-----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, VdyN/1OP1MjRbf+pdr/bVuFnbbJFpoqThq7pdf1Xf92UtpoagoTqEj7iDmGWWrJw xO/AXFidY/iCmIeHzEha0w== 0000950005-99-000265.txt : 19990318 0000950005-99-000265.hdr.sgml : 19990318 ACCESSION NUMBER: 0000950005-99-000265 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990317 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: 99567081 BUSINESS ADDRESS: STREET 1: 20 GREAT OAKS BLVD STREET 2: SUITE 220 CITY: SAN JOSE STATE: CA ZIP: 95119 BUSINESS PHONE: 4082600155 MAIL ADDRESS: STREET 1: 20 GREAT OAKS BLVD STREET 2: SUITE 220 CITY: SAN JOSE STATE: CA ZIP: 95119 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, 1999 [ ] Transition report under Section 13 or 15(d) of the Exchange Act. For the transition period from _______ to ______ Commission file number: 001-12531 ISONICS CORPORATION (Exact name of small business issuer as specified in its charter) California 77-0338561 ---------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 5906 McIntyre Street Golden, Colorado 80403 ---------------------- (Address of principal executive offices) (303) 279-7900 -------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ The number of shares outstanding of the registrant's Common Stock, no par value, was 6,215,612 at March 12, 1999. Transitional Small Business Disclosure Format (check one): Yes __ No _X_ Isonics Corporation TABLE OF CONTENTS FORM 10-QSB Part I: Financial Information Item 1: Financial Statements Condensed Consolidated Balance Sheets as of January 31, 1999 and April 30, 1998 ..................... 3 Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended January 31, 1999 and 1998 ............................... 5 Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended January 31, 1999 and 1998 ........................................... 6 Notes to Condensed Consolidated Financial Statements .............................................. 7 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations ..................... 12 Part II: Other Information Item 6: Exhibits and Reports on Form 8-K .......................... 21 Signatures .................................................................. 22 2 Part I: Financial Information Item 1: Condensed Financial Statements ISONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
ASSETS (Unaudited) January 31, 1999 April 30, 1998 ---------------- -------------- CURRENT ASSETS: Cash and cash equivalents $ 228 $1,044 Accounts receivable (Net of allowance of $156 and $130, respectively) 3,389 1,629 Inventories 1,134 456 Prepaid expenses and other assets 260 45 Deferred income taxes 128 112 -------------------------------- Total current assets $5,139 $3,286 -------------------------------- LONG-TERM ASSETS Property and equipment, net 1,089 1,626 Goodwill, net 3,450 236 Notes receivable from shareholders 127 170 Other assets 81 22 Deferred income taxes 85 315 -------------------------------- Total long-term assets $4,832 $2,369 -------------------------------- TOTAL ASSETS $9,971 $5,655 ================================ See notes to condensed consolidated financial statements.
3 ISONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited) January 31, 1999 April 30, 1998 ---------------- -------------- CURRENT LIABILITIES: Current portion of long-term debt $ 261 $ 80 Notes payable from shareholders 877 -- Accounts payable 3,908 657 Accrued liabilities 1,155 738 ------------------------------------ Total current liabilities $ 6,201 $ 1,475 ------------------------------------ LONG-TERM LIABILITIES: Long-term debt 859 312 Deferred income taxes 197 427 ------------------------------------ Total long-term liabilities $ 1,056 $ 739 ------------------------------------ SHAREHOLDERS' EQUITY: Class A Preferred Stock--no par value 10,000,000 shares authorized; none outstanding -- -- Common stock--no par value. 20,000,000 shares 6,364 5,289 authorized; issued and outstanding: April 30, 1998, 5,714,250; January 31, 1999, 6,327,779 Notes receivable from shareholders (382) (337) Accumulated deficit (3,268) (1,511) ------------------------------------ Total shareholders' equity $ 4,832 $ 3,411 ------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,971 $ 5,655 ==================================== See notes to condensed consolidated financial statements.
