-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AHmFsJytgID1Mook+2qK0+Uu6S2+y46YABwadEpy9onSdllkGdDUYeENOsSfyRXl Ij9WfB2+DQkIUCeoezefYA== 0000950005-98-000265.txt : 19980317 0000950005-98-000265.hdr.sgml : 19980317 ACCESSION NUMBER: 0000950005-98-000265 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980316 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISONICS CORP CENTRAL INDEX KEY: 0001023966 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 770338561 STATE OF INCORPORATION: CA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-12531 FILM NUMBER: 98566123 BUSINESS ADDRESS: STREET 1: 4010 MOORPACK AVENUE STREET 2: SUITE 119 CITY: SAN JOSE STATE: CA ZIP: 95117 BUSINESS PHONE: 4082600155 MAIL ADDRESS: STREET 1: 4010 MOORPACK AVENUE STREET 2: SUITE 119 CITY: SAN JOSE STATE: CA ZIP: 95117 10QSB 1 FORM 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-QSB (Mark One) [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended January 31, 1998 [ ] Transition report under Section 13 or 15(d) of the Exchange Act. For the transition period from _______ to ______ Commission file number: 001-12531 ISONICS CORPORATION (Exact name of small business issuer as specified in its charter) California 77-0338561 ---------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 4010 Moorpark Avenue, Suite 119 San Jose, California 95117 -------------------------- (Address of principal executive offices) (408) 260-0155 -------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ The number of shares outstanding of the registrant's Common Stock, no par value, was 5,360,268 at March 4, 1998. Transitional Small Business Disclosure Format (check one): Yes __ No X Isonics Corporation TABLE OF CONTENTS FORM 10-QSB Part I: Financial Information Item 1: Financial Statements Condensed Balance Sheets as of January 31, 1998 and April 30, 1997....................................................3 Condensed Statements of Operations for the Three and Nine Month Periods Ended January 31, 1998 and 1997...............4 Condensed Statements of Cash Flows for the Nine Month Periods Ended January 31, 1998 and 1997.....................5 Notes to Condensed Financial Statements..........................6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations................................9 Part II: Other Information Item 6: Exhibits and Reports on Form 8-K................................15 Signatures ...................................................................16 2 Part I: Financial Information Item 1: Condensed Financial Statements ISONICS CORPORATION CONDENSED BALANCE SHEETS (in thousands, except share amounts) January 31, April 30, 1998 1997 ------- ------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,272 $ 28 Accounts receivable 149 4 Inventories 1,247 1,539 Prepaid expenses 43 14 ------- ------- Total current assets 2,711 1,585 Property and equipment, net 128 70 Goodwill, net 256 315 Notes receivable from shareholders 164 41 Other assets 7 11 Debt issuance costs, net -- 106 Deferred offering costs -- 556 ------- ------- Total $ 3,266 $ 2,684 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of long-term debt $ 32 $ 403 Accounts payable 314 1,105 Accrued liabilities 390 518 ------- ------- Total current liabilities 736 2,026 Long-term debt 40 1,268 Commitments -- -- Stockholders' Equity (Deficit): Class A Preferred Stock - no par value - 10,000,000 shares authorized; none outstanding -- -- Common stock - no par value - 20,000,000 shares authorized; issued and outstanding: April 30, 1997, 3,570,046; January 31,1998, 5,360,268 4,581 1,129 Notes receivable from stockholders (332) (343) Accumulated deficit (1,759) (1,396) ------- ------- Total stockholders' equity (deficit) 2,490 (610) ------- ------- Total $ 3,266 $ 2,684 ======= ======= See notes to condensed financial statements. 3 ISONICS CORPORATION CONDENSED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended January 31, January 31, ---------------------- ---------------------- 1998 1997 1998 1997 ------- ------- ------- ------- Net revenues $ 1,968 $ 951 $ 5,274 $ 3,355 Cost of revenues 1,296 742 3,636 2,579 ------- ------- ------- ------- Gross margin 672 209 1,638 776 Operating expenses: Selling, general and administrative 369 303 1,005 890 Research and development 227 133 579 321 ------- ------- ------- ------- Total operating expenses 596 436 1,584 1,211 ------- ------- ------- ------- Operating income (loss) 76 (227) 54 (435) Interest income 27 6 53 9 Interest expense (4) (138) (217) (235) ------- ------- ------- ------- Total interest income (expense), net 23 (132) (164) (226) ------- ------- ------- ------- Income (loss) before extraordinary item and income taxes 99 (359) (110) (661) Income tax expense -- -- 1 53 ------- ------- ------- ------- Income (loss) before extraordinary item 99 (359) (111) (714) Extraordinary item - loss on extinguishment of debt -- -- (252) -- ------- ------- ------- ------- NET INCOME (LOSS) $ 99 $ (359) $ (363) $ (714) ======= ======= ======= ======= Net income (loss) per share - basic Net income (loss) per share before extraordinary item $ 0.02 $ (0.06) $ (0.02) $ (0.12) ======= ======= ======= ======= Extraordinary item $ -- $ -- $ (0.04) $ -- ======= ======= ======= ======= Net income (loss) per share $ 0.02 $ (0.06) $ (0.06) $ (0.12) ======= ======= ======= ======= Shares used in computing per share information 5,360 6,138 5,836 6,109 ======= ======= ======= ======= Net income (loss) per share - diluted Net income (loss) per share before extraordinary item $ 0.01 $ (0.06) $ (0.02) $ (0.12) ======= ======= ======= ======= Extraordinary item $ -- $ -- $ (0.04) $ -- ======= ======= ======= ======= Net income (loss) per share $ 0.01 $ (0.06) $ (0.06) $ (0.12) ======= ======= ======= ======= Shares used in computing per share information 6,625 6,138 5,836 6,109 ======= ======= ======= ======= Pro forma net income (loss) per share - diluted Net income (loss) per share $ 0.01 $ (0.04) $ (0.03) $ (0.08) ======= ======= ======= ======= Shares used in computing pro forma per share information 6,625 6,378 5,997 6,440 ======= ======= ======= ======= See notes to condensed financial statements.
4 ISONICS CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Nine Months Ended January 31, ------------------ 1998 1997 ------- ------- Net cash used in operating activities $ (285) $(1,811) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Property and Equipment (72) (10) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt and warrants -- 1,741 Repayments of debt (1,844) (66) Proceeds from issuance of common stock, net 3,452 202 Payment of debt issuance costs (7) (106) ------- ------- Cash provided by financing activities 1,601 1,771 ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,244 (50) Cash and cash equivalents at beginning of period 28 116 ------- ------- Cash and cash equivalents at end of period $ 1,272 $ 66 ======= ======= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 171 $ 123 ======= ======= Income taxes $ 1 $ 9 ======= ======= See notes to condensed financial statements. 5 ISONICS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS Basis of Presentation The accompanying condensed financial statements of Isonics Corporation (the "Company") as of January 31, 1998 and for the three and nine months ended January 31, 1998 and 1997 have been prepared on the same basis as the 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 the Company's audited financial statements and notes thereto included in the Company's Prospectus dated September 22, 1997. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents and trade accounts receivable. Cash equivalents are maintained with high quality institutions and are regularly monitored by management. The Company extends credit to its customers, most of whom are large, established companies. Credit risk is mitigated by performing ongoing credit evaluations of its customers' financial condition and generally does not require collateral. Net Income (Loss) Per Share Net income (loss) per share is based on the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares include common stock options and warrants (using the treasury stock method). Common equivalent shares are excluded from the computation in loss periods as their effect is antidilutive, except that, pursuant to Securities and Exchange Commission rules, all shares issuable from the exercise of warrants issued and stock options granted by the Company at a price less than the initial public offering price during the twelve months preceding the offering date of September 23, 1997 have been included in the calculation (using the treasury stock method) as if they had been outstanding for all periods. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128. "Earnings Per Share." The Company has adopted SFAS 128 for the quarter ended January 31, 1998 and restated earnings per share data for periods to conform with SFAS 128. SFAS 128 replaces current earnings per share ("EPS") reporting requirements and requires a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income attributable to common stockholders by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. However, the SEC rules regarding share issuances and option and other rights granted to acquire shares prior to an initial public offering, as stated above, are still applicable and such amounts are included in both basic and diluted EPS. Pro forma net loss per share has been presented to depict what the net income (loss) per share would have been had the common shares issuable for debt repayment been outstanding during that period. 6 The following table illustrates the reconciliation of the numerators and denominators of the basic and diluted earnings per share computation:
Three Months Nine Months Ended Ended January 31, January 31, 1998 1997 1998 1997 ------- ------- ------- ------- BASIC EPS Net income (loss) before extraordinary item $ 99 $ (359) $ (111) $ (714) Extraordinary item -- -- (252) -- ------- ------- ------- ------- Net income (loss) $ 99 $ (359) $ (363) $ (714) ======= ======= ======= ======= Weighted average common stock outstanding 5,360 4,471 4,934 3,972 Stock options, warrants and convertible preferred stock issued twelve months preceding the initial public offering -- 1,667 902 2,137 ------- ------- ------- ------- Number of shares 5,360 6,138 5,836 6,109 ======= ======= ======= ======= DILUTED EPS Net income (loss) before extraordinary item $ 99 $ (359) $ (111) $ (714) Extraordinary item -- -- (252) -- ------- ------- ------- ------- Net income (loss) $ 99 $ (359) $ (363) $ (714) ======= ======= ======= ======= Weighted average common stock outstanding 5,360 4,471 4,934 3,972 Stock options, warrants and convertible preferred stock issued twelve months preceding the initial public offering -- 1,667 902 2,137 Dilutive effect of stock options 515 -- -- -- Dilutive effect of warrants 750 -- -- -- ------- ------- ------- ------- Number of shares 6,625 6,138 5,836 6,109 ======= ======= ======= =======
