**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

----

 

**FORM 10-QSB**

 
| (**Mark One)** |
|----------------|
|           |
| **ý**     | **  Quarterly report under  Section 13 or 15(d) of the Securities Exchange Act of 1934.** |

 

**Forthe quarterly period ended July 31, 2003**

 
| **o** | **  Transition  report under Section 13 or 15(d) of the Exchange Act.** |
|-------|-----------------------------------------------------------------------------------|

 

**Forthe transition period from          to**

 

**Commissionfile number:  001-12531**

 

**ISONICS CORPORATION**

(Exact name of small businessissuer as specified in its charter)

** **

| **California**                                                  |   | **77-0338561**                     |
|-----------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (IRS Employer  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 allreports required to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes ý  No o

 

The number of shares outstanding of theregistrant’s Common Stock, no par value, was 12,117,457 at August 31, 2003.

 

Transitional Small Business Disclosure Format(check one):

Yes o  No ý

 

 

----

 

**Isonics Corporation and Subsidiaries**

 

**TABLE OF CONTENTS**

** **

**FORM 10-QSB**

 
| Part I:    | Financial Information |
|------------|-----------------------|
|       |                  |   |
|       | Item 1:               | Financial Statements |
|       |                  |   |
|       |                  | Condensed Consolidated Balance Sheets as of  July 31, 2003 and April 30, 2003 |
|       |                  | Condensed Consolidated Statements of  Operations for the Three Month Periods  Ended July 31, 2003 and 2002 |
|       |                  | Condensed Consolidated Statements of Cash  Flows for the Three Month Periods Ended  July 31, 2003 and 2002 |
|       |                  | Notes to Condensed Consolidated Financial  Statements |
|       |                  |   |
|       | Item 2:               | Management’s Discussion and Analysis of  Financial Condition and Results of  Operations |
|       |                  |   |
|       | Item 3:               | Controls and Procedures |
|       |                  |   |
| Part  II:  | Other  Information    |
|       |                  |   |
|       | Item 2:               | Changes  in Securities and Use of Proceeds |
|       |                  |   |
|       | Item 6:               | Exhibits  and Reports on Form 8-K |
|       |                  |   |
| Signatures |
|       |                  |   |

 

2

----

 

**PartI:  Financial Information**

 

**Item1: Condensed Financial Statements**

 

**ISONICS CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands, except share amounts)**

 

**ASSETS**

 
|                                                                  |   | **(Unaudited)**    |   |                |   |
|-----------------------------------------------------------------------|--------|--------------------|--------|---------------------|--------|
|                                                                  |   | **July 31,  2003** |   | **April 30,  2003** |   |
| CURRENT ASSETS:                                                       |   |               |   |                |   |
| Cash and cash equivalents                                             |   | $                  | 606    |                | $      | 742 |   |
| Accounts receivable (net of  allowances of $30 and $29, respectively) |   | 646                |   | 711                 |   |
| Inventories                                                           |   | 798                |   | 748                 |   |
| Prepaid expenses and other  current assets                            |   | 244                |   | 246                 |   |
| Total current assets                                                  |   | 2,294              |   | 2,447               |   |
|                                                                  |   |               |   |                |   |
| LONG-TERM ASSETS                                                      |   |               |   |                |   |
| Property and equipment, net                                           |   | 565                |   | 615                 |   |
| Goodwill                                                              |   | 1,807              |   | 1,807               |   |
| Intangible assets, net                                                |   | 770                |   | 792                 |   |
| Other assets                                                          |   | 82                 |   | 86                  |   |
| Total long-term assets                                                |   | 3,224              |   | 3,300               |   |
|                                                                  |   |               |   |                |   |
| TOTAL ASSETS                                                          |   | $                  | 5,518  |                | $      | 5,747 |   |

 

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

 
|                                                                                                                                                                                                                         |   | **(Unaudited)**    |   |                |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|---------------------|--------|
|                                                                                                                                                                                                                         |   | **July 31,  2003** |   | **April 30,  2003** |   |
| CURRENT LIABILITIES:                                                                                                                                                                                                         |   |               |   |                |   |
| Current portion of obligation  under capital leases                                                                                                                                                                          |   | $                  | 49     |                | $      | 48 |   |
| Accounts payable                                                                                                                                                                                                             |   | 967                |   | 909                 |   |
| Accrued liabilities                                                                                                                                                                                                          |   | 528                |   | 396                 |   |
| Notes payable                                                                                                                                                                                                                |   | 170                |   | —              |   |
| Total current liabilities                                                                                                                                                                                                    |   | 1,714              |   | 1,353               |   |
|                                                                                                                                                                                                                         |   |               |   |                |   |
| OBLIGATION UNDER CAPITAL  LEASES, net of current portion                                                                                                                                                                     |   | 73                 |   | 86                  |   |
|                                                                                                                                                                                                                         |   |               |   |                |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                                   |   |               |   |                |   |
| Class A Preferred Stock—no par  value; 10,000,000 shares authorized; 963,666 shares issued and outstanding on  July 31, 2003 and April 30, 2003; $1,445,499 liquidation preference on July  31, 2003 and April 30, 2003 |   | 745                |   | 745                 |   |
| Common stock—no par value;  40,000,000 shares authorized; ­­12,117,457  shares issued and outstanding on July 31, 2003, and 12,113,533 shares issued  and outstanding on April 30, 2003                  |   | 11,672             |   | 11,668              |   |
| Additional paid in capital                                                                                                                                                                                                   |   | 4,362              |   | 4,362               |   |
| Deferred compensation                                                                                                                                                                                                        |   | (135               | )      | (145                | )      |
| Accumulated deficit                                                                                                                                                                                                          |   | (12,913            | )      | (12,322             | )      |
| Total stockholders’ equity                                                                                                                                                                                              |   | 3,731              |   | 4,308               |   |
|                                                                                                                                                                                                                         |   |               |   |                |   |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                             |   | $                  | 5,518  |                | $      | 5,747 |   |

 

See notes to condensed consolidated financialstatements.