4 ISONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended January 31, January 31, -------------------------- -------------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Net revenues $ 6,670 $ 1,968 $ 14,309 $ 5,274 Cost of revenues 5,393 1,296 11,575 3,636 -------- -------- -------- -------- Gross margin 1,277 672 2,734 1,638 Operating expenses: Selling, general and administrative 826 369 2,444 1,005 Research and development 250 227 962 579 Restructuring and office closure -- -- 708 -- -------- -------- -------- -------- Total operating expenses 1,076 596 4,114 1,584 -------- -------- -------- -------- Operating income (loss) 201 76 (1,380) 54 -------- -------- -------- -------- Other income (expense): Foreign exchange 131 -- 35 -- Interest income 9 27 21 53 Interest expense (87) (4) (236) (217) -------- -------- -------- -------- Total other income (expense), net 53 23 (180) (164) -------- -------- -------- -------- Income (loss) before extraordinary item and income taxes 254 99 (1,560) (110) Income tax expense 177 -- 197 1 -------- -------- -------- -------- Income (loss) before extraordinary item 77 99 (1,757) (111) -------- -------- -------- -------- Extraordinary item - loss on extinguishment of debt -- -- -- (252) -------- -------- -------- -------- NET INCOME (LOSS) $ 77 $ 99 $ (1,757) $ (363) ======== ======== ======== ======== Net income (loss) per share--basic Net income (loss) per share before extraordinary item $ 0.01 $ 0.02 $ (0.29) $ (0.02) Extraordinary item $ -- $ -- $ -- $ (0.04) Net income (loss) per share $ 0.01 $ 0.02 $ (0.29) $ (0.06) Shares used in computing per share information 6,216 5,360 6,120 5,836 Net income (loss) per share--diluted Net income (loss) per share before extraordinary item $ 0.01 $ 0.01 $ (0.29) $ (0.02) Extraordinary item $ -- $ -- $ -- $ (0.04) Net income (loss) per share $ 0.01 $ 0.01 $ (0.29) $ (0.06) Shares used in computing per share information 6,918 6,625 6,120 5,836 See notes to condensed consolidated financial statements.
5 ISONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Nine Months Ended January 31, ----------------------------- 1999 1998 ------- ------- Net cash provided by (used in) operating activities $ 146 $ (285) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Property and Equipment (120) (72) Purchase of Chemotrade, net of cash acquired (546) -- ----------------------------- Cash used in investing activities $ (666) $ (72) ----------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Line of credit, net 931 -- Proceeds from issuance of long-term debt 500 -- Repayments of debt (1,714) (1,844) Proceeds from issuance of common stock, net 17 3,452 Payment of debt issuance costs (30) (7) ----------------------------- Cash provided by (used in) financing activities $ (296) $ 1,601 ----------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: (816) 1,244 Cash and cash equivalents at beginning of period 1,044 28 ----------------------------- Cash and cash equivalents at end of period $ 228 $ 1,272 ============================= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 149 $ 171 ============================= Income taxes $ 242 $ 1 ============================= Supplemental disclosure of noncash investing and financing activities: Equipment acquired under capital lease $ 14 $ -- ============================= Purchase of Chemotrade: Cash paid, net of cash acquired $ 546 Stock issued to sellers 894 Debt issued to sellers 1,750 Liabilities assumed 1,598 ------- Assets acquired (including goodwill of $3,385) $ 4,788 ======= See notes to condensed consolidated financial statements.