Inventories Inventories consist of (in thousands): January 31, April 30, 1998 1997 ------ ------ Finished goods $1,041 $1,387 Work in process -- -- Raw materials 206 152 ------ ------ Inventories $1,247 $1,539 ====== ====== 7 ISONICS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) Significant Customers and Suppliers At January 31, 1998 one customer accounted for 95% of total accounts receivable. One customer accounted for 53% and 67% of net revenues during the nine months ended January 31, 1998 and 1997, respectively. Three different customers accounted for 15%, 12% and 12% of net revenues during the nine months ended January 31, 1998. The Company currently uses a single source processor in its manufacturing process; a disruption of this relationship would have an adverse impact on the operating results of the Company. To date, the Company has not experienced a disruption; however, the Company is actively pursuing alternative sources. There can be no assurance that such alternative sources will be available on commercially reasonable terms or at all. Extinguishment of Debt The terms of the Company's $1,397,000 non-convertible promissory notes issued in September 1996 stated that in the event of an initial public offering of the Company's stock, all principal and interest would be due within five days of the closing of such initial public offering. Accordingly, the Company repaid the notes and interest during the second quarter ended October 31, 1997. At the time of the repayment, unamortized debt issuance costs and discounts totaling approximately $252,000 were charged to earnings as an extraordinary item. Recent Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 "Reporting Comprehensive Income," which requires that an entity report, by major components and as a single total, the change in its net assets from non-shareholder sources during the period; and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an entity's business segments and related disclosures about its products, services, geographic areas and major customers. Adoption of these statements will not impact the Company's financial position, results of operations or cash flows. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted. 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations The statements contained in this Report on Form 10-QSB that are not purely historical are forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions or strategies regarding the future. Forward looking statements include: statements regarding future products or product development; statements regarding future selling, general and administrative costs and research and development spending and the Company's product development strategy; and statements regarding future capital expenditures and financing requirements. All forward looking statements included in this document are based on information available to the Company on the date hereof, and the Company undertakes no obligation to update any such forward looking statements. It is important to note that the Company's actual results could differ materially from those in such forward looking statements. Overview Founded in 1992, Isonics Corporation ("Isonics" or the "Company") is a specialty chemical and advanced materials company which develops and commercializes products based on stable isotopes. Stable isotopes are ultra-ultra pure materials engineered at the molecular level to provide enhanced performance properties in semiconductors, lasers and high performance lighting and energy production. Stable isotopes are also widely used in basic research, pharmaceutical development and drug design, as well as in medical diagnostics and imaging. By replacing materials traditionally used in these industries with isotopically engineered versions of the same materials, product performance, safety, and economics can be enhanced significantly. Using state-of-the-art technology, Isonics produces a wide range of enriched stable isotopes which are then converted into products which meet the specialized needs of Isonics' customers. Isonics' core business is production and supply of depleted zinc (DZ), a non-radioactive stable isotope, to the energy industry. In fiscal 1996, Isonics expanded its business scope to include development of isotopically engineered materials for the medical research, medical diagnostic and semiconductor industries. In June 1997 Isonics produced the world's first isotopically pure silicon epitaxial wafer suitable for semiconductor fabrication. In July 1997 Isonics exercised an option for an exclusive license for two U.S. patents owned by Yale University concerning isotopically pure silicon and a wide range of other semiconductor materials. In February 1998, the Company announced the availability of isotopically pure silicon-28 epitaxial wafers in prototype quantities. The Company is