, 2000, in the accompanying financial
statements has been restated to reflect the value of a deemed dividend on
preferred stock.
/s/ Grant Thornton LLP
San Jose, California
July 26, 2001
F-2
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
APRIL 30,
-------------------
2001 2000
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,090 $ 3,385
Accounts receivable (net of allowances of $39 and $119,
respectively) 778 1,055
Income taxes receivable 419 --
Note receivable -- 208
Inventories 492 266
Prepaid expenses and other current assets 190 209
Deferred income taxes, current -- 148
------- --------
Total current assets 2,969 5,271
PROPERTY AND EQUIPMENT, net 95 660
GOODWILL (net of accumulated amortization of $493 and $323,
respectively) 3,006 3,062
NOTES RECEIVABLE FROM SHAREHOLDERS -- 17
DEFERRED INCOME TAXES -- 492
OTHER ASSETS 32 31
------- --------
$ 6,102 $ 9,533
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and line of credit $ 16 $ 20
Accounts payable 754 533
Accrued liabilities 590 591
Income taxes payable - 373
------- --------
Total current liabilities 1,360 1,517
STOCKHOLDERS' EQUITY (Information for 2000 is restated. See
Note 8)
Class A Preferred Stock - no par value; 10,000,000 shares
authorized; shares issued and outstanding: 2001 -
963,666; 2000 - 1,830,000 745 1,415
Common stock - no par value; 20,000,000 shares authorized;
shares issued and outstanding: 2001 - 8,961,288; 2000 -
10,492,931 8,508 6,764
Additional paid in capital 2,745 2,016
Deferred compensation -- (150)
Accumulated deficit (7,256) (2,029)
------- --------
Total stockholders' equity 4,742 8,016
------- --------
$ 6,102 $ 9,533
======= ========
See Notes to Consolidated Financial Statements
F-3
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
APRIL 30,
-------------------
2001 2000
-------- --------
Net revenues $ 7,789 $12,733
Cost of revenues 6,019 10,156
-------- -------
Gross margin 1,770 2,577
Operating expenses:
Selling, general and administrative 4,645 3,754
Research and development 1,134 1,224
-------- -------
Total operating expenses 5,779 4,978
-------- -------
Operating loss (4,009) (2,401)
Other income (expense)
Interest income 82 105
Loss on disposal of property and equipment (354) --
Gain (loss) on sale of depleted zinc business (208) 5,296
Gain on sale of International Process Research Corporation 59 --
Interest expense (2) (321)
Foreign exchange (66) 29
Other -- 110
-------- -------
Total other income (expense), net (489) 5,219
-------- -------
Income (loss) before income tax expense (4,498) 2,818
Income tax expense -- 129
-------- -------
NET INCOME (LOSS) $ (4,498) $ 2,689
======== =======
DEEMED DIVIDEND ON PREFERRED STOCK
(Information for 2000 is restated - See Note 8) $ (729) $ (686)
-------- -------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
(Information for 2000 is restated - See Note 8) $ (5,227) $ 2,003
======== =======
NET INCOME (loss) per share - basic
Net income (loss) per share attributable to common
shareholders
(Information for 2000 is restated - See Note 8) $ (.63) $ 0.30
Shares used in computing per share information 8,329 6,781
NET INCOME (loss) per share - diluted
Net income (loss) per share attributable to common
shareholders
(Information for 2000 is restated - See Note 8) $ (.63) $ 0.19
Shares used in computing per share information 8,329 10,409
See Notes to Consolidated Financial Statements
F-4
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ADDITIONAL
SHAREHOLDER
PREFERRED STOCK COMMON STOCK ---------------------
-------------------- ---------------------- PAID IN NOTES DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
--------- -------- ----------- -------- -------- ---------- ------------
BALANCES, April 30, 1999 -- $ -- 6,607,760 $6,795 -- $ (469) $ --
Issuance of preferred stock
(Restated--See Note 8) 1,830,000 1,415 -- -- 1,330 -- --
Deemed dividend of preferred
stock (Restated--See Note 8) -- -- -- -- 686 -- --
Exercise of stock options and
warrants -- -- 3,918,986 81 -- -- --
Fair value of warrants issued
for debt restructuring -- -- -- 157 -- -- --
Fair value of stock issued for
services as deferred
compensation -- -- 25,000 153 -- -- (153)
Amortization of deferred
compensation -- -- -- -- -- -- 3
Shares issued under Employee
Stock Purchase Program -- -- 13,723 13 -- -- --
Repayment of notes receivable
from stockholders, net of
interest -- -- -- -- -- 34 --
Repayment of notes receivable
and accrued interest with
common stock -- -- (72,538) (435) -- 435 --
Net income -- -- -- -- -- -- --
--------- ------- ----------- ------ ------ ------ ------
BALANCES, April 30, 2000
(Restated-See Note 8) 1,830,000 1,415 10,492,931 6,764 2,016 -- (150)
Conversion of preferred stock to
common stock (866,334) (670) 866,334 670 -- -- --
Deemed dividend on preferred
stock -- -- -- -- 729 -- --
Exercise of stock options and
warrants -- -- 301,244 208 -- -- --
Fair value of common stock and
warrants issued for services -- -- 4,500 44 -- -- --
Amortization of deferred
compensation -- -- -- -- -- -- 150
Issuance of common stock -- -- 337,500 675 -- -- --
Shares issued under Employee
Stock Purchase Program -- -- 14,214 16 -- -- --
Fair value of common stock
issued for patent rights -- -- 75,000 131 -- -- --
Cancellation of common stock
issued to Eagle Picher related
to exercise of common stock
warrants -- -- (3,130,435) -- -- -- --
Net loss -- -- -- -- -- -- --
--------- ------- ----------- ------ ------ ------ ------
BALANCES, April 30, 2001 963,666 $ 745 8,961,288 $8,508 $2,745 $ -- $ --
========= ======= =========== ====== ====== ====== ======
(ACCUMULATED
DEFICIT) TOTAL
------------ --------
BALANCES, April 30, 1999 $ (4,032) $ 2,294
Issuance of preferred stock
(Restated--See Note 8) -- 2,745
Deemed dividend of preferred
stock (Restated--See Note 8) (686) --
Exercise of stock options and
warrants -- 81
Fair value of warrants issued
for debt restructuring -- 157
Fair value of stock issued for
services as deferred
compensation -- --
Amortization of deferred
compensation -- 3
Shares issued under Employee
Stock Purchase Program -- 13
Repayment of notes receivable
from stockholders, net of
interest -- 34
Repayment of notes receivable
and accrued interest with
common stock -- --
Net income 2,689 2,689
-------- --------
BALANCES, April 30, 2000
(Restated-See Note 8) (2,029) 8,016
Conversion of preferred stock to
common stock -- --
Deemed dividend on preferred
stock (729) --
Exercise of stock options and
warrants -- 208
Fair value of common stock and
warrants issued for services -- 44
Amortization of deferred
compensation -- 150
Issuance of common stock -- 675
Shares issued under Employee
Stock Purchase Program -- 16
Fair value of common stock
issued for patent rights -- 131
Cancellation of common stock
issued to Eagle Picher related
to exercise of common stock
warrants -- --
Net loss (4,498) (4,498)
-------- --------
BALANCES, April 30, 2001 $ (7,256) $ 4,742
======== ========
See Notes to Consolidated Financial Statements
F-5
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
APRIL 30,
-------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,498) $ 2,689
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
(Gain) loss on sale of depleted zinc business 208 (5,296)
Gain on sale of International Process Research
Corporation (59) --
Depreciation and amortization 311 567
Interest on notes receivable from shareholders -- (23)
Fair value of common stock and warrants issued for
services and amortization of deferred compensation 194 160
Deferred income taxes 419 (640)
Loss on disposal of property and equipment 354 75
Forgiveness of notes receivable due from stockholders -- 27
Changes in operating assets and liabilities:
Accounts and notes receivable 294 (146)
Income taxes receivable (419) --
Inventories (226) (1,066)
Prepaid expenses and other assets 18 (139)
Accounts payable 221 (522)
Accrued liabilities 188 (336)
Income taxes payable (152) 323
-------- --------
Net cash used in operating activities (3,147) (4,327)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (43) (15)
Proceeds from sale of depleted zinc business -- 6,730
-------- --------
Net cash provided by (used in) investing
activities (43) 6,715
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit and other borrowings (4) (1,931)
Proceeds from borrowings -- 75
Repayment of notes receivable from shareholders -- 57
Proceeds from issuance of preferred stock -- 2,250
Proceeds from issuance of common stock 899 94
-------- --------
Net cash provided by financing activities 895 545
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,295) 2,933
Cash and cash equivalents at beginning of period 3,385 452
-------- --------
Cash and cash equivalents at end of period $ 1,090 $ 3,385
======== ========
See Notes to Consolidated Financial Statements
F-6
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Isonics Corporation develops and markets products worldwide based on
isotopes for applications in the energy, medical research, diagnostic,
pharmaceutical and semiconductor industries. The consolidated financial
statements include our accounts and those of our wholly-owned subsidiary,
Chemotrade GmbH. The consolidated financial statements also include the accounts
of International Process Research Corporation ("IPRC") through January 31, 2001.
On February 1, 2001, we sold IPRC to a management group (see Note 5). All
significant intercompany accounts have been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents include investments purchased with a maturity of less than
ninety days. Cash balances held in foreign bank accounts were $616,000 and
$557,000 at April 30, 2001 and 2000, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject us 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. We extend credit to our customers, most of whom are
large, established companies. Performing ongoing credit evaluations of our
customers' financial condition mitigates credit risk and we generally do not
require collateral.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
We perform periodic assessments to determine the existence of obsolete, slow
moving and non-salable inventories, and record provisions to reduce such
inventories to net realizable value when necessary.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over three to seven years. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the lease term.
GOODWILL
Goodwill resulted from the acquisitions of Isoserve, Inc. and Chemotrade. We
evaluate goodwill for impairment by comparing the unamortized balance of
goodwill to the undiscounted future cash flows of the related assets. We modify
or adjust goodwill if impairment is indicated. Based upon our most recent
evaluation, we believe that no impairment of goodwill exists as of April 30,
2001. Due to the sale of the depleted zinc business to Eagle-Picher on December
1, 1999, unamortized goodwill of $112,000 related to the Isoserve, Inc.
acquisition was charged against the gain on the sale of the product line for the
year ended April 30, 2000. The goodwill resulting from the Chemotrade
acquisition is being amortized on a straight-line basis over twenty years. In
2001, we increased the amount of recorded goodwill by $114,000 resulting from
contingent consideration payable to the sellers based on the 2001 earnings of
Chemotrade.
F-7
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
We account 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. Prior to the sale of IPRC,
revenue from contract research and development services was recognized ratably
as services were performed and costs were incurred. Following the sale of IPRC,
we no longer conduct contract research and development activities.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, we are 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. These estimates are based upon mangagement's best findings,
after considering past and current events and assumptions about future events.
Actual results could differ from those estimates.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, trade receivables, trade
payables and debt approximates carrying value due to the short maturity of such
instruments.
TRANSLATION OF FOREIGN CURRENCIES
We conduct substantially all of our transactions in U.S. dollars, except for
certain transactions of Chemotrade that are conducted in Duetsche Marks. The
financial statements of Chemotrade are prepared in Duetsche Marks and remeasured
into U.S. dollars 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
We account for stock-based awards to employees and directors using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations.
We provide additional pro forma disclosures as required under Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
NET INCOME (LOSS) PER SHARE
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Contingently issuable shares are
included in the computation of basic earnings per share when the related
conditions are satisfied. Diluted earnings per share is computed using the
weighted average number of common shares and potentially dilutive securities
outstanding
F-8
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
during the period. Potentially dilutive securities consist of contingently
issuable shares, the incremental common shares issuable upon conversion of
preferred stock (using the "if converted" method) and shares issuable upon the
exercise of stock options and warrants (using the "treasury stock" method).
Potentially dilutive securities are excluded from the computation if their
effect is anti-dilutive.
In 2001, a total of 5,742,947 outstanding stock options and warrants, and
963,666 outstanding Class A Convertible Preferred Stock shares have been
excluded from the diluted computation, as the inclusion would be anti-dilutive.
During 2000 and 2001, 3,130,435 shares of common stock were excluded from the
basic computation, as the issuance of this common stock was contingent upon the
delivery of silicon-28 per the terms of the Eagle-Picher transaction (see Note
4).
The following table reconciles the shares used in the per share computation
(in thousands):
YEAR ENDED
APRIL 30,
-------------------
2001 2000
-------- --------
Weighted average shares of common stock outstanding 10,807 7,174
Less: Weighted average shares contingently issued (2,478) (393)
------ ------
Shares used for net income (loss) per share - basic 8,329 6,781
Dilutive effect of stock options and warrants -- 1,850
Dilutive effect of convertible preferred stock -- 1,385
Add back: weighted average shares contingently issued -- 393
------ ------
Shares used for net income (loss) per share - diluted 8,329 10,409
====== ======
RECLASSIFICATIONS
Certain reclassifications have been made to the 2000 financial statements in
order to conform to the 2001 presentation.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (the "FASB") adopted
SFAS No. 141 "Business Combinations and SFAS No. 142, "Goodwill and Intangible
Assets." SFAS No. 141 addresses the methods used to account for business
combinations and requires the use of the purchase method of accounting for all
combinations after June 30, 2001. SFAS No. 142 addresses the methods used to
amortize intangible assets and to assess impairment of those assets, including
goodwill resulting from business combinations accounted for under the purchase
method. SFAS No. 142 is effective for fiscal years beginning after December 15,
2001; however, we may elect to early adopt the statement beginning May 1, 2001.
Included in our assets at April 30, 2001, is goodwill related to the acquisition
of Chemotrade in 1998 with a net carrying value of $3,006,000. Upon adoption of
SFAS No. 142, we will no longer amortize this goodwill, decreasing our
amortization expense by approximately $175,000 per year. We are required to
assess this goodwill for impairment in the year of adoption. We will not be able
to determine the full effect of these new pronouncements on our financial
position or our results of operations, or decide if we will early adopt the new
standard until we are able to complete our analysis of the impairment provisions
of the new standards. Under existing accounting standards, our assessment of the
Chemotrade goodwill indicated that no impairment existed as of April 30, 2001.
In
F-9
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the event our analysis under the new guidance indicates this goodwill is
impaired, we will be required to record a charge to our earnings in the year of
adoption.
NOTE 2 - REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, we have sustained substantial losses from operations in recent years,
and such losses have continued through the unaudited quarter ended July 31,
2001. In addition, we have used, rather than provided, cash in our operations,
and have been unable to secure adequate financing to meet our future cash needs.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company, which in
turn is dependent upon our ability to meet our financing requirements on a
continuing basis, to maintain present financing, and to succeed in our future
operations. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should we be
unable to continue in existence.
We continue to pursue several items that will help us meet our future cash
needs. We expect to receive an income tax refund of approximately $419,000
resulting from a carry-back claim associated with the current year taxable loss.
In addition, we continue to aggressively pursue our claim of $75,500,000 against
Eagle-Picher. We are currently in the arbitration process and hope to come to
resolution in fiscal 2002 (see Note 4). We are also currently working with
several different sources, including both strategic and financial investors, in
order to raise sufficient capital to finance both our continuing operations and
our proposed acquisition of Silicon Evolution, Inc. (see Note 13). Although
there is no assurance that funding will be available or that the outcome in the
Eagle-Picher case will be positive, we believe that our current business plan,
if successfully funded, will significantly improve our operating results and
cash flow in the future.
NOTE 3 - FINANCIAL STATEMENT COMPONENTS
Inventories consist of the following (in thousands):
APRIL 30,
-------------------
2001 2000
-------- --------
Finished goods $ 186 $ 139
Work in process 306 127
----- -----
$ 492 $ 266
===== =====
F-10
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - FINANCIAL STATEMENT COMPONENTS (CONTINUED)
Property and equipment consists of the following (in thousands):
APRIL 30,
-------------------
2001 2000
-------- --------
Office furniture and equipment $ 272 $ 174
Production equipment 34 898
Leasehold improvements 7 19
------ ------
313 1,091
Accumulated depreciation and amortization (218) (431)
------ ------
$ 95 $ 660
====== ======
Accrued liabilities consist of the following (in thousands):
APRIL 30,
-------------------
2001 2000
-------- --------
Compensation $ 52 $ 68
Customer advances and deposits 152 194
Restructuring costs 33 47
Contingent consideration payable on Chemotrade acquisition 114 --
Other 239 282
----- -----
$ 590 $ 591
===== =====
Supplemental disclosure of non-cash investing and financing activities (in
thousands):
APRIL 30,
-------------------
2001 2000
-------- --------
Conversion of trade payables into debt $ -- $ 243
Conversion of liabilities and debt into preferred stock $ -- $ 495
Retirement of common stock to pay shareholder notes
receivable $ -- $ 435
Class A Preferred Stock converted into Common Stock $ 670 $ --
Common Stock issued for patent rights $ 131 $ --
Contingent consideration accrued on Chemotrade acquisition $ 114 $ --
Supplemental disclosures of cash flow information (in thousands):
APRIL 30,
-------------------
2001 2000
-------- --------
Cash paid during the period for:
Interest $ 3 $ 388
Income taxes 195 433
NOTE 4 - SALE OF DEPLETED ZINC BUSINESS
On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC for $8,230,000, including $1,500,000 due in equal installments
on November 30, 2000, 2001 and 2002. We
F-11
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - SALE OF DEPLETED ZINC BUSINESS (CONTINUED)
received cash of approximately $6,730,000 from Eagle-Picher at the closing, of
which approximately $1,150,000 was used to pay certain accrued liabilities and
debt. Upon completion of the sale, we recognized a net gain on the sale
amounting to $5,088,000. Eagle-Picher's obligation to pay the final $1,500,000
is subject to the performance of our former depleted zinc supplier under the
terms of a supply agreement that was transferred to Eagle-Picher in the sale.