6 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation The accompanying condensed consolidated financial statements of Isonics Corporation and Subsidiaries (the "Company" or "Isonics") as of January 31, 1999, and for the three and nine months ended January 31, 1999, and 1998, 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 common equivalent shares outstanding during the period. Common equivalent shares include common stock options and warrants. Basic net income (loss) per share is computed by dividing net income (loss) by the number of weighted average common shares outstanding. Diluted net income (loss) per share reflects potential dilution from outstanding stock options and warrants using the treasury stock method. Outstanding stock options and warrants are excluded from the diluted earnings per share calculation when the inclusion would be antidilutive. Inventories Inventories consist of (in thousands): January 31, 1999 April 30, 1998 ---------------- -------------- Finished goods $1,125 $ 250 Work in progress -- -- Raw materials 9 206 --------------------------- Total inventories $1,134 $ 456 =========================== Goodwill Goodwill resulted from the Isoserve, Inc., and Chemotrade GmbH and subsidiary acquisitions, and is being amortized on a straight line basis over six and twenty years, respectively. 7 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Notes payable - shareholders Two notes were issued to each of the sellers of Chemotrade GmbH and subsidiary as consideration for a portion of the purchase price. One note with an aggregate value of 1,663,000 DM ($924,000), bearing interest at 2% per month, and secured by certain accounts receivable was issued in June 1998, and repaid in August 1998. A second note for 1,500,000 DM valued at $826,000 upon issuance, and reflected at its dollar equivalent of $877,000 at January 31, 1999, bearing interest at 10%, secured by the common stock purchased by Isonics, due June 1999, was also issued in connection with the purchase. Long term debt Long term debt consists of the following (in thousands): January 31, 1999 April 30, 1998 ---------------- -------------- Bank term loan - guaranteed by the SBA $ 0 $ 40 Bank term loan 220 147 Bank term loan 437 0 Revolving line of credit 460 159 Capital leases 3 46 -------------------------- Sub-total $1,120 $ 392 Less current maturities 261 80 -------------------------- Total $ 859 $ 312 ========================== The bank term loan is collateralized by all of Isonics' U.S. assets and bears interest at the lender's prime (8.00% at January 31, 1999) plus 2.25%. Principal and interest payments are due monthly based upon forty-eight (48) monthly payments. The balance of the note is due July 2000. The bank term loan is collateralized by all of Isonics' U.S. assets and bears interest at the lender's prime (8.00% at January 31, 1999) plus 5.0%. Interest only payments were due through October 31, 1998. Commencing November 1, 1998, principal and interest payments are due monthly based upon twenty-five (25) monthly payments. The balance of the note is due July 2000. The revolving line of credit is collateralized by all of Isonics' U.S. assets and bears interest at the lender's prime (8.00% at January 31, 1999) plus 2.25%. Borrowings are limited to 35% of eligible inventory up to $500,000 and 80% of eligible accounts receivable up to $1,250,000. Interest payments are due monthly and the outstanding balance is due July 2000. 8 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Restructuring and office closure costs On October 31, 1998, the Company announced a corporate restructuring and the relocation of its headquarters to Golden, Colorado, the site of its wholly-owned subsidiary, International Process Research Corporation (Interpro). On October 31, 1998, the Company recorded a $708,000 charge of which $468,000 is related to the write-off of certain fixed assets, $132,000 to terminate certain lease agreements, and $108,000 for severance and other costs. At January 31, 1999, accrued restructuring costs totaling $133,000 are included in accrued liabilities. The Company anticipates additional charges in subsequent periods of approximately $170,000 to $260,000, related to the relocation of personnel. Significant Customers At January 31, 1999, and January 31, 1998, no one customer accounted for more than 10% of total accounts receivable. However, one customer accounted for approximately 17% of net revenues during the nine months ended January 31, 1999, and approximately 13% of net revenues during the three months ended January 31, 1999. Related party transactions The Company has a 6% ownership interest in IUT Institute GmbH ("IUT"), located in Berlin, Germany. IUT purchases certain raw materials from Chemotrade, processes the materials and sells the finished material to Chemotrade. At January 31, 1999, accounts payable totaling approximately $35,000 was due to IUT. The Company has also advanced IUT $54,000 for services to be performed in the future. During the nine months ended January 31, 1999, Chemotrade sold $308,000 of material to IUT and purchased $124,000 of material from IUT. 9 ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 price has been accounted for effective June 1, 1998, the date control was transferred. The purchase price was denominated in German Deutsche Marks, and all amounts reported below are translated at the historical conversion rate unless otherwise stated. The purchase price consideration on June 1, 1998, consisted of $2.576 million paid at closing, and $1.07 million to be paid through June 2001. Transaction costs as of January 31, 1999, were $125,000. 