 

3

----

 

**ISONICS CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(in thousands, except per share data)**

**(Unaudited)**

 
|                                             |   | **Three  Months Ended  July 31,** |   |
|--------------------------------------------------|--------|-----------------------------------|--------|
|                                             |   | **2003**                          |   | **2002** |   |
| Revenues                                         |   | $                                 | 2,285  |   | $ | 2,241 |   |
| Cost of revenues                                 |   | 1,730                             |   | 1,656 |   |
| Gross margin                                     |   | 555                               |   | 585 |   |
|                                             |   |                              |   |   |   |
| Operating expenses:                              |   |                              |   |   |   |
| Selling, general and  administrative             |   | 1,083                             |   | 1,160 |   |
| Research and development                         |   | 65                                |   | 61 |   |
| Total operating expenses                         |   | 1,148                             |   | 1,221 |   |
|                                             |   |                              |   |   |   |
| Operating loss                                   |   | (593                              | )      | (636 | ) |
|                                             |   |                              |   |   |   |
| Other income (expense):                          |   |                              |   |   |   |
| Gain on legal settlement, net                    |   | —                            |   | 2,140 |   |
| Amortization of debt offering  costs             |   | —                            |   | (182 | ) |
| Foreign exchange                                 |   | (15                               | )      | (49 | ) |
| Interest and other income                        |   | 24                                |   | 35 |   |
| Interest expense                                 |   | (7                                | )      | (556 | ) |
| Total other income (expense),  net               |   | 2                                 |   | 1,388 |   |
| Income (loss) before income  taxes               |   | (591                              | )      | 752 |   |
| Income tax expense                               |   | —                            |   | — |   |
| NET INCOME (LOSS)                                |   | $                                 | (591   | ) | $ | 752 |   |
|                                             |   |                              |   |   |   |
| **Net income (loss) per share—basic**       |   |                              |   |   |   |
| Net income (loss) per share                      |   | $                                 | (.05   | ) | $ | .07 |   |
| Shares used in computing per  share information  |   | 12,115                            |   | 10,950 |   |
|                                             |   |                              |   |   |   |
| **Net income (loss) per share**—**diluted** |   |                              |   |   |   |
| Net income (loss) per share                      |   | $                                 | (.05   | ) | $ | .06 |   |
| Shares used in computing per  share information  |   | 12,115                            |   | 12,524 |   |

 

See notes to condensed consolidated financialstatements.

 

4

----

 

**ISONICS CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)**

**(Unaudited)**

 
|                                                                    |   | **Three  Months Ended July 31,** |       |
|-------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                    |   | **2003**                         |       | **2002** |   |
|                                                                    |   |                             | ** ** |   | ** ** |
| Net cash provided by (used in)  operating activities                    |   | $                                | (298       | ) | $ | 1,737 |   |
|                                                                    |   |                             |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                  |   |                             |       |   |   |
| Purchases of property and  equipment                                    |   | —                           |       | (2 | ) |
| Cash used in investing  activities                                      |   | —                           |       | (2 | ) |
|                                                                    |   |                             |       |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                  |   |                             |       |   |   |
| Payments on borrowings                                                  |   | —                           |       | (25 | ) |
| Proceeds from issuance of notes  payable                                |   | 170                              |       | — |   |
| Proceeds from issuance of  common stock                                 |   | 4                                |       | 1 |   |
| Principal payments under  capital lease obligations                     |   | (12                              | )          | — |   |
| Cash provided by (used in)  financing activities                        |   | 162                              |       | (24 | ) |
|                                                                    |   |                             |       |   |   |
| NET INCREASE (DECREASE) IN CASH  AND CASH EQUIVALENTS:                  |   | (136                             | )          | 1,711 |   |
| Cash and cash equivalents at  beginning of period                       |   | 742                              |       | 725 |   |
| Cash and cash equivalents at  end of period                             |   | $                                | 606        |   | $ | 2,436 |   |
|                                                                    |   |                             |       |   |   |
| Supplemental disclosure of cash  flow information:                      |   |                             |       |   |   |
| Cash paid during the period  for:                                       |   |                             |       |   |   |
| Interest                                                                |   | $                                | 4          |   | $ | 13 |   |
| Income taxes                                                            |   | $                                | —     |   | $ | — |   |
|                                                                    |   |                             |       |   |   |
| Supplemental disclosure of  noncash investing and financing activities: |   |                             |       |   |   |
|                                                                    |   |                             |       |   |   |
| Series 2002A Convertible Notes  converted into common stock             |   | $                                | —     |   | $ | 1,000 |   |

 

See notes to condensed consolidated financialstatements.

 

5

----

 

**ISONICS CORPORATION AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

***Basis ofPresentation***

 

Theaccompanying unaudited condensed consolidated financial statements of IsonicsCorporation and Subsidiaries as of July 31, 2003, and for the three monthsended July 31, 2003 and 2002 have been prepared on the same basis as the annualaudited financial statements.  In theopinion of management, such unaudited information includes all adjustments(consisting only of normal recurring accruals) necessary for a fairpresentation of this interim information. Operating results and cash flows for interim periods are not necessarilyindicative of results for the entire year. The information included in this report should be read in conjunctionwith our audited financial statements and notes thereto (which include anopinion from Grant Thornton LLP that expresses substantial doubt regarding ourability to continue as a going concern) included in our Annual Report on Form10-KSB for the year ended April 30, 2003.

 

***Realization of Assets***

 

The accompanying condensedconsolidated financial statements have been prepared in conformity withaccounting principles generally accepted in the United States of America, whichcontemplate our continuation as a going concern.  However, we have sustained substantial losses from operations inrecent years, and such losses have continued through August 31, 2003.  In addition, historically we have used,rather than provided, cash in our operations, and have been unable to secureadequate financing to meet our future cash needs.

 

In view of the mattersdescribed in the preceding paragraph, recoverability of a major portion of therecorded asset amounts shown in the accompanying balance sheet is dependentupon our continued operations, which in turn is dependent upon our ability tomeet our financing requirements on a continuing basis, to maintain presentfinancing, and to succeed in our future operations.  The condensed consolidated financial statements do not includeany adjustments relating to the recoverability and classification of recordedasset amounts or amounts and classification of liabilities that might benecessary should we be unable to continue in existence.

