-----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, DKHH2Uma7oonDHvmKOF8SKVPRMhhO01YOgytkUA2T8eS1cmp1UwuOm5ohNTo5ZJZ 9ugAMcXtBVnJiWbSjy10gQ== 0000950005-98-000770.txt : 19980922 0000950005-98-000770.hdr.sgml : 19980922 ACCESSION NUMBER: 0000950005-98-000770 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980921 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: 98712530 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 July 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.) 20 Great Oaks Blvd., Suite 220 San Jose, California 95119 (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 6,166,539 at September 14, 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 Consolidated Balance Sheets as of July 31, 1998 and April 30, 1998.......................................3 Condensed Consolidated Statements of Operations for the Three Month Periods Ended July 31, 1998 and 1997.........4 Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended July 31, 1998 and 1997.........5 Notes to Condensed Consolidated Financial Statements..........6 Item 2: Management's Discussion and Analysis or Plan 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 AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) July 31, April 30, 1998 1998 -------- -------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 397 $ 1,044 Accounts receivable (net of allowances of $ 259 and $130, respectively) 3,354 1,629 Inventories 1,018 456 Prepaid expenses and other assets 323 45 Deferred income taxes 146 112 -------- -------- Total current assets 5,238 3,286 Property and equipment, net 1,602 1,626 Goodwill, net 3,517 236 Notes receivable from shareholders 142 170 Other assets 62 22 Deferred income taxes 293 315 -------- -------- Total $ 10,854 $ 5,655 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 173 $ 80 Notes payable 1,750 -- Accounts payable 2,754 657 Accrued liabilities 1,064 738 -------- -------- Total current liabilities 5,741 1,475 Long-term debt 495 312 Deferred income taxes 405 427 Stockholders' Equity: 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, 1998, 5,714,250: July 31,1998, 6,166,539 6,200 5,289 Notes receivable from stockholders (343) (337) Accumulated deficit (1,644) (1,511) -------- -------- Total stockholders' equity 4,213 3,441 -------- -------- Total $ 10,854 $ 5,655 ======== ======== See notes to condensed consolidated financial statements.
3 ISONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited) Three Months Ended July 31, -------------------- 1998 1997 ------- ------- Net revenues $ 3,933 $ 1,535 Cost of revenues 2,989 1,179 ------- ------- Gross margin 944 356 Operating expenses: Selling, general and administrative 682 267 Research and development 323 149 ------- ------- Total operating expenses 1,005 416 ------- ------- Operating loss (61) (60) Interest income 24 6 Interest expense (76) (135) ------- ------- Total interest income (expense), net (52) (129) ------- ------- Loss before income taxes (113) (189) Income tax expense 20 1 ------- ------- NET LOSS $ (133) $ (190) ======= ======= Net income (loss) per share Basic $ (.02) $ (.04) ======= ======= Diluted $ (.02) $ (.04) ======= ======= Shares used in computing per share amounts: Basic 5,978 4,550 ======= ======= Diluted 5,978 4,550 ======= ======= See notes to condensed consolidated financial statements. 4 ISONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Three Months Ended July 31, ------------------------ 1998 1997 ------- ------- Net cash provided by (used in) operating activities $ (305) $ 373 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Property and Equipment (32) (57) CASH FLOWS FROM FINANCING ACTIVITIES: Line of credit, net 187 -- Repayments of debt (25) (257) Purchase of Chemotrade, net of cash acquired (489) -- ------- ------- Cash used in financing activities (310) (257) ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (647) 59 Cash and cash equivalents at beginning of period 1,044 28 ------- ------- Cash and cash equivalents at end of period $ 397 $ 87 ======= ======= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 60 $ 63 ======= ======= Income taxes $ 1 $ 1 ======= ======= Supplemental disclosure of noncash investing and financing activities: Equipment acquired under capital lease $ 10 $ -- ======= ======= Purchase of Chemotrade Cash paid, net of cash acquired $ 489 Stock issued to sellers 894 Debt issued to sellers 1,750 Liabilities assumed 1,598 ------- Assets acquired (including goodwill of $3,328) $ 4,731 ======= See notes to condensed consolidated financial statements.