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 nine-month period ended January 31, 1999, and 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, and two notes. The first note of $924,000 (1,663,000 DM) bearing interest at 2% per month, was paid in August 1998, and a second note of $826,000 (1,500,000 DM) bearing interest at 10%, is due June 1, 1999. The sellers have guaranteed Chemotrade's defined pretax earnings will be at least 1,000,000 DM (the dollar equivalent of $584,000 at January 31, 1999), for the sixteen months ended April 30, 1999, and twelve months ended April 30, 2000 and 2001. If the pretax earnings of Chemotrade are less than 1,000,000 DM for the sixteen month period ended April 30,1999, or year ended April 30, 2000, the note payable valued at $826,000 upon issuance and reflected at its dollar equivalent of $877,000 at January 31, 1999 (1,500,000 DM) due June 1, 1999, will be reduced by 0.75 DM for each 1.00 DM shortfall of earnings. If Chemotrade has pretax earnings of at least 1,000,000 DM for the fiscal year ended April 30, 2001, the sellers will receive additional consideration of 500,000 DM (the dollar equivalent of $292,000 at January 31, 1999). If the pretax earnings are less than 1,000,000 DM during the twelve months ended April 30, 2001, the consideration will be reduced 0.50 DM for each 1.00 DM shortfall in earnings. The contingent consideration for the year ended April 30, 2001, will be recorded as additional goodwill upon Chemotrade meeting the pretax earnings requirement. The excess of the $3.499 million purchase price over the fair value of the tangible assets acquired, $1.712 million, less liabilities assumed of $1.598 million, $3.385 million has been allocated to goodwill and will be amortized over twenty years. The difference between the note valued at $877,000 at January 31, 1999, and $826,000 at June 30, 1998, as well as other foreign currency gains and losses have been included in foreign exchange expense in the condensed consolidated statements of operations. The Functional Currency of Chemotrade is the U.S. Dollar. 10 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 (doing business as 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 nine months ended January 31, 1999, include the operating results of Chemotrade commencing June 1, 1998, and the operating results of Interpro commencing May 1, 1998. Pro forma results of operations are as follows (in thousands, except per share data): Nine Months Ended January 31, --------------------------------- 1999 1998 ------------- ------------- Net revenues $ 12,683 $ 14,949 Gross Margin 3,065 2,834 ------------- ------------- Net income (loss) (257) (1,762) ------------- ------------- Net income (loss) per share--basic $ (0.04) $ (0.29) ============= ============= Shares used in computing per share information 6,072 6,161 Net income (loss) per share--diluted $ (0.04) $ (0.29) ============= ============= Shares used in computing per share information 6,072 6,161 11 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 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-radio active 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. 12 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Effective April 30, 1998, Isonics acquired all of the outstanding capital stock of Interpro (doing business as Colorado Minerals Research Institute.) 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. 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 labeled compounds for pharmaceutical research and drug design, as well as oxygen-18 for use in producing a radio isotope used in positron emission 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, SILC, or radio isotopes orders, and product shipments made to DZ, SILC, and radio isotope users during such quarter as was the case in certain previous quarters. 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. 13 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of net sales. The table and the discussion below should be read in conjunction with the condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.
Three Months Ended Nine Months Ended January 31, January 31, ----------------------- ---------------------- 1999 1998 1999 1998 ----- ----- ----- ----- Net revenues 100.0 % 100.0% 100.0% 100.0% Cost of revenues 80.9 65.9 80.9 68.9 ----- ----- ----- ----- Gross margin 19.1 34.1 19.1 31.1 ----- ----- ----- ----- Operating expenses: Selling, general & administrative 12.4 18.8 17.1 19.1 Research & development 3.7 11.5 6.7 11.0 Restructuring & office closure -- -- 4.9 -- ----- ----- ----- ----- Total operating expenses 16.1 30.3 28.7 30.1 ----- ----- ----- ----- Operating income (loss) 3.0 3.8 (9.6) 1.0 ----- ----- ----- ----- Other income (expense) net 0.8 1.2 (1.3) (3.1) ----- ----- ----- ----- Income (loss) before extraordinary item and income taxes 3.8 5.0 (10.9) (2.1) ----- ----- ----- ----- Income tax expense 2.7 -- 1.4 -- ----- ----- ----- ----- Income (loss) before extraordinary Item 1.1 5.0 (12.3) (2.1) ----- ----- ----- ----- Extraordinary item--loss on extinguishment of debt -- -- -- (4.8) ----- ----- ----- ----- NET INCOME (LOSS) 1.1 % 5.0% (12.3)% (6.9)% ===== ===== ===== =====