For the year ended April 30, 2000, we were recognizing the $1,500,000 on a
straight-line basis as our former supplier performed. As of April 30, 2000, we
had recognized additional gain of $208,000. Eagle-Picher failed to make the
first additional payment due November 30, 2000. We believe that the unaffiliated
supplier performed as required, and that Eagle-Picher has no cause for its
non-payment. We have demanded payment from Eagle-Picher, but Eagle-Picher made
an unacceptable counteroffer. A total of $458,000 of the contingent gain had
been recognized at the time of Eagle-Picher's default, of which $250,000 had
been recognized in the year ended April 30, 2001. We ceased recognizing any
additional contingent gain as a result of Eagle Picher's failure to make the
first payment when due. We established a reserve for the notes receivable and
gain recognized to date resulting in a net loss of $208,000 in 2001.
Additionally, as of December 1, 1999, Eagle-Picher was to supply us with 200
kilograms of silicon-28 by December 31, 2000, to be used in research and
development activities. We gave Eagle-Picher a warrant to obtain 4,000,000
shares of our common stock, however, these warrants and the underlying shares,
were contingent upon the delivery of silicon-28 by Eagle-Picher by December 31,
2000. Eagle-Picher exercised its warrant, under a net exercise provision in the
warrant agreement, and received 3,130,435 shares of our Common Stock, in March
2000. Because Eagle-Picher exercised its warrant pursuant to the terms of the
net exercise provision, Eagle-Picher did not pay cash to exercise the warrant.
Eagle-Picher disputed our calculation and believed we should have issued to it
an additional 155,279 shares of common stock.
In addition to its refusal to pay the aforementioned $500,000 due
November 30, 2000, Eagle-Picher did not deliver 200 kilograms of silicon-28,
meeting the specifications as set forth in our agreement, by December 31, 2000.
We know that Eagle-Picher's silicon-28 production facility in Oklahoma has
encountered certain technical difficulties, which Eagle-Picher refers to as a
FORCE MAJEURE. We believe that Eagle-Picher's technical difficulties do not meet
the definition of FORCE MAJEURE per our agreements, which would entitle
Eagle-Picher to a delay in the delivery requirement.
As Eagle-Picher is claiming FORCE MAJEURE, it believes it is entitled to
retain its ownership to the 3,130,435 shares obtained through the net exercise
of the warrant and believes it also should receive the disputed 155,279 shares
of our common stock. We continue to dispute Eagle-Picher's claims and on
January 26, 2001, our Board of Directors authorized us to cancel Eagle-Picher's
common stock shares and return those shares to the "authorized, unissued"
category. We cancelled the shares on February 20, 2001.
We notified Eagle-Picher of our intention to pursue the dispute resolution
process, as set forth in the agreement with Eagle-Picher, in December 2000. The
dispute resolution process consists of three phases. The first phase was
negotiations between designated members of senior management of the two
companies. Several meetings were held in December 2000 and January 2001. No
resolution was reached.
F-12
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - SALE OF DEPLETED ZINC BUSINESS (CONTINUED)
The second phase was mediation. Eagle-Picher notified us of its desire to
mediate this dispute on January 18, 2001. A mediation session was held on
January 26, 2001. Again, no resolution was reached. The third phase is binding
arbitration. On March 26, 2001, we filed for binding arbitration. We are
claiming damages against Eagle-Picher of $75,500,000. An arbitration hearing
will be scheduled for late 2001. We have been informed by our legal counsel that
it will likely take a minimum of six-to-nine months or longer to complete the
arbitration phase.
On February 8, 2001, Eagle-Picher informed us that they would be seeking
damages, in excess of $10,000,000, for alleged misrepresentations regarding the
status of the depleted zinc business at the time of the sale. We believe these
allegations to be groundless, and we believe we made full and complete
disclosure to Eagle-Picher at the time of the sale.
Discovery has not yet commenced in the arbitration proceeding. Consequently,
it is premature for us to predict any likely outcome. We intend to vigorously
defend against Eagle-Picher's claim and to prosecute our own claims against
Eagle-Picher until successfully resolved or a settlement is reached.
NOTE 5 - REORGANIZATION AND SUBSEQUENT SALE OF IPRC
On May 1, 2000, we substantially reorganized IPRC to focus on the recovery
and recycling of zinc metal from various sources, including galvanized steel
scrap, electric arc furnace dust and brass scrap. From May 1, 2000, through
January 31, 2001 IPRC did not engage in any revenue producing activities.
In January 2001, we acquired the patent rights related to the recovery and
recycling of zinc processes from three unaffiliated parties. A total of 75,000
shares of our Common Stock valued at $131,000 were issued for these rights. On
February 1, 2001 we sold IPRC and the acquired patent rights to Interpro Zinc,
LLC, a limited liability company formed by a management group. As part of the
transaction, Interpro Zinc, LLC assumed approximately $700,000 in liabilities
associated with the operations of IPRC and agreed to indemnify us against any
contingent liabilities related to the IPRC site in Golden, Colorado. The
management group consists of Dr. Robert H. Cuttris, formerly president of IPRC,
James E. Alexander, president, chief executive officer and chairman of the board
of directors of Isonics Corporation, and Boris Rubizhevsky, senior vice
president and director of Isonics Corporation. Each of the three aforementioned
individuals owns 25% of Interpro Zinc, LLC. Each of the three aforementioned
individuals contributed $100,000 to Interpro Zinc, LLC to continue the
development of the zinc recovery technology. Isonics received a 25% interest in
Interpro Zinc LLC as consideration for the sale. We realized a gain from the
sale of IPRC of $59,000, representing the net liabilities at the date of
disposition. In addition, Interpro Zinc, LLC has assumed Dr. Cuttriss'
employment agreement that extended through September 2003. We have signed a
cooperation agreement with Interpro Zinc, LLC to continue leasing office,
laboratory and storage space at our current location. This agreement expires
December 31, 2001.
F-13
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
APRIL 30,
-------------------
2001 2000
-------- --------
Deferred tax assets
Accruals and expenses deductible in future periods $ 1,464 $ 1,609
Net operating loss and credit carryforwards 683 --
-------- -------
Total deferred tax assets 2,147 1,609
Valuation allowance (2,083) (376)
-------- -------
64 1,233
Deferred tax liabilities
Amortization and depreciation (64) (593)
-------- -------
$ -- $ 640
======== =======
Income tax expense (benefit) consists of the following (in thousands):
APRIL 30,
-------------------
2001 2000
-------- --------
Current
Federal $ (419) $ 640
State -- 98
Foreign -- 31
------ ------
(419) 769
Deferred
Federal 419 (640)
State -- --
------ ------
419 (640)
------ ------
$ -- $ 129
====== ======
F-14
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - INCOME TAXES (CONTINUED)
A reconciliation of our effective tax rate to the federal statutory tax rate
of 34% follows (in thousands):
APRIL 30,
-------------------
2001 2000
-------- --------
Expected tax (benefit) at federal statutory rate $ (1,529) $ 958
State taxes net of federal benefit (178) 98
Foreign income taxed at different rates -- (77)
Non-deductible expenses -- 67
Utilization of previously unrecognized net operating loss
and tax credit carryforwards -- (115)
Change in valuation allowance 1,707 (802)
-------- --------
$ -- $ 129
======== ========
The federal net operating loss carryforward of approximately $1,720,000 as
of April 30, 2001 expires in 2016. In addition, Chemotrade has a net operating
loss carryforward of approximately $281,000 which under current German tax law
will not expire until utilized. There were no operating loss carryforwards as of
April 30, 2000.
We have established a full valuation allowance against the deferred tax
assets because it is uncertain whether we will utilize these benefits due to
continuing operating losses.
NOTE 7 - DEBT AND LINE OF CREDIT
We have term debt outstanding of $16,000 and $20,000 as of April 30, 2001
and 2000, respectively relating to a vehicle loan. We currently have no lending
facilities with any financial institutions, except for an unsecured line of
credit available to Chemotrade in the amount of DM 400,000 ($182,000) and a
letter of credit guarantee relating to imports and exports for $50,000. As of
April 30, 2001 there are no borrowings outstanding under the line of credit.
NOTE 8 - STOCKHOLDERS' EQUITY
COMMON STOCK
On December 13, 2000, we completed a private placement to accredited
investors whereby we sold 337,500 units for $675,000. Each unit consisted of one
share of common stock and two redeemable Class B common stock purchase warrants.
Class B warrants are exercisable at $1.50 per share until December 31, 2005.
Each Class B warrant entitles the holder to receive one share of common stock
and one redeemable Class C common stock purchase warrant. We are required to
issue an additional 112,500 shares and 225,000 Class B warrants to the
purchasers of the units if the average bid price of our common stock does not
equal or exceed $2.00 per share during the 30 days following the date of an
effective registration statement covering these shares. Each Class C warrant
entitles the holder to purchase one share of common stock at $2.50 until
December 31, 2005. We may redeem the Class B and C warrants at a price of $.10
if the closing price of our common stock trades at or above $3.75 per share for
any 20 of 30 consecutive trading days provided a registration statement
permitting the exercise of those warrants is then current and effective.
F-15
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
On September 22, 1997, we completed an initial public offering of 810,000
units, each unit consisting of one share of common stock and one redeemable
Class A common stock purchase warrant. Each Class A warrant entitles the holder
to purchase one share of common stock at $5.80 per share, exercisable until
September 21, 2001. We may redeem the Class A warrants at a price of $0.10 per
warrant if the closing price of our common stock is at least $14.50 per share
for at least 20 consecutive trading days. In connection with the offering, we
granted the underwriter warrants to purchase 80,000 units at $9.57 per unit. The
underwriter warrants expire on September 21, 2002; however, the Class A warrant
included in the unit expires on September 21, 2001.
On April 30, 2001, we completed an exchange offer whereby the holders of
Class A warrants could exchange each Class A warrant for a Class B warrant. In
order to participate in the exchange offer, each holder of the Class A warrants
was required to submit their election by April 30, 2001. As of April 30, 2001,
124,400 of the 810,000 Class A warrants had been processed and exchanged for
Class B warrants. As of June 20, 2001, 632,610 of the Class A warrants have been
exchanged for Class B warrants.
PREFERRED STOCK
On July 29, 1999, we completed a private placement financing to accredited
investors and creditors valued in total at approximately $2,745,000. We issued
1,830,000 units, each consisting of one share of Series A Convertible Preferred
Stock and one common stock purchase 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. The liquidation preference for the Series A
Convertible Preferred Stock is $1.50 per share amounting to a total liquidation
preference of $1,445,499 at April 30, 2001. Each warrant allows the investor to
purchase one share of common stock for $3.75 through July 29, 2002.
In addition to converting $425,000 of existing debt 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
obligations under a royalty agreement.
- Extended the payment due date for the remaining balance on the
Chemotrade acquisition note to July 2000, which note has been paid in
full.
- Extended the payment due date for unsecured promissory notes to
January 2000, which notes have been paid in full.
During 1998, the Emerging Issues Task Force issued EITF 98-5, "Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios," which was applicable for equity instruments
issued after May 20, 1999. EITF 98-5 requires issuers of convertible preferred
stock containing a nondetachable conversion feature that is in-the-money at the
commitment date to allocate part of the proceeds of the issuance to the
conversion feature based on its intrinsic value. The conversion feature on the
1,830,000 shares of preferred stock had an intrinsic value of $686,000 at the
commitment date. This amount is considered a deemed dividend and was not
F-16
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
previously reported as such in our financial statements for the year ended April
30, 2000. The net income (loss) attributable to common shareholders and net
income (loss) per share for the year ended April 30, 2000 have been restated to
reflect this deemed dividend as follows:
PREVIOUSLY
REPORTED RESTATED
---------- ----------
Net income (loss) attributable to common shareholders $2,689,000 $2,003,000
Net income (loss) per share attributable to common
shareholders - basic $ .40 $ .30
Net income (loss) per share attributable to common
shareholders - diluted $ .26 $ .19
On November 16, 2000, the Emerging Issues Task Force issued EITF 00-27,
"Application of EITF Issue 98-5, 'Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios,' to Certain
Convertible Instruments." EITF 00-27 requires the use of an effective conversion
price in determining the value of a conversion feature contained in a
convertible equity instrument. The consensus opinion for this issue is
retroactive for instruments issued after May 20, 1999 and is to be applied in
the quarter that includes November 16, 2000. In applying the requirements of
EITF 00-27, we determined the value of the conversion feature contained in our
preferred stock to be $1,415,000. Of this amount, $686,000 has been reported as
a deemed dividend in 2000 as discussed above. The remaining $729,000 has been
reported as a deemed dividend in 2001.
STOCK OPTION AND PURCHASE PLANS
1996 STOCK OPTION PLAN
Our 1996 Stock Option Plan authorized the grant of incentive and
nonqualified stock options to our key employees, directors or consultants. The
options generally expire ten years from the date of grant. In September 1997,
the Board of Directors terminated the 1996 Stock Option Plan. As of April 30,
2001, there remain 358,769 options outstanding under the 1996 Stock Option Plan.
DIRECTORS' STOCK OPTION PLAN
The 1998 Directors' Plan provides that each person serving as a member of
the Board, who is not an employee of Isonics, receive options to purchase 20,000
shares of 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 at
the time of election. The exercise price for the options is the quoted market
price on the date of grant and the options are exercisable for five years from
such date. The options granted under the directors' plan vest immediately. In
the event a director resigns or is not re-elected to the Board, failure to
exercise the options within three months results in the options' termination. As
of April 30, 2001, options to purchase a total of 140,000 shares were
outstanding under the directors' plan.
EXECUTIVE AND INCENTIVE STOCK OPTION PLANS
In November 1996, the Board of Directors adopted the Executive and Incentive
Stock Option Plans authorizing the granting of up to 570,000 and 150,000
incentive and nonqualified stock options respectively, to our key employees,
directors or consultants. Effective October 11, 2000, shareholders
F-17
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
approved an increase in the authorized shares for the Executive and Incentive
Stock Option Plans to 1,000,000 and 500,000 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 five
to ten years after the date of grant. As of April 30, 2001, options to purchase
a total of 609,083 shares were outstanding under the Executive and Incentive
Stock Option Plans.
EMPLOYEE STOCK PURCHASE PLAN
The employee stock purchase plan has reserved 200,000 shares of our common
stock for sale 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 of our common stock at the beginning or the end of the offering
period. As of April 30, 2001, 27,937 shares have been issued under the plan.
PRO FORMA DISCLOSURE OF COMPENSATION EXPENSE UNDER SFAS NO. 123
The exercise price of options granted is the quoted market price of our
stock on the date of grant. Accordingly, no compensation expense has been
recognized for grants from the plans made to employees or directors. Had
compensation cost for grants to employees and directors been determined based on
the fair value of the options at the grant dates consistent with SFAS No. 123,
"Accounting For Stock-Based Compensation," our results of operations and per
share amounts for the years ended April 30, 2001 and 2000 would have been
changed to the pro forma amounts indicated below.
2001 2000
------------ ----------
Net income (loss) attributable to common shareholders
(Information for 2000 is restated)
As reported $ (5,227,000) $2,003,000
Pro forma $ (5,819,000) $ 562,000
Income (loss) per share attributable to common
shareholders - basic (Information for 2000 is restated)
As reported $ (.63) $ .30
Pro forma $ (.70) $ .08
Income (loss) per share attributable to common
shareholders - diluted (Information for 2000 is restated)
As reported $ (.63) $ 0.19
Pro forma $ (.70) $ 0.05
For purposes of the pro forma disclosures, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions; no expected dividends,
volatility of 150%; risk-free interest rate of 6.0%; and expected
F-18
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
lives of five (5) years. A summary of the status of our stock option plans as of
April 30, 2001 and 2000, and changes during the years ending on these dates is
presented below.
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding, May 1, 1999 996,577 $1.49
Granted 169,500 $6.35
Exercised (21,813) $1.16
Canceled (57,500) $1.69
--------- -----
Outstanding, April 30, 2000 1,086,764 $2.25
Granted 235,000 $2.68
Exercised (201,912) $1.03
Canceled (12,000) $2.00
--------- -----
Outstanding, April 30, 2001 1,107,852 $2.43
========= =====
The weighted average fair value of options granted during the years ended
April 30, 2001 and 2000 was $2.46 and $5.78, respectively.