5 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation The accompanying condensed financial statements of Isonics Corporation and Subsidiaries (the "Company" or "Isonics") as of July 31, 1998 and for the three months ended July 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 Annual Report on Form 10-KSB. Net Income (Loss) Per Share Net income (loss) per share is based on the weighted average number of common and equivalent shares outstanding during the period. Basic net income (loss) per share is computed by dividing net income (loss) by the number of weighted average common shares outstanding. Diluted net income per share reflects potential dilution from outstanding stock options and warrants, using the treasury stock method. Outstanding stock options and warrants are excluded from the diluted earnings per share calculation in loss periods. Inventories Inventories consist of (in thousands): July 31, April 30, 1998 1998 ------ ------ Finished goods $ 740 $ 250 Work in process -- -- Raw materials 278 206 ------ ------ Inventories $1,018 $ 456 ====== ====== Goodwill Goodwill resulted from the Isoserve, Inc., and Chemotrade GmbH and subsidiary acquisitions (See Business Developments) and is being amortized on a straight line basis over six and twenty years, respectively. Notes payable Two notes payable were issued to the sellers of Chemotrade GmbH and subsidiary as consideration for a portion of the purchase price. One note is for $924,000, bears interest at 2% per month, and is secured by certain accounts receivable. The note was repaid in August 1998. A second note for $826,000 bearing interest at 10%, secured by the common stock purchased by Isonics, is due June 1999. Significant Customers and Suppliers At July 31, 1998 three customers accounted for 30%, 14%, and 14% of total accounts receivable. Two customers accounted for 30% and 14% of net revenues during the three months ended July 31, 1998. Three different customers accounted for 51%, 19%, and 17% of net revenues during the three months ended July 31, 1997. 6 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company currently uses a single source processor in its DZ 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. Business Developments Acquisition of Chemotrade GmbH and Subsidiary On July 21, 1998, the Company acquired all of the outstanding shares of Chemotrade GmbH and subsidiary (collectively "Chemotrade"), which was owned by two common shareholders. Chemotrade is engaged in the distribution, development and manufacture of stable and radio isotopes. The purchase has been accounted for effective June 1, 1998, the date control of Chemotrade was transferred. The purchase price consideration consisted of $2.576 million paid at closing and $1.107 million to be paid through June 2001. Transaction costs as of July 31, 1998 were $68,000 and imputed interest from the effective date of the acquisition, June 1, 1998, to the date that consideration was paid or interest began accruing on consideration, June 30, 1998, totaled $28,000. Imputed interest is reflected as interest expense in the consolidated statements of operations for the three month period ended July 31, 1998 as a reduction in the purchase price. The consideration paid upon closing consisted of cash of $758,000, 357,730 restricted shares of common stock with a fair market value of $894,000, two notes, one for $924,000 bearing interest at 2% per month, which was paid in August, and a second note of $826,000 bearing interest at 10%, due June 1, 1999. The sellers have guaranteed Chemotrade's defined pre tax earnings will be at least $550,000 during each of the sixteen months ended April 30, 1999 and twelve months ended April 30, 2000 and 2001. If the pre tax earnings of Chemotrade are less than $550,000 for the sixteen month period ended April 30, 1999 or year ended April 30, 2000, the note payable of $826,000 due June 1, 1999, will be reduced by $0.75 for each $1.00 shortfall of earnings. If Chemotrade has pretax earnings of at least $550,000 for the fiscal year ended April 30, 2001, the sellers will receive additional consideration of $281,000. If the pre tax earnings are less than $550,000 during the twelve months ended April 30, 2001, the consideration will be reduced $0.50 for each shortfall in earnings. The contingent consideration for the year ended April 30, 2001 will be recorded as additional goodwill upon Chemotrade meeting the pre tax earnings requirement. The excess of the $3.442 million purchase price over the fair value of the tangible assets acquired, $1.712 million, less liabilities assumed of $1.598 million, $3.328 million has been allocated to goodwill and will be amortized over twenty years. 7 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Acquisition of International Process Research Corporation ("Interpro") Effective April 30, 1998, the Company acquired all of the outstanding common stock of Interpro dba Colorado Minerals Research Institute. The purchase price was paid in 353,982 shares of the Company's common stock with a fair market value of $708,000. Transaction costs were $70,000, no goodwill was recognized upon completing the transaction. The reported results of operations of the Company for the three months ended July 31, 1998 includes two months of the operating results of Chemotrade and three months of the operating results of Interpro. Pro forma results of operations as if the acquisition had occurred at the beginning of the three month period ended July 31, 1998 and 1997 are as follows (in thousands, except per share data): Three Months Ended July 31, -------------------- 1998 1997 ------- ------- Net revenues $ 4,854 $ 3,867 Gross margin 1,051 777 Net loss (64) (269) Net loss per share: basic $ (0.01) $ (0.05) diluted $ (0.01) $ (0.05) Number of shares used in computing per share information basic 6,099 5,262 ======= ======== diluted 6,099 5,262 ======= ======== 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 and radio isotopes. 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. 