currently evaluating potential applications for isotopically pure silicon in collaboration with certain industrial and university partners and is developing strategies for commercialization. Isonics currently supplies stable isotope labeled compounds ("SILCs"), mainly enriched carbon, for pharmaceutical research and medical diagnostic test development. In February 1998, the Company announced its intention to enter a joint venture agreement with the Institute of Stable Isotopes in Tblisi, Georgia, for enriched carbon-13 production. The partners anticipate first increasing capacity of the existing facilities located in Tblisi, followed by establishing additional production facilities in Europe and the United States. The Company is also independently developing advanced, lower cost, production technology for enriched carbon for use in minimally invasive diagnostic tests which are being developed by others. The Company believes that a substantial portion of its revenues in the future will depend on its success in developing and selling products in the semiconductor and SILC markets. In September 1997, Isonics completed its initial public offering. The proceeds of the offering are being used to fund the Company's silicon and carbon development efforts, to selectively add key technical personnel and to perform engineering studies prior to adopting a plan to increase and geographically diversify manufacturing capacity necessary to support planned sales growth. Historically, substantially all of the Company's net revenues in any particular period have been attributable to a limited number of customers and sales of DZ and SILCs. The Company operates with little backlog and a significant portion of the Company's total revenues to date have been, and the Company believes will continue to be in the near term, derived from a limited number of DZ and SILC orders in any particular quarter. Consistent with the Company's historical experience, the Company's quarterly results are expected to be materially affected by the size, timing and quantity of DZ and SILC orders, and product shipments made to DZ and SILC users during such quarter. 9 As a result, a lost or delayed sale could have a significant impact on the Company's operating results for a particular period, and such fluctuations could materially and adversely affect the Company's business, financial condition and results of operations. Results of Operations The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of net sales. The table and the discussion below should be read in conjunction with the condensed financial statements and the notes thereto appearing elsewhere in this report.
Three Months Ended Nine Months Ended January 31, January 31, ---------------------------- ---------------------------- 1998 1997 1998 1997 ----------- ------------- ----------- ------------- Net revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues 65.9 78.0 68.9 76.9 ----------- ------------- ----------- ------------- Gross Margin 34.1 22.0 31.1 23.1 ----------- ------------- ----------- ------------- Operating expenses: Selling, general and administrative 18.8 31.9 19.0 26.5 Research and development 11.4 14.0 11.0 9.6 ----------- ------------- ----------- ------------- Total operating expenses 30.2 45.9 30.0 36.1 ----------- ------------- ----------- ------------- Operating income (loss) 3.9 (23.9) 1.1 (13.0) Interest income (expense) Interest income 1.4 0.7 1.0 0.3 Interest expense (0.2) (14.5) (4.2) (7.0) ----------- ------------- ----------- ------------- Total interest income (expense), net 1.2 (13.8) (3.2) (6.7) ----------- ------------- ----------- ------------- Income (loss) before extraordinary item and income taxes 5.1 (37.7) (2.1) (19.7) Income tax expense -- -- -- (1.6) ----------- ------------- ----------- ------------- Income (loss) before extraordinary item 5.1 (37.7) (2.1) (21.3) Extraordinary item - loss on extinguishment of debt -- -- (4.8) -- =========== ============= =========== ============= NET INCOME (LOSS) 5.1% (37.7)% (6.9)% (21.3)% =========== ============= =========== =============
Net Revenues Net revenues for the three and nine months ended January 31, 1998 were $1.97 million and $5.27 million, respectively, an increase of 106.9% and 57.2%, respectively for the comparable periods in the prior fiscal period. The growth on a quarterly and year-to-date basis is due primarily to increased sales of DZ and SILC products. Net revenues from DZ increased by approximately $807,000 and $1.80 million, respectively for the three and nine months ended January 31, 1998, on increased unit sales of approximately 43% and 44%, respectively. Average unit sales prices for DZ increased in comparison to the previous fiscal years comparable quarter. Net revenues from SILCs were approximately $225,000 for the three months ended January 31, 1998, an increase of approximately $210,000 from the same period of the previous year. For the nine months ended January 31, 1998, SILC revenues were approximately $852,000, an increase of approximately $548,000 or 181% for the comparable period of the previous year. The revenue growth reflects the increasing sales of SILCs, specifically, enriched carbon products. International sales represented less than 10% of net revenues for the three and nine months ended January 31, 1998 and 1997. 