14 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Net Revenues Net revenues for the three and nine months ended January 31, 1999, were $6.670 million and $14.309 million, respectively, an increase of 239% and 171% over $1.968 million and $5.274 million for the comparable periods in the prior fiscal period. The growth on a quarterly and year-to-date basis is because of the additional net revenues from the Interpro and Chemotrade acquisitions. Net revenues from DZ decreased by approximately $67,000 for the three months ended January 31, 1999, on increased unit sales of approximately 24%. Net revenues from DZ decreased approximately $885,000 for the nine months ended January 31, 1999, on increased unit sales of approximately 4%. Average unit sales prices of DZ decreased for the three and nine months ended January 31, 1999, in comparison to the previous year's fiscal quarter and year to date period due to a less refined product being sold during the periods. Gross Margin Gross margin for the three and nine months ended January 31, 1999, decreased to approximately 19.1% and 19.1% of net revenues from approximately 34.1% and 31.1% for the same periods in the prior fiscal year. The decrease is because of reduced unit sales prices of DZ, the increased proportion of net revenues generated from contract manufacturing performed by Interpro, and stable and radio isotope revenues generated by Chemotrade which typically have lower margins. Selling, General and Administrative Expenses Selling, general and administrative expenses increased on a dollar basis to approximately $826,000, or 12.4% of net revenues for the three months ended January 31, 1999, from $369,000, or 18.8% of net revenues in the comparable period of the prior year. The dollar increase for the quarter ended January 31, 1999, was primarily attributable to the acquisition of Interpro and Chemotrade, while the percentage decrease was due primarily to increased net revenues attributable acquisition of Interpro and Chemotrade. For the nine months ended January 31, 1999, these expenses increased on a dollar basis to approximately $2,444,000, or 17.1% of net revenues from $1,005,000, or 19.1% of net revenues of the comparable period of the prior year. The dollar increase was again primarily attributable to the acquisition of Interpro and Chemotrade, as was the percentage decrease. The Company anticipates that selling, general and administrative expenses will generally remain stable or decrease in absolute dollars because of the restructuring and San Jose office closure, and may vary as a percentage of net revenues (See Restructuring and office closure). 15 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Research and Development Research and development expenses increased by approximately $23,000, or 10.1%, to $250,000 for the quarter ended January 31, 1999, from $227,000 for the comparable period in fiscal 1998, while declining on a percentage basis to 3.7% of net revenues from approximately 11.5%. For the nine months ended January 31, 1999, research and development expenses increased by approximately $383,000, or 66.1%, to $962,000 from $579,000 for the comparable period in the previous fiscal year, while decreasing on a percentage basis to 6.7% of net revenues from 11.0%. The dollar increase during the quarter and nine months ended January 31, 1999, was primarily because of 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 and nine months ended January 31, 1999, compared to the same period of the previous fiscal year was because of revenue growth associated with the Company's acquisitions. 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 remain stable (as measured in dollars), in the near term because of the timing of material usage and outside services, but may vary as a percentage of revenues. Restructuring and office closure On October 31, 1998, the Company announced a restructuring of its operations and relocation of its headquarters to Golden, Colorado, the location of its subsidiary, Interpro. The Company recorded a $708,000 charge of which $468,000 is related to the write-off of certain fixed assets, $132,000 to terminate certain lease agreements and $108,000 for severance and other costs. The Company anticipates additional charges in subsequent periods of approximately $170,000 to $260,000 related to the relocation of personnel. Restructuring and office closure costs incurred through January 31, 1999, are approximately $575,000. Other income (expense), net Other income (expense), net reflects interest expense, amortization of issuance costs, and foreign currency gains and losses. Other income, net increased by $30,000 to $53,000 for the quarter ended January 31, 1999, from other income, net of $23,000 for the comparable period of the previous fiscal year. The increase was the result of foreign currency gains from notes payable denominated in German Deutsche Marks due to the sellers of Chemotrade which was offset by an increase in interest expense. Other expense, net increased by $16,000 to $180,000 for the nine months ended January 31, 1999, from $164,000 during the comparable period of the previous fiscal year. The increase was due mainly to increased interest expense. Income taxes There was a provision for income taxes for the quarter ended January 31, 1999, because of income generated by the Company's German-based subsidiary, Chemotrade, during the quarter. The provision for the nine months ended January 31, 1999, of $197,000 was also the result of foreign taxes attributable to Chemotrade. The provision of $1,000 for the three months and $0 for the nine months ended January 31, 1998, was the result of domestic (primarily) state taxes. 