The following information applies to options outstanding at April 30, 2001:
WEIGHTED AVERAGE
REMAINING
RANGE OF NUMBER WEIGHTED AVERAGE CONTRACTUAL LIFE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING EXERCISE PRICE (YEARS) EXERCISABLE EXERCISE PRICE
--------------------- ----------- ---------------- ---------------- ----------- ----------------
$0.58 207,340 $ 0.58 5 207,340 $ 0.58
$1.00 - $1.44 204,583 $ 1.25 3 169,583 $ 1.28
$1.62 - $2.38 348,929 $ 1.86 4 338,209 $ 2.06
$2.56 - $3.50 180,000 $ 2.98 4 145,000 $ 3.08
$5.50 - $7.31 167,000 $ 6.39 4 89,500 $ 6.82
--------- -------
1,107,852 $ 2.43 949,632 $ 2.20
========= =======
NOTES RECEIVABLE FROM SHAREHOLDERS
In fiscal 1997, two of our executive officers 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, we 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 accrued interest at an annual rate equal to the minimum applicable
federal rate, and interest was payable annually; principal and accrued but
unpaid interest was due five years from the date of the note. In addition,
during fiscal 1998, we 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 agreed
to pay compensation to such officers equal to the
F-19
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
amount of interest payable under these loans and the amount of taxes payable as
a result of such compensation.
In January 2000, the Board of Directors agreed to forgive the current
interest and principal due related to the tax notes and to accept Isonics common
stock, owned by the officers, in payment of the balances owed for the share
purchase loans. The amount owed by Mr. James Alexander, our President and CEO,
that was forgiven was $74,000. The amount owed by Mr. Boris Rubizhevsky, our
Senior Vice President, that was forgiven was $61,000. In both cases the amount
forgiven was treated as bonus compensation to Mr. Alexander and
Mr. Rubizhevsky. Each officer surrendered 30,437 shares of Isonics Common Stock
to pay off $175,000 of principal and accrued interest. The other two loans,
executed in fiscal 1999, were paid in full: the first, in cash, in March 2000;
and the second, by the surrender of 11,664 shares of our common stock in
January 2000. As of April 30, 2001 and 2000 we had no notes receivable
outstanding for the acquisition of stock.
WARRANTS
We have issued warrants in connection with debt offerings, private
placements of both common and convertible preferred stock, our IPO and as
consideration for concessions from lenders and vendors. A summary of the
activity in our warrants follows:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- ----------------
Outstanding, May 1, 1999 2,442,470 $3.90
Warrants issued in debt restructuring 95,000 2.61
Warrants issued in private placement of convertible
preferred stock 2,330,000 3.75
Warrants issued for isotope supply agreement 4,000,000 3.75
Exercised (3,897,173) 3.55
Forfeited, via net exercise (1,043,650) 3.92
Expired -- 0.00
----------- -----
Outstanding, April 30, 2000 3,926,647 $4.01
Warrants issued in private placement of common stock 675,000 1.50
Warrants issued under anti-dilution agreement 146,301 3.52
Warrants issued for services 10,000 5.00
Exercised (99,332) 2.76
Forfeited, via net exercise (23,521) 2.76
Expired -- 0.00
----------- -----
Outstanding, April 30, 2001 4,635,095 $3.44
=========== =====
F-20
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
The outstanding warrants as of April 30, 2001, are summarized as follows:
NUMBER WEIGHTED AVERAGE EXPIRATION
OUTSTANDING EXERCISE PRICE DATE
----------- ---------------- ----------
Class A Warrants 685,600 $5.80 09-21-2001
Class B Warrants 799,400 $1.50 12-31-2005
Class C Warrants -- $ -- 12-31-2005
Other Warrants 3,150,095 $3.42 (1)
--------- -----
4,635,095 $3.44
========= =====
(1) The other warrants expire at various dates ranging from September 27, 2001
through July 31, 2007.
In July 1999, we made a principal payment of $550,000 towards the amounts
owing to the former Chemotrade shareholders from the acquisition of Chemotrade.
At that time, we extended the due date of the balance to July 31, 2000. In
consideration for the extension, we issued 70,000 warrants to the former
Chemotrade shareholders, exercisable at $3.00 per warrant until June 30, 2004.
We recognized a charge amounting to $157,000 representing the fair value of the
warrants issued determined using the Black-Scholes option pricing model.
Under the terms of the preferred stock private placement on July 29, 1999,
the related shareholders have anti-dilution rights if we issue or sell common
stock after July 29, 1999 for a per share consideration less than the current
exercise price of the related warrants. As a result of potential dilution
triggered by the December 13, 2000 private placement, we issued an additional
146,301 common stock warrants to the preferred shareholders and reduced the
exercise price to $3.52 on all related warrants in order to satisfy the
anti-dilution provisions.
As a result of the exchange offer completed on April 30, 2001 whereby the
holders of Class A warrants could exchange each Class A warrant for a Class B
warrant, we are required to issue approximately 120,000 additional common stock
warrants and reduce the exercise price of all the warrants issued in the
preferred stock placement to approximately $3.36 in order to satisfy the anti-
dilution provisions discussed above. The additional warrants and the reduction
in the exercise price occurred on July 26, 2001.
The private placement agreement associated with the private placement
completed on December 13, 2000 required that we register the common stock and
the common stock underlying the Class B common stock warrants by June 14,
2001 or penalty provisions would apply. As we were unable to complete the
effective registration of such shares by June 14, 2001, on July 26, 2001, we
rectified the situation by issuing approximately an additional 112,500 shares
of common stock and an additional 675,000 Class B warrants to the accredited
investors of the private placement. As a result of this settlement, the
anti-dilution provisions related to the preferred stock private placement
were triggered. In order to satisfy the anti-dilution provisions, on July 26,
2001 we issued approximately 135,000 common stock warrants and reduced the
exercise price to approximately $3.17 for all related warrants.
NOTE 9 - BUSINESS SEGMENTS AND FOREIGN OPERATIONS
During the year ended April 30, 2000 we had two operating segments
consisting of Isotope Products conducted through Isonics and Chemotrade and
Contract Research and Development Services
F-21
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - BUSINESS SEGMENTS AND FOREIGN OPERATIONS (CONTINUED)
conducted in IPRC. As discussed in Note 5, our contract research and development
activities ceased on May 1, 2000, and accordingly, we currently have one
operating segment.
Information by segment is set forth below (in thousands):
2001 2000
-------- --------
Segment revenues:
Isotope products $ 7,789 $ 11,577
Contract research and development services -- 1,156
-------- --------
Total $ 7,789 $ 12,733
Segment operating (loss) income:
Isotope products $ (4,009) $ (2,070)
Contract research and development services -- (331)
-------- --------
Total $ (4,009) $ (2,401)
Total assets:
Isotope products $ 6,102 $ 8,711
Contract research and development services -- 822
-------- --------
Total $ 6,102 $ 9,533
A summary of our operations by geographic area is presented below (in
thousands):
2001 2000
-------- --------
Net revenues
United States $ 2,602 $ 4,501
Germany 5,187 8,232
-------- --------
Total $ 7,789 $ 12,733
Operating (loss) income
United States $ (3,978) $ (2,486)
Germany (31) 85
-------- --------
Total $ (4,009) $ (2,401)
Total assets
United States $ 1,814 $ 4,731
Germany 4,288 4,802
-------- --------
Total $ 6,102 $ 9,533
NOTE 10 - EMPLOYEE BENEFIT PLAN
We have a profit sharing plan qualified under section 401(k) of the Internal
Revenue Code. The plan is a defined contribution plan, covering substantially
all of our employees. Company contributions to the plan aggregated approximately
$39,000 and $40,000 for 2001 and 2000, respectively.
F-22
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - CONCENTRATIONS
As of April 30, 2001, five customers accounted for approximately 50.2% of
total net accounts receivable. One of these customers, and four other customers,
accounted for approximately 41.0% of net revenues during the year ended April
30, 2001. Two different customers accounted for approximately 25% of net
revenues during the year ended April 30, 2000. One of these customers accounted
for approximately 18% of accounts receivable at April 30, 2000. Two customers
accounted for approximately 34.9% of the German segment's revenue for the year
ended April 30, 2001. One of these customers accounted for approximately 23.3%
of the German segment's accounts receivable at April 30, 2001.
NOTE 12 - COMMITMENTS
We rent office and production facilities and equipment under operating
leases expiring through March 2004. Rent expense for operating leases was
approximately $224,000 for the years ended April 30, 2001 and 2000. Future
minimum annual operating lease commitments are as follows (in thousands):
YEAR ENDING APRIL 30,
---------------------
2002 $188
2003 176
2004 50
----
$414
====
NOTE 13 - SUBSEQUENT EVENTS
On July 18, 2001 we signed a letter of intent to acquire certain net assets
of Silicon Evolution, Inc. in exchange for 2,000,000 restricted shares of common
stock. In addition, we may be required to issue up to 1,600,000 additional
shares of restricted common stock if the acquired net assets achieve certain
operating objectives, as defined, in the sixth fiscal quarter after the closing
of the transaction.
F-23
PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED FINANCIAL STATEMENTS
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
JULY 31, 2001 APRIL 30, 2001
-------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 660 $ 1,090
Accounts receivable (net of allowances of $12 and $39,
respectively)........................................... 685 778
Income taxes receivable................................... 419 419
Inventories............................................... 381 492
Prepaid expenses and other current assets................. 226 190
------- -------
Total current assets.................................... 2,371 2,969
------- -------
LONG-TERM ASSETS
Property and equipment, net............................... 83 95
Goodwill (net of accumulated amortization of $537 and
$493, respectively)..................................... 2,963 3,006
Other assets.............................................. 40 32
------- -------
Total long-term assets.................................. 3,086 3,133
------- -------
TOTAL ASSETS................................................ $ 5,457 $ 6,102
======= =======
(UNAUDITED)
JULY 31, 2001 APRIL 30, 2001
-------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and line of credit........................ $ 15 $ 16
Accounts payable.......................................... 519 754
Accrued liabilities....................................... 541 590
------- -------
Total current liabilities............................... 1,075 1,360
------- -------
STOCKHOLDERS' EQUITY:
Class A Preferred Stock--no par value; 10,000,000 shares
authorized; 963,666 shares issued and outstanding on
July 31, 2001 and
April 30, 2001.......................................... 745 745
Common stock--no par value. 20,000,000 shares authorized;
9,310,975 shares issued and outstanding on July 31,
2001, and 8,961,288 shares issued and outstanding on
April 30, 2001.......................................... 8,835 8,508
Additional Paid in Capital................................ 2,745 2,745
Accumulated deficit....................................... (7,943) (7,256)
------- -------
Total stockholders' equity.............................. 4,382 4,742
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 5,457 $ 6,102
======= =======
See notes to condensed consolidated financial statements.
F-24
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
JULY 31,
-----------------------
2001 2000
-------- --------
Net revenues................................................ $1,634 $2,036
Cost of revenues............................................ 1,213 1,522
------ ------
Gross margin............................................ 421 514
Operating expenses:
Selling, general and administrative....................... 929 1,203
Research and development.................................. 105 304
------ ------
Total operating expenses................................ 1,034 1,507
------ ------
Operating loss.............................................. (613) (993)
------ ------
Other income (expense):
Foreign exchange.......................................... (59) 69
Interest and other income................................. 9 99
Interest expense.......................................... (20) (16)
------ ------
Total other income (expense), net....................... (70) 152
------ ------
Loss before income taxes.................................... (683) (841)
Income tax expense.......................................... 4 1
------ ------
NET LOSS.................................................... $ (687) $ (842)
====== ======
NET LOSS PER SHARE--BASIC AND DILUTED
Net loss per share.......................................... $(0.08) $(0.11)
Shares used in computing per share information.............. 9,108 7,639
See notes to condensed consolidated financial statements.
F-25
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
JULY 31,
-------------------
2001 2000
-------- --------
Net cash used in operating activities....................... $ (755) $ (1,508)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (2) (11)
------- --------
Cash used in investing activities....................... (2) (11)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 327 193
------- --------
Cash provided by financing activities................... 327 193
------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS:.................. (430) (1,326)
Cash and cash equivalents at beginning of period.......... 1,090 3,385
------- --------
Cash and cash equivalents at end of period................ $ 660 $ 2,059
======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 1 $ 1
======= ========
Income taxes............................................ $ 4 $ 675
======= ========
Supplemental disclosure of noncash investing and financing
activities:
Class A Preferred Stock converted into Common Stock..... $ -- $ 470
======= ========
See notes to condensed consolidated financial statements.
F-26
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Isonics
Corporation and Subsidiaries as of July 31, 2001, and for the three months ended
July 31, 2001, and 2000, 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, 2001.
REALIZATION OF ASSETS
The accompanying condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a
going concern. However, we have sustained substantial losses from operations in
recent years, and such losses have continued through August 31, 2001. In
addition, we have used, rather than provided, cash in our operations, and have
been unable to secure adequate financing to meet our future cash needs.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company, which in
turn is dependent upon our ability to meet our financing requirements on a
continuing basis, to maintain present financing, and to succeed in our future
operations. The condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should we be unable to continue in existence.
We continue to pursue several items that will help us meet our future cash
needs. We expect to receive an income tax refund of approximately $419,000
resulting from a carry-back claim associated with the prior year taxable loss.
In addition, we continue to aggressively pursue our claim of $75,500,000 against
Eagle-Picher. We are currently in the arbitration process and hope to come to
resolution in calendar 2002 (see "SALE OF DEPLETED ZINC BUSINESS"). We are also
currently working with several different sources, including both strategic and
financial investors, in order to raise sufficient capital to finance both our
continuing operations and potential expansion. Although there is no assurance
that funding will be available or that the outcome in the Eagle-Picher case will
be positive, we believe that our current business plan, if successfully funded,
will significantly improve our operating results and cash flow in the future.
NET INCOME (LOSS) PER SHARE
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Contingently issuable shares are
included in the computation of basic earnings per share when the related
conditions are satisfied. Diluted earnings per share is computed using the
weighted average number of common shares and potentially dilutive securities
outstanding during the period. Potentially dilutive securities consist of
contingently issuable shares, the incremental common shares issuable upon
conversion of preferred stock (using the "if converted" method) and shares
issuable upon the exercise of stock options and warrants (using the "treasury
stock" method). Potentially dilutive securities are excluded from the
computation if their effect is anti-dilutive.
F-27
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of July 31, 2001, a total of 6,487,864 outstanding stock options and
warrants, and 963,666 outstanding shares of Class A Convertible Preferred Stock
have been excluded from the diluted net income (loss) per share calculation, as
their inclusion would be anti-dilutive. As of July 31, 2000, a total of
4,814,999 outstanding stock options and warrants, and 1,516,667 outstanding
shares of Class A Convertible Preferred Stock were excluded from the diluted net
income (loss) per share calculation, as the inclusion would be anti-dilutive.
During the three month period ending July 31, 2000, 3,130,435 shares of common
stock were excluded from the basic computation, as the issuance of this common
stock was contingent upon the delivery of silicon-28 per the terms of the
Eagle-Picher transaction. On February 20, 2001 we canceled the 3,130,435 shares
of Common Stock issued to Eagle-Picher as discussed in "SALE OF DEPLETED ZINC
BUSINESS."
During the three month period ended July 31, 2001, we issued the following
shares of Common Stock:
NUMBER OF
DESCRIPTION COMMON STOCK SHARES
----------- -------------------
Balance as of April 30, 2001............................. 8,961,288
Exercise of warrants..................................... 233,320
Additional shares issued in connection with
December 13, 2000 private placement.................... 112,504
Shares issued from employee stock purchase plan.......... 3,863
---------
Balance as of July 31, 2001.............................. 9,310,975
=========
The terms of the private placement completed on December 13, 2000 required
that we register the common stock and the common stock underlying the Class B
common stock warrants by June 14, 2001. As we were unable to complete the
effective registration of such shares by June 14, 2001, on July 26, 2001, we
rectified the situation by issuing an additional 112,504 shares of common stock
and an additional 675,000 Class B warrants to the investors of the private
placement.
INVENTORIES
Inventories consist of (in thousands):
JULY 31, 2001 APRIL 30, 2001
-------------- ---------------
Finished goods...................................... $ 80 $186
Work in progress.................................... 301 306
---- ----
Total inventories................................. $381 $492
==== ====
SIGNIFICANT CUSTOMERS
At July 31, 2001, three customers accounted for approximately 47% of total
net accounts receivable. These three customers accounted for approximately 43%
of net revenues for the three months ended July 31, 2001. At April 30, 2001,
five customers accounted for approximately 50.2% of total net accounts
receivable. At July 31, 2001, two customers accounted for approximately 50% of
the German segment's net accounts receivable. These two customers accounted for
approximately 44% of the German segment's net revenues for the three months
ended July 31, 2001. One customer accounted for approximately 23.3% of the
German segment's accounts receivable at April 30, 2001.
F-28
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BUSINESS SEGMENTS AND FOREIGN OPERATIONS
Information by segment is set forth below (in thousands):
THREE MONTHS ENDED
JULY 31,
-----------------------
2001 2000
-------- --------
Segment revenues:
Isotope products....................................... $1,634 $2,036
------ ------
Total................................................ $1,634 $2,036
====== ======
THREE MONTHS ENDED
JULY 31,
-----------------------
2001 2000
-------- --------
Segment operating (loss) income:
Isotope products....................................... $ (613) $ (993)
------ ------
Total................................................ $ (613) $ (993)
====== ======
JULY 31, 2001 APRIL 30, 2001
-------------- ---------------
Identifiable Assets:
Isotope products.................................. $5,457 $6,102
------ ------
Total........................................... $5,457 $6,102
====== ======
A summary of operations by geographic area is as follows:
THREE MONTHS ENDED
JULY 31,
-----------------------
2001 2000
-------- --------
Net revenues:
United States.......................................... $ 904 $ 528
Germany................................................ 730 1,508
------ ------
Total................................................ $1,634 $2,036
====== ======
THREE MONTHS ENDED
JULY 31,
-----------------------
2001 2000
-------- --------
Operating (loss) income:
United States.......................................... $ (541) $ (875)
Germany................................................ (72) (118)
------ ------
Total................................................ $ (613) $ (993)
====== ======
F-29
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001 APRIL 30, 2001
-------------- ---------------
Identifiable Assets:
United States..................................... $1,450 $1,814
Germany........................................... 4,007 4,288
------ ------
Total........................................... $5,457 $6,102
====== ======
SALE OF DEPLETED ZINC BUSINESS
On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC for $8,230,000, including $1,500,000 due in equal installments
on November 30, 2000, 2001 and 2002. We received cash of approximately
$6,730,000 from Eagle-Picher at the closing, of which approximately $1,150,000
was used to pay certain accrued liabilities and debt. Upon completion of the
sale, we recognized a net gain on the sale amounting to $5,088,000.