 

We continue to pursue fundingthat will help us meet our future cash needs. We are currently working with several different sources, including bothstrategic and financial investors (including Quivira Venture Partners), inorder to raise sufficient capital to finance both our continuing operations andour recently acquired isotope-based trace detection technology.  Although there is no assurance that additionalfunding will be available, we believe that our current business plan, ifsuccessfully funded, will significantly improve our operating results and cashflow in the future.

 

***Accounting for Stock-Based Compensation***

 

We account for stock-basedcompensation to employees and directors using the intrinsic value method inaccordance with Accounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees*andrelated interpretations, as permitted by SFAS No. 123 *Accountingfor Stock-Based Compensation*,as amended.  Compensation expensefor stock options is measured as the excess, if any, of the quoted market priceof our stock at the date of grant over the amount an employee must pay toacquire the stock.  No stock-basedemployee compensation costs relating to options is reflected within our netloss as all options granted had an exercise price equal to or greater than themarket value of the underlying common stock on the date of grant.  We record compensation expense forrestricted stock awards based on the quoted market price of our stock at thedate of the grant and the vesting period.

 

6

----

 

The following table illustratesthe effect on net loss and net loss per share if we had applied the fair valuerecognition provisions of SFAS No. 123 to stock-based compensation (inthousands, except per share data):

 
|                                                                                                                                 |   | **Three  Months Ended  July 31,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                                 |   | **2003**                          |   | **2002** |   |
| Net income (loss), as reported                                                                                                       |   | $                                 | (591   | ) | $ | 752 |   |
| Deduct: Total stock-based  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (60                               | )      | (51 | ) |
| Adjusted net income (loss)                                                                                                           |   | $                                 | (651   | ) | $ | 701 |   |

* *
|                        |   | **Three  Months Ended  July 31,** |   |
|-----------------------------|--------|-----------------------------------|--------|
|                        |   | **2003**                          |   | **2002** |   |
| Net income (loss) per share |   |                              |   |   |   |
| Basic – as reported    |   | $                                 | (.05   | ) | $ | .07 |   |
| Basic – adjusted       |   | $                                 | (.05   | ) | $ | .06 |   |
| Diluted – as reported  |   | $                                 | (.05   | ) | $ | .06 |   |
| Diluted – adjusted     |   | $                                 | (.05   | ) | $ | .06 |   |

 

***Net Income (Loss)Per Share***

 

Basicnet income (loss) per share is computed using the weighted average number ofcommon shares outstanding during the period. Contingently issued shares are included in the computation of basic netincome (loss) per share when the related conditions are satisfied.  Diluted net income (loss) per share iscomputed using the weighted average number of common shares and potentiallydilutive securities outstanding during the period.  Potentially dilutive securities consist of contingently issuedshares, the common shares issuable upon conversion of preferred stock orconvertible debt (using the “if converted” method) and shares issuable upon theexercise of stock options and common stock warrants (using the “treasury stock”method).  Potentially dilutivesecurities are excluded from the computation if their effect is anti-dilutive.

 

Thefollowing table reconciles the denominator for the diluted net income (loss)per share computation (in thousands):

** **
|                                                                                                                  |   | **Three  Months Ended  July 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                  |   | **2003**                          |   | **2002** |   |
| Denominator for basic net  income (loss) per share – weighted average shares                                     |   | 12,115                            |   | 10,950 |   |
|                                                                                                                  |   |                              |   |   |   |
| Effect of dilutive securities:                                                                                        |   |                              |   |   |   |
| Dilutive effect of conversion  of preferred stock                                                                     |   | —                            |   | 1,465 |   |
| Dilutive effect of stock  options                                                                                     |   | —                            |   | 109 |   |
| Denominator for diluted net  income (loss) per share – adjusted weighted-average shares and assumed  conversions |   | 12,115                            |   | 12,524 |   |

 

7

----

 

As of July 31, 2003, a total of5,182,840 outstanding stock options and common stock warrants and 963,666outstanding shares of Class A Convertible Preferred Stock were excluded fromthe diluted net income (loss) per share calculation, as the inclusion would beanti-dilutive.  As of July 31, 2002, atotal of 4,213,743 outstanding stock options and common stock warrants and883,000 common shares related to the $1,000,000 in face value of Series 2002AConvertible Notes converted during the three months ended July 31, 2002, wereexcluded from the diluted net income (loss) per share calculation, as theinclusion would be anti-dilutive.

 

During the three month periodended July 31, 2003, we issued the following shares of common stock:

 
| **Description**                                  |   | **Number of  Common Stock Shares** |   |
|--------------------------------------------------|--------|------------------------------------|--------|
| Balance as of April 30, 2003                     |   | 12,113,533                         |   |
| Shares issued from employee  stock purchase plan |   | 3,924                              |   |
| Balance as of July 31, 2003                      |   | 12,117,457                         |   |

 

The aforementioned equity transactions increased common stock in theaccompanying condensed consolidated balance sheets by $4,000 for the threemonths ended July 31, 2003.

 

***Inventories***

 

Inventories consist of (in thousands):

 
|                   |   | **July 31,  2003** |   | **April 30,  2003** |   |
|------------------------|--------|--------------------|--------|---------------------|--------|
| Finished goods         |   | $                  | 371    |                | $      | 312 |   |
| Work in process        |   | 406                |   | 414                 |   |
| Materials and supplies |   | 21                 |   | 22                  |   |
| Total inventories      |   | $                  | 798    |                | $      | 748 |   |

 

***Significantcustomers***

 

As of July 31, 2003, three customers accounted for approximately 48% oftotal net accounts receivable.  Threecustomers accounted for approximately 46% of total net accounts receivable atApril 30, 2003.  Two customers (EasternIsotopes and Perkin Elmer Life Sciences) accounted for approximately 31% and11%, respectively, of revenues for the three months ended July 31, 2003.  Two customers (Perkin Elmer Life Sciencesand Eastern Isotopes) accounted for approximately 22% and 20%, respectively, ofrevenues for the three months ended July 31, 2002.  Three customers (Perkin Elmer Life Sciences, IBT SA, and IdahoIsotopes) accounted for approximately 44%, 24%, and 15%, respectively, of theGerman operation’s revenues for the three months ended July 31, 2003.  Two customers (Perkin Elmer Life Sciencesand Reviss Ltd.) accounted for approximately 45% and 23%, respectively, of theGerman operation’s revenues for the three months ended July 31, 2002.  Two customers accounted for approximately74% of the German operation’s accounts receivable at July 31, 2003.  Two customers accounted for approximately52% of the German operation’s accounts receivable at April 30, 2003.