16 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources The Company's principal sources of funding have been cash from operations, borrowed funds, and sales of common stock. The Company generated cash from operations of approximately $146,000 and used cash in operating activities of $285,000 during the nine months ended January 31, 1999, and 1998, respectively. Cash generated from operating activities during the nine months ended January 31, 1999, was principally the result of a net loss of $1.757 million and increases in accounts receivable, and inventory, offset by adjustments for non-cash items, primarily the write-off of fixed assets in the restructuring, depreciation and amortization, and increases in accounts payable and accrued liabilities. Cash used by operating activities during the nine months ended January 31, 1998, was principally the result of a net loss $363,000, net of adjustments for non-cash items, primarily depreciation, amortization and extraordinary loss on extinguishment of debt, and increases in accounts receivable, inventory, and other current assets. The Company's investing activities used cash of $666,000 and $72,000 for the nine months ended January 31, 1999, and 1998, respectively. Cash used during the nine months ended January 31, 1999, resulted primarily from the purchase of Chemotrade and purchase of property and equipment. Investing activities for the nine months ended January 31, 1998, were for purchases of property and equipment. Financing activities used cash of $296,000 during the nine months ended January 31, 1999, and provided cash of $1.601 million during the comparable period of the previous fiscal year. Cash used during the nine months ended January 31, 1999, resulted primarily from the payment of bank debt and notes associated with the Chemotrade acquisition, which was offset in part by proceeds from the line of credit and term loans. 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. At January 31, 1999, the Company had $228,000 of cash and cash equivalents, a decrease of $816,000 compared to $1,044,000 as of April 30, 1998. At January 31, 1999, the Company had negative working capital of $1,062,000, a decrease of $2,873,000 compared to working capital of $1,811,000 as of April 30, 1998. The decrease is primarily the result of the Company's cash payments for the acquisition of Chemotrade and the losses incurred for the nine months ended January 31, 1999. During the nine months ended January 31, 1999, the Company paid the sellers of Chemotrade $1,601,000 of cash, and has one note for $877,000 outstanding due to the sellers on June 1, 1999. On July 24, 1998, the Company obtained a $3.0 million asset based 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 through October 31, 1998; and commencing August 1, 1998, payable over twenty five months, a $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 and $742,000 of accounts payable. Chemotrade has one unsecured revolving line of credit for 400,000 DM ($234,000 at January 31, 1999). The Company is in the process of evaluating secured credit facilities for Chemotrade. 17 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 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 quarters and product shipments by the Company to DZ customers during such periods. 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. 18 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 and managerial 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 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. Mr. 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. 19 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 has implement appropriate changes to its systems to ensure Y2K compatibility. The Company believes the cost of addressing any unidentified issues with the Year 2000 Problem will not have a material adverse affect on the result of operations or financial position of the Company. Additionally, the company has evaluated the potential impact on it of a Year 200 problem on the part of its important third party vendors and has found none. 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. Based on published reports, the Company does not anticipate that the Year 2000 problem will have a material impact on its business or operations. 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 expiring September 2000, 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. 20 Part II: Other Information Item 6: Exhibits and Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended January 31, 1999. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Golden, County of Jefferson, State of Colorado, on the 16h day of March, 1999. Isonics Corporation (Registrant) By /s/James E. Alexander ---------------------------------------------------- James E. Alexander President, Chief Executive Officer and Director By /s/Brantley J. Halstead ---------------------------------------------------- Brantley J. Halstead Chief Accounting Officer and Chief Financial Officer 22 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB FOR THE PERIOD ENDED JANUARY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS APR-30-1999 MAY-01-1998 JAN-31-1999 228 0 3,389 156 1,134 5,139 1,352 (263) 9,971 6,201 859 0 0 6,364 (382) 9,971 14,309 14,309 11,575 11,575 4,114 0 236 (1,560) 197 (1,757) 0 0 0 (1,757) (.29) (.29)
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