Eagle-Picher's obligation to pay the final $1,500,000 is subject to the
performance of our former depleted zinc supplier under the terms of a supply
agreement that was transferred to Eagle-Picher in the sale.
For the year ended April 30, 2000, we were recognizing the $1,500,000 on a
straight-line basis as our former supplier performed. As of April 30, 2000, we
had recognized additional gain of $208,000. Eagle-Picher failed to make the
first additional payment due November 30, 2000. We believe that the unaffiliated
supplier performed as required, and that Eagle-Picher has no cause for its
non-payment. We have demanded payment from Eagle-Picher, but Eagle-Picher made
an unacceptable counteroffer. A total of $458,000 of the contingent gain had
been recognized at the time of Eagle-Picher's default, of which $250,000 had
been recognized in the year ended April 30, 2001. We ceased recognizing any
additional contingent gain as a result of Eagle Picher's failure to make the
first payment when due. We established a reserve for the notes receivable and
reversed the gain recognized in 2001, resulting in a net loss of $208,000 in
2001.
Additionally, as of December 1, 1999, Eagle-Picher was to supply us with 200
kilograms of silicon-28 by December 31, 2000, to be used in research and
development activities. We gave Eagle-Picher a warrant to obtain 4,000,000
shares of our common stock, however, these warrants and the underlying shares,
were contingent upon the delivery of silicon-28 by Eagle-Picher by December 31,
2000. Eagle-Picher exercised its warrant, under a net exercise provision in the
warrant agreement, and received 3,130,435 shares of our Common Stock, in
March 2000. Because Eagle-Picher exercised its warrant pursuant to the terms of
the net exercise provision, Eagle-Picher did not pay cash to exercise the
warrant. Eagle-Picher disputed our calculation and believed we should have
issued to it an additional 155,279 shares of common stock.
In addition to its refusal to pay the aforementioned $500,000 due
November 30, 2000, Eagle-Picher did not deliver 200 kilograms of silicon-28,
meeting the specifications as set forth in our agreement, by December 31, 2000.
We know that Eagle-Picher's silicon-28 production facility in Oklahoma has
encountered certain technical difficulties, which Eagle-Picher refers to as a
FORCE MAJEURE. We believe that Eagle-Picher's technical difficulties do not meet
the definition of FORCE MAJEURE per our agreements, which would entitle
Eagle-Picher to a delay in the delivery requirement.
As Eagle-Picher is claiming FORCE MAJEURE, it believes it is entitled to
retain its ownership to the 3,130,435 shares obtained through the net exercise
of the warrant and believes it also should receive the disputed 155,279 shares
of our common stock. We continue to dispute Eagle-Picher's claims and on
January 26, 2001, our Board of Directors authorized us to cancel Eagle-Picher's
common stock shares
F-30
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and return those shares to the "authorized, unissued" category. We cancelled the
shares on February 20, 2001.
We notified Eagle-Picher of our intention to pursue the dispute resolution
process, as set forth in the agreement with Eagle-Picher, in December 2000. The
dispute resolution process consists of three phases. The first phase was
negotiations between designated members of senior management of the two
companies. Several meetings were held in December 2000 and January 2001. No
resolution was reached.
The second phase was mediation. Eagle-Picher notified us of its desire to
mediate this dispute on January 18, 2001. A mediation session was held on
January 26, 2001. Again, no resolution was reached. The third phase is binding
arbitration. On March 26, 2001, we filed for binding arbitration. We are
claiming damages against Eagle-Picher of $75,500,000. An arbitration hearing has
been scheduled for April 2002. We have been informed by our legal counsel that
it will likely take a minimum of six-to-nine months or longer to complete the
arbitration phase.
On February 8, 2001, Eagle-Picher informed us that they would be seeking
damages, in excess of $10,000,000, for alleged misrepresentations regarding the
status of the depleted zinc business at the time of the sale. We believe these
allegations to be groundless, and we believe we made full and complete
disclosure to Eagle-Picher at the time of the sale.
Discovery is only in the very preliminary stages of the arbitration
proceeding. Consequently, it is premature for us to predict any likely outcome.
We intend to vigorously defend against Eagle-Picher's claim and to prosecute our
own claims against Eagle-Picher until successfully resolved or a settlement is
reached.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board adopted SFAS No. 141
BUSINESS COMBINATIONS and SFAS No. 142 GOODWILL AND INTANGIBLE ASSETS. SFAS
No. 141 addresses the methods used to account for business combinations and
requires the use of the purchase method of accounting for all combinations after
June 30, 2001. SFAS No. 142 addresses the methods used to amortize intangible
assets and to assess impairment of those assets, including goodwill resulting
from business combinations accounted for under the purchase method. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001.
Included in our assets at July 31, 2001, is goodwill related to the acquisition
of Chemotrade in 1998 with a net carrying value of $2,963,000. Upon adoption of
SFAS No. 142, we will no longer amortize this goodwill, decreasing our
amortization expense by approximately $175,000 per year. We are required to
assess this goodwill for impairment in the year of adoption. We will not be able
to determine the full effect of these new pronouncements on our financial
position or our results of operations, until we are able to complete our
analysis of the impairment provisions of the new standards. Under existing
accounting standards, our assessment of the Chemotrade goodwill indicated that
no impairment existed as of July 31, 2001. In the event our analysis under the
new guidance indicates this goodwill is impaired, we will be required to record
a charge to our earnings in the year of adoption.
F-31
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 provision covers
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 Isonics' bylaws
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
II-1
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 Isonics' directors, officers, or employees to whom
authority to act for the Board in connection with that 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.
We are not aware of any litigation or threatened litigation or other
proceeding involving an Isonics' director, officer or employee pursuant to which
an individual is seeking indemnification.
Section 317 of the California Code and the Bylaws of Isonics provide for
the indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons, under certain circumstances, for
liabilities (including 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:
DOCUMENT EXHIBIT NUMBER
------- --------------
Underwriting Agreement ........................... 1.01
Registrant's Certificate of Incorporation ........ 3.01
Registrant's Bylaws .............................. 3.02
Form of Indemnity Agreement ...................... 10.09
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.
The Selling Shareholders will pay only those expenses directly related to the
transfer of their securities. All amounts are estimates except for the
Securities and Exchange Commission registration fee and the NASD filing fee.
II-2
Securities and Exchange Commission registration fee ... $ 1,663
NASD filing fee ....................................... 0
Accounting fees and expenses .......................... 20,000
Legal fees and expenses ............................... 25,000
Printing fees and expenses ............................ 10,000
Blue-sky fees and expenses ............................ 8,000
Transfer agent and registrar fees and expenses ........ 5,000
Miscellaneous ......................................... 500
Fees to be paid by Selling Security Holders ........... 0
Fees to be paid by Isonics ............................ 0
Total ................................................. $70,163
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:
1996 Stock Option Plan. Although this plan has been terminated, there
are options outstanding.
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 the shareholders in October 1996. In October 2000,
our shareholders approved increasing the number of stock options
available to 1,000,000, an increase of 430,000 stock options. The
directors approved this increase in August 2000.
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 the shareholders in
October 1996. In October 2000, our shareholders approved increasing
the number of stock options available to 500,000, an increase of
350,000 stock options. The directors approved this increase in August
2000.
1998 Employee Stock Purchase Plan. The Stock Purchase Plan authorized
employee purchase of up to 200,000 shares of Isonics common stock. The
directors approved this plan in August 1998. Shareholders approved it
in October 1998.
II-3
As of October 5, 2001, options to purchase a total of 263,125 shares,
101,458 shares, and 358,769 shares respectively, were outstanding
under the Executives' Plan, Employees' Plan, and 1996 Stock Option
Plan, and options to purchase 664,417, 354,362, and 0 shares,
respectively, remained available for grant. Our shareholders were
asked to approve an increase in the number of shares of common stock
issuable under the Employees' Plan to 500,000 and under the
Executives' Plan to 1,000,000. These increases were approved by our
shareholders at the annual meeting held October 11, 2000. The number
of options issuable under the two plans was increased by 350,000 in
the Employee's Plan, and 430,000, in the Executive's Plan.
(b) NAMES OF PRINCIPAL UNDERWRITERS. None
(c) CONSIDERATION RECEIVED. The stock options and bonuses issued outside of
Isonics' employee benefit plans were, for the most part, issued as
additional compensation or in the form of bonuses.
(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, and no advertising or public solicitation was
involved in any of the transactions.
(e) NOT APPLICABLE.
(f) USE OF PROCEEDS. Where proceeds were received, the proceeds were utilized
for working capital purposes.
SEPTEMBER 2001 ISSUANCE FOR TECHNOLOGY LICENSE AGREEMENT
(a) SECURITIES SOLD. This sale occurred on September 14, 2001, although the
securities were not issued until the California Secretary of State accepted
the Certificate of Designation for filing on October 10, 2001. The
securities sold consisted of 500,000 shares of Series B convertible
preferred stock.
(b) UNDERWRITERS AND OTHER PURCHASERS. No underwriters, agents, or placement
agents participated in the private placement. The sole purchaser was
Silicon Evolution, Inc., a corporation formed under Oregon law.
(c) PURCHASE PRICE. This was entirely a non-cash transaction. The securities
were issued in exchange for a license to certain technology and patents
owned or licensed by Silicon Evolution.
(d) EXEMPTION CLAIMED. The transaction was not accomplished through any form of
public advertising or general solicitation, and was completed only after
the directors of Silicon Evolution had received such information regarding
Isonics as they determined necessary or appropriate in the circumstances.
The transaction was, therefore, exempt from the registration requirements
of the Securities Act of 1933, as amended, by reason of Section 4(2).
II-4
(e) TERMS OF CONVERSION OR EXERCISE. The Series B stock will be automatically
converted into common stock when sufficient shares of common stock have
been authorized by the Isonics shareholders.
(f) USE OF PROCEEDS. This is not applicable as Isonics will be receiving no
cash proceeds from this issuance.
DECEMBER 2000 UNIT ISSUANCE
(a) SECURITIES SOLD. This sale occurred on December 13, 2000. The securities
sold as units consisted of one share of common stock and two Class B
redeemable common stock warrants. The total number of units sold were
337,500.
In July 2001, in consideration for an amendment to the agreement by which
these investors acquired the units, Isonics issued these purchasers (all of
whom are accredited investors) an additional 675,000 Class B warrants and
112,504 shares of common stock.
(b) UNDERWRITERS AND OTHER PURCHASERS. No underwriters, agents, or placement
agents participated in the private placement or the subsequent issuance.
(c) PURCHASE PRICE. The Units were offered and sold to ten accredited investors
for cash payments totaling $675,000 ($2.00 per unit). To the extent
additional units are issued, the total price per unit will be reduced.
Isonics received no cash for the subsequent issuance.
(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 for transactions not involving a public offering
and for transactions with accredited investors only. No advertising or
public solicitation was involved in these transactions.
(e) TERMS OF CONVERSION OR EXERCISE. The Class B warrants are exercisable on
the terms set forth herein.
(f) USE OF PROCEEDS. Working capital purposes.
DECEMBER 1999 WARRANT ISSUANCE
(a) SECURITIES SOLD. This sale 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.
II-5
(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. The warrant and underlying
shares were subsequently cancelled.
(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. No advertising or public solicitation was
involved in these transactions.
(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 resulted in Eagle-Picher acquiring
3,130,435 shares of our common stock. We have subsequently canceled the
shares because of Eagle-Picher's failure to deliver 200 kilograms of
silicon-28 to us.
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. This sale of securities occurred on July 29, 1999. The
securities sold include:
(i) 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;
(ii) 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
(iii) 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;
(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;
II-6
(iii) 330,000 Units were issued to accredited investors in settlement of
debt obligations at the rate of $1.50 per Unit for a total amount of
debt satisfied of $495,000; and
(iv) 500,000 warrants were issued to a single accredited investor as
compensation pursuant to an investment banking agreement.
(c) CONSIDERATION RECEIVED. The Units were sold for a purchase price of $1.50
per Unit. 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. No
advertising or public solicitation was involved in any of the transactions.
(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. The Series A convertible preferred stock was initially entitled
to a liquidation preference of $1.50 per share which was subsequently
adjusted to approximately $1.20 per share.
(ii) The warrants are each exercisable to purchase a single share of common
stock (subject to dilution adjustment) for a purchase price that was
initially $3.75 per share through the expiration date, July 29, 2002.
The purchase price has subsequently been modified to $3.19 per share.
(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. In a registration statement on Form
S-3, dated October 10, 2000, all of the shares of common stock
underlying the Series A convertible preferred stock and the warrants
were registered.
(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.
II-7
JUNE 1998 CHEMOTRADE ACQUISITION
(a) SECURITIES SOLD. 357,730 shares of common stock, valued at $894,000.
(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. No advertising or public solicitation was
involved in any of the transactions.
(e) TERMS OF CONVERSION OR EXERCISE. Not applicable.
(f) USE OF PROCEEDS. Not applicable.
JUNE 1998 IPRC 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 IPRC, 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). No
advertising or public solicitation was involved in any of the transactions.
(e) TERMS OF CONVERSION OR EXERCISE. Not applicable.
(f) USE OF PROCEEDS. Not applicable.
II-8
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS PURSUANT TO ITEM 601 OF REGULATION S-B:
EXHIBIT
NUMBER TITLE
------- -----
1.01 Form of Underwriting Agreement. (1)
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).
3.04 Certificate Of Determination Of Preferences And Rights Of Series B
Convertible Preferred Stock(11)
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 Class A warrant Certificate. (1)
4.05 Form of warrant Agreement between the Registrant and Continental Stock
Transfer & Trust Company. (8)
4.06 Specimen Class B warrant Certificate (see exhibit 10.27).
4.07 Specimen Class C warrant Certificate (see exhibit 10.27).
4.08 Amendment No. 1 to warrant Agreement between the Registrant and
Continental Stock Transfer & Trust Company. (7)
5.01+ Opinion of Arter Hadden, 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)
II-9
EXHIBIT
NUMBER TITLE
------- -----
10.14 Security Agreement dated March 31, 1995 between Isonics and Isoserve, Inc. (1)
10.15
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)
10.27 Amended and Restated warrant Agreement effective as of January 15,
2001, between the Registrant and Continental Stock Transfer and Trust
Company, Inc. (8)
10.28 Stock Purchase Agreement dated February 1, 2001, by and between
Isonics Corporation and Interpro Zinc, LLC. (9)
10.29 Joint R&D Project Agreement, dated April 21, 1999, by and between
Silex Systems Limited and Isonics Corporation. (10)
10.30 Contribution to "Corporate Research - ECE/Baliga" fund dated December
30, 1999, from Isonics Corporation to North Carolina State University. (10)
10.31 Sponsored Research Agreement, dated December 15, 1999, by and between
Isonics Corporation and Southern Methodist University. (10)
10.32 Stevenson-Wydler Cooperative Research and Development Agreement, dated
November 9, 1999, by and between Ernest Orlando Lawrence Berkeley
National Laboratory and Isonics Corporation (with attached Project
Letter Agreement). (10)
10.33 Memorandum of Agreement, dated July 1996, by and among Electrochemical
Plant, AO Techsnabexport Co., Ltd. and A & R Materials, Inc. (10)
10.34* Agreement between Isonics Corporation and Silicon Evolution, Inc.
dated September 14, 2001
10.35* Technology License Agreement dated September 14, 2001, between Silicon
Evolution, Inc. and Isonics Corporation
10.36* Form of employment agreement to be entered into pursuant to the
agreement between Isonics Corporation and Silicon Evolution, Inc.
dated September 14, 2001
10.37* Form of lease agreement to be entered into pursuant to the agreement
between Isonics Corporation and Silicon Evolution, Inc. dated
September 14, 2001
10.38 Amended and Restated Warrant Agreement dated July 26, 2001. (11)
21.1 List of subsidiaries.
23.10* Consent of independent accountants.
+ To be filed by amendment.
* FILED WITH THIS REGISTRATION STATEMENT. ALL OTHER DOCUMENTS HAVE BEEN
PREVIOUSLY FILED.
II-10
(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 obtained.
(7) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531) dated
August 17, 2000, and filed August 18, 2000, and incorporated herein by
reference.
(8) Filed with Isonics' registration statement on Form S-4 (File No. 333-37696)
or the amendments thereto, and incorporated herein by reference.
(9) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531) dated
February 1, 2001, and incorporated herein by reference.
(10) Filed with Isonics' annual report on Form 10-KSB (File No. 001-12531) for
the year ended April 30, 2001, and incorporated herein by reference.
(11) Filed with Isonics' Form 8-A/12(g) filed on August 1, 2001.