 

***BusinessSegments and Foreign Operations***

 

We currently have tworeportable segments: life sciences and semiconductor materials andproducts.  Our life sciences segmentsells stable and radioisotopes in elemental and simple compound forms for usein life sciences applications.  Oursemiconductor materials and products segment sells SOI wafers and is involvedin several research and development projects including silicon-28.  Reconciling items consist primarily of

 

8

----

 

corporate expenses that havenot been allocated to a specific reportable segment. Amounts for the threemonths ended July 31, 2002 have been reclassified to conform with the currentyear presentation.

 

Information by segment is set forth below (in thousands):

 
|                                  |   | **Three  Months Ended  July 31,** |   |
|---------------------------------------|--------|-----------------------------------|--------|
|                                  |   | **2003**                          |   | **2002** |   |
| Segment revenues:                     |   |                              |   |   |   |
| Life sciences                         |   | $                                 | 2,022  |   | $ | 2,229 |   |
| Semiconductor materials and  products |   | 263                               |   | 12 |   |
| Total                                 |   | $                                 | 2,285  |   | $ | 2,241 |   |

 
|                                  |   | **Three  Months Ended  July 31,** |   |
|---------------------------------------|--------|-----------------------------------|--------|
|                                  |   | **2003**                          |   | **2002** |   |
| Segment operating (loss)  income:     |   |                              |   |   |   |
| Life sciences                         |   | $                                 | 166    |   | $ | 262 |   |
| Semiconductor materials and  products |   | (132                              | )      | (133 | ) |
| Reconciling amounts                   |   | (627                              | )      | (765 | ) |
| Total                                 |   | $                                 | (593   | ) | $ | (636 | ) |

 
|                                  |   | **July 31, 2003** |   | **April 30, 2003** |   |
|---------------------------------------|--------|-------------------|--------|--------------------|--------|
| Total Assets:                         |   |              |   |               |   |
| Life sciences                         |   | $                 | 3,600  |               | $      | 3,807 |   |
| Semiconductor materials and  products |   | 1,132             |   | 1,193              |   |
| Reconciling amounts                   |   | 786               |   | 747                |   |
| Total                                 |   | $                 | 5,518  |               | $      | 5,747 |   |

 

A summary of operations by geographic area isas follows:

 
|          |   | **Three  Months Ended  July 31,** |   |
|---------------|--------|-----------------------------------|--------|
|          |   | **2003**                          |   | **2002** |   |
| Revenues:     |   |                              |   |   |   |
| United States |   | $                                 | 1,731  |   | $ | 1,595 |   |
| Germany       |   | 554                               |   | 646 |   |
| Total         |   | $                                 | 2,285  |   | $ | 2,241 |   |

 
|                     |   | **Three  Months Ended  July 31,** |   |
|--------------------------|--------|-----------------------------------|--------|
|                     |   | **2003**                          |   | **2002** |   |
| Operating (loss) income: |   |                              |   |   |   |
| United States            |   | $                                 | (579   | ) | $ | (613 | ) |
| Germany                  |   | (14                               | )      | (23 | ) |
| Total                    |   | $                                 | (593   | ) | $ | (636 | ) |

 

9

----

 
|          |   | **July 31, 2003** |   | **April 30, 2003** |   |
|---------------|--------|-------------------|--------|--------------------|--------|
| Total Assets: |   |              |   |               |   |
| United States |   | $                 | 2,796  |               | $      | 2,956 |   |
| Germany       |   | 2,722             |   | 2,791              |   |
| Total         |   | $                 | 5,518  |               | $      | 5,747 |   |

 

***ConsultingAgreement with Investor Relations Services, Inc.***

 

On December 18, 2001 we entered into aone-year consulting agreement with Investor Relations Services, Inc. (“IRSI”)whereby we issued 500,000 shares of restricted common stock for consultingservices consisting of financial advisory, strategic business planning andinvestor and public relations services. The shares of restricted common stock vested immediately and wereconsidered full payment for services (including IRSI expenses) to be performedduring the first six months of calendar 2002. During the last six

months of calendar 2002 IRSI was to act as anadvisor but to the extent that we requested IRSI to incur any expenses on ourbehalf, we would have been required to reimburse IRSI for such costs.

 

On July 1, 2002 we amended the agreementwhereby we issued 250,000 shares of restricted common stock (valued at $247,500based upon the fair market value of the stock) so that IRSI would continue toperform consulting services consisting of financial advisory, strategicbusiness planning and investor and public relations services.  The shares of restricted common stock vestedimmediately and were considered full payment for services (including IRSIexpenses) to be performed during the last six months of calendar 2002.  In August 2002, the contract was terminateddue to nonperformance by IRSI and as a result, effective as of July 1, 2002,the 250,000 shares of restricted common stock were cancelled and returned tothe “authorized, unissued” category.

 

During October 2002 and again in August 2003,IRSI disputed our termination of the agreement based upon nonperformance andrequested to mediate the matter.  OnSeptember 11, 2003, we entered into a verbal agreement whereby we agreed tosettle the dispute in its entirety by issuing to IRSI 100,000 shares of ourrestricted common stock (valued at $94,000 based upon the fair market value ofthe stock).  As a result of thesettlement, we have accrued the $94,000, which is included in accruedliabilities in the accompanying condensed consolidated balance sheets.

 

***RelatedParty Transactions***

 

On July 30, 2003, we entered into anagreement with our Vice President of Life Sciences whereby he loaned us$80,000, which is included in notes payable in the accompanying condensedconsolidated balance sheets.  The loanbore interest at a rate of 12% per annum and was repaid on August 4, 2003.