10 Gross Margin Gross margin for the three and nine months ended January 31, 1998 increased to 34.1% and 31.1% of net revenues respectively, from 22.0% and 23.1% for the same periods in the prior fiscal year. The improvement is due to increased average unit sales prices for DZ, increased proportion of net revenues generated from DZ and to a lesser extent increased gross margins from SILCs. Increases in gross margins were offset in part by charges associated with writing off the Company's cadmium inventory and certain SILCs during the nine months ended January 31, 1998. Selling, General and Administrative Expenses Selling, general and administrative expenses increased on a dollar basis to approximately $369,000 for the quarter ended January 31, 1998, from $303,000, while declining on a percentage basis to 18.8% of net revenues for the third quarter of fiscal 1998 from 31.9% of net revenues for the comparable period in fiscal 1997. For the nine months ended January 31, 1998, these expenses increased on a dollar basis to $1.0 million from $890,000 for the comparable period in fiscal 1997, while declining on a percentage basis to 19.0% of net revenues for the nine months ended January 31, 1998 from 26.5% for the comparable period in fiscal 1997. The dollar increase for the quarter and nine months ended January 31, 1998 was primarily attributable to professional fees and media relations costs associated with being a public company, while the decrease as a percentage of net revenues was due to growth in DZ and SILC product revenues. The Company anticipates that selling, general and administrative expenses will generally continue to increase in absolute dollars to support anticipated revenue growth, but may vary as a percentage of net revenues. Research and Development Expenses Research and development expenses increased by approximately $94,000, or 70.7% , to $227,000 for the quarter ended January 31, 1998 from $133,000 for the comparable period in fiscal 1997, while declining on a percentage basis to 11.4% of net revenues from 14.0%. For the nine months ended January 31, 1998, research and development expenses increased by $258,000 or 80.4%, to $579,000 from $321,000 for the comparable period in the previous fiscal year, while increasing on a percentage basis to 11.0% of net revenues from 9.6%. Both the dollar and percentage increases during the quarter and nine months ended January 31, 1998 were primarily due to increased staffing and consulting costs associated with the development of isotopically pure silicon wafers; costs to develop advanced, lower cost production technology for enriched carbon; and commencement of a feasibility study to increase isotope production. The decrease in research and development expenses as a percentage of net revenues for the quarter ended January 31, 1998 compared to the same period of the previous fiscal year was due to revenue growth. The Company believes that the development and introduction of new product applications is critical to its future success and expects that research and development expenses will increase on a dollar basis, but may vary as a percentage of net revenues. Interest income (expense), net Interest expense, reflects interest and prior to the Company's initial public offering, amortization of issuance costs and discounts on outstanding debt. Interest expense, net, decreased by $155,000 to net interest income of $23,000 for the quarter ended January 31, 1998 from net interest expense of $132,000 for the comparable period of the previous fiscal year. For the nine months ended January 31, 1998, interest expense, net, decreased to $164,000 from $226,000 for the comparable period in fiscal 1997. During the quarter ended October 31, 1997, the Company repaid approximately $1.78 million of outstanding debt which resulted in reduced interest expense for the quarter and nine months ended January 31, 1998. Income taxes There is no provision for income taxes for the quarters ended January 31, 1998 and 1997, respectively. The Company has sufficient net operating loss carryforwards to eliminate net income generated during the three months 11 ended January 31, 1999. For the nine months ended January 31, 1998, income taxes decreased $52,000 to $1,000 for the comparable period of the previous year. Fiscal 1998 taxes are the result of minimum state taxes. The provision for income taxes for the quarter and nine months ended January 31, 1997 was the result of providing a valuation allowance on deferred tax assets. Extraordinary Item In accordance with the terms of certain outstanding notes the Company was required to repay debt totaling $1,397,000 upon the closing of the Company's initial public offering in September 1997. Upon repayment of the notes, in the quarter ended October 31, 1997, unamortized debt issuance costs and discounts totaling $252,000 were charged to earnings as an extraordinary item. Liquidity and Capital Resources Since inception, the Company's principal sources of funding have been its cash from operations, borrowed funds and sales of common stock. The Company used cash in operating activities of approximately $285,000 and $1.8 million during the nine months ended January 31, 1998 and 1997, respectively. Cash used by operating activities during the