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.
II-11
(b) 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 relative to alleged securities act violations
(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,
the Registrant will submit to a court of appropriate jurisdiction the question
of whether such indemnification is against public policy and will be governed by
the final adjudication of such issue.
II-12
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 November 6, 2001.
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.
/s/ James E. Alexander President, Chief Executive Officer, Chief November 6, 2001
James E. Alexander Operating Officer, and Director and as
Attorney-in-fact for Boris Rubizhevsky,
Lindsay A. Gardner, Richard L. Parker and
Larry J. Wells (all directors)
/s/ John V. Sakys Principal Accounting Officer and Principal November 6, 2001
John V. Sakys Financial Officer
II-13
EX-10.34
3
a2062300zex-10_34.txt
EXHIBIT 10.34
Agreement between
Isonics Corporation
and
Silicon Evolution, Inc.
The following sets forth an agreement dated as of September 14, 2001, by
and between Isonics Corporation, a California corporation whose address is 5906
McIntyre Street, Golden, Colorado 80403 and Silicon Evolution, Inc., an Oregon
corporation ("SEI") whose address is12013 NE 99th Street, Suite 1600, Vancouver,
WA 98682.
A. SEI and Isonics have engaged in discussions regarding various forms by
which Isonics could acquire certain assets, subject to certain liabilities,
of SEI.
B. Isonics has loaned funds to SEI pursuant to a loan agreement, the repayment
of which has been collateralized by SEI's assets as described in the
financing statements filed with the Oregon secretary of state and in the
other financing documents.
C. SEI and Isonics have determined that this agreement sets forth the manner
in which they desire to proceed with the business transaction that has been
under discussion for several months.
NOW, THEREFORE, in consideration of the mutual promises and covenants contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which both Isonics and SEI hereby acknowledge:
1. LICENSE AGREEMENT. SEI owns or has rights to certain technology as
described on Exhibit 1 to this Agreement (the "SEI Technology").
(a) SEI hereby grants a fully-paid, royalty-free license to the SEI
Technology to Isonics and hereby delivers to Isonics a license for the SEI
Technology in the form of Exhibit 2 which license is effective immediately.
(b) Isonics agrees that: (i) it will file its "Certificate of Determination
of Preferences and Rights of Series B Convertible Preferred Stock" (the
"Certificate" and "Series B Stock," respectively) with the California
Secretary of State in the form reviewed by SEI not later than Tuesday,
September 18, 2001; (ii) upon filing the Certificate, Isonics will issue
500,000 shares of its restricted Series B Stock to SEI; and (iii) Isonics
will seek to increase its authorized capitalization at its next
shareholders' meeting to a level at least sufficient to allow the
conversion of the Series B Stock into Isonics common stock. In connection
with the requirements of clause (iii), Isonics represents that its
management and directors intend to recommend the approval of the increased
capitalization to the shareholders and they intend to cast their votes for
approval of the increase in authorized capitalization.
1
The shares to be issued to SEI (including both the Series B Preferred
Stock and the common stock to be issued in exchange for the Series B
Preferred Stock) will be restricted securities (as that term is defined in
Rule 144), but will be included in a registration statement to be filed by
Isonics on Form S-3 after an adequate number of common shares are
authorized and after Isonics' currently-pending registration statement on
Form SB-2 (File No. 333-56562) has become effective under the Securities
Act of 1933.
Notwithstanding the effectiveness of a Form S-3 registration statement
or the availability of an exemption from registration, SEI hereby agrees
for itself and for any person who accepts assignment from SEI of any of the
Isonics shares that it, he, she or they, will not publicly sell or offer
for sale any Isonics common stock received upon conversion of the Series B
Preferred Stock for a period of not less than twelve months after the date
the Series B Preferred Stock is issued.
After the Form S-3 registration has become effective under the
Securities Act of 1933 (or at such other time an exemption from
registration is available) and subject to the lock-up agreement contained
in the preceding paragraph, Isonics will cooperate with SEI in distributing
the shares of Isonics common stock to its creditors.
(c) In connection with the issuance of the shares as contemplated in
Subsection 1(b), and in addition to the representations and warranties
contained in the License, SEI represents and warrants to Isonics that: (i)
it has obtained and reviewed such information regarding the business,
financial condition, assets, management, and risks associated with an
investment in Isonics as SEI, its directors and officers, have determined
to be appropriate and necessary, (ii) it and they have received
satisfactory answers to such questions regarding any of the information
submitted or requested, it and they understand the risks associated with
the acquisition of securities issued by Isonics, (iii) it and they
understand that the securities are and will be when the common stock is
issued "restricted" as that term is defined in Rule 144 under the
Securities Act of 1933, as amended and, therefore, SEI represents that it
is acquiring the shares (and will acquire the common stock upon conversion
of the Series B Stock) for investment purposes only and without a view
toward further distribution (which it can only accomplish provided a
registration statement for such shares is available or if it establishes an
exemption from registration under federal and applicable state securities
laws); and (iv) SEI, its directors and officers, have consulted with its
and their respective legal, financial, tax, and investment advisors
regarding the issuance of the license in exchange for shares of Series B
Stock to the extent it or they have determined such consultation to be
necessary or appropriate.
(d) SEI acknowledges that the Series B Stock is fair and adequate
consideration for the license agreement.
2
2. ISONICS' FINANCING AGREEMENTS. Isonics does not currently have
sufficient capital available to complete the business plan for the manufacture
of SOI and other silicon wafers ("Wafer Manufacturing Business") as SEI and
Isonics have previously discussed. SEI understands that Isonics needs to raise
capital and there can be no assurance that Isonics will be able to do so
successfully, or on economical or reasonable terms. In consideration of the
foregoing:
(a) Isonics will use its best efforts to negotiate with the landlords
renting equipment and real property to SEI terms that will permit Isonics
to use (effective on or after October 1, 2001) in its own right the
locations currently being occupied by SEI in Vancouver, Washington, known
as "D-1" (including the clean room and equipment associated therewith),
Suite 1700, and Suite 1600, plus such other equipment currently leased by
SEI as Isonics (in its discretion) determines to be necessary or
appropriate.
(b) Isonics will use its best efforts to obtain a lease (effective on or
after October 1, 2001) for the two machines currently located in SEI's
premises which are known as the "AC320" and the "Strasbaugh grinder."
(c) Effective when Isonics receives Adequate Funding (as defined in the
next paragraph), Isonics will lease property, plant, and equipment from SEI
as Isonics may specify, and will pay SEI a lease rental payment of $30,000
per month payable monthly in advance pursuant to the Equipment Lease
attached hereto as Exhibit 3;
(d) Isonics will use its best efforts to assume the lease under which SEI
is lessee for the property referred to as the "Troutdale, Oregon facility"
when Isonics has equity financing of at least $2,000,000 (after deducting
the expenses of obtaining such financing) or such lesser amount that is, in
Isonics' discretion, sufficient to carry out the business plan of moving
the Wafer Manufacturing Business to the Troutdale, Oregon facility
("Adequate Funding").
(e) Isonics will enter into employment agreements with Ralph Ahlgren, Hans
Walitzki, and Kurt Dichmann on terms they have previously discussed,
pursuant to an agreement in the form of Exhibit 4, (which agreements will
become effective on the earliest of the following:
Isonics' receipt of Adequate Funding;
Isonics commencing the Wafer Manufacturing Business on a commercial
scale; and
Isonics providing written notice to the employee that the agreement
has become effective.
If any employment agreement becomes effective prior to the date Isonics has
received Adequate Funding, then each of the employees named above will be
paid 60% of the salary designated in the employment agreement, with the
3
remaining 40% being accrued and deferred until Isonics receives Adequate
Funding, but for no longer than six months. If any salary is deferred,
payment of the deferred salary will commence on the date Isonics receives
Adequate Funding (but in any event, on a date not later than six months
after the effective date of the employment agreement), and shall thereafter
be paid in twelve, equal monthly (or in Isonics' discretion 24 equal
semi-monthly) installments in addition to the employee's full salary as set
forth in the employment agreement.
(f) Isonics will issue shares and options (exercisable for ten years after
the employment agreements become effective at a price to be determined
based on the date the employment agreement(s) become effective and the
individuals become employees of Isonics) to Messrs. Ahlgren (100,000
shares, 100,000 options), Walitzki (200,000 shares, 200,000 options), and
Dichmann (100,000 shares, 100,000 options), subject to: (i) each of them
signing the agreements required by the Isonics Corporation plans referred
to as the "Executives Plan" and the "Equity Plan"; (ii) the Isonics
shareholders approving an increase in the number of shares authorized for
issuance under the plans; (iii) each of them making necessary or
appropriate provisions for any obligation under federal or state tax law,
or reporting obligation under the Securities Exchange Act of 1934, as
amended; (iv) options vesting at the rate of 20% per year of employment,
with the first vesting occurring when the employment agreement becomes
effective; and (v) 10% of the shares vesting one year thereafter; an
additional 15% vesting two years after the employment agreement becomes
effective; an additional 20% vesting three years after the employment
agreement becomes effective; an additional 25% vesting four years after the
employment agreement becomes effective; and the remaining 30% vesting five
years after the employment agreement becomes effective.
(g) Isonics will make reasonable provision for hiring other employees of
SEI, on terms and subject to conditions (including equity participation) as
Isonics and each employee may negotiate.
(h) Isonics will cause such documents (employment agreements, option
agreements, stock bonus agreements, and other documentation necessary or
appropriate to complete the foregoing) to be prepared for each of Mssrs.
Ahlgren, Walitzki, and Dichmann.
3. MISCELLANEOUS PROVISIONS.
(a) HEADINGS. The titles to sections of this Agreement are not a part of
this Agreement and shall have no effect upon the construction or
interpretation of any part hereof.
(b) SUCCESSORS AND ASSIGNS. All of the covenants, agreements, terms and
conditions contained in this Agreement shall inure to and be binding upon
SEI and Isonics and their respective successors and assigns.
4
(c) NO PARTNERSHIP. Isonics does not in any way or for any purpose become a
partner or joint venturer of, or member of a joint enterprise with, SEI in
the conduct of its business.
(d) NON-WAIVER. Waiver by SEI or Isonics of any breach of any term,
covenant or condition herein contained shall not be deemed to be a waiver
of such term, covenant or condition of this Agreement.
(e) ENTIRE AGREEMENT. Except as otherwise set forth in this Agreement, this
Agreement and the Exhibits hereto contain all covenants and agreements
between SEI and Isonics relating in any manner to the subject matter of
this Agreement.
(f) SEVERABILITY. Any provision of this Agreement which shall prove to be
invalid, void or illegal shall in no way affect, impair or invalidate any
other provision hereof and the remaining provisions hereof shall
nevertheless remain in full force and effect. If the intent of any section
of this Agreement so indicate, the obligations of SEI and Isonics pursuant
to such section of this Agreement shall survive the termination of this
Agreement.
(g) NOTICES. All notices which SEI or Isonics may be required, or may
desire, to serve on the other may be served by personal service or by
mailing by certified mail, postage prepaid, or by facsimile or courier at
the address set forth in the first paragraph above, or such other address
as the parties may from time to time designate to the other in writing. The
time of rendition of such notice shall be deemed to be the time when the
notice is either personally delivered or deposited in the mail as herein
provided.
(h) FORCE MAJEURE. Time periods or deadlines for SEI's or Isonics's
performance under any provisions of this Agreement shall be extended for
periods of time during which the nonperforming party's performance is
prevented due to circumstances beyond the party's control, including,
without limitation, labor disputes, embargoes, governmental restrictions or
regulations, inclement weather and other acts of God, war or other strife.
(i) APPLICABLE LAW. The laws of the State of Colorado shall govern the
validity, performance, and enforcement of this Agreement. Any action
arising or that may be deemed to arise under this lease shall be brought in
the Jefferson County, Colorado.
(j) LEGAL REPRESENTATION. Each of the parties acknowledge that they have
sought and received such legal representation regarding the subject matter
of this Agreement as they have determined to be necessary or appropriate.
SEI acknowledges and agrees that the law firm of Norton Lidstone, P.C. has
represented only Isonics in connection with the negotiation of this
Agreement,
5
the employment agreements, the lease agreement, the license agreement, and
the other documents and agreements attached to or contemplated by this
Agreement. SEI acknowledges that Norton Lidstone, P.C. has not provided
advice or counsel to any other party to this Agreement or any agreement
contemplated hereby.
(k) ATTORNEYS' FEES. In any action brought to enforce the terms and
conditions of this Agreement, the prevailing party shall be entitled, as
part of its award, to reasonably attorneys' fees incurred.
(l) FULL CORPORATE AUTHORITY. Isonics represents to SEI and SEI represents
to Isonics that all corporate actions have been properly taken to confer
upon the undersigned the authority to execute this agreement on behalf of
Isonics and SEI, respectively.
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Agreement to be executed as of the day and year first above written.
LESSOR By
------------------------------------
Silicon Evolutions, Inc. Ralph Ahlgren, President
By
------------------------------------
Hans Walitzki, Vice President
ISONICS By
------------------------------------
Isonics Corporation James E. Alexander, President
6
EX-10.35
4
a2062300zex-10_35.txt
EXHIBIT 10.35
TECHNOLOGY LICENSE AGREEMENT
This Technology License Agreement (Agreement) dated as of the Effective Date as
defined below is made by and between Silicon Evolution, Inc., an Oregon
corporation, ("SEI"), and Isonics Corporation, a California corporation,
("Isonics").
RECITALS
A) SEI owns certain intellectual property assets which are more particularly
described on Exhibit "A" (the " SEI IP").
B) SEI has licensed intellectual property from Wacker Siltronic Corporation
and Wacker-Siltronic AG by agreement dated May 31, 2000 which are more
particularly described on Exhibit "B" (the "Wacker IP").
C) Isonics desires to obtain a license to use, commercialize, and sell
products made with the IP, and to further license and sublicense the SEI IP
and the Wacker IP.
D) SEI is willing to grant such a license to Isonics on the terms set forth
herein.
1. DEFINITIONS
a. AFFILIATE: "Affiliate" of a party shall mean any person,
organization, or entity that in any way, directly or indirectly, controls,
is controlled by, or is under common control with such party. For the
purposes of this definition, "control" shall mean ownership of at least
fifty percent (50%) equity interest in or by such person, organization, or
entity.
b. BUSINESS: "Business" shall mean the business of manufacturing and
marketing silicon-on-insulation wafers for the semiconductor industry.
c. BUSINESS INFORMATION: "Business Information" means any material
in human or machine readable form used, compiled or produced by or for the
business of manufacturing and using the Licensed Technology for the
Licensed Products as set forth on Exhibit "A".
d. CLEAN ROOM LEASES. "Clean Room Leases" means a sublease and two
equipment leases, each of which is currently existing (although in default)
between SEI and: (i) IMAT, Inc. who is the lessee of Building D (Phase
VIII), D-100, located at 12516 N.E. 95th Street, Vancouver, Washington,
which granted SEI a sublease for that property on March 1, 2000, but has
served a notice of termination of that sublease effective October 7, 2001;
(ii) IMAT, Inc. who is the owner of a DI water system made by US Filter
Corporation and who has leased that equipment to SEI pursuant to a lease
dated April 1, 2000, which lease is in default and as to which the lessor
has served a notice of termination effective October 7, 2001; and (iii)
Techno Vest International who is the owner of a Class 10 Cleanroom with
related facilities which includes chiller, air-handling unit and air-duct,
and a water clean station with related facilities which include waste
chemical pump stations and chemical fume exhaust systems, and who has
leased that
1
equipment to SEI pursuant to a lease dated April 30, 2000, which lease is
in default and as to which the lessor has served a notice of termination
effective October 7, 2001.
e. CONFIDENTIAL INFORMATION. "Confidential Information" shall mean
(i) any patent applications, Trade Secrets, or Know-How held by either
party and regardless of whether marked or designated "confidential" or
"proprietary," and (ii) any information disclosed to the receiving party
orally or in writing or in model form, in whatever format, relative to
operations, existing and proposed contracts, sales training and techniques,
financial data, trade secrets, marketing and business plans, research
and/or development, data, formulae, processes, designs, specifications,
product knowledge, procedures, methods and techniques whether disclosed by
way of documents, oral communications, or visits to factories or other
premises, and all information regarding the existing and proposed
commercial operations of the disclosing party or relative to any other
confidential proprietary information which is clearly marked at the time of
disclosure as being "Confidential." Information transmitted orally and
identified at that time as being Confidential shall be considered as
"Confidential Information" if it is reduced to writing and transmitted to
the receiving party within 15 days of its disclosure. "Confidential
Information" does not include information relating to the Licensed
Technology that SEI may provide to Isonics, which information Isonics may
use and disclose in its discretion.
f. COPYRIGHTS: "Copyright(s)" means all forms of proprietary rights
granted by a government with respect to an original work of authorship
fixed in any tangible medium of expression from which it can be perceived,
reproduced or otherwise communicated relating to the relating to the
Technology covered by, and existing at the time of, this Agreement as
specifically set forth in Exhibit "A".
g. EFFECTIVE DATE: "Effective Date" means that date when SEI
executes and delivers this Agreement to Isonics by facsimile or hand
delivery.
h. IMPROVEMENTS: "Improvements" shall mean any enhancement or
modification of the Licensed Technology by Isonics.
i. KNOW-HOW: "Know How" means all factual knowledge and information
related to the Business and the Technology which is not capable of precise,
separate description but which, in accumulated form, after being acquired
as a result of trial and error, gives to the one acquiring it the ability
to produce and market something which one would otherwise not have known
how to produce and market with the same accuracy or precision necessary for
commercial success, provided, however, that such knowledge and information
is not in the public domain or readily available to any third party other
than a limited number of persons who have agreed to keep that information
secret.
j. LICENSED PRODUCT: "Licensed Product" shall mean the products
manufactured using any of the Licensed Technology.
k. LICENSED TECHNOLOGY: "Licensed Technology" shall mean the SEI IP
and the Wacker IP.
l. PARTY: "Party" shall mean either SEI or Isonics as the context
requires.