 

On August 26, 2003, we entered into anagreement with our Vice President of Life Sciences whereby he loaned us$120,000.  The loan bore interest at arate of 12% per annum and was repaid on September 11, 2003.

 

On September 9, 2003, we entered into anagreement with our Vice President of Semiconductor Materials and Productswhereby he loaned us $100,000.  The loanbore interest at a rate of 12% per annum and was repaid on September 11, 2003.

 

10

----

 

***LeaseAgreement***

 

In August 2003, we entered into amonth-to-month lease (at a rate of $2,800 per month) with the Colorado Schoolof Mines Research Institute to continue leasing office and storage space at ourcurrent location.

 

***New Accounting Standards***

 

In May 2003, the FASB issuedSFAS No. 150, *Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity*whichwas effective for financial instruments entered into or modified after May 31,2003, and otherwise was effective for us as of August 1, 2003.  SFAS No. 150 changes the classification inthe condensed consolidated balance sheets of certain common financialinstruments from either equity or mezzanine presentation to liabilitiespresentation, and requires an issuer of those financial statements to recognizechanges in fair value or redemption amounts as applicable in earnings.  The adoption of SFAS No. 150 did not have amaterial impact on our condensed consolidated financial statements.

 

We have reviewed all otherrecently issued, but not yet effective, accounting pronouncements and do notbelieve any such pronouncements will have a material impact on our condensedconsolidated financial statements.

 

11

----

 

**Item2: Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

 

*The statements contained in this Report onForm 10-QSB that are not purely historical are forward looking statementswithin the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934, including statements regarding ourexpectations, hopes, intentions or strategies regarding the future.  Forward-looking statements include:statements regarding future products or product development; statementsregarding future selling, general and administrative costs and research anddevelopment spending and our product development strategy; and statementsregarding future capital expenditures and financing requirements.  All forward-looking statements included inthis document are based on information available to us on the date hereof, andwe undertake no obligation to update any such forward-looking statements.  It is important to note that our actualresults could differ materially from those in such forward-looking statements.*

 

***General Discussion***

 

Founded in 1992, we are anadvanced materials and technology company. We are developing and we anticipate commercializing products createdfrom materials whose natural isotopic ratios have been modified as well asnon-isotopic (natural) materials.  Anisotope is one of two or more species (or nuclides) of the same chemicalelement that differ from one another only in the number of neutrons in theatom’s nucleus.  The different number ofneutrons can create significantly different nuclear properties.  The most well-known of these properties isradioactivity.  Radioactive isotopes (orradioisotopes) can be found in nature. Most of our radioisotopes, however, are man-made.  Stable isotopes, as distinguished fromradioisotopes, are not radioactive.

 

Several manufacturers, locatedprimarily in republics that once were part of the Soviet Union, produceradioactive and stable isotopes.  We buythese isotopes from the manufacturers and resell them in the form of commonchemical compounds.  For example,oxygen-18 is sold as water, and zinc-68 is sold as zinc oxide.  Today our business addresses the materialneeds of two primary markets:

 

•                  Life sciences(involving isotopic materials) and

•                  Semiconductormaterials and products (including both isotopic and non-isotopic materials).

 

While we are currently focusingon these two markets, we continue to evaluate other applications for bothstable and radioisotopes and non-isotopic materials.  In November 2002, we commenced manufacturing silicon-on-insulator(“SOI”) wafers in our own manufacturing facility.  In December 2002 we acquired certain isotope-based tracedetection technology that can be used to detect explosives and chemical andbiological weapons.  If and when webegin sales of these products, we expect these products to constitute a thirdmarket (the homeland security market) for our products.

 

We also sell isotopes for usein basic scientific research and industrial applications.  We believe our core competency is ourability to identify, develop, source, and commercialize products and servicesbased on isotopically engineered materials as well as non-isotopic semiconductormaterials.

 

Our revenues in the future willdepend on our success in developing and selling products in the semiconductorand stable and radioactive isotope markets. Consistent with our historical experience, our quarterly results havebeen materially affected by the size, timing, and quantity of orders andproduct shipments during a given quarter. In addition, our quarterly results have been significantly impacted byone-time events including the July 2002 settlement of the Eagle-PicherTechnologies, LLC (“Eagle-Picher”) dispute and sale of Chemotrade Leipzig(“CTL”).  We cannot offer any assurancethat these types of events will occur in the future.

 

12

----

 

***Results of Operations***

 

The following table sets forth,for the periods indicated, certain statement of operations data expressed as apercentage of revenues.  The table andthe discussion below should be read in conjunction with the condensedconsolidated financial statements and the notes thereto appearing elsewhere inthis report.

 
|                                 |   | **Three  Months Ended  July 31,** |       |
|--------------------------------------|--------|-----------------------------------|------------|
|                                 |   | **2003**                          |       | **2002** |   |
|                                 |   |                              | ** ** |   | ** ** |
| Revenues                             |   | 100.0                             | %          | 100.0 | % |
| Cost of revenues                     |   | 75.7                              |       | 73.9 |   |
| Gross margin                         |   | 24.3                              |       | 26.1 |   |
|                                 |   |                              |       |   |   |
| Operating expenses:                  |   |                              |       |   |   |
| Selling, general and  administrative |   | 47.4                              |       | 51.8 |   |
| Research and development             |   | 2.8                               |       | 2.7 |   |
| Total operating expenses             |   | 50.2                              |       | 54.5 |   |
| Operating loss                       |   | (25.9                             | )          | (28.4 | ) |
|                                 |   |                              |       |   |   |
| Other income (expense), net          |   | —                            |       | 61.9 |   |
| Income (loss) before income  taxes   |   | (25.9                             | )          | 33.5 |   |
| Income tax expense                   |   | —                            |       | — |   |
| NET INCOME (LOSS)                    |   | (25.9                             | )%         | 33.5 | % |

 

***Revenues***

 

Revenuesincreased from $2,241,000 for the three months ended July 31, 2002 to$2,285,000 for the three months ended July 31, 2003, an increase of $44,000 or2.0%.  The increase is due to $263,000of semiconductor materials and products sales for the three months ended July31, 2003 as compared to $12,000 for the three months ended July 31, 2002,partially offset by a decrease in isotope product sales.  Included in semiconductor materials andproducts revenues for the three months ended July 31, 2003 is a $200,000 saleof silicon-28 as a bulk isotope.