nine months ended January 31, 1998 was principally the result of a net loss of $363,000, net of adjustments for non-cash items, primarily depreciation, amortization and extraordinary loss on extinguishment of debt. Cash used by operating activities during the nine months ended January 31, 1997, was principally the result of a net loss of $714,000, adjusted for non-cash items, increases in accounts receivable and inventories, offset in part by increases in accounts payable. The Company's investing activities used cash of $72,000 and $10,000 for the nine months ended January 31, 1998 and 1997, respectively. Investing activities were for purchases of property and equipment. Financing activities provided cash of $1.6 million and $1.8 million during the nine months ended January 31, 1998 and 1997, respectively. Cash provided by financing activities during the nine months ended January 31, 1998 resulted primarily from the completion of the Company's initial public offering which was offset in part by the repayment of outstanding debt. Financing activities during the nine months ended January 31, 1997 consisted of the issuance of notes and common stock which was offset in part by debt issuance costs and principal payments on debt. At January 31, 1998, the Company had $1.3 million of cash and equivalents, an increase of $1.2 million compared to $28,000 as of April 30, 1997. At January 31, 1998, the Company had $2.0 million working capital, an increase of $2.4 million compared to negative $441,000 as of April 30, 1997. The increases were primarily the result of the Company's initial public offering in September 1997. At present, the Company has no credit facility with a bank or other financial institution and no in-place source of capital, however, the Company is in the process of evaluating several credit facilities. The Company believes that cash and equivalents on hand at January 31, 1998 will be sufficient to allow the Company to continue its expected level of operations for at least 12 months. Factors That May Affect Future Results In evaluating the Company's business, prospective investors should carefully consider the following factors in addition to the other information presented in this report and in the Company's other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect the Company's business. Relationship With Certain Suppliers and Availability of Raw Materials The Company depends upon an isotope enrichment plant, located in Russia, which is owned by the Ministry of Atomic Energy of the Russian Federation ("the Ministry"), which is part of the cabinet of the government of the Russian Federation, for one process involved in the manufacturing of DZ. The Company also relies upon a single or 12 limited number of suppliers and processors for certain other manufacturing processes. The Company signed an agreement with the commercial department of the Ministry to purchase certain isotope separation services through 2001. Disruption or termination of services provided by the Ministry or the Company's single or limited suppliers and processors could have a material and adverse affect upon the Company's financial condition and results of operations. Operations in Russia and the Republic of Georgia Operations in Russia and the republic of Georgia ("Georgia") entail certain risks. In recent years the former republics of the Soviet Union including Georgia have experienced political, social and economic change as they sought independence from the former central government in Moscow, and certain of the republics, including Russia and Georgia, have attempted to transition from a central controlled economy toward market-based economics. These changes have involved, in certain cases, armed conflict. There can be no assurance that political or economic instability in these republics will not continue or worsen. The supply of stable isotopes could be directly affected by political, economic and military conditions in Russia and Georgia. Accordingly the operations of the Company could be materially adversely affected if hostilities in Russia should occur, if trade between Russia or Georgia and the United States were interrupted, if political conditions in Russia or the Georgia disrupt transportation or processing concerning the Company's goods, if laws or government policies concerning foreign business operations in Russia or Georgia change substantially, or if tariffs are introduced. Customer Concentration Historically, substantially all of the Company's net revenues in any particular period have been attributable to a limited number of customers. Consistent with the Company's historical experience, the Company's quarterly results during fiscal 1998 and 1999 are expected to be affected materially by the level of orders received from significant DZ and SILC users during such quarter and product shipments by the Company to DZ and SILC customers during such period. There can be no assurance that the Company's principal customers will continue to purchase products. A decrease in or loss of orders from one or more major customers would have a material and adverse effect on the Company's financial condition and results of operations. Factors Affecting Operating Results; Variability of Orders The Company operates with little backlog and a significant