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 isotopes which are then converted into products which meet the specialized needs of Isonics' customers. Isonics' core business is the 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 remaining 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. Effective April 30, 1998, Isonics purchased International Process Research Corporation ("Interpro") dba Colorado Minerals Research Institute by acquiring all of the outstanding capital stock of Interpro. Interpro is a contract research and development and materials processing company which has been performing key steps in Isonics' DZ manufacturing process and jointly developing new, lower cost technologies to better meet customer needs. The acquisition was made to assure future availability of this critical manufacturing technology and to provide an infrastructure platform for performing value added processing of other isotopes. 9 Effective June 1, 1998, Isonics acquired Chemotrade GmbH and subsidiary, headquartered in Dusseldorf, Germany, to expand Isonics' product offerings and to enter the European market for stable and radio isotopes. Chemotrade is a value-added re-seller of stable and radio isotopes. It supplies radio isotopes for pharmaceutical and industrial research as well as for industrial and medical imaging, calibration sources and for brachytherapy applications. Chemotrade also distributes calibration sources, manufactured by duPont with Chemotrade supplied radio isotopes, in Germany and other European countries. Chemotrade supplies various stable isotope labelled compounds for pharmaceutical research and drug design, as well as oxygen-18 for use in producing a radio isotope used in positron emmission tomography. Chemotrade's market is primarily Europe but frequently sales are made to North America and Asia; customers include duPont, Amersham, and New England Nuclear Life Sciences. 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. 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 consolidated financial statements and the notes thereto appearing elsewhere in this report. Three Months Ended July 31, ----------------- 1998 1997 ----- ----- Net revenues 100.0% 100.0% Cost of revenues 76.0 76.8 ----- ----- Gross Margin 24.0 23.2 ----- ----- Operating expenses: Selling, general and administrative 17.4 17.4 Research and development 8.2 9.7 ----- ----- Total operating expenses 25.6 27.1 ----- ----- Operating loss (1.6) (3.9) Interest income (expense) net (1.3) (8.4) ----- ----- Loss before income taxes (2.9) (12.3) Income tax expense 0.5 0.1 ----- ----- NET LOSS (3.4)% (12.4)% ===== ===== Net Revenues Net revenues for the three months ended July 31, 1998 were $3.93 million compared to $1.53 million for the three months ended July 31, 1997, an increase of $2.40 million or 157%. The increase was primarily due to increases in revenues from DZ sales and the net revenues from the Interpro and Chemotrade acquisitions. Net revenues from DZ increased by approximately $903,000 for the three months ended July 31, 1998, on increased unit sales of 10 approximately 35%. Average unit sales prices for DZ increased in comparison to the previous fiscal years' comparable quarter. Gross Margin Gross margin for the three months ended July 31, 1998 increased to 24.0% from 23.2% of net revenues in the comparable period of the prior year. The improvement is due to increased average unit sales prices for DZ, offset in part by lower margins on contract manufacturing performed by Interpro and stable and radio isotope revenues generated by Chemotrade. Selling, General and Administrative Expenses Selling, general and administrative expenses increased on a dollar basis to approximately $682,000, or 17.4% of net revenues for the three months ended July 31, 1998, from $267,000, or 17.4% of net revenues in the comparable period of the prior year. The dollar increase for the quarter ended July 31, 1998 was primarily attributable to the acquisition of Interpro and Chemotrade as well as professional fees and media relations costs associated with being a public company, while the amount as a percentage of net revenues did not change. 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 $174,000, or 117%, to $323,000 for the quarter ended July 31, 1998 from $149,000 for the comparable period of the prior year, while declining on a percentage basis to 8.2% of net revenues from 9.7%. The dollar increase during the quarter ended July 31, 1998 were primarily due to increased staffing and material costs associated with the development of isotopically pure silicon wafers and development costs incurred at Interpro. The decrease in research and development expenses as a percentage of net revenues for the quarter ended July 31, 1998 compared to the same period of the previous 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 costs and, prior to the Company's initial public offering in September 1997, amortization of issuance costs and discounts on outstanding debt. Interest expense, net, decreased by $77,000 to $52,000 for the quarter ended July 31, 1998 from net interest expense of $129,000 for the comparable period of the previous fiscal year. The decrease was due to the Company repaying approximately $1.78 million of outstanding debt from the proceeds of its initial public offering offset in part by interest charged on notes payable issued to the sellers of Chemotrade, imputed interest of $28,000 recorded from the effective date of the acquisition to the actual date consideration was paid to the sellers, and interest on debt outstanding at Interpro. Income taxes The provision for income taxes was $20,000 and $1,000 for the quarters ended July 31, 1998 and 1997, respectively. The provision for income taxes of $20,000 for the three months ended July 31, 1998, was the result of foreign taxes on Chemotrade's net income. The provision of $1,000 for the three months ended July 31, 1997 was the result of state taxes. 