2
m. PATENTS: "Patent(s)" means all forms of proprietary rights
granted by a government with respect to a design or an Invention, including
patents and certificates of addition, utility models, and enforceable
patent applications, i.e. those under which injunctive relief is available,
as well as any continuation, division, extension, renewal, revival, or
reissue thereof or substitution therefor relating to the Technology covered
by, and existing at the time of, this Agreement as specifically set forth
on Exhibit "A"
n. TECHNICAL INFORMATION: "Technical Information" means any material
in human or machine-readable form which embodies or describes the Licensed
Technology set forth on Exhibit "A".
o. TECHNOLOGY: "Technology" shall mean any and all compositions,
machines, articles of manufacture, processes, apparatus, (collectively the
"Inventions"); Patents, Copyrights, Trade Secrets, and Know-How; data,
writings and works of authorship (including without limitation software,
protocols, program codes, audiovisual effects created by program code, and
documentation related thereto, drawings); mask works; other tangible and
intangible items (including without limitation materials, samples,
components, tools, and operating devices, E.G., board assemblies, and
engineering models); and Technical Information relating to the IP.
p. TECHNOLOGY RIGHTS: "Technology Rights" shall mean intellectual
property rights including Patents, Copyrights, Trade Secrets and Know-How,
but not trademarks and trade names.
q. TERRITORY: "Territory" shall mean world-wide.
r. TRADE SECRETS: "Trade Secrets" means any Technical Information
and Business Information that generally facilitates the sale of products,
increases revenues, is not generally known by others than the parties
except by those subject to restrictions on disclosure, and provides an
advantage over the competition.
2. GRANT
a. GRANT OF LICENSE: Subject to the terms and conditions of this
Agreement, SEI hereby grants to Isonics: (A) (and to the fullest extent
allowable in the license of the Wacker IP) a fully paid, non-exclusive,
royalty free, perpetual, transferable, license of all of SEI's rights to
the Wacker IP and all related Licensed Technology within the Territory and
(B) a fully paid, exclusive, royalty free, perpetual, transferable, license
of all of SEI's rights to the SEI IP and all related Licensed Technology
within the Territory to (i) use, modify or create derivative works of the
Licensed Technology and Licensed Products, or sublicense such rights (as
set forth below) and (ii) make, have made, and sell the Licensed Products
within the Territory.
b. IMPROVEMENTS: All Improvements to the Licensed Technology
developed by Isonics will belong to Isonics. To the extent Isonics (or any
person at the direction of Isonics) creates, invents, or authors such
Improvement shall have the right to file patent applications, or any
continuations, renewals or extensions thereof in its own name, or copyright
registrations
3
c. SUBLICENSES: Isonics may sub-license the Licensed Technology, or
any portion thereof, in its discretion. SEI may not grant further licenses
or sublicenses to the Licensed Technology without Isonics' approval. After
the Effective Date, SEI may not practice the Licensed Technology without
Isonics' written consent, which consent Isonics will not unreasonably
withhold.
d. CONVERSION TO NON-EXCLUSIVE LICENSE. SEI may (upon 30 days' prior
written notice and an opportunity during such 30 day period for Isonics to
cure the deficiency described by SEI in the written notice) convert this
Agreement into a non-exclusive license if either: (i) Isonics fails to
engage in the production of silicon-on-insulation wafers on or before
October 1, 2002; or (ii) Isonics fails to invest at least $2,000,000 in
facilities for the production of silicon wafers (including plant and
equipment) on or before October 1, 2002.
e. Isonics has the right to terminate this Agreement (and upon
written notice to SEI of such event, SEI will return to Isonics the
consideration described in paragraph 3(b), below, or the shares of common
stock issued upon conversion of that consideration) at any time until
December 1, 2001, unless prior to that time Isonics has entered into an
agreement acceptable to Isonics in its sole discretion for the continuation
of the Clean Room Leases, or the substitution of new leases for the Clean
Room Leases.
3. OBLIGATION OF LICENSOR AND LICENSEE
a. NONASSERTION. SEI agrees that it shall not assert against Isonics
or its customers and licensees or sublicensees, any claims for infringement
or misappropriation based on the manufacture, use, or sale of any Licensed
Products.
b. CONSIDERATION. As full payment for the grant of the license
hereby, Isonics hereby agrees to issue to SEI 500,000 shares of its Series
B Convertible Preferred Stock.
c. In connection with the acceptance of the shares, SEI represents
and warrants that:
(i) SEI and its board of directors have consulted with its and
their legal, tax, financial, and investment advisors regarding the
acceptance of Isonics stock as full consideration for this Agreement.
(ii) SEI and its advisors have reviewed information about Isonics
as they have determined necessary or appropriate in making an
investment decision with respect to the acquisition of Isonics stock
(including, without limitation, Isonics' annual report on Form 10-KSB
for the year ended April 30, 2001 and subsequent reports filed with
the Securities and Exchange Commission all of which are available
online at www.sec.gov).
(iii) SEI is accepting the shares for investment purposes only
and will not further distribute the shares except pursuant to a
registration statement that Isonics may file in accordance with other
commitments, or pursuant to an exemption from registration that must
be established to the satisfaction of Isonics.
(iv) SEI understands that because of the risks associated with
its
4
acquisition of Isonics shares and because of the lack of
transferability of those shares it may not be able to profit from the
ownership of those shares for a significant period of time, if ever.
(v) SEI will cooperate with Isonics in establishing an exemption
from registration for the issuance to SEI of the shares under the
Securities Act of 1933 and under applicable state securities laws. For
the purposes of this exemption, SEI represents and warrants that its
principal place of business is in Vancouver, Washington.
4. PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
a. GENERAL. Both Parties shall take reasonable measures to prevent
unauthorized copying and protect the Licensed Technology, and use best
efforts to protect the Trade Secrets and Know-How therein, but neither
Party shall be obligated hereunder to take any measures in excess of those
it takes to protect its own valuable Technology.
b. THIRD PARTY INFRINGERS. Upon the discovery of any infringement or
misappropriation of the Licensed Technology under the Technology Rights,
the Parties hereto shall consult together with a view to reaching an
agreement as to the ways and means of eliminating such infringement or
addressing such misappropriation. If the Parties agree jointly to commence
litigation against potential third party infringers, they will agree by
their respective shares the expense burden thereof, which shares will be
identical to their respective division of any recoveries thereof. In the
event that SEI declines to participate in the enforcement and/or protection
of the Licensed Technology under the Technology Rights, Isonics may, at its
sole discretion and expense and to the extent permitted by law, initiate
proceedings or take such steps as it deems appropriate, to enforce its
rights with respect thereto. SEI shall cooperate with Isonics in such
defense at Isonics' sole expense.
c. SEI DISCLOSURE. During the period following the Effective Date,
SEI will disclose to Isonics all information regarding the Technology that
is or may be relevant to Isonics' contemplated operations, and will provide
Isonics with copies of all written documentation relating to the
Technology.
d. CONFIDENTIAL TREATMENT. The Parties will treat any Confidential
Information obtained by the receiving party pursuant to the provisions of
this Agreement as confidential, except that in the event of any dispute,
litigation or arbitration proceedings between the parties, such
Confidential Information may be disclosed to the tribunal. Prior to any
Confidential Information being disclosed pursuant to the preceding
sentence, the receiving party shall give the disclosing party reasonable
notice of pending disclosure and both parties shall cooperate to undertake
all reasonable measures to obtain a protective order prohibiting or
limiting disclosure of such Confidential Information.
5. REPRESENTATIONS AND WARRANTIES SEI warrants and represents to Isonics
that (i) SEI has the right, power and legal capacity to enter into this
Agreement and has the right to license the Licensed Technology as set forth
above; and (ii) to the best of SEI's knowledge, the Licensed Technology does not
infringe upon the rights of any third party.
6. REMEDIES
5
a. INJUNCTIVE RELIEF. In the event of a breach by either Party, of
the confidentiality or licensing provisions contained in this Agreement,
the non-breaching Party shall be entitled to an injunction from engaging in
or continuing with any conduct which may constitute a breach or threatened
breach of those provisions. An injunction may also be sought against the
breaching Party from rendering services to any person, firm, corporation,
association or other entity which may in some manner receive benefit from
the breaching Party's breach or threatened breach of those provisions. The
Parties agree that there is no adequate remedy at law for the irreparable
harm that would result from a breach thereof and therefore the Parties
consent to injunctive relief to enforce this Agreement. Nothing in this
Section shall be construed as prohibiting the Parties from pursuing other
remedies which may be available for breach or threatened breach, including
the recovery of damages.
b. ATTORNEYS' FEES. In the event of any action or proceeding brought
by either Party against the other under this Agreement, the prevailing
Party shall be entitled to recover all expenses incurred therefor,
including, but not limited to, reasonable attorneys' fees.
c. DISPUTE RESOLUTION.
(i) STEP NEGOTIATIONS. The Parties shall attempt in good faith
to resolve any dispute arising out of or relating to this Agreement
promptly by negotiations, as follows. Any Party may give the other
Party written notice of any dispute not resolved in the normal course
of business. Executives of both Parties who have previously been
involved in the dispute shall meet at a mutually acceptable time and
place within 10 days after delivery of such notice, and thereafter as
often as they reasonably deem necessary, to exchange relevant
information and to attempt to resolve the dispute. If the matter has
not been resolved by these persons within 30 days of the disputing
Party's notice, or if the Parties fail to meet within 10 days, the
dispute shall be referred to senior executives of both Parties who
have authority to settle the dispute and who shall likewise meet to
attempt to resolve the dispute. If the matter has not been resolved
within 30 days from the referral of the dispute to senior executives,
or if no meeting of senior executives has taken place within 15 days
after such referral, either Party may initiate mediation as provided
hereinafter. If a negotiator intends to be accompanied at a meeting by
an attorney, the other negotiator shall be given at least three
working days' notice of such intention and may also be accompanied by
an attorney. All negotiations pursuant to this clause are confidential
and shall be treated as compromise and settlement negotiations for
purposes of the Federal Rules of Evidence and state rules of evidence.
(ii) MEDIATION. If the dispute has not been resolved by
negotiation as provided above, the Parties shall endeavor to settle
the dispute by mediation by the Judicial Arbiter Group, Inc., Denver,
Colorado, under its then effective rules.
(iii) ARBITRATION. Should all good faith attempts to resolve the
dispute amicably as set forth above be exhausted, and if agreed to by
the Parties, any dispute arising in connection with this Agreement may
be finally settled by arbitration before the Judicial Arbiter Group,
Denver, Colorado, by three
6
arbitrators appointed on an expedited basis. Such arbitration shall
take place in Denver, Colorado. The arbitrators shall be bound by the
laws governing this Agreement, and this Agreement, and shall be bound
by the obligation to retain Confidential Information in confidence in
perpetuity and not to disclose Confidential Information.
7. MISCELLANEOUS
a. SUCCESSORS AND ASSIGNMENT. Except as provided herein, this
Agreement or any rights hereunder shall not be assigned or transferred, in
whole or in part, by either Party without the prior written consent of the
other Party, and any such permitted assignment or transfer shall be binding
on each Party's successors and permitted assignees.
b. LIMITATION OF RIGHTS. Except as expressly provided in this
Agreement, nothing contained herein shall be construed as conferring any
license or other rights by implication, estoppel or otherwise.
c. SEVERABILITY. If any provision of this Agreement be adjudicated
invalid or against public policy for any reason by a court of competent
jurisdiction, it is specifically intended that each and every provision not
so invalidated shall remain in full force and effect.
d. CHOICE OF LAW. This Agreement is made and entered into in the
State of Colorado, and shall in all ways be governed and construed by the
law of such State, without regard to conflicts of law.
e. WAIVER. No waiver of any provision of this Agreement shall be
construed to be a waiver of any subsequent breach of the same or any other
provision of this Agreement.
f. INDEXING. All indexing set forth in this Agreement is intended
for convenience only and shall not control or affect the meaning,
construction or effect of this Agreement or of any of the provisions
thereof.
g. NON-PARTNERSHIP. Each Party shall bear its respective expenses,
risks, and liabilities arising out of its efforts related to this
Agreement. The Parties to this Agreement are independent contractors. This
Agreement shall not constitute, create, give effect to, or imply a joint
venture, pooling arrangement, partnership, formal business organization or
any type of permanent arrangement of any kind. Neither Party shall (i) have
the authority to bind the other except to the extent authorized herein,
(ii) be liable to the other for any damages, whether direct, indirect,
special, incidental or consequential, whether arising out of contract, tort
(negligence) or strict liability, or (iii) share losses with the other.
h. NO THIRD-PARTY BENEFICIARY RIGHTS. No provision of this Agreement
is intended nor shall be interpreted to provide or create any third party
beneficiary rights or any other rights of any kind in any sublicensee, and
all provisions hereof shall be personal solely between the Parties hereto.
i. NOTICES. All notices which Lessor or Isonics may be required, or
may
7
desire, to serve on the other may be served by personal service or by
mailing by certified mail, postage prepaid, at such address as the parties
may from time to time designate to the other in writing, or by facsimile to
such telephone number as the parties may from time to time designate
provided the sending facsimile machine automatically prints out a receipt
for such transmission. The time of rendition of such notice shall be deemed
to be the time when the notice is either personally delivered or deposited
in the mail as herein provided, or a facsimile receipt has been printed.
j. INTEGRATION. This Agreement constitutes the entire Agreement
between the Parties. No amendments to this Agreement shall be made other
than by a written amendment signed by both Parties.
By their signatures below: (a) SEI affirmatively represents to Isonics that
it's board of directors has unanimously approved this Agreemenet and the grant
of this license to Isonics; and (b) Isonics affirmatively represents to SEI that
it will submit this Agreement to its board of directors and that it will advise
SEI of the Effective Date hereof.
Licensor Licensee
Silicon Evolutions, Inc. Isonics Corporation
By: By:
--------------------------- ---------------------------------
Ralph Ahlgren, President James E. Alexander, President
By:
---------------------------
Hans Walitzki, Vice President
8
EX-10.36
5
a2062300zex-10_36.txt
EXHIBIT 10.36
Form of
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is dated September 14, 2001, by
and between Isonics Corporation, a California corporation (the "Company"), and
____________, an individual resident of the State of ___________ ("Employee"),
and is effective as set forth in Paragraph 3, below.
R E C I T A L S:
The Company is engaged in various business activities as described in its
annual report on Form 10-KSB for the year ended April 30, 2001 and its quarterly
report on Form 10-QSB for the quarter ended July 31, 2001, and has recently
acquired a business manufacturing silicon-on-insulator and other wafers, all of
which involves the knowledge and use of certain intellectual property and other
confidential information of the Company for the conduct of the Company's
business (the "Business"); and
The Company has offered employment to Employee for reasonable compensation
for Employee's duties, responsibilities and restrictions described in this
Agreement but also desires to obtain certain agreements from the Employee
regarding confidentiality, non-disclosure, and assignment of inventions.
In consideration of the mutual agreements, promises and undertakings set
forth in this Agreement, and intending to be legally bound by this Agreement,
the parties hereto agree as follows:
1. POSITION. Employee will serve as ________ for the Company. Employee
shall serve in any additional position to which he is hereafter appointed by the
Board of Directors of the Company, but in any event shall not serve in any
capacity that is less than the position stated herein.
2. DUTIES. The Employee will perform the duties that the Board of
Directors of the Company and the President may from time to time reasonably
direct (the "Duties"). Employee will devote substantially all of the Employee's
full productive time, ability and attention to the Business during the term of
this Agreement and shall not directly or indirectly render services of a
business, commercial or professional nature to any other person or organization,
whether for compensation or not, without the prior written consent of the
Company. Employee will report to the President of the Company.
3. EMPLOYMENT PERIOD. (a) This Agreement shall become effective upon the
earliest of the following events (the "Effective Date"):
(i) The Company's receipt of Adequate Funding. For the purposes of this
Agreement, "Adequate Funding" means when the Company has received equity
financing of at least $2,000,000 (after deducting the expenses of obtaining
such financing) or such lesser amount that is, in the Company's discretion,
sufficient to carry out the business
1
plan of establishing the business of manufacturing silicon-on-insulator
wafers and other silicon wafers in or near Troutdale, Oregon (the "Wafer
Manufacturing Business").
(ii) The Company commencing the Wafer Manufacturing Business at any
location on a commercial scale.
(iii) The Company providing written notice to Employee that this Agreement
has become effective.
(b) The term of the employment pursuant to this Agreement shall be for a
period of five years beginning on the Effective Date (the "Employment Period").
Notwithstanding anything to the contrary contained herein, the Employment Period
is subject to termination pursuant to Sections 6 and 7 below.