portion of the Company's net revenues have been, and the Company believes will continue to be, derived from a limited number of orders that are processed and shipped in the same quarter in which the orders are received. The timing of such orders and their fulfillment has caused, and is likely to continue to cause, material fluctuations in the Company's operating results. The Company's expense levels are relatively fixed and as has been the case in prior quarters, these factors will affect the Company's operating results for future periods. Management of Growth The Company has experienced periods of rapid growth that have placed a significant strain on the Company's financial resources. The Company's ability to manage growth effectively, particularly given the increasing scope of operations, will require it to continue to implement and improve its management, operational, and financial information systems, as well as to develop the management skills of its personnel and to train, motivate and manage its employees. The Company's failure to effectively manage growth could have a material adverse effect on the Company's business, financial condition and results of operations. 13 Dependence on Key Personnel The Company's future success will depend in significant part upon the continued service of its key technical, sales and senior management personnel, including James E. Alexander, the Company's President and Chief Executive Officer, and Boris Rubizhevsky, the Company's Senior Vice President, Isotope Production and Supply. The Company maintains $1 million of key man life insurance on the lives of Messrs. Alexander and Rubizhevsky and both are covered by employment agreements with the Company extending through September 2001. The Company believes that its future success will depend in large part upon its ability to attract and retain qualified personnel for its operations. The failure to attract or retain such persons could materially adversely affect the Company's business, financial condition and results of operations. Dates following December 31, 1999 and beyond (the "Year 2000 Problem") Many existing computer systems and applications, and other devices, use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. Such systems and applications could fail or create erroneous results unless corrected. The Company relies on its internal financial systems and external systems of business enterprises such as customers, suppliers, creditors, and financial organizations both domestically and globally, directly and indirectly for accurate exchange of data. The Company has evaluated such systems and believes the cost of addressing the Year 2000 Problem, will not have a material adverse affect on the result of operations or financial position of the Company. However, even though the internal systems of the Company are not materially affected by the Year 2000 issue the Company could be affected through disruption in the operation of the enterprises with which the Company interacts. Volatility of Stock Price The trading price of the Company's securities has been subject to wide fluctuations in response to quarter to quarter variations in operating results, announcements of technological innovations or new products by the Company or its competitors, and other events or factors. In addition, the stock market has experienced wide price and volume fluctuations, which have at times been unrelated to the operating performance of the companies whose securities are traded. These broad market fluctuations may adversely effect the market price of the Common Stock and Warrants. Shares Eligible for Future Sale The officers and directors of the Company and all other stockholders have agreed, pursuant to lock-up agreements, that without the prior written consent of Monroe Parker Securities, Inc. (the Representative) and the Company, that they will not sell or otherwise dispose of common stock beneficially owned by them. The Company has been advised by officials of the Representative in the initial public offering, that on December 22, 1997, the Representative ceased market-making activities; therefore, the Company may, in the future at its sole discretion, release a portion of securities subject to these lock-up agreements. 14 Part II: Other Information Item 6: Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit Number Description Page(s) ------ ----------- ------- 27.01 Financial Data Schedule 17 (b) Reports on Form 8-K. The Company did not file any Reports on Form 8-K during the quarter ended January 31, 1998. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, County of Santa Clara, State of California, on the 16th day of March, 1998. Isonics Corporation (Registrant) By_______________________________________________ James E. Alexander President, Chief Executive Officer and Director By_______________________________________________ Paul J. Catuna Vice President, Finance Chief Financial Officer 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB FOR THE PERIOD ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS APR-30-1998 MAY-01-1997 JAN-31-1998 1,272 0 149 0 1,247 2,711 128 41 3,266 736 40 0 0 4,581 (332) 3,266 5,274 5,274 3,636 3,636 1,584 0 164 (110) 1 (111) 0 (252) 0 (363) (.06) (.06)
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