 

Revenuesfrom domestic isotope product sales for the three months ended July 31, 2003were $1,468,000, a decrease of 7.3%, or $115,000, from $1,583,000 for the three months ended July 31, 2002.  The decrease was primarily the result of asignificant decrease in the sale of radioisotopes partially offset by anincrease in the sale of stable isotopes.

 

Revenuesfrom international isotope product sales for the three months ended July 31,2003 were $554,000, a decrease of 14.2%, or $92,000, from $646,000 for thethree months ended July 31, 2002.  Thedecrease was primarily the result of a significant decrease in sales of onespecific radioisotope due to a worldwide decrease in demand.  It is uncertain as to if the demand for thisradioisotope will return to previous levels.

 

13

----

 

We do not anticipatesignificant revenues from sales of silicon-28 based products in fiscal 2004(although we have completed a $200,000 transaction for the sale of silicon-28as a bulk isotope in the quarter ended July 31, 2003).  We are collaborating with academia andindustry to evaluate the benefits of isotopically- pure silicon-28.  We believe that if evaluations demonstratethe commercial feasibility of one or more products, demand could emerge in thehigh-performance micro-processor segment of the semiconductor market.  We can offer no assurance, however, thatthese evaluations will demonstrate the commercial feasibility of any products,that we will be able to commercialize any such products, or that a market willemerge for any such products.

 

***Gross Margin***

 

Grossmargin for the three months ended July 31, 2003 was $555,000, a decrease of5.1%, or $30,000, from $585,000 for the three months ended July 31, 2002.  On a percentage of revenues basis, grossmargin decreased 1.8 percentage points to 24.3%, for the three months endedJuly 31, 2003, from 26.1%, for the three months ended July 31, 2002.  The dollar decrease is directly attributableto a decrease in both domestic and international isotope product salespartially offset by an increase in gross margin generated from the sale ofsemiconductor materials and products. The percentage of revenues decrease is due to a decrease in highermargin domestic isotope sales and an increase in lower margin semiconductormaterials and products sales partially offset by a decrease in lower margininternational isotope sales.  Weanticipate that the gross margin from sales of semiconductor materials andproducts (both in dollar value and as a percentage of revenues) will increaseover time as sales increase and minimize the overall effect of fixed costs, butwe can offer no assurances that this will come to fruition.

 

***Selling, General andAdministrative Expenses***

 

Selling,general and administrative expenses decreased $77,000, to $1,083,000, for thethree months ended July 31, 2003, from $1,160,000, for the three months endedJuly 31, 2002.  On a percentage of revenuesbasis, selling, general and administrative expenses decreased 4.4 percentagepoints to 47.4%, for the three months ended July 31, 2003, from 51.8%, for thethree months ended July 31, 2002.  Thedollar decrease is primarily related to a decrease in legal costs associatedwith the Eagle-Picher dispute and a decrease in other professional servicespartially offset by an increase in headcount and facility costs related to thesemiconductor materials and products business segment.  The percentage decrease is also attributableto a decrease in legal costs associated with the Eagle-Picher dispute, adecrease in other professional services and an increase in revenues partiallyoffset by an increase in headcount and facility costs related to the semiconductormaterials and products business segment.

 

Ifwe are able to obtain the necessary funding, we anticipate that we willincrease our selling, general and administrative expenses during the yearending April 30, 2004 through anticipated increased marketing efforts for oursemiconductor materials and products segment and in an effort to market theisotope-based trace detection technology that we recently acquired fromIUT.  There can be no assurance that ouranticipated increased selling, general and administrative expenses will resultin increased revenues from product sales.

 

14

----

 

***Research andDevelopment Expenses***

 

Consistent with our productdevelopment strategy, we are seeking to identify and evaluate new stable andradioactive isotope products and potential markets for economic and technicalfeasibility.  We do not anticipateincurring any research and development costs associated with the technologythat we recently acquired from the Institut of Umwelttechnologien GmbH (“IUT”)in the second quarter of the year ending April 30, 2004.  We anticipate that we may incur significantresearch and development costs associated with this technology later in theyear ending April 30, 2004 only if we are able to obtain additionalfinancing.  We will, in addition,continue funding research and development to improve technologies for isotopeseparation and material processing technologies.  Because of the uniqueness of our business, the unique chemicalsand processes we deal with and the handling precautions required, theseexpenses can be significant.  We cannotoffer any assurance that our current or future lines of business or productsresulting from our research and development efforts will be profitable orgenerate significant revenues.

 

Research and developmentexpenses increased $4,000, to $65,000, for the three months ended July 31,2003, from $61,000, for the three months ended July 31, 2002.  On a percentage of revenues basis, researchand development expenses increased .1 percentage point to 2.8% for the threemonths ended July 31, 2003, from 2.7%, for the three months ended July 31,2002.

 

We believe that the developmentand introduction of new product applications is critical to our futuresuccess.  We expect that research anddevelopment expenses may increase assuming sufficient cash remains availableand we are able to procure necessary materials and outside services, but willlikely continue to vary as a percentage of revenues because of the timing andamount of future revenues.  Except forwork being performed at our facilities in Vancouver, Washington, we operate noother facilities of our own for research and development.  All other research and development work isperformed by outside entities, none of which we control.  None of the companies that currently performresearch and development work for us does so on an exclusive basis.