(c) If this Agreement becomes effective prior to the date the Company has
received Adequate Funding, then Employee will be paid 60% of the Base Salary as
set forth in Section 4(a) below, with the remaining 40% being accrued and
deferred until the Company receives Adequate Funding, but for no longer than six
months. If any Base Salary is deferred, payment of the deferred Base Salary will
commence on the date the Company receives Adequate Funding (but in any event, on
a date not later than six months after the Effective Date of this Agreement),
and shall thereafter be paid in twelve, equal monthly (or in the Company's
discretion 24 equal semi-monthly) installments in addition to Employee's
Compensation as set forth in Section 4(a) below.
4. COMPENSATION. Subject to Sections 6, 7, 8, 9 and 10, as compensation
for Employee's services, and as compensation for Employee's covenants set forth
in this Agreement, the Company agrees as follows:
(a) BASE SALARY: The Company will pay Employee a base salary ("Base
Salary") at a rate of $__________ per year. The payment of Base Salary
will be in accordance with the Company's regular payroll practices and
will be pro rated for any period less than a year. Employee's Base
Salary will be reviewed at the end of each twelve month period of
employment and may be modified from time to time by the Company, but
in no event shall any such compensation adjustment reduce the base
salary below the rate hereinabove specified. Nothing contained herein
shall require the Company to increase Employee's salary or other
compensation.
(b) BONUS. Employee shall be eligible to receive a performance bonus from
time-to-time based on such factors as the Board of Directors may
determine appropriate in light of the Company's operating results and
other factors that may be identified by the Board of Directors.
(c) ADDITIONAL COMPENSATION. At the discretion of the Board of Directors
of the Company (and without implying any obligation on the Company to
award a bonus to Employee), Employee will be eligible to participate
in any employment plans available to its employees, and may from time
to time be awarded a cash bonus or bonuses, or other
2
incentive compensation, for services rendered or other contributions
made to the Company during the term of his employment under this
Agreement.
(d) BENEFITS. During the term of this Agreement, Employee also shall be
entitled to receive such benefits as are made available to other
personnel of the Company in comparable positions, with comparable
service credit and with comparable duties and responsibilities. Such
benefits shall be subject to the terms of the applicable plan
documents, summary plan descriptions and/or employment policies and
shall be subject to modification, amendment or revocation in
accordance with the terms of such documents, policies and procedures.
5. HOLIDAYS; VACATION. Employee shall be entitled to enjoy paid time off
for Company holidays the same as employees of the Company generally, according
to the policies of the Company from time to time in effect. Employees shall be
entitled to paid vacation and personal time off in accordance with the Company's
policies.
6. TERMINATION BY COMPANY FOR CAUSE. The Company retains the right to
terminate Employee's employment at any time for "Cause" immediately upon written
notice to Employee. The Company's termination of Employee's employment will be
for "Cause" if and only if both
(1) the Board of Directors of the Company reasonably determines that
Employee has, during the term of Employee's employment, (i) breached or
failed to perform in any material respect any reasonable and proper duty or
obligation imposed upon him in connection with his employment or this
Agreement, or breached any fiduciary duty to the Company, as to which the
Company has given him not less than ten (10) days written notice, and which
breach or failure has not been cured within any such period, (ii) committed
acts of personal dishonesty that would have a reasonable likelihood of
sustaining a claim made by the Company for damages in a court of competent
jurisdiction, (iii) pled guilty or no contest or been convicted of a crime
involving moral turpitude, whether or not committed during the term of
employment, (iv) violated the provisions of Sections 11, 12, 13 or 14 of
this Agreement, (v) committed any dishonest, unethical, fraudulent,
disloyal or felonious act in respect of his duties to the Company, or (vi)
committed any other act or series of acts that (in the Company's reasonable
opinion) damages the Company's reputation in the financial community or any
other community in which it cariries on business, and
(2) the Board of Directors gives Employee written notice of such
termination for Cause stating specifically the facts upon which the
determination of Cause was made.
If the Company terminates Employee's employment for Cause:
(a) the Company will pay the Base Salary through the date of termination,
prorated for any partial payroll period;
(b) the Company will pay the Employee for any accrued and unused vacation,
if any, that Employee was eligible for at the date of termination.
3
7. TERMINATION BY COMPANY NOT FOR CAUSE. The Company retains the right to
terminate Employee's employment at any time for any reason other than for Cause
by giving Employee written notice. In the event of such termination:
(a) At the same time the Company terminates the Employee pursuant to this
Paragraph, (and provided the Employee has been employed by the Company
for at least six months prior to the date of termination) the Company
will pay the Employee six months Base Salary, but not more than the
remaining term of this Agreement;
(b) At the same time the Company terminates the Employee pursuant to this
Paragraph, the Company will pay the Employee for any accrued or unused
vacation, if any, that Employee was eligible for at the date of
termination.
The Company may require that Employee vacate the Company's premises at any time
during the notice period provided under Section 7.
8. RESIGNATION. Employee has the right to terminate Employee's employment
by giving the Company 10 business days advance written notice (a "Resignation").
The effect of Employee's Resignation will be the same as if the Company had
terminated Employee's employment for Cause, the date of termination being the
last day of the 10 business day notice period.
9. DEATH. If Employee's employment is terminated by Employee's death, the
Company will compensate the Employee's estate pursuant to Section 7, above, as
though the Company terminated the Employee's employment hereunder without Cause.
10. DISABILITY OR RETIREMENT OF EMPLOYEE. If Employee's employment is
terminated by "Disability" or "Retirement," the effect of such termination will
be the same as if Employee's employment had been terminated by Employee's death.
For purposes of this Agreement, "Disability" means a disability by reason of the
occurrence of an injury or disease (including mental illness) or a physical or
mental condition that, in the opinion of an appropriate physician chosen by the
Board of Directors of the Company, (i) results in Employee becoming unable
adequately to perform his customary duties for the Company and (ii) such
disability is expected to last more than one hundred eighty (180) days of which
Employee will be unable to perform a minimum of forty (40) hours per week of the
type of work described in Section 2 of this Agreement. For purposes of this
Agreement, "Retirement" means a severance from the Company's employment by the
Employee (i) who has attained his sixty-fifth birthday or (ii) who has completed
twenty (20) consecutive years as an employee of the Company.
11. NON-COMPETE. Employee hereby agrees that during the Employment Period
and (if, and only if the Employment Period is terminated pursuant to Paragraphs
6 or 8, above) through the period ending on the first anniversary of Employee's
actual date of termination, if Employee is, in fact, terminated pursuant to the
terms of this Agreement (collectively, the "Restrictive Period"), he shall not,
for any reason whatsoever, directly or indirectly, whether individually or as an
officer,
4
director, shareholder, owner, partner, joint venturer, employee, independent
contractor, consultant or advisor to or of any entity, or in any other capacity:
(a) engage, participate or invest in any business which is competitive
with the Business; provided, however, that nothing contained herein
shall be construed to prevent Employee from investing in up to 5% of
the outstanding stock of any competing corporation that is
widely-traded and listed on a recognized national, international or
regional securities exchange or traded in the U.S. over-the-counter
market, but only if Employee is not actively involved in and does not
render consulting services to the business of said corporation, or
(b) sell or provide any competitive products or services relating to the
Business, to, or solicit for the purpose of selling or providing any
competitive products or services relating to the Business, to, any
person or entity that was a customer of the Company at any time during
the one-year period ending on the last day of the Employment Period
(the "Termination Date") or at any time during the period ending on
the one-year anniversary of Employee's actual date of termination, if
Employee is, in fact, terminated pursuant to the terms of this
Agreement, or that was actively being solicited by the Company to
become a customer of the Company at any time during such period.
12. The foregoing Paragraph 11 does not apply after the termination of the
Employment Period if the Employment Period is terminated for any reason other
than those set forth in Paragraphs 6 of 8, above. NONSOLICITATION. Employee
further agrees, during the Restrictive Period, notwithstanding any allegation of
breach of this Agreement, not to solicit, hire, influence or attempt to
influence any employee of the Company to terminate his or her employment or
other contractual relationship with the Company for any reason including,
without limitation, working for a competitor. Additionally, Employee agrees that
during the Restrictive Period Employee will not directly or indirectly attempt
to solicit or conduct business with any person or entity that is a client,
customer or active prospect of the Company at the time of Employee's termination
if such business would be in competition with the Business. The terms "client,"
"customer" and "active prospect" include, but are not limited to, any person or
entity solicited or contacted by Employee or the Company or any person or entity
to whom services have been rendered by Employee or the Company directly or
indirectly during the two (2) years preceding Employee's termination. Employee
acknowledges Employee's duty, both by contract and common law, not to interfere
with contractual relationships and not to use proprietary and confidential
information about customers or clients of the Company for the advantage of any
person or entity other than the Company.
13. NONDISCLOSURE OF PROPRIETARY CONFIDENTIAL INFORMATION. Employee
acknowledges that, during the Employment Period, Employee will obtain special
training and will have access to and become familiar with various trade secrets
and confidential information consisting of, among other items: trade secrets,
methods of operation, techniques, designs, processes, technologies, compilations
of information, past, present and prospective customer lists, records, and
specifications that are owned and commercially beneficial to the Company,
including any compilation of various trade secrets or data derived from such
information (collectively, the "Proprietary Information"). The Proprietary
Information does not include information which at the time it is disclosed by
the
5
Employee was already in the public domain. If Employee is required by law to
disclose Proprietary Information, Employee shall notify the Company, in writing,
of the nature of such disclosure and the Proprietary Information to be
disclosed, as soon as is possible and/or practical, and permit the Company the
opportunity to contest or limit such disclosure.
Employee agrees that Employee will not disclose, either during
Employee's employment with the Company or after Employee's termination for
whatever reason, any Proprietary Information to any person or entity, except in
the course of Employee's duties on behalf of the Company, and that, similarly,
Employee will not use such information for the benefit of any person or entity
other than the Company at any time. Employee agrees that upon Employee's
termination, Employee will deposit with or return to the Company all copies (in
any media, including, without limitation, electronic storage media) of
documents, records, notebooks or any other information or documentation of the
Company's Proprietary Information, and all derivatives thereof, whether the
Proprietary Information or documentation was developed or prepared by Employee
or by others. Employee acknowledges that this covenant of nondisclosure is an
integral term of this Agreement and is given in consideration of Employee's
employment and the other consideration granted in this Agreement.
14. DISCLOSURE OF DEVELOPMENTS. Employee agrees to hold in complete trust
for the benefit of the Company, and to disclose promptly and fully to the
Company in writing, and hereby assigns to the Company any and all inventions,
discoveries, ideas, concepts, improvements, copyrightable works (including moral
rights, if any) and other developments conceived, made, discovered or developed
by him solely or jointly with others, during the term of his employment by the
Company, whether during or outside of usual working hours and whether on the
Company's premises or not, which relate in any manner to the Business
(collectively, the "Developments").
(a) OWNERSHIP OF DEVELOPMENTS. Any and all Developments shall be the sole
and exclusive property of the Company, whether or not patentable or
copyrightable, and Employee agrees that he will assist and fully
cooperate in every way, at the Company's expense, in securing,
maintaining and enforcing, for the benefit of the Company or its
designee, patents, copyrights, or other type of proprietary or
intellectual property protection for the Developments in any and all
countries. Employee acknowledges and agrees that each Development, to
the fullest extent permitted by law, is a "work made for hire," as
defined by the federal copyright laws, and therefore all copyrights in
and to such works are and will be owned by the Company. To the extent
that Employee authors any copyrightable work in any medium while
employed by the Company pursuant to this Agreement that relates or
pertains in any way to the Company or any of the operations or
activities of the Company, and which is not a "work made for hire,"
Employee hereby assigns all right, title and interest, including, but
not limited to, all rights of copyright (including moral rights, if
any), in and to such works to the Company.
(b) ADDITIONAL ACTS BY EMPLOYEE. Employee further agrees at the request of
the Company (but without additional compensation from the Company
during his employment by the Company) to execute any and all papers
and (at the expense of the Company) perform all lawful acts that the
Company deems necessary for the
6
preparation, filing, prosecution and maintenance of applications for
United States and foreign letters patent, or for United States and
foreign copyrights, on the Developments, and to execute such
instruments as are necessary or convenient to assign to the Company,
its successors, assigns, or nominees, all of Employee's right, title
and interest in the Developments and the like, so as to establish,
maintain, or perfect, in the Company, its successors, assigns, or
nominees, the entire right, title and interest to the Developments,
and also to execute any instruments necessary or which the Company may
deem desirable in connection with any continuation, renewal, or
reissue thereof, or in the conduct of any proceedings or litigation in
regard to such Developments.
15. EMPLOYEE'S REPRESENTATIONS. Employee represents and warrants that he
is free to enter into this Agreement and to perform each of the terms and
covenants of it. Employee represents and warrants that he is not restricted or
prohibited, contractually or otherwise, from entering into and performing this
Agreement, and that his execution and performance of this Agreement is not a
violation or breach of any other agreement between Employee and any other person
or entity.
16. LIFE INSURANCE. The Company may at its discretion and at any time
apply for and procure as owner and for its own benefit and at its own expense,
insurance on the life of Employee in such amounts and in such form or forms as
the Company may choose. Employee shall cooperate with the Company in procuring
such insurance and shall, at the request of the Company, submit to such medical
examinations, supply such information and execute such documents as may be
required by the insurance company or companies to whom the Company has applied
for such insurance. Employee shall have no interest whatsoever in any such
policy or policies, except that, upon the termination of Employee's employment
hereunder, Employee shall have the privilege of purchasing any such insurance
from the Company for an amount equal to the actual premiums thereon previously
paid by the Company.
17. ASSIGNMENT. No party hereto may assign or delegate any of its rights
or obligations hereunder without the prior written consent of the other party
hereto. Except as otherwise expressly provided herein, all covenants and
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective legal
representatives, heirs, successors and assigns of the parties hereto whether so
expressed or not.
18. LIMITATIONS. This Agreement shall not confer any right or impose any
obligation on the Company to continue the employment of Employee in any
capacity, or limit the right of the Company or Employee to terminate Employee's
employment.
19. ATTORNEYS' FEES AND COSTS. If any action in arbitration or at law or
in equity is necessary to enforce or interpret the terms of this Agreement, the
prevailing party will be entitled to reasonable attorneys' fees, costs and
necessary disbursements in addition to any other relief to which he or it may be
entitled.
20. WAIVER OF BREACH. The actual or apparent waiver by either party to
this Agreement of a breach of any provision of this Agreement will not operate
or be construed as an actual or
7
constructive waiver of that breach or any subsequent breach by any party.
Waivers are not effective unless in writing and signed by the party granting the
waiver.
21. MULTIPLE COUNTERPARTS. This Agreement may be executed in counterparts,
each of which for all purposes is to be deemed an original, and all of which
constitute, collectively, one agreement. In making proof of this Agreement, it
will not be necessary to produce or account for more than one counterpart of
this Agreement. Furthermore, a photocopy of any counterpart will be valid and
have the same effect as an original.
22. SEVERABILITY AND SAVINGS CLAUSE. If any one or more of the provisions
or subjects contained in this Agreement is for any reason held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability will not affect the validity and enforceability of any other
provisions or subjects of this Agreement, and it is the intention of the parties
that there shall be substituted for such invalid, illegal or unenforceable
provision a provision as similar to such provision as may be possible and yet be
valid, legal and enforceable. Further, should any provisions of this Agreement
ever be reformed or rewritten by a judicial body, those provisions as rewritten
will be binding, but only in that jurisdiction, on Employee and the Company as
if contained in the original Agreement.
23. SUCCESSORS; SURVIVAL; AFFILIATES. This Agreement and the rights and
obligations under this Agreement will be binding upon and inure to the benefit
of the parties to this Agreement and their respective legal representatives, and
will also bind and inure to the benefit of any successor of the Company by
merger or consolidation or any assignee of all or substantially all of the
Company's assets. Except to any such successor or assignee of the Company,
neither this Agreement nor any rights or benefits under this Agreement may be
assigned by either party to this Agreement. Each covenant on the part of
Employee contained in Sections 11, 12, 13 and 14 shall be construed as an
agreement independent of any other provision of this Agreement and shall survive
the termination of this Agreement, pursuant to the terms contained therein. The
existence of any claim or cause of action of Employee against the Company,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by the Company of any such covenant. The protective
covenants in Sections 11, 12, 13 and 14 shall also inure to the benefit of the
Company's affiliates (as hereinafter defined) and these covenants shall be
enforceable against Employee by each of such affiliates as third party
beneficiaries. An "affiliate" of the Company is any person or entity that
directly, or indirectly through one or many intermediaries, controls or is
controlled by, or is under common control with, the Company.
24. ENTIRE AGREEMENT. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties with respect to
Employee's employment by the Company and contains all of the covenants and
agreements between the parties with respect to such employment. This Agreement
can only be changed by the parties in writing, executed by the party against
whom enforcement of any modifications may be sought.
25. GOVERNING LAW AND VENUE . This Agreement will be governed by and
construed in accordance with the substantive laws of the State of Colorado
without regard to conflict of law provisions. Venue for any disputes shall be
the federal district courts in Portland, Oregon.
8
26. NOTICES. Any notice under this Agreement will be in writing and will
be deemed to have been duly given when delivered personally or three (3) days
after such notice is deposited in the United States mail, registered, postage
prepaid, and addressed, to the Company, at its principal office, or to Employee
at Employee's last permanent address as shown on the Company's records.