11 Liquidity and Capital Resources Since inception, the Company's principal sources of funding have been cash from operations, borrowed funds and sales of common stock. The Company used cash in operating activities of approximately $305,000 and generated cash from operating activities of $373,000 during the three months ended July 31, 1998 and 1997, respectively. Cash used in operating activities during the three months ended July 31, 1998 was principally the result of a net loss of $133,000, offset by adjustments for non-cash items, primarily depreciation and amortization, imputed interest, and increases in accounts receivable and inventory. Cash generated from operating activities during the three months ended July 31, 1997, was principally the result of decreases in inventory and increases in accounts payable and accrued liabilities, offset by the net loss of $190,000, adjusted for non-cash expense items and increases in accounts receivable. The Company's investing activities used cash of $32,000 and $57,000 for the three months ended July 31, 1998 and 1997, respectively. Investing activities were for purchases of property and equipment. Financing activities used cash of $310,000 and $257,000 during the three months ended July 31, 1998 and 1997, respectively. Cash used by financing activities during the three months ended July 31, 1998 resulted primarily from the payment of the cash portion of the Chemotrade consideration which was offset in part by proceeds from line of credit borrowings. Cash used in financing activities during the three months ended July 31, 1997, consisted of repayment of debt. At July 31, 1998, the Company had $397,000 of cash and equivalents, a decrease of $647,000 compared to $1,044,000 as of April 30, 1998. At July 31, 1998, the Company had negative working capital of $503,000, a decrease of $2,314,000 compared to working capital of $1,811,000 as of April 30, 1998. The decrease is primarily the result of the Company's acquisition of Chemotrade. During the three months ended July 31, 1998, the Company paid the sellers of Chemotrade $758,000 of cash and issued two notes payable for an aggregate $1,750,000. On July 24, 1998, the Company obtained a $3.0 million credit facility for its U.S. operations, secured by its U.S. assets, with a lender. The loan consists of a $500,000 equipment term loan, payable over forty eight months, a $250,000 term loan with interest only payments due monthly and principal due October 31, 1998, $500,000 revolving line of credit, with borrowings limited to 35% of eligible inventory, a $1,250,000 revolving line of credit, with borrowings limited to 80% of eligible accounts receivable and a $500,000 equipment acquisition term loan. The availability of the equipment acquisition loan is conditioned upon the Company achieving and maintaining minimum debt service coverage ratios. The proceeds of the new facility were used to repay approximately $537,000 of debt outstanding at July 31, 1998 and $742,000 of accounts payable. Chemotrade has two unsecured revolving lines of credit that combined total $395,000. The Company is in the process of evaluating several secured credit facilities for Chemotrade. 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 supplier of raw material for DZ. 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 12 Ministry or the Company's single supplier of raw material 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. Recently, the former republics of the Soviet Union including Georgia have experienced political, social and economic change as they sought independence from the former central government in Moscow, and certain of the republics, including Russia and Georgia, have attempted to transition from a central controlled economy toward a market-based economy. These changes have involved, in certain cases, armed conflict. There can be no assurance that political or economic instability in these republics will not continue or worsen. The supply of stable isotopes could be directly affected by political, economic and military conditions in Russia and Georgia. Accordingly, 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 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 1999 and 2000 are expected to be affected materially by the level of orders received from significant DZ users during such quarter and product shipments by the Company to DZ 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 its 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. 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, Boris Rubizhevsky, the Company's Senior Vice President, Isotope Production and Supply, Robert Cuttriss, President of Interpro, and Herbert Hegener, Managing Director of Chemotrade. The Company maintains $1 13 million of key man life insurance on the lives of Messrs. Alexander, Rubizhevsky and Cuttriss and all are covered by employment agreements with the Company extending through September 2001, 2001, and 2003, respectively. Messr. Hegener is covered by an employment agreement with the Company extending through the year 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 Company's common stock and common stock 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 was advised by officials of the Representative, 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. An amended Current Report on Form 8-K/A was filed by the Registrant on July 29, 1998 to submit the audited financial statements of International Process Research Corporation and pro forma financial information for the year ended April 30, 1998. A Current Report on Form 8-K was filed by the Registrant on May 27, 1998 to put on file the Stock Purchase Agreement among Isonics Corporation, Metallurgy International, Inc. and International Process Research Corporation; the Escrow Agreement among Isonics Corporation, Metallurgy International, Inc., Robert H, Cuttriss (as Agent), and Colorado Business Bank as Escrow Agent, and press releases announcing the execution and consummation of the acquisition. 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 18th day of September, 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 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB FOR THE PERIOD ENDED JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS APR-30-1999 MAY-01-1998 JUL-31-1998 397 0 3,613 259 1,018 5,238 1,808 206 10,854 5,741 495 0 0 6,200 (343) 10,854 3,933 3,933 2,989 2,989 1,005 0 52 (113) 20 (133) 0 0 0 (133) (.02) (.02)
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