 

***Other Income (Expense), net***

 

Other income (expense), netincludes net gains from a legal settlement, amortization of debt offeringcosts, gains or losses on the sale of lines of businesses or subsidiaries,interest income and expense, and foreign currency gains and losses.  Other income (expense), net decreased$1,386,000, to $2,000, for the three months ended July 31, 2003, from $1,388,000,for the three months ended July 31, 2002. The decrease is primarily attributable to the gain (net of thecontingency portion of legal fees) of $2,140,000 related to the settlement ofthe Eagle-Picher dispute partially offset by the expensing of $546,000 ofpreviously unamortized discount related to the Series 2002A Convertible Notesto interest expense and $182,000 of previously capitalized debt offering costsas a result of the conversion of the notes to common stock recognized duringthe three months ended July 31, 2002.

 

***Income Taxes***

 

We currently operate at a lossand expect to operate at a loss until revenues increase from our currentoperations or until the products currently under development begin to generatesufficient revenue.  The losses weanticipate incurring during the remaining portion of the current year are notexpected to generate an income tax benefit because of the uncertainty of therealization of the deferred tax asset. As a result, we have provided a valuation allowance against our netdeferred tax assets as realization is uncertain.

 

15

----

 

***Net Income (Loss)***

 

We recognized a net loss of$591,000 for the three months ended July 31, 2003, as compared to net income of$752,000 for the three months ended July 31, 2002.  We anticipate that losses will continue until revenues increasefrom our current operations or until we generate revenues from productsintroduced as a result of our research and development projects.

 

Net income in future years willbe dependent upon our ability to increase net revenues faster than we increaseour selling, general and administrative expenses, research and developmentexpense and other expenses.  Assuming weobtain the necessary funding, we anticipate expanding our SOI operations andgenerating additional revenues during the remainder of the year ending April30, 2004.  However, because of ourcontinuing research and development efforts on new products (possibly includingproducts based on our homeland security technology), we anticipate that ouroperations during the year ending April 30, 2004 will result in a loss since weare not likely to increase our revenues from our existing products or generateadditional sales from the new products we may develop in a sufficient amount(if at all) to offset our operating expenses.

 

***Liquidity and Capital Resources***

 

Our working capital andliquidity have eroded significantly during the three months ended July 31,2003.  Working capital decreased$514,000, to $580,000 at July 31, 2003, from $1,094,000, at April 30, 2003.

 

Our principal sources offunding for the three months ended July 31, 2003 and 2002 have been from thesettlement of the Eagle-Picher dispute, short term loans and proceeds from thesale of shares under our employee stock purchase program.  We used cash in operating activities of$298,000 during the three months ended July 31, 2003 and provided cash fromoperating activities of $1,737,000 during the three months ended July 31,2002.  Cash used in operating activitiesduring the three months ended July 31, 2003 was principally the result of a netloss of $591,000.  Cash provided byoperating activities for the three months ended July 31, 2002 was principallythe result of the settlement of the Eagle-Picher dispute partially offset byoperating losses.

 

Our investing activities usedcash of zero and $2,000 for the three months ended July 31, 2003 and 2002,respectively.  Cash used in investingactivities for the three months ended July 31, 2002 resulted from purchases ofproperty and equipment.

 

Financing activities providedcash of $162,000 for the three months ended July 31, 2003 and used cash of$24,000 for the three months ended July 31, 2002. Cash provided by financingactivities for the three months ended July 31, 2003 resulted principally fromshort-term working capital loans.  Cashused in financing activities for the three months ended July 31, 2002 resultedprimarily from payments on borrowings of $25,000.

 

At July 31, 2003, we had$606,000 of cash and cash equivalents, a decrease of $136,000, as compared to$742,000, at April 30, 2003.

 

16

----

 

Our stock was trading at pricessignificantly below the $1.00 per share Nasdaq minimum bid price requirement attimes during the last half of the calendar year ended December 31, 2002 and hasagain at times been trading below $1.00 per share since late February2003.  We have received notificationfrom Nasdaq that we are not in compliance with the $1.00 minimum bid pricerequirement.  We have been provideduntil February 23, 2004 to come into compliance, meaning a minimum of 10consecutive trading days with a closing bid price at $1.00 or more per share.  The volatility of our stock price, ourcurrent price which is significantly below $1.00 per share, and our financialcondition may result in our failing to meet Nasdaq’s requirements.  As a result, we could potentially be at riskof Nasdaq action to remove our securities from its SmallCap market.  We cannot give any assurance that we will beable to meet the Nasdaq requirements to maintain our SmallCap listing, or thatif we do, a stable trading market will develop for our stock.

 

In general, we expect that ourworking capital will decrease over time as we continue to use our capital andcash flows from revenues for operations, research and development, andinvesting activities.  We do not expectworking capital to increase until we are able to increase our revenues toexceed our cash out-flow (assuming we are able to increase our revenues) orcomplete a financing arrangement.  Withour anticipated revenues from operations during the period and projecting ourcash flow on the basis of our historical expenditures, we have sufficient cashavailable to fund our short-term working capital requirements into October2003.

 

We are currently working withseveral different sources, including both strategic and financial investors(including Quivira Venture Partners), in order to raise sufficient capital tofinance both our continuing operations and our proposed homeland securitybusiness through the use of the isotope-based trace detection technology weacquired from IUT.  Although there is noassurance that funding will be available, we believe that our current businessplan, if successfully funded, will significantly improve our operating resultsand cash flow in the future.

 

***Critical Accounting Policies***

 

The material accounting policies that webelieve are the most critical to an investor’s understanding of our financialresults and condition and require complex management judgment have beenexpanded and are discussed below.

 

*Goodwilland Intangible Assets*

 

Effective May 1, 2002 we adopted SFAS No. 142*Goodwill and Other Intangible Assets.*  SFAS No. 142 addresses the methods used toamortize intangible assets and to assess impairment of those assets, includinggoodwill resulting from business combinations accounted for under the purchasemethod.  Although we adopted SFAS No.142 effective May 1, 2002, goodwill and intangible assets other than goodwillacquired after June 30, 2001 have been amortized or not amortized in accordancewith SFAS 142.  We acquired intangibleassets from Silicon Evolution, Inc. (“SEI”) and IUT subsequent to June 30,2001, and have accounted for those assets in accordance with the requirementsof SFAS No. 142.  Included in our assetsat July 31, 2003, is goodwill related to the acquisition of Chemotrade in 1998with a net carrying value of $1,807,000. Effective with the adoption of SFASNo. 142, we no longer amortize this goodwill, decreasing our amortizationexpense by approximately $110,000 per year.