27. REMEDIES.
(a) INJUNCTIVE RELIEF. Employee agrees that a breach or threatened breach,
based on reasonable and good faith evidence of a breach on Employee's
part, of any covenant contained in Sections 11, 12, 13 or 14 will
cause irreparable damage to the Company. For that reason, Employee
further agrees that the Company is entitled as a matter of right to an
injunction from any court of competent jurisdiction, restraining any
further violation of any of such covenants by Employee, Employee's
future employers, employees, partners, agents or any person or entity
related, directly or indirectly, to Employee. The right to an
injunction is in addition to whatever other remedies the Company may
have, including specifically the recovery of damages.
(b) ARBITRATION. Except to the extent provided in Section 27(a) above, any
controversy of any nature whatsoever, including but not limited to
tort claims or contract disputes, between the parties to this
Agreement (including their directors, officers, employees, agents,
successors, assigns, heirs, executors and beneficiaries) relating to
the formation, execution, interpretation, breach or enforcement of
this Agreement, shall be submitted to arbitration before the
JAMS-Endispute ("JAMS"), in accordance with their rules then in effect
and the substantive law of the State of Colorado and the United
States. The parties agree that any party requesting arbitration of any
dispute under this section must give formal written notice of the
party's demand for arbitration within one hundred twenty (120) days
after such dispute first arises and failure to timely communicate the
arbitration notice shall constitute a waiver of such dispute. Each of
the parties to this Agreement shall appoint one person as an
arbitrator to hear and determine such disputes, and if they should be
unable to agree, then the two arbitrators shall choose a third
arbitrator from a panel made up of experienced arbitrators selected
pursuant to the procedures of the JAMS and, once chosen, the third
arbitrator's decision shall be final, binding and conclusive upon the
parties to this Agreement. The arbitrators shall be bound in their
deliberations and their decision by the terms of this Agreement and
any applicable law. The arbitrators may not award punitive or
exemplary damages, but will have the power to award prejudgment
interest and attorneys' fees to the prevailing party. The award of the
arbitration panel may be confirmed by any state or federal court of
competent jurisdiction, and may be challenged only upon the grounds
provided in Section 10 of the Federal Arbitration Act, Title 9, United
States Code. This agreement to arbitrate shall survive the execution
of this Agreement. BY THEIR EXECUTION OF THIS AGREEMENT, EACH PARTY TO
THIS AGREEMENT CONSENTS, ON BEHALF OF HIMSELF OR ITSELF AND THEIR
RESPECTIVE SUCCESSORS, HEIRS AND ASSIGNS, TO SUCH BINDING ARBITRATION
IN ACCORDANCE WITH THE TERMS OF THIS SECTION. THE RIGHT TO ARBITRATE
IS INTEGRAL TO AND NOT SEVERABLE FROM THIS AGREEMENT. THE PARTIES
ACKNOWLEDGE THAT THEY HAVE READ THIS ARBITRATION
9
AGREEMENT AND KNOWINGLY CONSENT TO ITS CONSEQUENCES, INCLUDING THE
WAIVER OF THE RIGHT TO LITIGATE CERTAIN DISPUTES. The expenses of such
arbitration will be borne by the losing party or in such proportion as
the arbitrators will decide. A material or anticipatory breach of any
section of this Agreement will not release either party from the
obligations of this Section 27(b).
The parties hereto have executed the Agreement as of the date first
mentioned above.
COMPANY:
ISONICS CORPORATION
By:
-----------------------------------
James E. Alexander, President
EMPLOYEE:
--------------------------------------
Name:
Address:
Telephone:
Facsimile:
10
EX-10.37
6
a2062300zex-10_37.txt
EXHIBIT 10.37
LEASE AGREEMENT
WITH
OPTION TO PURCHASE
This Lease Agreement with Option to Purchase is executed on September 28,
2001, but is effective as of Commencement Date set forth below, and is between
Silicon Evolution, Inc. (collectively referred to as "Lessor") and Isonics
Corporation, a California corporation. Therefore, in consideration of the mutual
promises and obligations set forth below, the parties agree as follows:
1. FUNDAMENTAL LEASE PROVISIONS AND DEFINITIONS.
LESSOR: Silicon Evolution, Inc.
LESSOR'S ADDRESS: 12013 NE 99th Street
Suite 1600
Vancouver, WA 98682
Tel: 360-604-5080
ISONICS: Isonics Corporation
ISONIC'S ADDRESS: 5906 McIntyre Street
Golden, CO 80403
Attn: President
Tel: 303-279-7900
Fax: 303-279-7300
LOCATION OF EQUIPMENT: 12013 NE 99th Street
Suite 1600 and neighboring buildings
Vancouver, WA 98682
INITIAL LEASE TERM: Twelve Months
COMMENCEMENT DATE: To be determined by written notification from
Isonics to Lessor
TERMINATION DATE: Twelve months after the Commencement Date
1
RENT: $30,000 per month (subject to adjustment in
accordance with Sections 5.2 and 5.3)
2. LEASED EQUIPMENT. Lessor hereby leases to Isonics and Isonics hereby leases
from Lessor the Equipment described on Exhibit "A" attached hereto and by this
reference incorporated herein. The Equipment is referred to herein as the
"Leased Equipment."
3. TERM.
3.1 The Initial Lease Term shall commence on the Commencement Date and
expire at midnight on the Termination Date, unless sooner terminated or extended
as hereinafter provided. When used herein, the term "Commencement Date" is the
earlier of the following:
(a) date Isonics has obtained equity financing that is, in Isonics'
discretion, sufficient to carry out the business of manufacturing
silicon-on-insulator and other silicon wafers as the term "Adequate
Funding" is used in that certain agreement between Isonics and Lessor dated
September 14, 2001 which relates to a license between Lessor and Isonics
and certain other related transactions as described therein; and
(b) the date Isonics takes possession of and commences use of the leased
assets.
3.2 Isonics may, upon fifteen days written notice to Lessor, renew the
Initial Lease Term for up to two additional terms, each consisting of a 12 month
period, at the rate of $30,000 per month.
3.3 The Lessor may terminate this lease upon fifteen days written notice to
Isonics if the Commencement Date has not occurred on or before November 30,
2001. If the Lessor sends such written notice to Isonics, Isonics may establish
the Commencement Date during such fifteen day period and, in such case, all
other provisions of this Lease will control.
4. OBLIGATIONS OF LESSOR.
4.1 Upon payment by Isonics of the Rent and other Obligations of Isonics as
set forth herein, and upon the observance and performance of all the covenants,
terms, and conditions for which Isonics is responsible, Isonics shall peaceably
and quietly hold and enjoy the Leased Equipment for the entire Term without
hindrance or interruption by Lessor or any other person or persons lawfully or
equitably claiming by, through, or under Lessor's control, nevertheless, to the
terms and conditions of this Lease.
4.2 During the term of this Lease, Lessor shall not voluntarily,
involuntarily, directly, indirectly, or by operation of law assign, transfer, or
encumber the Leased Equipment or any portion thereof or any interest therein
without the prior written consent of Isonics.
2
5. OBLIGATIONS OF ISONICS. During the Lease Term, Isonics shall pay Rent and
all Operating Costs (as hereinafter defined) on or before the date first due.
5.1 RENT. Isonics shall pay Rent (including any Additional Rent) on a
monthly basis, on or before the first day of each month during the Lease Term.
Monthly Rent shall be as set forth above. Rent shall be delinquent, and this
Lease shall be in default if Lessor has not received the Rent payment by the
tenth day of the month for which the Rent is due. At Isonics's or Lessor's
request, Isonics will make payments to Lessor by wire transfer of funds to an
account designated by Lessor.
(a) As Additional Rent, Isonics will pay when due all Personal Property
Taxes. As used in this Lease, the term "Personal Property Taxes" shall mean
any and all taxes, charges and assessments (special or general, ordinary or
extraordinary) levied with respect to the Leased Equipment.
(b) As Additional Rent, Isonics will be responsible for all operating and
maintenance expenses for the Leased Equipment.
5.2 DEDUCTIONS FROM RENT. Isonics is entitled to reduce the Rent to the
extent any of the Leased Equipment becomes unavailable to Isonics through no
fault of Isonics, whether such action results from a vendor or financer of the
Leased Equipment taking possession of the Leased Equipment (or any portion
thereof) because of a failure by the Lessor to make necessary payments or
because the Leased Equipment (or any portion thereof) fails due to normal wear
and tear. The amount of the deduction shall be as described on Exhibit "A," or
if no specific deduction is reflected on Exhibit "A," an amount equal to the
fair lease value of the equipment that failed.
5.3 RENT DEFERRAL. If Isonics commences this Lease before receiving
Adequate Funding, then Isonics may defer payment of Rent for the first three
months of this Lease. In that event, Isonics will pay Rent at the rate of
$40,000 per month for the remaining nine months of the initial term of this
Lease.
6. Not included.
7. NO LIENS. Isonics shall keep the Leased Equipment clear from any and all
liens arising out of any work performed, materials furnished or obligations
incurred by or for Isonics.
8. SECURITY. Isonics, at its own expense, shall provide adequate security for
the Leased Equipment.
3
9. THE LEASED EQUIPMENT. Isonics acknowledges that the Leased Equipment is
located in premises that are leased by third parties to Lessor, although Lessor
is in default in certain of its obligations under leases to those third parties.
Lessor represents that it has had conversations about these defaults and based
on those discussions believes that Isonics will be able to negotiate alternative
arrangements with the third parties. Isonics agrees to use its best efforts to
negotiate accommodation with these third parties, but to the extent Isonics must
pay the third parties (or provide other value to the third parties) in excess of
the amount set forth in the leases for such premises on a going-forward basis
from the Commencement Date, Isonics may pay such expenses and add the amount so
paid to the amounts advanced by Isonics to the Lessor under a loan and security
agreement entered into between the parties.
10. COVENANTS AND WARRANTIES. Isonics and Lessor agree and warrant as follows:
10.1 At the Commencement Date, the Lessor warrants to Isonics that the
Leased Equipment is in good repair and operable physical condition, given the
age of the and prior use of the Leased Equipment. At the Commencement Date, the
Lessor is not aware of any material maintenance or repairs that need to be made
to the Leased Equipment in order to make any portion of the Leased Equipment
usable or operational.
10.2 Isonics will operate the Leased Equipment in accordance with the
operating instructions for the Leased Equipment and in accordance with the
historical practice pursuant to which the Lessor previously operated the Leased
Equipment.
10.3 Upon the termination of this Lease for any reason, Isonics will return
the Leased Equipment to the Lessor.
11. INSURANCE. Isonics shall, during the entire term hereof, keep in full force
and effect a policy of general liability and property damage insurance with
respect to the Leased Equipment, and the business operated by Isonics, in which
the limits of liability per occurrence and in which the limit of property damage
liability shall not be less than reasonably required for the nature of the
business being conducted.
12. DAMAGE OR DESTRUCTION. In case of damage to or destruction of the Leased
Equipment by fire, vandalism, malicious mischief or any other casualty, Isonics
shall be entitled to all proceeds from any insurance policies.
13. INDEMNIFICATION. Isonics covenants and agrees to protect and save Lessor
harmless and indemnified against and from any penalty or damage or charges
imposed for any violation of any laws or ordinances, either occasioned by
Isonics in connection with its usage of the Leased Equipment. Isonics further
agrees to protect, indemnify and save Lessor harmless from and against any and
all claims, and against any and all loss, cost, damage or expense, including
4
without limitation, reasonable attorneys' fees, arising out of any failure of
Isonics in any respect to comply with and perform all the requirements and
provisions hereof.
13. IMPROVEMENTS AND ALTERATIONS. Isonics has the right to make and Lessor
consents to Isonics making all alterations, installations, additions, and
improvements ("Improvements") necessary for the operation or maintenance of the
Leased Equipment. Improvements by Isonics shall be made at Isonics's sole cost
and expense.
14. DEFAULT BY ISONICS AND RIGHTS OF LESSOR.
14.1 DEFAULTS. If Isonics fails to perform any covenant, term, agreement or
condition of this Lease within 30 days after notice from Lessor (provided,
however, that if the nature of such default other than for nonpayment is such
that the same cannot reasonably be cured within such 30-day period, Isonics
shall not be deemed in default if Isonics shall commence such cure within said
30-day period and thereafter diligently prosecutes the same to completion), then
Lessor, in addition to all other rights and remedies available to Lessor by law
or by other provisions hereof, may, without process, immediately remove all
persons and property, and, at Lessor's option, terminate this Lease as to all
future rights of Isonics.
14.2 REMEDIES
(a) Isonics hereby agrees to pay Lessor and to indemnify Lessor for
all reasonable attorneys' fees and expenses incurred in enforcing any of the
terms of this Lease or any other rights or remedies of Lessor.
(b) To the extent that Isonics fails to pay any amount due hereunder
on or before the date such payment was due (including Rent), such amount will be
considered to be additional Rent (unless the default relates to the payment of
Rent) and Isonics will be obligated to pay Lessor, at Lessor's discretion, an
amount equal to 5% or less of such Rent or additional Rent on demand by Lessor.
The additional amounts required by this Paragraph shall also be considered
additional Rent and shall be added to and included within Rent as such are
incurred.
15. OPTION TO PURCHASE: By executing this Lease, Lessor grants Isonics the
right to purchase the Leased Equipment, or any portion thereof, at any time
during this Agreement for a price equal to the "orderly liquidation value" as
determined by a third party appraiser acceptable to both Lessor and Lessee. If
the Lessee exercises this option during the first twelve months of this lease,
the remaining lease payments due during the first twelve months of this lease
will be added to the "orderly liquidation value."
16. MISCELLANEOUS PROVISIONS.
5
16.1 HEADINGS. The titles to sections of this Lease are not a part of this
Lease and shall have no effect upon the construction or interpretation of any
part hereof.
16.2 SUCCESSORS AND ASSIGNS. All of the covenants, agreements, terms and
conditions contained in this Lease shall inure to and be binding upon Lessor and
Isonics and their respective successors and assigns.
16.3 NO PARTNERSHIP. Lessor does not in any way or for any purpose become a
partner or joint venturer of, or member of a joint enterprise with, Isonics in
the conduct of its business. The provisions of this Lease providing for Isonics
payment of Rent and Additional Rent, are included solely for the purpose of
providing a method whereby the Rent is to be measured and ascertained.
16.4 NON-WAIVER. Waiver by Lessor or Isonics of any breach of any term,
covenant or condition herein contained shall not be deemed to be a waiver of
such term, covenant or condition of this Lease, regardless of Lessor's or
Isonics's knowledge of such preceding breach at the time of acceptance or
payment of Rent.
16.5 ENTIRE AGREEMENT. Except as otherwise set forth in this Lease, this
Lease contains all covenants and agreements between Lessor and Isonics relating
in any manner to the Rent, Isonics's use of the Leased Equipment, and other
matters set forth in this Lease.
16.6 SEVERABILITY. Any provision of this Lease which shall prove to be
invalid, void or illegal shall in no way affect, impair or invalidate any other
provision hereof and the remaining provisions hereof shall nevertheless remain
in full force and effect. If the intent of any section of this Lease so
indicate, the obligations of Lessor and Isonics pursuant to such section of this
Lease shall survive the termination of this Lease.
16.7 NO ACCORD AND SATISFACTION. No payment by Isonics or receipt by Lessor
of a lesser amount than Rent, and other charges stipulated herein shall be
deemed to be other than on account of the earliest stipulated Rent or other
charges, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment as Rent be deemed an accord and satisfaction,
and Lessor shall accept such check or payment without prejudice to Lessor's
right to recover the balance of such Rent, and other charges or pursue any other
remedy in this Lease.
16.8 NOTICES. All notices which Lessor or Isonics may be required, or may
desire, to serve on the other may be served by personal service or by mailing by
certified mail, postage prepaid, at such address as the parties may from time to
time designate to the other in writing, or by facsimile to such telephone number
as the parties may from time to time designate provided the sending facsimile
machine automatically prints out a receipt for such transmission. The time of
rendition of such notice shall be deemed to be the time when the notice is
either personally delivered or deposited in the mail as herein provided, or a
facsimile receipt has been printed.
6
16.9 FORCE MAJEURE. Time periods or deadlines for Lessor's or Isonics's
performance under any provisions of this Lease (except for the payment of money)
shall be extended for periods of time during which the nonperforming party's
performance is prevented due to circumstances beyond the party's control,
including, without limitation, labor disputes, embargoes, governmental
restrictions or regulations, inclement weather and other acts of God, war or
other strife.
16.10 APPLICABLE LAW. The laws of the State of Colorado shall govern the
validity, performance, and enforcement of this Lease. Any action arising or that
may be deemed to arise under this lease shall be brought in the Jefferson
County, Colorado.
16.11 ATTORNEYS' FEES. In any action brought to enforce the terms and
conditions of this Lease, the prevailing party shall be entitled, as part of its
award, to reasonably attorneys' fees incurred.
IN WITNESS WHEREOF, the parties hereto have executed or caused this Lease
to be executed this 10th day of September, effective as of the day and year
first above written.
LESSOR By
-----------------------------------
Silicon Evolutions, Inc. Hans Walitzki, Vice President
and Ralph Ahlgren, President
ISONICS By
-----------------------------------
Isonics Corporation James E. Alexander, President
7
EX-23.1
7
a2062300zex-23_1.txt
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated July 26, 2001, accompanying the consolidated
financial statements of Isonics Corporation and Subsidiaries contained in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts".
GRANT THORNTON LLP
Denver, Colorado
November 6, 2001