 

17

----

 

In accordance with SFAS No. 142, we havecompleted our annual impairment test on our life sciences reporting unit, whichhas recorded goodwill.  In completingour analysis of the life sciences reporting unit, we used the Discounted CashFlow Method (“DCF Method”) in which the reporting unit was valued bydiscounting the projected cash flows to its present value based upon a riskadjusted discount rate.  As a result ofthe testing, we determined that there is no impairment of goodwill.  We are required to assess goodwill forimpairment annually, or earlier if indicators of impairment do arise.  We are not aware of any indicators ofpossible impairment as of September 15, 2003.

 

In performing the calculation under SFAS No.142, we made several assumptions, including the use of the DCF Method, thenumber of years used in the projection, the discount rate and growthassumptions.  Had we elected to usedifferent variables, the outcome of the calculation could have been different.

 

We utilized the DCF Method in order tocalculate the fair value of our life sciences reporting unit.  We had the option to utilize the marketcapitalization method but given the complexity of our business, we determinedthat we couldn’t reasonably bifurcate the market value of the life sciencesreporting unit from our other operations based upon our market value as awhole.  In utilizing the DCF method, webased our calculation over a conservative six-year life with no projectedgrowth over the final four years.  Thefinal four years were kept constant in order to ensure that we did notoverestimate the potential of the reporting unit.  The six-year life was utilized as a result of the fact that thelife sciences reporting unit has been selling isotopes for over fifteen yearsand that demand for isotopes is projected to increase over the next tenyears.  Given the history of thereporting unit and the projected future of the industry, we determined that itwas reasonable to utilize a six-year life. Had we utilized a life of less than six years, the calculation may havesuggested that impairment was present. In addition, we discounted the projected cash flows at a rate of12%.  The 12% was deemed reasonablegiven the current low market interest rate and the extremely low risk of thelife sciences business offset by the higher cost of capital for a small companyand the related difficulties we have had in raising necessary capital over theyears.  Had we utilized a discount ratethat was substantially larger than 12%, the calculation may have suggested thatimpairment was present.

 

Our intangible assets result from theperpetual, exclusive technology license agreement with SEI that we entered intoon September 14, 2001 and the isotope-based trace detection technology weacquired from IUT in December 2002.  Asthe intangible assets were acquired after June 30, 2001, we adhere to theguidance provided by SFAS No. 142 *Goodwilland Other Intangible Assets*. Both the intangible assets acquired from SEI and the isotope-based tracedetection technology are being amortized over their estimated useful lives often years (which are based upon many factors including the time it will take todevelop the technology, the expected life of the finalized product(s) and theestimated lives of similar products). We will continue to evaluate each reporting period whether events andcircumstances continue to support our assessment of a ten-year life for theseintangible assets.  Additionally, ifindicators of impairment do arise in the future, the intangible assets will betested for impairment and may result in an impairment charge in thefuture.  We are not aware of anyindicators of possible impairment as of September 15, 2003.

 

18

----

 

*Valuationof Equity Transactions*

 

We value transactions associated with commonor preferred stock that is convertible into common stock based on the marketvalue of the underlying common stock on the date of the signing of theagreement.  We value transactionsassociated with common stock warrants at the appropriate measurement dateutilizing the Black-Scholes pricing model, with assumptions as to volatility(100%), risk-free interest rate (4.0%) and estimated life of the warrants basedon historical information.  If theassumptions used, as they relate to volatility, risk-free interest rate andestimated life of the warrants, were materially different, the overallvaluation of these transactions could change significantly.

 

**Item 3:Controls and Procedures**

 

As required by Rule 13a-15under the Securities Exchange Act of 1934, within the 90 days prior to thefiling date of this report, we carried out an evaluation of the effectivenessof the design and operation of our disclosure controls and procedures.  This evaluation was carried out under thesupervision and with the participation of our principal executive officer aswell as our principal financial officer, who concluded that our disclosurecontrols and procedures are effective. There have been no significant changes in our internal controls or inother factors, which could significantly affect internal controls subsequent tothe date we carried out our evaluation.

 

Disclosure controls andprocedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Securities Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the Securities and Exchange Commission’srules and forms.  Disclosure controlsand procedures include, without limitation, controls and procedures designed toensure that information required to be disclosed in our reports filed under theExchange Act is accumulated and communicated to management, including ourprincipal executive officer and our principal financial officer, asappropriate, to allow timely decisions regarding required disclosure.

 

PART II

OTHER INFORMATION

 
| **Item 2:** | **Changes in Securities and Use of Proceeds**                                                 |
|-------------|-----------------------------------------------------------------------------------------------|
|        |                                                                                          |
| None        |                                                                                          |
|        |                                                                                          |
| **Item 6:** | **Exhibits and Reports on Form 8-K**                                                          |
|        |                                                                                          |
| (a)         |  Exhibits.                                                                               |
|        |                                                                                          |
|        | 31. Certification pursuant to  Sarbanes-Oxley Section 302                                     |
|        | 32. Certification pursuant to 18 U.S.C.  Section 1350                                         |
|        |                                                                                          |
| (b)         | Reports on Form 8-K                                                                           |
|        |                                                                                          |
|        | Isonics filed no reports on Form 8-K during  the quarter ended July 31, 2003 or subsequently. |

 

19

----

 

**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 theundersigned, thereunto duly authorized, in the City of Golden, County ofJefferson, State of Colorado, on the fifteenth day of September, 2003.

 
|   | Isonics Corporation |
|--------|---------------------|
|   |                | (Registrant) |
|   |                |   |
|   |                |   |
|   | By                  |   | /s/James E. Alexander |   |
|   |                | James E. Alexander |
|   |                | President, Chief Executive Officer and Director |
|   |                |   |
|   |                |   |
|   | By                  |   | /s/John V. Sakys |   |
|   |                | John V. Sakys |
|   |                | Chief Accounting Officer and Chief Financial Officer |
|        |                     |  |  |  |  |

 

20

----